Civil Law Review II 10th Assignment (Credit Transactions)
1. Eastern Shipping Lines v. CA (1994)
Parties:
Mercantile Insurance Company Insurer
(plaintiff in this case)
Eastern Shipping Lines Shipping Company
Metro Port Service, Inc. Arrastre Operator
Allied Brokerage Corporation Customs Broker
Facts:
Two fiber drums of riboflavin were shipped from
Japan via a vessel owned by Eastern Shipping Lines.
The shipment was insured by Mercantile Insurance
Company. Upon arrival of the shipment in Manila, it was
discharged unto the custody of Metro Port, which
excepted to one drum said to be in bar order, which
damage was unknown to the Insurer. Later on, Allied
Brokerage received the shipment, one drum opened
and without seal. It then delivered the shipment to the
consignees warehouse, which excepted to one drum
which contained spillages, while the rest of the
contents was adulterated/fake. As a result of the
losses, Insurer paid the consignee in accordance with
its insurance policy. Exercising its right of subrogation,
the Insurer sued Eastern Shipping Lines, Metro Port
Service and Allied Brokerage Corporation for damages.
The trial court (upheld by the CA) ruled in favour of
the Insurer and adjudged defendants jointly and
severally liable to pay:
The amount of P19,032.95, with the present legal
interest of 12% per annum from October 1, 1982,
the date of filing of this complaints, until fully paid
(the liability of defendant Eastern Shipping, Inc.
shall not exceed US$500 per case or the CIF value
of the loss, whichever is lesser, while the liability of
defendant Metro Port Service, Inc. shall be to the
extent of the actual invoice value of each package,
crate box or container in no case to exceed
P5,000.00 each, pursuant to Section 6.01 of the
Management Contract);
Issues:
1. Whether or not the payment of legal interest on
an award for loss or damage is to be computed from
the complaint is filed or from the date the decision
appealed from is rendered.
2. Whether the applicable rate of interest, referred
to above, is 12% or 6%.
Ruling:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the
measure of recoverable damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed,
as follows:
1. When the obligation is breached, and it consists
in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
that which may have been stipulated in
writing. 21 Furthermore, the interest due shall itself
earn legal interest from the time it is judicially
demanded. 22 In the absence of stipulation, the rate
of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of
Article 1169 23 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed
at the discretion of the court 24 at the rate of
6% per annum. 25 No interest, however, shall be
adjudged on unliquidated claims or damages
except when or until the demand can be
established with reasonable certainty. Accordingly,
where the demand is established with reasonable
certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially
(Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time
the demand is made, the interest shall begin to run
only from the date the judgment of the court is
made (at which time the quantification of damages
may be deemed to have been reasonably
ascertained). The actual base for the computation
of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum
of money becomes final and executory, the rate of
legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its
satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of credit.
2. Sps. Florendo v. CA (1996)
Facts:
Gilda Florendo was an employee of Land Bank from
May 17, 1976 until August 16, 1984 when she
voluntarily resigned. However, before her resignation,
she applied for a housing loan of P148,000.00, payable
within 25 years from Land Banks Provident Fund on
July 20, 1983. On March 19, 1985, Land Bank increased
the interest rate on Florendos loan from 9% per
annum to 17%, the said increase to take effect on
March 19, 1985. Spouses Florendo protested the
increase in a letter dated June 11, 1985 to which Land
Bank replied through a letter. Thereafter, Land Bank
 Civil Law Review II 10th Assignment (Credit Transactions)
kept on demanding that Florendo pay the increased
interest or the new monthly installments based on the
increased interest rate, but Spouses Florendo
vehemently maintained that the said increase is
unlawful and unjustifiable. Because of Land Banks
repeated demands, Spouses Florendo were forced to
file the instant suit for injunction and damages.
Issue: Whether the respondent bank has a valid and
legal basis to impose an increased interest rate on the
Florendo's housing loan.
Ruling: NONE. In Banco Filipino Savings & Mortgage
Bank vs. Navarro 152 SCRA 346 (1987), the Supreme
Court in essence ruled that in general there is nothing
inherently wrong with escalation clauses. In IBAA vs.
Spouses Salazar 159 SCRA 133 (1988), the Court
reiterated the rule that escalation clauses are valid
stipulations in commercial contracts to maintain fiscal
stability and to retain the value of money in long term
contracts. However, the unilateral determination and
imposition of increased interest rates by Land Bank is
obviously violative of the principle of mutuality of
contracts ordained in Article 1308 of the Civil Code.
3. PNB v. CA and Spouses Fernandez (1994)
Facts:
Spouses Fernandez (private respondents) obtained
a loan from PNB in the amount of P50,000 as
evidenced by a Credit Agreement. The credit
agreement, promissory note and the deed of real
estate mortgage executed by private respondents. all
contained a stipulation to the effect that PNB reserves
the right to increase the interest rate within the limits
allowed by law at any time depending on whatever
policy it may adopt in the future. Later on, private
respondents were granted another loan secured by
another real estate mortgage with the same
stipulations. Meanwhile, PNB gradually increased the
interest rate from 6% to 30% to 12%.
Private respondents filed an action for specific
performance against PNB and NACIDA praying that the
court orders PNB and NACIDA to issue in their favor a
release of mortgage among others.
The RTC dismissed the complaint, while the CA
reversed the dismissal with respect to PNB and
disallowed the increases in interest rates.
Issue: Whether or not PNBs unilateral increase of the
interest rate proper.
Ruling: No. P.D. No. 1684 and C.B. Circular No. 905 no
more than allow contracting parties to stipulate freely
regarding any subsequent adjustment in the interest
rate that shall accrue on a loan or forbearance of
money, goods or credits. In fine, they can agree to
adjust, upward or downward, the interest previously
stipulated. However, contrary to the stubborn
insistence of petitioner bank, the said law and circular
did not authorize either party to unilaterally raise the
interest rate without the other's consent. It is basic that
there can be no contract in the true sense in the
absence of the element of agreement, or of mutual
assent of the parties. If this assent is wanting on the
part of the one who contracts, his act has no more
efficacy than if it had been done under duress or by a
person of unsound mind. Similarly, contract changes
must be made with the consent of the contracting
parties. The minds of all the parties must meet as to
the proposed modification, especially when it affects
an important aspect of the agreement. In the case of
loan contracts, it cannot be gainsaid that the rate of
interest is always a vital component, for it can make or
break a capital venture. Thus, any change must be
mutually agreed upon, otherwise, it is bereft of any
binding effect. We cannot countenance petitioner
bank's posturing that the escalation clause at bench
gives it unbridled right to unilaterally upwardly adjust
the interest on private respondents' loan. That would
completely take away from private respondents the
right to assent to an important modification in their
agreement, and would negate the element of mutuality
in contracts.
4. Medel v. CA (1998)
Facts:
In this case, there were three loan transactions on
November 7 and 19, 1985 and on June 11, 1986.
Servando and Medel obtained a loan from Veronica
who was engaged in the money lending business under
the name "Gonzales Credit Enterprises" as evidenced
by promissory notes. On maturity of the first two
promissory notes, the borrowers failed to pay their
indebtedness. Consequently, like the previous loans,
Servando and Medel failed to pay the third loan on
maturity. Servando and Medel with the latter's
husband, Dr. Rafael Medel, consolidated all their
previous unpaid loans totaling P440,000.00, and
sought from Veronica another loan in the amount of
P60,000.00, bringing their indebtedness to a total of
P500,000.00, payable on August 23, 1986. In the
promissory note it was stipulated that Servando and
Medels loan would earn interest at 5.5% per month
plus 2% service charge per annum until fully paid
according to the amortization schedule contained
therein.
Issue: Whether the stipulated rate of interest at 5.5%
per month on the loan of P500,000.00 is usurious.
