1. SECURITY BANK AND TRUST COMPANY, Inc. vs. RODOLFO M.

CUENCA

DOCTRINE: An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. The 1989 Loan Agreement expressly stipulated that its
purpose was to liquidate, not to renew or extend, the outstanding indebtedness. Moreover,
respondent did not sign or consent to the 1989 Loan Agreeement, which had alledgedly extended
the original P8 million credit facility. Hence, his obligation as a surety should be deemed
extinguished, pursuant to Article 2079 of the Civil Code, which specifically states that [a]n
extension granted to the debtor by the creditor without the consent of the guarantor extinguishes
the guaranty.
An essential alteration in the terms of a Loan Agreement without the consent of the
surety extinguishes the latters obligation. The submission that only the borrower, not the surety,
is entitled to be notified of any modification in the original loan accommodation is untenablesuch theory is contrary to the to the principle that a surety cannot assume an obligation more
onerous than that of the principal. That the Indemnity Agreement is a continuing surety does not
authorize the lender to extend the scope of the principal obligation inordinately; A continuing
guaranty is one which covers all transaction, including those arising in the future, which are
within the description or contemplation of the contract of guaranty, until the expiration or
termination thereof.
FACTS:
Security Bank granted a credit line in the amount of 8 million pesos in favour of Sta. Ines, a
corporation engaged in logging operations and in which Rodolfo Cuenca is the President. In
order to secure payment, Sta. Ines executed a chattel mortgage over some of its machineries and
equipments and as an additional security Cuenca executed an Indemnity Agreement where he
bound himself jointly and severally with Sta. Ines and without the benefit of excussion of
whatever amount the client may be indebted to the bank by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions, increases, amendments,
conversions and revivals of the aforesaid credit accommodation(s). After Cuenca resigned, Sta.
Ines was able to obtained a loan of 6 million pesos, but was unable to pay the amortization
payments and requested Security Bank a complete restructure of its indebtedness which was
approved and without prior notice to or consent of Cuenca. Despite that Sta. Ines was still unable
to pay. As a result Security Bank made failed attempts to demand from Sta. Ines and Cuenca the
fulfillment of their obligation, thus a complaint was filed and a decision in favour of Security
Bank was rendered which held Cuenca liable. On appeal, Cuenca contends that the original
agreement of 8 million loan was extinguished by novation when the obligation under the 6
million loan and subsequent restructuring was granted.
ISSUE:
Whether Cuenca is liable as a surety to the 6 million loan under the Indemnity Agreement?

HELD:
NO. The Indemnity Agreement is a continuing surety and as such does not authorize the bank to
extend the scope of the principal obligation inordinately. A surety being an onerous undertaking,
a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor
of the solidary debtor. The fundamental rules of fair play require the creditor to obtain the
consent of the surety to any material alteration in the principal loan agreement, or at least to
notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtained
in excess of the amount or beyond the period stipulated in the original agreement, absent any
clear stipulation showing that the latter waived his right to be notified thereof, or to give consent
thereto. This is especially true where, as in this case, respondent was no longer the principal
officer or major stockholder of the corporate debtor at the time the later obligations were
incurred. He was thus no longer in a position to compel the debtor to pay the creditor and had no
more reason to bind himself anew to the subsequent obligations.
2. Medel v. CA
Doctrine: A CB Circular cannot repeal a law. Only a law can repeal another law.
Jurisprudence provides that CB Circular did not repeal nor in a way amend the Usury Law but
simply suspended the latters effectivity (Security Bank and Trust Co vs RTC). Usury has been
legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may
agree upon.
Law: Article 2227, Civil Code
The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a
penalty if they are iniquitous or unconscionable.
Note: While the Usury Law ceiling on interest rates was lifted by the CB Circular 905, nothing in
the said circular could possibly be read as granting carte blanche authority to lenders to raise
interest rates to levels which would either enslave their borrowers or lead to a haemorrhaging of
their assets (Almeda vs. CA, 256 SCRA 292 [1996]).
Facts: Defendants obtained a loan from Plaintiff in the amount P50, 000.00, payable in 2 months
and executed a promissory note. Plaintiff gave only the amount of P47, 000.00 to the borrowers
and retained P3, 000.00 as advance interest for 1 month at 6% per month.
Defendants obtained another loan from Defendant in the amount of P90, 000.00, payable in 2
months, at 6% interest per month. They executed a promissory note to evidence the loan and
received only P84, 000.00 out of the proceeds of the loan.
For the third time, Defendants secured from Plaintiff another loan in the amount of P300, 000.00,
maturing in 1 month, and secured by a real estate mortgage. They executed a promissory note in
favor of the Plaintiff. However, only the sum of P275, 000.00, was given to them out of the
proceeds of the loan.
Upon maturity of the three promissory notes, Defendants failed to pay the indebtedness.

Defendants consolidated all their previous unpaid loans totalling P440, 000.00, and sought from
Plaintiff another loan in the amount of P60, 000.00, bringing their indebtedness to a total of
P50,000.00. They executed another promissory note in favor of Plaintiff to pay the sum of P500,
000.00 with a 5.5% interest per month plus 2% service charge per annum, with an additional
amount of 1% per month as penalty charges.
On maturity of the loan, the Defendants failed to pay the indebtedness which prompt the
Plaintiffs to file with the RTC a complaint for collection of the full amount of the loan including
interests and other charges.
Declaring that the due execution and genuineness of the four promissory notes has been duly
proved, the RTC ruled that although the Usury Law had been repealed, the interest charged on
the loans was unconscionable and revolting to the conscience and ordered the payment of the
amount of the first 3 loans with a 12% interest per annum and 1% per month as penalty.
On appeal, Plaintiff-appellants argued that the promissory note, which consolidated all the
unpaid loans of the defendants, is the law that governs the parties.
The Court of Appeals ruled in favor of the Plaintiff-appellants on the ground that the Usury Law
has become legally inexistent with the promulgation by the Central Bank in 1982 of Circular No.
905, the lender and the borrower could agree on any interest that may be charged on the loan,
and ordered the Defendants to pay the Plaintiffs the sum of P500,000, plus 5.5% per month
interest and 2& service charge per annum , and 1% per month as penalty charges.
Defendants filed the present case via petition for review on certiorari.
Issue: WON the stipulated 5.5% interest rate per month on the loan in the sum of P500, 000.00 is
usurious.
Held: No.
A stipulated rate of interest at 5.5% per month on the P500, 000.00 loan is excessive, iniquitous,
unconscionable and exorbitant, but it cannot be considered usurious because Central Bank
Circular No. 905 has expressly removed the interest ceilings prescribed by the Usury Law and
that the Usury Law is now legally inexistent.
3. Republic vs Bagtas
Doctrine:
Commodatum is essentially gratuitous. If there is compensation, then it shall be treated as a
lease. Lessee is liable as possessor in bad faith because the period already lapsed.
Even if this is a commodatum, the bailee is still liable for the loss of the thing, even if it should
be through a fortuitous event, as provided in Art. 1942 of the Civil Code as when the period
stipulated already expired and he is liable because the thing loaned was delivered with appraisal

of value and there was no contrary stipulation regarding his liability in case there is a fortuitous
event.
Facts: Bagtas borrowed three bulls from the Bureau of Animal Industry for one year for breeding
purposes subject to payment of breeding fee of 10% of book value of the bull. Upon expiration,
Bagtas asked for renewal. The renewal was granted only to one bull. Bagtas offered to buy the
bulls at its book value less depreciation but the Bureau refused. The Bureau said that Bagtas
should either return or buy it at book value. Bagtas proved that he already returned two of the
bulls, and the other bull died during a Huk raid, hence, obligation already extinguished. He
claims that the contract is a commodatum hence, loss through fortuitous event should be borne
by the owner.
Issue: WON Bagtas is liable for the death of the bull.
Held: Yes. Commodatum is essentially gratuitous. However, in this case, there is a 10% charge.
If this is considered compensation, then the case at bar is a lease. Lessee is liable as possessor in
bad faith because the period already lapsed.
Even if this is a commodatum, Bagtas is still liable because the fortuitous event happened when
he held the bull and the period stipulated already expired and he is liable because the thing
loaned was delivered with appraisal of value and there was no contrary stipulation regarding his
liability in case there is a fortuitous event.

