MOBIL OIL PHILIPPINES, INC., plaintiff-appellant, vs.

RUTH
R. DIOCARES, ET AL., defendants-appellees.

Faylona, Berroya, Norte & Associates for plaintiff-appellant.

Vivencio G. Ibrado, Jr. for defendants-appellees.

SYLLABUS

1. CIVIL LAW; MORTGAGES; REAL ESTATE MORTGAGE;

INSTRUMENT TO BE RECORDED IN THE REGISTRY OF PROPERTY;
NON-COMPLIANCE WITH REQUIREMENT IS NOT A BAR TO
FORECLOSURE. — The conclusion of the lower court denying the
foreclosure sought by plaintiff and holding that no real estate mortgage was
established because the document in which it appears was not recorded in
the Registry of Property, does not commend itself for approval. The codal
provision is clear and explicit. Even if the instrument were not recorded, "the
mortgage is nevertheless binding between the parties." The law cannot be
any clearer. Effect must be given to it as written. The mortgage subsists; the
parties are bound. As between them, the mere fact that there is as yet no
compliance with the requirement that it be recorded cannot be a bar to
foreclosure.
2. ID.; ID.; ID.; EXCEPTION TO THE RULE DEMANDED BY EQUITY
AND JUSTICE. — It is not difficult to discern why an exception should be
made to the rule that it is indispensable for a mortgage to be validly
constituted that it be recorded. Equity so demands and justice is served.
There is thus full acknowledgment of the binding effect of a promise, which
must be lived up to, otherwise the freedom a contracting party is supposed to
possess becomes meaningless. It could be said of course that to allow
foreclosure in the absence of such a formality is to offend against the
demands of jural symmetry. What is "indispensable" may be dispensed with.
Such an objection is far from fatal. This would not be the first time when logic
yields to what is fair and what is just. To such an overmastering requirement,
law is not immune.
3. ID.; ID.; ID.; ID.; LEGISLATIVE INTENT SHOULD NOT BE
FRUSTRATED. — To rule as the lower court did in requiring registration in
order that the mortgage may be said, would be to show less than fealty in the
purpose that animated the legislators in giving expression to their will that the
failure of the instrument to be recorded does not result in the mortgage being
any the less "binding between the parties." In the language of the Report of
 the Code Commission: "In Article (2125) an additional provision is made that if
the instrument of mortgage is not recorded, the mortgage is nevertheless
binding between the parties." We are not free to adopt then an interpretation,
even assuming that the codal provision lacks the forthrightness and clarity
that this particular norm does and therefore requires construction, that would
frustrate or nullify such legislative objective.
4. STATUTES; APPLICATION NOT INTERPRETATION THEREOF
WHEN TERMS ARE IN UNAMBIGUOUS LANGUAGE. — What the law
requires in unambiguous language must be lived up to. No interpretation is
needed, only its application, the undisputed facts calling for it.

DECISION

FERNANDO, J : p

It may very well be, as noted by jurists of repute, that to stress the
element of a promise as the basis of contracts is to acknowledge the influence
of natural law. 1 Nonetheless, it does not admit of doubt that whether under
the civil law or the common law, the existence of a contract is unthinkable
without one's word being plighted. So the New Civil Code provides: "A
contract is a meeting of minds between two persons whereby one binds
himself, with respect to the other, to give something or to render some
service." 2 So it is likewise under American law. Thus: "A contract is a promise
or a set of promises for the breach of which the law gives a Remedy, or the
performance of which the law in some way recognizes as a duty." 3

