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1. PRUDENTIAL BANK, PRUDENTIAL BANK, vs. IAC, PHILIPPINE LOC with interest at 6% per annum beginning September 15,
RAYON MILLS INC. and ANACLETO R. CHI– BrunxAlabastro 1974 until fully paid.

Warning: Taas, complicated, and libognina case. Daghan issues, At IAC, PRUDENTIAL BANK argued that the RTC erred, among
sub-issues and impt notes to remember ESPECIALLY for recits. others, in:
Gi-outline nanakotanandiri related sa lesson for your · disregarding its right to reimbursement from the private
convenience, sorry langdaan if taas! Required na 4 issues ang respondents for the entire unpaid balance of the imported
case, related sa topic. Kung gubutanmo, I suggest pag-full text. machines, the total amount of which was paid to the Nissho
HAHA! Company Ltd.
· finding that the solidary guaranty clause signed by
On August 8, 1962 Philippine Rayon Mills, Inc. entered into a Anacleto R. Chi is not a guaranty at all
contract with Nissho Co., Ltd. of Japan for the importation of · controverting the judicial admissions of Anacleto R. Chi
textile machineries under a five-year deferred payment plan. To that he is at least a simple guarantor of the said trust receipt
effect payment for said machineries, the Philippine Rayon Mills, obligation
Inc. applied for a commercial letter of credit with the Prudential · contravening, based on the assumption that Chi is a
Bank and Trust Company in favor of Nissho. By virtue of said simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code
application, the Prudential Bank opened a Letter of Credit in and the related evidence and jurisprudence which provide that
favor of defendant-appellant. Against this letter of credit, such liability had already attached
drafts, were drawn and issued by Nissho which were all paid by
the Prudential Bank through its correspondent in Japan, the IAC upheld the RTC, and disagreed with the PRUDENTIAL
Bank of Tokyo, Ltd. As indicated on their faces, two of these BANK's contention (maramingsiyangsinabiperoang related sa
drafts were accepted by the Philippine Rayon Mills, Inc. through lesson is…). Chi cannot be held liable with regard to the
its president, Anacleto R. Chi, while the others were not. stipulations made in the trust receipt because the records fail to
show that PRUDENTIAL BANK had either exhausted the
Upon the arrival of the machineries, the Prudential Bank properties of Philippine Rayon or had resorted to all legal
indorsed the shipping documents to the Philippine Rayon Mills, remedies as required in Article 2058 of the Civil Code. As
Inc. which accepted delivery of the same. To enable the provided for under Articles 2052 and 2054 of the Civil Code, the
Philippine Rayon Mills, Inc. to take delivery of the machineries, obligation of a guarantor is merely accessory and subsidiary,
it executed, by prior arrangement with the Prudential Bank, a respectively. Chi's liability would therefore arise only when the
trust receipt which was signed by Anacleto R. Chi in his capacity principal debtor fails to comply with his obligation.
as President (sic) of Philippine Rayon Mills, Inc. company. At the
back of the trust receipt is a printed form to be accomplished by A) WON Chi may be held severally liable with Phil. Rayon
two sureties who, by the very terms and conditions thereof, Mills Inc. by virtue of his signature on the trust receipt. No, Chi
were to be jointly and severally liable to the Prudential Bank is only a guarantor
should the Philippine Rayon Mills, Inc. fail to pay the total
amount or any portion of the drafts issued by Nissho and paid CONTENTION: PRUDENTIAL BANK insists that by virtue of the
for by Prudential Bank. The Philippine Rayon Mills, Inc. was able clear wording of the statement, specifically the clause ". . . we
to take delivery of the textile machineries and installed the jointly and severally agree and undertake . . .," and the
same at its factory site concluding sentence on exhaustion, Chi's liability therein is
Sometime in 1967, the Philippine Rayon Mills, Inc. ceased
business operation. So its factory was leased by Yupangco Held: Our own reading of the questioned solidary guaranty
Cotton Mills for an annual rental of P300,000.00, which was clause yields no other conclusion than that the obligation of Chi
subsequently renewed. On January 5, 1974, all the textile is only that of a guarantor. This is further bolstered by the last
machineries in the defendant-appellant's factory were sold to sentence which speaks of waiver of exhaustion, which,
AIC Development Corporation for P300,000.00. Meanwhile, the nevertheless, is ineffective in this case because the space
obligation of the Philippine Rayon Mills, Inc. arising from the therein for the party whose property may not be exhausted was
letter of credit and the trust receipt remained unpaid and not filled up. Under Article 2058 of the Civil Code, the defense
unliquidated. Repeated formal demands for the payment of the of exhaustion (excussion) may be raised by a guarantor before
said trust receipt yielded no result. Hence, the present action he may be held liable for the obligation. The clause "we jointly
for the collection of the principal amount of P956,384.95 was and severally agree and undertake" refers to the undertaking
filed on October 3, 1974 against the Philippine Rayon Mills, Inc. of the two (2) parties who are to sign it or to the liability
and Anacleto R. Chi. existing between themselves. It does not refer to the
undertaking between either one or both of them on the one
RTC: sentenced Philippine Rayon Mills, Inc. to pay plaintiff the hand and the PRUDENTIAL BANK on the other with respect to
sum of P153,645.22, the amounts due on the drafts from the the liability described under the trust receipt. Elsewise stated,
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their liability is not divisible as between them, i.e., it can be Civil Code, a contract of guaranty does not have to appear in a
enforced to its full extent against any one of them. public document.

NOTE: If mangutana si maam “What kind of contract was B) WON Chi cannot, pursuant to Article 2058 of the Civil
entered here, from your lesson in OBLI, how should it be Code, be compelled to pay until after PRUDENTIAL BANK has
construed?” Answer: Contract of Adhesion. exhausted and resorted to all legal remedies against the
principal debtor, Philippine Rayon since the records show that
Held: Any doubt as to the import or true intent of the solidary there was no exhaustion made. No, he can be compelled.
guaranty clause should be resolved against the PRUDENTIAL
BANK. The trust receipt, together with the questioned solidary Held: Excussion (defense of exhaustion under 2058) is not a
guaranty clause, is on a form drafted and prepared solely by the condition sine qua non for the institution of an action against a
PRUDENTIAL BANK; Chi's participation therein is limited to the guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court
affixing of his signature thereon. It is, therefore, a contract of stated: " Although an ordinary personal guarantor — not a
adhesion; as such, it must be strictly construed against the mortgagor or pledgor — may demand the aforementioned
party responsible for its preparation. exhaustion, the creditor may, prior thereto, secure a judgment
against said guarantor, who shall be entitled, however, to a
CONTENTION According to the IAC: The last sentence of the deferment of the execution of said judgment against him until
guaranty clause is incomplete. Furthermore, the plaintiff- after the properties of the principal debtor shall have been
appellant also failed to have the purported guarantee clause exhausted to satisfy the obligation involved in the case."
acknowledged before a notary public. All these show that the
alleged guaranty provision was disregarded and, therefore, not C) WON it was improper to implead Chi as a co-defendant in
consummated. Even assuming that it was fully executed and the case before the Trial Court. No, it was not improper.
acknowledged still defendant-appellee Chi cannot be held liable
thereunder because the records show that the plaintiff- Held: Section 6, Rule 3 of the Rules of Court on permissive
appellant had neither exhausted the property of the Philippine joinder of parties explicitly allows it. It reads: "SEC. 6.
Rayon Mills, Inc. nor had it resorted to all legal remedies against Permissive joinder of parties. — All persons in whom or against
the said Philippine Rayon Mills, Inc. as provided in Article 2058 whom any right to relief in respect to or arising out of the same
of the Civil Code. The obligation of a guarantor is merely transaction or series of transactions is alleged to exist, whether
accessory under Article 2052 of the Civil Code and subsidiary jointly, severally, or in the alternative, may, except as otherwise
under Article 2054 of the Civil Code. Therefore, the liability of provided in these rules, join as plaintiffs or be joined as
the defendant-appellee arises only when the principal debtor defendants in one complaint, where any gotten of law or fact
fails to comply with his obligation." common to all such plaintiffs or to all such defendants may
arise in the action; but the court may make such orders as may
NOTE: Mag-ana nasad simaam, “under your OBLI/SALES, is the be just to prevent any plaintiff or defendant from being
IAC correct”? Answer. NO. embarrassed or put to expense in connection with any
proceedings in which he may have no interest." This is the
Held: While indeed, the clause ought to have been signed by equity rule relating to multifariousness. It is based on trial
two (2) guarantors, the fact that it was only Chi who signed the convenience and is designed to permit the joinder of plaintiffs
same did not make his act an idle ceremony or render the or defendants whenever there is a common question of law or
clause totally meaningless. By his signing, Chi became the sole fact. It will save the parties unnecessary work, trouble and
guarantor. The attestation by witnesses and the expense.
acknowledgment before a notary public are not required by law
to make a party liable on the instrument. The rule is that D) What is Chi’s liability?
contracts shall be obligatory in whatever form they may have
been entered into, provided all the essential requisites for their Held: Chi's liability is limited to the principal obligation in the
validity are present; however, when the law requires that a trust receipt plus all the accessories thereof including judicial
contract be in some form in order that it may be valid or costs; with respect to the latter, he shall only be liable for those
enforceable, or that it be proved in a certain way, that costs incurred after being judicially required to pay. Interest and
requirement is absolute and indispensable. 30 With respect to a damages, being accessories of the principal obligation, should
guaranty, 31 which is a promise to answer for the debt or also be paid; these, however, shall run only from the date of the
default of another, the law merely requires that it, or some filing of the complaint. Attorney's fees may even be allowed in
note or memorandum thereof, be in writing. Otherwise, it appropriate cases. In the instant case, the attorney's fees to be
would be unenforceable unless ratified. 32 While the paid by Chi cannot be the same as that to be paid by Philippine
acknowledgment of a surety before a notary public is required Rayon since it is only the trust receipt that is covered by the
to make the same a public document, under Article 1358 of the guaranty and not the full extent of the latter's liability. All things

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considered, he can be held liable for the sum of P10,000.00 as Macrogen Realty and/or petitioner in the course of the business
attorney's fees in favor of the PRUDENTIAL BANK. operations of the said corporation.

2. G.R. No. 173526 August 28, 2008 Petitioner averred that he never made representations to
BENJAMIN BITANGA, petitioner, vs. PYRAMID CONSTRUCTION respondent that Macrogen Realty would faithfully comply with
ENGINEERING CORPORATION, respondent. its obligations under the Compromise Agreement. He did not
offer to guarantee the obligations of Macrogen Realty to entice
Facts: respondent to enter into the Compromise Agreement but that,
Respondent alleged it entered into an agreement with on the contrary, it was respondent that required Macrogen
Macrogen Realty, of which petitioner is the President, to Realty to offer some form of security for its obligations before
construct for the latter the Shoppers Gold Building. agreeing to the compromise; further alleged that his wife
Marilyn was not aware of the obligations that he assumed
Respondent commenced civil, structural, and architectural under both the Compromise Agreement and the Contract of
works on the construction project. However, Macrogen Realty Guaranty as he did not inform her about said contracts, nor did
failed to settle respondent’s progress billings. he secure her consent thereto at the time of their execution.
Relying on the assurances made by petitioner, who was no less Petitioner argued that the benefit of excussion was still
than the President of Macrogen Realty, respondent continued available to him according to him, respondent failed to exhaust
the construction project. all legal remedies to collect from Macrogen Realty the amount
due under the Compromise Agreement, considering that
But, respondent suspended work on the construction project Macrogen Realty still had uncollected credits which were more
since the conditions that it imposed for the continuation had than enough to pay for the same. Given these premise,
not been complied with by Macrogen Realty and it instituted petitioner could not be held liable as guarantor.
with the Construction Industry Arbitration Commission (CIAC) a
case for arbitration against Macrogen Realty seeking payment The RTC rendered a summary judgment ordering the Spouses to
by the latter of its unpaid billings and project costs. pay the respondent. Ca affirmed but held the wife not liable.

The respondent and Macrogen Realty entered into a Issues:

Compromise Agreement, with petitioner acting as signatory for Whether or not petitioner is liable. [Yes]
and in behalf of Macrogen Realty. Under the Compromise Whether petitioner can avail the benefit of excussion. [No]
Agreement, Macrogen Realty agreed to pay respondent the
total amount of P6,000,000.00 in six equal monthly Ruling: Yes.
installments, with each installment to be delivered on the Under a contract of guarantee, the guarantor binds himself to
15th day of the month, beginning 15 June 2000. the creditor to fulfill the obligation of the principal debtor in
case the latter should fail to do so. The guarantor who pays for
Petitioner guaranteed the obligations of Macrogen Realty under a debtor, in turn, must be indemnified by the latter. However,
the Compromise Agreement by executing a Contract of the guarantor cannot be compelled to pay the creditor unless
Guaranty in favor of respondent, by virtue of which he the latter has exhausted all the property of the debtor and
irrevocably and unconditionally guaranteed the full and resorted to all the legal remedies against the debtor. This is
complete payment of the principal amount of liability of what is otherwise known as the benefit of excussion.
Macrogen Realty in the sum of P6,000,000.00.
Article 2060 of the Civil Code reads:
However, contrary to petitioner’s assurances, Macrogen Realty Art. 2060. In order that the guarantor may make use of the
failed and refused to pay all the monthly installments agreed benefit of excussion, he must set it up against the creditor upon
upon in the Compromise Agreement.Hence, respondent moved the latter’s demand for payment from him, and point out to the
for the issuance of a writ of execution against Macrogen Realty, creditor available property of the debtor within Philippine
which CIAC granted. The sheriff filed a return stating that he territory, sufficient to cover the amount of the debt.
was unable to locate any property of Macrogen Realty, except
its bank deposit of P20,242.33, with the Planters Bank. The afore-quoted provision imposes a condition for the
invocation of the defense of excussion. Article 2060 of the Civil
According to respondent, petitioner’s obligation as guarantor Code clearly requires that in order for the guarantor to make
was already due and demandable. As to Marilyn’s (wife of use of the benefit of excussion, he must set it up against the
petitioner) liability and contended that Macrogen Realty was creditor upon the latter’s demand for payment and point out to
owned and controlled by petitioner and Marilyn and/or by the creditor available property of the debtor within the
corporations owned and controlled by them and would have Philippines sufficient to cover the amount of the debt.
redounded to the benefit of both and/or their corporations; It must be stressed that despite having been served a demand
Marilyn cannot be unaware of the obligations incurred by letter at his office, petitioner still failed to point out to the
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respondent properties of Macrogen Realty sufficient to cover its 10 March 1981 PhilGuarantee paid TRB Nine Hundred Thirty
debt as required under Article 2060 of the Civil Code. Such Four Thousand Eight Hundred Twenty Four Pesos and Thirty
failure on petitioner’s part forecloses his right to set up the Four Centavos (P934,824.34).[10] Subsequently, PhilGuarantee
defense of excussion. made several demands on JN, but the latter failed to pay. On
30 May 1983, JN, through Rodrigo Sta. Ana, proposed to settle
Worthy of note as well is the Sheriff’s return stating that the the obligation “by way of development and sale” of the
only property of Macrogen Realty which he found was its mortgaged property.[11] PhilGuarantee, however, rejected the
deposit of P20,242.23 with the Planters Bank. proposal.

Article 2059(5) of the Civil Code thus finds application and PhilGuarantee thus filed a Complaint for collection of
precludes petitioner from interposing the defense of excussion. money and damages against herein petitioners.
We quote:
Art. 2059. This excussion shall not take place: WON PhilGuarantee may hold petitioners liable? Yes.
(5) If it may be presumed that an execution on the property of Held:
the principal debtor would not result in the satisfaction of the
obligation. Under a contract of guarantee, the guarantor binds himself to
the creditor to fulfill the obligation of the principal debtor in
As the Court of Appeals correctly ruled: case the latter should fail to do so.[34] The guarantor who pays
We find untenable the claim that the petitioner cannot be for a debtor, in turn, must be indemnified by the latter.[35]
compelled to pay Pyramid because the Macrogen Realty has However, the guarantor cannot be compelled to pay the
allegedly sufficient assets. Reason: The said petitioner had not creditor unless the latter has exhausted all the property of the
genuinely controverted the return made by Sheriff Joseph F. debtor and resorted to all the legal remedies against the
Bisnar, who affirmed that, after exerting diligent efforts, he was debtor.[36] This is what is otherwise known as the benefit of
not able to locate any property belonging to the Macrogen excussion.
Realty, except for a bank deposit with the Planter’s Bank at
Buendia, in the amount of P20,242.23. It is axiomatic that the It is clear that excussion may only be invoked after legal
liability of the guarantor arises when the insolvency or inability remedies against the principal debtor have been expanded.
of the debtor to pay the amount of debt is proven by the return Thus, it was held that the creditor must first obtain a judgment
of the writ of execution that had not been unsatisfied. Petition against the principal debtor before assuming to run after the
denied. alleged guarantor, “for obviously the ‘exhaustion of the
principal’s property’ cannot even begin to take place before
judgment has been obtained.”[37]
LEONOR STA. ANA vs. PHILIPPINE EXPORT AND FOREIGN LOAN The law imposes conditions precedent for the invocation of the
GUARANTEE CORPORATION - Brunx defense. Thus, in order that the guarantor may make use of the
benefit of excussion, he must set it up against the creditor
JN Development Corporation (“JN”) and Traders Royal Bank upon the latter’s demand for payment and point out to the
(TRB) entered into an agreement whereby TRB would extend to creditor available property of the debtor within the Philippines
JN an Export Packing Credit Line for Two Million Pesos sufficient to cover the amount of the debt.
(P2,000,000.00). The loan was covered by several securities,
including a real estate mortgage[2] and a letter of guarantee While a guarantor enjoys the benefit of excussion, nothing
from respondent Philippine Export and Foreign Loan Guarantee prevents him from paying the obligation once demand is made
Corporation (“PhilGuarantee”), now Trade and Investment on him. Excussion, after all, is a right granted to him by law and
Development Corporation of the Philippines, covering seventy as such he may opt to make use of it or waive it.
percent (70%) of the credit line.[3] With PhilGuarantee PhilGuarantee’s waiver of the right of excussion cannot prevent
issuing a guarantee in favor of TRB,[4] JN, petitioner spouses it from demanding reimbursement from petitioners. The law
Rodrigo and Leonor Sta. Ana[5] and petitioner Narciso Cruz[6] clearly requires the debtor to indemnify the guarantor what the
executed a Deed of Undertaking[7] (Undertaking) to assure latter has paid.
repayment to PhilGuarantee.
Petitioners’ claim that PhilGuarantee had no more obligation to
It appears that JN failed to pay the loan to TRB upon its pay TRB because of the alleged expiration of the contract of
maturity; thus, on 8 October 1980 TRB requested PhilGuarantee guarantee is untenable. The guarantee, dated17 December
to make good its guarantee.[8] PhilGuarantee informed JN 1979, states:
about the call made by TRB, and inquired about the action of JN
to settle the loan.[9] Having received no response from JN, on
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In the event of default by JNDC and as a consequence thereof, renunciation of the benefit of excussion in the contract of
PHILGUARANTEE is made to pay its obligation arising under the guarantee, ruled against the guarantor.
aforesaid guarantee PHILGUARANTEE shall pay the BANK the
amount of P1.4 million or 70% of the total obligation unpaid… In the case at bar, PhilGuarantee is not invoking the benefit of
excussion. It cannot be overemphasized that excussion is a
.... right granted to the guarantor and, therefore, only he may
invoke it at his discretion. The benefit of excussion, as well as
This guarantee shall be valid for a period of one (1) year from the requirement of consent to extensions of payment, is a
date hereof but may be renewed upon payment by JNDC of the protective device pertaining to and conferred on the guarantor.
guarantee fee at the same rate of 1.5% per annum.[40] These may be invoked by the guarantor against the creditor as
defenses to bar the unwarranted enforcement of the
The guarantee was only up to 17 December 1980. JN’s guarantee.
obligation with TRB fell due on 30 June 1980, and demand on
PhilGuarantee was made by TRB on 08 October 1980. That However, PhilGuarantee did not avail of these defenses when it
payment was actually made only on 10 March 1981 does not paid its obligation according to the tenor of the guarantee once
take it out of the terms of the guarantee. What is controlling is demand was made on it. What is peculiar in the instant case is
that default and demand on PhilGuarantee had taken place that petitioners, the principal debtors themselves, are
while the guarantee was still in force. muddling the issues and raising the same defenses against the
guarantor, which only the guarantor may invoke against the
creditor, to avoid payment of their own obligation to the
petitioners’ claim that PhilGuarantee’s failure to give its express guarantor. The Court cannot countenance their self-seeking
consent to the alleged extensions granted by TRB to JN had desire to be exonerated from the duty to reimburse
extinguished the guarantee. PhilGuarantee after it had paid TRB on their behalf and to
unjustly enrich themselves at the expense of PhilGuarantee.
The requirement that the guarantor should consent to any
extension granted by the creditor to the debtor under Art. 2079 Did the alleged foreclosure of the real estate mortgage over the
is for the benefit of the guarantor. As such, it is likewise land executed as security for the loan agreement extinguish
waivable by the guarantor. Thus, even assuming that PhilGuarantee’s obligation? No.
extensions were indeed granted by TRB to JN, PhilGuarantee
could have opted to waive the need for consent to such The foreclosure was made on 27 August 1993, “after the case
extensions. Indeed, a guarantor is not precluded from waiving was submitted for decision in 1992 and before the issuance of
his right to be notified of or to give his consent to extensions the decision of the court a quo in 1998”.[48] Thus, foreclosure
obtained by the debtor. Such waiver is not contrary to public was resorted to by TRB against JN when they both had become
policy as it is purely personal and does not affect public aware that PhilGuarantee had already paid TRB and that there
interest.[41] was a pending case filed by PhilGuarantee against petitioners.

In the instant case, PhilGuarantee’s waiver can be inferred from complaint a quo was filed by PhilGuarantee as guarantor for JN,
its actual payment to TRB after the latter’s demand, despite and its cause of action was premised on its payment of JN’s
JN’s failure to pay the renewal/guarantee fee as indicated in obligation after the latter’s default. PhilGuarantee was well
the guarantee.[42] within its rights to demand reimbursement for such payment
made, regardless of whether the creditor, TRB, was
For the above reasons, there is no basis for petitioner’s claim subsequently able to obtain payment from JN. If double
that PhilGuarantee was a mere volunteer payor and had no payment was indeed made, then it is JN which should go after
legal obligation to pay TRB. The law does not prohibit the TRB, and not PhilGuarantee. Petitioners have no one to blame
payment by a guarantor on his own volition, heedless of the but themselves, having allowed the foreclosure of the property
benefit of excussion. In fact, it recognizes the right of a for the full value of the loan despite knowledge of
guarantor to recover what it has paid, even if payment was PhilGuarantee’s payment to TRB. Having been aware of such
made before the debt becomes due,[43] or if made without payment, they should have opposed the foreclosure, or at the
notice to the debtor,[44] subject of course to some conditions. very least, filed a supplemental pleading with the trial court
informing the same of the foreclosure sale.
Is Willex case applicable? No.
can the clause “. . . In the event of default by JNDC and as a
In the said case, the guarantor claimed that it could not be consequence thereof, PHILGUARANTEE is made to pay its
proceeded against without first exhausting all of the properties obligation arising under the aforesaid guarantee,
of the debtor. The Court, finding that there was an express PHILGUARANTEE shall pay the BANK the amount of P1.4 million
or 70% of the total obligation unpaid, but in no case shall such
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payment exceed the amount of its guarantee of P1.4 million. the other surety, Manila Compañia de Seguros, in accordance
However, any amount/s that PHILGUARANTEE or the BANK may with article 8137 of the Civil Code. The Manila Compañia de
subsequently recover from JNDC or from any other source Seguros refused to pay the balance, contending that so long as
pertaining to this transaction shall be shared pari-passu in the the liability of the Tobacconists did not exceed P3,000, it was
proportion of 70% for PHILGUARANTEE and 30% for the BANK.” not bound to pay anything because its bond referred only to the
be invoked? No. Petitioners not being parties to the said obligation of the Tobacconists in excess of P3,000 and up to
agreement. The clause is clearly for the benefit of the P5,000. Hence Mira Hermanos, Inc., brought this action against
guarantor and no other the Manila Tobacconists, Inc., Provident Insurance Co., and
Manila Compañia de Seguros to recover from them jointly and
The Court notes the letter[51] of Rodrigo Sta. Ana offering, by severally the sum of P909.12 with legal interest thereon from
way of settlement of JN’s obligations to PhilGuarantee, the very the date of the complaint.
same parcel of land mortgaged as security for the loan
agreement. This further weakens the position of petitioners, ISSUE:
since it becomes obvious that they acknowledged the payment
made by PhilGuarantee on their behalf and that they were in Whether or not Manila Compania de Seguros is liable only in so
fact willing to negotiate with PhilGuarantee for the settlement far as the liability of Manila Tobacconists has exceeded P3000.
of the said obligation before the filing of the complaint a quo.

