PARAY v. RODRIGUEZ, ET AL., G.R. No.

132287 (JANUARY 24, 2006)

FACTS: Respondents were the owners of shares of stock in Quirino-Leonor-Rodriguez Realty Inc. In 1979 to 1980, respondents secured by way of pledge of some of their shares of stock to petitioners Bonifacio and Faustina Paray (Parays) the payment of certain loan obligations. When the Parays attempted to foreclose the pledges on accou nt of respondents failure to pay their loans, respondents filed complaints with RTC of Cebu City. The actions sought the declaration of nullity of the pledge agreements, among others. However the RTC dismissed the complaint and gave due course to the foreclosure and sale at public auction of the various pledges. This decision attained finality after it was affirmed by the Court of Appeals and the Supreme Court. Respondents then received Notices of Sale which indicated that the pledged shares were to be sold at public auction. However, before the scheduled date of auction, all of respondents caused the consignation with the RTC Clerk of Court of various amounts. It was claimed that respondents had attempted to tender payments to the Parays, but had been rejected. Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal Espeleta successfully bidding for all of the pledged shares. None of respondents participated or appeared at the auction. Respondents instead filed a complaint with the RTC seeking the declaration of nullity of the concluded public auction. Respondents argument: Respondents argued that their tender of payment and subsequent consignations served to extinguish their loan obligations and discharged the pledge contracts. Petitioners argument: Petitioners countered that the auction sale was conducted pursuant to a final and executory judgment and that the tender of payment and consignations were made long after their obligations had fallen due. They pointed out that the amounts consigned could not extinguish the principal loan obligations of respondents since they were not sufficient to cover the interests due on the debt. They likewise argued that the essential procedural requisites for the auction sale had been satisfied. Ruling of RTC: The RTC dismissed the complaint, expressing agreement with the position of the Parays. It held that respondents had failed to tender or consign payments within a reasonable period after default and that the proper remedy of respondents was to have participated in the auction sale. Ruling of CA: The Court of Appeals however reversed the RTC on appeal, ruling that the consignations extinguished the loan obligations and the subject pledge contracts; and the auction sale as null and void. It (CA) chose to uphold the sufficiency of the consignations owing to an imputed policy of the law that favored redemption and mandated a liberal construction to redemption laws. The attempts at payment by respondents were characterized as made in the exercise of the right of redemption. CA likewise found fault with the auction sale, holding that there was a need to individually sell the various shares of stock as they had belonged to different pledgors.

ISSUES:

1. WON right of redemption exists over personal properties (such as the subject pledged shares).

2. WON the consignations made by respondents prior to the auction sale are sufficient to extinguish the loan
obligations and the subject pledged contracts.

3. WON the act of respondents in consigning the payments should be deemed done in the exercise of their right of 4. 5.
redemption owing to an imputed policy of the law that favored redemption and mandated a liberal construction to redemption laws. WON a buyer at a public auction ipso facto becomes the owner of the pledged shares pending the lapse of the one-year redemptive period WON there is a need to individually sell the various shares of stock as they had belonged to different pledgors.

HELD: 1. No. No law or jurisprudence establishes or affirms such right. Indeed, no such right exists. The right of redemption over mortgaged real property sold extrajudicially is established by Act No. 3135, as amended. The said law does not extend the same benefit to personal property. In fact, there is no law in our statute books which vests the right of redemption over personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have served as the vehicle for any legislative intent to bestow a right of redemption over personal property, since that law governs the extrajudicial sale of mortgaged personal property, but the statute is definitely silent on the point. The right of redemption as affirmed under Rule 39 of the Rules of Court applies only to execution sales, more precisely execution sales of real property. It must be clarified that the subject sale of pledged shares was an extrajudicial sale, specifically a notarial sale, as distinguished from a judicial sale as typified by an execution sale. Under the Civil Code, the foreclosure of a pledge occurs extrajudicially, without intervention by the courts. All the creditor needs to do, if the credit has not been satisfied in due time, is to proceed before a Notary Public to the sale of the thing pledged. In this case, petitioners attempted to proceed extrajudicially with the sale of the pledged shares by public auction. However, extrajudicial sale was stayed with the filing of Civil Cases which sought to annul the pledge contracts. The final and executory judgment in those cases affirmed the pledge contracts and disposed them. Said judgment did not direct the sale by public auction of the pledged shares, but instead upheld the right of the Parays to conduct such sale at their own volition. 2. No.

