FACTS:

Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles
Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his business, the
Sterela Marketing and Services (“Sterela” for brevity). Specifically, Sanchez asked private respondent
to deposit in a bank a certain amount of money in the bank account of Sterela for purposes of its
incorporation. She assured private respondent that he could withdraw his money from said account
within a month’s time. With this, Mrs. Vivies, Sanchez and a certain Estrella Dumagpi, secretary of
Doronilla, went to the bank to open an account with Mrs. Vives and Sanchez as signatories. A
passbook was then issued to Mrs. Vives. Subsequently, private respondent learned that part of the
money was withdrawn without presentment of the passbook as it was his wife got hold of such. Mrs.
Vives could not also withdraw said remaining amount because it had to answer for some postdated
checks issued by Doronilla who opened a current account for Sterela and authorized the bank to debit
savings.

Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for the
return of his client’s money. Doronilla issued another check for P212,000.00 in private respondent’s
favor but the check was again dishonored for insufficiency of funds.

Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC)
in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The RTC ruled in favor of
the private respondent which was also affirmed in toto by the CA. Hence this petition.

ISSUE: WON THE TRANSACTION BETWEEN THE DORONILLA AND RESPONDENT VIVES WAS
ONE OF SIMPLE LOAN.

HELD: NO.

A circumspect examination of the records reveals that the transaction between them was a
commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of loans in this
wise:

By the contract of loan, one of the parties delivers to another, either something not consumable so
that the latter may use the same for a certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition that the same amount of the
same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership
passes to the borrower.

The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such
as money, the contract would be a mutuum. However, there are some instances where a
commodatum may have for its object a consumable thing. Article 1936 of the Civil Code provides:

Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.

Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the
parties is to lend consumable goods and to have the very same goods returned at the end of the
period agreed upon, the loan is a commodatum and not a mutuum.

The rule is that the intention of the parties thereto shall be accorded primordial consideration in
determining the actual character of a contract. In case of doubt, the contemporaneous and
subsequent acts of the parties shall be considered in such determination.
Lourdes V. Galas (Galas) was the original owner of a piece of property (subject property) located at
Malindang St., Quezon City, covered by Transfer Certificate of Title (TCT) No. RT-67970(253279).[5]

On July 6, 1993, Galas, with her daughter, Ophelia G. Pingol (Pingol), as co-maker, mortgaged the
subject property to Yolanda Valdez Villar (Villar) as security for a loan in the amount of Two Million
Two Hundred Thousand Pesos (P2,200,000.00).[6]

On October 10, 1994, Galas, again with Pingol as her co-maker, mortgaged the same subject
property to Pablo P. Garcia (Garcia) to secure her loan of One Million Eight Hundred Thousand Pesos
(P1,800,000.00).[7]

On November 21, 1996, Galas sold the subject property to Villar for One Million Five Hundred
Thousand Pesos (P1,500,000.00), and declared in the Deed of Sale[9] that such property was free
and clear of all liens and encumbrances of any kind whatsoever.[10]

On December 3, 1996, the Deed of Sale was registered and, consequently, TCT No.
RT-67970(253279) was cancelled and TCT No. N-168361[11] was issued in the name of Villar. Both
Villars and Garcias mortgages were carried over and annotated at the back of Villars new TCT.[12]

On October 27, 1999, Garcia filed a Petition for Mandamus with Damages[13] against Villar before the
RTC, Branch 92 of Quezon City. Garcia subsequently amended his petition to a Complaint for
Foreclosure of Real Estate Mortgage with Damages.[14] Garcia alleged that when Villar purchased
the subject property, she acted in bad faith and with malice as she knowingly and willfully disregarded
the provisions on laws on judicial and extrajudicial foreclosure of mortgaged property. Garcia further
claimed that when Villar purchased the subject property, Galas was relieved of her contractual
obligation and the characters of creditor and debtor were merged in the person of Villar. Therefore,
Garcia argued, he, as the second mortgagee, was subrogated to Villars original status as first
mortgagee, which is the creditor with the right to foreclose. Garcia further asserted that he had
demanded payment from Villar,[15] whose refusal compelled him to incur expenses in filing an action
in court.[16]

Villar, in her Answer,[17] claimed that the complaint stated no cause of action and that the second
mortgage was done in bad faith as it was without her consent and knowledge. Villar alleged that she
only discovered the second mortgage when she had the Deed of Sale registered. Villar blamed Garcia
for the controversy as he accepted the second mortgage without prior consent from her. She averred
that there could be no subrogation as the assignment of credit was done with neither her knowledge
nor prior consent. Villar added that Garcia should seek recourse against Galas and Pingol, with whom
he had privity insofar as the second mortgage of property is concerned.

The RTC held that the second mortgage constituted in Garcias favor had not been discharged, and
that Villar, as the new registered owner of the subject property with a subsisting mortgage, was liable
for it.[28]

The Court of Appeals reversed the RTC in a Decision dated February 27, 2003,
Garcia is now before this Court, with the same arguments he posited before the lower courts. In his
Memorandum,[37] he added that the Deed of Real Estate Mortgage contained a stipulation, which is
violative of the prohibition on pactum commissorium.

Whether or not the sale of the subject property to Villar was in violation of the prohibition on pactum
commissorium;

Prohibition on pactum commissorium

Garcia claims that the stipulation appointing Villar, the mortgagee, as the mortgagors attorney-in-fact,
to sell the property in case of default in the payment of the loan, is in violation of the prohibition on
pactum commissorium, as stated under Article 2088 of the Civil Code, viz:

Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose
of them. Any stipulation to the contrary is null and void.

Villars purchase of the subject property did not violate the prohibition on pactum commissorium. The
power of attorney provision above did not provide that the ownership over the subject property would
automatically pass to Villar upon Galass failure to pay the loan on time. What it granted was the mere
appointment of Villar as attorney-in-fact, with authority to sell or otherwise dispose of the subject
property, and to apply the proceeds to the payment of the loan.[40] This provision is customary in
mortgage contracts, and is in conformity with Article 2087 of the Civil Code, which reads:

Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due,
the things in which the pledge or mortgage consists may be alienated for the payment to the creditor.

Galass decision to eventually sell the subject property to Villar for an additional P1,500,000.00 was
well within the scope of her rights as the owner of the subject property. The subject property was
transferred to Villar by virtue of another and separate contract, which is the Deed of Sale. Garcia
never alleged that the transfer of the subject property to Villar was automatic upon Galass failure to
discharge her debt, or that the sale was simulated to cover up such automatic transfer.
FACTS: Philippine Ports Authority awarded a project to F.F. Cruz & Genaro Reyes Construction, Inc.
executed a Sub-Contract Agreement with a condition that the sub-contractor shall file immediately
upon its receipt of Notice to Proceed, a performance bond from a duly accredited surety company
equivalent to 10% of the subcontractor's total cost. F.F. Cruz gave G. Reyes an advance payment of
Php 2.2 million guaranteed by a surety bond for the same amount issued by American Home
Insurance of New York. G. Reyes finally admitted that continuing the project was no longer a wise
investment and called on F.F. Cruz to take over the project. F.F. Cruz, thus took over the unfinished
project. F.F. Cruz demanded from American Home the payment of Php 2.2 million representing the
amount of the bond. American Home, in turn, informed G.Reyes of F.F. Cruz's demand. As the claim
left unheeded, F.F. Cruz made a final demand on American Home on 10 July 1993. G. Reyes likewise
ignored American Home's demand to fulfill its obligation set forth in the Indemnity Agreement it
executed in favor of the latter.

ISSUE: Whether or not American Home Insurance of New York shall be liable as surety

RULING: Yes. The payment of the Php2.2 million advanced by F.F. Cruz is the principal liability of G.
Reyes. However, with the issuance of the surety bond, a contract of suretyship was entered into
making American Home Insurance of New York equally liable.

A contract of suretyship is an agreement whereby a party called the surety, guarantees the
performance by another party, called the principal or obligor, of an obligation or undertaking in favor of
another party called the obligee. By its very nature, under the laws regulating suretyship, the liability of
the surety is joint and several but is limited to the amount of the bond, and its terms are determined
strictly by the terms of the contract of suretyship in relation to the principal contract between the
obligor and the obligee.
The surety is considered in law as possessed of the identity of the debtor in relation to whatever is
adjudged touching upon the obligation of the latter. Their liabilities are so interwoven as to be
inseparable. Although the contract of suretyship is, in essence, secondary only to a valid principal
obligation, the surety's liability to the creditor is direct, primary and absolute; he becomes liable for the
debt and duty of another although he possesses no direct or personal interest over the obligations nor
does he receive any benefit therefrom.

On January 27, 1999, respondent Petroleum Distributors and Services Corporation (PDSC), through
its president, Conrado P. Limcaco, entered into a building contract[3] with N.C. Francia Construction
Corporation (FCC), represented by its president and chief executive officer, Emmanuel T. Francia, for
the construction of a four-story commercial and parking complex located at MIA Road corner
Domestic Road, Pasay City, known as Park N Fly Building (Park N Fly). Under the contract, FCC
agreed to undertake the construction of Park N Fly for the price of ₱45,522,197.72.

The parties agreed that the construction work would begin on February 1, 1999. Under the Project
Evaluation and Review Technique Critical Path Method (PERT-CPM), the project was divided into two
stages: Phase 1[4] of the construction work would be finished on May 17, 1999 and Phase 2[5] would
begin on May 18, 1999 and finish on October 20, 1999. The project should be turned over by October
21, 1999.[6] It was further stipulated that in the event FCC failed to finish the project within the period
specified, liquidated damages equivalent to 1/10 of 1% of the contract price for every day of delay
shall accrue in favor of PDSC.[7]

To ensure compliance with its obligation, FCCs individual officers, namely, Natividad Francia,
Emmanuel C. Francia, Jr., Anna Sheila C. Francia, San Diego Felipe G. Bermudez, Emmanuel T.
Francia, Charlemagne C. Francia, and Ruben G. Caperia, signed the Undertaking of Surety[8] holding
themselves personally liable for the accountabilities of FCC.
Also, FCC procured Performance Bond No. 31915 amounting to ₱6,828,329.00 from petitioner
Philippine Charter Insurance Corporation (PCIC) to secure full and faithful performance of its
obligation under the Building Contract.[9]

The construction of the Park N Fly started on February 1, 1999.

Pursuant to the Building Contract, PDSC sourced out construction materials and subcontracted
various phases of the work to help obtain the lowest cost of the construction and speed up the work of
the project. These resulted in the reduction of the contract price.[10]

During the Phase 1 of the project, PDSC noticed that FCC was sixteen (16) days behind schedule. In
a Letter[11] dated March 25, 1999, it reminded FCC to catch up with the schedule of the projected
work path, or it would impose the penalty of 1/10 of the 1% of the contract price. The problem,
however, was not addressed, as the delay increased to 30 days[12] and ballooned to 60 days.[13]

Consequently, on September 10, 1999, FCC executed a deed of assignment,[14] assigning a portion
of its receivables from Caltex Philippines, Inc. (Caltex), and a chattel mortgage,[15] conveying some
of its construction equipment to PDSC as additional security for the faithful compliance with its
obligation.