The law may go further and require that certain formalities be executed.
Thus, for a mortgage to be validly constituted, "it is indispensable, . . ., that the
document in which it appears be recorded in the Registry of Property." The
same codal provision goes on: "If the instrument is not recorded, the
mortgage is nevertheless binding between the parties." 4
The question before us in this appeal from a lower court decision, one
we have to pass upon for the first time, is the effect, if any, to be given to a
mortgage contract admittedly not registered, only the parties being involved in
the suit. The lower court was of the opinion that while it "created a personal
obligation [it] did not establish a real estate mortgage." 5 It did not decree
foreclosure therefor. Plaintiff-appellant appealed. We view the matter
differently and reverse the lower court.
The case for the plaintiff, Mobil Oil Philippines, Inc., now appellant, was
summarized in the lower court order of February 25, 1966, subject of this
appeal. Thus: "In its complaint plaintiff alleged that on Feb. 9, 1965
defendants Ruth R. Diocares and Lope T. Diocares entered into a contract of
loan and real estate mortgage wherein the plaintiff extended to the said
defendants a loan of P45,000.00; that said defendants also agreed to buy
from the plaintiff on cash basis their petroleum requirements in an amount of
not less than 50,000 liters per month; that the said defendants will pay to the
plaintiff 9-1/2% per annum on the diminishing balance of the amount of their
loan; that the defendants will repay the said loan in monthly installments of
P950.88 for a period of five (5) years from February 9, 1965; that to secure
the performance of the foregoing obligation they executed a first mortgage on
two parcels of land covered by Transfer Certificates of Title Nos. T-27136 and
T-27946, both issued by the Register of Deeds of Bacolod City. The
agreement further provided that in case of failure of the defendants to pay any
of the installments due and purchase their petroleum requirements in the
minimum amount of 50,000 liters per month from the plaintiff, the latter has
the right to foreclose the mortgage or recover the payment of the entire
obligation or its remaining unpaid balance; that in case of foreclosure the
plaintiff shall be entitled to 12% of the indebtedness as damages and
attorney's fees. A copy of the loan and real estate mortgage contract executed
between the plaintiff and the defendants is attached to the complaint and
made a part thereof. The complaint further alleges that the defendant paid
only the amount of P1,901.76 to the plaintiff, thus leaving a balance of
P43,098.24, excluding interest, on their indebtedness. The said defendants
also failed to buy on cash basis the minimum amount of petroleum which they
agreed to purchase from the plaintiff. The plaintiff, therefore, prayed that the
defendants be ordered to pay the amount of P43,098.24, with interest at 9-
1/2% per annum from the date it fell due, and in default of such payment that
the mortgaged properties be sold and the proceeds applied to the payment of
defendants' Obligation." 6
Defendants, Ruth R. Diocares and Lope T. Diocares, now appellees,
admitted their indebtedness as set forth above, denying merely the alleged
refusal to pay, the truth, according to them, being that they sought for an
extension of time to do so, inasmuch as they were not in a position to comply
with their obligation. They further set forth that they did request plaintiff to
furnish them with the statement of accounts with the view of paying the same
on installment basis, which request was, however, turned down by the
plaintiff.
Then came a motion from the plaintiff for a judgment on the pleadings,
which motion was favorably acted on by the lower court. As was stated in the
order appealed from: "The answer of the defendants dated October 21, 1965
did not raise any issue. On the contrary, said answer admitted the material
allegations of the complaint. The plaintiff is entitled to a judgment on the
pleadings." 7
As to why the foreclosure sought by plaintiff was denied, the lower court
order on appeal reads thus: "The Court cannot, however, order the
foreclosure of the mortgage of properties, as prayed for, because there is no
allegation in the complaint nor does it appear from the copy of the loan and
real estate mortgage contract attached to the complaint that the mortgage had
been registered. The said loan agreement although binding among the parties
merely created a personal obligation but did not establish a real estate
mortgage. The document should have been registered. (Art. 2125, Civil Code
of the Phil.)" 8 The dispositive portion is thus limited to ordering defendants "to
pay the plaintiff the account of P43,098.24, with interest at the rate of 9-1/2%
per annum from the date of the filing of the complaint until fully paid, plus the
amount of P2,000.00 as attorneys' fees, and the costs of the suit." 9
Hence this appeal, plaintiff-appellant assigning as errors the holding of
the lower court that no real estate mortgage was established and its
consequent refusal to order the foreclosure of the mortgaged properties. As
set forth at the outset, we find the appeal meritorious.
The lower court should not have held that no real estate mortgage was
established and should have ordered its foreclosure. The lower court
predicated its inability to order the foreclosure in view of the categorical nature
of the opening sentence of the governing article 10 that it is indispensable, "in
order that a mortgage may be validly constituted, that the document in which it
appears be recorded in the Registry of Property." Note that it ignored the
succeeding sentence: "If the instrument is not recorded, the mortgage is
nevertheless binding between the parties." Its conclusion, however, is that
what was thus created was merely "a personal obligation but did not establish
a real estate mortgage."
Such a conclusion does not commend itself for approval. The codal
provision is clear and explicit. Even if the instrument were not recorded, "the
mortgage is nevertheless binding between the parties." The law cannot be
any clearer. Effect must be given to it as written. The mortgage subsists; the
parties are bound. As between them, the mere fact that there is as yet no
compliance with the requirement that it be recorded cannot be a bar to
foreclosure.
A contrary conclusion would manifest less than full respect to what the
codal provision ordains. The liability of the mortgagor is therein explicitly
recognized. To hold, as the lower court did, that no foreclosure would lie
under the circumstances would be to render the provision in question
nugatory. That we are not allowed to do. What the law requires in
 unambiguous language must be lived up to. No interpretation is needed, only
its application, the undisputed facts calling for it. 11
Moreover to rule as the lower court did would be to show less than
fealty to the purpose that animated the legislators in giving expression to their
will that the failure of the instrument to be recorded does not result in the
mortgage being any the less "binding between the parties." In the language of
the Report of the Code Commission: "In article [2125] an additional provision
is made that if the instrument of mortgage is not recorded, the mortgage is
nevertheless binding between the parties." 12 We are not free to adopt then an
interpretation, even assuming that the codal provision lacks the forthrightness
and clarity that this particular norm does and, therefore, requires construction,
that would frustrate or nullify such legislative objective.
Nor is the reason difficult to discern why such an exception should be
made to the rule that is indispensable for a mortgage to be validly constituted
that it be recorded. Equity so demands, and justice is served. There is thus
full acknowledgment of the binding effect of a promise, which must be lived up
to, otherwise the freedom a contracting party is supposed to possess
becomes meaningless. It could be said of course that to allow foreclosure in
the absence of such a formality is to offend against the demands of jural
symmetry. What is "indispensable" may be dispensed with. Such an objection
is far from fatal. This would not be the first time when logic yields to what is
fair and what is just. To such an overmastering requirement, law is not
immune.
WHEREFORE, the lower court order of February 25, 1966 is affirmed
with the modification that in default of the payment of the above amount of
P43,028.94 with interests at the rate of 9-1/2% per annum from the date of the
filing of the complaint, that the mortgage be foreclosed with the properties
subject thereof being sold and the proceeds of the sale applied to the
payment of the amounts due the plaintiff in accordance with law. With costs
against defendants-appellees.
(Mobil Oil Philippines, Inc. v. Diocares, G.R. No. L-26371, [September 30,
|||