YES, Manilla Compania de Seguros is only liable when the the

4. MIRA HERMANOS, INC., vs. MANILA TOBACCONISTS, INC., liability of Manila Tobacconist has exceeded P3000.
ET AL., defendants.
We find that the statement of the trial court to the effect that
By virtue of a written contract entered into between Mira the bond of P3,000 responded for the obligation of the
Hermanos, Inc., and Manila Tobacconists, Inc., the former Tobacconists up to the sum of P3,000 and the bond of P2,000
agreed to deliver to the latter merchandise for sale on responded for the obligation of the Tobacconists only insofar as
consignment under certain specified terms and the latter it might exceed P3,000 and up to P5,000, is not a mere theory
agreed to pay to the former on or before the 20th day of each but a finding of fact based upon the undisputed testimony of
month the invoice value of all the merchandise sold during the the witnesses called by the defendant Manila Compañia de
preceding month. Mira Hermanos, Inc., required of the Manila Seguros in support of its special defense hereinbefore quoted.
Tobacconists, Inc., a bond of P3,000, which was executed by the While on its face the bond given by the Manila Compañia de
Provident Insurance Co., on September 2, 1939, to secure the Seguros contains the same terms and conditions (except as to
fulfillment of the obligation of the Tobacconists under the the amount) as those of the bond given by the Provident
contract up to the sum of P3,000. Insurance Co., nevertheless it was pleaded by the Manila
Compañia de Seguros and found proven by the trial court "que
In the month of October, 1940, the volume of the business of
la intencion realmente que se habia perseguido, por lo menos
the Tobacconists having increased so that the merchandise
en lo que respecta a la Manila Tobacconists, Inc., y la Manila
received by it on consignment from Mira Hermanos exceeded
Compañia de Seguros, era la de que esta fianza de P2,000
P3,000 in value, Mira Hermanos required of the Tobacconist an
habria de responder solamente por todo aquello que
additional bond of P2,000, and in compliance with that
excediera de los P3,000." (Interpretation: Manila Compania de
requirement the defendant Manila Compañia de Seguros, on
seguros will only be liable for the bond of P2000 when the
October 16, 1940, executed a bond of P2,000with the same
liability of Manila Tobacconists will exceed P3000.)
terms and conditions (except as to the amount) as the bond of
the Provident Insurance Co. The evidence upon which that finding is based is not only
undisputed but perfectly reasonable and convincing. For, as the
On June 1, 1941, a final and complete liquidation was made of
trial court observed, there would have been no need for the
the transactions between Mira Hermanos and the Tobacconists,
additional bond of P2,000 if its purpose were to cover the first
as a result of which there was found a balance due from the
P2,000 already covered by the P3,000 bond of the Provident
latter to the former of P2,272.79, which indebtedness the
Insurance Co. Indeed, we might add, if the purpose of the
Tobacconists recognized but was unable to pay. Thereupon
additional bond of P2,000 were to cover not the excess over
Mira Hermanos made a demand upon the two surety
and above P3,000 but the first P2,000 of the obligation of the
companies for the payment of said sum.
principal debtor like the bond of P3,000 which covered only the
The Provident Insurance Co., paid only the sum of P1,363.67, first P3,000 of said obligation, then it would result that had the
which is 60% of the amount owned by the Tobacconists to Mira obligation of the Tobacconists exceeded P3,000, neither of the
Hermanos, alleging that the remaining 40% should be paid by two bonds would have responded for the excess, and that was
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precisely the event against which Mira Hermanos wanted to purchased by said Chung Chu Sing of Ed. A. Keller & Co. The
protect itself by demanding the additional bond of P2,000. debt remained unpaid (total debt was composed of four
invoices of varying amounts — P395.50, P450, P565, and
5.Tuason, Tuason, Inc. vs. Machuca GR-L 22177 Dec. 2 1924 –
Pearl Canada An action had been commenced against the said debtor, Chung
Chu Sing, by Kuenzle & Streiff for the recovery of the
Facts: Manila Compania de Seguros signed a note for P9,633 in indebtedness due. Before judgment was secured in that action,
favor of Tuason, Tuason Inc. to guarantee a liability of Universal Tan Sunco brought an action against Chung Chu Sing for the
Trading Co, In turn, Universal Trading Co. and its president, payment of another robligation for which Tan Sunco acted as
Antonio Machuca, in his personal capacity, executed a guarantor. Immediately after obtaining judgment, Tan Sunco
document wherein they bound themselves solidarily to caused to be levied thereunder executions upon all of the
reimburse Manila Compania de Seguros all of such sum it may property of Chung Chu Sing, which property was not more than
pay or become bound to pay, upon its obligation to Tuason, sufficient to pay the judgments under which the levies were
Tuason Inc. whether or not it shall have actually paid such sums made.
or any part thereof. Universal Trading Co. was declared
insolvent. The plaintiff in this action contends that said four judgments
ought to be set wholly aside on account of their having been
Tuason, Tuason, Inc. brought action against Manila Compania obtained, as he claims, by collusion and fraud, because the
De Seguros to recover the value of the note and obtained final debtor did not owe anything to Sunco at the time the four
judgment. Later, Manila Compania De Seguros filed a complaint judgments were secured, basing that contention on the fact,
against Machuca to recover the amount which Manila which is admitted, that Sunco had not yet paid the sums for
Compania De Seguros was sentenced to pay Tuason, Tuason, which he had become surety and in connection with he
Inc, plus attorney’s fees, judicial costs and sheriff’s fees, and obtained the judgments.
interest, although Manila Compania De Seguros had not, in fact,
paid the amount of the judgment. Issue: WON a guarantor who sues his principal debtor before
paying the debt himself entitled to recover judgment for the
Issue: debt?
a) WON Tuason, Tuason Inc. Is entitled to the relief sought in
view of the above facts? Held: No, while the surety has the right to obtain judgment
b) WON Tuason, Tuason Inc. has the right to recover from against his principal debtor, he will not be permitted to realize
Machuca more than the value of the note executed by Tuason, on said judgment to the point of actual collection until he has
Tuason, Inc. in favor of Manila Compania de Seguros? satisfied, or caused to be satisfied, the obligation the payment
of the obligation of which he assures. A guarantor who obtains
Held: judgment against his principal cannot execute said judgment
a. Yes. It is indispensable that Universal Trading Co. became against the latter’s property until he has paid the debt for which
bound by virtue of final judgment to pay the value of the note he stands as guarantor
executed by it in favor of Manila Compania de Seguros, and
according to the document executed solidarily by Universal We think that article 1843 of the Civil Code is applicable to this
Trading Co. and Machuca, Machuca bound himself to pay case. In their purpose articles 1838 and are quite distinct,
Tuason, Tuason, Inc. as soon as the latter may have become although in perfect harmony, the latter making more clearly
bound and liable, whether or not it shall have actually paid. effective the purpose of the former. Article 1838 provides for
b. Machuca must not be responsible for the expenses the enforcement of the rights of the surety against the debtor
incurred by Manila Compania De Seguros in the litigation after he has paid the debt. Article 1843 provides for his
between it and Tuason, Tuason, Inc. and it cannot charge protection before he has paid but after he has become liable to
Machuca with expenses it was compelled to make by reason of do so. The one gives a right of action after payment, the other a
its fault. It is entitled only to expenses incurred by it in the protective remedy before payment. (Supreme court of Spain,
action against Machuca. March 22, 1901.) The one is a substantive right, the other of the
nature of a preliminary remedy. The one gives a right of action
which, without the provisions of the other, might be worthless.
6. Kuenzle vs. Sunco The remedy given in article 1843 purpose to obtain for the
surety "relief from the burden of his suretyship or guaranty to
Facts: defend him against any proceedings of the creditor and from
the danger of insolvency of the debtor." (Last paragraph of art.
Tan Sunco was a surety for Chung Chu Sing for the payment by 1843.) Article 1838, speaking strictly, has no such purpose.
the latter of the purchase price of certain merchandise When the surety’s rights under this article become available, he
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is past the point where a preliminary protective remedy is of said payments to the settlement of said credit
any value to him. accommodation.
This power of attorney shall also remain irrevocable
It being evident that the purpose of article 1843 is to give to the until our total indebtedness to the said Bank have
surety a remedy in anticipation of the payment of the debt, been fully liquidated.
which debt, being due, he could be called upon to pay at any
time, it remains only to say, in this connection, that the only ATACO delivered to the Bureau of Public Works, and the latter
procedure known under our present practice to enforce that accepted, asphalt to the total value of P431,466.52. Of this
the right is by action. (Manresa, Civil Code, vol. 12, p. 320.) The amount the PNB regularly collected, from April 21, 1948 to
defendant Sunco availed himself of that right against debtor. November 18, 1948, P106,382.01. Thereafter, for unexplained
The methods employed by him to realize his end were unusual reasons, the PNB ceased to collect, until in 1952 its
but not of themselves fraudulent. investigators found that more moneys were payable to ATACO
from the Public Works office, because the latter had allowed
But while the surety has the right to obtain as he did the mother creditor to collect funds due to ATACO under the same
judgments against the principal debtor, he ought not to be purchase order to a total of P311,230.41.
allowed to realized on said judgments to the point of actual
collection of the same until he has satisfied or caused to be Its demands on the principal debtor and the Surety having been
satisfied the obligation the payment of which he assures. refused, the PNB sued both to recover the balance of
Otherwise, a great opportunity for collusion and improper P158,563.18 as of February 15, 1950, plus interests and costs.
practice between the surety and his principal would be offered
which might result to the injury and prejudice of the creditor On October 4, 1958, the trial court rendered a decision in favor
who holds the claim against them. of PNB.
PNB recoursed to the CA, which rendered an adverse decision
The judgment of the court below is, therefore, affirmed, with and modified the judgment of the trial court.
costs against the Appellant. But the said Sunco shall not execute
said judgments against the property of the judgment debtor The CA found PNB to have been negligent in having stopped
until he has paid the debt for which he stands surety. So collecting from the Bureau of Public Works the moneys falling
ordered. due in favor of the principal debtor, ATACO, from and after
November 18, 1948, before the debt was fully collected,
thereby allowing such funds to be taken and exhausted by
7. PNB vs. Manila Surety - RanizzaDatukon other creditors to the prejudice of the surety, and held that the
Bank's negligence resulted in exoneration of respondent Manila
Facts: Philippine National Bank (PNB) had opened a letter of Surety & Fidelity Company.
credit and advanced thereon $120,000.00 to Edgington Oil
Refinery for 8,000 tons of hot asphalt. Of this amount, 2,000 Issue: Is Manila Surety exonerated from liability? YES.
tons worth P279,000.00 were released and delivered to Adams
&Taguba Corporation (known as ATACO) under a trust receipt Ruling: Even if the assignment with power of attorney from
guaranteed by Manila Surety & Fidelity Co. up to the amount of the principal debtor were considered as mere additional
P75,000.00. To pay for the asphalt, ATACO constituted the Bank security still, by allowing the assigned funds to be exhausted
its assignee and attorney-in-fact to receive and collect from the without notifying the surety, the Bank deprived the former of
Bureau of Public Works the amount aforesaid out of funds any possibility of recoursing against that security.The Bank
payable to the assignor under Purchase Order No. 71947. thereby exonerated the surety, pursuant to Article 2080 of the
Civil Code:
The conditions of this assignment are as follows:
1. The same shall remain irrevocable until the said ART. 2080. — The guarantors, even though they be
credit accomodation is fully liquidated. solidary, are released from their obligation whenever
by come act of the creditor they cannot be subrogated
2. The PNB is hereby appointed as our Attorney-in-Fact to the rights, mortgages and preferences of the latter.
for us and in our name, place and stead, to collect and
to receive the payments to be made by virtue of the PNB’s contention: the power of attorney obtained from ATACO
aforesaid Purchase Order, with full power and was merely in additional security in its favor, and that it was the
authority to execute and deliver on our behalf, receipt duty of the surety, and not that of the creditor, owed see to it
for all payments made to it; to endorse for deposit or that the obligor fulfills his obligation, and that the creditor
encashment checks, money order and treasury owed the surety no duty of active diligence to collect any, sum
warrants which said Bank may receive, and to apply from the principal debtor, citing Judge Advocate General vs.
Court of Appeals, G.R. No. L-10671, October 23, 1958.
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· On November 24, 1989, dissatisfied with the

Issue: Is the contention tenable? NO. progress of the work undertaken by x x x JDS,
[respondent] Republic-Asahi extrajudicially rescinded
Ruling: The SC held that the argument of PNB misses the the contract pursuant to Article XIII of said contract,
point. The CA did not hold the Bank answerable for negligence and wrote a letter to x x x JDS informing the latter of
in failing to collect from the principal debtor but for its neglect such rescission.
in collecting the sums due to the debtor from the Bureau of
Public Works, contrary to its duty as holder of an exclusive and · Such rescission, according to Article XV of the
irrevocable power of attorney to make such collections, since contract shall not be construed as a waiver of
an agent is required to act with the care of a good father of a [respondent’s] right to recover damages from x x x JDS
family (Civ. Code, Art. 1887) and becomes liable for the and the latter’s sureties.
damages which the principal may suffer through his non-
performance (Civ. Code, Art. 1884). Certainly, the Bank could · "[Respondent] alleged that, as a result of x x x
not expect that the Bank would diligently perform its duty JDS’s failure to comply with the provisions of the
under its power of attorney, but because they could not have contract, which resulted in the said contract’s
collected from the Bureau even if they had attempted to do so. rescission, it had to hire another contractor to finish
It must not be forgotten that the Bank's power to collect was the project, for which it incurred an additional expense
expressly made irrevocable, so that the Bureau of Public Works of three million two hundred fifty six thousand, eight
could very well refuse to make payments to the principal debtor hundred seventy four pesos (P3,256,874.00).
itself, and a fortiori reject any demands by the surety.
· "[Respondent] then filed [a] complaint against x x
x JDS and SICI
o It sought from x x x JDS payment
ofP3,256,874.00 representing the additional
expenses, jointly and severally.
· [Respondent] Republic-Asahi Glass Corporation
(Republic-Asahi) entered into a contract with x x x Jose
o payment of P750,000.00 as damages in
D. Santos, Jr., the proprietor of JDS Construction (JDS),
accordance with the performance bond
for the construction of roadways and a drainage
system in Republic-Asahi’s compound.
o exemplary damages in the amount
of P100,000.00
· Republic-Asahi Glass Corporation was to pay x x x
JDS five million three hundred thousand pesos
o attorney’s fees in the amount of at
(P5,300,000.00) inclusive of value added tax for said
least P100,000.00.
construction, which was supposed to be completed
within a period of two hundred forty (240) days.
· On July 10, 1991, [petitioner] SICI filed its answer,
alleging that the [respondent’s] money claims against
· In order to guarantee the faithful and satisfactory
[petitioner and JDS] have been extinguished by the
performance of its undertakings’ x x x JDS, shall post a
death of Jose D. Santos, Jr.
performance bond of seven hundred ninety five
thousand pesos (P795,000.00).
Issue: Whether or not [petitioner’s] ] Stronghold Insurance Co.,
Inc’s (SICI) liability under the performance bond was
· Thus, JDS executed, jointly and severally with
AUTOMATICALLY extinguished by the death of Santos, the
[petitioner] Stronghold Insurance Co., Inc. (SICI)
Performance Bond No. SICI-25849/g(13)9769.

Held: No. The death did not extinguish SICI’s liability because it
· Several times prior to November of 1989,
is solidarily liable with Santos.
[respondent’s] engineers called the attention of x x x
JDS to the alleged alarmingly slow pace of the
construction, which resulted in the fear that the Ratio:
construction will not be finished within the stipulated
240-day period. · As a general rule, the death of either the creditor
or the debtor does not extinguish the obligation

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· The liability of petitioner is contractual in nature, and absolute; in other words, he is directly and
because it executed a performance bond worded as equally bound with the principal.”
· The death of the principal debtor will not work
“ xxx That we, JDS CONSTRUCTION of 208-A to convert, decrease or nullify the substantive right of
San Buena Building, contractor, of Shaw Blvd., the solidary creditor.
Pasig, MM Philippines, as principal and the
STRONGHOLD INSURANCE COMPANY, INC. a · Despite the death of the principal debtor, respondent
corporation duly organized and existing under may still sue petitioner alone, in accordance with the solidary
and by virtue of the laws of the Philippines nature of the latter’s liability under the performance bond.
with head office at Makati, as Surety, are held
and firmly bound unto the REPUBLIC ASAHI
GLASS CORPORATION and to any individual, 9. SPOUSES VICKY TAN TOH and LUIS TOH vs.
firm, partnership, corporation or association SOLID BANK CORPORATION, FIRST BUSINESS PAPER
supplying the principal with labor or materials CORPORATION, KENNETH NG LI and MA. VICTORIA NG LI –
in the penal sum of SEVEN HUNDRED NINETY Kirstin Dela Cruz G.R. No. 154183 August 7, 2003
FIVE THOUSAND (P795,000.00), Philippine
Currency, for the payment of which sum, well Facts:
and truly to be made, we bind ourselves, our RESPONDENT SOLID BANK CORPORATION AGREED TO EXTEND
heirs, executors, administrators, successors an "omnibus line" credit facility worth P10 million in favor of
and assigns, jointly and severally, firmly by respondent First Business Paper Corporation (FBPC). Terms and
these presents xxx. conditions were embodied in a “letter-advise”. The "letter-
advise"was effective upon "compliance with the documentary
· As a surety, petitioner is solidarily liable with requirements."
Santos in accordance with the Civil Code, which
provides as follows: The documents essential for the credit facility and submitted
for this purpose were thexxx (c) Continuing Guaranty for any
o "Art. 2047. By guaranty a person, called and all amounts signed by petitioner-spouses Luis Toh and Vicky
the guarantor, binds himself to the creditor Tan Toh, and respondent-spouses Kenneth and Ma. Victoria Ng
to fulfill the obligation of the principal Li.
debtor in case the latter should fail to do so.
The spouses Luis Toh and Vicky Tan Toh were then Chairman of
"If a person binds himself solidarily with the the Board and Vice-President, respectively, of FBPC, while
principal debtor, the provisions of Section respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li were
4,17 Chapter 3, Title I of this Book shall be President and General Manager, respectively, of the same
observed. In such case the contract is called a corporation.
More than thirty (30) days from date of the "letter-advise,"
petitioner-spouses Luis Toh and Vicky Tan Toh and respondent-
spouses Kenneth Ng Li and Ma. Victoria Ng Li signed the
required Continuing Guaranty, which was embodied in a public
document prepared solely by respondent Bank.
o "Art. 1216. The creditor may proceed
against any one of the solidary debtors or
The ContinuingGuaranty set forth no maximum limit on the
some or all of them simultaneously. The
indebtedness that respondent FBPC may incur and for which
demand made against one of them shall not
the sureties may be liable, stating that the credit facility "covers
be an obstacle to those which may
any and all existing indebtedness of, and such other loans and
subsequently be directed against the others,
credit facilities which may hereafter be granted to FIRST
so long as the debt has not been fully
The surety also contained a de facto acceleration clause if
· Elucidating on these provisions, the Court "default be made in the payment of any of the instruments,
in Garcia v. Court of Appeals18 : “although the contract indebtedness, or other obligation" guaranteed by petitioners
of a surety is in essence secondary only to a valid and respondents. So as to strengthen this security, the
principal obligation, his liability to the creditor or Continuing Guaranty waived rights of the sureties against delay
promisee of the principal is said to be direct, primary
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or absence of notice or demand on the part of respondent sureties after their withdrawal from FBPC, they could have
Bank, and gave future consent to the Bank's action to "extend simply terminated the agreement by serving the required
or change the time payment, and/or the manner, place or notice of revocation upon the Bank as expressly allowed
terms of payment," including renewal, of the credit facility or therein.
any part thereof in such manner and upon such terms as the
Bank may deem proper without notice to or further assent from Although the Court held that the spouses are validly bound by
the sureties. the Continuing Guaranty, they are discharged of their liability
because of the following omissions made by the bank:
Respondent FBPC availed of the credit facility and procured
letters of credit. It obtained loans totaling P15,227,510.00. 1) The bank made illicit extensions;
Since the letters of credit were secured, FBPC through its Certainly, while the Bank may extend the due date at its
officers Kenneth Ng Li, Ma. Victoria Ng Li and Redentor Padilla discretion pursuant to the Continuing Guaranty, it should
as signatories executed a series of trust receipts over the goods nonetheless comply with the requirements that domestic
allegedly purchased from the proceeds of the loans. letters of credit be supported by fifteen percent (15%) marginal
deposit extendible three (3) times for a period of thirty (30)
On 13 January 1994 respondent Bank received information that days for each extension, subject to twenty-five percent (25%)
respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had partial payment per extension. This reading of the Continuing
fraudulently departed from their conjugal home. The Bank Guaranty is consistent with Philippine National Bank v. Court of
invoked the Continuing Guaranty executed by petitioner- Appeals that any doubt on the terms and conditions of the
spouses Luis Toh and Vicky Tan Toh who were the only parties surety agreement should be resolved in favor of the surety.
known to be within national jurisdiction to answer as sureties As a result of these illicit extensions, petitioner-spouses Luis
for the credit facility of FBPC and served a demand letter to Toh and Vicky Tan Toh are relieved of their obligations as
them. sureties of respondent FBPC under Art. 2079 of the Civil Code.

Respondent Bank filed a complaint for sum of money with ex 2) The guaranty was executed more than thirty (30)
parte application for a writ of preliminary attachment against days from the original acceptance period as required in
FBPC, spouses Kenneth Ng Li and Ma. Victoria Ng Li, and the "letter-advise"; and
spouses Luis Toh and Vicky Tan Toh.
3) Failure of the bank to ascertain the purpose of
Petitioner-spouses acknowledged that Luis Toh was designated the procurement of the trust receipts.
as one of the authorized corporate signatories for transactions
in relation to FBPC's checking account with respondent Bank. The consequence of the omissions of the respondent bank is to
Petitioner-spouses however could not be certain whether to discharge the surety, petitioners herein, under Art. 2080 of the
deny or admit the due execution and authenticity of the Civil Code, or at the very least, mitigate the liability of the surety
Continuing Guaranty. They could only allege that they were up to the value of the property or lien released –
made to sign papers in blank and the Continuing Guaranty could If the creditor x xx has acquired a lien upon the property of a
have been one of them. principal, the creditor at once becomes charged with the duty
of retaining such security, or maintaining such lien in the
Petitioners averred that they already withdrew from FBPC and interest of the surety, and any release or impairment of this
therefore should no longer be liable. They also averred that security as a primary resource for the payment of a debt, will
sometime in June 1993 they obtained from respondent Kenneth discharge the surety to the extent of the value of the property
Ng Li their exclusion from the several surety agreements they or lien released x xxx [for] there immediately arises a trust
had entered into with different banks. relation between the parties, and the creditor as trustee is
bound to account to the surety for the value of the security in
Issue: W/N Spouses Toh can be held liable under the Continuing his hands.
Guaranty between the FBPC and the Bank.