On even date, PDSC and FCC likewise executed a memorandum of agreement (MOA),[16] wherein
the parties agreed to revise the work schedule of the project. As a consequence, Performance Bond
No. 31915 was extended up to March 2, 2000.[17]

For failure of FCC to accomplish the project within the agreed completion period, PDSC, in a letter[18]
dated December 3, 1999, informed FCC that it was terminating their contract based on Article 12,
Paragraph 12.1 of the Building Contract. Subsequently, PDSC sent demand letters[19] to FCC and its
officers for the payment of liquidated damages amounting to ₱9,149,962.02 for the delay. In the same
manner, PDSC wrote PCIC asking for remuneration pursuant to Performance Bond No. 31915.[20]

Despite notice, PDSC did not receive any reply from either FCC or PCIC, constraining it to file a
complaint[21] for damages, recovery of possession of personal property and/or foreclosure of
mortgage with prayer for the issuance of a writ of replevin and writ of attachment, against FCC and its
officers before the RTC. PDSC later filed a supplemental complaint[22] impleading PCIC, claiming
coverage under Performance Bond No. 31915 in the amount of ₱6,828,329.66.

whether or not PCIC as a surety,was not liable as a principal obligor

The suretys obligation is not an original and direct one for the performance of his own act, but merely
accessory or collateral to the obligation contracted by the principal. Nevertheless, although the
contract of a surety is in essence secondary only to a valid principal obligation, his liability to the
creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is
directly and equally bound with the principal.

Corollary, when PDSC communicated to FCC that it was terminating the contract, PCICs liability, as
surety, arose. The claim of PDSC against PCIC occurred from the failure of FCC to perform its
obligation under the building contract. As mandated by Article 2047 of the Civil Code, to wit:

Article 2047. By guaranty, a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3,
Title I of this Book shall be observed. In such case, the contract is called a suretyship.

Thus, suretyship arises upon the solidary binding of a person deemed the surety with the principal
debtor for the purpose of fulfilling an obligation.[43] A surety is considered in law as being the same
party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their
liabilities are interwoven as to be inseparable.[44] Therefore, as surety, PCIC becomes liable for the
debt or duty of FCC although it possesses no direct or personal interest over the obligations of the
latter, nor does it receive any benefit therefrom.[45]

ASIA TRUST DEVELOPMENT BANK, Petitioner, v. CARMELO H. TUBLE, Respondent.

SERENO, J.:

FACTS:

Carmelo Tuble (Tuble), who served as the vice-president of petitioner Asiatrust Development Bank
(Asiatrust), availed of himself of the loan privileges offered by the bank. The first loan was secured by
a real estate mortgage. The Real Estate Mortgage Contract contained a dragnet clause. The second
loan was a consumption loan with an interest at 18% per annum as evidenced by Promissory Note
No. 0143.

After his retirement from Asiatrust, Tuble had outstanding obligations of ₱421,800 representing the
real estate loan and ₱100,000 as consumption loan. When Tuble refused to settle his loans, Asiatrust
filed a Petition for Extra-judicial Foreclosure of real estate mortgage over his property. The Petition
was based only on his real estate loan, which at that time amounted to ₱421,800. Asiatrust emerged
as the highest bidder. Subsequently, Tuble timely redeemed the property for ₱1,318,401.91.

Despite his payment of the redemption price, Tuble questioned how the foreclosure basis of ₱421,800
ballooned to ₱1,318,401.91 in a matter of one year. Thus, Tuble filed a Complaint for recovery of sum
of money against Asiatrust seeking to recover the excess charges on the redemption price. He
averred that Asiatrust erroneously imposed an 18% annual interest rate to the real estate loan.
Asiatrust countered that the 18% annual interest was supported by Promissory Note No. 0143. Both
the RTC and the CA ruled in favor of Tuble.

ISSUE: Whether or not Asiatrust erred in applying the 18% annual interest rate to the redemption
price?

HELD: The Court of Appeals is affirmed.

MERCANTILE LAW: foreclosure of mortgage; right of redemption

In foreclosures, the mortgaged property is subjected to the proceedings for the satisfaction of the
obligation. As a result, payment is effected by abnormal means whereby the debtor is forced by a
judicial proceeding to comply with the presentation or to pay indemnity.

Once the proceeds from the sale of the property are applied to the payment of the obligation, the
obligation is already extinguished. Thus, in Spouses Romero v. Court of Appeals, we held that the
mortgage indebtedness was extinguished with the foreclosure and sale of the mortgaged property,
and that what remained was the right of redemption granted by law.

Consequently, since the Real Estate Mortgage Contract is already extinguished, petitioner can no
longer rely on it or invoke its provisions, including the dragnet clause stipulated therein. It follows that
the bank cannot refer to the 18% annual interest charged in Promissory Note No. 0143, an obligation
allegedly covered by the terms of the Contract.

Neither can the bank use the consummated contract to collect on the rest of the obligations, which
were not included when it earlier instituted the foreclosure proceedings. It cannot be allowed to use
the same security to collect on the other loans. To do so would be akin to foreclosing an already
foreclosed property.
Despite the extinguishment of the Real Estate Mortgage Contract, Tuble had the right to redeem the
security by paying the redemption price. The right of redemption of foreclosed properties was a
statutory privilege he enjoyed. Redemption is by force of law, and the purchaser at public auction is
bound to accept it. Thus, it is the law that provides the terms of the right; the mortgagee cannot dictate
them.

Thus, we held in Rural Bank of San Mateo, Inc. v. Intermediate Appellate Court that the power to
decide whether or not to foreclose is the prerogative of the mortgagee; however, once it has made the
decision by filing a petition with the sheriff, the acts of the latter shall thereafter be governed by the
provisions of the mortgage laws, and not by the instructions of the mortgagee. In direct contravention
of this ruling, though, the bank included numerous charges and loans in the redemption price, which
inexplicably ballooned to ₱1,318,401.91. On this error alone, the claims of petitioner covering all the
additional charges should be denied.

The decision and resolution of the Court of Appeals are AFFIRMED.

On June 13, 1995, petitioner-spouses Manolito and Lourdes de Leon executed a Promissory Note5
binding themselves to pay Nissan Gallery Ortigas the amount of P458,784.00 in 36 monthly
installments of P12,744.00, with a late payment charge of five percent (5%) per month.6 To secure
the obligation under the Promissory Note, petitioner-spouses constituted a Chattel Mortgage7 over a
1995 Nissan Sentra 1300 4-Door LEC with Motor No. GA-13-549457B and Serial No.
BBAB-13B69336.8

On the same day, Nissan Gallery Ortigas, with notice to petitioner-spouses, executed a Deed of
Assignment9 of its rights and interests under the Promissory Note with Chattel Mortgage in favor of
Citytrust Banking Corporation (Citytrust).10

On October 4, 1996, Citytrust was merged with and absorbed by respondent Bank of the Philippine
Islands (BPI).11

Petitioner-spouses, however, failed to pay their monthly amortizations from August 10, 1997 to June
10, 1998.12 Thus, respondent BPI, thru counsel, sent them a demand letter13 dated October 16,
1998.

On November 19, 1998, respondent BPI filed before the Metropolitan Trial Court (MeTC) of Manila a
Complaint14 for Replevin and Damages, docketed as Civil Case No. 161617 and raffled to Branch 6,
against petitioner-spouses.15 The summons, however, remained unserved, prompting the MeTC to
dismiss the case without prejudice.16 Respondent BPI moved for reconsideration on the ground that it
was still verifying the exact address of petitioner-spouses.17 On March 21, 2002, the MeTC set aside
the dismissal of the case.18 On April 24, 2002, summons was served on petitioner-spouses.19

Petitioner-spouses, in their Answer,20 averred that the case should be dismissed for failure of
respondent BPI to prosecute the case pursuant to Section 321 of Rule 17 of the Rules of Court;22
that their obligation was extinguished because the mortgaged vehicle was stolen while the insurance
policy was still in force;23 that they informed Citytrust of the theft of the mortgaged vehicle through its
employee, Meldy Endaya (Endaya);24 and that respondent BPI should have collected the insurance
proceeds and applied the same to the remaining obligation.25

On November 11, 2003, respondent BPI presented its evidence ex parte.26 It offered as evidence the
testimony of its Account Consultant, Lilie Coria Ultu (Ultu), who testified on the veracity of the
Promissory Note with Chattel Mortgage, the Deed of Assignment, the demand letter dated October
16, 1998, and the Statement of Account27 of petitioner-spouses.28

For their part, petitioner-spouses offered as evidence the Alarm Sheet issued by the Philippine
National Police on December 3, 1997, the Sinumpaang Salaysay executed by Reynaldo Llanos
(Llanos), the Subpoena for Llanos, the letter of Citytrust dated July 30, 1996, the letters of respondent
BPI dated January 6, 1998 and June 25, 1998, and the testimonies of Ultu and petitioner Manolito.29

The party who alleges a fact has the burden of proving it.

Section 1, Rule 131 of the Rules of Court defines "burden of proof" as "the duty of a party to present
evidence on the facts in issue necessary to establish his claim or defense by the amount of evidence
required by law." In civil cases, the burden of proof rests upon the plaintiff, who is required to establish
his case by a preponderance of evidence.55 Once the plaintiff has established his case, the burden of
evidence shifts to the defendant, who, in turn, has the burden to establish his defense.56

In this case, respondent BPI, as plaintiff, had to prove that petitioner-spouses failed to pay their
obligations under the Promissory Note. Petitioner-spouses, on the other hand, had to prove their
defense that the obligation was extinguished by the loss of the mortgaged vehicle, which was insured.

However, as aptly pointed out by the MeTC, the mere loss of the mortgaged vehicle does not
automatically relieve petitioner-spouses of their obligation57 as paragraph 7 of the Promissory Note
with Chattel Mortgage provides that:

7. The said MORTGAGOR covenants and agrees to procure and maintain through the
MORTGAGEE, a comprehensive insurance from a duly accredited and responsible insurance
company approved by the MORTGAGEE, over the personalty hereinabove mortgaged to be insured
against loss or damage by accident, theft, and fire for a period of one (1) year from date hereof and
every year thereafter until the mortgage DEBTS are fully paid with an insurance company or
companies acceptable to the MORTGAGEE in an amount not less than the outstanding balance of
the mortgage DEBTS; that he/it will make all loss, if any, under such policy or policies payable to the
MORTGAGEE forthwith. x x x

xxxx

MORTGAGOR shall immediately notify MORTGAGEE in case of loss, damage or accident suffered
by herein personalty mortgaged and submit proof of such loss, damages or accident. Said loss
damage or accident for any reason including fortuitous event shall not suspend, abate, or extinguish
[petitioner spouses’] obligation under the promissory note or sums due under this contract x x x

In case of loss or damage, the MORTGAGOR hereby irrevocably appoints the MORTGAGEE as
his/its attorney-in-fact with full power and authority to file, follow-up, prosecute, compromise or settle
insurance claims; to sign, execute and deliver the corresponding papers, receipts and documents to
the insurance company as may be necessary to prove the claim and to collect from the latter the
insurance proceeds to the extent of its interest. Said proceeds shall be applied by the MORTGAGEE
as payment of MORTGAGOR’s outstanding obligation under the Promissory Note and such other
sums and charges as may be due hereunder or in other instruments of indebtedness due and owing
by the MORTGAGOR to the MORTGAGEE and the excess, if any, shall thereafter be remitted to the
MORTGAGOR. MORTGAGEE however shall be liable in the event there is a deficiency.

x x x x58

Based on the foregoing, the mortgagor must notify and submit proof of loss to the mortgagee.1âwphi1
Otherwise, the mortgagee would not be able to claim the proceeds of the insurance and apply the
same to the remaining obligation.
On January 28, 1992, respondents, spouses Alejandro and Myrna

Reblando (collectively, the Reblandos), obtained a one hundred and fifty

thousand-peso (PhP 150,000) loan from PNB. To secure the payment of the

loan, the Reblandos executed a real estate mortgage1

(REM) over two (2)

parcels of land located in General Santos City, the first covered by Transfer

Certificate of Title (TCT) No. T-40839 and the second by Tax Declaration

(TD) No. 59006 and designated as Cadastral Lot No. 10 (Lot No. 10). The pro forma REM contract
consisted of two (2) pages plus a duly-signed

supplemental page,2

providing a description of Lot No. 10

TD No. 38950, formerly in the name of the Ministry of Human

Settlements, was cancelled and replaced with TD No. 590064

in Alejandro

Reblando’s (Alejandro’s) name on September 12, 1990. Improvements on

the lot consisted of a residential house and a store shed.5

TCT No. T-40839 was then registered in the name of Letecia

Reblando-Bartolome, who earlier executed a Special Power of Attorney,6

authorizing Alejandro, her brother, to utilize the lot covered by the title as

collateral to secure a loan not execeeding PhP 150,000.