4. REPUBLIC OF THE PHILIPPINES vs. JOSE GRIJALDO

Doctrine:
"By a contract of (simple) loan, one of the parties delivers to another ... money or other
consumable thing upon the condition that the same amount of the same kind and quality shall be
paid." (Article 1933, Civil Code)
The obligation, under the promissory notes evidencing the loans, is to pay the value thereof; that
is, to deliver a sum of money a clear case of an obligation to deliver, a generic thing. Article
1263 of the Civil Code provides:
In an obligation to deliver a generic thing, the loss or destruction of anything of the same
kind does not extinguish the obligation.
FACTS:

In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bank
of Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per
annum, compounded quarterly. These loans are evidenced by five promissory notes executed by
the appellant in favor of the Bank of Taiwan, Ltd., as follows: On June 1, 1943, P600.00; on June
3, 1943, P159.11; on June 18, 1943, P22.86; on August 9, 1943,P300.00; on August 13, 1943,
P200.00, all notes without due dates, but because the loans were due one year after they were
incurred. To secure the payment of the loans the appellant executed a chattel mortgage on the
standing crops on his land, Lot No. 1494 known as Hacienda Campugas in Hinigiran, Negros
Occidental.
By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided for
in the Trading with the Enemy Act, as amended, the assets in the Philippines of the Bank of
Taiwan, Ltd. were vested in the Government of the United States. Pursuant to the Philippine
Property Act of 1946 of the United States, these assets, including the loans in question, were
subsequently transferred to the Republic of the Philippines by the Government of the United
States under Transfer Agreement dated July 20, 1954. These assets were among the properties
that were placed under the administration of the Board of Liquidators created under Executive
Order No. 372, dated November 24, 1950, and in accordance with Republic Acts Nos. 8 and 477
and other pertinent laws.
On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman
of the Board of Liquidators, made a written extrajudicial demand upon the appellant for the
payment of the account in question. The record shows that the appellant had actually received the
written demand for payment, but he failed to pay.
On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of
Hinigaran, Negros Occidental, to collect from the appellant the unpaid account in question. The
Justice of the Peace Of Hinigaran, after hearing, dismissed the case on the ground that the action
had prescribed. The appellee appealed to the Court of First Instance of Negros Occidental and on
March 26, 1962 the court a quo rendered a decision ordering the appellant to pay the appellee the
sum of P2,377.23 as of December 31, 1959, plus interest at the rate of 6% per annum
compounded quarterly from the date of the filing of the complaint until full payment was made.
The appellant was also ordered to pay the sum equivalent to 10% of the amount due as attorney's
fees and costs.
The appellant appealed directly to this Court. During the pendency of this appeal the appellant
Jose Grijaldo died. Upon motion by the Solicitor General this Court, in a resolution of May 13,
1963, required Manuel Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who
are the legal heirs of Jose Grijaldo to appear and be substituted as appellants in accordance with
Section 17 of Rule 3 of the Rules of Court.
ISSUE:
Whether or not the obligation to pay is extinguished.

The appellant likewise maintains, in support of his contention that the appellee has no cause of
action, that because the loans were secured by a chattel mortgage on the standing crops on a land
owned by him and these crops were lost or destroyed through enemy action his obligation to pay
the loans was thereby extinguished.
HELD:
This argument is untenable. The terms of the promissory notes and the chattel mortgage that the
appellant executed in favor of the Bank of Taiwan, Ltd. do not support the claim of appellant.
The obligation of the appellant under the five promissory notes was not to deliver a determinate
thing namely, the crops to be harvested from his land, or the value of the crops that would be
harvested from his land. Rather, his obligation was to pay a generic thing the amount of
money representing the total sum of the five loans, with interest. The transaction between the
appellant and the Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of
money. "By a contract of (simple) loan, one of the parties delivers to another ... money or other
consumable thing upon the condition that the same amount of the same kind and quality shall be
paid." (Article 1933, Civil Code) The obligation of the appellant under the five promissory notes
evidencing the loans in questions is to pay the value thereof; that is, to deliver a sum of money
a clear case of an obligation to deliver, a generic thing. Article 1263 of the Civil Code
provides:
In an obligation to deliver a generic thing, the loss or destruction of anything of the same
kind does not extinguish the obligation.
The chattel mortgage on the crops growing on appellant's land simply stood as a security for the
fulfillment of appellant's obligation covered by the five promissory notes, and the loss of the
crops did not extinguish his obligation to pay, because the account could still be paid from other
sources aside from the mortgaged crops.
5. People vs. Dick Ong, 204 SCRA 942
Doctrine:
Bank deposits are in the nature of irregular deposits. They are really loans because they
earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated
loans and are to be covered by the law on loans. Current and savings deposits are loans to a
bank because it can use the same.
Facts:
Accused Dick Ong opened a savings account with HSBTC with an initial deposit of P22.14 in
cash and P10,000.00 in check. Ong was allowed to withdraw from his savings account with
the Bank the sum of P5,000.00, without his check undergoing the usual and reglementary
clearance, which normally takes about 5 working days. The withdrawal slip was signed and
approved by Lino Morfe, then the Branch Manager, and accused Lucila Talabis, the Branch
Cashier. Subsequently, Ong deposited eleven checks in his savings account with the Bank

and from which he made again a withdrawal against said checks before they were cleared
with the approval of Talabis. However, when the Bank presented the eleven checks to their
respective drawee banks for payment, they were all dishonored for lack or insufficiency of
funds.
The Bank filed a criminal action for Estafa against Ong, and the Banks officer in charge
Villaran andT alabis.Talabis testified that the approval of the withdrawals of Ong against
his uncleared checks was in accordance with theinstruction of their then bank manager and
that it is a kind of accommodation given to Ong and also a common practice in branches of
the Bank. RTC ruled Ong as guilty for the crime of estafa but acquitted Villarin and Talabis
as their guilt were not proven beyond reasonable doubt. CA affirmed RTCs decisions.

Issue:
1.What is the nature of bank deposits?
2.Wether or not Ong is guilty of Estafa.

Ruling:
1. The Supreme Court held in several cases, that bank deposits are in the nature of irregular
deposits. They are really loans because they earn interest. All kinds of bank deposits,
whether fixed, savings, or current are to be treated loans and are to be covered by the law
on loans. Current and savings deposits are loans to a bank because it can use the same

2. The elements of this kind of estafa are the following:
(1) postdating or issuance of a check in payment of anobligation contracted at the time the
check was issued;
(2) lack or insufficiency of funds to cover the check; and
(3) damage to the payee thereof.
In this case, the fact was established that Ong either issued or indorsed the subject checks.
However, it must be remembered that the reason for the conviction of an accused of the
crime of estafa is his guilty knowledge of thefact that he had no funds in the bank when he
negotiated the spurious check. In the present case, however, the prosecution failed to prove
that Ong had knowledge with respect to the checks he indorsed. In additon, it has also been
proven that it was the Bank which granted him to draw against uncollected deposit(DAUD)
without the need of any pretensions on his part. This privilege was not only for the subject
checks, but for other past transactions. If he indeed acted fraudulently, he could not have
done so without the active cooperation of the Banks employees. Since Talabis andVillaran
were declared innocent of the crimes charged against them, the same should be said for the
Ong

Thus, Ong cannot be held criminally liable against the Bank. He can only be held civilly
liable as the Bank incurred damages.
6. Investors Finance Corporation vs. Autoworld Sales Corporation, et. al., G.R. NO.
128990 ; SEPTEMBER 21, 2000

Doctrine:
Generally, the courts only need to rely on the face of written contracts to determine the
intention of the parties. "However, the law will not permit a usurious loan to hide itself
behind a legal form. Parol evidence is admissible to show that a written document though
legal in form was in fact a device to cover usury. If from a construction of the whole
transaction it becomes apparent that there exists a corrupt intention to violate the Usury
Law, the courts should and will permit no scheme, however ingenious, to becloud the crime
of usury.
Indeed, the Usury Law recognizes the legitimate purchase of negotiable mercantile paper
by innocent purchasers. But even the law has anticipated the potential abuse of such
transactions to conceal usurious loans. Thus, the law itself made a qualification. It would
recognize legitimate purchase of negotiable mercantile paper, whether usurious or
otherwise, only if the purchaser had no intention of evading the provisions of the Usury
Law and that the purchase was not apart of the original usurious transaction. Otherwise,
the law would not hesitate to annul such contracts. Thus, Art. 1957 of the Civil Code
provides Contracts and stipulations, under any cloak or device whatever, intended to
circumvent the laws on usury shall be void. The borrower may recover in accordance with
the laws on usury.