Ruling: NO. The stipulated rate of interest at 5.5% per
month is excessive, iniquitous, unconscionable and
exorbitant. However it is not usurious because as
consistently held, Circular No. 905 of the Central Bank,
adopted on December 22, 1982, has expressly
removed the interest ceilings of the Usury Law and that
the Usury Law is now legally inexistent. Interest can
now be charged as lender and borrower may agree
upon. The interest of 5.5% per month, or 66% per
annum, stipulated upon by the parties in the
promissory note is iniquitous or unconscionable, and,
hence, contrary to morals ("contra bonos mores"), if
not against the law. The stipulation is void. The courts
shall reduce equitably liquidated damages, whether
intended as an indemnity or a penalty if they are
iniquitous or unconscionable.
5. PNB v. CA and Spouses Fernandez (1994)
Facts:
 Civil Law Review II 10th Assignment (Credit Transactions)
On 1986, 1987, and 1990 the Solangons executed
3 real estate mortgages in which they mortgaged a
parcel of land situated in Sta. Maria, Bulacan, in favor
of the Salazar to secure payment of a loan of P60,
000.00 payable within a period of four (4) months, with
interest thereon at the rate of 6% per month, to secure
payment of a loan of P136, 512.00, payable within a
period of one (1) year, with interest thereon at the
legal rate, and to secure payment of a loan in the
amount of P230, 000.00 payable within a period of four
(4) months, with interest thereon at the legal rate. This
action was initiated by the Solangons to prevent the
foreclosure of the mortgaged property. They alleged
that they obtained only one loan form the defendant-
appellee, and that was for the amount of P60, 000.00,
the payment of which was secured by the first of the
above-mentioned mortgages. The subsequent
mortgages were merely continuations of the first one,
which is null and void because it provided for
unconscionable rate of interest. They have already paid
the defendant-appellee P78, 000.00 and tendered P47,
000.00 more, but the latter has initiated foreclosure
proceedings for their alleged failure to pay the loan
P230, 000.00 plus interest.
Issue: Whether or not the interest rate of 6% per
month unconscionable.
Ruling: Yes, although the C.B. Circular No 905 lifted
the ceiling on interest rates there is nothing in the said
circular that grants lenders carte blanche authority to
raise interest rates to levels which will either enslave
their borrowers or lead to hemorrhaging of their assets.
In the case of Medel vs. C.A. the S.C. has held that
5.5% per month was reduced for being iniquitous,
unconscionable and exorbitant hence it is contrary to
morals (contra bonos mores). In this case, the
Solangons are in a worse situation than the Medel
case (6% per month interest rate) the said interest rate
should be reduced equitably.
6. Dio v. Jardines (2006)
Facts:
On December 14, 1992, Leonides C. Dio
(petitioner) filed a Petition for Consolidation of
Ownership with the Regional Trial Court of Baguio City,
Branch 7 (RTC). She alleged that: on January 31, 1987,
Lina Jardines (respondent) executed in her favor a
Deed of Sale with Pacto de Retro over a parcel of land
with improvements thereon covered by Tax Declaration
No. 44250, the consideration for which amounted to
P165,000.00; it was stipulated in the deed that the
period for redemption would expire in six months or on
July 29, 1987; such period expired but neither
respondent nor any of her legal representatives were
able to redeem or repurchase the subject property; as
a consequence, absolute ownership over the property
has been consolidated in favor of petitioner.
Respondent countered in her Answer that: the
Deed of Sale with Pacto de Retro did not embody the
real intention of the parties; the transaction actually
entered into by the parties was one of simple loan and
the Deed of Sale with Pacto de Retro was executed just
as a security for the loan; the amount borrowed by
respondent during the first week of January 1987 was
only P50,000.00 with monthly interest of 9% to be paid
within a period of six months, but since said amount
was insufficient to buy construction materials for the
house she was then building, she again borrowed an
additional amount of P30,000.00; it was never the
intention of respondent to sell her property to
petitioner; the value of respondents residential house
alone is over a million pesos and if the value of the lot
is added, it would be around one and a half million
pesos; it is unthinkable that respondent would sell her
property worth one and a half million pesos for only
P165,000.00; respondent has even paid a total of
P55,000.00 out of the amount borrowed and she is
willing to settle the unpaid amount, but petitioner
insisted on appropriating the property of respondent
which she put up as collateral for the loan; respondent
has been the one paying for the realty taxes on the
subject property; and due to the malicious suit filed by
petitioner, respondent suffered moral damages.
The RTC ruled in favor of petitioner, but the CA
reversed, holding that the true nature of the contract
between the parties was one of equitable mortgage.
The Supreme Court agreed with the CA.
Issue: Whether or not the 9% or 10% monthly interest
rate unconscionable.
Ruling: Yes. Applying the afore-cited rulings to the
instant case, the inescapable conclusion is that the
agreed interest rate of 9% per month or 108% per
annum, as claimed by respondent; or 10% per month
or 120% per annum, as claimed by petitioner, is clearly
excessive, iniquitous, unconscionable and exorbitant.
Although respondent admitted that she agreed to the
interest rate of 9%, which she believed was exorbitant,
she explained that she was constrained to do so as she
was badly in need of money at that time. As declared
in the Medel case and Imperial vs. Jaucian, [i]niquitous
and unconscionable stipulations on interest rates,
penalties and attorneys fees are contrary to morals.
Thus, in the present case, the rate of interest being
charged on the principal loan of P165,000.00, be it 9%
or 10% per month, is void. The CA correctly reduced
the exhorbitant rate to legal interest.
Applied to the present case, since the agreed
interest rate is void, the parties are considered to have
no stipulation regarding the interest rate. Thus, the
rate of interest should be 12% per annum to be
computed from judicial or extrajudicial demand,
subject to the provisions of Article 1169 of the Civil
Code: Those obliged to deliver or to do something
incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of
the obligation. However, the demand by the creditor
shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so
declares; or (2) When from the nature and the
circumstances of the obligation it appears that the
designation of the time when the thing is to be
delivered or the service is to be rendered was a
controlling motive for the establishment of the
contract; or (3) When demand would be useless, as
when the obligor has rendered it beyond his power to
perform.
 Civil Law Review II 10th Assignment (Credit Transactions)

The records do not show any of the circumstances
enumerated above. Consequently, the 12% interest
should be reckoned from the date of extrajudicial
demand. Petitioner testified that she went to
respondents place several times to try to collect
payment, but she (petitioner) failed to specify the
dates on which she made such oral demand. The only
evidence which clearly shows the date when petitioner
made a demand on respondent is the demand letter
dated March 19, 1989 (Exh. C), which was received by
respondent or her agent on March 29, 1989 per the
Registry Return Receipt (Exh. C- 1). Hence, the interest
of 12% per annum should only begin to run from March
29, 1989, the date respondent received the demand
letter from petitioner.
7. Imperial v. Jaucian (2004)
Facts:
Petitioner obtained six (6) separate loans
amounting to P 320,000.00 from the respondent. In the
written agreement, they agreed upon the 16% interest
per month plus penalty charge of 5% per month and
the 25% attorneys fee, failure to pay the said loans on
the stipulated date. Petitioner executed six (6)
separate promissory notes and issued several checks
as guarantee for payment. When the said loans
become overdue and unpaid, especially when the
petitioners checks issued were dishonored, respondent
made repeated oral and written demands for payment.
The petitioner was able to pay only P 116,540.00 as
found by the RTC. Although she alleged that she had
already paid the amount of P 441,780.00 and the
excess of P 121,780.00 is more than the interest that
could be legally charged, the Court affirms the findings
of RTC that petitioner is still indebted to the
respondent.
Issue: Whether or not the stipulated interest of 16%
per month, 5% per month for penalty charge and 25%
attorneys fee are unconscionable.