Ruling: No.
This Court holds that the Continuing Guaranty is a valid and
binding contract of petitioner-spouses as it is a public document
that enjoys the presumption of authenticity and due execution.
Similarly, there is no basis for petitioners to limit their
responsibility thereon so long as they were corporate officers
and stockholders of FBPC. Nothing in the Continuing Guaranty
restricts their contractual undertaking to such condition or
eventuality. Verily, if petitioners intended not to be charged as
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innkeeper, on deposit and that he may validly hold on thereto

PLEDGE until Mike Abella pays his obligations.

10. ATTY. DIONISIO CALIBO, JR., VS .COURT OF APPEALS and Held: In a contract of pledge, the creditor is given the right to
DR. PABLO U. ABELLA – January 29, 2001 - CAR GONZALES retain his debtor's movable property in his possession, or in
that of a third person to whom it has been delivered, until the
Facts: PR Pablo is the owner of a tractor. Sometime in 1985, debt is paid. For the contract to be valid, it is necessary that: (1)
PR’s son, Mike, rented the house of Calibo. In 1986, Pablo left the pledge is constituted to secure the fulfillment of a principal
the tractor in the safekeeping of Mike, which the later kept in obligation; (2) the pledgor be the absolute owner of the thing
the garage of the rented house. However, Mike was not able to pledged; and (3) the person constituting the pledge has the free
pay the rental arrears and bills in the leased premises. Mike also disposal of his property, and in the absence thereof, that he be
assured Calibo that he would be staying in the leased property legally authorized for the purpose.
until the end of December 1986 and that he would be settling
his account with Calibo, offering the tractor as security. The said As found by the trial court and affirmed by respondent court,
tractor was moved to the garage of Calibo’s father. In 1987, on the pledgor in this case, Mike Abella, was not the absolute
three occasions, Calibo tried to collect payment from Mike. owner of the tractor that was allegedly pledged to petitioner.
When again confronted with his outstanding obligation, Mike The tractor was owned by his father, private respondent, who
reassured Calibo that the tractor would stand as a guarantee for left the equipment with him for safekeeping. Clearly, the
its payment. That was the last time Calibo saw or heard from second requisite for a valid pledge, that the pledgor be the
Mike. absolute owner of the property, is absent in this case. Hence,
there is no valid pledge.
On November 22, 1988, Mike's father, Pablo Abella, came to
Tagbilaran City to claim and take possession of the tractor. "He who is not the owner or proprietor of the property pledged
Calibo, however, informed Pablo that Mike left the tractor with or mortgaged to guarantee the fulfillment of a principal
him as security for the payment of Mike's obligation to him. obligation, cannot legally constitute such a guaranty as may
Pablo offered to write Mike a check for P2,000.00 in payment of validly bind the property in favor of his creditor, and the
Mike's unpaid lease rentals, in addition to issuing postdated pledgee or mortgagee in such a case acquires no right
checks to cover the unpaid electric and water bills the whatsoever in the property pledged or mortgaged."
correctness of which Pablo said he still had to verify with Mike.
Calibo told Pablo that he would accept the P2,000.00-check There also does not appear to be any agency in this case. We
only if the latter would execute a promissory note in his favor to agree with the Court of Appeals that:
cover the amount of the unpaid electric and water bills. Pablo "As indicated in Article 1869, for an agency relationship to be
was not amenable to this proposal. The two of them having deemed as implied, the principal must know that another
failed to come to an agreement, Pablo left and went back to person is acting on his behalf without authority. Here, appellee
Cebu City, unsuccessful in his attempt to take possession of the categorically stated that the only purpose for his leaving the
tractor." subject tractor in the care and custody of Mike Abella was for
safekeeping, and definitely not for him to pledge or alienate the
On November 25, 1988, private respondent instituted an action same. If it were true that Mike pledged appeellee's tractor to
for replevin, claiming ownership of the tractor and seeking to appellant, then Mike was acting not only without appellee's
recover possession thereof from petitioner. RTC and CA ruled in authority but without the latter's knowledge as well.
favour of Pablo. Article 1911, on the other hand, mandates that the principal is
solidarily liable with the agent if the former allowed the latter
The Court of Appeals sustained the ruling of the trial court that to act as though he had full powers. Again, in view of appellee's
Mike Abella could not have validly pledged the subject tractor lack of knowledge of Mike's pledging the tractor without any
to petitioner since he was not the owner thereof, nor was he authority from him, it stands to reason that the former could
authorized by its owner to pledge the tractor. Respondent court not have allowed the latter to pledge the tractor as if he had full
also rejected petitioner's contention that, if not a pledge, then a powers to do so."
deposit was created. The Court of Appeals said that under the There is likewise no valid deposit in this case. In a contract of
Civil Code, the primary purpose of a deposit is only safekeeping deposit, a person receives an object belonging to another with
and not, as in this case, securing payment of a debt. the obligation of safely keeping it and of returning the same.
Petitioner himself states that he received the tractor not to
Issue: W/N the tractor in question was validly pledged to him safely keep it but as a form of security for the payment of Mike
by private respondent's son Mike Abella to answer for the Abella's obligations. There is no deposit where the principal
latter's monetary obligations to petitioner. Or in alternative, purpose for receiving the object is not safekeeping.
that the tractor was left with him, in the concept of an

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11.CAVITE DEVELOPMENT BANK and FAR EAST BANK AND Such contention has NO MERIT. In determining the nature of a
TRUST COMPANY vs. SPS. CYRUS LIM and LOLITA CHAN LIM, contract, the courts are not bound by the name or title given to
CA - G.R. No. 131679 February 1, 2000 Kristine Javier it by the contracting parties. In the case at bar, the sum of
P30,000.00, although denominated in the offer to purchase as
 A certain Rodolfo Guansing obtained loan from CDB in the
"option money," is actually in the nature of earnest money or
amount of 90K and mortgaged a parcel of land to secure
down payment when considered with the other terms of the
 CDB was the highest bidder in the foreclosure sale.
In this case, after the payment of the 10% option money, the
Guansing failed to redeem it hence Guansing’s TCT was
Offer to Purchase provides for the payment only of the balance
cancelled a NEW TCT was issued
of the purchase price, implying that the "option money" forms
 Lolita Chan Lim offered to purchase such property from part of the purchase price. This is precisely the result of paying
CDB. The written Offer to Purchase states in part: earnest money under Art. 1482 of the Civil Code. Moreover,
RTC found that CDB accepted Lim's offer to purchase based on
We hereby offer to purchase your property at La Loma, the testimony of an established witness.
Quezon City for P300,000.00 under the following terms and
conditions: Given CDB's acceptance of Lim's offer to purchase, it appears
that a contract of sale was perfected and, indeed, partially
(1) 10% Option Money; executed because of the partial payment of the purchase
(2) Balance payable in cash; price. There is, however, a serious legal obstacle to such sale,
rendering it impossible for CDB to perform its obligation as
(3) Provided that the property shall be cleared of illegal
seller to deliver and transfer ownership of the property.
occupants or tenants.
Nemodat quod non habet, as an ancient Latin maxim says. One
Pursuant to the foregoing terms and conditions of the
cannot give what one does not have. In applying this precept to
offer, Lim paid CDB P30,000.00 as Option Money, for which
a contract of sale, a distinction must be kept in mind between
she was issued Official Receipt.
the "perfection" and "consummation" stages of the contract.
 However, after some time following up the sale, Lim A contract of sale is perfected at the moment there is a meeting
discovered that the subject property was originally of minds upon the thing which is the object of the contract and
registered in the name of the father of the mortgagor upon the price. It is, therefore, not required that, at the
Guansing, Perfecto Guansing. Rodolfo succeeded in having perfection stage, the seller be the owner of the thing sold or
his own title, the same one whuch he mortgaged to CDB. It even that such subject matter of the sale exists at that point in
appears however, that the father, Perfecto, instituted a time. Thus, under Art. 1434 of the Civil Code, when a person
civil case for the cancellation of his son’s title in which sells or alienates a thing which, at that time, was not his, but
Perfecto’s title was restored and in effect cancelling later acquires title thereto, such title passes by operation of law
Rodolfo’s. Such decision has become final and executory. to the buyer or grantee. This is the same principle behind the
 Aggrieved by what she considered a serious sale of "future goods" under Art. 1462 of the Civil
misrepresentation by CDB and its mother-company, FEBTC, Code.However, under Art. 1459, at the time of delivery or
on their ability to sell the subject property, Lim, joined by consummation stage of the sale, it is required that the seller be
her husband, filed an action for specific performance and the owner of the thing sold. Otherwise, he will not be able to
damages. comply with his obligation to transfer ownership to the buyer. It
is at the consummation stage where the principle of nemodat
 RTC = Favored Sps. Lim. quod non habetapplies.
 CA = Affirmed in toto. Motion for Recon. was denied as In this case, the sale by CDB to Lim of the property mortgaged
well. Hence this petition. in 1983 by Rodolfo Guansing must, therefore, be deemed a
RULING: 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
1. What is the legal relation between the bank and Lolita because the foreclosure sale, by virtue of which, the property
Chan Lim; Is the bank mortgagee-in-good-faith? had been awarded to CDB as highest bidder, is likewise void
CDB and FEBTC deny that a contract of sale was ever perfected since the mortgagor was not the owner of the property
between them and Lolita Chan Lim. They contend that Lim's foreclosed.
letter-offer clearly states that the sum of P30,000,00 was given A foreclosure sale, though essentially a "forced sale," is still a
as option money, not as earnest money. They thus conclude sale in accordance with Art. 1458 of the Civil Code, under
that the contract between CDB and Lim was merely an option which the mortgagor in default, the forced seller, becomes
contract, not a contract of sale. obliged to transfer the ownership of the thing sold to the
highest bidder who, in turn, is obliged to pay therefor the bid
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price in money or its equivalent.Being a sale, the rule that the 2. Who, if any, among the parties was at fault for the nullity of
seller must be the owner of the thing sold also applies in a the contract?
foreclosure sale. This is the reason Art. 2085 of the Civil Code,
Both the RTC and CA found petitioner Banks guilty of fraud
in providing for the essential requisites of the contract of
when Lim was asked by CDB to pay the 10% option money, CDB
mortgage and pledge, requires, among other things, that the
already knew that it was no longer the owner of the said
mortgagor or pledgor be the absolute owner of the thing
property, its title having been cancelled. Petitioners contend
pledged or mortgaged, in anticipation of a possible foreclosure
that: (1) such finding of the appellate court is founded entirely
sale should the mortgagor default in the payment of the loan.
on speculation and conjecture; (2) neither CDB nor FEBTC was a
There is, however, a situation where, despite the fact that the party in the case where the mortgagor's title was cancelled; (3)
mortgagor is not the owner of the mortgaged property, his title CDB is not privy to any problem among the Guansings; and (4)
being fraudulent, the mortgage contract and any foreclosure the final decision cancelling the mortgagor's title was not
sale arising therefrom are given effect by reason of public annotated in the latter's title.
policy. This is the doctrine of "the mortgagee in good faith"
In relation to these factual issues, we are bound by the findings
based on the rule that all persons dealing with property
of fact of both RTC and CA. In any case, we are convinced of
covered by a Torrens Certificate of Title, as buyers or
petitioners' negligence in approving the mortgage application
mortgagees, are not required to go beyond what appears on
of Rodolfo Guansing.
the face of the title. The public interest in upholding the
indefeasibility of a certificate of title, as evidence of the lawful 3. Civil effects of a void contract.
ownership of the land or of any encumbrance thereon, protects
Article 1412(2) of the Civil Code provides:
a buyer or mortgagee who, in good faith, relied upon what
appears on the face of the certificate of title. If the act in which the unlawful or forbidden cause
consists does not constitute a criminal offense, the
This principle is cited by petitioners in claiming that, as a
following rules shall be observed:
mortgagee bank, it is not required to make a detailed
investigation of the history of the title of the property given as x xx x xx x xx
security before accepting a mortgage.
(2) When only one of the contracting parties is at fault,
We are NOT CONVINCED, however, that under the he cannot recover what he has given by reason of the
circumstances of this case, CDB can be considered a mortgagee contract, or ask for the fulfillment of what has been
in good faith. While petitioners are not expected to conduct an promised him. The other, who is not at fault, may
exhaustive investigation on the history of the mortgagor's demand the return of what he has given without any
title, they cannot be excused from the duty of exercising the obligation to comply with his promise.
due diligence required of banking institutions. In Tomas v.
Tomas,we noted that it is standard practice for banks, before
approving a loan, to send representatives to the premises of 12. DEVELOPMENT BANK OF THE PHILIPPINES,
the land offered as collateral and to investigate who are real vs.
PRUDENTIAL BANK G.R. No. 143772 November 22, 2005 -
owners thereof, noting that banks are expected to exercise Madel Malone-Cervantes
more care and prudence than private individuals in their
dealings, even those involving registered lands, for their Facts: In 1973, Lirag Textile Mills, Inc. (Litex) opened an
business is affected with public interest. We held thus: irrevocable commercial letter of credit with Prudential Bank for
US$498,000. This was in connection with its importation of
In this case, there is no evidence that CDB observed its duty of
5,000 spindles for spinning machinery with drawing frame,
diligence in ascertaining the validity of Rodolfo Guansing's
simplex fly frame, ring spinning frame and various accessories,
title. It appears that Rodolfo Guansing obtained his fraudulent
spare parts and tool gauge. These were released to Litex under
title by executing an Extra-Judicial Settlement of the Estate
covering "trust receipts" it executed in favor of Prudential Bank.
With Waiver where he made it appear that he and Perfecto
Litex installed and used the items in its textile mill.
Guansing were the only surviving heirs entitled to the property,
On October 10, 1980, DBP granted a foreign currency loan in
and that Perfecto had waived all his rights thereto. This self-
the amount of US$4,807,551 to Litex. To secure the loan, Litex
executed deed should have placed CDB on guard against any
executed real estate and chattel mortgages on its plant site,
possible defect in or question as to the mortgagor's title.
including machineries and equipments covered by the "trust
Moreover, the alleged ocular inspection report by CDB's
representative was never formally offered in evidence. Indeed,
petitioners admit that they are aware that the subject land was
Prudential Bank learned about DBP’s plan for the overall
being occupied by persons other than Rodolfo Guansing and
rehabilitation of Litex and it notified DBP of its claim over the
that said persons, who are the heirs of Perfecto Guansing,
various items covered by the "trust receipts" which had been
contest the title of Rodolfo.21
installed and used by Litex in the textile mill. Prudential Bank
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informed DBP that it was the absolute and juridical owner of BANK and as its property with liberty to sell the same for its
the said items and they were thus not part of the mortgaged account but without authority to make any other disposition
assets that could be legally ceded to DBP. whatsoever of the said goods or any part thereof (or the
proceeds thereof) either by way of conditional sale, pledge, or
For the failure of Litex to pay its obligation, DBP extra-judicially otherwise. (Emphasis supplied)
foreclosed on the real estate and chattel mortgages, including
the articles claimed by Prudential Bank. DBP acquired the Trust receipt transactions are governed by the provisions of Sec.
foreclosed properties as the highest bidder. 4, PD 115, the Trust Receipts Law. In a trust receipt transaction,
the goods are released by the entruster (who owns or holds
Subsequently, DBP published an invitation to bid for the auction absolute title or security interests over the said goods) to the
sale of the textile mill formerly owned by Litex, the land which it entrustee on the latter’s execution and delivery to the entruster
was built, as well as the machineries and equipments therein. of a trust receipt. The trust receipt evidences the absolute title
Learning of the intended public auction, Prudential Bank wrote or security interest of the entruster over the goods. As a
DBP reasserting its claim over the items covered by "trust consequence of the release of the goods and the execution of
receipts" in its name and advising DBP not to include them in the trust receipt, a two-fold obligation is imposed on the
the auction. It also demanded the turnover of the articles or entrustee, namely:
alternatively, the payment of their value. (1) to hold the designated goods, documents or instruments in
Since its demands remained unheeded, Prudential Bank filed a trust for the purpose of selling or otherwise disposing of them
complaint for a sum of money with damages against DBP. RTC and (2) to turn over to the entruster either the proceeds
decidedin favor of Prudential Bank, on appeal with CA, it thereof to the extent of the amount owing to the entruster or
affirmed the decision of the trial court in toto. as appears in the trust receipt, or the goods, documents or
instruments themselves if they are unsold or not otherwise
Issue/s: disposed of, in accordance with the terms and conditions
1.) WON the the agreement between Litex and specified in the trust receipt.
Prudential Bank over the machineries and equipments
denominated as “trust receipts” were valid under PD In the case of goods, they may also be released for other
115 of the Trust Receipts Law. Yes purposes substantially equivalent to (a) their sale or the
2.) WON Litex had authority to dispose the procurement of their sale; or (b) their manufacture or
machineries and equipment, which was the subject of processing with the purpose of ultimate sale, in which case the
the trust receipt agreement, to conditional sale, entruster retains his title over the said goods whether in their
pledge or any other means. No. original or processed form until the entrustee has complied
Held: 1.) DBP contended that the contested articles were fully with his obligation under the trust receipt; or (c) the
excluded from goods that could be covered by a trust receipt, loading, unloading, shipment or transshipment or otherwise
that the chattels in controversy were procured by DBP’s dealing with them in a manner preliminary or necessary to their
mortgagor LITEX for the exclusive use of its textile mills. They sale. Thus, in a trust receipt transaction, the release of the
were not procured (a) to sell or otherwise procure their sale; (b) goods to the entrustee, on his execution of a trust receipt, is
to manufacture or process the goods with the purpose of essentially for the purpose of their sale or is necessarily
ultimate sale.(emphasis supplied) connected with their ultimate or subsequent sale.

Hence, the transactions between Litex and Prudential Bank 2.) The articles were owned by Prudential Bank and they were
were allegedly not trust receipt transactions within the meaning only held by Litex in trust. While it was allowed to sell the items,
of PD 115. It follows that, the transactions were not governed Litex had no authority to dispose of them or any part thereof or
by the Trust Receipts Law. We disagree. their proceeds through conditional sale, pledge or any other
The various agreements between Prudential Bank and Litex
commonly denominated as "trust receipts" were valid. As the Article 2085 (2) of the Civil Code requires that, in a contract of
Court of Appeals correctly ruled, their provisions did not pledge or mortgage, it is essential that the pledgor or
contravene the law, morals, good customs, public order or mortgagor should be the absolute owner of the thing pledged
public policy. or mortgaged. Article 2085 (3) further mandates that the
The agreements uniformly provided: person constituting the pledge or mortgage must have the free
disposal of his property, and in the absence thereof, that he be
Received, upon the Trust hereinafter mentioned from the legally authorized for the purpose.
PRUDENTIAL BANK (hereinafter referred to as BANK) the
following goods and merchandise, the property of said BANK Litex had neither absolute ownership, free disposal nor the
specified in the bill of lading as follows: …and in consideration authority to freely dispose of the articles. Litex could not have
thereof, I/We hereby agree to hold said goods in trust for the subjected them to a chattel mortgage. Their inclusion in the
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mortgage was voidand had no legal effect. There being no valid resumption of regularity, and to overcome this presumption,
mortgage, there could also be no valid foreclosure or valid there must be evidence that is clear, convincing and more than
auction sale. merely preponderant that there was irregularity in its
execution; otherwise, the document should be upheld.
No one can transfer a right to another greater than what he
himself has.Nemodat quod non habet. Hence, Litex could not Sps. Jayme, therefore, should not be allowed to
transfer a right that it did not have over the disputed items. disclaim the validity of a transaction they voluntarily and
Corollarily, DBP could not acquire a right greater than what its knowingly entered into for the simple reason that such
predecessor-in-interest had. The spring cannot rise higher than transaction turned out prejudicial to them later on.
its source. DBP merely stepped into the shoes of Litex as trustee
of the imported articles with an obligation to pay their value or
to return them on Prudential Bank’s demand. By its failure to 14. Hechanova and Masavs.Hon. MidpantaoAdil, and
pay or return them despite Prudential Bank’s repeated PioServando-Madriaga
demands and by selling them to Lyon without Prudential Bank’s
knowledge and conformity, DBP became a trustee ex maleficio. Facts:The case under review is for the annulment of a deed of
sale dated March 11, 1978, executed by Jose Y. Servando in
13. Vda de. Jayme vs. CA- Bena Sofia Logramonte favor of Hechanova and Masa, covering three parcels of land
situated in Iloilo City. Claiming that the said parcels of land
Facts:Sps. Graciano and Mamerta Jayme are the registered were mortgaged to him (PioServando)in 1970 by the vendor,
owners of the subject lot in Mandaue City, Cebu. On Jan. 8, who is his cousin(Jose Y. Servando), to secure a loan of
1973, Sps. Jayme entered into a Contract of Lease with George P20,000.00, the plaintiff PioServando impugned the validity of
Neri, president of Airland Motors Corp. (now Cebu Asiancars, the sale as being fraudulent, and prayed that it be declared null
Inc.). The terms and conditions of the lease contract provides and void and the transfer certificates of title issued to the
that Asiancars may use the leased premises as a collateral to vendees be cancelled, or alternatively, if the sale is not
secure payment of loan which Asiancars may obtain from any annulled, to order the defendant Jose Servando to pay the
bank. amount of P20,000.00, plus interests, and to order defendants
In Oct. 1977, Asiancars obtained a loan of P6M from to pay damages. Attached to the complaint was a copy of the
the Metropolitan Bank and Trust Company (MBTC). The subject private document evidencing the alleged mortgage (Annex
lot was one of the collaterals for the loan. As mortgagors, Sps. A),which is quoted hereunder:
Jayme signed a Deed of Real Estate Mortgage (REM) in favor of August 20, 1970
MBTC. This is to certify that I, Jose YusayServando, the sole owner of
three parcel of land under Tax Declaration No. 28905, 44123
Asiancars failed to pay the loan and eventually, MBTC and 31591 at Lot No. 1, 1863-Portion of 1863 & 1860 situated at
extrajudicially foreclosed the mortgage. As a result of the Sto. Nino St., Arevalo, Compania St. &Compania St., Interior
foreclosure, herein petitioners, heirs of Graciano Jayme, filed a Molo, respectively, have this date mortgaged the said property
civil complaint. Petitioners claim that the Sps. Jayme are to my cousin PioServando, in the amount of TWENTY
illiterate and were deceived into signing the Deed of REM. Their THOUSAND PESOS (P20,000.00), redeemable for a period not
intention, as well as consent was only to be bound as exceeding ten (10) years, the mortgage amount bearing an
guarantors. MBTC denied the said allegations. interest of 10% per annum.
I further certify that in case I fail to redeem the said properties
Issue: WON the Deed of REM should be annulled on the ground within the period stated above, my cousin PioServando, shall
of vitiated consent. become the sole owner thereof.