FACTS:
Anthony Que, in behalf of AUTOWORLD, applied for a direct loan with FNCB. However,
since the Usury Law imposed an interest rate ceiling at that time, FNCB informed Anthony
Que that it was not engaged in direct lending; consequently, AUTOWORLD's request for
loan wasdenied. But however remedied to extend funds by purchasing any of its
outstanding receivables at a discount, the parties agreed to execute an Installment Paper
Purchase ("IPP") transaction to enable AUTOWORLD to acquire the additional capital it
needed. The parties signed three contracts to implement the "IPP" transaction.


After which it was concluded AUTOWORLD started paying the monthly installments
to FNCB. After paying nineteen (19) monthly installments on the first transaction ("IPP"
worth P6,980,000.00) and three (3) monthly installments on the second transaction (loan
worth P3,000,000.00), AUTOWORLD advised FNCB that it intended to pre-terminate the

two (2) transactions by paying their outstanding balances in full. It then requested FNCB to
provide a computation of the remaining balances. FNCB sent AUTOWORLD its computation
requiring it to pay a total amount ofP10,026,736.78.


AUTOWORLD disagreed with the latter's computation of its outstanding balances.
However, FNCB replied that it would only be willing to reconcile its accounting records
with AUTOWORLD upon payment of the amounts demanded. Thus, despite its objections,
AUTOWORLD reluctantly paid.


AUTOWORLD asked FNCB for a refund of its overpayments in the total amount of
P3,082,021.84. According to AUTOWORLD, it overpaidP2,586,035.44 to settle the first
transaction and P418,262.00 to settle the second transaction.


The parties attempted to reconcile their accounting figures butthe subsequent
negotiations broke down prompting AUTOWORLD to file anaction before the Regional Trial
Court of Makati to annul the Contractto Sell, the
Deed of Assignment and the Real Estate Mortgage all dated 9 February 1981. It likewise
prayed for the nullification of the Promissory Note dated 18 June 1982 and the Real Estate
Mortgage dated 24 June 1982.


In its complaint, AUTOWORLD alleged that the aforementioned contracts were only
perfected to facilitate a usurious loan and therefore should be annulled. FNCB should
refund the amounts ofP2,586,035.44 as excess payment for the first transaction
andP418,262.00 as excess payment for the second transaction.


FNCB argued that the contracts were not executed to hide a usurious loan. Instead,
the parties entered into a legitimate Installment Paper Purchase ("IPP") transaction, or
purchase of receivables at a discount, which FNCB could legally engage in as a financing
company. With regard to the second transaction, the existence of a usurious interest rate
had no bearing on the P3,000,000.00 loan since at the time it was perfected on 18 January
1982 Central Bank Circular No. 871 dated 21 July 1981 had effectively lifted the ceiling
rates for loans having a period of more than three hundred sixty-five(365) days.


The Regional Trial Court of Makati ruled in favor of FNCB. The Court of Appeals
modified the decision of the trial court and concluded that the "IPP" transaction,
comprising of the three (3) contracts perfected on 9 February 1981, was merely a scheme

employed by the parties to disguise a usurious loan. It ordered the annulment of the
contracts and required FNCB to reimburse AUTOWORLD P2,586,035.44 as excess interest
payments over the 12% ceiling rate. However, with regard to the second transaction, the
appellate court ruled that at the time it was executed the ceiling rates imposed by the
Usury Law had already been lifted thus allowing the parties to stipulate any rate of interest.
The appellate court deleted the award of P50,000.00 as attorney's fees in favor of FNCB
explaining that the filing of the complaint against FNCB was exercised in good faith. Hence,
this petition of FNCB.

ISSUE:
Whether the three (3) contracts that were executed to implement a legitimate Installment
Paper Purchase ("IPP") transaction are concealment to a usurious loan.

HELD:
We stress at the outset that this petition concerns itself only with the first transaction
involving the alleged' "IPP" worth P6,980,000.00, which was implemented through the
three 3 contracts of 9February 1981. As to the second transaction, which involves the
P3,000,000.00 loan, we agree with the appellate court that it was executed when the ceiling
rates of interest had already been removed, hence the parties were free to fix any interest
rate.


Generally, the courts only need to rely on the face of written contracts to determine
the intention of the parties. "However, the law will not permit a usurious loan to hide itself
behind a legal form. Parol evidence is admissible to show that a written document though
legal in form was in fact a device to cover usury. If from a construction of the whole
transaction it becomes apparent that there exists a corrupt intention to violate the Usury
Law, the courts should and will permit no scheme, however ingenious, to becloud the crime
of usury. The following circumstances show that such scheme was indeed.


Thus, although the three (3) contracts seemingly show at face value that petitioner
only entered into a legitimate discounting of receivables, the circumstances cited prove
that the P6,980,000.00 was really a usurious loan extended to AUTOWORLD.


Indeed, the Usury Law recognizes the legitimate purchase of negotiable mercantile
paper by innocent purchasers. But even the law has anticipated the potential abuse of such
transactions to conceal usurious loans. Thus, the law itself made a qualification. It would
recognize legitimate purchase of negotiable mercantile paper, whether usurious or

otherwise, only if the purchaser had no intention of evading the provisions of the Usury
Law and that the purchase was not apart of the original usurious transaction. Otherwise,
the law would not hesitate to annul such contracts. Thus, Art. 1957 of the Civil Code
provides Contracts and stipulations, under any cloak or device whatever, intended to
circumvent the laws on usury shall be void. The borrower may recover in accordance with
the laws on usury.


In the case at bar, the attending factors surrounding the execution of the three (3)
contracts on 9 February 1981 clearly establish that the parties intended to transact a
usurious loan. These contracts should therefore be declared void.

7. CA Agro-Industrial vs CA, G.R. No. 90027 March 3, 1993

Doctrine:
The Civil Code provides that the depositary would be liable if, in performing its obligation, it is
found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. In the
absence of any stipulation, the diligence of a good father of a family is to be observed.
Any stipulation exempting the depositary from any liability arising from the loss of the thing
deposited on account of fraud, negligence or delay would be void for being contrary to law and
public policy.
Facts

Petitioner (through its President) purchased 2 parcels of land from spouses Pugao for P350 K
with a downpayment of P75 K.
Per agreement, the land titles will be transferred upon full payment and will be placed in a
safety deposit box (SBDB) of any bank. Moreover, the same could be withdrawn only upon
the joint signatures of a representative of the Petitioner and the Pugaos upon full payment of
the purchase price.
Thereafter, Petitioner and spouses placed the titles in SDB of Respondent Security Bank and
signed a lease contract which substantially states that the Bank will not assume liability for
the contents of the SDB.
Subsequently, 2 renter's keys were given to the renters one to the Petitioner and the other
to the Pugaos. A guard key remained in the possession of the Respondent Bank. The SDB
can only be opened using these 2 keys simultaneously.
Afterwards, a certain Mrs. Ramos offered to buy from the Petitioner the 2 lots that would
yield a profit of P285K.
Mrs. Ramos demanded the execution of a deed of sale which necessarily entailed the
production of the certificates of title. Thus, Petitioner with the spouses went to Respondent
Bank to retrieve the titles.

However, when opened in the presence of the Bank's representative, the SDB yielded no
such certificates.
Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer
to purchase the lots; as a consequence, the Petitioner allegedly failed to realize the expected
profit of P285K.
Hence, Petitioner filed a complaint for damages against Respondent Bank.
Lower courts ruled in favour of Respondent Bank. Thus, this petition.