1969], 140 PHIL 17

 TRADERS ROYAL BANK, petitioner, vs. NORBERTO
CASTAÑARES and MILAGROS CASTAÑARES, respondents.

DECISION

VILLARAMA, JR., J : p

Assailed in this petition for review under Rule 45 of the 1997 Rules of
Civil Procedure, as amended, is the Decision 1 dated January 11, 2006 of the
Court of Appeals (CA) in CA-G.R. CV No. 67257 which reversed the Joint
Decision 2 dated August 26, 1998 of the Regional Trial Court (RTC) of Cebu
City, Branch 13 in Civil Case Nos. R-22608 and CEB-112.
The Facts
Respondent-spouses Norberto and Milagros Castañares are engaged
in the business of exporting shell crafts and other handicrafts. Between 1977
and 1978, respondents obtained from petitioner Traders Royal Bank various
loans and credit accommodations. Respondents executed two real estate
mortgages (REMs) dated April 18, 1977 and January 25, 1978 covering their
properties (TCT Nos. T-38346, T-37536, T-37535, T-37192 and T-37191). As
evidenced by Promissory Note No. BD-77-113 dated May 10, 1977, petitioner
released only the amount of P35,000.00 although the mortgage deeds
indicated the principal amounts as P86,000.00 and P60,000.00. 3
Type of Loan Date Granted Amount

Packing May 10, 1977 P19,000.00

Credit
Packing May 18, 1977 P25,000.00
Credit
Packing June 23, 1977 P12,500.00
Credit
Packing August 19, P2,900.00
Credit 1977
Packing April 4, 1978 P18,000.00
Credit
Packing April 19, 1978 P23,000.00
Credit

On June 22, 1977, petitioner transferred the amount of P1,150.00 from

respondents' current account to their savings account, which was erroneously
posted as P1,500.00 but later corrected to reflect the figure P1,150.00 in the
savings account passbook. By the second quarter of 1978, the loans began to
mature and the letters of credit against which the packing advances were
granted started to expire. Meanwhile, on December 7, 1979, petitioner,
without notifying the respondents, applied to the payment of respondents'
outstanding obligations the sum of $4,220.00 or P30,930.49 which was
remitted to the respondents thru telegraphic transfer from AMROBANK,
Amsterdam by one Richard Wagner. The aforesaid entries in the passbook of
respondents and the $4,220.00 telegraphic transfer were the subject of
respondents' letter-complaint 5 dated September 20, 1982 addressed to the
Manager of the Regional Office of the Central Bank of the Philippines.
For failure of the respondents to pay their outstanding loans with
petitioner, the latter proceeded with the extrajudicial foreclosure of the real
estate mortgages. 6 Thereafter, a Certificate of Sale 7covering all the
mortgaged properties was issued by Deputy Sheriff Wilfredo P. Borces in
favor of petitioner as the lone bidder for P117,000.00 during the auction sale
conducted on November 24, 1981. Said certificate of sale was registered with
the Office of the Register of Deeds on February 4, 1982. ISAaTH