Ruling: YES. The rate must be equitably reduced for
being iniquitous, unconscionable and exorbitant. While
the Usury Law ceiling on interest rates was lifted by
C.B. Circular No. 905, nothing in the said circular grants
lenders carte blanche authority to raise interests rates
to levels which will either enslave their borrowers or
lead to a hemorrhaging of their assets. When the
agreed rate is iniquitous or unconscionable, it
considered contrary to morals, if not against the law.
Such stipulation is void. Since the stipulation is void, it
is as if there was no express contract thereon. Hence,
courts may reduce the interest rate as reason and
equity demand. The interest rate of 16% per month
was reduced to 1.167% per month or 14% per annum
and the penalty charge of 5% per month was also
reduced to 1.167% per month or 14% per annum. The
attorneys fees here are in the nature of liquidated
damages and the stipulation therefor is aptly called a
penal clause. So long as the stipulation does not
contravene the law, morals, public order or public
policy, it is binding upon the obligor. Nevertheless, in
the case at bar, petitioners failure to comply fully with
her obligation was not motivated by ill will or malice.
The partial payments she made were manifestations of
her good faith. Hence the attorneys fees were reduced
to 10% of the total due and payable.
The trial court, as affirmed by the CA, reduced the
interest rate from 16 percent to 1.167 percent per
month or 14 percent per annum; and the stipulated
penalty charge, from 5 percent to 1.167 percent per
month or 14 percent per annum. Petitioner alleges that
absent any written stipulation between the parties, the
lower courts should have imposed the rate of 12
percent per annum only. The records show that there
was a written agreement between the parties for the
payment of interest on the subject loans at the rate of
16 percent per month. As decreed by the lower courts,
this rate must be equitably reduced for being
iniquitous, unconscionable and exorbitant. "While the
Usury Law ceiling on interest rates was lifted by C.B.
Circular No. 905, nothing in the said circular grants
lenders carte blanche authority to raise interest rates
to levels which will either enslave their borrowers or
lead to a hemorrhaging of their assets." In Medel v. CA,
the Court found the stipulated interest rate of 5.5
percent per month, or 66 percent per annum,
unconscionable. In the present case, the rate is even
more iniquitous and unconscionable, as it amounts to
192 percent per annum. When the agreed rate is
iniquitous or unconscionable, it is considered "contrary
to morals, if not against the law. [Such] stipulation is
void." Since the stipulation on the interest rate is void,
it is as if there were no express contract thereon.
Hence, courts may reduce the interest rate as reason
and equity demand.1 We find no justification to reverse
or modify the rate imposed by the two lower courts.
8. Gullas v. PNB (1935)
Facts:
Cebu The Treasurer for the US Veterans Bureau
issued a warrant in the amount of $361 payable to the
order of Francisco Bascos who indorsed it to Atty.
Paulino Gullas and Pedro Lopez. Gullas and Lopez
further indorsed the warrant to PNB. However, the US
Veterans Bureau later on dishonored the instrument.
PNB notified Gullas, who happened to be a depositor of
PNB, it applied the outstanding balance of Gullas with
PNB for the partial payment of the warrant. Gullas, who
was in Manila at that time, so he did not get the notice.
Because of the deduction PNB made, checks issued
by Gullas for the payment of his insurance were not
paid.
Issues: (1) Whether or not PNB had the right to apply
the deposit to the debt of Gullas; and (2) Whether or
not PNB is liable to Gullas for damages.
Ruling:
(1) Yes. As a general rule, a bank has a right of set
off of the deposits in its hands for the payment of any
indebtedness to it on the part of a depositor.
1 Note: Just because a stipulated interest rate is
unconscionable, it does not follow that the court would
automatically impose the legal interest rate.
 Civil Law Review II 10th Assignment (Credit Transactions)
(2) Yes. Starting, therefore, from the premise that
the Philippine National Bank had with respect to the
deposit of Gullas a right of set off, we next consider if
that remedy was enforced properly. The fact we believe
is undeniable that prior to the mailing of notice of
dishonor, and without waiting for any action by Gullas,
the bank made use of the money standing in his
account to make good for the treasury warrant. At this
point recall that Gullas was merely an indorser and had
issued in good faith. As to a depositor who has funds
sufficient to meet payment of a check drawn by him in
favor of a third party, it has been held that he has a
right of action against the bank for its refusal to pay
such a check in the absence of notice to him that the
bank has applied the funds so deposited in
extinguishment of past due claims held against him.
(Callahan vs. Bank of Anderson [1904], 2 Ann. Cas.,
203.) The decision cited represents the minority
doctrine, for on principle it would seem that notice is
not necessary to a maker because the right is based on
the doctrine that the relationship is that of creditor and
debtor. However this may be, as to an indorser the
situation is different, and notice should actually have
been given him in order that he might protect his
interests.
9. Guingona v. City Fiscal of Manila (1984)
Facts:
Clement David charged Guingona, Martin, and
Santos with estafa and violation of Central Bank
Circular No. 364 and related Central Bank regulations
on foreign exchange transactions. David invested with
the Nation Savings and Loan Association, (NSLA) the
sum of P1,145,546.20 on nine deposits, P13,531.94 on
savings account deposits (jointly with his sister, Denise
Kuhne), US$10,000.00 on time deposit, US$15,000.00
under a receipt and guarantee of payment and
US$50,000.00 under a receipt that David was induced
into making the aforestated investments by Robert
Marshall, an Australian national who was allegedly a
close associate of petitioner Guingona Jr., then NSLA
President, Martin, then NSLA Executive Vice-President
of NSLA and Santos, then NSLA General Manager; that
on March 21, 1981 NSLA was placed under receivership
by the Central Bank, so that David filed claims
therewith for his investments and those of his sister;
that on July 22, 1981 David received a report from the
Central Bank that only P305,821.92 of those
investments were entered in the records of NSLA; that,
therefore, the respondents in I.S. No. 81-31938
misappropriated the balance of the investments, at the
same time violating Central Bank Circular No. 364 and
related Central Bank regulations on foreign exchange
transactions; that after demands, petitioner Guingona
Jr. paid only P200,000.00, thereby reducing the
amounts misappropriated to P959,078.14 and
US$75,000.00." At the inception of the preliminary
investigation before respondent Lota, petitioners
moved to dismiss the charges against them for lack of
jurisdiction because David's claims allegedly comprised
a purely civil obligation which was itself novated. Fiscal
Lota denied the motion to dismiss. But, after the
presentation of David's principal witness, the
petitioners filed the instant petition because: (a) the
production of the Promissory Notes, Banker's
Acceptance, Certificates of Time Deposits and Savings
Account allegedly showed that the transactions
between David and NSLA were simple loans, i.e., civil
obligations on the part of NSLA which were novated
when Guingona, Jr. and Martin assumed them; and (b)
David's principal witness allegedly testified that the
duplicate originals of the aforesaid instruments of
indebtedness were all on file with NSLA, contrary to
David's claim that some of his investments were not
recorded.
Issue: Whether there was a contract of deposit
between David and the bank.
Ruling: NONE. When David invested his money on
nine savings deposits with the aforesaid bank, the
contract that was perfected was a contract of simple
loan or mutuum and not a contract of deposit. Under
Art. 1980 of the New Civil Code, [f]ixed, savings, and
current deposits of-money in banks and similar
institutions shall be governed by the provisions
concerning simple loan. In the case of Serrano v.
Central Bank of the Philippines (96 SCRA 102 [1980]), it
was ruled that bank deposits are in the nature of
irregular deposits. They are really loans because they
earn interest. Hence, the relationship between Clement
David and the Nation Savings and Loan Association is
that of creditor and debtor; consequently, the
ownership of the amount deposited was transmitted to
the Bank upon the perfection of the contract and it can
make use of the amount deposited for its banking
operations, such as to pay interests on deposits and to
pay withdrawals. While the Bank has the obligation to
return the amount deposited, it has, however, no
obligation to return or deliver the same money that
was deposited. And, the failure of the Bank to return
the amount deposited will not constitute estafa
through misappropriation punishable under the Revised
Penal Code, but it will only give rise to civil liability over
which the public respondents have no jurisdiction.