Ruling: NO The defendants (Petitioners herein Hechanova and

Masa)moved to dismiss the complaint on the grounds that it
Reasoning:The Deed of REM entered into by Sps. Jayme partake
did not state a cause of action, the alleged mortgage being
of a Third Party Mortgage under Art. 2085 (3) of the Civil Code
invalid and unenforceable since it was a mere private document
which reads: The following requisites are essential to the
and was not recorded in the Registry of Deeds; and that the
contracts of pledge and mortgage: (3) that the persons
plaintiff was not the real party in interest and, as a mere
constituting the pledge or mortgage have the free disposal of
mortgagee, had no standing to question the validity of the sale.
their property, and in the absence thereof that they be legally
The motion was denied by the respondent Judge, in its order
authorized for the purpose.
dated June 20, 1978, "on the ground that this action is actually
In the case at bar, it has been shown that the Sps. one for collection."
Jayme affixed their signature on the Deed of REM, in the Issue: Whether PioServando has a cause of action to annul the
presence of 2 instrumental witnesses, and duly notarized by deed of sale executed by the Jose Servando in favor of
Atty. Cabrera. As a notarized document, it has in its favor the Hechanova and Masa.
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Held:No,It is clear from the records of this case that After making a downpayment of P7,700.00, the SPOUSES failed
PioServando has no cause of action. PioServando has no to pay the balance of P40,000.00. Due to these unpaid
standing to question the validity of the deed of sale executed by balances, BAYANIHAN filed an action for specific performance
the deceased defendant Jose Servando in favor of his co- against the SPOUSES docketed as Civil Case No. 80420.
defendants Hechanova and Masa. No valid mortgage has been Judgment was rendered in favor of BAYANIHAN. The dispositive
constituted PioServando's favor, the alleged deed of mortgage portion of the decision reads:
being a mere private document and not registered; moreover,
it contains a stipulation (pactocomisorio) which is null and void WHEREFORE, judgment is hereby rendered, ordering the
under Article 2088 of the Civil Code. Even assuming that the defendants, jointly and severally, to pay the plaintiffs, the sum
property was validly mortgaged to the PioServando, his of P40,000.00, with interest at the legal rate from July 1, 1970
recourse was to foreclose the mortgage, not to seek annulment until full payment.In the event of their failure to do so within
of the sale. thirty (30) days from notice of this judgment, they are hereby
ordered to execute the corresponding deed of absolute sale in
favor of the plaintiff and/or the assignment of leasehold rights
15.Uy Tong vs CA - Mizzy Maree Martinez over the defendant's apartment located at 307 Ligaya Building,
Alvarado Street, Binondo, Manila, upon the payment by the
FACTS: Petitioners Uy Tong (also known as Henry Uy) and Kho plaintiff to the defendants of the sum of P3,535.00.
Po Giok (SPOUSES) used to be the owners of Apartment No. 307
of the Ligaya Building, together with the leasehold right for Pursuant to said judgment, an order for execution pending
ninety- nine (99) years over the land on which the building appeal was issued by the trial court and a deed of assignment
stands. The land is registered in the name of Ligaya dated May 27, 1972, was executed by the SPOUSES over
Investments, Inc. Apartment No. 307 of the Ligaya Building together with the
leasehold right over the land on which the building stands. The
It appears that Ligaya Investments, Inc. owned the building SPOUSES acknowledged receipt of the sum of P3,000.00 more
which houses the apartment units but sold Apartment No. 307 or less, paid by BAYANIHAN pursuant to the said judgment.
and leased a portion of the land in which the building stands to
the SPOUSES. Notwithstanding the execution of the deed of assignment the
SPOUSES remained in possession of the premises.
In February, 1969, the SPOUSES purchased from private Subsequently, they were allowed to remain in the premises as
respondent Bayanihan Automotive, Inc. (BAYANIHAN) seven (7) lessees for a stipulated monthly rental until November 30,1972.
units of motor vehicles for a total amount of P47,700.00
payable in three (3) installments. The transaction was Despite the expiration of the said period, the SPOUSES failed to
evidenced by a written "Agreement" wherein the terms of surrender possession of the premises in favor of BAYANIHAN.
payment had been specified as follows: This prompted BAYANIHAN to file an ejectment case against
them in the City Court of Manila docketed as Civil Case No.
That immediately upon signing of this Agreement, the VENDEE 240019. This action was however dismissed on the ground that
shall pay unto the VENDOR the amount of Seven Thousand BAYANIHAN was not the real party in interest, not being the
Seven Hundred (P7,000.00) Pesos, Philippine Currency, and the owner of the building.
amount of Fifteen Thousand (P15,000.00) Pesos shah be paid
on or before March 30, 1969 and the balance of Twenty Five After demands to vacate the subject apartment made by
Thousand (P25,000.00) Pesos shall be paid on or before April BAYANIHAN's counsel was again ignored by the SPOUSES, an
30, 1969, the said amount again to be secured by another action for recovery of possession with damages was filed as Civil
postdated check with maturity on April 30, 1969 to be drawn by Case No. 121532 against the SPOUSES and impleading Ligaya
the VENDEE; Investments, Inc. as party defendant.

That if for any reason the VENDEE should fail to pay her The decision in said case was rendered in favor of BAYANIHAN
aforementioned obligation to the VENDOR,the latter shall ordering the SPOUSES to vacate, surrender and deliver
become automatically the owner of the former's apartment possession of Apartment 307, Ligaya Building; Ordering
which is located at No. 307, Ligaya Building, Alvarado St., defendant Ligaya Investment, Inc. to recognize the right of
Binondo, Manila, with the only obligation on its part to pay unto ownership and possession of BAYANIHAN over Apartment No.
the VENDEE the amount of Three Thousand Five Hundred Thirty 307, Ligaya Building; and ordering Ligaya Investment, Inc. to
Five (P3,535.00) Pesos, Philippine Currency; and in such event acknowledge plaintiff as assignee-lessee in liue of defendants
the VENDEE shall execute the corresponding Deed of absolute spouses Uy Tong and Kho Po Giok over the lot on which the
Sale in favor of the VENDOR and or the Assignment of Leasehold building was constructed.

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The SPOUSES appealed to the Court of Appeals. On October Clearly, there was no automatic vesting of title on BAYANIHAN
2,1984, the respondent Court of Appeals affirmed in toto the because it took the intervention of the trial court to exact
decision appealed from. fulfillment of the obligation, which, by its very nature is ".
.anathema to the concept of pactocommissorio" [Northern
The SPOUSES contend that the deed of assignment is null and Motors, Inc. v. Herrera, G.R. No. L-32674, February 22, 1973, 49
void because it is in the nature of SCRA 392].
a pactumcommissoriumand/or was borne out of the same.
And even granting that the original agreement between the
ISSUE: WON the deed of assignment is in the nature of a parties had the badges of pactumcommissorium, the deed of
pactumcommissorium? (taking into account the two elements assignment does not suffer the same fate as this was executed
of pactumcommissorium as related to our topic on pledge and pursuant to a valid judgment in Civil Case No. 80420. This being
mortgage) the case, there is no reason to impugn the validity of the said
deed of assignment.
RULING:In support of the first argument, petitioners bring to
the fore the contract entered into by the parties whereby 16. SPS ONG v ROBAN LENDING CORPORATION - Sigrid Mier
petitioner Kho Po Giok agreed that the apartment in question
will automatically become the property of private respondent Facts: On different dates from July 14, 1999 to March 20, 2000,
BAYANIHAN upon her mere failure to pay her obligation. This petitioner-spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong
agreement, according to the petitioners is in the nature of obtained several loans from RobanLending Corporation
a pactumcommissorium which is null and void, hence, the deed (respondent) in the total amount of P4,000,000.00. These loans
of assignment which was borne out of the same agreement were secured by a real estate mortgage on petitioners' parcels
suffers the same fate. of land located in Binauganan, Tarlac City and covered by TCT
No. 297840.
The prohibition on pactumcommissorium stipulations is
provided for by Article 2088 of the Civil Code: On February 12, 2001, petitioners and respondent
executed an Amendment to Amended Real Estate Mortgage2
Art. 2088. The creditor cannot appropriate the things given by consolidating their loans inclusive of charges thereon which
way of pledge or mortgage, or dispose of the same. Any totaled P5,916,117.50. On even date, the parties executed a
stipulation to the contrary is null and void. Dacion in Payment Agreement3 wherein petitioners assigned
the properties covered by TCT No. 297840 to respondent in
The aforequoted provision furnishes the two elements settlement of their total obligation, and a Memorandum of
for pactum commissorium to exist: (1) that there should be a Agreement.
pledge or mortgage wherein a property is pledged or
mortgaged by way of security for the payment of the principal Petitioners filed a complaint before the RTC for
obligation; and (2) that there should be a stipulation for an declaration of mortgage contract as abandoned, annulment of
automatic appropriation by the creditor of the thing pledged or deeds, illegal exaction, unjust enrichment, accounting, and
mortgaged in the event of non-payment of the principal damages, alleging that the Memorandum of Agreement and the
obligation within the stipulated period. Dacion in Payment executed are void for being
pactumcommissorium. Further, Sps Ong alleged that the loans
A perusal of the terms of the questioned agreement evinces no extended to them from July 14, 1999 to March 20, 2000 were
basis for the application of the pactumcommissorium provision. founded on several uniform promissory notes, which provided
First, there is no indication of 'any contract of mortgage entered for 3.5% monthly interest rates, 5% penalty per month on the
into by the parties. It is a fact that the parties agreed on the sale total amount due and demandable, and a further sum of 25%
and purchase of trucks. attorney's fees thereon,8 and in addition, respondent exacted
certain sums denominated as "EVAT/AR." Petitioners decried
Second, there is no case of automatic appropriation of the these additional charges as "illegal, iniquitous, unconscionable,
property by BAYANIHAN. When the SPOUSES defaulted in their and revolting to the conscience as they hardly allow any
payments of the second and third installments of the trucks borrower any chance of survival in case of default."
they purchased, BAYANIHAN filed an action in court for specific
performance. The trial court rendered favorable judgment for By Decision of April 21, 2004, Branch 64 of the Tarlac
BAYANIHAN and ordered the SPOUSES to pay the balance of City RTC, finding on the basis of the pleadings that there was no
their obligation and in case of failure to do so, to execute a pactumcommissorium which was likewise upheld by the Court
deed of assignment over the property involved in this case. The of Appeals.
SPOUSES elected to execute the deed of assignment pursuant
to said judgment. Issue: Whether both contracts constitute pactumcommissorium
or dacion en pago.
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inspire of repeated demands and the obligation as of

Held: This Court finds that the Memorandum of Agreement and September 30, 1969 stood at P 15,137.11 including accrued
Dacion in Payment constitute pactumcommissorium, which is interest and service charge.
prohibited under Article 2088 of the Civil Code which provides:
On May 3, 1966 and June 20, 1966, defendants
“The creditor cannot appropriate the things given by way of AnastacioTeodoro, Sr. (Father) and AnastacioTeodoro, Jr. (Son)
pledge or mortgage, or dispose of them. Any stipulation to the executed in favor of plaintiff two Promissory Notes (Nos. 11515
contrary is null and void." and 11699) for P8,000.00 and P1,000.00 respectively, payable in
120 days at 12% interest per annum. Father and Son made a
The elements of pactumcommissorium, which enables partial payment on the May 3, 1966 promissory Note but none
the mortgagee to acquire ownership of the mortgaged property on the June 20, 1966 Promissory Note, leaving still an unpaid
without the need of any foreclosure proceedings are: balance of P8,934.74 as of September 30, 1969 including
1. there should be a property mortgaged by way of accrued interest and service charge.
security for the payment of the principal obligation,
and The three Promissory Notes stipulated that any interest due if
2. there should be a stipulation for automatic not paid at the end of every month shall be added to the total
appropriation by the creditor of the thing mortgaged in amount then due, the whole amount to bear interest at the
case of non-payment of the principal obligation within rate of 12% per annum until fully paid; and in case of collection
the stipulated period. through an attorney-at-law, the makers shall, jointly and
severally, pay 10% of the amount over-due as attorney's fees,
In the case at bar, the Memorandum of Agreement and the which in no case shall be leas than P200.00.
Dacion in Payment contain no provisions for foreclosure It appears that on January 24, 1964, the Son executed in favor
proceedings nor redemption. Under the Memorandum of of plaintiff a Deed of Assignment of Receivables from the
Agreement, the failure by the petitioners to pay their debt Emergency Employment Administration in the sum of
within the one-year period gives respondent the right to P44,635.00. The Deed of Assignment provided that it was for
enforce the Dacion in Payment transferring to it ownership of and in consideration of certain credits, loans, overdrafts and
the properties covered by TCT No. 297840. Respondent, in other credit accommodations extended to defendants as
effect, automatically acquires ownership of the properties security for the payment of said sum and the interest thereon,
upon petitioners' failure to pay their debt within the and that defendants do hereby remise, release and quitclaim all
stipulated period. its rights, title, and interest in and to the accounts receivables.

Respondent argues that the law recognizes dacion en pago In their stipulations of Fact, it is admitted by the parties that
as a special form of payment whereby the debtor alienates plaintiff extended loans to defendants on the basis and by
property to the creditor in satisfaction of a monetary obligation. reason of certain contracts entered into by the defunct
This does not persuade. In a true dacion en pago, the Emergency Employment Administration (EEA) with defendants
assignment of the property extinguishes the monetary debt. In for the fabrication of fishing boats, and that the Philippine
the case at bar, the alienation of the properties was by way of Fisheries Commission succeeded the EEA after its abolition; that
security, and not by way of satisfying the debt. The Dacion in non-payment of the notes was due to the failure of the
Payment did not extinguish petitioners' obligation to Commission to pay defendants after the latter had complied
respondent. On the contrary, under the Memorandum of with their contractual obligations; and that the President of
Agreement executed on the same day as the Dacion in plaintiff Bank took steps to collect from the Commission, but no
Payment, petitioners had to execute a promissory note for collection was effected.
P5,916,117.50 which they were to pay within one year.
For failure of defendants to pay the sums due on the
As to the rates: This Court finds the attorney's fees of 25% Promissory Note, this action was instituted on November 13,
of the principal, interests and interests thereon, and the penalty 1969, originally against the Father, Son, and the latter's wife.
fees unconscionable, and thus reduces the attorney's fees to Because the Father died, however, during the pendency of the
25% of the principal amount only. suit, the case as against him was dismiss under the provisions of
Section 21, Rule 3 of the Rules of Court. The action, then is
17. MANILA BANKING VS TEODORO ( JAN 13 1989) against defendants Son and his wife for the collection of the
sum of P 15,037.11 on Promissory Note No. 14487; and against
FACTS:On April 25, 1966, defendants, together with defendant Son for the recovery of P 8,394.7.4 on Promissory
AnastacioTeodoro, Sr., jointly and severally, executed in favor Notes Nos. 11515 and 11699, plus interest on both amounts at
of plaintiff a Promissory Note (No. 11487) for the sum of 12% per annum from September 30, 1969 until fully paid, and
P10,420.00 payable in 120 days, or on August 25, 1966, at 12% 10% of the amounts due as attorney's fees.
interest per annum. Defendants failed to pay the said amount the trial court rendered its judgment adverse to defendants
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American Jurisprudence (68 2d, Secured Transaction, Section

ISSUES: 50) said:
(1) whether or not the assignment of receivables has the effect
of payment of all the loans contracted by appellants from The characters of the transaction between the parties is to be
appellee bank; and determined by their intention, regardless of what language was
(2) whether or not appellee bank must first exhaust all legal used or what the form of the transfer was. If it was intended to
remedies against the Philippine Fisheries Commission before it secure the payment of money, it must be construed as a
can proceed against appellants for collections of loan under the pledge. However, even though a transfer, if regarded by itself,
promissory notes which are plaintiffs bases in the action for appellate to have been absolute, its object and character might
collection. still be qualified and explained by a contemporaneous writing
declaring it to have been a deposit of the property as collateral
RULING: Appealed decision of the trial court is affirmed. security. It has been Id that a transfer of property by the debtor
to a creditor, even if sufficient on its farm to make an absolute
I conveyance, should be treated as a pledge if the debt continues
It is evident that the assignment of receivables executed by in existence and is not discharged by the transfer, and that
appellants on January 24, 1964 did not transfer the ownership accordingly, the use of the terms ordinarily exporting
of the receivables to appellee bank and release appellants from conveyance, of absolute ownership will not be given that effect
their loans with the bank incurred under promissory notes Nos. in such a transaction if they are also commonly used in pledges
11487,11515 and 11699. and mortgages and therefore do not unqualifiedly indicate a
transfer of absolute ownership, in the absence of clear and
The Deed of Assignment provided that it was for and in ambiguous language or other circumstances excluding an intent
consideration of certain credits, loans, overdrafts, and their to pledge. (Lopez v. Court of Appeals, 114 SCRA 671 [1982]).
credit accommodations in the sum of P10,000.00 extended to
appellants by appellee bank, and as security for the payment of Definitely, the assignment of the receivables did not result from
said sum and the interest thereon; that appellants as assignors, a sale transaction. It cannot be said to have been constituted by
remise, release, and quitclaim to assignee bank all their rights, virtue of a dation in payment for appellants' loans with the bank
title and interest in and to the accounts receivable assigned (lst evidenced by promissory note Nos. 11487, 11515 and 11699
paragraph). It was further stipulated that the assignment will which are the subject of the suit for collection in Civil Case No.
also stand as a continuing guaranty for future loans of 78178. At the time the deed of assignment was executed, said
appellants to appellee bank and correspondingly the loans were non-existent yet. The deed of assignment was
assignment shall also extend to all the accounts receivable; executed on January 24, 1964 (Exh. "G"), while promissory note
appellants shall also obtain in the future, until the consideration No. 11487 is dated April 25, 1966 (Exh. 'A), promissory note
on the loans secured by appellants from appellee bank shall 11515, dated May 3, 1966 (Exh.'B'), promissory note 11699, on
have been fully paid by them (No. 9). June 20, 1966 (Exh. "C"). At most, it was a dation in payment for
P10,000.00, the amount of credit from appellee bank indicated
The position of appellants, however, is that the deed of in the deed of assignment. At the time the assignment was
assignment is a quitclaim in consideration of their indebtedness executed, there was no obligation to be extinguished except the
to appellee bank, not mere guaranty, in view of the following amount of P10,000.00. Moreover, in order that an obligation
provisions of the deed of assignment: may be extinguished by another which substitutes the same, it
is imperative that it be so declared in unequivocal terms, or that
... the Assignor do hereby remise, release and quit-claim unto the old and the new obligations be on every point incompatible
said assignee all its rights, title and interest in the accounts with each other (Article 1292, New Civil Code).
receivable described hereunder. (Emphasis supplied by
appellants, first par., Deed of Assignment). Obviously, the deed of assignment was intended as collateral
... that the title and right of possession to said account security for the bank loans of appellants, as a continuing
receivable is to remain in said assignee and it shall have the guaranty for whatever sums would be owing by defendants to
right to collect directly from the debtor, and whatever the plaintiff, as stated in stipulation No. 9 of the deed.
Assignor does in connection with the collection of said
accounts, it agrees to do so as agent and representative of the In case of doubt as to whether a transaction is a pledge or a
Assignee and it trust for said Assignee ...(Ibid. par. 2 of Deed of dation in payment, the presumption is in favor of pledge, the
Assignment).' (Record on Appeal, p. 27) latter being the lesser transmission of rights and interests
(Lopez v. Court of Appeals, supra).
The character of the transactions between the parties is not,
however, determined by the language used in the document In one case, the assignments of rights, title and interest of the
but by their intention. Thus, the Court, quoting from the defendant in the contracts of lease of two buildings as well as
her rights, title and interest in the land on which the buildings
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were constructed to secure an overdraft from a bank Notwithstanding that the time for the payment of said sum has
amounting to P110,000.00 which was increased to P150,000.00, expired and no payment has been made, the defendants refuse
then to P165,000.00 was considered by the Court to be to deliver to plaintiff the said property.
documents of mortgage contracts inasmuch as they were
executed to guarantee the principal obligations of the The plaintiff filed a complaint in CFI Laguna, praying that
defendant consisting of the overdrafts or the indebtedness judgment be rendered in his behalf ordering the defendants to
resulting therefrom. The Court ruled that an assignment to deliver to him the house and lot claimed, and to pay him in
guarantee an obligation is in effect a mortgage and not an addition thereto as rent (P8 per month) from February of that
absolute conveyance of title which confers ownership on the year, and to pay the costs of the action.
assignee (People's Bank & Trust Co. v. Odom, 64 Phil. 126
[1937]). Defense of Alinea: The defendants argued that the principal
borrowed was only 200 pesos and that the interest was 280
II pesos, although the amount of indebtedness was made to
As to whether or not appellee bank must have to exhaust all appear in the sum of 480 pesos; and that as their special
legal remedies against the Philippine Fisheries Commission defense defendants alleged that they offered to pay the
before it can proceed against appellants for collection of loans plaintiff the sum of 480 pesos, but the plaintiff had refused to
under their promissory notes, must also be answered in the accept the same.
TC Ruling: The trial court rendered a judgment ordering the
The obligation of appellants under the promissory notes not defendants to deliver to the plaintiff the house and lot and to
having been released by the assignment of receivables, pay the costs of the action.
appellants remain as the principal debtors of appellee bank
rather than mere guarantors. The deed of assignment merely ISSUES:
guarantees said obligations. That the guarantor cannot be (1) WAS THE CONTRACT BETWEEN THE PARTIES THAT OF
compelled to pay the creditor unless the latter has exhausted MORTGAGE, OR PLEDGE, OR ANTICHRESIS; LOAN AND A
all the property of the debtor, and has resorted to all the legal PROMISE OF SALE
remedies against the debtor, under Article 2058 of the New We have in this case a contract of loan and a promise of sale
Civil Code does not therefore apply to them. It is of course of of a house and lot, the price of which should be the amount
the essence of a contract of pledge or mortgage that when the loaned, if within a fixed period of time such amount should not
principal obligation becomes due, the things in which the be paid by the debtor-vendor of the property to the creditor-
pledge or mortgage consists may be alienated for the payment vendee of same.
to the creditor (Article 2087, New Civil Code). In the instant
case, appellants are both the principal debtors and the pledgors The contract was not a mortgage because in order to
or mortgagors. Resort to one is, therefore, resort to the other. constitute a valid mortgage it is indispensable that the
instrument be registered in the Register of Property,
Appellee bank did try to collect on the pledged receivables. As in accordance with article 1875 of the Civil Code, and because
the Emergency Employment Agency (EEA) which issued the said document was not vested with the character and
receivables had been abolished, the collection had to be conditions of a public instrument.
coursed through the Office of the President which disapproved
the same (Record on Appeal, p. 16). The receivable became The contract was not a pledge because the property was not a
virtually worthless leaving appellants' loans from appellee bank personal property and because the debtor continued in
unsecured. It is but proper that after their repeated demands possession thereof and the said property has never been
made on appellants for the settlement of their obligations, occupied by the creditor.
appellee bank should proceed against appellants. It would be an
exercise in futility to proceed against a defunct office for the The contract was not an antichresis too because the creditor
collection of the receivables pledged. has never been in possession of the property, has not enjoyed
the said property, and has not received its rents.
FACTS:In 1905, defendants borrowed from the plaintiff P480,
payable in January of same year under the agreement that if, at Either one of the contracts is perfectly legal. Both are
the expiration of the said period, said amount should not be authorized by the Civil Code (Articles 1451, 1740, and 1753).
paid it would be understood that the house and lot they owned
be considered as absolutely sold to the plaintiff for the said The fact that the parties have agreed at the same time, in such
sum. a manner that the fulfillment of the promise of sale would
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depend upon the nonpayment or return of the amount loaned, HELD:

has not produced any essential defect which would tend to - The conclusion of the court below that the
nullify the same. property was not delivered in accordance with the
provisions of article 1863 of the Civil Code is sustained
If the promise of sale is not vitiated because, according to the by the proofs. His conclusion that the pledge was
agreement between the parties thereto, the price of the same ineffective against Martinez is correct. It appears,
is to be the amount loaned and not repaid, neither would the however, that the document of pledge is a public
loan be null or illegal, for the reason that the added agreement document which contains an admission of
provides that in the event of failure of payment the sale of indebtedness.
property as agreed will take effect, the consideration being the
amount loaned and not paid. - In other words, while it is intended to be a
pledge, it is also a credit which appears in a public
It is a principle in law, that the will of the contracting parties is document. Article 1924, paragraph 3, letter a, is
the law of contracts. As the amount loaned has not been paid therefore applicable; and, said public document
and continues in possession of the debtor, it is only just that the antedating the judgment of defendant Martinez, takes
promise of sale be carried into effect, and the necessary preference thereover. The validity of that document in
instrument be executed by the vendees. so far as it shows an indebtedness against Maria
Aniversario and its effectiveness against her have not,
however, been determined. She is not a party to this
19. G.R. No. L-5219 February 15, 1910 action. No judgment can be rendered affecting her
JOSE McMICKING, sheriff of Manila, plaintiff-appellee, rights or liabilities under said instrument. If said
vs. PEDRO MARTINEZ and GO JUNA, defendants. instrument is invalid or for any other cause
GO JUNA, appellant. unenforceable against her, it would be wholly unjust,
by declaring its preference over a debt acknowledged
by and conclusive against her, to require that said
(Mali ataangnaasa syllabus, since 2010 nakabutangdidto, pero funds be paid over to the holder of said document.
1910 na case xa when I searched using the GR. No) That would be to require her to pay a debt which has
not only not been shown to be enforceable against her
Facts: but which, as a witness for the defendant Martinez on
- The defendant, Pedro Martinez, some time during the the trial of this cause, she expressly and vehemently
year 1908 obtained judgment in the Court of First Instance of repudiated as a valid claim against her.
the city of Manila against one Maria Aniversario; that thereafter
execution was issued upon said judgment and the sheriff levied - The judgement is, therefore, reversed; and it is
upon a pailebot, Tomasa, alleged to be the property of said ordered that the cause be returned to the court below;
Maria Aniversario; that thereupon the said defendant Go Juna that the plaintiff bring in Maria Aniversario as a party
intervened and claimed a lien upon said boat by virtue of a to this action, and that she be given an opportunity to
pledge of the same to him by the said Maria Aniversario made make her defense, if she have any, to the document in
on the 27th day of February, 1907, which said pledge was question under proper procedure. No finding as to
evidenced by a public instrument bearing that date. costs. So ordered.