Issues:
1. Whether or not the disputed contract is an ordinary contract of lease?
2. Whether or not the provisions of the cited contract are valid?
3. Whether or not Respondent Bank is liable for damages?
Ruling:
1. No. SC ruled that it is a special kind of deposit because:
the full and absolute possession and control of the SDB was not given to the joint renters
the Petitioner and the Pugaos.
The guard key of the box remained with the Respondent Bank; without this key, neither of
the renters could open the box and vice versa.
In this case, the said key had a duplicate which was made so that both renters could have
access to the box.
Moreover, the renting out of the SDBs is not independent from, but related to or in
conjunction with, the principal function of a contract of deposit the receiving in custody
of funds, documents and other valuable objects for safekeeping.
2. NO. SC opined that it is void.

Generally, the Civil Code provides that the depositary (Respondent Bank) would be
liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or
contravention of the tenor of the agreement.
In the absence of any stipulation, the diligence of a good father of a family is to be
observed.
Hence, any stipulation exempting the depositary from any liability arising from the loss
of the thing deposited on account of fraud, negligence or delay would be void for being
contrary to law and public policy (which is present in the disputed contract)
Said provisions are inconsistent with the Respondent Bank's responsibility as a depositary
under Section 72(a) of the General Banking Act.

3. NO. SC ruled that:

no competent proof was presented to show that Respondent Bank was aware of the
private agreement between the Petitioner and the Pugaos that the Land titles were
withdrawable from the SDB only upon both parties' joint signatures,
and that no evidence was submitted to reveal that the loss of the certificates of title was
due to the fraud or negligence of the Respondent Bank.

8. BPI Investment Corp vs CA

Doctrine:
A loan contract is not a consensual contract but a real contract. It is perfected only upon the
delivery of the object of the contract. It is a basic principle in reciprocal obligations that
neither party incurs in delay, if the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him. Only when a party has performed his
part of the contract can he demand that the other party also fulfills his own obligation and
if the latter fails, default sets in.
FACTS:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment
and Development Corporation (AIDC), the predecessor of BPIIC, for the construction of a
house on his lot. Said house and lot were mortgaged to AIDC to secure the loan. Roa sold
the house and lot to private respondents ALS and Antonio Litonjua for P850,000. They paid
P350,000 in cash and assumed the P500,000 balance of Roas indebtedness with AIDC. The
latter, however, was not willing to extend the old interest rate to private respondents and
proposed to grant them a new loan of P500,000 to be applied to Roas debt and secured by
the same property. Consequently, in March 1981, private respondents executed a mortgage
deed with the provision that payment of the monthly amortization shall commence on May
1, 1981. On August 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC. On
September 1982, BPIIC released to private respondents P7,146.87, purporting to be what
was left of their loan after full payment of Roas loan. In June 1984, BPIIC instituted
foreclosure proceedings against private respondents on the ground that they failed to pay
the mortgage indebtedness which from May 1, 1981 to June 30, 1984. ALS and Litonjua
filed a Civil Case against BPIIC. They alleged, among others, that they were not in arrears in
their payment, but in fact made an overpayment as of June 30, 1984. They maintained that
they should not be made to pay amortization before the actual release of the P500,000 loan
in August and September 1982. BPIIC on the other hand claims that a contract of loan is a
consensual contract, and a loan contract is perfected at the time the contract of mortgage
was executed, which in this case, was on March 1981

ISSUE:

Whether or not a contract of loan is a consensual contract.

HELD:

No. A loan contract is not a consensual contract but a real contract. It is perfected
only upon the delivery of the object of the contract. In the present case, the loan contract
between BPI, on the one hand, and ALS and Litonjua, on the other, was perfected only on

September 13, 1982, the date of the second release of the loan. A contract of loan involves a
reciprocal obligation, wherein the obligation or promise of each party is the consideration
for that of the other. It is a basic principle in reciprocal obligations that neither party incurs
in delay, if the other does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. Only when a party has performed his part of the contract can
he demand that the other party also fulfills his own obligation and if the latter fails, default
sets in. Consequently, petitioner could only demand for the payment of the monthly
amortization after September 13, 1982 for it was only then when it complied with its
obligation under the loan contract.
9. ROMAN V. ASIA BANKING CORPORATION
Doctrine:
As provided by the Warehouse Receipts Act, in case the warehouse man fails to mark it as nonnegotiable, a holder of the receipt who purchase if for value supposing it to be negotiable may,
at his option, treat such receipt as imposing upon the warehouseman the same liabilities he would
have incurred had the receipt been negotiable. This appears to have given any warehouse receipt
not marked non-negotiable practically the same effect as a receipt which, by its terms, is
negotiable provided the holder of such unmarked receipt acquired it for value supposing it to be
negotiable, circumstances which admittedly exist in the present case.
FACTS: U. de Poli, for value received, issued a quedan convering the 576 bultos of tobacco to
the Asia Banking Corporation (claimant & appellant). It was executed as a security for a loan.
The aforesaid 576 butlos are part and parcel of the 2, 766 bultos purchased by U. de Poli from
Felisa Roman (claimant & appellee).
The quedan was marked as Exhibit D which is a warehouse receipt issued by the warehouse of
U. de Poli for 576 bultos of tobacco. In the left margin of the face of the receipt, U. de Poli
certifies that he is the sole owner of the merchandise therein described. The receipt is endorsed in
blank; it is not marked non-negotiable or not negotiable.
Since a sale was consummated between Roman and U. de Poli, Romans claim is a vendors lien.
The lower court ruled in favor of Roman on the theory that since the transfer to Asia Banking
Corp. (ASIA) was neither a pledge nor a mortgage, but a security for a loan, the vendors lien of
Roman should be accorded preference over it.
However, if the warehouse receipt issued was non-negotiable, the vendors lien of Roman cannot
prevail against the rights of ASIA as indorsee of the receipt.
ISSUE: WON the quedan issued by U. de Poli in favor of ASIA. Is negotiable, despite failure to
mark it as not negotiable?
HELD: YES. The warehouse receipt in question is negotiable. It recited that certain merchandise
deposited in the ware house por orden of the depositor instead of a la orden, there was no
other direct statement showing whether the goods received are to be delivered to the bearer, to a
specified person, or to a specified order or his order. However, the use of por orden was
merely a clerical or grammatical error and that the receipt was negotiable.

As provided by the Warehouse Receipts Act, in case the warehouse man fails to mark it as nonnegotiable, a holder of the receipt who purchase if for value supposing it to be negotiable may,
at his option, treat such receipt as imposing upon the warehouseman the same liabilities he would
have incurred had the receipt been negotiable. This appears to have given any warehouse receipt
not marked non-negotiable practically the same effect as a receipt which, by its terms, is
negotiable provided the holder of such unmarked receipt acquired it for value supposing it to be
negotiable, circumstances which admittedly exist in the present case. Hence, the rights of the
indorsee, ASIA, are superior to the vendors lien.
10. PICZON V. PICZON, GR No. L-29139, November 15, 1974
Doctrine:
Under Art.2048 of the Civil Code, a guaranty is gratuitous, unless there is a stipulation to the
contrary.
Facts: Sosing-Lobos & Co. obtained loan from Piczon Co. Esteban Piczon (president of
borrowing firm) bound himself as guarantor to pay plaintiffs-appellants the sum of P12,500 with
12% interest from August 6, 1964 until said principal amount shall have been duly paid. The
parties also agreed to the use of the loan as surety cash deposit for the registration with the SEC.
Consuelo Piczon (lending firm) brought action to recover the amount loaned. Court ruled in
favor of Consuelo Piczon and ordered Esteban Piczon and Sosing-Lobos to pay him as guarantor
the amount of the loan plus interest.
Issue: WON Esteban Piczon is a surety or a guarantor?
Held: Under the terms of the contract Esteban Piczon expressly bound himself only as guarantor.
A guaranty must express, and it would be violative of the law to consider a party to be bound as
surety when the very word used in the agreement is guarantor.

11. Legaspi vs Celestial, G.R. Nos. L-43673 and 43674, October 24, 1938
Doctrine:
When a contracts of loan with security does not stipulate the payment of interest but
provides for the delivery to the creditor by the debtor of the real property constituted as
security for the payment thereof, in order that the creditor may administer the same and
avail himself of its fruits, without stating that said fruits are to be applied to the payment of
interest, if any, and afterwards to that of the principal of the credit, the contract shall be
considered to be one of mortgage and not of antichresis.