There is no doubt that if the principal obligation is satisfied, the pledges should be terminated as well. Article 2098 of the Civil Code provides that the right of the creditor to retain possession of the pledged item exists only until the debt is paid. Article 2105 of the Civil Code further clarifies that the debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest. At the same time, the right of the pledgee to foreclose the pledge is also established under the Civil Code. When the credit has not been satisfied in due time, the creditor may proceed with the sale by public auction under the procedure provided under Article 2112 of the Code. In order that the consignation could have the effect of extinguishing the pledge contracts, such amounts should cover not just the principal loans, but also the monthly interests thereon. In the case at bar, while the amounts consigned by respondents could answer for their respective principal loan obligations, they were not sufficient to cover the interests due on these loans, which were pegged at the rate of 5% per month or 60% per annum.

3.

No.

The pledged shares in this case are not subject to redemption. Thus, the consigned payments should not be treated with liberality, or somehow construed as having been made in the exercise of the right of redemption.

4.

Yes.

Obviously, since there is no right to redeem personal property, the rights of ownership vested unto the purchaser at the foreclosure sale are not entangled in any suspensive condition that is implicit in a redemptive period.

5.

No.

This concern is obviously rendered a non-issue by the fact that there can be no right to redemption in the first place. Rule 39 of the Rules of Court does provide for instances when properties foreclosed at the same time must be sold separately, such as in the case of lot sales for real property under Section 19. However, these instances again pertain to execution sales and not extrajudicial sales. No provision in the Rules of Court or in any law requires that pledged properties sold at auction be sold separately. On the other hand, under the Civil Code, it is the pledgee, and not the pledgor, who is given the right to choose which of the items should be sold if two or more things are pledged. No similar option is given to pledgors under the Civil Code. Moreover, there is nothing in the Civil Code provisions governing the extrajudicial sale of pledged properties that prohibits the pledgee of several different pledge contracts from auctioning all of the pledged properties on a single occasion, or from the buyer at the auction sale in purchasing all the pledged properties with a single purchase price. The relative insignificance of ascertaining the definite apportionments of the sale price to the individual shares lies in the fact that once a pledged item is sold at auction, neither the pledgee nor the pledgor can recover whatever deficiency or excess there may be between the purchase price and the amount of the principal obligation.

RULING: Decision of the Court of Appeals is SET ASIDE and the decision of the RTC Cebu City is REINSTATED.

Caltex Philippines vs CA Facts: On various dates, defendant, a commercial banking institution, through its Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz. One time Mr. dela Cruz delivered the CTDs to Caltex Philippines in connection with his purchase of fuel products from the latter. However, Sometime in March 1982, he informed the Sucat Branch Manger that he lost all the certificates of time deposit in dispute. New CTDs were issued after the execution of affidavit of loss. Subsequently, Angel dela Cruz negotiated and obtained a loan from defendant bank and executed a notarized Deed of Assignment of Time Deposit, which stated, among others, that he surrenders to defendant bank "full control of the indicated time deposits from and after date" of the assignment and further authorizes said bank to pre-terminate, set-off and "apply the said time deposits to the payment of whatever amount or amounts may be due" on the loan upon its maturity. In 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat branch and presented for verification the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff "as security for purchases made with Caltex Philippines, Inc." by said depositor. The bank received a letter from the plaintiff formally informing of its possession of the CTDs in question and of its decision to pre-terminate the same. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of the CTDs in a letter dated February 7, 1983. The loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the matured loan. However, the plaintiff filed the instant complaint, praying that defendant bank be ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus accrued interest and compounded interest therein at 16% per annum, moral and exemplary damages as well as attorney's fees. Issues: Whether or not the transaction between Caltex and de la cruz is valid pledge. Whether or not Caltex can recover the CTDs Held: 1. The transaction entered into is a pledge. Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof, and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. In the present case, however, there was no negotiation in the sense of a transfer of the

legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, must be contractually provided for. In the case at bar, evidence suggests that the instrument was delivered to Caltex by Dela Cruz as security to the fuel purchases of the latter and not as payment for such purchases. 2. No. The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien. As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, which inceptively provide: Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. Art. 2096. 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. Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz. Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely. On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was embodied in a public instrument. Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution of any public instrument which could affect or bind private respondent. Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better right over the CTDs in question.