A few years later, the parties agreed to up the loan value from PhP

150,000 to PhP 260,000. They then executed an “Amendment to Real Estate

Mortgage” on January 4, 1995,7

reflecting the increase in the loan

accommodationBarely two weeks after, or on January 26, 1995, the parties again

agreed to another increase, this time to PhP 312,000 and executed for the

purpose a second “Amendment to Real Estate Mortgage.”8

Meanwhile, on July 24, 1995, Alejandro and the Bliss Development

Corporation (BDC), a subsidiary of the Home Insurance and Guaranty

Corporation, which in turn was under the then Ministry of Human

Settlements, entered into a Contract to Sell over a dwelling unit (Unit No.

10) in the Rural Bliss 1 Project located at Calumpang, Gen. Santos City with

an area of 36 square meters.

Later developments saw the Reblandos defaulting in the payment of

their loan obligation, prompting the PNB to commence extra-judicial

foreclosure of the mortgage. On May 12, 1997, the Reblandos received a

Notice of Extra-Judicial Foreclosure of Lot No. 10 and the lot covered byTCT No. T-40839.9

At the foreclosure sale, the PNB, as lone bidder, was

awarded the lots for its bid of PhP 439,990.62 and was issued on July 11,

1997 a Certificate of Extra-Judicial Sale covering both collaterals.10 This

certificate was duly registered with the Registry of Deeds of General Santos

City on September 2, 1997.

Following the lapse of the redemption period without the Reblandos

redeeming the properties, PNB consolidated its ownership over the subject

parcels of land.11 Thereafter, PNB secured a new title over the property

covered by TCT No. T-40839. A new tax declaration12 under its name was

issued also for Lot No. 10 and the improvements.

Subsequently, the RTC, acting on PNB’s ex parte petition, issued an

Order13 granting a writ of possession.

On May 10, 2000, the Reblandos filed a complaint before the RTC,

seeking, as their main prayer, the declaration of nullity of the mortgage over

Lot No. 10 allegedly constituted on January 13, 1995 when PNB and the

Reblandos executed the “Amendment to Real Estate Mortgage.” According

to them, they could not have validly created a mortgage over Lot No. 10, not

being the owner when the mortgage was constituted, citing in this regard

Development Bank of the Philippines (DBP) v. Court of Appeals.

14 What,

they added, impelled them to include Lot No. 10 in the mortgage package,

albeit it did not belong to them, was the PNB’s “require[ment] [for them] to
post [Lot No. 10] as additional collateral.”15

Whether or not mortgage is valid

Article 2085 of the Civil Code provides that a mortgage contract, to

be valid, must have the following requisites: (a) that it be constituted to

secure the fulfilment of a principal obligation; (b) that the mortgagor be the

absolute owner of the thing mortgaged; and (c) that the persons constituting

the mortgage have free disposal of their property, and in the absence of free

disposal, that they be legally authorized for the purpose. The presence of the

second requisite––absolute ownership––is the contentious determinative

issue.In this case, not only was the tax declaration in Alejandro’s name, but

also, respondents admittedly possessed the property mortgaged, their

residence being constructed on it.43 It is for this very reason that they prayed

for injunction before the RTC when the writ of possession was issued

against them.44 There is, therefore, a prima facie proof of ownership in this

case which respondents failed to rebut. Consequently, the power of

Alejandro to subject Lot No. 10 as collateral to the loan stands.

In sum, respondents failed to prove and the trial and appellate courts

erred in ruling that the Contract to Sell, supposedly the proof that Lot No. 10

was owned by the government at the time of the mortgage, covers Lot No.

10, a parcel of land, when in fact it covers Unit No. 10, a dwelling unit under

the BLISS Development Project. The pieces of evidence, consisting of the

tax declarations and the annotations, as well as the amendments to the REM

executed and signed by respondents, show that Lot No. 10 was alreadyowned by Alejandro at the
time of the mortgage. The latter being the owner

of the lot, he then could validly encumber said property by way of mortgage.

Therefore, the REM constituted is valid, contrary to respondents’ insistence

that the contract is void for lack of authority on the part of the mortgagor to

encumber the property used as collateral for the loan.

It is unfortunate that both the RTC and the CA heavily relied on the

Contract to Sell of Unit No. 10 when it is readily apparent that the Contract

to Sell, on which their decisions in favor of the nullity of the mortgage were

anchored, covers a different subject matter. Also, it is but proper for Us to

warn parties against this practice of attempting to mislead courts into

believing their cause and, worse, subsequently ruling in their favor, by

making it appear that their evidence supports their position when, in fact, it

is not in any way related to the case or by omitting to attach a material part

of their evidence to support their false theory on the case.

On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a Complaint5 for sum of money
and damages with prayer for preliminary attachment against respondents Spouses Romeo and Annie
Abella before the Regional Trial Court, Branch 8, Kalibo, Aklan. The case was docketed as Civil Case
No. 6627.6redarclaw

In their Complaint, petitioners alleged that respondents obtained a loan from them in the amount of
P500,000.00. The loan was evidenced by an acknowledgment receipt dated March 22, 1999 and was
payable within one (1) year. Petitioners added that respondents were able to pay a total of
P200,000.00—P100,000.00 paid on two separate occasions—leaving an unpaid balance of
P300,000.00.7redarclaw

In their Answer8 (with counterclaim and motion to dismiss), respondents alleged that the amount
involved did not pertain to a loan they obtained from petitioners but was part of the capital for a joint
venture involving the lending of money.9redarclaw

Specifically, respondents claimed that they were approached by petitioners, who proposed that if
respondents were to "undertake the management of whatever money [petitioners] would give them,
[petitioners] would get 2.5% a month with a 2.5% service fee to [respondents]."10 The 2.5% that each
party would be receiving represented their sharing of the 5% interest that the joint venture was
supposedly going to charge against its debtors. Respondents further alleged that the one year
averred by petitioners was not a deadline for payment but the term within which they were to return
the money placed by petitioners should the joint venture prove to be not lucrative. Moreover, they
claimed that the entire amount of P500,000.00 was disposed of in accordance with their agreed terms
and conditions and that petitioners terminated the joint venture, prompting them to collect from the
joint venture's borrowers. They were, however, able to collect only to the extent of P200,000.00;
hence, the P300,000.00 balance remained unpaid.11redarclaw

whether interest accrued on respondents' loan from petitioners, If so, at what rate?

Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall be due unless it has
been expressly stipulated in writing."
On the matter of interest, the text of the acknowledgment receipt is simple, plain, and unequivocal. It
attests to the contracting parties' intent to subject to interest the loan extended by petitioners to
respondents. The controversy, however, stems from the acknowledgment receipt's failure to state the
exact rate of interest.

Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a rate. In
Spouses Toring v. Spouses Olan,35 this court clarified the effect of Article 1956 of the Civil Code and
noted that the legal rate of interest (then at 12%) is to apply: "In a loan or forbearance of money,
according to the Civil Code, the interest due should be that stipulated in writing, and in the absence
thereof, the rate shall be 12% per annum."36redarclaw

Spouses Toring cites and restates (practically verbatim) what this court settled in Security Bank and
Trust Company v. Regional Trial Court of Makati, Branch 61: "In a loan or forbearance of money, the
interest due should be that stipulated in writing, and in the absence thereof the rate shall be 12% per
annum."37redarclaw
Respondent Paper City is a domestic corporation engaged in the manufacture of paper products.
Paper City applied for and was granted loans and credit accommodations in peso and dollar
denominations by RCBC secured by 4 Deeds of Continuing Chattel Mortgages on its machineries and
equipments found inside its paper plants.

However, a unilateral Cancellation of Deed of Continuing Chattel Mortgage on Inventory of

Merchandise/Stocks-in-Trade was executed by RCBC over the merchandise and stocks-in-trade
covered by the continuing chattel mortgages.

RCBC, Metrobank and Union Bank (creditor banks with RCBC instituted as the trustee bank) entered
into a Mortgage Trust Indenture (MTI) with Paper City. In the said MTI, Paper City acquired an
additional P170, 000,000.00 from the creditor banks in addition to the previous loan from RCBC
amounting to P110, 000,000.00.

The old loan of P110,000,000.00 was partly secured by various parcels of land situated in Valenzuela
City. The new loan obligation of P170,000,000.00 would be secured by the same five (5) Deeds of
Real Estate Mortgage and additional real and personal properties described in an annex to MTI,
Annex "B" which covered the machineries and equipments of Paper City.

The MTI was later amended to increase the contributions of the RCBC and Union Bank. As a
consequence, they executed a Deed of Amendment to MTI but still included as part of the mortgaged
properties by way of a first mortgage the various machineries and equipments located in and bolted to
and/or forming part of buildings.

A Second Supplemental Indenture to the MTI was executed to increase the amount of the loan
secured against the existing properties composed of land, building, machineries and equipments and
inventories described in Annexes "A" and "B."

Finally, a Third Supplemental Indenture to the MTI was executed to increase the existing loan
obligation with an additional security composed of a newly constructed two-storey building and other
improvements, machineries and equipments located in the existing plant site.

Paper City was able to comply with its loan obligations but economic crisis ensued which made it
difficult for Paper City to meet the terms of its obligations leading to payment defaults. Consequently,
RCBC filed a Petition for Extrajudicial Foreclosure.

The petition was for the extra-judicial foreclosure of eight parcels of land including all improvements
thereon which were sold in favor of the creditor banks RCBC, Union Bank and Metrobank as the
highest bidders.

This foreclosure sale prompted Paper City to file a Complaint against the creditor banks alleging that
the extra-judicial sale of the properties and plants was null and void due to lack of prior notice and
attendance of gross and evident bad faith on the part of the creditor banks.

Acting on the said motion, the trial court issued an Order denying the prayer and ruled that the
machineries and equipments were included in the annexes and form part of the MTI.

Paper City filed its Motion for Reconsideration which was favorably granted by the trial court with
justification that the disputed machineries and equipments are chattels by agreement of the parties
through their inclusion in the four Deeds of Chattel Mortgage and the deed of cancellation executed
by RCBC was not valid because it was done unilaterally and without the consent of Paper City.
The CA affirmed the Order.

ISSUE

Whether the subject machineries and equipments were included in the mortgage, extrajudicial
foreclosure and in the consequent sale.

RULING

Yes. By contracts, all uncontested in this case, machineries and equipments are included in the
mortgage in favor of RCBC, in the foreclosure of the mortgage and in the consequent sale on
foreclosure also in favor of petitioner.

Repeatedly, the parties stipulated that the properties mortgaged by Paper City to RCBC are various
parcels of land including the buildings and existing improvements thereon as well as the machineries
and equipments, which as stated in the granting clause of the original mortgage, are "more particularly
described and listed that is to say, the real and personal properties listed in Annexes ‘A’ and ‘B’.”

The plain language and literal interpretation of the MTIs must be applied. The petitioner, other creditor
banks and Paper City intended from the very first execution of the indentures that the machineries
and equipments enumerated in Annexes "A" and "B" are included. Obviously, with the continued
increase in the amount of the loan, totaling hundreds of millions of pesos, Paper City had to offer all
valuable properties acceptable to the creditor banks.

The MTIs did not describe the equipments and machineries as personal property. Notably, while
"personal" appeared in the granting clause of the original MTI, the subsequent Deed of Amendment
specifically stated that:

x x x The machineries and equipment listed in Annexes "A" and "B" form part of the improvements
listed above and located on the parcels of land subject of the Mortgage Trust Indenture and the Real
Estate Mortgage.