Facts:

On January 17, 1935, the plaintiffs brought an action against the defendant Damaso
Celestial in the justice of the peace court of Kawit, Cavite, praying that judgment be
rendered, ordering said defendant to pay to the abovenamed plaintiffs the sum of
P556.160, plus the corresponding legal interest thereon from the date of the filing of the
complaint, until fully paid, and the costs.

The defendant, answering the complaint, admitted the essential facts alleged therein,
stating that he was disposed to pay what he should appear still to be indebted and, by way
of counterclaim and cross-complaint, claimed that, the contract entered into between him
and the plaintiffs being an antichresis, the latter were bound to render an account of the
products of the five salt beds, the total production of which was from 300 to 350 cavans of
salt at P1 a cavan.

Legaspi et al brought an action against Celestial to pay a certain obligation plus the
interests. Celestial, contends, among others, that the contract entered into between them
was an antichresis, thus, Legaspi et al are bound to render an account of the products.

Issue:
Whether or not the contract was an antichresis.

Held:
No. It was a mortgage.
It appears therefore that the debtor, instead of paying a certain per cent of the principal of
the loan as compensation for the sacrifice made by the creditors in depriving themselves of
the use of their principal and the enjoyment of its fruits, so as to give them to the debtor,
has delivered to them the property constituted as a security for the payment of the loan, so
that they may administer and use it, enjoying its fruits, by way of compensation for their
said sacrifice in lending said debtor their money. Therefore, the contracts, which are the
subject matter of this action, have all the essential requisites of a mortgage, enumerated in
article 1857 of the Civil Code and, consequently, are mortgage contracts.
When a contracts of loan with security does not stipulate the payment of interest but
provides for the delivery to the creditor by the debtor of the real property constituted as
security for the payment thereof, in order that the creditor may administer the same and
avail himself of its fruits, without stating that said fruits are to be applied to the payment of
interest, if any, and afterwards to that of the principal of the credit, the contract shall be
considered to be one of mortgage and not of antichresis.

12. Saura Import &Export Co., Inc v. DBP, G.R. No. L-24968 April 27, 1972

Doctrine:
It is a concept derived from the principle that since mutual agreement can create a
contract, mutual disagreement by the parties can cause its extinguishment. In view of such
extinguishment, said perfected consensual contract to deliver did not constitute a real
contract of loan.

Facts:
Saura Inc. applied to the Rehabilitation Finance Corp (before its conversion to DBP) for a
loan of 500k secured by a first mortgage of the factory building to finance for the
construction of a jute mill factory and purchase of factory implements. RFC accepted and
approved the loan application subject to some conditions which Saura admitted it could not
comply with. Without having received the amount being loaned, and sensing that it could
not at anyway obtain the full amount of loan, Saura Inc. then asked for cancellation of the
mortgage which RFC also approved. Nine years after the cancellation of the mortgage,
Saura sued RFC for damages for its non-fulfillment of obligations arguing that there was
indeed
a
perfected
consensual
contract
between
them.

Issue:
Was there a perfected consensual contract? Was there a real contract of loan which would
warrant recovery of damages arising out of breach of such contract?

Held:
On the first issue, yes, there was indeed a perfected consensual contract, as recognized in
Article 1934 of the Civil Code. There was undoubtedly offer and acceptance in this case: the
application of Saura, Inc. for a loan of P500,000.00 was approved by resolution of the
defendant, and the corresponding mortgage was executed and registered. But this fact
alone falls short of resolving the second issue and the basic claim that the defendant failed
to fulfill its obligation and the plaintiff is therefore entitled to recover damages. The action
thus taken by both partiesSaura's request for cancellation and RFC's subsequent
approval of such cancellationwas in the nature of mutual desistance what Manresa
terms "mutuo disenso" which is a mode of extinguishing obligations. It is a concept
derived from the principle that since mutual agreement can create a contract, mutual
disagreement by the parties can cause its extinguishment. In view of such extinguishment,
said perfected consensual contract to deliver did not constitute a real contract of loan.
13. Cesar Sulit vs. CA and Iluminada Cayco, G.R. No. 119247, February 17, 1997, 268
SCRA 441.

Doctrine:
The general rule that mere inadequacy of price is not sufficient to set aside a foreclosure
sale is based on the theory that the lesser the price the easier it will be for the owner to
effect the redemption. The same thing cannot be said where the amount of the bid is in
excess of the total mortgage debt.
The application of the proceeds for the sale of the mortgaged property to the mortgagors
obligation is an act of payment, not payment by dation; hence, it is mortgagees duty to
return any surplus on the selling to the mortgagor. It is stated that the motgagee is deemed
trustee for the mortgagor of the equity of redemption.
Facts:
Iluminada Cayco executed a Real Estate Mortgage in favor of Cesar Sulit over Lot 2630
located in Caloocan City to secure a loan worth P4Million. Upon default within the
stipulated period, Sulit executed an extrajudicial foreclosure and was able to purchase the
land for P7Million through the public auction held by a Notary Public. Sulit then filed for
the issuance of the writ or possession to the RTC of Caloocan which was granted. Cayco
filed a motion to set aside the foreclosure proceeding on the ground that there is infirmities
in the procedural of the proceedings. RTC denied the motion that prompted the filing of the
petition for certiorari with Preliminary Injunction and/or TRO before the CA. The CA issued
a decision ordering Sulit to pay Cayco with the surplus money and upon failure to pay the
same declare tha foreclosure proceeding as deemed cancelled.

Issue:
w/n the purchaser is an extrajudicial foreclosure sale is entitled to the issuance of a writ of
possession over the mortgaged property despite failure to pay the surplus proceeds of the
sale to the mortgagor or person entitle thereto?

Held:
No. The application of the proceeds for the sale of the mortgaged property to the
mortgagors obligation is an act of payment, not payment by dation; hence, it is mortgagees
duty to return any surplus on the selling to the mortgagor. It is stated that the motgagee is
deemed trustee for the mortgagor of the equity of redemption. The general rule that mere
inadequacy of price is not sufficient to set aside a foreclosure sale is based on the theory
that the lesser the price the easier it will be for the owner to effect the redemption. The
same thing cannot be said where the amount of the bid is in excess of the total mortgage
debt. The reason is that in case the mortgagor decides to exercise his right of redemption,
Section 30 of Rule 39 provides that the redemption price should be equivalent to the
amount of the purchase price, plus one per cent monthly interest up to the time of the
redemption, together with the amount of any assessments or taxes which the purchaser

may have paid thereon after purchase, and interest on such last-named amount at the same
rate. Applying the same to the present case would be highly iniquitous if the amount of
redemption be based to P7Million because that would be unjustifiably higher than the
amount of the mortgage debt. Thereby, prejudicial to Caycos Right of Redemption. Where
the redemptioner chooses to exercise the right of redemption, it is the policy of the law to
aid rather than to defeat his right. It stands to reason that redemption should be looked
with favor and where no injury will follow, a liberal construction will be given to our
redemption laws, specifically to the right of redemption. Low auction price is tolerated by
the Court as long as it is not shocking to the conscience of the Court because it is in favor to
the right of the mortgagor to redeem the property based on that low price. The Court will
not, thereby, tolerate high auction price that will make the redemptioner to elect his right
to redemption because of the high price, as in this case.
14. PNB vs Sayo, Noahs Ark Sugar Refinery, et. al. GR No. 129918, July 9, 1998
Doctrine:
The loss of the warehouseman's lien, however, does not necessarily mean the
extinguishment of the obligation to pay the warehousing fees and charges which continues
to be a personal liability of the owners, i.e., the pledgors, not the pledgee.
Imperative is the right of the warehouseman to demand payment of his lien at this
juncture, because, in accordance with Section 29 of the Warehouse Receipts Law, the
warehouseman loses his lien upon goods by surrendering possession thereof. In other
words, the lien may be lost where the warehouseman surrenders the possession of the
goods without requiring payment of his lien, because a warehousemans lien is possessory
in nature.
Facts:
In accordance with Act No. 2137, the Warehouse Receipts Law, Noah's Ark Sugar Refinery
issued on several dates, 5 Warehouse Receipts.
The receipts are substantially in the form, and contains the terms, prescribed for negotiable
warehouse receipts by Section 2 of the law.
Two of the Warehouse Receipts were negotiated and endorsed to Luis T. Ramos, and 3 of
the Warehouse Receipts were negotiated and endorsed to Cresencia K. Zoleta.
Ramos and Zoleta then used the quedans as security for two loan agreements obtained by
them from the Philippine National Bank. The aforementioned quedans were endorsed by
them to the Philippine National Bank.
Luis T. Ramos and Cresencia K. Zoleta failed to pay their loans upon maturity on January 9,
1990. Consequently, on March 16, 1990, the Philippine National Bank wrote to Noah's Ark
Sugar Refinery demanding delivery of the sugar stocks covered by the quedans endorsed to