- This action was brought by the sheriff against Go Juna and

Pedro Martinez to determine the rights of the parties to the 20. Caltex vs CA G.R. No. 97753 August 10, 1992
funds in his hands. Maria Aniversario was not made a party.
Facts: On various dates, defendant, a commercial banking
- The said Pedro Martinez alleged as a defense that the institution, through its Sucat Branch issued 280 certificates of
pledge which said document was intended to constitute had time deposit (CTDs) in favor of one Angel dela Cruz who
not been made effective by delivery of the property pledged, as deposited with herein defendant the aggregate amount of
required by article 1863 of the Civil Code, and that, therefore, P1,120,000.00
there existed no preference in favor of said Go Juna.
Angel dela Cruz delivered the said certificates of time (CTDs) to
ISSUE: 1.W/N it was proper for the lower court to exclude herein plaintiff in connection with his purchased of fuel
Maria Aniversario? No products from the latter.

2.W/N a pledge may also be used as proof of Sometime in March 1982, Angel dela Cruz informed
indebtedness? Yes Mr.TimoteoTiangco, the Sucat Branch Manger, that he lost all
the certificates of time deposit in dispute. Mr.Tiangco advised
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said depositor to execute and submit a notarized Affidavit of The CTDs in question undoubtedly meet the requirements of
Loss, as required by defendant bank's procedure, if he desired the law for negotiability. The parties' bone of contention is with
replacement of said lost CTDs regard to requisite (d) set forth above. It is noted that
Mr.Timoteo P. Tiangco, Security Bank's Branch Manager way
On March 18, 1982, Angel dela Cruz executed and delivered to back in 1982, testified in open court that the depositor reffered
defendant bank the required Affidavit of Loss to in the CTDs is no other than Mr. Angel de la Cruz.

In March 25, 1982, Angel dela Cruz negotiated and obtained a If it was really the intention of respondent bank to pay the
loan from defendant bank in the amount of P875,000.00. On amount to Angel de la Cruz only, it could have with facility so
the same date, said depositor executed a notarized Deed of expressed that fact in clear and categorical terms in the
Assignment of Time Deposit which stated, among others, that documents, instead of having the word "BEARER" stamped on
he (de la Cruz) surrenders to defendant bank "full control of the the space provided for the name of the depositor in each CTD.
indicated time deposits from and after date" of the assignment On the wordings of the documents, therefore, the amounts
and further authorizes said bank to pre-terminate, set-off and deposited are repayable to whoever may be the bearer thereof.
"apply the said time deposits to the payment of whatever Thus, petitioner's aforesaid witness merely declared that Angel
amount or amounts may be due" on the loan upon its maturity de la Cruz is the depositor "insofar as the bank is concerned,"
On December 8, 1982, plaintiff was requested furnish "a copy of but obviously other parties not privy to the transaction
the document evidencing the guarantee agreement with Mr. between them would not be in a position to know that the
Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" depositor is not the bearer stated in the CTDs. Hence, the
obligation against which plaintiff proposed to apply the time situation would require any party dealing with the CTDs to go
deposits (Defendant's Exhibit 564). behind the plain import of what is written thereon to unravel
In April 1983, the loan of Angel dela Cruz with the defendant the agreement of the parties thereto through facts aliunde. This
bank matured and fell due and on August 5, 1983, the latter need for resort to extrinsic evidence is what is sought to be
set-off and applied the time deposits in question to the avoided by the Negotiable Instruments Law and calls for the
payment of the matured loan application of the elementary rule that the interpretation of
In view of the foregoing, plaintiff filed the instant complaint, obscure words or stipulations in a contract shall not favor the
praying that defendant bank be ordered to pay it the aggregate party who caused the obscurity.
value of the certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein at 16% per 2.) NO. As between petitioner and respondent bank, the latter
annum, moral and exemplary damages as well as attorney's has definitely the better right over the CTDs in question.
After trial, the court a quo rendered its decision dismissing the The records reveal that Angel de la Cruz, whom petitioner chose
instant complaint. not to implead in this suit for reasons of its own, delivered the
CTDs amounting to P1,120,000.00 to petitioner without
Issues: informing respondent bank thereof at any time. Unfortunately
(1) WON the subject certificates of deposit are non-negotiable for petitioner, although the CTDs are bearer instruments, a valid
instruments; negotiation thereof for the true purpose and agreement
(2) WON the petitioner can recover the CTDs between it and De la Cruz, as ultimately ascertained, requires
both delivery and indorsement. For, although petitioner seeks
Held: to deflect this fact, the CTDs were in reality delivered to it as a
security for De la Cruz' purchases of its fuel products. Any doubt
1) NO. CTDs in question are negotiable instruments. as to whether the CTDs were delivered as payment for the fuel
Section 1 Act No. 2031, otherwise known as the Negotiable products or as a security has been dissipated and resolved in
Instruments Law, enumerates the requisites for an instrument favor of the latter by petitioner's own authorized and
to become negotiable, viz: responsible representative himself.

(a) It must be in writing and signed by the maker or drawer; In a letter dated November 26, 1982 addressed to respondent
(b) Must contain an unconditional promise or order to pay a Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". .
sum certain in money; . These certificates of deposit were negotiated to us by Mr.
(c) Must be payable on demand, or at a fixed or determinable Angel dela Cruz to guarantee his purchases of fuel products"
future time; (Emphasis ours.) This admission is conclusive upon petitioner,
(d) Must be payable to order or to bearer; and its protestations notwithstanding. Under the doctrine of
(e) Where the instrument is addressed to a drawee, he must be estoppel, an admission or representation is rendered conclusive
named or otherwise indicated therein with reasonable certainty. upon the person making it, and cannot be denied or disproved
as against the person relying thereon. 14 A party may not go
back on his own acts and representations to the prejudice of
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the other party who relied upon them. 15 In the law of Respondent bank duly complied with this statutory
evidence, whenever a party has, by his own declaration, act, or requirement. Contrarily, petitioner, whether as purchaser,
omission, intentionally and deliberately led another to believe a assignee or lien holder of the CTDs, neither proved the amount
particular thing true, and to act upon such belief, he cannot, in of its credit or the extent of its lien nor the execution of any
any litigation arising out of such declaration, act, or omission, public instrument which could affect or bind private
be permitted to falsify it. respondent. Necessarily, therefore, as between petitioner and
respondent bank, the latter has definitely the better right over
Adverting again to the Court's pronouncements in Lopez, supra, the CTDs in question.
we quote therefrom:
The character of the transaction between the parties is to be
determined by their intention, regardless of what language was 21. ESTATE OF GEORGE LITTONvs.CIRIACO B. MENDOZA and
used or what the form of the transfer was. If it was intended to CA
secure the payment of money, it must be construed as a pledge; Facts: Bernal spouses 2 are engaged in the manufacture of
but if there was some other intention, it is not a pledge. embroidery, garments and cotton materials. Sometime in
However, even though a transfer, if regarded by itself, appears September 1963, C.B.M. Products, 3 with Mendoza as
to have been absolute, its object and character might still be president, offered to sell to the Bernals textile cotton materials
qualified and explained by contemporaneous writing declaring it and, for this purpose, Mendoza introduced the Bernals to
to have been a deposit of the property as collateral security. It Alfonso Tan. Thus, the Bernals purchased on credit from Tan
has been said that a transfer of property by the debtor to a some cotton materials worth P 80,796.62, payment of which
creditor, even if sufficient on its face to make an absolute was guaranteed by Mendoza. Thereupon, Tan delivered the said
conveyance, should be treated as a pledge if the debt continues cotton materials to the Bernals. In view of the said
in inexistence and is not discharged by the transfer, and that arrangement, on November 1963, C.B.M. Products, through
accordingly the use of the terms ordinarily importing Mendoza, asked and received from the Bernals PBTC Check No.
conveyance of absolute ownership will not be given that effect 626405 for P 80,796.62 dated February 20, 1964 with the
in such a transaction if they are also commonly used in pledges understanding that the said check will remain in the possession
and mortgages and therefore do not unqualifiedly indicate a of Mendoza until the cotton materials are finally manufactured
transfer of absolute ownership, in the absence of clear and into garments after which time Mendoza will sell the finished
unambiguous language or other circumstances excluding an products for the Bernals. Meanwhile, the said check matured
intent to pledge. without having been cashed and Mendoza demanded the
issuance of another check 4 in the same amount without a date.
The pertinent law on this point is that where the holder has a
lien on the instrument arising from contract, he is deemed a On the other hand, on February 28, 1964, defendant Mendoza
holder for value to the extent of his lien. 23 As such holder of issued two (2) PNB checks 5 in favor of Tan in the total amount
collateral security, he would be a pledgee but the requirements of P 80,796.62. He informed the Bernals of the same and told
therefor and the effects thereof, not being provided for by the them that they are indebted to him and asked the latter to sign
Negotiable Instruments Law, shall be governed by the Civil Code an instrument whereby Mendoza assigned the said amount to
provisions on pledge of incorporeal rights, 24 which inceptively Insular Products Inc. Tan had the two checks issued by Mendoza
provide: discounted in a bank. However, the said checks were later
returned to Tan with the words stamped "stop payment" which
Art. 2095. Incorporeal rights, evidenced by negotiable appears to have been ordered by Mendoza for failure of the
instruments, . . . may also be pledged. The instrument proving Bernals to deposit sufficient funds for the check that the
the right pledged shall be delivered to the creditor, and if Bernals issued in favor of Mendoza.
negotiable, must be indorsed. Hence, as adverted to above, Tan brought an action against
Mendoza docketed as Civil Case No. Q-8303 6 while the Bernals
Art. 2096. A pledge shall not take effect against third persons if brought an action for interpleader docketed as Civil Case No.
a description of the thing pledged and the date of the pledge do 56850 7 for not knowing whom to pay. While both actions were
not appear in a public instrument. pending resolution by the trial court, on March 20, 1966, Tan
Aside from the fact that the CTDs were only delivered but not assigned in favor of George Litton, Sr. his litigatious credit * in
indorsed, the factual findings of respondent court quoted at the Civil Case No. 56850 against Mendoza, duly submitted to the
start of this opinion show that petitioner failed to produce any court, with notice to the parties.
document evidencing any contract of pledge or guarantee
agreement between it and Angel de la Cruz. On the other hand, After due trial, the lower court ruled that the said PNB checks
the assignment of the CTDs made by Angel de la Cruz in favor of were issued by Mendoza in favor of Tan for a commission in the
respondent bank was embodied in a public instrument. sum of P 4,847.79 and held Mendoza liable as a drawer whose
liability is primary and not merely as an indorser and thus

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directed Mendoza to pay Tan the sum of P 76,000.00, the sum way of a compromise agreement does not bind the assignee,
still due, plus damages and attorney's fees. petitioner herein.

Meanwhile, on February 2, 1971, pending the resolution of the Indeed, a painstaking review of the record of the case reveals
said appeal, Mendoza entered into a compromise agreement that private respondent has, from the very beginning, been fully
with Tan wherein the latter acknowledged that all his claims aware of the deed of assignment executed by Tan in favor of
against Mendoza had been settled and that by reason of said Litton, Sr. as said deed was duly submitted to Branch XI of the
settlement both parties mutually waive, release and quit then Court of First Instance of Manila in Civil Case No. 56850 (in
whatever claim, right or cause of action one may have against relation to Civil Case No. Q-8303) where C.B.M. Products is one
the other, with a provision that the said compromise of the defendants and the parties were notified through their
agreement shall not in any way affect the right of Tan to counsel. 25 As earlier mentioned, private respondent herein is
enforce by appropriate action his claims against the Bernal the president of C.B.M. Products, hence, his contention that he
spouses. is not aware of the said deed of assignment deserves scant
consideration from the Court. Petitioner pointed out at the
While the case was still pending reconsideration by the same time that private respondent together with his counsel
respondent court, Tan, the assignor, died leaving no properties were served with a copy of the deed of assignment which
whatever to satisfy the claim of the estate of the late George allegation remains uncontroverted. Having such knowledge
Litton, Sr. thereof, private respondent is estopped from entering into a
In its Resolution dated August 30, 1977, 13 the respondent compromise agreement involving the same litigated credit
court set aside its decision and approved the compromise without notice to and consent of the assignee, petitioner
agreement. herein. More so, in the light of the fact that no reimbursement
has ever been made in favor of the assignee as required under
Issue: WON to set aside the said compromise on the ground Article 1634. Private respondent acted in bad faith and in
that previous thereto, Tan executed a deed of assignment in connivance with assignor Tan so as to defraud the petitioner in
favor of George Litton, Sr. involving the same litigated credit. entering into the compromise agreement.

Held: Yes. WHEREFORE, the petition is GRANTED. The assailed resolution

We rule for the petitioner. The fact that the deed of assignment of the respondent court dated August 30,1977 is hereby SET
was done by way of securing or guaranteeing Tan's obligation in ASIDE, the said compromise agreement being null and void, and
favor of George Litton, Sr., as observed by the appellate court, a new one is hereby rendered reinstating its decision dated
will not in any way alter the resolution on the matter. The January 27, 1977, affirming in toto the decision of the lower
validity of the guaranty or pledge in favor of Litton has not been court.
questioned. Our examination of the deed of assignment shows
that it fulfills the requisites of a valid pledge or mortgage. 22
Although it is true that Tan may validly alienate the litigatious 22. Lim Tay vs CA/CBR-KING
credit as ruled by the appellate court, citing Article 1634 of the
Civil Code, said provision should not be taken to mean as a Facts: On 8 January 1980, Sy Guiok secured a loan from Lim Tay
grant of an absolute right on the part of the assignor Tan to in the amount of P40,000 payable within 6 months. To secure
indiscriminately dispose of the thing or the right given as the payment of the aforesaid loan and interest thereon, Guiok
security. The Court rules that the said provision should be read executed a Contract of Pledge in favor of Lim Tay whereby he
in consonance with Article 2097 of the same code. 23 Although pledged his 300 shares of stock in the Go Fay & Company Inc.
the pledgee or the assignee, Litton, Sr. did not ipso facto Guiok obliged himself to pay interest on said loan at the rate of
become the creditor of private respondent Mendoza, the 10% per annum from the date of said contract of pledge. On the
pledge being valid, the incorporeal right assigned by Tan in same date, Alfonso Sy Lim secured a loan, from Lim Tay in the
favor of the former can only be alienated by the latter with due amount of P40,000 payable in 6 months. To secure the payment
notice to and consent of Litton, Sr. or his duly authorized of his loan, Sy Lim executed a "Contract of Pledge" covering his
representative. To allow the assignor to dispose of or alienate 300 shares of stock in Go Fay & Co. Under said contract, Sy Lim
the security without notice and consent of the assignee will obliged himself to pay interest on his loan at the rate of 10%
render nugatory the very purpose of a pledge or an assignment per annum from the date of the execution of said contract. The
of credit. contractual stipulation in the pledge showed that Lim Tay was
merely authorized to foreclose the pledge upon maturity of the
Moreover, under Article 1634, 24 the debtor has a loans, not to own them. Such foreclosure is not automatic, for it
corresponding obligation to reimburse the assignee, Litton, Sr. must be done in a public or private sale. Guiok and Sy Lim
for the price he paid or for the value given as consideration for endorsed their respective shares of stock in blank and delivered
the deed of assignment. Failing in this, the alienation of the the same to Lim Tay. However, Guiok and Sy Lim failed to pay
litigated credit made by Tan in favor of private respondent by their respective loans and the accrued interests thereon to Lim
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Tay. In October 1990, Lim Tay filed a "Petition for Mandamus" certificates of stock through extraordinary prescription, as
against Go Fay & Co., with the SEC (SEC Case 03894), praying provided for in Article 1132 of the Civil Code. What is required
that an order be issued directing the corporate secretary of Go by Article 1132 is possession in the concept of an owner.
Fay & Co. to register the stock transfers and issue new Herein, Lim Tay's possession of the stock certificates came
certificates in favor of Lim Tay; and ordering Go Fay & Co. to about because they were delivered to him pursuant to the
pay all dividends due and unclaimed on the said certificates to contracts of pledge. His possession as a pledgee cannot ripen
Lim Tay. In the interim, Sy Lim died. Guiok and the Intestate into ownership by prescription. Lim Tay expressly repudiated
Estate of Alfonso Sy Lim, represented by Conchita Lim, filed the pledge, only when he filed his Complaint and claimed that
their Answer-In-Intervention with the SEC. he was not a mere pledgee, but that he was already the owner
of the shares. Based on the foregoing, Lim Tay has not acquired
After due proceedings, the SEC hearing officer promulgated a the certificates of stock through extraordinary prescription.
Decision dismissing Lim Tay's Complaint on the ground that Neither did Lim Tay acquire the shares by virtue of a novation of
although the SEC had jurisdiction over the action, pursuant to the contract of pledge. Novation cannot be presumed by
the Decision of the Supreme Court in the case of "Rural Bank of Guiok's and Sy Lim's indorsement and delivery of the
Salinas et. al. versus Court of Appeals, et al., 210 SCRA 510," he certificates of stock covering the 600 shares, nor Lim Tay's
failed to prove the legal basis for the secretary of the receipt of dividends from 1980 to 1983, nor the fact that Guiok
Corporation to be compelled to register stock transfers in favor and Sy Lim have not instituted any action to recover the shares
of Lim Tay and to issue new certificates of stock under his since 1980. Novation is never presumed inferred.
name. Lim Tay appealed the Decision of the hearing officer to
the SEC, but, on 7 March 1996, the SEC promulgated a Decision, 23. Insular Life vs. Young - KemuelSalmite
dismissing Lim Tay's appeal. On appeal to the Court of Appeals, Facts: In December, 1987, respondent Robert Young, together
the appellate court debunked Lim Tay's claim that he had with his associates and co-respondents, acquired by purchase
acquired ownership over the shares by virtue of novation, Home Bankers Savings and Trust Co., now petitioner Insular
holding that Guiok's and Sy Lim's indorsement and delivery of Savings Bank ("the Bank," for brevity), from the Licaros family
the shares were pursuant to Articles 2093 and 2095 of the Civil for P65,000,000.00. Young and his group obtained 55% equity
Code and that Lim Tay's receipt of dividends was in compliance in the Bank, while Jorge Go and his group owned the remaining
with Article 2102 of the same Code. Lim Tay's claim that he had 45%.
acquired ownership of the shares by virtue of prescription was Subsequently, the Bank granted respondents and others
likewise dismissed by the appellate court. Lim Tay brought individual loans in the total amount of P153,000,000.00,
before the Supreme Court a Petition for Review on Certiorari in secured by promissory notes.3
accordance with Rule 45 of the Rules of Court. On December, 1990, Benito Araneta, a stockholder of the Bank,
signified his intention to purchase 99.82% of its outstanding
capital stock for P340,000,000.00, subject to the condition that
the ownership of all the shares will be consolidated in Young's
Issue: Whether Lim Tay is the owner of the shares previously name. On February 5, 1991, Araneta paid Young P14,000,000.00
subjected to pledge, for him to cause the registration of said as part of the downpayment.
shares in his own name.
In order to carry out the intended sale to Araneta, Young
bought from Jorge Go and his group their 45% equity in the
Bank for P153,000,000.00. In order to pay this amount, Young
obtained a short-term loan of P170,000,000.00 from
Held: Lim Tay's ownership over the shares was not yet
International Corporate Bank ("Interbank") to finance the
perfected when the Complaint was filed. The contract of pledge purchase.
certainly does not make him the owner of the shares pledged.
Further, whether prescription effectively transferred ownership
However, Araneta backed out from the intended sale and
of the shares, whether there was a novation of the contracts of
demanded the return of his downpayment.
pledge, and whether laches had set in were difficult legal issues,
which were unpleaded and unresolved when Lim Tay asked the
Meanwhile, Young's loan from Interbank became due, causing
corporate secretary of Go Fay to effect the transfer, in his favor,
his serious financial problem. Consequently, he engaged the
of the shares pledged to him. Lim Tay has failed to establish a
services of Asian Oceanic Investment House, Inc. ("Asian
clear legal right. Lim Tay's contention that he is the owner of
Oceanic"), a domestic company owned and controlled by
the said shares is completely without merit. Lim Tay does not
another petitioner, Insular Life Assurance Co., Ltd. ("Insular
have any ownership rights at all. At the time Lim Tay instituted
Life"), to look for possible sources of capital.
his suit at the SEC, his ownership claim had no prima facie leg to
stand on. At best, his contention was disputable and uncertain.
On August 27, 1991, through the intervention of Asian Oceanic,
Lim Tay cannot claim to have acquired ownership over the
Young and Insular Life entered into a Credit Agreement.5 Under
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its provisions, Insular Life extended a loan to Young in the stating that due to business reverses, he shall not be able to pay
amount of P200,000,000.00. To secure the loan, Young, acting his obligations under the Credit Agreement between him and
in his behalf and as attorney-in-fact of the other stockholders, Insular Life. Consequently, Young "unconditionally and
executed on the same day a Deed of Pledge6 over 1,324,864 irrevocably waive(s) the benefit of the period" of the loan (up to
shares which represented 99.82% of the outstanding capital December 26, 1991) and Insular "may consider (his) obligations
stock of the Bank. The next day, he also executed a promissory thereunder as defaulted." He likewise interposes no objection
note7 in favor of Insular Life in the same amount with an to Insular Life's exercise of its rights under the said agreement.
interest rate of 26% per annum to mature 120 days from
execution. The Credit Agreement further provides that Insular Forthwith, Insular Life instructed its counsel to foreclose the
Life shall have the prior right to purchase the Schedule I Shares pledge constituted upon the shares. The latter then sent Young
(owned by Young) and the Schedule II Shares (owned by the a notice informing him of the sale of the shares in a public
other stockholders of the Bank), as well as the 250,000 shares auction scheduled on October 28, 1991, and in the event that
which will be issued after the additional capital the shares are not sold, a second auction sale shall be held the
of P25,000,000.00 (payable from the proceeds of the loan) shall next day, October 29.
have been infused. On October 28, 1991, only Insular Life submitted a bid, hence,
On October 1, 1991, Insular Life and Insular Life Pension Fund the shares were not sold on that day. The next day, a second
formally informed Young of their intention to acquire 30% and auction was held. Again, Insular Life was the sole bidder. Since
12%, respectively, of the Bank's outstanding shares, subject to the shares were not sold at the two public auctions, Insular Life
due diligence audit and proper documentation. 8 On October 9, appropriated to itself, not only the original 1,324,864 shares,
1991, Insular Life and Young, authorized to represent the other but also the 250,000 shares subsequently issued by the Bank
stockholders, entered into a Memorandum of Agreement and delivered to Insular Life by way of pledge. Thus, Insular Life
(MOA),9 wherein Insular Life and its Pension Fund agreed to gave Young an acquittance of his entire claim.14
purchase 830,860 common shares and 311,572 common Thereafter, title to the said shares was consolidated in the
shares, respectively, for a total consideration name of Insular Life. On November 12, 1991, the
of P198,000,000.00. Under its terms, the MOA is subject to BangkoSentralngPilipinas' Supervision and Examination Sector
Young's representations and warranties10 that, as of September approved Insular Life's request to maintain its present
30, 1991, the Bank has (a) a total outstanding paid-in capital ownership of 99.82% of the Bank.
of P157,714,900.00, (b) a total net worth of P114,801,539.00,
and (c) total loans with doubtful recovery of P60,000,000.00. From October 31, 1991 to December 27, 1991, Insular Life
The MOA is also subject to these "condition precedents": 11 (1) invested a total of P325,000,000.00 in the Bank. Meanwhile, on
Young shall infuse additional capital of P50,000,000.00 into the November 27, 1991, its Board of Directors, during its meeting,
Bank, and (2) Insular Life and its Pension Fund shall undertake a accepted the resignation of Young as President.16
due diligence audit on the Bank to determine whether the On January 7, 1992, Young and his associates filed with the
provision forP60,000,000.00 doubtful account made by Young is Regional Trial Court (RTC), Branch 142, Makati City, a
sufficient. complaint17 against the Bank, Insular Life and its counsel, Atty.
Jacinto Jimenez, petitioners, for annulment of notarial sale,
On October 11, 1991, Insular Life, through a team of auditors specific performance and damages, docketed as Civil Case No.
led by Mr.WilfridoPatawaran, conducted a due diligence audit 92-049. The complaint alleges, inter alia, that the notarial sale
on the Bank pursuant to the MOA. The audit revealed several conducted by petitioner Atty. Jacinto Jimenez is void as it does
check-kiting operations which amounted to P340,000,000.00. not comply with the requirement of notice of the second
As a result, the Bank's Board of Directors was convened to auction sale; that Young was forced by the officers of Insular
discuss this matter. Life to sign letters to enable them to have control of the Bank;
On October 17, 1991, a special meeting of the Bank's directors that under the MOA, Insular Life should apply the purchase
was held. Chief Executive Officer Antonino L. Alindogan, Jr. price of P198,000,000.00 (corresponding to the 55% of the
reported to the Board the initial findings of the audit team outstanding capital stock of the Bank) to Young's loan
about the irregularities in the Bank's "kiting operations." When of P200,000,000.00 and pay the latter P162,000,000.00,
asked to explain these anomalies, Young, who was then the representing the remaining 45% of its outstanding capital stock,
Bank's President, assumed responsibility since it happened which must be set-off against the loans of the other
during his incumbency. Thereupon, he offered, among others, respondents.
to the Bank the 45% of his holdings as security. He admitted
that he has compromised the interest of the Bank and thus Issue: WON the foreclosure of the pledge held on October 29,
tendered his resignation. The Board deferred its acceptance . 1992 is void. NO