Considering that the Indenture which is the instrument of the mortgage that was foreclosed exactly
states through the Deed of Amendment that the machineries and equipments listed in Annexes "A"
and "B" form part of the improvements listed and located on the parcels of land subject of the
mortgage, such machineries and equipments are surely part of the foreclosure of the "real estate
properties, including all improvements thereon" as prayed for in the petition.

The real estate mortgage over the machineries and equipments is even in full accord with the
classification of such properties by the Civil Code of the Philippines as immovable property. Thus:

Article 415. The following are immovable property:

(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
xxxx

(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an
industry or works which may be carried on in a building or on a piece of land, and which tend directly
to meet the needs of the said industry or works;
ARCAM & Company, Inc. (ARCAM) is engaged in the operation of a

sugar mill in Pampanga.5

Between 1991 and 1993, ARCAM applied for and

was granted a loan by respondent Philippine National Bank (PNB).6

To

secure the loan, ARCAM executed a Real Estate Mortgage over a 350,004-

square meter parcel of land covered by TCT No. 340592-R and a Chattel

Mortgage over various personal properties consisting of machinery,

generators, field transportation and heavy equipment.

ARCAM, however, defaulted on its obligations to PNB. Thus, on

November 25, 1993, pursuant to the provisions of the Real Estate Mortgage

and Chattel Mortgage, PNB initiated extrajudicial foreclosure proceedings in

the Office of the Clerk of Court/Ex Officio Sheriff of the Regional Trial

Court (RTC) of Guagua, Pampanga.7

The public auction was scheduled on

December 29, 1993 for the mortgaged real properties and December 8, 1993

for the mortgaged personal properties.

On December 7, 1993, ARCAM filed before the SEC a Petition for

Suspension of Payments, Appointment of a Management or Rehabilitation

Committee, and Approval of Rehabilitation Plan, with application for

issuance of a temporary restraining order (TRO) and writ of preliminary

injunction. The SEC issued a TRO and subsequently a writ of preliminary

injunction, enjoining PNB and the Sheriff of the RTC of Guagua, Pampanga

from proceeding with the foreclosure sale of the mortgaged properties.8

An

interim management committee was also created.

On February 9, 2000, the SEC ruled that ARCAM can no longer be

rehabilitated. The SEC noted that the petition for suspension of payment

was filed in December 1993 and six years had passed but the potential

“white knight” investor had not infused the much needed capital to bail out
ARCAM from its financial difficulties.9

Thus, the SEC decreed thatARCAM be dissolved and placed under liquidation.10 The SEC Hearing

Panel also granted PNB’s motion to dissolve the preliminary injunction and

appointed Atty. Manuel D. Yngson, Jr. & Associates as Liquidator for

ARCAM.11 With this development, PNB revived the foreclosure case and

requested the RTC Clerk of Court to re-schedule the sale at public auction of

the mortgaged properties.

Contending that foreclosure during liquidation was improper,

petitioner filed with the SEC a Motion for the Issuance of a Temporary

Restraining Order and/or Writ of Preliminary Injunction to enjoin the

foreclosure sale of ARCAM’s assets. The SEC en banc issued a TRO

effective for seventy-two (72) hours, but said TRO lapsed without any writ

of preliminary injunction being issued by the SEC. Consequently, on July

28, 2000, PNB resumed the proceedings for the extrajudicial foreclosure sale

of the mortgaged properties.12 PNB emerged as the highest winning bidder

in the auction sale, and certificates of sale were issued in its favor.

On November 16, 2000, petitioner filed with the SEC a motion to

nullify the auction sale.13 Petitioner posited that all actions against

companies which are under liquidation, like ARCAM, are suspended

because liquidation is a continuation of the petition for suspension

proceedings. Petitioner argued that the prohibition against foreclosure

subsisted during liquidation because payment of all of ARCAM’s

obligations was proscribed except those authorized by the Commission.

Moreover, petitioner asserted that the mortgaged assets should be included

in the liquidation and the proceeds shared with the unsecured creditors.

In its Opposition, PNB asserted that neither Presidential Decree (P.D.)

No. 902-A nor the SEC rules prohibits secured creditors from foreclosing ontheir mortgages to satisfy
the mortgagor’s debt after the termination of the

rehabilitation proceedings and during liquidation proceedings.14

On January 4, 2005, the SEC issued a Resolution15 denying

petitioner’s motion to nullify the auction sale. It held that PNB was not

legally barred from foreclosing on the mortgages.

Aggrieved, petitioner filed on February 28, 2005, a petition for review

in the CA questioning the January 4, 2005 Resolution of the SEC.16

By Resolution dated April 14, 2005, the CA dismissed the petition on

the ground that petitioner failed to attach material portions of the record and

other documents relevant to the petition as required in Rule 46, Section 3 of

the 1997 Rules of Civil Procedure, as amended. The CA likewise denied

ARCAM’s motion for reconsideration in its Resolution dated January 24,

2006.

Issue: Whether PNB, as a secured creditor, can foreclose on the mortgaged properties of a
corporation under liquidation without the knowledge and prior approval of the liquidator or the SEC.
YES.

It is worth mentioning that under RA 10142, otherwise known as the Financial Rehabilitation and
Insolvency Act (FRIA) of 2010, the right of a secured creditor to enforce his lien during liquidation
proceedings is retained. Section 114 of said law thus provides:

SEC. 114. Rights of Secured Creditors. – The Liquidation Order shall not affect the right of a secured
creditor to enforce his lien in accordance with the applicable contract or law. A secured creditor may:

a) waive his rights under the security or lien, prove his claim in the liquidation proceedings and
share in the distribution of the assets of the debtor; or

b) maintain his rights under his security or lien;

If the secured creditor maintains his rights under the security or lien:

1. the value of the property may be fixed in a manner agreed upon by the creditor and the
liquidator. When the value of the property is less than the claim it secures, the liquidator may convey
the property to the secured creditor and the latter will be admitted in the liquidation proceedings as a
creditor for the balance; if its value exceeds the claim secured, the liquidator may convey the property
to the creditor and waive the debtor’s right of redemption upon receiving the excess from the creditor;

2. the liquidator may sell the property and satisfy the secured creditor’s entire claim from the
proceeds of the sale; or

3. the secured creditor may enforce the lien or foreclose on the property pursuant to applicable
laws.

Held: In this case, PNB elected to maintain its rights under the security or lien; hence, its right to
foreclose the mortgaged properties should be respected, in line with our pronouncement in Consuelo
Metal Corporation.
Bank of Commerce vs. Spouses Flores Digest

G.R. No. 174006 : December 8, 2010

BANK OF COMMERCE and STEPHEN Z. TAALA, Petitioners, v. Spouses ANDRES and ELIZA
FLORES,Respondents.

NACHURA, J.:

FACTS:

Respondents borrowed money from petitioner bank in the amount of Nine Hundred Thousand Pesos
(P900,000.00). Respondents executed a Real Estate Mortgage over the condominium unit as
collateral, and the same was annotated at the back of CCT No. 2130. Respondents again borrowed
One Million One Hundred Thousand Pesos (P1,100,000.00) from petitioner bank, which was also
secured by a mortgage over the same property annotated at the back of CCT No. 2130.

Respondents paid One Million Eleven Thousand Five Hundred Fifty-Five Pesos and 54 centavos
(P1,011,555.54). On the face of the receipt, it was written that the payment was "in full payment of the
loan and interest." Respondents then asked petitioner bank to cancel the mortgage annotations on
CCT No. 2130. However, the bank refused to cancel the same and demanded payment of P
4,633,916.67. Respondents requested for an accounting which would explain how the said amount
was arrived at.

However, instead of heeding respondents request, petitioner bank applied for extra-judicial
foreclosure of the mortgages over the condominium unit.

Respondents filed suit with the RTC, Quezon City, assailing the validity of the foreclosure and auction
sale of the property. They averred that the loans secured by the property had already been paid in full.
Petitioner bank admitted that there were only two (2) mortgage loans annotated at the back of CCT
No. 2130, but denied that respondents had already fully settled their outstanding obligations with the
bank. It averred that several credit lines were granted to respondent Andres Flores by petitioner bank
that were secured by promissory notes executed by him, and which were either increased or
extended from time to time.

The RTC rendered decision dismissing the Complaint for Specific Performance. The RTC stated that
the evidence submitted by petitioner bank, specifically the promissory notes and statement of account
dated February 27, 1998, negated this contention. Respondents filed a motion for reconsideration but
the same was denied. Aggrieved, respondents appealed to the CA.

The CA reversed the RTC decision. The CA ratiocinated that the principal obligation or loan was
already extinguished by the full payment thereof. Consequently, the real estate mortgages securing
the principal obligation were also extinguished. The CA also noted that the two mortgages were
individually annotated at the back of CCT No. 2130. Thus, the CA opined that the individual
annotations clearly indicated that the said mortgages were not meant to serve as a continuing
guaranty for any future loan that respondents would obtain from petitioner bank.

Petitioners filed a motion for reconsideration but the same was denied. Hence, this petition.

ISSUE: Whether or not the real estate mortgage over the subject condominium unit is a continuing
guaranty for the future loans of respondent spouses despite the full payment of the principal loans
annotated on the title of the subject property.

HELD: Yes. CA Decision Reversed and Set Aside

CIVIL LAW- A continuing guaranty is a recognized exception to the rule that an action to foreclose a
mortgage must be limited to the amount mentioned in the mortgage contract

Under Article 2053 of the Civil Code, a guaranty may be given to secure even future debts, the
amount of which may not be known at the time the guaranty is executed. This is the basis for
contracts denominated as a continuing guaranty or suretyship. A continuing guaranty is not limited to
a single transaction, but contemplates a future course of dealing, covering a series of transactions,
generally for an indefinite time or until revoked. It is prospective in its operation and is generally
intended to provide security with respect to future transactions within certain limits, and contemplates
a succession of liabilities, for which, as they accrue, the guarantor becomes liable. In other words, a
continuing guaranty is one that covers all transactions, including those arising in the future, which are
within the description or contemplation of the contract of guaranty, until the expiration or termination
thereof.

A guaranty shall be construed as continuing when, by the terms thereof, it is evident that the object is
to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a
certain period, especially if the right to recall the guaranty is expressly reserved. In other jurisdictions,
it has been held that the use of particular words and expressions, such as payment of "any debt," "any
indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be
furnished the principal debtor "at any time" or "on such time" that the principal debtor may require, has
been construed to indicate a continuing guaranty.

In the instant case, the language of the real estate mortgage unambiguously reveals that the security
provided in the real estate mortgage is continuing in nature. Thus, it was intended as security for the
payment of the loans annotated at the back of CCT No. 2130, and as security for all amounts that
respondents may owe petitioner bank. It is well settled that mortgages given to secure future advance
or loans are valid and legal contracts, and that the amounts named as consideration in said contracts
do not limit the amount for which the mortgage may stand as security if from the four corners of the
instrument the intent to secure future and other indebtedness can be gathered.

Respondents full payment of the loans annotated on the title of the property shall not effect the
release of the mortgage because, by the express terms of the mortgage, it was meant to secure all
future debts of the spouses and such debts had been obtained and remain unpaid. Unless full
payment is made by the spouses of all the amounts that they have incurred from petitioner bank, the
property is burdened by the mortgage.