it by Zoleta and Ramos. Noah's Ark Sugar Refinery refused to comply with the demand
alleging ownership thereof.
Issue: Is Noahs Arks refusal to deliver the goods to PNB a valid exercise of his lien on the
goods stored?
Should Noahs Ark deliver the sugar stocks to PNB prior to the satisfaction of its warehouse
lien?
Held:
A. The refusal of private respondents to deliver the goods was not anchored on a valid
excuse, i.e., non-satisfaction of the warehouseman's lien over the goods, but on an
adverse claim of ownership. Private respondents justified their refusal to deliver
the goods by claiming that they "are still the legal owners of the subject quedans and
the quantity of sugar represented therein." Under the circumstances, this hardly
qualified as a valid, legal excuse. The loss of the warehouseman's lien, however, does
not necessarily mean the extinguishment of the obligation to pay the warehousing
fees and charges which continues to be a personal liability of the owners, i.e., the
pledgors, not the pledgee, in this case. But even as to the owners-pledgors, the
warehouseman fees and charges have ceased to accrue from the date of the
rejection by Noah's Ark to heed the lawful demand by petitioner for the release of
the goods (1990).

B. As per the SC decision in an earlier case, PNB vs Hon. Pres. Judge Benito, Noahs Ark
Sugar Refinery, et. al. (GR 119231, April 18, 1996), affirming the findings of the
Court of Appeals that the Philippine National Bank is the owner of said sugar
stocks covered by the Warehouse Receipts. As owner/possessor of the Warehouse
Receipt, the PNB is entitled to the stocks of sugar as the endorsee of the quedans,
delivery to it shall be effected only upon payment of the storage fees. Imperative is
the right of the warehouseman to demand payment of his lien at this juncture,
because, in accordance with Section 29 of the Warehouse Receipts Law, the
warehouseman loses his lien upon goods by surrendering possession thereof. In
other words, the lien may be lost where the warehouseman surrenders the
possession of the goods without requiring payment of his lien, because a
warehousemans lien is possessory in nature.
15. DBP vs. Zaragoza, G.R. No. L-23493 August 23,1978
Doctrine:
In extrajudicial foreclosure of mortgage, where the proceeds of the sale is insufficient to
cover the debt, the mortgagee is entitled to claim the deficiency from the debtor. Under the
Mortgage Law, the mortgagee has the right to claim for the deficiency resulting from the

price obtained in the sale of the real property at public auction and the outstanding
obligation at the time of the foreclosure proceedings.
It is true that the provision under Rules of Court (Sec. 6, Rule 70) refers to a judicial
foreclosure, but the underlying principle is the same, that the mortgage is but a security
and not a satisfaction of indebtedness.
Facts:
Jovencio A. Zaragoza and Avelina E. Zaragoza, defendants-appellants, obtained a loan of
P30,000 on July 19, 1949 from the Development Bank of the Philippines, appellee. The loan
was secured by a real estate mortgage. It was stipulated that upon failure of appellants to
pay the amortization due, according to the terms and conditions thereof, appellee shall
have the authority to foreclose extra-judicially the mortgaged property, pursuant to
Republic Act No. 3135, as amended. Conformably to this stipulation, upon breach of the
conditions of the mortgage, appellee foreclosed extra-judicially the mortgage on December
10, 1952, and the Provincial Sheriff of Pangasinan posted the requisite notice of the sale at
public auction of the mortgaged property.

On June 10, 1957, the property was sold at public auction to the appellee, being the highest
bidder therein, for the sum of P21,035.00. After applying the proceeds of the sale to satisfy
the outstanding balance of the indebtedness in the amount of P28,914.36, it was found that
appellants still owed the appellee in the amount of P7,779.36. Suit for the deficiency with
preliminary attachment was filed by appellee against appellants on June 20, 1961. In their
answer, appellants averred that after an extrajudicial foreclosure of property, no deficiency
judgment would lie and that from the date of the foreclosure to the sale of said property,
the mortgagor is no longer liable for the interest on the loan. The aforesaid contentions of
appellants were overruled by the trial court, who thereupon rendered the aforesaid
judgment in favor of the appellee.

Issue:
Whether or not the mortgagee is entitled to claim the deficiency in extrajudicial foreclosure
of mortgage

Held:
The Supreme Court, in Philippine Bank of Commerce v. Tomas de Vera, ruled that in
extrajudicial foreclosure of mortgage, where the proceeds of the sale is insufficient to cover
the debt, the mortgagee is entitled to claim the deficiency from the debtor. Under the
Mortgage Law, the mortgagee has the right to claim for the deficiency resulting from the
price obtained in the sale of the real property at public auction and the outstanding
obligation at the time of the foreclosure proceedings. Under the Rules of Court (Sec. 6, Rule

70), 'Upon the sale of any real property, under an order for a sale to satisfy a mortgage or
other encumbrance thereon, if there be a balance due to the plaintiff after applying the
Proceeds of the sale, the court, upon motion, should render a judgment against the
defendant for any such balance for which by the record of the case, he may be personally
liable to the plaintiff, ...' It is true that this refers to a judicial foreclosure, but the underlying
principle is the same, that the mortgage is but a security and not a satisfaction of
indebtedness.
16. DEVELOPMENT BANK OF THE PHILIPPINES, Plaintiff-Appellee, v. DIONISIO
MIRANG, Defendant-Appellant.
Doctrine:
The bank, as creditor, can recover the balance of the indebtedness; When the Legislature intends
to bar or occlude a creditor from suing for any deficiency after foreclosing and selling the
security given for the obligation, it makes express provisions to that effect, as it did in Article
2115 of the Civil Code on pledge.
Although the predicament of the mortgagor, whose failure to pay the loan was due to the fact that
the plantation which was being financed was attacked by mosaic disease, may evoke sympathy,
it does not justify a disregard of the terms of the contract he entered into. His obligation
thereunder is neither conditional nor aleatory; its terms are clear and subject to no exception.
Facts:
Dionisio Mirang obtained a P14,000.00 loan from the Rehabilitation Finance Corporation (now
Development Bank of the Philippines) for the development of his plantation. After he had
obtained P13,000.00 the bank refused to make any further releases on the ground that the
plantation was attacked by mosaic disease which destroyed the abaca plants, By reason of his
failure to pay the yearly amortization, the mortgaged property was sold at public auction in
which the bank was the highest bidder for P2,010.00. Mirang was duly advised of the sale with
the information that the same was subject to his right of redemption within one year. This right
was not exercised and the Development Bank of the Philippines filed the complaint to recover
the balance of the indebtedness. The trial court directed him to pay the total unpaid obligation.
He appealed.
Issues:
Whether the bank has a right to recover the balance of his indebtedness after the mortgaged
property had been sold
Whether he should be exempted from paying since the abaca was destroyed by mosaic disease;
and
Whether he should pay only the price paid at the auction sale.