DIOSDADO YULIONGSIU vs.PHILIPPINE NATIONAL BANK (Cebu Branch) Facts: Yuliongsiu was the owner of two (2) vessels, namely: The M/S Surigao, valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated the FS-203, valued at P210,672.24, which was purchased by him from the Philippine Shipping Commission, by installment or on account. As of January or February, 1943, plaintiff had paid to the Philippine Shipping Commission only the sum of P76,500 and the balance of the purchase price was payable at P50,000 a year, due on or before the end of the current year. Yuliongsiu obtained a loan of P50,000 from PNB. To guarantee its payment, plaintiff pledged the M/S Surigao, M/S Don Dino and its equity in the FS-203, as evidenced by the pledge contract , duly registered with the office of the Collector of Customs for the Port of Cebu. Yuliongsiu effected partial payment of the loan in the sum of P20,000. The remaining balance was renewed by the execution of 2 promissory notes in the bank's favor. These two notes were never paid at all by Yuliongsiu on their respective due dates. PNB filed criminal charges against Yuliongsiu and two other accused for estafa thru falsification of commercial documents, and they were convicted by the trial court and sentenced to indemnify PNB in the sum of P184,000. CA affirmed conviction. The corresponding writ of execution issued to implement the order for indemnification was returned unsatisfied as Yuliongsiu was totally insolvent .Meanwhile, together with the institution of the criminal action, PNB took physical possession of three pledged vessels while they were at the Port of Cebu, and after the first note fell due and was not paid, the Manager of PNB, acting as attorney-in-fact of Yuliongsiu pursuant to the terms of the pledge contract, executed a document of sale, transferring the two pledged vessels and Yuliongsiu's equity in FS-203, to PNB for P30,042.72.The FS-203 was subsequently surrendered by PNB to the Philippine Shipping which rescinded the sale to Yuliongsiu, for failure to pay the remaining installments on the purchase price. The other two boats were sold byPNB to third parties.Yuliongsiu commenced action in the CFI to recover the three vessels or their value and damages from PNB.The lower court rendered its decision ruling: (a) that the bank's taking of physical possession of the vessels was justified by the pledge contract and the law; (b) that the private sale of the pledged vessels by PNB to itself withoutnotice to the plaintiff-pledgor as stipulated in the pledge contract was likewise valid; and (c) that the PNB should paythe sums of P1,153.99 and P8,000, as his remaining account balance, or set-off these sums against the indemnitywhich Yuliongsiu was ordered to pay to it in the criminal cases. Issue : W/N the contract was a chattel mortgage so that PNB cannot take possession of the chattels until after there has been default. Held: No. Pledge.

Ratio: The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract. Necessarily, this judicial admission binds Yuliongsiu. Without any showing that this was made thru palpable mistake, no amount of rationalization can offset it. PNB as pledgee was therefore entitled to the actual possession of the vessels. While it is true that Yuliongsiu continued operating the vessels after the pledge contract was entered into, his possession was expressly made subject to the order of the pledgee." The provision of Art. 2110 of the present Civil Code being new, cannot apply to the pledge contract here which was entered into on June 30, 1947. On the other hand, there is an authority supporting the proposition that the pledgee can temporarily entrust the physical possession of the chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely as trustee for the pledgee. Yuliongsiu also urge Us to rule that constructive delivery is insufficient to make pledge effective. The type of delivery will depend upon the nature and the peculiar circumstances of each case. The parties here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold said property subject to the order of the pledgee."Considering the circumstances of this case and the nature of the objects pledged, i.e., a vessel used in maritime business, such delivery is sufficient. Since PNB was, pursuant to the terms of pledge contract, in full control of the vessels thru Yuliongsiu, the former could take actual possession at any time during the life of the pledge to make more effective its security. Its taking of the vessels therefore was not unlawful. Nor was it unjustified considering that Yuliongsiu had just defrauded the PNB in the huge sum of P184,000

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. LAUREANO ATENDIDO, defendant-appellant.