Petition Granted
In 1973, Luis Ramos obtained a credit line under an agricultural loan account from the Philippine
National Bank (PNB), Balayan Branch, for P83,000.00.[4] To secure the loan, the parties executed a
Real Estate Mortgage[5] on October 23, 1973, the relevant provisions of which stated:

That for and in consideration of certain loans, overdrafts and other credit accommodations obtained
from the Mortgagee, which is hereby fixed at P83,000.00 Philippine Currency and to secure the
payment of the same and those others that the Mortgagee may extend to the Mortgagor, including
interest and expenses, and other obligations owing by the Mortgagor to the Mortgagee, whether direct
or indirect principal or secondary, as appear in the accounts, books and records of the Mortgagee, the
Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors
or assigns, the parcels of land which are described in the list inserted at the back of this document, or
in a supplementary list attached hereto, together with all the buildings and improvements now existing
or which may hereafter be erected or constructed thereon and all easements, sugar quotas,
agricultural or land indemnities, aids or subsidies, including all other rights or benefits annexed to or
inherent therein now existing or which may hereafter exist, and also other assets acquired with the
proceeds of the loan hereby secured all of which the mortgagor declares that he is the absolute owner
free from all liens and encumbrances. In case the Mortgagor executes subsequent promissory note or
notes either as a renewal of the former note, as an extension thereof, or as a new loan, or is given
any other kind of accommodations such as overdrafts, letters of credit, acceptances and bills of
exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as
security for the payment of the said promissory note or notes and/or accommodations without the
necessity of executing a new contract and this mortgage shall have the same force and effect as if the
said promissory note or notes and/or accommodations were existing on the date thereof. This
mortgage shall also stand as security for said obligations and any and all other obligations of the
Mortgagor to the Mortgagee of whatever kind and nature whether such obligations have been
contracted before, during or after the constitution of this mortgage. However, if the Mortgagor shall
pay to the Mortgagee, its successors or assigns the obligations secured by this mortgage, together
with interests, cost and other expenses, on or before the date they are due, and shall keep and
perform all the covenants and agreements herein contained for the Mortgagor to keep and perform,
then this mortgage shall be null and void, otherwise, it shall remain in full force and effect.[6

]SHOULD THE GENERAL TERMS OF THE REAL ESTATE MORTGAGE EXECUTED BY

BORROWER LUIS T. RAMOS IN FAVOR OF LENDER PNB BE UNDERSTOOD TO INCLUDE IN
ITS COVERAGE THE BORROWERS SUGAR QUEDAN FINANCING LOAN THAT IS DIFFERENT
FROM HIS AGRICULTURAL CROP LOAN UNDISPUTEDLY AGREED UPON BY THE PARTIES TO
BE COVERED BY THE COLLATERAL?

In Prisma Construction & Development Corporation v. Menchavez,[40] we discussed the settled

principles that:
Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith. When the terms of a contract are clear and leave no doubt as to the
intention of the contracting parties, the literal meaning of its stipulations governs. In such cases,
courts have no authority to alter the contract by construction or to make a new contract for the parties;
a court's duty is confined to the interpretation of the contract the parties made for themselves without
regard to its wisdom or folly, as the court cannot supply material stipulations or read into the contract
words the contract does not contain. It is only when the contract is vague and ambiguous that courts
are permitted to resort to the interpretation of its terms to determine the parties' intent.[41]

Here, it cannot be denied that the real estate mortgage executed by the parties provided that it shall
stand as security for any subsequent promissory note or notes either as a renewal of the former note,
as an extension thereof, or as a new loan, or is given any other kind of accommodations such as
overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments on Trust
Receipts, etc. The same real estate mortgage likewise expressly covered any and all other obligations
of the Mortgagor to the Mortgagee of whatever kind and nature whether such obligations have been
contracted before, during or after the constitution of this mortgage. Thus, from the clear and
unambiguous terms of the mortgage contract, the same has application even to future loans and
obligations of the mortgagor of any kind, not only agricultural crop loans

On December 27, 2000, Rolando lent P350,000.00 without any security to L&J, a property developer
with Atty. Esteban Salonga (Atty. Salonga) as its President and General Manager. The loan, with no
specified maturity date, carried a 6% monthly interest, i.e., P21,000.00. From December 2000 to
August 2003, L&J paid Rolando a total of P576,000.007 representing interest charges.

As L&J failed to pay despite repeated demands, Rolando filed a Complaint8 for Collection of Sum of
Money with Damages against L&J and Atty. Salonga in his personal capacity before the MeTC,
docketed as Civil Case No. 05-7755. Rolando alleged, amongothers, that L&J’s debtas of January
2005, inclusive of the monthly interest, stood at P772,000.00; that the 6% monthly interest was upon
Atty. Salonga’s suggestion; and, that the latter tricked him into parting with his money without the loan
transaction being reduced into writing.

In their Answer,9 L&J and Atty. Salonga denied Rolando’s allegations. While they acknowledged the
loan as a corporate debt, they claimed that the failure to pay the same was due to a fortuitous event,
that is, the financial difficulties brought about by the economic crisis. They further argued that Rolando
cannot enforce the 6% monthly interest for being unconscionable and shocking to the morals. Hence,
the payments already made should be applied to the P350,000.00 principal loan.

During trial, Rolando testified that he had no communication with Atty. Salonga prior to the loan
transaction but knew him as a lawyer, a son of a former Senator, and the owner of L&J which
developed Brentwood Subdivision in Antipolo where his associate Nilo Velasco (Nilo) lives. When Nilo
told him that Atty. Salonga and L&J needed money to finish their projects, heagreed to lend them
money. He personally met withAtty. Salonga and their meeting was cordial.

He narrated that when L&J was in the process of borrowing the P350,000.00 from him, it was Arlene
San Juan (Arlene), the secretary/treasurer of L&J, who negotiated the terms and conditions
thereof.She said that the money was to finance L&J’s housing project. Rolando claimed that it was not
he who demanded for the 6% monthly interest. It was L&J and Atty. Salonga, through Arlene, who
insisted on paying the said interest as they asserted that the loan was only a short-term one.

whether to uphold the judgment of the CA that the principal loan is deemed paid isdependent on the
validity of the monthly interest rate imposed.

The lack of a written stipulation to pay interest on the loaned amount disallows a creditor from
charging monetary interest.

Under Article 1956 of the Civil Code, no interest shall bedue unless it has been expressly stipulated in
writing. Jurisprudence on the matter also holds that for interest to be due and payable, two conditions
must concur: a) express stipulation for the payment of interest; and b) the agreement to pay interest is
reduced in writing.

Here, it is undisputed that the parties did not put down in writing their agreement. Thus, no interest is
due. The collection of interest without any stipulation in writing is prohibited by law.22

But Rolando asserts that his situation deserves an exception to the application of Article 1956. He
blames Atty. Salonga for the lack of a written document, claiming that said lawyer used his legal
knowledge to dupe him. Rolando thus imputes bad faith on the part of L&J and Atty. Salonga. The
Court, however, finds no deception on the partof L&J and Atty. Salonga. For one, despite the lack of a
document stipulating the payment of interest, L&J nevertheless devotedly paid interests on the loan. It
only stopped when it suffered from financial difficulties that prevented it from continuously paying the
6% monthly rate. For another,regardless of Atty. Salonga’s profession, Rolando who is an architect
and an educated man himself could have been a more reasonably prudent person under the
circumstances. To top it all, he admitted that he had no prior communication with Atty. Salonga.
Despite Atty. Salonga being a complete stranger, he immediately trusted him and lent his company
P350,000.00, a significant amount. Moreover, as the creditor,he could have requested or required that
all the terms and conditions of the loan agreement, which include the payment of interest, be put
down in writing to ensure that he and L&J are on the same page. Rolando had a choice of not
acceding and to insist that their contract be put in written form as this will favor and safeguard him as
a lender. Unfortunately, he did not. It must be stressed that "[c]ourts cannot follow one every step of
his life and extricate him from bad bargains, protect him from unwise investments, relieve him from
one-sided contracts,or annul the effects of foolish acts. Courts cannotconstitute themselves guardians
of persons who are not legally incompetent."23
CIFIC REHOUSE CORP V. EIB SECURITIES INC, G.R. NO 184036 (2010) FACTS:

During the period of June 2003 to March 2004, plaintiffs Pacific Rehouse Corp (PRC), through their
broker EIB Securities (EIB) purchased 60,790,000 shares of Kuok Properties Inc (KPP), valued at
P0.22 per share. 1.

Subsequently, PRC also bought 32,180,000 DMIC shares. Of these shares, 16,180,000 were
acquired through EIB, while the remaining 16,000,000 were transferred from Westlink Global Equities
Inc. The DMIC shares were purchased at P.038 per share 2.

PRc and EIB agreed to sell the KPP shares for P0.14 per share with the option to buy back or
reacquire the KPP shares within a period of 30 days from transaction date at P0.18 per share. 3.

Since PRC was undecided on whether it was to exercise their option to buy back the shares, PRC
and EIB agreed to extend the buyback option 4.

However, without their knowledge or consent, EIB sold the 32,180,000 DMIC shares at P0.24 per
share despite knowing that such sale would result in a substantial loss to PRC. 5.

As such, PRC filed an action against EIB for damages 6.

The trial court held in favor of PRC. It held that that EIB went beyond its authority in selling

petitioner’s DMIC shares in order to buy back the KKP shares

7.

Petitioners asserted the inapplicability of Sec 7 of the SDAA to their liability to reacquire the KKP
shares, as the DMIC shares were not sold to pay their P70 million obligation to EIB but to settle their
obligation to the buyers of their KKP shares

ISSUE:

WON EiB acted within the scope of its authority in the sale of the DMIC shares

HELD:

No. Sec 7 of the SDAA does not apply to petitioner’s obligation to third party purchasers of their KKP
shares under the “full cross to seller” obligation, and certainly

EIB could not use said provision for the repurchase of the KKP shares. Indubitably, the sale of the
DMIC shares made by EIB is null and void for lack of authority to do so since PRC never gave their
consent or permission to the sale. Moreover, ART 1991 NCC provides that the agent must act within
the scope of his authority.

Pursuant to the authority given by the principal, the agent is granted the right to “affect the

legal relations of his principal by the performance of acts effectuated in accordance with the

principal’s manifestation of consent. CAB: The scope of EIB as agent of petitioner is “to retain apply,

sell, or dispose of all or any of the

petitioners’ property,” “of all

or any indebtedness or other obligations of petitioners to EIB are not

discharged in full by PRC “when due or on demand in or towards the payment and discharge of such
obligation or liability.”

The right to sell or dispose of the properties of petitioners by EIB is unequivocally confined to the
payment of obligations and liabilities of petitioners to EIB and none other. Thus, when EIB sold the
DMIC shares to buy back the KPP shares, it paid the proceeds to the vendees of said shares, the act
of which is clearly an obligation to a third party and hence, beyond the scope of itsauthority as agent.

On May 20, 2006, ABC paid Lucky Star P575,000.00 (with 2% withholding tax) as advance payment,
representing 50% of the contract price.[7] Lucky Star, thereafter, commenced the drilling work. By July
18, 2006, just a few days before the agreed completion date of 60 calendar days, Lucky Star
managed to accomplish only ten (10) % of the drilling work. On the same date, petitioner sent a
demand letter to Lucky Star for the immediate completion of the drilling work[8] with a threat to cancel
the agreement and forfeit the bonds should it still fail to complete said project within the agreed
period.

On April 28, 2006, Asset Builders Corporation (ABC) entered into an agreement with Lucky Star
Drilling & Construction Corporation (Lucky Star) as part of the completion of its project to construct the
ACG Commercial Complex on NHA Avenue corner Olalia Street, Barangay Dela Paz, Antipolo City.[2]
As can be gleaned from the Purchase Order,[3] Lucky Star was to supply labor, materials, tools, and
equipment including technical supervision to drill one (1) exploratory production well on the project
site.

To guarantee faithful compliance with their agreement, Lucky Star engaged respondent Stronghold
which issued two (2) bonds in favor of petitioner. The first, SURETY BOND G(16) No. 141558, dated
May 9, 2006, covers the sum of P575,000.00[4] or the required downpayment for the drilling work.