10. BPI v. Reyes (1996)
Facts:
Edvin F. Reyes opened a joint savings account with
his wife, Sonia at BPI Cubao. Reyes also held a joint
AND/OR Savings Account with his grandmother,
Emeteria Fernandez, at the same BPI branch. He
regularly deposited in this account the U.S. Treasury
Warrants payable to the order of Emeteria as her
monthly pension. Emeteria died on December 28, 1989
without the knowledge of the U.S. Treasury
Department. She was still sent U.S. Treasury Warrant in
the amount of U.S. $377.003 or P10,556.00. Reyes
deposited the said U.S. treasury check of Fernandez to
his joint savings account with his wife. Two months
after Reyes transferred the funds of his joint account
with Fernandez amounting to P13,112.91 to his joint
account with his wife. The U.S. Treasury Warrant was
dishonored as it was discovered that Fernandez died
three days prior to its issuance. The U.S. Department of
Treasury requested the bank for a refund. For the first
time the bank came to know of the death of Fernandez.
Reyes was informed that the treasury check was the
subject of a claim by Citibank NA, correspondent of BPI.
He verbally authorized them to debit from his other
 Civil Law Review II 10th Assignment (Credit Transactions)
joint account the amount stated in the dishonored U.S.
Treasury Warrant. On the same day, BPI debited the
amount of P10,556.00 from spouses Reyes joint
account. Reyes demanded from BPI the restitution of
the debited amount. He claimed that because of the
debit, he failed to withdraw his money when he needed
them. He then filed a suit for Damages against BPI
before the RTC. BPI, averred that Reyes gave them his
express verbal authorization to debit the questioned
amount. RTC dismissed the complaint for lack of cause
of action. On appeal, the CA reversed the RTCs
decision.
Issue: (1) Whether or not Reyes verbally authorized
BPI to debit from his other joint account the amount
claimed by the US Department of Treasury; and (2)
Whether a creditor-debtor relationship exists between
Reyes and BPI for legal compensation to be proper.
Ruling:
(1) Yes. We are not disposed to believe private
respondents allegation that he did not give any verbal
authorization. His testimony is uncorroborated. Nor
does he inspire credence. His past and fraudulent
conduct is an evidence against him. He concealed from
petitioner bank the death of Fernandez on December
28, 1989. As of that date, he knew that Fernandez was
no longer entitled to receive any pension. Nonetheless,
he still received the U.S. Treasury Warrant of
Fernandez, and on January 4, 1990 deposited the same
in Savings Account No. 3185-0128-82. To pre-empt a
refund, private respondent closed his joint account with
Fernandez (Savings Account No. 31- 85- 0128-82) on
March 8, 1990 and transferred its balance to his joint
account with his wife (Savings Account No. 3 185-0172-
56). Worse, private respondent declared under the
penalties of perjury in the withdrawal slip dated March
8, 1990 that his co-depositor, Fernandez, is still living.
By his acts, private respondent has stripped himself of
credibility.
(2) YES; therefore, legal compensation is proper.
Compensation shall take place when two persons, in
their own right, are creditors and debtors of each other.
Article 1290 of the Civil Code provides that when all
the requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount.
Legal compensation operates even against the will of
the interested parties and even without the consent of
them. Since this compensation takes place ipso jure, its
effects arise on the very day on which all its requisites
concur. When used as a defense, it retroacts to the
date when its requisites are fulfilled. The elements of
legal compensation are all present in the case at bar.
The obligors bound principally are at the same time
creditors of each other. BPI stands as a debtor of
Reyes, a depositor. At the same time, BPI is the creditor
of Reyes with respect to the dishonored U.S. Treasury
Warrant which the latter illegally transferred to his joint
account. The debts involved consist of a sum of money.
They are due, liquidated, and demandable.
11. Traders Insurance v. Dy Eng Giok (1958)
Facts:
From 1948 to 1952 the corporation "Destilleria Lim
Tuaco & Co., Inc." had one Dy Eng Giok as its provincial
sales agent, with the duty of turning over the proceeds
of his sales to the principal, the distillery company. As
of August 3, 1951, the agent Dy Eng Giok had an
outstanding running account in favor of his principal in
the sum of P12,898.61. On August 4, 1951, a surety
bond (Annex A, complaint) was executed by Dy Eng
Giok, as principal and appellant Traders Insurance and
Surety Co., as solidary guarantor, whereby they bound
themselves, jointly and severally, in the sum of
P10,000.00 in favor of the Destilleria Lim Tuaco & Co.,
Inc.
From August 4, 1951 to August 3, 1952, agent Dy
Eng Giok contracted obligations in favor of the
Destilleria Lim Tuaco & Co., in the total amount of
P41,449.93; and during the same period, he made
remittances amounting to P41,864.49. The distillary
company, however, applied said remittances first to Dy
Eng Giok's outstanding balance prior to August 4, 1951
(before the suretyship agreement was executed) in the
sum of P12,898.61; and the balance of P28,965.88 to
Dy's obligations between August 4, 1951 and August 3,
1952. It then demanded payment of the remainder
(P12,484.05) from the agent, and later, from the
appellant Surety Company. The latter paid P10,000.00
(the maximum of its bond) on July 17, 1953,
apparently, without questioning the demand; and then
sought reimbursement from Dy Eng Giok and his
counter guarantors, appellees herein. Upon their failure
to pay, it began the present action to enforce
collection.
Issue: Whether or not Destilleria Lim Tuaco & Co.
acted properly when it applied the remittances first to
Dy Eng Gioks outstanding balance prior to Aug. 4,
1951. (This, in turn, would determine whether or not
Traders Insurance has a cause of action against Dy Eng
Giok.)
Ruling: No, for two reasons:
The first is that, in the absence of express
stipulation, a guaranty or suretyship operates
prospectively and not retroactively; that is to say, it
secures only the debts contracted after the guaranty
takes effect (El Vencedor vs. Canlas, 44 Phil. 699). This
rule is a consequence of the statutory directive that a
guaranty is not presumed, but must be express, and
can not extend to more than what is stipulated. (New
Civil Code, Art. 2055). To apply the payments made by
the principal debtor to the obligations he contracted
prior to the guaranty is, in effect, to make the surety
answer for debts incurred outside of the guaranteed
period, and this can not be done without the express
consent of the guarantor. Note that the suretyship
agreement, Annex A, did not guarantee the payment of
any outstanding balance due from the principal debtor,
Dy Eng Giok; but only that he would turn over the
proceeds of the sales to the "Destilleria Lim Tuaco &
Co., Inc.", and this he has done, since his remittances
during the period of the guaranty exceed the value of
his sales. There is no evidence that these remittances
did not come from his sales.
The second reason is that, since the obligations of
Dy Eng Giok between August 4, 1951 to August 4,
 Civil Law Review II 10th Assignment (Credit Transactions)
1952, were guaranteed, while his indebtedness prior to
that period was not secured, then in the absence of
express application by the debtor, or of any receipt
issued by the creditor specifying a particular
imputation of the payment (New Civil Code, Art. 1252),
any partial payments made by him should be imputed
or applied to the debts that were guaranteed, since
they are regarded as the more onerous debts from the
standpoint of the debtor (New Civil Code, Art. 1254).