On November 24, 1982, petitioner instituted Civil Case No. R-22608 for
deficiency judgment, claiming that after applying the proceeds of foreclosure
sale to the total unpaid obligations of respondents (P200,397.78),
respondents were still indebted to petitioner for the sum of
P83,397.68. 8 Respondents filed their Answer With Counterclaim on
December 27, 1982. 9
On February 10, 1983, respondents filed Civil Case No. CEB-112 for
the recovery of the sums of P2,584.27 debited from their savings account
passbook and the equivalent amount of $4,220.00 telegraphic transfer, and in
addition, $55,258.85 representing the damage suffered by the respondents
from letters of credit left un-negotiated because of petitioner's refusal to pay
the $4,220.00 demanded by the respondents. 10
The cases were consolidated before Branch 13, RTC of Cebu City.
Ruling of the RTC
In a Joint Decision 11 dated August 26, 1998, the RTC ruled in favor of
the petitioner, as follows:
WHEREFORE, in view of the foregoing, judgment is hereby
rendered in Civil Case No. R-22608 in favor of the plaintiff and against
the defendants directing the defendants jointly and solidarily to pay
plaintiff the sum of P83,397.68 with legal rate of interest to be computed
from November 24, 1981 (the date of the auction sale) until full payment
thereof. They are likewise directed to pay plaintiff attorney's fees in the
sum of P10,000.00 plus litigation expenses in the amount of P2,500.00.
 With cost against defendants.
In CEB-112, judgment is hereby rendered dismissing the
complaint.
With cost against the plaintiff.
SO ORDERED. 12
The trial court found that despite respondents' insistence that the REM
covered only a separate loan for P86,000.00 which they believed petitioner
committed to lend them, the evidence clearly shows that said REM was
constituted as security for all the promissory notes. No separate demand was
made for the amount of P86,000.00 stated in the REM, as the demand was
limited to the amounts of the promissory notes. The trial court further noted
that respondents never questioned the judgment for extrajudicial foreclosure,
the certificate of sale and the deficiency in that case. 13
With respect to the passbook entries, the trial court stated that no
objection thereto was made by the respondents until five years later when in a
letter dated August 10, 1982, respondents' counsel asked petitioner to be
enlightened on the matter. Neither did respondents protest the application of
the balance (P1,150.00) in the passbook to his account with petitioner. More
important, respondent Norberto Castañares in his testimony admitted that the
matter was already clarified to him by petitioner and that the latter had the
right to apply his deposit to his loan accounts. Admittedly, his complaint has to
do more with the lack of consent on his part and the non-issuance of official
receipt. However, he did not follow up his request for official receipt as he did
not want to be going back and forth to the bank. 14 EHIcaT

CA Ruling
With the trial court's denial of their motion for reconsideration,
respondents appealed to the CA. Finding merit in respondents' arguments,
the appellate court set aside the trial court's judgment under its
Decision 15 dated January 11, 2006, thus:
WHEREFORE, in view of the foregoing premises, judgment is
hereby rendered by us GRANTING the appeal filed in this case and
REVERSING AND SETTING ASIDE the Joint Decision dated August 26,
1998, Regional Trial Court, 7th Judicial Region, Branch 13, in Civil Case
No. R-22608 and Civil Case No. CEB-112. With regard to Civil Case No.
R-22608, the real estate mortgage dated April 18, 1977 is hereby
DECLARED as valid in part as to the amount of P35,000.00 actually
released in favor of appellants, while the real estate mortgage dated
January 26, 1978 is hereby declared as null and void. Furthermore, in
Civil Case No. CEB-112, TRB is hereby ordered to release the amount
of US$4,220.90 to the appellants at its current rate of exchange. No
pronouncement as to costs.
 SO ORDERED. 16
The CA held that the RTC overlooked the fact that there were no
adequate evidence presented to prove that petitioner released in full to the
respondents the proceeds of the REM loan. Citing Filipinas Marble
Corporation v. Intermediate Appellate Court 17 and Naguiat v. Court of
Appeals, 18 the appellate court declared that where there was failure of the
mortgagee bank to deliver the consideration for which the mortgage was
executed, the contract of loan was invalid and consequently the accessory
contract of mortgage is likewise null and void. In this case, only P35,000.00
out of the P86,000.00 stated in the REM dated April 18, 1977 was released to
respondents, and hence the REM was valid only to that extent. For the same
reason, the second REM was null and void since no actual loan proceeds
were released to the respondents-mortgagors. The REMs are not connected
to the subsequent promissory notes because these were signed by
respondents for the sole purpose of securing packing credits and export
advances. Further citing Acme Shoe, Rubber and Plastic Corp. v. Court of
Appeals, 19 the CA stated that the rule is that a pledge, real estate mortgage
or antichresis may exceptionally secure after-incurred obligations only as long
as these debts are accurately described therein. In this case, neither of the
two REMs accurately described or even mentioned the securing of future
debts or obligations. 20
The CA thus held that petitioner's remedy would be to file a collection
case on the unpaid promissory notes which were not secured by the REMs.
As to the $4,220.00 telegraphic transfer, the CA ruled that petitioner
had no basis for withholding and applying the said amount to respondents'
loan account. Said transaction was separate and distinct from the contract of
loan between petitioner and respondents. Petitioner had no authority to
convert the said telegraphic transfer into cash since the participation of
respondents was necessary to sign and indorse the disbursement voucher
and check. Moreover, petitioner was not transparent in its actions as it did not
inform the respondents of its intention to apply the proceeds of the telegraphic
transfer to their loan account and worse, it did not even present an official
receipt to prove payment. Section 5 of Republic Act No. 6426, otherwise
known as the Foreign Currency Deposit Act, provides that there shall be no
restriction on the withdrawability by the depositor of his deposit or the
transferability of the same abroad except those arising from contract between
the depositor and the bank. 21
The Petition
Petitioner raised the following grounds in the review of the CA decision:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE
REAL ESTATE MORTGAGE DATED 18 APRIL 1977 IS VALID ONLY
 IN PART TO THE EXTENT OF PHP35,000.00 WHICH IS ALLEGEDLY
THE AMOUNT PROVED TO HAVE BEEN ACTUALLY RELEASED TO
RESPONDENTS OUT OF THE SUM OF PHP86,000.00.
II. THE COURT OF APPEALS ERRED IN DECLARING AS NULL
AND VOID THE REAL ESTATE MORTGAGE DATED 26 JANUARY
1978 IN THAT NO ACTUAL LOAN PROCEEDS WERE RELEASED IN
FAVOR OF THE RESPONDENTS. aSIATD