On August 3, 2006, ABC sent a Notice of Rescission of Contract with Demand for Damages to Lucky
Star.

On August 16, 2006, ABC sent a Notice of Claim for payment to Stronghold to make good its
obligation under its bonds.[10]
Despite notice, ABC did not receive any reply either from Lucky Star or Stronghold, prompting it to file
its Complaint for Rescission with Damages against both before the RTC[11] on November 21, 2006.

In its Answer (with Complusory Counterclaim and Cross-Claim), dated January 24, 2007, Stronghold
denied any liability arguing that ABC had not shown any proof that it made an advance payment of
50% of the contract price of the project. It further averred that ABCs rescission of its contract with
Lucky Star virtually revoked the claims against the two bonds and absolved them from further
liability.[12]

Lucky Star, on the other hand, failed to file a responsive pleading within the prescribed period and,
thus, was declared in default by the RTC in its Order dated August 24, 2007.[13]

Essentially, the primary issue is whether or not respondent insurance company, as surety, can be
held liable under its bonds.

Suretyship, in essence, contains two types of relationship – the principal relationship between the
obligee (petitioner) and the obligor (Lucky Star), and the accessory surety relationship between the
principal (Lucky Star) and the surety (respondent). In this arrangement, the obligee accepts the
surety’s solidary undertaking to pay if the obligor does not pay. Such acceptance, however, does not
change in any material way the obligee’s relationship with the principal obligor. Neither does it make
the surety an active party to the principal obligee-obligor relationship. Thus, the acceptance does not
give the surety the right to intervene in the principal contract. The surety’s role arises only upon the
obligor’s default, at which time, it can be directly held liable by the obligee for payment as a solidary
obligor.

In the case at bench, when Lucky Star failed to finish the drilling work within the agreed time frame
despite petitioner’s demand for completion, it was already in delay. Due to this default, Lucky Star’s
liability attached and, as a necessary consequence, respondent’s liability under the surety agreement
arose.
Rune and Lea (Spouses Stroem) entered into an Owners-Contractor Agreement for the construction
of a two-storey building with Asis-Leif & Company, Inc., Pursuant to the agreement, Asis-Leif and
Cynthia Asis-Leif secured Performance Bond No. LP/G(13)83056 from Stronghold Insurance
Company, Inc. (Stronghold), binding themselves jointly and severally to pay the spouses Stroem the
agreed amount of P4.5 Million in the event the construction project is not finished. The company did
not finish the project, and an independent appraisal firm hired by the spouses to evaluate the project’s
progress evaluated it as to percentage of completion: 47.53% of the residential building, 65.62% of
the garage, and 13.32% of the swimming pool, fence, gate, and land development. Despite demand
from the spouses Stroem for Asis-Leif to settle its obligations, no response was received from the
company. Hence, the spouses filed a Complaint with Preliminary Attachment against Asis-Leif,
Cunthia Asis-Leif, and Stronghold, for breach of contract and sum of money. Only Stronghold
answered the summons, as Asis-Leif absconded the country. After trial, the RTC rendered judgment
in favour of the spouses and ordered Stronghold to pay them P4.5 Million plus 6% interest from the
time of first demand. Both parties appealed to the CA. The latter decided in favour of the spouses,
and dismissed the appeal of Stronghold. Stronghold, without declaring in its petition for review on
certiorari with the Supreme Court that it filed a Partial Motion for Reconsideration of the CA, elevated
the case to the Supreme Court. It agues that the RTC had no jurisdiction over the case, as it is the
Construction Industry Arbitration Committee which had jurisdiction over the subject matter, pursuant
to the arbitration clause in the agreement between the spouses and Asis-Leif, which are part and
parcel of the conditions of the bond. Were it not for such stipulations, Stronghold would not have
agreed to the bond. Likewise, Stronghold is liable only for the amount of the unfinished work, not the
entire obligation. On the other hand, the spouses argue otherwise. They aver that Stronghold was
guilty of forum-shopping; the Owners-Contractor Agreement is separate and distinct from the
Performance Bond; the company is liable to them for the entire amount as the terms of the bond
clearly show that Stronghold bound itself as a surety. Therefore, notice to Stronghold is not required
for it to be liable.

Whether or not Stronghold is liable under the Performance Bond; if so, the extent of its liability; and
the nature of tis liability, as an ordinary suretyship or as a corporate suretyship.

A performance bond is a kind of suretyship agreement. A suretyship agreement is an agreement

“whereby a party, called the surety, guarantees the performance by another party, called the principal
or obligor, of an obligation or undertaking in favor of another party, called the obligee.” In the same
vein, a performance bond is “designed to afford the project owner security that the . . . contractor, will
faithfully comply with the requirements of the contract . . . and make good [on the] damages sustained
by the project owner in case of the contractor’s failure to so perform.”

It is settled that the surety’s solidary obligation for the performance of the principal debtor’s obligation
is indirect and merely secondary. Nevertheless, the surety’s liability to the “creditor or promisee of the
principal is said to be direct, primary and absolute; in other words, he is directly and equally bound
with the principal.”

Verily, “[i]n enforcing a surety contract, the ‘complementary-contracts-construed-together’ doctrine

finds application. According to this principle, an accessory contract must be read in its entirety and
together with the principal agreement.”
FACTS:

Petitioner Jocelyn M. Toledo, who was then the Vice-President of the College Assurance Plan (CAP)
Phils., Inc., obtained several loans from respondent Marilou M. Hyden.

Jocelyn had been religiously paying Marilou the stipulated monthly interest. However, the total
principal amount ofP290,000.00 remained unpaid. A document entitled "Acknowledgment of Debt" for
the amount ofP290,000.00 was signed by Jocelyn with two of her subordinates as witnesses. Also on
said occasion, Jocelyn issued checks to Marilou representing renewal payment of her five previous
loans.

Jocelyn ordered the stop payment on the remaining checks and filed with the RTC of Cebu City a
complaintagainst Marilou for Declaration of Nullity and Payment, Annulment, Sum of Money,
Injunction and Damages.

Jocelyn averred that Marilou forced, threatened and intimidated her into signing the "Acknowledgment
of Debt" and at the same time forced her to issue the postdated checks.She further claimed that the
application of her total payment ofP528,550.00 to interest alone is illegal, unfounded, unjust,
oppressive and contrary to law because there was no written agreement to pay interest. Marilou filed
an Answer alleging that Jocelyn voluntarily obtained the said loans knowing fully well that the interest
rate was at 6% to 7% per month. In fact, a 6% to 7% advance interest was already deducted from the
loan amount given to Jocelyn.
The trial court ruled in favor of Marilou which was affirmed by the CA.

Whether or not the imposition of interest at the rate of six percent (6%) to seven percent (7%) is
contrary to law, morals, good customs, public order or public policy.

The 6% to 7% interest per month paid by Jocelyn is not excessive under the circumstances of this
case. It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same
carried with it an interest rate of 6% to 7% per month, yet she did not complain. In fact, when she
availed of said loans, an advance interest of 6% to 7% was already deducted from the loan amount,
yet she never uttered a word of protest.

After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per
month and paying for the same, Jocelyn cannot now go to court to have the said interest rate annulled
on the ground that it is excessive, iniquitous, unconscionable, exorbitant, and absolutely revolting to
the conscience of man."This is so because among the maxims of equity are (1) he who seeks equity
must do equity, and (2) he who comes into equity must come with clean hands.The latter is a
frequently stated maxim which is also expressed in the principle that he who has done inequity shall
not have equity.It signifies that a litigant may be denied relief by a court of equity on the ground that
his conduct has been inequitable, unfair and dishonest, or fraudulent, or deceitful as to the
controversy in issue."
Asian Cathay Finance and Leasing Corporation, Petitioner vs. Spouses Cesario Gravador and Norma
de Vera andSpouses Emma Concepcion G. Dumigpi and Federico L. Dumigpi, Respondents, G.R.
No. 186550; 5 July 2010

Facts: Asian Cathay Finance and Leasing Corporation (ACFLC) extended a loan of P800,000.00 to
respondent Cesario Gravador (Cesario), with respondents Norma de Vera and Emma Concepcion
Dumigpi as his co-makers. The loan was payable in 60 monthly installments of P24,000.00 each and
secured by a real estate mortgage executed by Cesario over his property. Respondents paid the first
installment for November 1999 but failed to pay the subsequent installments. In February 2000,
ACFLC demanded payment of P1,871,480.00 from respondents. Respondents asked for more time to
pay but ACFLC denied their request.

Respondents filed a case for annulment of the real estate mortgage and promissory note before the
Regional Trial Court (RTC). Respondents averred that the mortgage did not make reference to the
promissory note and contained a provision on the waiver of the mortgagor’s right of redemption, which
is contrary to law and public policy. Respondents added that the promissory note did not specify the
maturity date of the loan, the interest rate, and the mode of payment, and illegally imposed liquidated
damages.

ACFLC filed a petition for extrajudicial foreclosure of mortgage with the office of the Deputy Sheriff.

The RTC dismissed respondents’ complaint for annulment of mortgage for lack of cause of action,
holding that respondents were well-educated individuals who could not feign naiveté in the execution
of the loan documents. The RTC further held that the alleged defects in the promissory note and in
the deed of real estate mortgage were too insubstantial to warrant the nullification of the mortgage. It
added that a promissory note was not one of the essential elements of a mortgage, thus, reference to
a promissory note was neither indispensable nor imperative for the validity of the mortgage.

Respondents appealed to the Court of Appeals (CA) which reversed the RTC. The CA held that the
amount of P1,871,480.00 demanded by ACFLC from respondents was unconscionable and
excessive. The CA fixed the interest rate at 12% per annum and reduced the penalty charge to 1%
per month. The CA also invalidated the waiver of respondents’ right of redemption for reasons of
public policy.

When the CA denied ACFLC’s motion for reconsideration, ACFLC brought the case to the Supreme
Court, insisting on the validity of the real estate mortgage and promissory note. ACFLC argued that
right of redemption was a privilege which respondents could waive as they did in this case. It further
argued that respondents’ action for annulment of mortgage was a collateral attack on its certificate of
title.

Issues: (1) Whether or not the interest imposed by ACFLC was unconscionable and excessive

Held: (1) It is true that parties to a loan agreement have a wide latitude to stipulate on any interest rate
in view of Central Bank Circular No. 905, series of 1982, which suspended the Usury Law ceiling on
interest rate effective 1 January 1983. However, interest rates, whenever unconscionable, may be
equitably reduced or even invalidated.

In a span of 3 months (from the payment of the initial installment for November 1999 up to ACFLC’s
demand on 1 February 2000), respondents’ principal obligation of P800,000.00 ballooned by more
thanP1,000,000.00. ACFLC failed to show any computation on how much interest was imposed and
on the penalties charged. Thus, the amount claimed by ACFLC was unconscionable.

Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals,
if not against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void
from the beginning. They cannot be ratified nor the right to set up their illegality as a defense be
waived. The nullity of the stipulation on the usurious interest does not, however, affect the lender’s
right to recover the principal of the loan. Nor would it affect the terms of the real estate mortgage. The
right to foreclose the mortgage remains with the creditors, and said right can be exercised upon the
failure of the debtors to pay the debt due. The debt due is to be considered without the stipulation of
the excessive interest. A legal interest of 12% per annum will be added in place of the excessive
interest formerly imposed. The nullification by the CA of the interest rate and the penalty charge and
the consequent imposition of an interest rate of 12% and penalty charge of 1% per month cannot,
therefore, be considered a reversible error.

The Court cited Spouses Castro vs. Tan, et al. (G.R. No. 168940; 24 November 2009), where it held
that: “The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in
principles of justice, or in the human conscience nor is there any reason whatsoever which may justify
such imposition as righteous and as one that may be sustained within the sphere of public or private
morals.”