12. Spouses Toh v. Solidbank (2003)
Facts:
Solid Bank extended a credit facility worth P10
million in favor of First Business Paper Corporation
(FBPC). Spouses Toh (Chairman and Vice-President of
FBPC) and spouses Li (President and General Manager
of FBPC) signed the Continuing Guaranty prepared by
Solid Bank. The contract was a surety agreement and
provided for the solidary liability of the signatories in
consideration of loans for the account of FBPC. The
surety agreement also contained an acceleration
clause waiving rights of the sureties against delay and
gave future consent to the Banks action to extend the
time of payment without notice to the sureties. FBPC
started to avail of the credit facility. The Bank learned
that spouses Li had fraudulently departed from their
conjugal home and claimed payment plus interests
from FBPC, invoking the Continuing Guaranty. The Bank
filed a complaint for sum of money.
Issue: Whether the petitioner-spouses Li are liable for
their obligations as sureties of FBPC.
Ruling: NO. The extensions of the letters of credit
made by respondent Bank without observing the
restrictions for exercising the privilege constitute illicit
extensions prohibited under the Civil Code which
provides that an extension granted to the debtor by
the creditor without the consent of the guarantor
extinguishes the guaranty. This act of the Bank is not a
mere failure or delay on its part to demand payment
after the debt has become due, as was the case in
unpaid five letters of credit which the Bank did not
extend, but comprises separate and binding
agreements to extend the due date admitted by the
Bank itself. As a result of these illicit extensions,
petitioner-spouses are relieved of their obligations as
sureties of respondent FBPC under Art. 2079 of the
Civil Code. The attached properties of FBPC, except for
two of them, were abandoned by the Bank. The
consequence of these omissions is to discharge the
surety, under Art. 2080 of the Civil Code, or at the very
least, mitigate the liability of the surety up to the value
of the property released. The negligence of the Bank in
failing to safe-keep the security results in the material
alteration of the principal contract and consequently
releases the surety.
13. Dizon v. Suntay (1972)
Facts:
Lourdes G. Suntay is the owner of a 3-carat
diamond ring which was delivered to Clarita R. Sison
for sale on commission. Upon receiving the ring, Clarita
delivered the receipt to Lourdes. After the lapse of a
considerable time without Clarita having returned the
ring, Lourdes made demands but Clarita could not
comply because the ring was pledged by Melia Sison
with Dominador Dizon's pawnshop. When Lourdes
found out about the pledge, she filed a case for Estafa.
Lourdes asked for the return of her ring but Dominador
refused.
Issue: Whether Lourdes can recover the ring from
Dominador.
Ruling: YES. The possession of movable property
acquired in good faith is equivalent to a title.
Nevertheless, one who has lost any movable or has
been unlawfully deprived thereof may recover it from
the person in possession of the same. If the possessor
of a lost movable of which the owner has been
unlawfully deprived, has acquired it in good faith at a
public sale, the owner cannot obtain its return without
reimbursing the price paid therefor. The right of the
owner cannot be defeated even by proof that there
was good faith in the acquisition by the possessor. The
right of the owner to recover personal property
acquired in good faith by another, is based on his being
dispossessed without his consent. Dominador cannot
invoke estoppel to bar Lourdes from recovering the
ring. He is engaged in a business where ordinary
prudence is needed to ascertain whether an individual
who is offering a jewelry through pledge is entitled to
do so. If no such care be taken, he should be the last to
complain if thereafter the right of the true owner of
such jewelry should be recognized. He ought to have
been on his guard before accepting the pledge in
question. Evidently, there was no such precaution
availed of.
14. Uy Tong v. CA (1988)
Facts:
Petitioner spouses Uy Tong and Kho Po Giok used to
be the owners of Apartment No. 307 of the Ligaya
Building, together with the leasehold right for 99 years
over the land on which the building stands. The
spouses purchased from private respondent Bayanihan
seven units of motor vehicles which was evidenced by
a written Agreement containing a stipulation that if the
spouses should fail to pay their obligation to the
Bayanihan, the latter shall become automatically the
owner of the former's apartment which is located at
No. 307, Ligaya Building and in such event the spouses
shall execute the corresponding Deed of Absolute Sale
in favor of Bayanihan and/or the Assignment of
Leasehold Rights. The spouses failed to pay their
obligation so Bayanihan filed an action for specific
performance where spouses were ordered to pay their
balance and in case of failure to do so, to execute a
deed of assignment over the property involved. The
spouses elected to execute the deed of assignment
pursuant to said judgment. An order for execution of
the deed of assignment was issued by the trial court.
Notwithstanding said execution, the spouses remained
in the possession of premises as lessees for a given
period. Upon expiration of the said period, the spouses
failed to surrender the possession of the premises in
favor of Bayanihan. An action for recovery of
possession with damages was filed against the
 Civil Law Review II 10th Assignment (Credit Transactions)
spouses. The CFI ruled in favor of Bayanihan. CA
affirmed CFIs ruling. Hence, the present petition. The
spouses contended that the deed of assignment is null
and void because it is in the nature of a pactum
commissorium and/or was borne out of the same.
Issue: Whether the deed of assignment is null void,
being in the nature of a pactum commissorium.
Ruling: NO. A perusal of the terms of the questioned
agreement evinces no basis for the application of the
pactum commissorium provision. First, there is no
indication of any contract of mortgage entered into by
the parties. It is a fact that the parties agreed on the
sale and purchase of motor vehicles. Second, there is
no case of automatic appropriation of the property by
Bayanihan. When the spouses defaulted in their
installment payments, Bayanihan filed an action in
court for specific performance. Clearly, there was no
automatic vesting of title on Bayanihan because it took
the intervention of the trial court to exact fulfillment of
the obligation, which by its very nature is anathema to
pactum commissorium. Even granting that the original
agreement between the parties had the badges of
pactum commissorium, the deed of assignment does
not suffer the same fate as this was executed pursuant
to a valid judgment in the action for specific
performance filed by Bayanihan. The intervention of a
trial court to exact fulfillment of the obligation is by its
very nature, anathema to pactum commissorium.
15. Acme Shoe Rubber v. CA (1996)
Facts:
Chua Pac, president of Acme Shoe, Rubber &
Plastic Corporation, executed a chattel mortgage in
favor of Producers Bank as security for Acmes
corporate loan of P3 million. The deed of chattel
mortgage contained a stipulation which provides: This
mortgage shall also stand as security for said
obligations and any and all other obligations of the
MORTGAGOR to the MORTGAGEE of whatever kind and
nature, whether such obligations have been contracted
before, during or after the constitution of this
mortgage.
After the P3 million was paid, Acme borrowed P1
million from the bank. This time, it was unpaid. Thus,
the bank applied for extrajudicial foreclosure of the
chattel mortgage prompting Chua Pac to file an action
for injunction.
The RTC and the CA ruled in favor of the bank.
Issue: Would it be valid and effective to have a clause
in a chattel mortgage that purports to likewise extend
its coverage to obligations yet to be contracted or
incurred?
Ruling: No. While a pledge, real estate mortgage, or
antichresis may exceptionally secure after-incurred
obligations so long as these future debts are accurately
described, a chattel mortgage, however, can only
cover obligations existing at the time the mortgage is
constituted.
A chattel mortgage, as hereinbefore so intimated,
must comply substantially with the form prescribed by
the Chattel Mortgage Law itself. One of the requisites,
under Section 5 thereof, is an affidavit of good faith.
While it is not doubted that if such an affidavit is not
appended to the agreement, the chattel mortgage
would still be valid between the parties (not against
third persons acting in good faith), the fact, however,
that the statute has provided that the parties to the
contract must execute an oath that - "x x x (the)
mortgage is made for the purpose of securing the
obligation specified in the conditions thereof, and for
no other purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose of
fraud." makes it obvious that the debt referred to in the
law is a current, not an obligation that is yet merely
contemplated. In the chattel mortgage here involved,
the only obligation specified in the chattel mortgage
contract was the P3,000,000.00 loan which petitioner
corporation later fully paid. By virtue of Section 3 of the
Chattel Mortgage Law, the payment of the obligation
automatically rendered the chattel mortgage void or
terminated.