On October 21, 1991, Young signed a letter13 prepared by Atty. Held:Notably, the Deed of Pledge which secured the Credit
Jacinto Jimenez, counsel of Insular Life, addressed to Mr. Agreement between the parties, covered not only 1,324,864
Vicente R. Ayllon, Chairman of the Bank's Board of Directors, shares which then constituted 99.82% of the total outstanding
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shares of petitioner Bank, but also the 250,000 shares its equity in the FS-203 to the defendant bank, executed on the
subsequently issued. Consequently, when Young waived in his same day and duly registered.
letter the period granted him under the said agreement and
manifested his inability to pay his obligation (which waiver has Subsequently, plaintiff effected partial payment of the loan in
been declared by the RTC and the CA to be valid), the loan the sum of P20,000. The remaining balance was renewed by the
extended by petitioner Insular Life became due and execution of two (2) promissory notes in the bank's favor.
demandable.33 Definitely, petitioners merely exercised the right 1. December 18, 1947, P20,000,due on April 16, 1948
granted to them under the law, which is to foreclose the pledge 2. February 26, 1948, for P10,000,due on June 25, 1948. These
constituted on the shares, in satisfaction of respondent Young's two notes were never paid at all by plaintiff on their respective
loan. due dates.

The Court of Appeals also erred in declaring that the auction On April 1948, the bank filed criminal charges against plaintiff
sale is void since petitioners failed to send a separate notice for and two other accused for estafa thru falsification of
the second auction. commercial documents, the accused had no funds in the
drawee bank. The accused were then convicted.
Article 2112 of the Civil Code provides:
"The creditor to whom the credit has not been satisfied in due Meanwhile, together with the institution of the criminal action,
time, may proceed before a Notary Public for the sale of the defendant bank took physical possession of three pledged
thing pledged. The sale shall be made at a public auction, and vessels while they were at the Port of Cebu, and on April 29,
with notification to the debtor and the owner of the thing 1948, after the first note fell due and was not paid, the Cebu
pledged in a proper case, stating the amount for which the Branch Manager of defendant bank, acting as attorney-in-fact
public sale is to be held. If at the first auction the thing is not of plaintiff pursuant to the terms of the pledge contract,
sold, a second one with the same formalities shall be held; and executed a document of sale, Exhibit "4", transferring the two
if at the second auction there is no sale either, the creditor may pledged vessels and plaintiff's equity in FS-203, to defendant
appropriate the thing pledged. In this case he shall be obliged to bank.
give an acquittance for his entire claim."
The FS-203 was subsequently surrendered by the defendant
Clearly, there is no prohibition contained in the law against the bank to the Philippine Shipping Commission which rescinded
sending of one notice for the first and second public auction as the sale to plaintiff for failure to pay the remaining installments
was done here by petitioner Insular Life. The purpose of the law on the purchase price thereof. The other two boats, the M/S
in requiring notice is to sufficiently apprise the debtor and the Surigao and the M/S Don Dino were sold by defendant bank to
pledgor that the thing pledged to secure payment of the loan third parties.
will be sold in a public auction and the proceeds thereof shall be
applied to satisfy the debt. When petitioner Insular Life sent a Plaintiff commenced action to recover the three vessels or their
notice to Young informing him of the public auction scheduled value and damages from defendant bank. The latter filed its
on October 28, 1991, and a second auction on the next day, answer, with a counterclaim for P202,000 plus P5,000
October 29, in the event that the shares are not sold on the first damages.
auction, the purpose of the law was achieved. We thus reject
respondents' argument that the term "second one" refers to a The lower court rendered its decision on (a) that the bank's
separate notice which requires the same formalities as the first taking of physical possession of the vessels on April 6, 1948 was
notice. justified by the pledge contract, Exhibit "A" & "1-Bank" and the
law; (b) that the private sale of the pledged vessels by
24. YULIOGSIU vs. CA- BemSarno defendant bank to itself without notice to the plaintiff-pledgor
as stipulated in the pledge contract was likewise valid.
FACTS: Yuliongsiu was the owner of TWO vessels, namely: The
M/S Surigao and the M/S Don Dino, and operated the FS-203, ISSUES: 1. WON the contract entered into is a pledge contract
which was purchased by him from the Philippine Shipping (not a chattel mortgage as alleged)
Commission, by installment or on account. As of January or
February, 1943, plaintiff had paid to the Philippine Shipping 2. WON the constructive delivery is sufficient to make pledge
Commission only the sum of P76,500 and the balance of the effective
purchase price was payable at P50,000 a year, due on or before
the end of the current year. HELD:
1.YES. The parties stipulated as a fact that Exhibit "A" & "1-
In June 1947, plaintiff obtained a loan of P50,000 from the Bank" is a pledge contract —
Philippine National Bank, Cebu Branch. To guarantee its
payment, plaintiff pledged the M/S Surigao, M/S Don Dino and 3. That a credit line of P50,000.00 was extended to the
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plaintiff by the defendant Bank, and the plaintiff obtained and NO MERIT. This law refers only, and is limited, to foreclosure of
received from the said Bank the sum of P50,000.00, and in real estate mortgages. 15 So, whatever formalities there are in
order to guarantee the payment of this loan, the pledge Act 3135 do not apply to pledge.
contract, Exhibit "A" & Exhibit "1-Bank", was executed and duly
registered with the Office of the Collector of Customs for the 2. Charter of PNB does not allow it to buy the property object of
Port of Cebu on the date appearing therein. foreclosure in case of private sales.
NO MERIT. Sec. 33 of Act 2612, as amended by Acts 2747 and
Necessarily, this judicial admission binds the plaintiff. Without 2938 only states that if the sale is public, the bank could
any showing that this was made thru palpable mistake, no purchase the whole or part of the property sold " free from any
amount of rationalization can offset it. right of redemption on the part of the mortgagor or pledgor."

The defendant bank as pledgee was therefore entitled to the 3. PRICE obtained at the sale is unconscionable.
actual possession of the vessels. While it is true that plaintiff NO MERIT. Plaintiff's remedy was to have set aside the sale. He
continued operating the vessels after the pledge contract was did not avail of this. Moreover, as pointed out by the lower
entered into, his possession was expressly made "subject to the court, plaintiff had at the time an obligation to return the
order of the pledgee." The provision of Art. 2110 of the present P184,000 fraudulently taken by him from defendant bank.
Civil Code being new — cannot apply to the pledge contract
here which was entered into on June 30, 1947. On the other
hand, there is an authority supporting the proposition that the 25. G.R. No. L-21069 October 26, 1967
pledgee can temporarily entrust the physical possession of the MANILA SURETY and FIDELITY COMPANY, INC. vs. RODOLFO R.
chattels pledged to the pledgor without invalidating the pledge. VELAYO - Sederiosa
In such a case, the pledgor is regarded as holding the pledged
property merely as trustee for the pledgee. Facts:
In 1953, Manila Surety & Fidelity Co., upon request of Rodolfo
2. YES. There is BancoEspañol-Filipino v. Peterson ruling that Velayo, executed a bond for P2,800.00 for the dissolution of a
symbolic delivery would suffice. In Betita v. Ganzon, the objects writ of attachment obtained by one Jovita Granados in a suit
pledged — carabaos — were easily capable of actual, manual against him in the CFI. Velayo undertook to pay the surety
delivery unto the pledgee. In BancoEspañol-Filipino v. Peterson, company an annual premium of P112.00. As "collateral security
the objects pledged — goods contained in a warehouse — were and by way of
hardly capable of actual, manual delivery in the sense that it of pledge" Velayo also delivered four pieces of jewelry to the
was impractical as a whole for the particular transaction and Surety Company "for the latter's further protection", with
would have been an unreasonable requirement. Thus, for power to sell the same in case the surety paid or become
purposes of showing the transfer of control to the pledgee, obligated to pay any amount of money in connection with said
delivery to him of the keys to the warehouse sufficed. In other bond.
words, the type of delivery will depend upon the nature and the
peculiar circumstances of each case. The parties here agreed Judgment was rendered in favor of Granados and execution
that the vessels be delivered by the "pledgor to the pledgor having been returned unsatisfied, the surety company was
who shall hold said property subject to the order of the forced to pay P2,800.00 that it later sought to recoup from
pledgee." Considering the circumstances of this case and the Velayo. Upon the latter's failure to do so, the surety caused the
nature of the objects pledged, i.e., vessels used in maritime pledged jewelry to be sold, realizing therefrom a net product of
business, such delivery is sufficient. P235.00 only. Velayo failed to pay the balance and the surety
company brought suit in the Municipal Court. Velayo countered
Since the defendant bank was, pursuant to the terms of pledge that the sale of the pledged jewelry extinguished any further
contract, in full control of the vessels thru the plaintiff, the liability on his part under Article 2115 of the 1950 Civil Code,
former could take actual possession at any time during the life which recites: The sale of the thing pledged shall extinguish the
of the pledge to make more effective its security. Its taking of principal obligation, whether or not the proceeds of the sale are
the vessels therefore on April 6, 1948, was not unlawful. Nor equal to the amount of the principal obligation, interest and
was it unjustified considering that plaintiff had just defrauded expenses in a proper case. If the price of the sale is more than
the defendant bank in the huge sum of P184,000. said amount, the debtor shall not be entitled to the excess,
unless it is otherwise agreed. If the price of the sale is less,
On validity of private sale of pledged vessels: neither shall the creditor be entitled to recover the deficiency,
Contentions of Yuliongsiu: notwithstanding any stipulation to the contrary.
1. statutory requirements as to public sales with prior notice in
connection with foreclosure proceedings are waivable, are no LEGAL ISSUE/S:
longer authoritative in view of the passage of Act 3135, as a.) WON Velayo is liable for the deficiency? NO.
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RULING: defendant EIB to buy back 61,100,000 KPP shares earlier sold by
Article 2115, in its last portion, clearly establishes that the plaintiffs.
extinction of the principal obligation supervenes by operation
of imperative law that the parties cannot override: Defendant EIB sold without authority plaintiffs’ 32,180,000
DMCI shares and used the proceeds thereof to buy back
If the price of the sale is less, neither shall the creditor be 61,000,000 KPP shares because defendant EIB made an
entitled to recover the deficiency notwithstanding any unauthorized promise and commitment to the buyer/s of
stipulation to the contrary. plantiffs’ KPP shares in April 2004 that plaintiffs would buy back
The provision is clear and unmistakable, and its effect cannot be the KPP shares.
evaded. By electing to sell the articles pledged, instead of suing
on the principal obligation, the creditor has waived any other ISSUE: whether or not the pledge on “KKP Shares/Property” is
remedy, and must abide by the results of the sale. No deficiency valid?
is recoverable.
The answer is no. It is indispensable that the pledgor is the
absolute owner of the thing pledged (second element). In the
FACTS: case at bar, the KKP shares were sold to third parties by EIB at
Plaintiffs Pacific Rehouse, bought 60,790,000 Kuok PhP 0.14 and, as a result, petitioners lost their right of
Properties, Inc. (“KPP”) shares of stock through the Philippine ownership over the KKP shares. Hence, from the time of the
Stock Exchange (“PSE”). The KPP shares were acquired by them sale, petitioners were no longer the absolute owners of said
through their broker, defendant EIB. shares, making the pledge constituted over said KKP shares null
and void.
Plaintiffs also bought/acquired 32,180,000 DMCI shares of Also, it is necessary under Art. 2085 that the person constituting
stock through the PSE. Of these shares, 16,180,000 were the pledge has the free disposal of his or her property, and in
likewise acquired by the plaintiffs through their broker, the absence of that free disposal, that he or she be legally
defendant EIB. authorized for the purpose (third element). This element is
absent in the case at bar. Petitioners no longer have the free
On 01 April 2004, plaintiffs and defendant EIB agreed to sell disposal of the KKP shares when EIB sold said shares at the
the 60,790,000 KPP shares of plaintiffs to any party for the price stock exchange as they are no longer the owners of the shares.
of P0.14 per share. Thus, there was no valid pledge constituted on the KKP shares.

As agreed by plaintiffs and defendant, the sale of the KPP The notice of sale, assuming it incorporates the accessory
shares of plaintiffs was made with an option on the part of the contract of pledge, merely stated “Property” as collateral in
plaintiffs to buy back or reacquire the said KPP shares within a addition to KKP shares. This is a blatant violation of Art. 2096,
period of thirty (30) days from the transaction date, at the buy- which provides that “a pledge shall not take effect against third
back price of P0.18 per share. persons if description of the thing pledged and the date of the
pledge do not appear in a public instrument.” The thing pledged
The notices of sale issued by EIB covering the sale of the KKP must be amply and clearly described and specifically identified.
shares of petitioners clearly show that the very same KKP Evidently, the word “Property” is vague, broad, and confusing
shares sold to third parties albeit under a buy-back as to the ownership. Hence, it does not satisfy the prescription
arrangement and the “Property” of petitioners were made the under Art. 2096 of the Code. Worse, the notice of sale is not in
collaterals to secure the payment of the reacquisition a public instrument as required by said legal provision;
therefore, the pledge on “property” is void and without legal
. Plaintiffs did not exercise their option to buy back the KPP effect.
shares and did not give any buy-back instruction/s to their
broker, defendant EIB. Moreover, the notices of sale must be construed against EIB.
Any ambiguity in a contract whose terms are susceptible of
On various dates in June 2004, without plaintiffs’ prior different interpretations must be read against the party who
knowledge and consent, defendant EIB sold plaintiffs drafted it.
32,180,000 DMCI shares of stock for an average price of P0.24
The DMCI shares which EIB construed to be included within the
per share. Defendant EIB sold the DMCI shares of plaintiffs.
ambit of the word “property” cannot be considered the thing
pledged to secure the buy back of the KKP shares in view of the
The proceeds of said DMCI shares sold by defendant EIB
vagueness of the word “Property” and the non-applicability of
without plaintiffs’ knowledge and consent were used by
the SDAA to the sale of the KKP shares. Pacific Rehouse

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Corporation, et al. vs. EIB Securities, Inc.;G.R. No. 184036,

October 13, 2010. REAL MORTGAGE

27. DBP v CA – Sigrid Mier

respondents. [G.R. No. 110053 October 16, 1995] – Luis Sy

FACTS: The subject of this controversy is a parcel of

unregistered land identified as Lot 1, PSU-142380, situated in
the Barrio of Toytoy, Municipality of Garchitorena, Province of
Camarines Sur, containing an area of 55.5057 hectares, more or
The land was originally owned by one PresentacionCordovez,
who donated (February 4, 1937) it to Luciano Sarmiento and
Luciano (June 8, 1964) sold the land to PacificoChica.
PacificoChica (April 27, 1965) mortgaged the land to DBP to
secure a loan of P6,000.00. However, he defaulted in the
payment of the loan, hence DBP caused the extrajudicial
foreclosure of the mortgage. In the auction sale held on
September 9, 1970, DBP acquired the property as the highest
bidder and was issued a certificate of sale on September 17,
1970 by the sheriff. PacificoChica failed to redeem the property,
and DBP consolidated its ownership over the same.
On October 14, 1980, respondent spouses offered to buy the
property for P18,599.99. DBP made a counter-offer of
P25,500.00 which was accepted by respondent spouses. The
parties further agreed that payment was to be made within six
months thereafter for it to be considered as cash payment. On
July 20, 1981, the deed of absolute sale, which is now being
assailed herein, was executed by DBP in favor of respondent
spouses. Said document contained a waiver of the seller's
warranty against eviction.
Thereafter, respondent spouses applied for an industrial tree
planting loan with DBP. The latter required the former to
submit a certification from the Bureau of Forest Development
that the land is alienable and disposable. However, on October
29, 1981, said office issued a certificate attesting to the fact
that the said property was classified as timberland, hence not
subject to disposition. The loan application of respondent
spouses was nevertheless eventually approved by DBP in the
sum of P140,000.00, despite the aforesaid certification of the
bureau, on the understanding of the parties that DBP would
work for the release of the land by the former Ministry of
Natural Resources. To secure payment of the loan, respondent
spouses executed a real estate mortgage over the land on
March 17, 1982, which document was registered in the
Registry of Deeds pursuant to Act No. 3344. The loan was
released on staggered basis, but their request the remaining
amount be released was not acted upon by DBP since the
release of the land by the Ministry of Natural Resources had not
been obtained.
On July 7, 1983, respondent spouses, as plaintiffs, filed a
complaint against DBP in the trial court seeking the annulment
of the subject deed of absolute sale on the ground that the
object thereof was verified to be timberland and, therefore, is
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in law an inalienable part of the public domain. TC annulled the CelebradaMangubat's admission in open court, are more than
subject deed of absolute sale and ordering DBP to return the adequate evidence to sustain petitioner's claim for payment of
P25,500.00 purchase price, plus interest; to reimburse to private respondents' aforestated indebtedness and for the
respondent spouses the taxes paid by them, the cost of the adjudication of DBP's claim therefor in the very same action
relocation survey, incidental expenses and other damages in now before us.
the amount of P50,000.00; and to further pay them attorney's
fees and litigation expenses in the amount of P10,000.00, and
the costs of suit. On appeal, the CA modified as to the award of 28. G.R. No. 156295. September 23, 2003/ Soriano vs.
damages but affirmed the rest of the trial court's decision. Galit/ Yap
Petitioner was issued a writ of possession in Civil Case No.
ISSUE: WON private respondent spouses Celebrada and 6643 for Sum of Money by the Regional Trial Court
AbnerMangubat should be ordered to pay petitioner DBP their of Balanga, Bataan, Branch 1. The writ of possession was,
loan obligation due under the mortgage contract executed however, nullified by the Court of Appeals in CA-G.R. SP No.
between them and DBP. YES 6589 because it included a parcel of land which was not among
those explicitly enumerated in the Certificate of Sale issued by
HELD: The contract of loan executed between the parties is the Deputy Sheriff, but on which stand the immovables covered
entirely different and discrete from the deed of sale they by the said Certificate. Petitioner contends that the sale of
entered into. The annulment of the sale will not have an effect these immovables necessarily encompasses the land on which
on the existence and demandability of the loan. One who has they stand.
received money as a loan is bound to pay to the creditor an
equal amount of the same kind and quality. Dissatisfied, petitioner filed the instant petition for review
The fact that the annulment of the sale will also result in the on certiorari.
invalidity of the mortgage does not have an effect on the
validity and efficacy of the principal obligation, for even an Facts:Respondent Ricardo Galit contracted a loan from
obligation that is unsupported by any security of the debtor petitioner Marcelo Soriano, in the total sum of P480,000.00,
may also be enforced by means of an ordinary action. evidenced by four promissory notes in the amount of
Where a mortgage is not valid, as where it is executed by one P120,000.00 each dated August 2, 1996; August 15,
who is not the owner of the property, or the consideration of 1996; September 4, 1996 and September 14, 1996. This loan
the contract is simulated or false, the principal obligation which was secured by a real estate mortgage over a parcel of land
it guarantees is not thereby rendered null and void. That covered by Original Certificate of Title No. 569. After he failed
obligation matures and becomes demandable in accordance to pay his obligation, Soriano filed a complaint for sum of
with the stipulations pertaining to it. money against him with the Regional Trial Court of Balanga City.
Under the foregoing circumstances, what is lost is only the
right to foreclose the mortgage as a special remedy for Respondents, the Spouses Ricardo and Rosalina Galit,
satisfying or settling the indebtedness which is the principal failed to file their answer. Hence, upon motion of
obligation.In case of nullity, the mortgage deed remains as Marcelo Soriano, the trial court declared the spouses in default
evidence or proof of a personal obligation of the debtor, and and proceeded to receive evidence for
the amount due to the creditor may be enforced in an petitioner Soriano ex parte.
ordinary personal action.
A reading of the mortgage contract executed by respondent On July 7, 1997, the Regional Trial Court of Balanga City
spouses in favor of petitioner, dated March 17, 1982, will rendered judgment in favor of petitioner Soriano.
readily show that it embodies not only the mortgage but the
complete terms and conditions of the loan agreement as well. The judgment became final and executory. Accordingly,
The provisions of said contract, specifically paragraphs 16 and the trial court issued a writ of execution in due course, by virtue
28 thereof, are so precise and clear as to thereby render of which, Deputy Sheriff Renato E. Robles levied on the
unnecessary the introduction of the promissory note which following real properties of the Galit spouses:
would merely serve the same purpose. Furthermore, 1. A parcel of land covered by Original Certificate
respondent CelebradaMangubat expressly acknowledged in her of Title No. T-569(Homestead Patent No. 14692)
testimony that she and her husband are indebted to petitioner situated in the Bo. of Tapulac, Orani, Bataan.
in the amount of P118,000.00, more or less. Admissions made 2. STORE/HOUSE – CONSTRUCTED on Lot No. 1103
by the parties in the pleadings or in the course of the trial or made of strong materials G.I. roofing situated at
other proceedings do not require proof and can not be Centro I, Orani, Bataan
contradicted unless previously shown to have been made 3. BODEGA – constructed on Lot 1103, made of
through palpable mistake. Thus, the mortgage contract which strong materials, G.I. roofing, situated in Centro
embodies the terms and conditions of the loan obligation of I, Orani, Bataan.
respondent spouses, as well as respondent
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At the sale of the above-enumerated properties at public object of scrutiny, however, is not the copy of the Certificate of
auction held on December 23, 1998, petitioner was the highest Sale on Execution of Real Properties issued by the deputy
and only bidder with a bid price of P483,000.00. Accordingly, sheriff on February 4, 1999, but the copy
on February 4, 1999, Deputy Sheriff Robles issued a Certificate thereof subsequently registered by petitioner with the Registry
of Sale of Execution of Real Property. of Deeds on April 23, 1999, which included an entry on
the dorsal portion of the first page thereof describing a parcel
On April 23, 1999, petitioner caused the registration of the of land covered by OCT No. T-40785 not found in the Certificate
“Certificate of Sale on Execution of Real Property” with the of Sale of Real Properties on file with the sheriff.
Registry of Deeds.
True, public documents by themselves may be adequate
The said Certificate of Sale registered with the Register of to establish the presumption of their validity. However, their
Deeds includes at the dorsal portion thereof the following probative weight must be evaluated not in isolation but in
entry, not found in the Certificate of Sale on file with Deputy conjunction with other evidence adduced by the parties in the
Sheriff RenatoE. Robles: controversy, much more so in this case where the contents of a
copy thereof subsequently registered for documentation
A parcel of land (Lot No. 1103 of the Cadastral Survey of Orani) purposes is being contested. No reason has been offered how
, with the improvements thereon, situated in the Municipality and why the questioned entry was subsequently intercalated in
of Orani. the copy of the certificate of sale subsequently registered with
the Registry of Deeds. Absent any satisfactory explanation as to
On February 23, 2001, ten months from the time the Certificate why said entry was belatedly inserted, the surreptitiousness of
of Sale on Execution was registered with the Registry of Deeds, its inclusion coupled with the furtive manner of its intercalation
petitioner moved for the issuance of a writ of possession. He casts serious doubt on the authenticity of petitioner’s copy of
averred that the one-year period of redemption had elapsed the Certificate of Sale. Thus, it has been held that while a public
without the respondents having redeemed the properties sold document like a notarized deed of sale is vested with the
at public auction; thus, the sale of said properties had already presumption of regularity, this is not a guarantee of the validity
become final. He also argued that after the lapse of the of its contents.
redemption period, the titles to the properties should be
considered, for all legal intents and purposes, in his name and It must be pointed out in this regard that the issuance of a
favor. Certificate of Sale is an end result of judicial foreclosure where
statutory requirements are strictly adhered to; where even the
The RTC subsequently granted the motion for issuance of writ slightest deviations therefrom will invalidate the
of possession. proceeding and the sale. Among these requirements is an
explicit enumeration and correct description of what properties
Respondents filed a petition for certiorari with the Court of are to be sold stated in the notice. The stringence in the
Appeals assailing the inclusion of the parcel of land covered by observance of these requirements is such that an incorrect title
Transfer Certificate of Title No. T-40785 among the list of real number together with a correct technical description of the
properties in the writ of possession. Respondents argued that property to be sold and vice versa is deemed a substantial and
said property was not among those sold on execution by fatal error which results in the invalidation of the sale.
Deputy SheriffRenato E. Robles as reflected in the Certificate of
Sale on Execution of Real Property. The certificate of sale is an accurate record of what
properties were actually sold to satisfy the debt. The strictness
The CA declared the writ of possession null and void. in the observance of accuracy and correctness in the
description of the properties renders the enumeration in the
Issues: certificate exclusive. Thus, subsequently including properties
1.) Whether or not the questioned writ of possession is in fact which have not been explicitly mentioned therein for
a nullity considering that it includes real property not expressly registration purposes under suspicious circumstances smacks of
mentioned in the Certificate of Sale of Real Property. Yes! fraud. The explanation that the land on which the properties
sold is necessarily included and, hence, was belatedly typed on
2.) (Main issue) WON a building by itself maybe mortgaged the dorsal portion of the copy of the certificate subsequently
apart from the land on which it is built. Yes! registered is at best a lame excuse unworthy of belief.