III. THE COURT OF APPEALS ERRED IN HOLDING THAT

PETITIONER HAD NO BASIS IN WITHHOLDING AND
SUBSEQUENTLY APPLYING IN PAYMENT OF RESPONDENTS'
OVERDUE ACCOUNT IN THE TELEGRAPHIC TRANSFER IN THE
AMOUNT OF U.S.$4,220.00. 22
Petitioner contends that the CA overlooked the specific stipulation in the
REMs that the mortgage extends not only to the amounts specified therein but
also to loans or credits subsequently granted, which include the packing
credits and export advances obtained by the respondents. Moreover, the
amounts indicated on the REMs need not exactly be the same amounts that
should be released and covered by checks or credit memos, the same being
only the maximum sum or "ceiling" which the REM secures, as explained by
petitioner's witness, Ms. Blesy Nemeño. Her testimony does not prove that the
proceeds of the loans were not released in full, as no credit memos in the
specific amounts received by the respondents can be presented.
Petitioner argues that the rulings cited by the CA do not at all support its
conclusion that the promissory notes were totally unrelated to the REMs. In
the Acme case, the pronouncement was that the after-incurred obligations
must, at the time they are contracted, only be accurately described in a proper
instrument as in the case of a promissory note. The confusion was brought by
the use in the CA decision of the word "therein" which is not found in the text
of the Acme ruling. Besides, it is way too impossible that future loans can be
accurately described, as the CA opined, at the time that a deed of real estate
mortgage is executed. The CA's reliance on the case of Filipinas Marble
Corporation, is likewise misplaced as it finds no application under the facts
obtaining in the present case. The misappropriation by some individuals of the
loan proceeds secured by petitioner was the consideration which compelled
this Court to rule that there was failure on the part of DBP to deliver the
consideration for which the mortgage was executed. Similarly, the case
of Naguiat is inapplicable in that there was evidence that an agent of the
creditor withheld from the debtor the checks representing the proceeds of the
loan pending delivery of additional collateral.
Finally, petitioner reiterates that it had the right by way of set-off the
telegraphic transfer in the sum of $4,220.00 against the unpaid loan account
of respondents. Citing Bank of the Philippine Islands v. Court of
Appeals, 23 petitioner asserts that they are bound principally as both creditors
and debtors of each other, the debts consisting of a sum of money, both due,
liquidated and demandable, and are not claimed by a third person. Hence, the
RTC did not err in holding that petitioner validly applied the amount of
P30,930.20 (peso equivalent of $4,220.00) to the loan account of the
respondents.
Our Ruling
We rule for the petitioner.
The subject REMs contain the following provision:
That, for and in consideration of certain loans, overdrafts and
other credit accommodations obtained, from the Mortgagee by the
Mortgagor and/or SPS. NORBERTO V. CASTAÑARES & MILAGROS
M. CASTAÑARES and to secure the payment of the same, the
principal of all of which is hereby fixed at EIGHTY-SIX THOUSAND
PESOS ONLY (P86,000.00) Pesos, Philippine Currency, as well as
those that the Mortgagee may hereafter extend to the Mortgagor . .
., including interest and expenses or any other obligation owing to
the Mortgagee, whether direct or indirect, principal or secondary,
as appears in the accounts, books and records of the Mortgagee . .
. . 24 (Emphasis supplied.)
The above stipulation is also known as "dragnet clause" or "blanket
mortgage clause" in American jurisprudence that would subsume all debts of
past and future origins. It has been held as a valid and legal undertaking, the
amounts specified as consideration in the contracts do not limit the amount for
which the pledge or mortgage stands as security, if from the four corners of
the instrument, the intent to secure future and other indebtedness can be
gathered. A pledge or mortgage given to secure future advancements is a
continuing security and is not discharged by the repayment of the amount
named in the mortgage until the full amount of all advancements shall have
been paid. 25
A "dragnet clause" operates as a convenience and accommodation to
the borrowers as it makes available additional funds without their having to
execute additional security documents, thereby saving time, travel, loan
closing costs, costs of extra legal services, recording fees, et cetera. 26 While
a real estate mortgage may exceptionally secure future loans or
advancements, these future debts must be sufficiently described in the
mortgage contract. An obligation is not secured by a mortgage unless it
comes fairly within the terms of the mortgage contract. 27 AHDaET