16. Roxas v. CA and Rural Bank of Dumalag
(1993)
Facts:
Petitioner Roxas is the owner of a parcel of land
located at Tanza Norte, Capiz. She obtained an
agricultural loan in the amount of PhP 2000. Real
estate mortgage was executed over the subject land as
security for the loan for failure to pay upon the loan's
maturity, private respondent foreclosed the mortgage;
subject land was sold at public auction to the bank,
being the highest bidder. Roxas filed a complaint for
cancellation of foreclosure of mortgage an annulment
of sale against private respondent claiming that the
foreclosure did not comply with the notice
requirements: there was failure to post notices in the
barrio where the land lies. The RTC rendered judgment
in favor of petitioner. However, on elevating the matter
to the CA, said court reversed the decision of the trial
court: section 5 of RA 720 does not require personal
notification to the mortgagor in case of foreclosure and
there was substantial requirement of said law.
Issue: Whether or not the auction sale was valid.
Ruling: No. It is settled doctrine that failure to publish
notice of auction sale as required by the statute
constitutes a jurisdiction defects with invalidates the
sale. Even slight deviations therefrom are not allowed.
Section 5 of R.A. No. 720, as amended by R.A. No.
5939, provides that notices of foreclosure should be
posted in at least three (3) of the most conspicuous
public places in the municipality and barrio where the
land mortgaged is situated.
In the case at bar, the Certificate of Posting which
was executed by the sheriff states that he posted three
(3) copies of the notice of public auction sale in three
(3) conspicuous public places in the municipality of
Panay, where the subject land was situated and in like
manner in Roxas City, where the public auction sale
took place. It is beyond despute that there was a
failure to publish the notices of auction sale as required
by law. Section 5 provides further that proof of
publication shall be accomplished by an affidavit of the
sheriff or officer conducting the foreclosure sale. In this
 Civil Law Review II 10th Assignment (Credit Transactions)
case, the sheriff executed a certificate of posting,
which is not the affidavit required by law. The rationale
behind this is simple: an affidavit is a sworn statement
in writing. Strict compliance with the aforementioned
provisions is mandated. We, therefore, cannot sustain
the view of respondent court that there was substantial
compliance with Section 5 of R.A. No. 720, as
amended, with respect to the affidavit of posting by
the sheriff and the non-posting of the required notice in
the barrio where the land mortgaged is situated.
Instead, We declare the foreclosure and public auction
sale of the subject land void.
17. Cerna v. CA (1993)
Facts:
Celerino Delgado and Conrad Leviste entered into a
loan agreement for P17,500 with interest evidenced by
a promissory note. On the same day, Delgado also
executed a chattel mortgage over a Willys jeep owned
by him. Acting as attorney-in-fact of Manolo Cerna, he
also mortgaged a Tanaus car owned by Cerna. Delgado
failed to pay the loan. Leviste filed a collection suit with
the CFI of Rizal against Delgado and Cerna as solidary
debtors. Cerna filed his Motion to Dismiss on the
grounds of lack of cause of action and death of
Delgado. He also alleged that since Leviste opted to
collect on the note, he could no longer foreclose the
mortgage. The CFI denied his motion to dismiss. The
CA also denied his motion to dismiss on the ground
that he was not able to prove Delgados death and the
consequent settlement proceedings of the latters
estate. He also failed to prove his claim that the special
power of attorney in favor of Delgado was forged. This
decision of the CA became final. He filed a second
motion to dismiss but was denied by the trial court.
The CA again denied his motion to dismiss, hence the
appeal to the SC. The CA ruled that the mortgage
contract prima facie shows that it created a solidary
obligation between Delgado and Cerna against Leviste.
Cerna contends that since he did not sign as joint
obligor in the promissory note signed by Delgado,
there is no cause of action and that Leviste opted to
collect from the promissory note, abandoning his right
to foreclose on the chattel mortgage.
Issues:
1. Whether Cerna was solidarily liable with Delgado for
the payment of the loan.
2. Whether the filing of the collection suit barred
foreclosure of the mortgage.
Ruling:
(1) No. Cerna was not solidarily liable with Delgado
for the payment of the loan. The contract of loan, as
evidenced by the promissory note, was signed by
Delgado only. Cerna had no part in the said contract.
Thus, nowhere could it be seen from the agreement
that petitioner was solidarily bound with Delgado for
the payment of the loan. Only Delgado signed the
promissory note and accordingly, he was the only one
bound by the contract of loan. Nowhere did it appear in
the promissory note that Cerna was a co-debtor. The
law is clear that contracts take effect only between the
parties. Cerna is not solidarily liable even if he was
allegedly a co-mortgagor of the principal debtor,
Delgado. There is solidarily liability only when the
obligation expressly so states, or when the law or the
nature of the obligation requires solidarity. There is also
no legal provision nor jurisprudence in our jurisdiction
which makes a third person who secures the fulfillment
of another's obligation by mortgaging his own property
to be solidarily bound with the principal obligor. It is
true that the contract stated that the chattel mortgage
was signed by Delgado for himself and by Delgado as
attorney-in-fact of Cerna but this alone does not make
petitioner a co-mortgagor especially so since only
Delgado signed the chattel mortgage as mortgagor.
The Special Power of Attorney did not make petitioner
a mortgagor. All it did was to authorize Delgado to
mortgage certain properties belonging to petitioner
and this is in compliance with the requirement in
Article 2085 of the Civil Code which states that an
essential requisite to the contract of mortgage is that
the persons constituting the pledge or mortgage have
the free disposal of their property, and in the absence
thereof, that they be legally authorized for the
purpose. In effect, petitioner lent his car to Delgado so
that the latter may mortgage the same to secure his
debt. Thus, from the contract itself, it was clear that
only Delgado was the mortgagor regardless of the fact
the he used properties belonging to a third person to
secure his debt.
(2) Yes. By filing the collection suit against Delgado
and Cerna, Leviste cannot foreclose on the mortgage.
Granting arguendo that Cerna is liable to answer for
Delgados indebtedness, Cerna could not be held liable
because the complaint was for recovery of a sum of
money, and not for the foreclosure of the security. We
agree with Cerna that the filing of collection suit barred
the foreclosure of the mortgage. A mortgagee who files
a suit for collection abandons the remedy of
foreclosure of the chattel mortgage constituted over
the personal property as security for the debt or value
of the promissory note which he seeks to recover in the
said collection suit. Hence, Leviste, having chosen to
file the collection suit, could not now run after
petitioner for the satisfaction of the debt. This is even
more true in this case because of the death of the
principal debtor, Delgado. Leviste was pursuing a
money claim against a deceased person. A person
holding a mortgage against the estate of a deceased
person may abandon such security and prosecute his
claim before the committee, and share in the
distribution of the general assets of the estate. It
provides also that he may, at his own election,
foreclose the mortgage and realize upon his security.
But the law does not provide that he may have both
remedies. If he elects one he must abandon the other.
If he fails in one he fails utterly.
18. & 19. Northern Motors v. Coquia (1975)
Facts:
Manila Yellow Taxicab Co. purchased on installment
from Northern Motors 200 Holden Torana cars. It made
a down payment of P1,000 on each car. It executed
chattel mortgages on the cars in favor of Northern
Motors Inc. as security for the promissory notes
covering the balance of the price. The notes and
 Civil Law Review II 10th Assignment (Credit Transactions)
mortgages for 172 cars were assigned to Filinvest
Credit Corp.
Tropical Commercial Co. obtained a judgment for
P167,311.27 against Manila Yellow Taxicab Co.
P110,000 of the judgment was assigned to Honesto
Ong. To satisfy the judgment, the sheriff levied upon 20
taxi cabs, 8 of which were mortgaged to Northern
Motors, 12 assigned to Filinvest. Northern Motors and
Filinvest filed their third-party claims with the sheriff.