Held:
The Supreme Court ruled that:
(1) The bank, as creditor, can recover the balance of the indebtedness; When the Legislature
intends to bar or occlude a creditor from suing for any deficiency after foreclosing and selling the
security given for the obligation, it makes express provisions to that effect, as it did in Article
2115 of the Civil Code on pledge. Hence, in the absence of a similar provision in Act 3135, as
amended, it cannot be concluded that the creditor loses his right given him under the Mortgage
Law and recognized in the Rules of Court, to take action for the recovery of any unpaid balance
on the principal obligation, simply because he has chosen to foreclose his mortgage
extrajudicially, pursuant to a special power of attorney given him by the mortgagor in the
mortgage contract.
(2) he is not exempted from paying the balance; Although the predicament of the mortgagor,
whose failure to pay the loan was due to the fact that the plantation which was being financed
was attacked by mosaic disease, may evoke sympathy, it does not justify a disregard of the terms
of the contract he entered into. His obligation thereunder is neither conditional nor aleatory; its
terms are clear and subject to no exception and;
(3) to redeem his homestead, he must pay, not merely obligation still and owing to the bank. In
the foreclosed property, the mortgagor or debtor to the Development Bank of the Philippines
should pay the entire amount he owed the bank on the date of sale, with interest thereon at the
rate agreed upon, pursuant to Section 31, Com. Act 459 which provides that mortgagor or debtor
shall, within one year . . . have the right to redeem the real property by paying to the Bank all the
amount he owed the latter on the date of sale, with interest on the total indebtedness at the rate
agreed upon in the obligation from said date.
17. ARNEL SY, vs. HONORABLE COURT OF APPEALS, STATE INVESTMENT
HOUSE, INC. and THE REGISTER OF DEEDS OF RIZAL
G.R. No. 83139 April 12, 1989; 172 SCRA 125
Doctrine:
Section 78 of the General Banking Act, as amended by P.D. No. 1828, states that:
... In the event of foreclosure, whether judicially or extra-judicially, of any mortgage on real
estate which is security for any loan granted before the passage of this Act or under the
provisions of this Act, the mortgagor or debtor whose real property has been sold at public
auction, judicially or extra-judicially, for the full or partial payment of an obligation to any bank,
banking or credit institution, within the purview of this Act shall have the right, within one year
after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem
the property by paying the amount fixed by the court in the order of execution, or the amount due
under the mortgage deed, as the case may be, with interest thereon at the rate specified in the
mortgage and all the costs, and judicial and other expenses incurred by the bank or institution

concerned by reason of the execution and sale and as a result of the custody of said property less
the income received from the property.

FACTS:
Carlos Coquinco executed in favor of SIHI a real estate mortgage over a parcel of land as
security of a loan in the amount of P1,000,000.00. For failure to pay his balance of
P1,126,220.56 the mortgaged property was extrajudicially foreclosed and sold at public auction
for P760,000.00 to SIHI.
Sy acquired by a deed of assignment Coquinco's right of redemption for and in consideration of
P500,000.00. Before the expiration of the one-year redemption period, petitioner offered to
redeem the foreclosed property from SIHI by tendering to the latter 2 manager's checks, one for
P760,000.00 representing the purchase price, and another for P91,200.00 representing interest at
the rate of 1% per month for 12 months, totaling P851,200.00. SIHI rejected this offer.
Petitioner filed an action for consignation to compel SIHI to accept the payment, to order SIHI to
surrender the title over the property and to issue a certificate of redemption in favor of petitioner.
A day before the expiration of the redemption period, petitioner decided to redeem the foreclosed
property directly from the Sheriff who accepted and issued to him the corresponding certificate
of redemption.
The court dismissed petitioner's complaint holding that it stated no cause of action because
petitioner failed to effect a valid redemption as required the General Banking Act.
ISSUE:
Whether or not a valid redemption was effected
HELD:
No, there was not.
Petitioner insists the case is governed by Act No. 3135, as amended, in relation to Section 30,
Rule 39 of the Revised Rules of Court which provides in part:
SEC. 30. Time and manner of, and amounts payable on, successive redemptions. Notice to be
given and filed. The judgment debtor, or redemptioner,, may redeem the property from the
purchaser, at any time within twelve months after the sale on paying the purchaser the amount of
his purchase, with one per centum per month interest thereon in addition, up to the time of
redemption, together with the amount of any assessments or taxes which the purchaser may have
paid thereon after purchase, and interest on such last-named amount at the same rate...
Respondent appellate court, applied the General Banking Act, held that no valid redemption was
effected because the amount was insufficient, it being less than the amount due under the real

estate mortgage contract of Coquinco or the latter's outstanding balance, with interest mortgage
contract plus expenses incurred by SIHI by reason of the foreclosure and the sale.

It must be emphasized that Section 78 of the General Banking Act, as amended by P.D. No. 1828
is applicable not only to "banks and banking institutions," but also to "credit institutions." And,
as certified by the Central Bank,* SIHI is a credit institution.
Had Coquinco attempted to redeem the subject foreclosed property, he would have had to pay
"the amount due under the mortgage deed ... with interest thereon at the rate specified in the
mortgage and all costs ... and other expenses incurred . . . by reason of the execution (or
foreclosure) and sale and as a result of the custody of said property less the income received
from the property . . ." pursuant to the General Banking Act in order to effect a valid redemption.
Since petitioner merely stepped into the shoes of Coquinco his assignor, petitioner should have
tendered and paid the same amount in order to redeem the property.
18. LIGUTAN vs. CA, GR# 138677
Doctrine:
Though penalty cannot be removed due to the agreement between the parties, except when there
is substantial performance in good faith by the obligor, the courts may equitably reduce (1) if it is
iniquitous or unconscionable, (2) if the principal obligation has been partly or irregularly
complied with.
FACTS:
Ligutan and dela Llana, obtained a loan from Security Bank and Trust Co. executing a
promissory note binding themselves jointly and severally to pay the sum borrowed with an
interest of 15.89% per annum upon maturity, a penalty of 5% every month on the outstanding
principal and interest in case of default, and 10% of the total amount due by way of attorneys
fees if the matter were indorsed to a lawyer for collection or if a suit were instituted to enforce
payment. The debtors failed to settle the debt. A complaint for recovery of the amount due was
filed with the RTC. The court held, among others, the borrowers were liable for a 3% per month
penalty (instead of 5%) and 10% of the total amount of the indebtedness for attorneys fee, in
addition to the principal loan. When case was pending for appeal, debtor Ligutan and his wife
mortgaged their real estate for security of the existing loan and in effect novating the contract
between them and the bank. Said Mortgage was foreclosed extrajudicially without the
mortgagors knowledge. Not satisfied with the decision of the appellate court, the debtors, herein
petitioners, filed a petition for review on certiorari.
ISSUE:
Whether or not the interest, penalty and attorneys fee decided are still exorbitant, iniquitous and
unconscionable

HELD:
The penalty clause is recognized in Art. 1226 of the New Civil Code. The SC said it is an
accessory undertaking (1) to assume greater liability on the part of an obligor in case of breach of
an obligation (2) to strengthen the coercive force of the obligation, and (3) to provide, in effect,
for what could be the liquidated damages resulting from such a breach. Though penalty cannot
be removed due to the agreement between the parties, except when there is substantial
performance in good faith by the obligor, the courts may equitably reduce (1) if it is iniquitous or
unconscionable, (2) if the principal obligation has been partly or irregularly complied with.
In this case, the SC sees no cogent ground to modify the ruling of CA in reducing the penalty.
Penalty cannot be set aside for this has been agreed by the parties and due to the fact that debtors
repeatedly breached their contractual obligation. Reduction was proper since debtor made a
partial
fulfillment
of
the
obligation.
The SC also ruled that the interest does not appear as being excessive because:
1) the payment of interest is not exactly the same as that of a surcharge or a penalty for a penalty
stipulation
is
not
necessarily
preclusive
of
interest;
and
2) a penalty stipulation is not necessarily preclusive of interest the two being distinct concepts
which
may
separately
be
demanded.
Hence, petition is denied.
19. SUMERARIZ V DBP
Doctrine:
It may not be amiss to note that, unlike Section 30 of Rule 39 of the Rules of Court, which
permits the extension of the period of redemption of mortgaged properties, Section 3 of
Commonwealth Act No. 459, in relation to Section 9 of Republic Act No. 85, which governs the
redemption of property mortgaged to the Bank, does not contain a similar provision.
FACTS:
Spouses Sumerariz constituted, in favor of the Rehabilitation Finance Corporation now
Development Bank of the Philippines a real estate mortgage of two (2) parcels of land
forming part of San Andres Subdivision, Manila and covered by Transfer Certificate of Title No.
1442, in their names, including a house to be constructed thereon, to guarantee a P15,000.00 loan
granted them by the Bank, payable within ten (10) years, at a given monthly amortization. In
view of plaintiffs' failure to comply with the terms and conditions of their contract, the Bank
asked the sheriff of Manila to take possession of the property and sell it at public auction. After
several postponements made upon plaintiffs' request, the sale was set for March 29, 1955. Upon
the behest of Juan Sumerariz made the day before, the Bank agreed, however, to postpone the
sale if there was a token payment of at least P100.00, before 9:00 a.m., the next day. No such
payment having been made, the Bank bought the property, on March 29, for P8,000.00, as the
highest bidder.