Nature: An appeal from a decision of CFI Nueva Ecija ordering Atendido to pay PNB the sum of P3,000, with interest thereon at the rate of 6% per annum from June 26, 1940, and the costs of action. Facts: June 26, 1940 - Atendido obtained from PNB a loan of P3,000 payable in 120 days with interest at 6% per annum from the date of maturity. To guarantee the payment of the obligation, Atendido pledged to PNB 2,000 cavanes of palay deposited in a warehouse in Bulacan. Atendido endorsed the corresponding warehouse receipt in favor of PNB. Before the maturity of the loan, the 2,000 cavanes of palay disappeared for unknown reasons in the warehouse. When the loan matured Atendido failed to pay. The present action was instituted. Atendido claims that the warehouse receipt covering the palay which was given as security having been endorsed in blank in favor of PNB, and the palay having been lost or disappeared, he thereby became relieved of liability. He also claims that he is entitled to an indemnity which represents the difference between the value of the palay lost and the amount of his obligation. CFI ruled in favor of PNB. Atendido appealed Issue: Whether the surrender of the warehouse receipt covering the 2,000 cavanes of palay given as a security, endorsed in blank, to PNB, has the effect of transferring their title or ownership to PNB. SC Held: CFI decision affirmed. The surrendering of the warehouse receipt was not that of a final transfer but merely as a guarantee to the fulfillment of the original obligation of P3,000.00. The 2,000 cavanes of palay covered by the warehouse receipt were given to PNB only as a guarantee to secure the fulfillment by Atendido of his obligation. This appears in the contract between them wherein it is expressly stated that said 2,000 cavanes of palay were given as a collateral security. The delivery of said palay being merely by way of security, it follows that by the very nature of the transaction its ownership remains with Atendido (the pledgor) subject only to foreclosure in case of non-fulfillment of the obligation. If the obligation is not paid upon maturity the most that PNB (the pledgee) can do is to sell the property and apply the proceeds to the payment of the obligation and to return the balance, if any, to the pledgor (Article 1872, Old Civil Code). According to the SC, this is the essence of this contract, for, according to law, a pledgee cannot become the owner of, nor appropriate to himself, the thing given in pledge (Article 1859, Old Civil Code).

If by the contract of pledge the pledgor continues to be the owner of the thing pledged during the pendency of the obligation, in case of loss of the property, the loss should be borne by the pledgor (owner). The fact that the warehouse receipt covering the palay was delivered, endorsed in blank, to PNB does not alter the situation, the purpose of such endorsement being merely to transfer the juridical possession of the property to the pledgee and to forestall any possible disposition thereof on the part of the pledgor.

MANILA SURETY v VELAYO

F: Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila. Velayo undertook to pay the surety company an annual premium of P112.00 and provided collateral jewelry with the authority to sell in case Manila Surety will be obliged to pay. Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution having been returned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to recoup from Velayo; and upon the latter's failure to do so, the surety caused the pledged jewelry to be sold, realizing therefrom a net product of P235.00 only The surety files a claim against Velayo because the security Is insufficient. Velayo claims the sale of the jewelry even if insufficient extinguishes the principal obligation. Issue: Won Velayos contention is correct Ruling: Yes! The sale of the thing pledged shall extinguish the principal obligation, whther or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case.

PARAY v RODRIGUEZ Facts: Respondents were the owners, in their respective personal capacities, of shares of stock in a corporation known as the Quirino-Leonor-Rodriguez Realty Inc.1 Sometime during the years 1979 to 1980, respondents secured by way of pledge of some of their shares of stock to petitioners Bonifacio and Faustina Paray ("Parays") the payment of certain loan obligations. When the Parays attempted to foreclose the pledges on account of respondents failure to pay their loans, respondents filed complaints with the Regional Trial Court (RTC) of Cebu City and , sought the declaration of nullity of the pledge agreements. However the RTC, in its decision3 dated 14 October 1988, dismissed the complaint and gave "due course to the foreclosure and sale at public auction of the various pledges. Respondents then received Notices of Sale which indicated that the pledged shares were to be sold at public auction. However, before the scheduled date of auction, all of respondents caused the consignation with the RTC Clerk of Court of various amounts. It was claimed that respondents had attempted to tender these payments to the Parays, but had been rebuffed. Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal Espeleta successfully bidding. Respondents instead filed on 13 November 1991 a complaint seeking the declaration of nullity of the concluded public auction. Petitioners now argue that the essential procedural requisites for the auction sale had been satisfied.

Issue: W/N the the essential procedural requisites for the auction sale had been satisfied?

Ruling: Yes. Under the Civil Code, the foreclosure of a pledge occurs extrajudicially, without intervention by the courts. All the creditor needs to do, if the credit has not been satisfied in due time, is to proceed before a Notary Public to the sale of the thing pledged.