Tropical Commercial posted indemnity bonds. The cars
were subsequently sold at public auction and the lower
court cancelled the indemnity bonds without notice.
The sheriff made an additional levy on 35 cars to
satisfy the unpaid balance. Meanwhile, 7 were
mortgaged to Northern Motors, 28 with Filinvest.
The lower court refused to reinstate the indemnity
bonds and ruled that the chattel mortgagee Northern
Motors was not entitled to the possession of the
mortgaged taxicabs by the mere fact of the execution
of the mortgage and that the mortgage lien followed
the chattel whoever might be its actual possessor.
Northern Motors filed a petition for certiorari to annul
the decision of the lower court which the SC denied,
hence the motion for reconsideration. Northern Motors
contends that as chattel mortgagee and unpaid vendor
it has the better right to the possession of the
mortgaged taxicabs.
Issue: Whether Northern Motors (mortgagee) has a
better right to the possession of the taxi cabs as
against an unsecured judgment creditor.
Ruling: YES, the mortgagee and unpaid vendor
Northern Motors has a better right to the possession of
the taxi cabs as against the unsecured judgment
creditor. Inasmuch as the condition of the chattel
mortgages had already been broken and Northern
Motors, Inc. had in fact instituted an action for replevin
so that it could take possession of the mortgaged
taxicabs, it has a superior, preferential and paramount
right to have possession of the mortgaged taxicabs
and to claim the proceeds of the execution sale. The
sheriff wrongfully levied upon the mortgaged taxicabs
and erroneously took possession of them. He could
have levied only upon the right or equity of redemption
pertaining to the Manila Yellow Taxicab Co., Inc. as
chattel mortgagor and judgment debtor, because that
was the only leviable or attachable property right of
the company in the mortgaged taxicabs. Jurisprudence
holds that after a chattel mortgage is executed, there
remains in the mortgagor a mere right of redemption.
To levy upon the mortgagor's incorporeal right or
equity of redemption, it was not necessary for the
sheriff to have taken physical possession of the
mortgaged taxicabs. In this case what the sheriff could
have sold at public auction was merely the mortgagor's
right or equity of redemption. The sheriff and the
judgment creditor are deemed to have constructive
notice of the chattel mortgages on the taxicabs. As a
consequence of the registration of the mortgages,
Northern Motors, Inc. had the symbolical possession of
the taxicabs. If the judgment creditor, Tropical
Commercial Co., Inc., or the assignee, Ong, bought the
mortgagor's equity of redemption at the auction sale,
then it would step into the shoes of the mortgagor,
Manila Yellow Taxicab Co., Inc. and be able to redeem
the vehicles from Northern Motors, Inc., the
mortgagee, by paying the mortgage debt. Inasmuch as
what remains to the mortgagor is only the equity of
redemption, it follows that the right of the judgment or
attaching creditor, who purchased the mortgaged
chattel at an execution sale, is subordinate to the lien
of the mortgagee who has in his favor a valid chattel
mortgage. It is neither right nor just that the lien of a
secured creditor should be rendered nugatory by a
wrongful execution engineered by an unsecured
creditor. Motion for reconsideration is granted. The
sheriff is directed to deliver to Northern Motors the
proceeds of the first auction sale and the seven taxi
cabs levied upon which are mortgaged with Northern
Motors.
20. Makati Leasing v. Wearever Textile (1983)
Facts:
In order to obtain financial accommodations from
Makati Leasing and Finance Corporation (MLFC),
Wearever Textile Mills, Inc., (WTMI) discounted and
assigned several receivables with the former under a
Receivable Purchase Agreement. To secure the
collection of the receivables assigned, Wearever Textile
Mills executed a Chattel Mortgage over certain raw
materials inventory as well as machinery described as
Artos Aero Dryer Stentering Range.
Upon WTMIs default, MLFC filed a petition for
extrajudicial foreclosure of the properties mortgage to
it but the Deputy Sheriff was not able to effect the
seizure of the machinery.
MLFC thereafter filed a complaint for judicial
foreclosure with the Court of First Instance of Rizal.
Acting on MLFCs application for replevin, the lower
court issued a writ of seizure, the enforcement of which
was however subsequently restrained upon WTMI's
filing of a motion for reconsideration. Later, the CFI
order the lifting the restraining order for the
enforcement of the writ of seizure and an order to
break open the premises of WTMI to enforce said writ.
Motion for reconsideration was likewise denied.
On appeal, CA set aside the Orders of the lower
court and ordered the return of the drive motor seized
by the sheriff. It ruled that machinery in suit cannot be
the subject of replevin, much less of a chattel
mortgage, because it is a real property pursuant to
Article 415 of the new Civil Code. The motion for
reconsideration filed by MLFC was likewise denied.
Issue: Whether the machinery in suit, considered as
real property under the law, be a proper subject of a
chattel mortgage.
Ruling: YES. A similar, if not identical issue was raised
in Tumalad v. Vicencio (41 SCRA 143, September 30,
1971), where Supreme Court ruled that a house of
strong materials may be considered as personal
property for purposes of executing a chattel mortgage
thereon as long as the parties to the contract so agree
and no innocent third party will be prejudiced thereby.
Hence, there is absolutely no reason why a machinery,
which is movable in its nature and becomes
immobilized only by destination or purpose, may not
 Civil Law Review II 10th Assignment (Credit Transactions)
be likewise treated as such. This is really because one
who has so agreed is estopped from denying the
existence of the chattel mortgage. It must be pointed
out that the characterization of the subject machinery
as chattel by the WTMI is indicative of intention and
impresses upon the property the character determined
by the parties. As stated in Standard Oil Co. of New
York v. Jaramillo (44 SCRA 630, March 16, 1923) it is
undeniable that the parties to a contract may by
agreement treat as personal property that which by
nature would be real property, as long as no interest of
third parties would be prejudiced thereby.
21. Associated Insurance v. Iya (1958)
Facts:
Spouses Valino were the owners of a house and lot
which they bought from Philippine Realty Corporation
(PRC). In 1951, Spouses Valino filed a bond subscribed
by the Associated Insurance and Surety Co., Inc., in
favor of NARIC to enable Spouses Valino to purchase on
credit rice from NARIC. And as counter-guaranty
therefore, Spouses Valino executed an alleged chattel
mortgage in favor of Associated Insurance. At the time
of the execution of the alleged chattel mortgage, the
title to the house was still registered in the name of
PRC. Subsequently in 1952, Spouses Valino executed a
real estate mortgage over the house and lot to secure
payment of their debt in favor of Isabel Iya.
Spouses Valino failed to pay NARIC, resulting in
Associated Insurances liability to pay NARIC.
Associated Insurance foreclosed the chattel mortgage,
and eventually the house was awarded to it as highest
bidder in the public sale.
When Associated Insurance found out about the
real estate mortgage, it filed a complaint against
Spouses Valino and Spouses Iya for the exclusion of the
house from the real estate mortgage.
Issue: Whether or not the house should be excluded
from the real estate mortgage.