Subsequently, the Bank repeatedly notified the plaintiffs that they could redeem the property
within one (1) year, or not later than March 29, 1956, upon a down payment of P2,806.64, the
balance payable in ten (10) years, at the rate of P166.50 per month. Instead of exercising the
right of redemption, on March 26, 1956, plaintiffs instituted Civil Case No. 29306, of the Court
of First Instance of Manila, against the Bank and the sheriff of Manila, to set aside the
aforementioned foreclosure sale, upon the ground that the Bank had failed to comply with its
agreement to postpone the auction sale scheduled to be held on March 29, 1956.
On July 19, 1956, while the case was pending in the trial Court, the Bank sold the property to the
Philippine Surety and Insurance Co., Inc., hereinafter referred to as the Surety Co. Subsequently,
or on January 13, 1958, laid Court rendered a decision dismissing the complaint in case No.
29306, for the reason that plaintiffs had not redeemed the property within the period prescribed
by law therefor and that the Bank had thereby become its absolute owner. Said decision was, on
November 5, 1959, affirmed by the Court of Appeals, in CA-G.R. No. 25077-R. Plaintiffs
petitioned the Supreme Court to review by certiorari the decision of the Court of Appeals; but
denied the petition,on February 5, 1960.
ISSUE:
WON the period to redeem was suspended by the institution of a separate civil case for
annulment of mortgage, foreclosure.
HELD:
YES. Although not a party in the first case, the inclusion of the Surety Co. as defendant in the
case at bar does not detract from the legal identity of both cases, because, by buying the property
from the Bank, the Surety Co. became merely the Bank's success. Neither does the absence, as
party herein, of the sheriff, who was one of the defendants in the first case, negate said identity,
inasmuch as the sheriff was but a formal party in said previous case, and is virtually a party in
the present proceedings, although not explicitly mentioned as such therein.
The subject-matter of both cases is, obviously, the same the property in question. There is,
likewise, identity of the cause of action. In the first case, the issue was the validity of the auction
sale in favor of the Bank, which sale, plaintiffs contended, had been made in violation of their
agreement with the Bank. In the case at bar, plaintiffs maintain that the conveyance by the Bank
to the Surety Co. is invalid, and this pretense is anchored upon the predicate that, when it took
place, the property did not belong to the Bank, the sale in its favor by the sheriff having been
made in violation of the alleged agreement aforementioned, which predicate had been rejected
Court in the previous case. Similarly, the cause of in the first case was based upon the alleged
right of the plaintiffs to the property in question, upon the ground that its sale to the Bank was
illegal. This premise is, also, the cornerstone of plaintiffs' cause of action in the case at bar.
Plaintiffs maintain that the period of one (1) year to redeem the property in question was

suspended by the institution of Case No. 29306, on March 26, 1956, or three (3) days before the
expiration of said period. We have not found, however, any statute or decision in support of this
pretense. Moreover, up to now plaintiffs have not exercised the right of redemption. Indeed,
although they have intimated their wish to redeem the property in question, they have not
deposited the amount necessary therefor. It may not be amiss to note that, unlike Section 30 of
Rule 39 of the Rules of Court, which permits the extension of the period of redemption of
mortgaged properties, Section 3 of Commonwealth Act No. 459, in relation to Section 9 of
Republic Act No. 85, which governs the redemption of property mortgaged to the Bank, does not
contain a similar provision. Again this question has been definitely settled by the decision in the
previous case declaring that plaintiffs' right of redemption has already been extinguished in view
of their failure to exercise it within the statutory period.
20. Cavite Development Bank v. Lim
Doctrine:
Definition of option contract: It is a preparatory contract in which one party grants to the other,
for a fixed period and under specified conditions, the power to decide, whether or not to enter
into a principal contract, it binds the party who has given the option not to enter into the principal
contract with any other person during the period designated, and within that period, to enter into
such contract with the one to whom the option was granted, if the latter should decide to use the
option. It is a separate agreement distinct from the contract to which the parties may enter upon
the consummation of the option.
Exception to rule that sale of mortgaged property is void when mortgagor is not the owner
thereof: mortgagee in good faith (all persons dealing with property covered by a Torrens
Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on the
face of the title)
Facts:
June 15, 1983 Rodolfo Guansing obtained a loan from CDB, to secure which he mortgaged a
parcel of land situated at La Loma and covered by TCT registered in his name.
As Guansing defaulted in the payment of his loan, CDB foreclosed the mortgage. The mortgaged
property was sold to CDB as the highest bidder at the foreclosure sale. Guansing failed to
redeem, and CDB consolidated title to the property in its name.
June 16, 1988 private respondent Lolita Chan Lim, assisted by a broker named Remedios
Gatpandan, offered to purchase the property from CDB.
Written Offer to Purchase:
We hereby offer to purchase your property at #63 Calavite and Retiro Sts., La Loma, Quezon
City for P300,000.00 under the following terms and conditions:
(1) 10% Option Money;

(2) Balance payable in cash;

(3) Provided that the property shall be cleared of illegal occupants or tenants.
Lim paid CDB P30,000 as Option Money.
After some time following up the sale, Lim discovered that the subject property was originally
registered in the name of Perfecto Guansing, father of mortgagor Rodolfo. Rodolfo succeeded in
having the property registered in his name under TCT No. 300809, the same title he mortgaged
to CDB. It appears, however, that the father, Perfecto, instituted a civil case for the cancellation
of his sons title. The trial court rendered a decision restoring Perfectos previous title and
cancelling TCT No. 300809 on the ground that the latter was fraudulently secured by Rodolfo.
This decision has since become final and executory.
Lim and her husband filed an action for specific performance and damages against CDB and its
mother-company, Far East Bank and Trust Co.
RTC in favor of Lim spouses: there was a perfected contract of sale; CDB and FEBTC liable for
damages. CA affirmed.
Issue:
W/N there was a VALID contract of sale between the parties.
Held:
NO.
There is a perfected contracted of sale
Contracts are not defined by the parties thereto but by principles of law. In determining the
nature of a contract, the courts are not bound by the name or title given to it by the contracting
parties. In the case at bar, the sum of P30,000, although denominated in the offer to purchase as
"option money," is actually in the nature of earnest money or down payment when considered
with the other terms of the offer.
Definition of option contract: It is a preparatory contract in which one party grants to the other,
for a fixed period and under specified conditions, the power to decide, whether or not to enter
into a principal contract, it binds the party who has given the option not to enter into the principal
contract with any other person during the period designated, and within that period, to enter into
such contract with the one to whom the option was granted, if the latter should decide to use the
option. It is a separate agreement distinct from the contract to which the parties may enter upon
the consummation of the option.
After the payment of the 10% option money, the Offer to Purchase provides for the payment
only of the balance of the purchase price, implying that the "option money" forms part of the
purchase price (i.e. earnest money).

CDB has accepted Lims offer to purchase and considered it as good and no longer subject to a
final approval.
However, it is impossible for CDB to perform its obligation as seller to deliver and transfer
ownership of the property. Nemo dat quod non habet (One cannot give what one does not have).
Ownership of the thing sold is required not during the perfection of the contract, but during
consummation.
. But it is void.
The sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo Guansing must be
deemed a nullity for CDB did not have a valid title to the said property. To be sure, CDB never
acquired a valid title to the property because the foreclosure sale, by virtue of which the property
had been awarded to CDB as highest bidder, is likewise void since the mortgagor was not the
owner of the property foreclosed.
Exception to rule that sale of mortgaged property is void when mortgagor is not the owner
thereof: mortgagee in good faith (all persons dealing with property covered by a Torrens
Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on the
face of the title)
Private respondents are entitled to recover the P30,000 option money paid by them plus legal
interest. Also, considering CDBs negligence, the award of moral damages on the basis of Arts.
21 and 2219 of the Civil Code is proper.