FACTS:

Respondent Trojan Metal Industries, Inc. (TMI) came to petitioner PCI Leasing and Finance, Inc.
(PCILF) to seek a loan. Instead of extending a loan, PCILF offered to buy various equipment TMI
owned. Hard-pressed for money, TMI agreed. PCILF and TMI immediately executed deeds of
saleevidencing TMIs sale to PCILF of various equipments. PCILF and TMI then entered into a lease
agreement whereby the latter leased from the former the various equipment it previously owned. The
lease agreement required TMI to give PCILF a guaranty deposit which would serve as security for the
timely performance of TMIs obligations under the lease agreement, to be automatically forfeited
should TMI return the leased equipment before the expiration of the lease agreement. Further,
spousesWalfridoandElizabethDizon, as TMIs President and Vice-President, respectively executed in
favor of PCILF a Continuing Guaranty of Lease Obligations.Under the continuing guaranty,
theDizonspouses agreed to immediately pay whatever obligations would be due PCILF in case TMI
failed to meet its obligations under the lease agreement. To obtain additional loan from another
financing company,TMI used the leased equipment as temporary collateral.PCILF considered the
second mortgage a violation of the lease agreement. PCILF sent TMI a demand letterfor the payment
of the latters outstanding obligation. PCILFs demand remained unheeded. PCILF filed with the RTC a
complaintagainst TMI, spousesDizon, and John Doe (collectively referred to as respondents hereon)
for recovery of sum of money and personal property. The RTC issued the writ of replevin PCILF
prayed for, directing the sheriff to take custody of the leased equipment. Not long after, PCILF sold
the leased equipment to a third party and collected the proceeds.

The RTC ruled in favor of PCILF. On appeal, the Court of Appeals ruled that the sale with lease
agreement was in fact a loan secured by chattel mortgage. It set aside the Decision of the RTC.

ISSUE: Whether or not the sale with lease agreement the parties entered into was a financial lease or
a loan secured by chattel mortgage.
HELD: Court of Appeals decision is affirmed.

CIVIL LAW: financial lease v. loan secured by chattel mortgage

Leasing shall refer to financial leasing which is a mode of extending credit through a non-cancelable
contract under which thelessorpurchases or acquires at the instance of the lessee heavy equipment,
motor vehicles, industrial machinery, appliances, business and office machines, and other movable
property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient
to amortize at least 70% of the purchase price or acquisition cost, including any incidental expenses
and a margin of profit, over the lease period. The contract shall extend over an obligatory period
during which the lessee has the right to hold and use the leased property and shall bear the cost of
repairs, maintenance, insurance, and preservation thereof, but with no obligation or option on the part
of the lessee to purchase the leased property at the end of the lease contract. Thus, in a true financial
leasing, whether under RA 5980 or RA 8556, a finance company purchases on behalf of a
cash-strapped lessee the equipment the latter wants to buy but, due to financial limitations, is
incapable of doing so. The finance company then leases the equipment to the lessee in exchange for
the latters periodic payment of a fixed amount of rental. In this case, however, TMI already owned the
subject equipment before it transacted with PCILF. Therefore, the transaction between the parties in
this case cannot be deemed to be in the nature of a financial leasing as defined by law.

Under Article 1144 of the Civil Code, the prescriptive period for actions based upon a written contract
and for reformation of an instrument is ten years. The right of action for reformation accrued from the
date of execution of the lease agreement on 8 April 1997. TMI timely exercised its right of action when
it filed an answer on 14 February 2000 asking for the reformation of the lease agreement.

Hence, had the true transaction between the parties been expressed in a proper instrument, it would
have been a simple loan secured by a chattel mortgage, instead of a simulated financial leasing.
Thus, upon TMIs default, PCILF was entitled to seize the mortgaged equipment, not as owner but as
creditor-mortgagee for the purpose of foreclosing the chattel mortgage. PCILFs sale to a third party of
the mortgaged equipment and collection of the proceeds of the sale can be deemed in the exercise of
its right to foreclose the chattel mortgage as creditor-mortgagee. The Court of Appeals correctly ruled
that the transaction between the parties was simply a loan secured by a chattel mortgage.

The petition for review isDENIED.

Mortgage of property within the community or the conjugal partnership is void if done without the
consent of the other spouse. Nevertheless, the execution of special powers of attorney perfects the
contract of mortgage. In other words, the SPA cures the defect of the mortgage.

On the 31st day of October in the year 1995, the woman was able to obtain a loan secured by a Real
Estate Mortgage over a real proper under her and his husband's name but without the consent of the
former. Partial payments were made by her through checks but the same were dishonored. As a
result, the creditor filed a complaint against her for foreclosure of the mortgage with damages.
The second-level court dismissed the case as the mortgage was, in the eyes of the court a quo, void
for having been executed without the necessary consent of the husband, despite the SPA executed
later by the husband for the wife. It must be noted that the SPA was executed only a few days after
the wife entered into the contract of loan with mortgage.

The second-level court however ruled that the subsequent execution of the SPA cannot be made to
retroact to the date of the execution of the real estate mortgage.

ISSUE:

Did the court commit any error in dismissing the case for foreclosure against the wife for the mortgage
entered into without the husband's consent despite the fact that a subsequent SPA was executed in
her favor?

RULING:

Yes, the court acted in error.

The execution of the SPA can be considered as acceptance of the mortgage by the other spouse that
perfected the contract or continuing offer.

Both Article 96 and Article 124 of the Family Code provide that the powers of the administration do not
include disposition or encumbrance without the written consent of the other spouse. Any disposition or
encumbrance without the written consent shall be void. However, both provisions also state that “the
transaction shall be construed as a continuing offer on the part of the consenting spouse and the third
person, and may be perfected as a binding contract upon the acceptance by the other spouse x x x
before the offer is withdrawn by either or both offerors.”
On 25 June 1962, petitioner DBP, Ozamis Branch, granted a P31,000.00 loan to respondent spouses
Lomantong Darapa and Sinab Dimakuta (spouses) who executed therefore a real and chattel
mortgage contract, which covered, among others, the following:

A warehouse to house the rice and corn mill, xxx constructed on a 357 square meter lot situated at
poblacion, Linamon, Lanao del Norte which lot is covered by Tax Declaration No. A-148 of Linamon,
Lanao del Norte.

The equity rights, participation and interest of the mortgagors over the above-mentioned parcel of land
on which the bodega is constructed situated in the Municipality of Linamon, Province of Lanao del
Norte, containing an area of 357 square meters, more or less, declared for tax purposes in the name
of Sinab Dimakuta and assessed at P2,430.00 per Tax Declaration No. A-148 for the year 1961 and
bounded as follows: on the North by Rafael Olaybar; on the South, by National Road[;] on the East by
Ulpiano Jimenez; on the West, by Rafael Olaybar; of which property the mortgagors are in complete
and absolute possession. x x x.

The aforesaid equity rights, participation and interest of the mortgagors in said parcel of land are not
registered under the Spanish Mortgage Law nor under Act 496 and the parties hereto hereby agree
that this instrument shall be registered under Act 3344, as amended.

It is further the agreement of the parties that immediately after the mortgagors acquire absolute
ownership of the land above-mentioned on which the aforementioned building is erected by means of
a free or sales patent or any other title vesting them with ownership in fee simple, the Mortgagors
shall execute a Real Estate Mortgage thereon in favor of the Mortgagee, the Development Bank of the
Philippines, to replace and substitute only, this portion of the herein mortgage contract.4
The assignment of the spouses’ equity rights over the land covered by Tax Declaration No. A-148 in
DBP’s favor was embedded in the Deed of Assignment of Rights and Interests5 which the spouses
executed simultaneous with the real and chattel mortgage contract.

In 1970, the spouses applied for the renewal and increase of their loan using Sinab Dimakuta’s
(Dimakuta) Transfer Certificate of Title (TCT) No. T-1,997 as additional collateral. The DBP
disapproved the loan application without returning, however, Dimakuta’s TCT.

When the spouses failed to pay their loan, DBP extrajudicially foreclosed the mortgages on 16
September 1971, which, unknown to the spouses, included the TCT No. T-1,997. The spouses failed
to redeem the land under TCT No. T-1,997 which led to its cancellation, and, the eventual issuance of
TCT No. T-7746 in DBP’s name.

In 1984, the spouses discovered all these and they immediately consulted a lawyer who forthwith sent
a demand letter to the bank for the reconveyance of the land. The bank assured them of the return of
the land. In 1994, however, a bank officer told them that such is no longer possible as the land has
already been bought by Abalos, daughter of the then provincial governor.

On 12 May 1994,6 the DBP sold the land to its co-petitioner Josefa Abalos (Abalos). The TCT No.
T-7746 (originally TCT No. T-1,997) was cancelled and on 6 July 1994, T-16,280 was issued in
Abalos’ name.7

Abalos, on her part, contended that she was an innocent purchaser for value who relied in good faith
on the cleanliness of the DBP’s Title.

The Court also finds unmeritorious the DBP’s contention that the spouses’ cause of action is barred
by estoppel, laches and prescription. DBP claims that the failure of the spouses to redeem their
property estopped them from questioning the validity of the foreclosure sale; and, that laches and
prescription have already set in because the spouses filed their action only after the lapse of 16
years31 from the issuance of DBP’s title.

In Pacific Mills, Inc. v. Court of Appeals,32 we laid down the requisites of estoppel as follows: (a)
conduct amounting to false representation or concealment of material facts or at least calculated to
convey the impression that the facts are otherwise than, and inconsistent with, those which the party
subsequently attempts to assert; (b) intent, or at least expectation that this conduct shall be acted
upon, or at least influenced by the other party; and (c) knowledge, actual or constructive, of the factual
facts.33

In the present petition, it cannot be concluded that the spouses are guilty of estoppel for the requisites
are not attendant.
Marcopper Mining Corporation was unable to pay its loans from the Asian Development Bank (ADB).
Later, ADB transferred all its rights to collect from Marcopper to MR Holdings, Ltd. In order to pay MR
Holdings, Marcopper assigned all its assets to MR Holdings and executed therefor a Deed of
Assignment in MR Holdings favor.

Meanwhile, another creditor of Marcopper, Solidbank Corporation, won a case against Marcopper.
The court then issued a writ of execution directing Sheriff Carlos Bajar to levy Marcopper’s assets.

MR Holdings then filed an opposition asserting that it is now the owner of Marcopper’s assets hence,
Bajar cannot levy them. The lower court denied MR Holdings on the ground that the Deed of
Assignment was made in bad faith and that MR Holdings was a foreign corporation doing business
without a license in the Philippines (by virtue of the Deed of Assignment) and as such cannot sue in
the Philippines.
ISSUE: Whether or not MR Holdings may sue on this particular transaction.

HELD: Yes. The Supreme Court emphasized the following rules when it comes to foreign corporations
doing business here in the Philippines:

if a foreign corporation does business in the Philippines without a license, it cannot sue before the
Philippine courts;

if a foreign corporation is not doing business in the Philippines, it needs no license to sue before
Philippine courts on an isolated transaction or on a cause of action entirely independent of any
business transaction;

if a foreign corporation does business in the Philippines with the required license, it can sue before
Philippine courts on any transaction.

Being a mere assignee does not constitute “doing business” in the Philippines. MR Holdings, a foreign
corporation, cannot be said to be doing business simply because it became an assignee of
Marcopper. MR Holdings was not doing anything else other than being a mere assignee. The only
time that MR Holdings is considered to be doing business here is that if it continues the business of
Marcopper – which it did not.

Therefore, since it is not doing business here, pursuant to the rules above, it can sue without any
license before Philippine courts on an isolated transaction or on a cause of action entirely
independent of any business transaction.