Ruling: The appellate court correctly observed that there was a

There are actually two (2) copies of the Certificate of Sale on marked difference in the appearance of the typewritten words
Execution of Real Properties issued on February 4, appearing on the first page of the copy of the Certificate of Sale
1999 involved, namely: (a) copy which is on file with the deputy registered with the Registry of Deeds and those appearing at
sheriff; and (b) copy registered with the Registry of Deeds. The the dorsal portion thereof. Underscoring the irregularity of the
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intercalation is the clearly devious attempt to let such an executed for the credit line and stipulated therein: with interest
insertion pass unnoticed by typing the same at the back of the thereon at the rate of 12% pa, until paid, with interest rate the
first page instead of on the second page which was merely half- Bank may, at any tie, without notice, raise within the limits
filled and could accommodate the entry with room to spare. allowed by law xxx.” Thereafter, PNB advised Mendoza that the
bank raised its interest rates to 14% pa, in line with CBMB
Main issue: WON a building by itself maybe mortgaged apart Resolution No 2126. Petitioner failed to pay and requested for
from the land on which it is built. Yes! restructuring of loans. Two promissory notes were signed by
Mendoza and his wife. Petitioner testified that respondent
Ruling: The argument that the land on which the buildings allegedly inserted in first promissory note No. 127/82 an
levied upon in execution is necessarily included is, likewise, interest rate of 21% instead of 18% covering the principal
tenuous. The SC cited Article 415 of the Civil Code and said amount, and on the second promissory note 128/82 the
that: interest of 18% instead of 12% representing accrued interest.
The foregoing provision of the Civil Code enumerates land
and buildings separately. This can only mean that a building The petitioner filed in the RTC in Pasig, Rizal a complaint for
is, by itself, considered immovable. Thus, it has been held that – specific performance, nullification of the extra-judicial
. . . while it is true that a mortgage of land necessarily includes, foreclosure and damages against respondents PNB, Fernando
in the absence of stipulation of the improvements thereon, Maramag Jr., Ricardo C. Decepida, Vice-President for
buildings, still a building by itself may be mortgaged apart Metropolitan Branches, and Bayani A. Bautista. He alleged that
from the land on which it has been built. Such mortgage would the Extrajudicial Foreclosure Sale of the mortgaged properties
be still a real estate mortgage for the building would still be was null and void since his loans were restructured to a five-
considered immovable property even if dealt with separately year term loan; hence, it was not yet due and demandable; that
and apart from the land. the escalation clauses in the subject two (2) Promissory Notes
Nos. 127/82 and 128/82 were null and void, that the total
In this case, considering that what was sold by virtue of amount presented by PNB as basis of the foreclosure sale did
the writ of execution issued by the trial court was merely the not reflect the actual loan obligations of the plaintiff to PNB;
storehouse and bodega constructed on the parcel of land that Bautista purposely delayed payments on his exports and
covered by Transfer Certificate of Title No. T-40785, which by caused delays in the shipment of materials; that PNB withheld
themselves are real properties of respondents spouses, the certain personal properties not covered by the chattel
same should be regarded as separate and distinct from the mortgage; and that the foreclosure of his mortgages was
conveyance of the lot on which they stand. premature so that he was unable to service his foreign clients,
resulting in actual damages amounting to Two Million Four
Thousand Four Hundred Sixty One Pesos (P2,004,461.00).
29. Mendoza vs CA – Michelle AndoyGR No. 116710, 25 June
2001 Respondent PNB appealed this decision of the trial court to the
Court of Appeals. And the Court of Appeals reversed the
FACTS: Petitioner Danilo D. Mendoza is engaged in the decision of the trial court and dismissed the complaint. Hence,
domestic and international trading of raw materials and this petition.
chemicals. He operates under the business name Atlantic
Exchange Philippines (Atlantic), a single proprietorship ISSUE: Whether or not the extrajudicial foreclosure of
registered with the Department of Trade and Industry (DTI). petitioner’s real estate and chattel mortgages is valid. YES.
Sometime in 1978 he was granted by respondent Philippine
National Bank (PNB) a Five Hundred Thousand Pesos HELD: It is clear, however, from the above-quoted provision of
(P500,000.00) credit line and a One Million Pesos the said promissory notes that respondent bank is authorized,
(P1,000,000.00) Letter of Credit/Trust Receipt (LC/TR) line. in case of default, to sell “things of value” belonging to the
mortgagor “which may be on its hands for deposit or otherwise
As security for the credit accommodations and for those which belonging to me/us and for this purpose.” Besides the
may thereinafter be granted, petitioner mortgaged to petitioner executed not only a chattel mortgage but also a real
respondent PNB the following: 1) three (3) parcels of land[3] estate mortgage to secure his loan obligations to respondent
with improvements in F. Pasco Avenue, Santolan, Pasig; 2) his bank.
house and lot in Quezon City; and 3) several pieces of
machinery and equipment in his Pasig coco-chemical plant. A stipulation in the mortgage, extending its scope and effect
to after-acquired property is valid and binding where the
The Real Estate Mortagage (REM) provided for an escalation after-acquired property is in renewal of, or in substitution for,
clause that rate of interest charged on the obligation secured goods on hand when the mortgage was executed, or is
shall be subject to such increase, during the life of the contract, purchased with the proceeds of the sale of such goods. As
within the rates allowed by law. Two promissory notes were
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earlier pointed out, the petitioner did not present any proof as one-year redemption period. The extrajudicial foreclosure of
to when the subject movables were acquired. petitioner’s real estate and chattel mortgages was not
premature and that it was in fact legal and valid. The petition is
More importantly, respondent bank makes a valid argument for hereby DENIED.
the retention of the subject movables. Respondent PNB asserts
that those movables were in fact "immovables by destination" PS: The case is quite long, please read the full text for other
under Art. 415 (5) of the Civil Code.[31] It is an established rule specific details. thanks.
that a mortgage constituted on an immovable includes not only
the land but also the buildings, machinery and accessories
installed at the time the mortgage was constituted as well as 30. LUCIA TAN vs. ARADOR VALDEHUEZA and REDICULO
the buildings, machinery and accessories belonging to the VALDEHUEZA – ZarGido
mortgagor, installed after the constitution thereof.
Petitioner also contends that respondent PNB’s bid prices for As submitted by the parties, the stipulated facts are as fallows;
this foreclosed properties in the total amount of Three Million For the first cause of action, A parcel of land was a subject
Seven Hundred Ninety Eight Thousand Seven Hundred Nineteen matter of the public auction sale held on May 6, 1955 at
Pesos and Fifty Centavos (P3,798,719.50), were allegedly Misamis Occidental, wherein the plaintiff was the highest
“unconscionable and shocking to the conscience of men”. He bidder and as such a Certificate of Sale was executed by Mr.
claims that the fair market appraisal of his foreclosed plant site Vicente D. Roa who was then the Ex-Officio Provincial Sheriff in
together with the improvements thereon located in Pasig, favor of Lucia Tan the herein plaintiff. Due to the failure of
Metro Manila amounted to Five Million Four Hundred Forty defendant AradorValdehueza to redeem the said land within
One Thousand Six Hundred Fifty Pesos (P5,441,650.00) while the period of one year as being provided by law, the Ex-Officio
that of his house and lot in Quezon City amounted to Seven Provincial Sheriff executed an ABSOLUTE DEED OF SALE in favor
Hundred Twenty Two Thousand Pesos (P722,000.00) per the of the plaintiff Lucia Tan.
appraisal report dated September 20, 1990 of Cuervo As to the second cause of action, as stipulated by the parties it
Appraisers, Inc. That contention is not well taken considering was said that defendants AradorValdehueza and
that: RediculoValdehueza have executed two documents of DEED OF
PACTO DE RETRO SALE in favor of the plaintiff herein, LUCIA
1. The total of the principal amounts alone of petitioner’s TAN of two portions of a parcel of land with the total amount of
subject Promissory Notes Nos. 127/82 and 128/82 which are (P1,500.00).
both overdue amounted to Four Million One Hundred Eighty The first parcel of land referred to in the second cause of action
Seven Thousand Nine Hundred Seventeen Pesos and Fifty Nine was not registered in the Registry of Deeds, while the Deed of
Centavos (P4,187,917.59). Pacto de Retro for the second land was registered. from the
execution of the Deed of Sale with right to repurchase
2. While the appraisal of Cuervo Appraisers, Inc. was mentioned in the second cause of action, defendants
undertaken in September 1990, the extrajudicial foreclosure of AradorValdehueza and RediculoValdehueza remained in the
petitioner’s real estate and chattel mortgages have been possession of the land; that land taxes to the said land were
effected way back on October 15, 1984, October 23, 1984 and paid by the same said defendants.
December 21, 1984.[34] Common experience shows that real Herein plaintiff files a case for the (a) declaration of ownership
estate values especially in Metro Manila tend to go upward due and recovery of possession of the parcel of land described in
to developments in the locality. the first cause of action of the complaint, and (b) consolidation
of ownership of two portions of another parcel of
3. In the public auction/foreclosure sales, respondent PNB, as (unregistered) land described in the second cause of action of
mortgagee, was not obliged to bid more than its claims or more the complaint, purportedly sold to the plaintiff in two separate
than the amount of petitioner’s loan obligations which are all deeds of pacto de retro.
overdue. The foreclosed real estate and chattel mortgages
which petitioner earlier executed are accessory contracts The trial court rendered judgement in favor of Tan but
covering the collaterals or security of his loans with respondent nonetheless treated the registered deed of pacto de retro as an
PNB. The principal contracts are the Promissory Notes Nos. equitable mortgage but considered the unregistered deed
127/82 and 128/82 which superseded and novated the 1979 of pacto de retro "as a mere case of simple loan, secured by the
promissory notes and the 1979 eleven (11) Applications and property thus sold under pacto de retro," on the ground that no
Agreements for Commercial Letter of Credit. suit lies to foreclose an unregistered mortgage.

Finally, the record shows that petitioner did not even attempt Issue:
to tender any redemption price to respondent PNB, as highest
bidder of the said foreclosed real estate properties, during the
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WON the trial judge made reversible error in declaring the On October 15, 1969, Spouses Canuto and Ma.AranzazuOreta
unregistered deed of pacto de retro " be a mere case of simple and SOLID Homes, Inc. executed a contract to sell involving a
loan. parcel of land. Upon signing the contract, the spouses oreta
made payment amounting to P7,869.40 with the agreement
Ruling: that the balance shall be payable in monthly installments of
Yes. Although unregistered the subject deed is still that of a P451.70 at 12% per annum.
The trial judge had not updated himself on law and On November 4, 1976, SOLID executed several real estate
jurisprudence; he cited, in support of his ruling, article 1875 of mortgage contracts in favor of State Investment Homes, Inc.
the old Civil Code and decisions of this Court circa 1910 and (STATE) over its subdivided parcels of land, one of which is the
1912. subject lot.
Under article 1875 of the Civil Code of 1889, registration was a
necessary requisite for the validity of a mortgage even as For Failure of SOLID to comply with its mortgage obligations
between the parties, but under article 2125 of the new Civil contract, STATE extrajudicially foreclosed the mortgaged
Code (in effect since August 30,1950), this is no longer so. properties including the subject lot on April 6, 1983, with the
corresponding certificate of sale issued therefor to STATE
If the instrument is not recorded, the mortgage is nonetheless annotated at the back of the titles covering the said properties
binding between the parties. (Article 2125, 2nd sentence). on October 13, 1983

TheValdehuezas having remained in possession of the land and On June 23, 1984, SOLID thru a Memorandum of Agreement
the realty taxes having been paid by them, the contracts which negotiated for the deferment of consolidation of ownership
purported to be pacto de retro transactions are presumed to be over the foreclosed properties by committing to redeem the
equitable mortgages, whether registered or not, there being no properties from STATE.
third parties involved.
On August 15, 1988, the spouses filed a complaint before the
Other issue/s: Housing and Land Use Regulatory Board, HLRB, against the
The Valdehuezas claim that the plaintiff affirmed that they developer SOLID and STATE for failure on the part of SOLID "to
remained in possession of the land and gave the proceeds of execute the necessary absolute deed of sale as well as to deliver
the harvest to the plaintiff; it is thus argued that they would title to said property . . . in violation of the contract to sell . . .,"
suffer double prejudice if they are to pay legal interest on the despite full payment of the purchase price as of January 7,
amounts stated in the pacto de retro contracts, as the lower 1981. In its Answer, SOLID, by way of alternative defense,
court has directed, alleged that the obligations under the Contract to Sell has
The record does not support this claim. Nowhere in the original become so difficult . . . the herein respondents be partially
and the amended complaints is an allegation of delivery to the released from said obligation by substituting subject lot with
plaintiff of the harvest from the land involved in the second another suitable residential lot from another subdivision which
cause of action. Hence, the defendants' answer had none to respondents own/operates". Upon the other hand, STATE, to
affirm. In submitting their stipulation of facts, the parties which the subject lot was mortgaged, averred that unless SOLID
prayed "for its approval and maybe made the basis of the pays the redemption price of P125,1955.00, it has "a right to
decision of this Honorable Court. " This, the court did. It cannot hold on and not release the foreclosed properties.
therefore be faulted for not receiving evidence on who profited
from the harvest. T However, HLURB ordered State to execute a deed of
conveyance in favor of complainants and deliver the title to the
he imposition of legal interest on the amounts subject of the land. Solid was then ordered to pay State the portion of the
equitable mortgages, P1,200 and P300, respectively, is without loan which corresponds to the value of the lot. this judgment
legal basis, for, "No interest shall be due unless it has been was sutained by the Board of Commissioners, Office of the
expressly stipulated in writing." (Article 1956, new Civil Code) President, and Court of Appeals.
Furthermore, the plaintiff did not pray for such interest; her
thesis was a consolidation of ownership, which was properly ISSUE
rejected, the contracts being equitable mortgages. W/N spouses Oreta's unregistered rights are superior over
State's registered mortgage over the property

31. State Investment vs. CA G.R. No. 115548 March 5, 1996 – HELD
Janie Lumanag Yes.
In fact, petitioner admits the superior rights of respondents-
FACTS spouses Oreta over the subject property as it did not pray for
the nullification of the contract between respondents-spouses
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and SOLID, but instead asked for the payment of the release it is argued that his opposition raises a controversial matter
value of the property in question, plus interest, attorney's fees which the court has no jurisdiction to pass upon.
and costs of suit against SOLID or, in case of the latter's inability
to pay, against respondents-spouses before it can be required The court held that even if the ownership of the deceased
to release the title of the subject property in favor of the Rafaela Yulo over the portion of the lot in question and the
respondent spouses. validity of the mortgage are disputed, such invalidity of the
mortgage is no proof of the non-existence of the mortgage nor
State's registered mortgage right over the property is inferior to a ground for objecting to its registration, citing the case of
that of respondents' unregistered right. The unrecorded sale is Register of Deeds of Manila vs. Maxima TinocoVda. de Cruz, et,
preferred for the reason that if the original owner (Solid) had al., 95 Phil., 818; 53 Off. Gaz., 2804.
parted with the ownership of the thing sold, he would no longer
have the free disposal of it and would not be able to mortgage Issue: WON, in registering the mortgage, the court passed
it. Registration of the mortgage is not important since it is upon the validity of the mortgage.
understood to be without prejudice to the rights of third
persons. Held:No. In the first place, as the judge below correctly ruled,
the proceeding to register the mortgage does not purport to
Pero if mag-ask si mam, about the issue regarding the Torrens determine the supposed invalidity of the mortgage or its effect.
system: Registration is a mere ministerial act by which a deed, contract
or instrument is sought to be inscribed in the records of the
ISSUE Office of the Register of Deeds and annotated at the back of the
W/N State has the right to rely on the face of the Torrens title certificate of title covering the land subject of the deed,
contract or instrument.
As a general rule, where there is nothing in the title to indicate The registration of a lease or mortgage, or the entry of a
any cloud or vice in the ownership thereof, the purchaser is not memorial of a lease or mortgage on the register, is not a
required to explore further. An exception to this is when the declaration by the state that such an instrument is a valid and
mortgagee or purchaser has knowledge of a defect or lack of subsisting interest in land; it is merely a declaration that the
title on the part of the vendor or that he was aware of sufficient record of the title appears to be burdened with the lease or
facts to induce a reasonably prudent man to inquire furher. In mortgage described, according to the priority set forth in the
this case, petitioner knows full well that Solid is engaged in certificate.
selling subdivision lots. Therefore, as founded on jurisprudence,
it should have taken necessary precautions to ascertain any The mere fact that a lease or mortgage was registered does not
flaw. Moreover, the uniform practice of financing institutions is stop any party to it from setting up that it now has no force or
to investigate, examine, and assess real property offered as effect. (Niblack, pp. 134-135, quoted in Francisco Land
security. State is therefore not a mortgagee in good faith. Registration Act, l950 ed., p. 348.)