Ruling: No. There is no question as to appellant's right
over the land covered by the real estate mortgage;
however, as the building constructed thereon has been
the subject of 2 mortgages; controversy arise as to
which of these encumbrances should receive
preference over the other. The decisive factor in
resolving the issue presented by this appeal is the
determination of the nature of the structure litigated
upon, for where it be considered a personality, the
foreclosure of the chattel mortgage and the
subsequent sale thereof at public auction, made in
accordance with the Chattel Mortgage Law would be
valid and the right acquired by the surety company
therefrom would certainly deserve prior recognition;
otherwise, appellant's claim for preference must be
granted. The lower Court, deciding in favor of the
surety company, based its ruling on the premise that
as the mortgagors were not the owners of the land on
which the building is erected at the time the first
encumbrance was made, said structure partook of the
nature of a personal property and could properly be the
subject of a chattel mortgage. We find reason to hold
otherwise, for as this Court, defining the nature or
character of a building, has said: . . . while it is true
that generally, real estate connotes the land and the
building constructed thereon, it is obvious that the
inclusion of the building, separate and distinct from the
land, in the enumeration of what may constitute real
properties (Art. 415, new Civil Code) could only mean
one thing that a building is by itself an immovable
property . . . Moreover, and in view of the absence of
any specific provision to the contrary, a building is an
immovable property irrespective of whether or not said
structure and the land on which it is adhered to belong
to the same owner. (Lopez vs. Orosa, G.R. Nos. supra,
p. 98).
A building certainly cannot be divested of its
character of a realty by the fact that the land on which
it is constructed belongs to another. To hold it the other
way, the possibility is not remote that it would result in
confusion, for to cloak the building with an uncertain
status made dependent on the ownership of the land,
would create a situation where a permanent fixture
changes its nature or character as the ownership of the
land changes hands. In the case at bar, as personal
properties could only be the subject of a chattel
mortgage (Section 1, Act 3952) and as obviously the
structure in question is not one, the execution of the
chattel mortgage covering said building is clearly
invalid and a nullity. While it is true that said document
was correspondingly registered in the Chattel Mortgage
Register of Rizal, this act produced no effect
whatsoever for where the interest conveyed is in the
nature of a real property, the registration of the
document in the registry of chattels is merely a futile
act. Thus, the registration of the chattel mortgage of a
building of strong materials produce no effect as far as
the building is concerned (Leung Yee vs. Strong
Machinery Co., 37 Phil., 644). Nor can we give any
consideration to the contention of the surety that it has
acquired ownership over the property in question by
reason of the sale conducted by the Provincial Sheriff
of Rizal, for as this Court has aptly pronounced: A
mortgage creditor who purchases real properties at an
extrajudicial foreclosure sale thereof by virtue of a
chattel mortgage constituted in his favor, which
mortgage has been declared null and void with respect
to said real properties, acquires no right thereto by
virtue of said sale (De la Riva vs. Ah Keo, 60 Phil., 899).
22. Republic v. Peralta (1987)
Facts:
In the voluntary insolvency proceedings
commenced by Quality Tobacco Corporation, the
following claims of creditors were filed: (1) P2.8 million
separation pay awarded by the NLRC to the
corporations employees; (2) P1.1 million by the BIR for
tobacco inspection fees; and (3) P280,000 by the BOC
for customs duties and taxes payable on various
importations.
Issue: Whether or not the employees claims should
be preferred in view of Art. 110 of the Labor Code.
Ruling: No. The resolution of the issue of priority
among the several claims filed in the insolvency
proceedings instituted by the Insolvent cannot,
however, rest on a reading of Article 110 of the labor
 Civil Law Review II 10th Assignment (Credit Transactions)
Code alone. Article 110 of the Labor Code, in
determining the reach of its terms, cannot be viewed in
isolation. Rather, Article 110 must be read in relation to
the provisions of the Civil Code concerning the
classification, concurrence and preference of credits,
which provisions find particular application in
insolvency proceedings where the claims of all
creditors, preferred or non-preferred, may be
adjudicated in a binding manner.
We believe and so hold that Article 110 of the
Labor Code did not sweep away the overriding
preference accorded under the scheme of the Civil
Code to tax claims of the government or any
subdivision thereof which constitute a lien upon
properties of the Insolvent. It is frequently said that
taxes are the very lifeblood of government. The
effective collection of taxes is a task of highest
importance for the sovereign. It is critical indeed for its
own survival. It follows that language of a much higher
degree of specificity than that exhibited in Article 110
of the Labor Code is necessary to set aside the intent
and purpose of the legislator that shines through the
precisely crafted provisions of the Civil Code. It cannot
be assumed simpliciter that the legislative authority,
by using in Article 110 the words "first preference" and
"any provision of law to the contrary notwithstanding"
intended to disrupt the elaborate and symmetrical
structure set up in the Civil Code. Neither can it be
assumed casually that Article 110 intended to subsume
the sovereign itself within the term "other creditors" in
stating that "unpaid wages shall be paid in full before
other creditors may establish any claim to a share in
the assets of employer." Insistent considerations of
public policy prevent us from giving to "other creditors"
a linguistically unlimited scope that would embrace the
universe of creditors save only unpaid employees.
We, however, do not believe that Article 110 has
had no impact at all upon the provisions of the Civil
Code. Bearing in mind the overriding precedence given
to taxes, duties and fees by the Civil Code and the fact
that the Labor Code does not impress any lien on the
property of an employer, the use of the phrase "first
preference" in Article 110 indicates that what Article
110 intended to modify is the order of preference found
in Article 2244, which order relates, as we have seen,
to property of the Insolvent that is not burdened with
the liens or encumbrances created or recognized by
Articles 2241 and 2242. We have noted that Article
2244, number 2, establishes second priority for claims
for wages for services rendered by employees or
laborers of the Insolvent "for one year preceding the
commencement of the proceedings in insolvency."
Article 110 of the Labor Code establishes "first
preference" for services rendered "during the period
prior to the bankruptcy or liquidation, " a period not
limited to the year immediately prior to the bankruptcy
or liquidation. Thus, very substantial effect may be
given to the provisions of Article 110 without
grievously distorting the framework established in the
Civil Code by holding, as we so hold, that Article 110 of
the Labor Code has modified Article 2244 of the Civil
Code in two respects: (a) firstly, by removing the one
year limitation found in Article 2244, number 2; and (b)
secondly, by moving up claims for unpaid wages of
laborers or workers of the Insolvent from second
priority to first priority in the order of preference
established I by Article 2244.
23. DBP v. NLRC (1994)
Facts:
Resort Hotel Corporation ("RHC") was the former
owner and operator of the Pines Hotel in Baguio City,
where private respondents were employed. The
property was hypothecated to petitioner Development
Bank of the Philippines ("DBP"). When RHC failed to
comply with its obligations, DPB foreclosed on the
mortgage. Following the foreclosure, Hotel
Development Corporation ("HDC"), a subsidiary of DBP,
assumed the management and operations of the hotel.
Private respondents were rehired by HDC. On 23
October 1984, Pines Hotel, unfortunately, was razed by
fire. On 05 November 1985, private respondents filed a
complaint against RHC for money claims still
outstanding in their favor at the time the foreclosure
was effected. HDC and DBP were also impleaded upon
the thesis that, should RHC be bereft of sufficient
property to answer for those claims, the foreclosed
property could be levied against in accordance with
Article 110 of the Labor Code.
The Labor Arbiter and the NLRC ruled in favor of
private respondents. DBP was ordered to deliver to
private respondents their claims for separation pay and
other money claims. No appeal from the NLRCs
decision was filed. When private respondents moved
for execution, DBP filed a motion for clarification with
the Labor Arbiter, claiming that the body of the
decision which says that RHC, not DBP, is liable to
private respondents is inconsistent with the dispositive
portion of the NLRCs decision which dismissed DBPs
appeal. The Labor Arbiter denied the motion, saying
that there is no such inconsistency. It also pointed out
that DBP was impleaded for reason that it foreclosed
the assets of RHC, and that private respondents would
like to ensure the enforcement of their money claims
against the foreclosed properties of their employer
invoking Art. 110 of the Labor Code.
Issue: Whether or not the private respondents may
pursue their claims against the foreclosed properties of
RHC.
Ruling: Yes. The Supreme Court, while upholding its
ruling in Republic v. Peralta (1987), held that private
respondents may still pursue the foreclosed properties
for the reason that NLRCs decision had not been
appealed, hence it has attained finality and can no
longer be challenged.