In holding that the REMs were null and void, the CA opined that the full
amount of the principal loan stated in the deed should have been released in
full, sustaining the position of the respondents that the promissory notes were
not secured by the mortgage and unrelated to it. However, a reading of the
afore-quoted provision of the REMs shows that its terms are broad enough to
cover packing credits and export advances granted by the petitioner to
respondents. That the respondents subsequently availed of letters of credit
and export advances in various amounts as reflected in the promissory notes,
buttressed the claim of petitioner that the amounts of P86,000.00 and
P60,000.00 stated in the REMs merely represent the maximum total loans
which will be secured by the mortgage. This must be so as respondents
confirmed that the mortgage was constituted for the purpose of obtaining
additional capital as dictated by the needs of their export business.
Significantly, no complaint was made by the respondents as to the non-
release of P86,000.00 and P60,000.00, in full, simultaneous or immediately
following the execution of the REMs — under a single promissory note each
equivalent to the said sums — and no demand for the said specific amounts
was ever made by the petitioner. Even the letter-complaint sent by
respondents to the Central Bank almost a year after the extrajudicial
foreclosure sale mentioned only the questioned entries in their passbook and
the $4,220.00 telegraphic transfer. Considering that respondents deemed it a
serious "banking malpractice" for petitioner not to release in full the loan
amount stated in the REMs, it can only be inferred that respondents
themselves understood that the P86,000.00 and P60,000.00 indicated in the
REMs was intended merely to fix a ceiling for the loan accommodations which
will be secured thereby and not the actual principal loan to be released at one
time. Thus, the RTC did not err in upholding the validity of the REMs and
ordering the respondents to pay the deficiency in the foreclosure sale to
satisfy the remaining mortgage indebtedness.
The cases relied upon by the CA are all inapplicable to the present
controversy. In Filipinas Marble Corporation, we held that pending the
outcome of litigation between DBP which together with Bancom officers were
alleged by the petitioner-mortgagor to have misspent and misappropriated the
$5 million loan granted by DBP, the provisions of P.D. No. 385 prohibiting
injunctions against foreclosures by government financial institutions, cannot
be automatically applied. Foreclosure of the mortgaged properties for the
whole amount of the loan was deemed prejudicial to the petitioner, its
employees and their families since the true amount of the loan which was
applied for the benefit of the petitioner can be determined only after a trial on
the merits. 28 No such act of misappropriation by corporate officers appointed
by the mortgagee is involved in this case. Besides, the respondents never
denied receiving the amounts under the promissory notes which were all
covered by the REMs and the very obligations subject of the extrajudicial
foreclosure.
 As to the ruling in Naguiat, we found therein no compelling reason to
disturb the lower courts' finding that the lender did not remit and the borrower
did not receive the proceeds of the loan. Hence, we held the mortgage
contract, being just an accessory contract, as null and void for absence of
consideration. 29 In this case, however, respondents admitted they received
all the amounts under the promissory notes presented by the petitioner. The
consideration in the execution of the REMs consist of those credit
accommodations to fund their export transactions. Respondents as an
afterthought raised issue on the nature of the amounts of principal loan
indicated in the REMs long after these obligations have matured and the
mortgage foreclosed due to their failure to fully settle their outstanding
accounts with petitioner. Having expressly agreed to the terms of the REMs
which are phrased to secure all such loans and advancements to be obtained
from petitioner, although the principal amount stated therein were not
released at one time and under several, not just one, subsequently
issued promissory notes, respondents may not be allowed to complain later
that the amounts they received were unrelated to the REMs.
On the issue of the $4,220.00 telegraphic transfer which was applied by
the petitioner to the loan account of respondents, we hold that the CA erred in
holding that petitioner had no authority to do so by way of compensation or
set off. In this case, the parties stipulated on the manner of such set off in
case of non-payment of the amount due under each promissory note.
The subject promissory notes thus provide:
In case of non-payment of this note or any installments thereof at
maturity, I/We jointly and severally, agree to pay an additional amount
equivalent to two per cent (2%) per annum of the amount due and
demandable as penalty and collection charges, in the form of liquidated
damages, until fully paid; and the further sum of ten per cent (10%)
thereof in full, without any deduction, as and for attorney's fees whether
actually incurred or not, exclusive of costs and judicial/extrajudicial
expenses; moreover, I/We, jointly and severally, further empower and
authorize the TRADERS ROYAL BANK, at its option, and without
notice, to set-off or to apply to the payment of this note any and all
funds, which may be in its hands on deposit or otherwise
belonging to anyone or all of us, and to hold as security therefor any
real or personal property, which may be in its possession or control by
virtue of any other contract. 30 (Emphasis supplied.)CcHDSA