The court below, in ordering the registration and annotation of

32. AGRICULTURAL CREDIT COOPERATIVE ASSOCIATION OF the mortgage, did not pass on its invalidity or effect. As the
HINIGARAN v ESTANISLAO YULO YUSAY, ET AL. – Ruby L. mortgage is admittedly an act of the registered owner, all that
Monday the judge below did and could do, as a registration court, is to
Facts: order its registration and annotation on the certificate of title
The records disclose that on July 20, 1952, Rafaela Yulo covering the land mortgaged. By said order the court did not
executed in favor of the movant, AGRICULTURAL CREDIT pass upon the effect or validity of the mortgage — these can
COOPERATIVE ASSOCIATION OF HINIGARAN, a mortgage for only be determined in an ordinary case before the courts, not
P33,626.29, due from her, her mother, sisters, brothers, and before a court acting merely as a registration court, which did
others, which amount she assumed to pay to the movant. A not have the jurisdiction to pass upon the alleged effect or
motion was presented to the court by the movant demanding validity.
the surrender of the owner's duplicate certificate of title that he
may annotate said mortgage at the back of the certificate.
EstanislaoYusay, a part owner of the lot, opposed the petition 33. PRODUCERS BANK OF THE PHILIPPINES vs. EXCELSA
on the ground that he is owner of a part of the property in INDUSTRIES, INC - Alexis Ben O. Barrera. G.R. No. 152071 May
question; that the granting of the motion would operate to his 8, 2009
prejudice, as he has not participated in the mortgage cited in
the motion; that Rafaela Yulo is dead; that the motion is not Facts: Sometime in January 1987, respondent applied, which
verified and movant's rights have lapsed by prescription. Finally was approved, for a packing credit line or a credit export

Batch 3 | 37
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advance with petitioner Producers Bank of the Philippines. The denied respondent’s motion for reconsideration. Thus,
application was supported by Letter of Credit. respondent elevated the matter to the Court of Appeals,
reiterating its claim that petitioner was not only a collection
KwangJu Bank, Ltd. of Seoul, Korea issued the letter of agent but was considered a purchaser of the export. On 30 May
credit through its correspondent bank, the Bank of the 2001, the Court of Appeals rendered the assailed decision,
Philippine Islands, for the account of Shin Sung reversing the RTC’s decision. Hence, the instant petition.
Commercial Co., Ltd., also located in Seoul, Korea. T.L.
World Development Corporation was the original Issue: W/N the extrajudicial foreclosure of mortgage was valid.
beneficiary of the letter of credit. On 05 December 1986,
for value received, T.L. World transferred to respondent Held: Yes. The validity of the extrajudicial foreclosure of the
all its rights and obligations under the said letter of mortgage is dependent on the following issues posed by
credit. petitioner: (1) the coverage of the "blanket mortgage clause;"
(2) petitioner’s failure to furnish personal notice of the
Prior to the application respondent had obtained a loan from foreclosure to respondent; and (3) petitioner’s obligation as
petitioner. The loan was secured by a real estate mortgage. negotiating bank under the letter of credit.
Significantly, the real estate mortgage contained the following
clause: Much of the discussion has revolved around who should be
liable for the dishonor of the draft and export documents. In
For and in consideration of those certain loans, overdraft the two undertakings executed by respondent as a condition for
and/or other credit accommodations on this date the negotiation of the drafts, respondent held itself liable if the
obtained from the MORTGAGEE, and to secure the drafts were not accepted. The two undertakings signed by
payment of the same, the principal of all of which is respondent are similarly-worded and contained respondent’s
hereby fixed at FIVE HUNDRED THOUSAND PESOS ONLY express warranties, to wit:
(P500,000.00) Pesos, Philippine Currency, as well as
those that the MORTGAGEE may hereafter extend to the In consideration of your negotiating the above described
MORTGAGOR, x xx . draft(s), we hereby warrant that the said draft(s) and
accompanying documents thereon are valid, genuine and
On 17 March 1987, respondent presented for negotiation to accurately represent the facts stated therein, and that such
petitioner drafts drawn under the letter of credit and the draft(s) will be accepted and paid in accordance with its/their
corresponding export documents. Petitioner purchased the tenor. We further undertake and agree, jointly and severally, to
drafts and export documents. The purchase was subject to the defend and hold you free and harmless from any and all
conditions laid down in two separate undertakings by actions, claims and demands whatsoever, and to pay on
respondent dated 17 March 1987 and 10 April 1987. demand all damages actual or compensatory including
attorney’s fees, costs and other awards or be adjudged to pay,
On 24 April 1987, KwangJu Bank, Ltd. notified petitioner in case of suit, which you may suffer arising from, by reason, or
through cable that the Korean buyer refused to pay on account of your negotiating the above draft(s) because of
respondent’s export documents on account of typographical the following discrepancies or reasons or any other discrepancy
discrepancies. KwangJu Bank, Ltd. returned to petitioner the or reason whatever.
export documents.
We hereby undertake to pay on demand the full amount of
Petitioner demanded from respondent. Due to respondent’s the above draft(s) or any unpaid balance thereof, the
failure to heed the demand, petitioner moved for the Philippine perso equivalent converted at the prevailing selling
extrajudicial foreclosure on the real estate mortgage over rate (or selling rate prevailing at the date you negotiate our
respondent’s properties. At the public auction held on 05 draft, whichever is higher) allowed by the Central Bank with
January 1988, the Sheriff of Antipolo, Rizal issued a Certificate interest at the rate prevailing today from the date of
of Sale in favor of petitioner as the highest bidder. negotiation, plus all charges and expenses whatsoever incurred
in connection therewith. You shall neither be obliged to contest
On 17 November 1989, respondent instituted an action for the or dispute any refusal to accept or to pay the whole or any part
annulment of the extrajudicial foreclosure with prayer for of the above draft(s), nor proceed in any way against the
preliminary injunction and damages against petitioner and the drawee, the issuing bank or any endorser thereof, before
Register of Deeds of Marikina. making a demand on us for the payment of the whole or any
unpaid balance of the draft(s).(Emphasis supplied)31
On 18 December 1997, the RTC rendered a decision upholding
the validity of the extrajudicial foreclosure and ordering the In Velasquez v. Solidbank Corporation,32 where the drawer
issuance of a writ of possession in favor of petitioner. The RTC therein also executed a separate letter of undertaking in
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consideration for the bank’s negotiation of its sight drafts, the execute additional security documents, thereby saving time,
Court held that the drawer can still be made liable under the travel, loan closing costs, costs of extra legal services, recording
letter of undertaking even if he is discharged due to the bank’s fees, et cetera.
failure to protest the non-acceptance of the drafts. The Court
explained, thus: x xx

Petitioner, however, can still be made liable under the letter of Petitioner, therefore, was not precluded from seeking the
undertaking. It bears stressing that it is a separate contract foreclosure of the real estate mortgage based on the unpaid
from the sight draft. The liability of petitioner under the letter drafts drawn by respondent. In any case, respondent had
of undertaking is direct and primary. It is independent from his admitted that aside from the unpaid drafts, respondent also
liability under the sight draft. Liability subsists on it even if the had due and demandable loans secured from another account
sight draft was dishonored for non-acceptance or non-payment. as evidenced by Promissory Notes (PN Nos.) BDS-001-87, BDS-
030/86 A, BDS-PC-002-/87 and BDS-005/87.
Respondent agreed to purchase the draft and credit petitioner
its value upon the undertaking that he will reimburse the However, the Court of Appeals invalidated the extrajudicial
amount in case the sight draft is dishonored. The bank would foreclosure of the mortgage on the ground that petitioner had
certainly not have agreed to grant petitioner an advance export failed to furnish respondent personal notice of the sale contrary
payment were it not for the letter of undertaking. The to the stipulation in the real estate mortgage.
consideration for the letter of undertaking was petitioner’s
promise to pay respondent the value of the sight draft if it was Petitioner, on the other hand, claims that under paragraph
dishonored for any reason by the Bank of Seoul.33 1239 of the real estate mortgage, personal notice of the
foreclosure sale is not a requirement to the validity of the
Thus, notwithstanding petitioner’s alleged failure to comply foreclosure sale.
with the requirements of notice of dishonor and protest under
Sections 8934 and 152,35 respectively, of the Negotiable A perusal of the records of the case shows that a notice of
Instruments Law, respondent may not escape its liability under sheriff’s sale40 was sent by registered mail to respondent and
the separate undertakings, where respondent promised to pay received in due course.41 Yet, respondent claims that it did not
on demand the full amount of the drafts. receive the notice but only learned about it from petitioner. In
any event, paragraph 12 of the real estate mortgage requires
Next issue: whether the real estate mortgage also served as petitioner merely to furnish respondent with the notice and
security for respondent’s drafts that were not accepted and does not oblige petitioner to ensure that respondent actually
paid by the KwangJu Bank, Ltd. receives the notice. On this score, the Court holds that
petitioner has performed its obligation under paragraph 12 of
Held: Yes. Respondent executed a real estate mortgage the real estate mortgage.
containing a "blanket mortgage clause," also known as a
"dragnet clause." It has been settled in a long line of decisions Last issue: whether respondent may still question the
that mortgages given to secure future advancements are valid foreclosure sale.
and legal contracts, and the amounts named as consideration in
said contracts do not limit the amount for which the mortgage Held: No. Plaintiff is estopped from questioning the foreclosure.
may stand as security if from the four corners of the instrument The plaintiff is guilty of laches and cannot at this point in time
the intent to secure future and other indebtedness can be question the foreclosure of the subject properties. Defendant
gathered. bank made demands against the plaintiff for the payment of
plaintiff’s outstanding loans and advances with the defendant
In Union Bank of the Philippines v. Court of Appeals,37 the as early as July 1997. Plaintiff acknowledged such outstanding
nature of a dragnet clause was explained, thus: loans and advances to the defendant bank and committed to
liquidate the same. For failure of the plaintiff to pay its
Is one which is specifically phrased to subsume all debts of past obligations on maturity, defendant bank foreclosed the
and future origins. Such clauses are "carefully scrutinized and mortgage on subject properties on January 5, 1988 the
strictly construed." Mortgages of this character enable the certificate of sale was annotated on March 24, 1988 and there
parties to provide continuous dealings, the nature or extent of being no redemption made by the plaintiff, title to said
which may not be known or anticipated at the time, and they properties were consolidated in the name of defendant in July
avoid the expense and inconvenience of executing a new 1989. Undeniably, subject foreclosure was done in accordance
security on each new transaction. A "dragnet clause" operates with the prescribed rules as may be borne out by the exhibits
as a convenience and accommodation to the borrowers as it submitted to this Court which are Exhibit "33," a notice of
makes available additional funds without their having to extrajudicial sale executed by the Sheriff of Antipolo, Exhibit
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"34" certificate posting of extrajudicial sale, Exhibit "35" return In a long line of cases, this Court has consistently ruled that the
card evidencing receipt by plaintiff of the notice of extrajudicial one-year redemption period should be counted not from the
sale and Exhibit "21" affidavit of publication. date of foreclosure sale, but from the time the certificate of sale
is registered with the Register of Deeds. Here, it is not disputed
34. G.R. No. 133079. August 9, 2005] that the sheriff’s certificate of sale was registered on 29
EDGALANI, Petitioners,
vs. And under Article 13 of the New Civil Code, a year is understood
THE HONORABLE COURT OF APPEALS; SPS. BENJAMIN SAN to have three hundred sixty-five (365) days each. Thus,
DIEGO and CARMENCITA SAN DIEGO; The EX-OFFICIO SHERIFF excluding the first day and counting from 30 October 1993
and CLERK OF COURT of the Regional Trial Court, Makati City; (under paragraph 3 of Article 13 of the New Civil Code), and
and the REGISTER OF DEEDS, Makati City, Respondent. bearing in mind that 1994 was a leap year, petitioners had only
until 29 October 1994, the 365th day after registration of the
Facts: Petitioners obtained a P350,000 loan from respondent sheriff’s certificate of sale on 29 October 1993, within which to
Carmencita San Diego secured by a real estate mortgage. They redeem the foreclosed property in accordance with law. And
again obtained an additional loan of P1,000,000. Then the since 29 October 1994 fell on a Saturday, petitioners had until
parties executed on September 13, 1991 an "Amendment of the following working day, 31 October 1994, within which to
Real Estate Mortgage". They stipulated that the loan shall be exercise their right of redemption.
paid within six (6) months from 16 September 1991, and if not
paid within said period, the mortgagee shall have the right to From the foregoing, it is clear as day that even the complaint
declare the mortgage due and may immediately foreclose the filed by the petitioners with the trial court on 09 November
same judicially or extrajudicially, in accordance with law. 1994 was instituted beyond the 1-year redemption period. In
fact, petitioners no less acknowledged that their complaint for
Petitioners defaulted in paying their loan in the amount of annulment of extrajudicial foreclosure and auction sale was
1,950,000. A petition for extrajudicial foreclosure of mortgage filed about eleven (11) days after the redemption period had
was filed. The mortgaged property was sold to respondent as already expired on 29 October 1994. They merely harp on the
the highest bidder. The Sheriff’s certificate of sale was alleged increase in the redemption price of the mortgaged
registered with the Office of the Register of Deeds, Makati City. property as the reason for their failure to redeem the same.
The title over the mortgaged property was consolidated to However, and as already pointed out herein, they chose not,
respondent after one year. despite notice, to appear during the foreclosure proceedings.

On November 9, 1994, petitioners filed a complaint for The validity of the extrajudicial foreclosure on 11 August 1993
annulment of the extrajudicial foreclosure and auction sale, was virtually confirmed by the trial court when it dismissed
with damages. petitioners’ complaint, and rightly so, what with the fact that
petitioners failed to exercise their right of redemption within
(1) They alleged that said foreclosure and auction sale were null the 1-year period therefor counted from the registration of the
and void for failure to comply with the requirements of notice sheriff’s certificate of sale.
and publication.
(2) It is petitioners’ main submission, however, that the very
Ruling: The law on redemption of mortgaged property is clear. reason why they did not avail of their redemption right is
Republic Act No. 3135 (An Act to Regulate the Sale of Property because Mrs. San Diego bloated their original loan
Under Special Powers Inserted In Or Annexed to Real Estate of P1,000,000.00 to P1,950,000.00, an issue supposedly not
Mortgages), as amended by Republic Act No. 4118, provides in considered and/or addressed by the appellate court in the
Section 6 thereof, thus: decision under review. In this regard, petitioners argue that the
Court of Appeals, in sustaining the extrajudicial foreclosure
proceedings, thereby go against the established jurisprudence
"Sec. 6. In all cases in which an extrajudicial sale is made under
that an action for foreclosure must be limited to the amount
the special power hereinbefore referred to, the debtor, his
mentioned in the mortgage document, P1,000,000.00 in this
successors in interest or any judicial creditor or judgment
creditor of said debtor, or any person having a lien on the
property subsequent to the mortgage or deed of trust under
which the property is sold, may redeem the same at any time Ruling: We do not take issue with petitioners’ submission that
within the term of one year from and after the date of the a mortgage may be foreclosed only for the amount appearing in
sale; xxx" (Emphasis supplied) the mortgage document, more so where, as here, the mortgage
contract entered into by the parties is evidently silent on the
payment of interest.
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It appears from the evidence on record that despite due notice is considered to have complied with the condition precedent
and publication of the same in a newspaper of general prescribed by law and may thereafter bring an action to enforce
circulation petitioners did not bother to attend the foreclosure redemption. If, on the other hand, the period is allowed to
sale nor raise any question regarding the propriety of the sale. lapse before the right of redemption is exercised, then the
It was only on November 9, 1994, or more than one year from action to enforce redemption will not prosper, even if the
the registration of the Sheriff’s Certificate of Sale, that they filed action is brought within the ordinary prescriptive period.
the instant complaint. Clearly, petitioners had slept on their Moreover, the period within which to redeem the property sold
rights and are therefore guilty of laches, which is defined as the at a sheriff’s sale is not suspended by the institution of an
failure or neglect for an unreasonable or explained length of action to annul the foreclosure sale.9 It is clear, then, that
time to do that which, by exercising due diligence, could or petitioners have lost any right or interest over the subject
should have been done earlier, failure of which gives rise to the property primarily because of their failure to redeem the same
presumption that the person possessed of the right or privilege in the manner and within the period prescribed by law. Their
has abandoned or has declined to assert the same. For sure, in belated attempts to question the legality and validity of the
the very petition they filed in this case, petitioners have not foreclosure proceedings and public auction must accordingly
offered any valid excuse why, despite notice to them of the fail.
petition for extrajudicial foreclosure filed by the respondents,
they failed to attend the proceedings and there voiced out what 35. UNIONBANK OF THE PHILIPPINES vs. THE COURT OF
they are now claiming. Truly, laches has worked against them. APPEALS and FERMINA S. DARIO and REYNALDO S.
DARIO/Jase Tan
(3) Petitioners presently insist that they requested for and were
granted an extension of time within which to redeem their Facts:
property, relying on a handwritten note allegedly written by  A mortgage was executed by spouses Leopoldo and Jessica
Mrs. San Diego’s husband on petitioners’ statement of account, Dario in favor of UnionBank on Dec. 17, 1991 to secure the
indicating therein the date 11 November 1994 as the last day to payment of a P 3 Million loan, including interests and
pay their outstanding account in full. charges. The mortgage covered a property under
Leopoldo’s name.
Ruling: Even assuming, in gratia argumenti, that they were  The principal obligation was not paid so
indeed granted such an extension, the hard reality, however, is UnionBankextrajudicially foreclosed the mortgage with
that at no time at all did petitioners make a valid offer to itself posting as the highest bidder.
redeem coupled with a tender of the redemption price.  One week before the expiration of the redemption period
expired, respondents filed a complaint for annulment of
For, in Lazo v. Republic Surety & Insurance Co., Inc, this Court sale and real estate mortgage reconveyance.
has made it clear that it is only where, by voluntary agreement  Title to the property was consolidated to UnionBank.
of the parties, consisting of extensions of the redemption  The respondents (Fermina and Reynaldo) allege that they
period, followed by commitment by the debtor to pay the are the true owners of the subject mortgaged property and
redemption price at a fixed date, will the concept of legal not spouses Leopoldo and Jessica Dario.
redemption be converted into one of conventional redemption.  They claimed that the original title, TCT No. 61571, was
entrusted to a certain Atty. Reynaldo Singson preparatory
Here, there is no showing whatsoever that petitioners agreed to to its administrative reconstitution after a fire gutted the
pay the redemption price on or before 11 November 1994, as Quezon City Hall building. Mortgagor Leopoldo, private
allegedly set by Mrs. San Diego’s husband. On the contrary, respondent Fermina's son, obtained the property from
their act of filing their complaint on 09 November 1994 to Atty. Singson, had the title reconstituted under his name
declare the nullity of the foreclosure sale is indicative of their without private respondents' knowledge, executed an
refusal to pay the redemption price on the alleged deadline set ante-dated deed of sale in his favor and mortgaged the
by the husband. At the very least, if they so believed that their property to UnionBank.
loan obligation was only for P1,000,000.00, petitioners should  UnionBank filed its answer ad cautelamasserting its status
have made an offer to redeem within one (1) year from the as an innocent mortgagee for value whose right or lien
registration of the sheriff’s certificate of sale, together with a upon the property mortgaged must be respected even if,
tender of the same amount. This, they never did. the mortgagor obtained his title through fraud.
 CA ruled that UnionBank acted in bad faith since it had
It must be remembered that the period of redemption is not a knowledge of the true ownership of the subject property.
prescriptive period but a condition precedent provided by law The foreclosure sale was annulled and cancel the title in
to restrict the right of the person exercising redemption. favor of UnionBank.
Correspondingly, if a person exercising the right of redemption
has offered to redeem the property within the period fixed, he
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Ø UnionBank claims to be a mortgagee in good faith and for are not even parties to the mortgage contract nor to the extra
value with a right to consolidate ownership over the foreclosed judicial sale is not necessary.
property with the redemption period having expired and there
having been no redemptioners. In real estate mortgage, when the principal obligation is not
Ø The alleged fraudulent mortgage was facilitated through paid when due, the mortgage has the right to foreclose the
private respondents' negligence so they must bear the loss. It mortgage and to have the property seized and sold with a view
also contends that since private respondents had filed several to applying the proceeds to the payment of the principal
pleadings, due process, being an opportunity to be heard either obligation.14 Foreclosure may be effected either judicially or
through pleadings or oral arguments, was observed. extrajudicially.
Ø Private respondents maintain that UNIONBANK's
consolidation of the title in its name was in bad faith, vitiated a In a public bidding during extra-judicial foreclosure, the creditor
standing court order, is against the law, thus void ab initio. The —mortgagee, trustee, or other person authorized to act for the
application for preliminary injunction was not rendered moot creditor may participate and purchase the mortgaged property
and academic by consolidation, which took place during the as any other bidder. Thereafter the mortgagor has one year
lifetime of the TRO, and did not follow the proper legal within which to redeem the property from and after
procedure due to the surreptitious manner it was registration of sale with the Register of Deeds. In case of non-
accomplished. By treating the application for preliminary redemption, the purchaser at foreclosure sale shall file with the
injunction as moot and academic and denying the motion for Register of Deeds, either a final deed of sale executed by the
indirect contempt without hearing, the RTC order ran afoul with person authorized by virtue of the power of attorney embodied
the requirements of due process. in the deed or mortgage, or his sworn statement attesting to
the fact of non-redemption; whereupon, the Register of Deeds
Issues: Shall issue a new certificate of title in favor of the purchaser
Was the consolidation of title in UNIONBANK's name proper? after the owner's duplicate of the certificate has been
And was the dismissal of the application for preliminary previously delivered and canceled.Thus, upon failure to redeem
prohibitory injunction valid? foreclosed realty, consolidation of title becomes a matter of
right on the part of the auction buyer,and the issuance of a
Ruling: certificate of title in favor of the purchaser becomes ministerial
Yes to both questions. upon the Register of Deeds.
UNIONBANK's consolidation of title over the property on 24
October 1994 was proper, though precipitate. Contrary to There is, moreover, nothing erroneous with the denial of
private respondents' allegation UNIONBANK violated no private respondents' application for preliminary prohibitory
standing court order. The only bar to consolidation was the injunction. The acts complained of have already been
temporary restraining order issued by Justice Lipana-Reyes on consummated. It is impossible to restrain the performance of
10 October 1994 which effectively halted the tolling of the consummated acts through the issuance of prohibitory
redemption period 7 days short of its expiration. When private injunction. When the act sought to be prevented had long been
respondents' original complaint was dismissed on 17 October consummated, the remedy of injunction could no longer be
1994 for failure to append a certification of non-forum entertained, hearing the application for preliminary injunction
shopping, the TRO, as an ancillary order that cannot stand would just be an exercise in futility.
independent of the main proceeding, becamefunctus officio.
Thus the tolling of the 12-month redemption period, In addition, to be entitled to the injunctive writ, movant must
interrupted by the filing of the complaint and the TRO, show that there exists a right to be protected which is directly
recommenced and eventually expired 7 days thereafter or on threatened by an act sought to be enjoined. Furthermore, there
24 October 1994, the date of the disputed consolidation. must be a showing that the invasion of the right is material and
substantial and that there is an urgent and paramount necessity
It is settled that the buyer in a foreclosure sale becomes the for the writ to prevent a serious damage.The injunctive remedy
absolute owner of the property purchased if it is not redeemed prevents a threatened or continuous irremediable injury to
during the period of one year after the registration of the sale. 12 some of the parties before their claim can be thoroughly
Consolidation took place as a matter of right since there was no investigated and advisedly adjudicated; it is resorted to only
redemption of the foreclosed property and the TRO expired when there is a pressing necessity to avoid injurious
upon dismissal of the complaint. UNIONBANK need not have consequences which cannot be remedied under any standard
informed private respondent that it was consolidaint its title compensation.
over the property, upon the expiration of the redemption
period, without the judgment debtor having made use of his In the case at bar, the consolidation of ownership over the
right of redemption, the ownership of the property sold mortgaged property in favor of UNIONBANK and the issuance of
becomes consolidated in the purchaser. Notice to the a new title in its name during the pendency of an action for
mortgagors and with more reason, to private respondents who annulment and reconveyance will not cause irreparable injury
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to private respondents who are plaintiffs in the said preliminary

injunction. This is because .as purchaser at a public auction,
UNIONBANK is only substituted to and acquires the right, title,
interest and claim of the judgment debtors or mortgagors to
the property at the time of levy.Perforce, the judgment in the
main action for reconveyance will not be rendered ineffectual
by the consolidation of ownership and the issuance of title in
the name of UNIONBANK.

More importantly, with the main action for reconveyance

pending before the RTC, the notice of lispendens, which despite
consolidation remains annotated on UNIONBANK's transfer
certificate of title subject to the outcome of the litigation,
sufficiently protects private respondents interest over the
property. A transfereependentelitestands exactly in the shoes of
the transferor and is bound by any judgment or decree which
may be rendered for or against the transferor. Once a notice of
lispendenshas been duly registered, any cancellation or issuance
of the title of the land involved as well as any subsequent
transaction affecting the same, would have to be subject to the
outcome of the litigation. In other words, upon the termination
of the litigation there can be no risk of losing the property or
any part thereof as a result of any conveyance of the land or
any encumbrance that may be made thereon posterior to the
filing of the notice of lispendens.

Finally, as to the issue of who between private respondents and

UNIONBANK is negligent and hence must bear the loss, the
same is not the proper subject of the present petition and can
only be resolved by the trial court after the trial on the merit of
the main case.

WHEREFORE, the assailed Decision of the Court of Appeals of 26

June 1997 nullifying the consolidation of ownership and
ordering the Register of Deeds of Quezon City to cancel TCT No.
120929 and reinstate TCT No. 41828 is hereby REVERSED and
SET ASIDE. The order of the trial court dated 7 August 1999,
declaring UNIONBANK's prayer for writ of preliminary
injunction moot and academic, is hereby REINSTATED. Let this
case be remanded to the Regional Trial Court for trial on the

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