Anent the issue of bad faith, the same was not proven. It appears that the deed of assignment was an
earlier agreement incidental to the loan agreement between ADB and Marcopper which precedes the
action brought by Solidbank against Marcopper.
On June 13, 1995, petitioner-spouses Manolito and Lourdes de Leon executed a Promissory Note5
binding themselves to pay Nissan Gallery Ortigas the amount of P458,784.00 in 36 monthly
installments of P12,744.00, with a late payment charge of five percent (5%) per month.6 To secure
the obligation under the Promissory Note, petitioner-spouses constituted a Chattel Mortgage7 over a
1995 Nissan Sentra 1300 4-Door LEC with Motor No. GA-13-549457B and Serial No.
BBAB-13B69336.8

On the same day, Nissan Gallery Ortigas, with notice to petitioner-spouses, executed a Deed of
Assignment9 of its rights and interests under the Promissory Note with Chattel Mortgage in favor of
Citytrust Banking Corporation (Citytrust).10

On October 4, 1996, Citytrust was merged with and absorbed by respondent Bank of the Philippine
Islands (BPI).11

Petitioner-spouses, however, failed to pay their monthly amortizations from August 10, 1997 to June
10, 1998.12 Thus, respondent BPI, thru counsel, sent them a demand letter13 dated October 16,
1998.

On November 19, 1998, respondent BPI filed before the Metropolitan Trial Court (MeTC) of Manila a
Complaint14 for Replevin and Damages, docketed as Civil Case No. 161617 and raffled to Branch 6,
against petitioner-spouses.15 The summons, however, remained unserved, prompting the MeTC to
dismiss the case without prejudice.16 Respondent BPI moved for reconsideration on the ground that it
was still verifying the exact address of petitioner-spouses.17 On March 21, 2002, the MeTC set aside
the dismissal of the case.18 On April 24, 2002, summons was served on petitioner-spouses.19

Petitioner-spouses, in their Answer,20 averred that the case should be dismissed for failure of
respondent BPI to prosecute the case pursuant to Section 321 of Rule 17 of the Rules of Court;22
that their obligation was extinguished because the mortgaged vehicle was stolen while the insurance
policy was still in force;23 that they informed Citytrust of the theft of the mortgaged vehicle through its
employee, Meldy Endaya (Endaya);24 and that respondent BPI should have collected the insurance
proceeds and applied the same to the remaining obligation.25

On November 11, 2003, respondent BPI presented its evidence ex parte.26 It offered as evidence the
testimony of its Account Consultant, Lilie Coria Ultu (Ultu), who testified on the veracity of the
Promissory Note with Chattel Mortgage, the Deed of Assignment, the demand letter dated October
16, 1998, and the Statement of Account27 of petitioner-spouses.28
For their part, petitioner-spouses offered as evidence the Alarm Sheet issued by the Philippine
National Police on December 3, 1997, the Sinumpaang Salaysay executed by Reynaldo Llanos
(Llanos), the Subpoena for Llanos, the letter of Citytrust dated July 30, 1996, the letters of respondent
BPI dated January 6, 1998 and June 25, 1998, and the testimonies of Ultu and petitioner Manolito.29

The party who alleges a fact has the burden of proving it.

Section 1, Rule 131 of the Rules of Court defines "burden of proof" as "the duty of a party to present
evidence on the facts in issue necessary to establish his claim or defense by the amount of evidence
required by law." In civil cases, the burden of proof rests upon the plaintiff, who is required to establish
his case by a preponderance of evidence.55 Once the plaintiff has established his case, the burden of
evidence shifts to the defendant, who, in turn, has the burden to establish his defense.56

In this case, respondent BPI, as plaintiff, had to prove that petitioner-spouses failed to pay their
obligations under the Promissory Note. Petitioner-spouses, on the other hand, had to prove their
defense that the obligation was extinguished by the loss of the mortgaged vehicle, which was insured.

However, as aptly pointed out by the MeTC, the mere loss of the mortgaged vehicle does not
automatically relieve petitioner-spouses of their obligation57 as paragraph 7 of the Promissory Note
with Chattel Mortgage provides that:

7. The said MORTGAGOR covenants and agrees to procure and maintain through the
MORTGAGEE, a comprehensive insurance from a duly accredited and responsible insurance
company approved by the MORTGAGEE, over the personalty hereinabove mortgaged to be insured
against loss or damage by accident, theft, and fire for a period of one (1) year from date hereof and
every year thereafter until the mortgage DEBTS are fully paid with an insurance company or
companies acceptable to the MORTGAGEE in an amount not less than the outstanding balance of
the mortgage DEBTS; that he/it will make all loss, if any, under such policy or policies payable to the
MORTGAGEE forthwith. x x x

xxxx

MORTGAGOR shall immediately notify MORTGAGEE in case of loss, damage or accident suffered
by herein personalty mortgaged and submit proof of such loss, damages or accident. Said loss
damage or accident for any reason including fortuitous event shall not suspend, abate, or extinguish
[petitioner spouses’] obligation under the promissory note or sums due under this contract x x x

In case of loss or damage, the MORTGAGOR hereby irrevocably appoints the MORTGAGEE as
his/its attorney-in-fact with full power and authority to file, follow-up, prosecute, compromise or settle
insurance claims; to sign, execute and deliver the corresponding papers, receipts and documents to
the insurance company as may be necessary to prove the claim and to collect from the latter the
insurance proceeds to the extent of its interest. Said proceeds shall be applied by the MORTGAGEE
as payment of MORTGAGOR’s outstanding obligation under the Promissory Note and such other
sums and charges as may be due hereunder or in other instruments of indebtedness due and owing
by the MORTGAGOR to the MORTGAGEE and the excess, if any, shall thereafter be remitted to the
MORTGAGOR. MORTGAGEE however shall be liable in the event there is a deficiency.

x x x x58

Based on the foregoing, the mortgagor must notify and submit proof of loss to the mortgagee.1âwphi1
Otherwise, the mortgagee would not be able to claim the proceeds of the insurance and apply the
same to the remaining obligation.

On May 22, 2001, respondents Spouses Silverio and Zosima Borbon, Spouses Xerxes and Erlinda
Facultad,and XM Facultad and Development Corporation commenced Civil Case No. CEB-26468 to
seek the declaration of the nullity of the promissory notes,real estate and chattel mortgages and
continuing surety agreement they had executed in favor of the petitioner. They further sought
damages and attorney’s fees, and applied for a temporary restraining order (TRO) orwrit of
preliminary injunction to prevent the petitioner from foreclosing on the mortgages against their
properties.

The complaintalleged that the respondents had obtained a loan from the petitioner, and had executed
promissory notes binding themselves, jointly and severally, to pay the sum borrowed; that as security
for the payment of the loan, they had constituted real estate mortgages on several parcels of land in
favor of the petitioner; and that they had been made to sign a continuing surety agreement and a
chattel mortgage on their Mitsubishi Pajero.

It appears that the respondents’obligation to the petitioner had reached P17,983,191.49, but they had
only been able to pay P13 Million because they had been adversely affected by the economic turmoil
in Asia in 1997. The petitioner required them to issue postdated checks to cover the loan under threat
of foreclosing on the mortgages. Thus, the complaint sought a TRO or a writ of preliminary injunction
to stay the threatened foreclosure.

On June 6, 2001, the petitioner filed its answer with affirmative defenses and counterclaim, as well as
its oppositionto the issuance of the writ of preliminary injunction, contending that the foreclosure of the
mortgages was within itslegal right to do.2

the CA grossly erred in not declaring that the RTC committed grave abuse of discretion in granting the
application of the respondents as the plaintiffs in Civil Case No. CEB-26468. The RTC apparently
disregarded the aforecited well-known norms and guidelines governing the issuance of the writ of
injunction. Thereby, the RTC acted capriciously and arbitrarily. Grave abuse of discretion means
either that the judicial or quasi-judicial power was exercised in an arbitrary or despotic manner by
reason of passion or personal hostility, or that the respondent judge, tribunal or board evaded a
positive duty, or virtually refused to perform the duty enjoined or to act in contemplation of law, such
as when such judge, tribunal or board exercising judicial or quasi-judicial powers acted in a capricious
or whimsical manner as to be equivalent to lack of jurisdiction.526

Spouses Palada v. Solidbank Corp.

GR No. 172227 June 29, 2011

Facts: Spouses Palada applied for a 3M loan with the respondent Solidbank. Petitioners received the
amount of 1M and secured the same with a deed of real estate mortgage of several properties in favor
of the respondent. Due to failure of the petitioners to pay their obligation, Solidbank foreclosed said
properties covered by the mortgage and sold the same. Petitioners filed for declaration of nullity of the
mortgage upon the ground, among others, that the loan contract was not perfected because the bank
delivered only 1M instead of the whole loan amount of 3M.

Issue: Was the contract of loan perfected?

Held: Yes, the loan contract was perfected. Under Article 1934 of the Civil Code, a loan contract is
perfected only upon the delivery of the object of the contract. In this case, although petitioners applied
for a P3 million loan, only the amount of P1 million was approved by the bank because petitioners
became collaterally deficient when they failed to purchase TCT No. T-227331 which had an appraised
value of P1,944,000.00. Hence, on March 17, 1997, only the amount of P1 million was released by
the bank to petitioners.

SPOUSES EDRALIN VS.PHILIPPINE VETERANS BANK

G.R. No. 168523 March 9, 2011

Facts:Veterans Bank granted petitioner spouses Fernando and Angelina executed a Real Estate
Mortgage in favor of the latter over a real property as a security of a loan in the amount of
P270,000.00. In due course, the foreclosure sale was held and sold the mortgaged property at public
auction. Veterans Bank emerged as the highest bidder at the said foreclosure sale and was issued
the corresponding Certificate of Sale.

Upon the Edralins’ failure to redeem the property during the one-year period provided under Act No.
3135, Veterans Bank acquired absolute ownership of the subject property. The Edralins failed to
vacate and surrender possession of the subject property to Veterans Bank. Thus Veterans Bank filed
an Ex-Parte Petition for the issuance of a Writ of possession beforethe Regional Trial Court but was
dismissed. Veterans Bank again filed an Ex-Parte Petition for Issuance of Writ of Possession before
the RTC. The Edralins moved to dismiss the petition on the ground that the dismissal RTC’s former
decision constituted res judicata.

The trial court denied the motion to dismiss explaining that the ground of failure to present evidence is
not a determination of the merits of the case hence does not constitute res judicata on the petition for
issuance of a writ of possession. Nevertheless, the trial court found no merit in the Veterans Bank’s
application and dismissed the same. Upon appeal, The appellate court ruled in favor of Veterans
Bank.

Issue: Whether or not the failure of petitionersto question the validity of the foreclosure proceedings or
the auction sale resulted in the ripening of the consolidation of ownership.

Ruling: No.Pactumcommissorium is ”a stipulation empowering the creditor to appropriate the thing

given as guaranty for the fulfillment of the obligation in the event the obligor fails to live up to his
undertakings, without further formality, such as foreclosure proceedings, and a public sale. “The
elements of pactumcommissorium, which enable the mortgagee to acquire ownership of the
mortgaged property without the need of any foreclosure proceedings, are: (1) there should be a
property mortgaged by way of security for the payment of the principal obligation, and (2) there should
be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of
non-payment of the principal obligation within the stipulated period.”

The second element is missing to characterize the Deed of Sale as a form of pactumcommissorium.
Veterans Bank did not, upon the petitioners’ default, automatically acquire or appropriate the
mortgaged property for itself. On the contrary, the Veterans Bank resorted to extrajudicial foreclosure
and was issued a Certificate of Sale by the sheriff as proof of its purchase of the subject property
during the foreclosure sale. That Veterans Bank went through all the stages of extrajudicial
foreclosure indicates that there was no pactumcommissorium.