Agreements for compensation of debts or any obligations when the

parties are mutually creditors and debtors are allowed under Art. 1282 of
the Civil Code even though not all the legal requisites for legal compensation
are present. Voluntary or conventional compensation is not limited to
obligations which are not yet due. 31 The only requirements for conventional
 compensation are (1) that each of the parties can fully dispose of the credit he
seeks to compensate, and (2) that they agree to the extinguishment of their
mutual credits. 32 Consequently, no error was committed by the trial court in
holding that petitioner validly applied, by way of compensation, the $4,220.00
telegraphic transfer remitted by respondents' foreign client through the
petitioner.
WHEREFORE, the petition is GRANTED. The Decision dated January
11, 2006 of the Court of Appeals in CA-G.R. CV No. 67257
is REVERSED and SET ASIDE. The Joint Decision dated August 26, 1998 of
the Regional Trial Court of Cebu City, Branch 13 in Civil Case Nos. R-22608
and CEB-112 is REINSTATED and UPHELD.
No pronouncement as to costs.
SO ORDERED.
(Traders Royal Bank v. Spouses Castañares, G.R. No. 172020, [December 6,
|||

2010], 651 PHIL 236-250)

MARY ANN DEHEZA-INAMARGA, petitioner, vs. CELENIA C.

ALANO, BERNALDA A. PAROHINOG, GODOFREDO ALANO,
AVELINO ALANO, ESTRELLA ALANO, FORTUNATA ALANO,
NANY ALANO, SALLY ALANO, ADIONITO ALANO, and
SUFRONIA ALANO, respondents.

DECISION

QUISUMBING, J : p

This petition for review on certiorari assails the Decision 1 dated

September 8, 2004 and Resolution 2 dated January 4, 2006 of the Court of
Appeals in CA-G.R. CV No. 64164. The appellate court had affirmed the
Decision 3 dated November 26, 1998 of the Regional Trial Court (RTC)
Branch 1, Kalibo, Aklan in Civil Case No. 4278. TcSCEa

The facts of the case are as follows:

Tomas Alano, husband of respondent Celenia Alano, owned two
parcels of land covered by Original Certificates of Title (OCT) Nos. P-761 and
P-762. He mortgaged the properties in favor of Renato Gepty on September
20, 1972. In 1976, Gepty demanded that Tomas pay the loan. Tomas,
however, did not have money at that time to redeem his properties so he
sought help from his niece, petitioner Mary Ann Deheza-Inamarga. Petitioner
agreed to pay the loan while the spouses, in turn, mortgaged said properties
to her. Petitioner kept in her possession OCT Nos. P-761 and P-762 and
asked the spouses to sign blank pieces of paper which petitioner said will be
converted into receipts evidencing their indebtedness to her.
In November 1990, after Tomas had passed away, respondents
Celenia and her children went to petitioner to redeem the property. Petitioner,
however, told them that she had mortgaged the property to the Rural Bank of
Libacao. Respondents verified the matter with the bank and discovered that
OCT Nos. P-761 and P-762 have been cancelled and in lieu thereof, Transfer
Certificates of Title (TCT) Nos. T-9080 and T-9081 were issued in petitioner's
name. Respondents learned that the TCTs in petitioner's favor were issued by
virtue of a Deed of Sale purportedly executed by the Spouses Alano in her
favor.
On January 24, 1991, respondents filed a complaint for the declaration
of nullity of document, reconveyance and damages against petitioner and the
Rural Bank of Libacao. Respondents contended that the deed of sale is null
and void because the signatures of the Spouses Alano were forged and even
if they were the signatures of the spouses, they were affixed on blank sheets
of paper which were not intended to be a deed of sale.
Petitioner, on the other hand, denied the allegation of forgery and
maintained that the deed of sale was valid. She claimed that the spouses
offered to sell her the property so they can use the purchase price of P7,000
to redeem the property from Gepty. Petitioner added that the action is barred
by prescription, laches and estoppel.
On November 26, 1998, the RTC rendered its decision, the dispositive
portion of which reads as follows:
WHEREFORE, judgment is hereby rendered:
1. Declaring the transaction between the plaintiffs and defendant Mary
Ann Deheza (Inamarga) as an EQUITABLE MORTGAGE and declaring
the plaintiffs entitled to redeem the mortgaged properties which shall be
effected upon payment of the mortgage debt to said defendant in the
amount of P2,400.00 with legal rate of interest from 1983, the year
plaintiffs ceased paying said defendant interests;
CIDaTc

2. Declaring the nullity of the Deed of Absolute Sale (Exh. "B") dated
March 4, 1978 allegedly executed by Tomas Alano in favor of Mary Ann
Deheza;
3. Declaring the nullity of Transfer Certificate of Title No. T-9080 and
Transfer Certificate of Title No. T-9081 in the name of Mary Ann Deheza;
 4. Ordering the reconveyance of Lot 7 and Lot 2, all of Psu-235010, by
defendant Mary Ann Deheza Inamarga in favor of the plaintiffs. In the
event that said defendant fails to reconvey to plaintiffs said lots, the
Clerk of Court is hereby directed to execute it pursuant to the provisions
of Section 10 of Rule 39 of the 1997 Rules of Civil Procedure. As
Amended;
5. Ordering defendant Mary Ann Deheza-Inamarga to pay plaintiffs
exemplary damages in the amount of P50,000.00 and attorney's fees in
the amount of P10,000.00.
Costs against said defendant.
SO ORDERED. 4
Petitioner elevated the case to the Court of Appeals but her appeal was
denied. 5 The appellate court held that the signatures in the Deed of Sale
were forged and even if they were genuine, the agreement entered into by the
parties was one of equitable mortgage. It likewise upheld the trial court's
award of damages, ruling that the transactions involved in the case were
repeatedly tainted with fraud.
Petitioner's motion for reconsideration having been denied, petitioner
filed the instant appeal, assigning errors as follows:
I.
THE LOWER COURT ERRED IN DECLARING THE TRANSACTION
BETWEEN [THE] SPOUSES TOMAS AND CELENIA ALANO AND THE
[PETITIONER] MARY ANN DEHEZA-INAMARGA AS ONE OF
EQUITABLE MORTGAGE AND NOT ONE OF SALE. ICaDHT

II.
THE LOWER COURT ERRED IN ORDERING THE RECONVEYANCE
OF THE LANDS IN QUESTION IN FAVOR OF THE [RESPONDENTS]
AND ORDERING THE NULLITY OF TCT NO. T-9080 AND TCT NO. T-
9081 IN THE NAME OF MARY ANN DEHEZA.
III.
THE LOWER COURT ERRED IN FINDING THAT THE QUESTIONED
DEED OF SALE WAS A FORGERY OR THAT IT WAS SIGNED IN
BLANK BY [THE] SPOUSES TOMAS AND CELENIA ALANO AND I[N]
GIVING CREDENCE TO THE EVIDENCE OF THE [RESPONDENTS].
IV.
THE LOWER COURT ERRED IN NOT DECLARING THAT
[RESPONDENTS'] ACTION IS ALREADY BARRED BY
PRESCRIPTION, LACHES OR ESTOPPEL.
 V.
THE LOWER COURT ERRED IN AWARDING EXEMPLARY
DAMAGES AND ATTORNEY'S FEE[S] TO THE [RESPONDENTS]. 6
Essentially, the issues for resolution are: (1) whether the Deed of Sale
is a forgery; (2) whether the transaction between petitioner and the Spouses
Alano is one of sale or equitable mortgage; (3) whether respondents' action is
already barred by prescription, laches or estoppel; and (4) whether the award
of exemplary damages and attorney's fees in favor of respondents is legal and
justifiable.
As to the first issue, petitioner contends that respondents never
presented a handwriting expert to prove that the signatures of Tomas and
Celenia Alano were forged and such allegation of forgery cannot overcome
the presumption of regularity in the performance of duty of the notary public
as well as the due execution of the public document. 7 Respondents, in turn,
contend that the findings of handwriting experts are not conclusive upon the
trial court.
ICAcHE

The question of forgery is one of fact. 8 It is well-settled that when

supported by substantial evidence or borne out by the records, the findings of
fact of the Court of Appeals are conclusive and binding on the parties and are
not reviewable by this Court. 9
It is a hornbook doctrine that the findings of fact of trial courts are
entitled to great weight on appeal and should not be disturbed except for
strong and valid reasons. It is not a function of this Court to analyze and
weigh evidence by the parties all over again. Our jurisdiction is limited to
reviewing errors of law that might have been committed by the Court of
Appeals. Where the factual findings of the trial court are affirmed in toto by the
Court of Appeals as in this case, there is great reason for not disturbing such
findings and for regarding them as not reviewable by this Court. 10
Moreover, after a careful perusal of the records and a thorough
consideration of this case, this Court finds sufficient basis for the finding of the
Court of Appeals that the said signatures were indeed forged. The Court of
Appeals cited apparent differences in the signatures on the face of the
documentary evidence submitted before the RTC. Also, it found that the
signatures on the deed of sale appeared to be different in characteristics,
spacing and strokes from the signatures of the Spouses Alano appearing in
other documents forming part of the records of this case which are admittedly
genuine.
Moreover, contrary to petitioner's contention, the presentation of a
handwriting expert is not necessary. Handwriting experts are usually helpful in
the examination of forged documents because of the technical procedure
involved in analyzing them. But resort to these experts is not mandatory or
indispensable to the examination or the comparison of handwriting. 11 The
findings of handwriting experts are not conclusive upon the courts. As this
Court has once observed, the authenticity of signatures "is not a highly
technical issue in the same sense that questions concerning, e.g., quantum
physics or topology or molecular biology, would constitute matters of a highly
technical nature. The opinion of a handwriting expert on the genuineness of a
questioned signature is certainly much less compelling upon a judge than an
opinion rendered by a specialist on a highly technical issue. The signatures on
a questioned document can be examined visually by a judge who can and
should exercise independent judgment on the issue of authenticity of such
signatures." 12TcIAHS

With regard to the second issue, petitioner contends that it was the
Spouses Alano who caused the execution of the deed of sale in question and
that the document was signed by them in the presence of the notary public.
She likewise argues that after the sale, she took possession of the land; and
she adds that the consideration for the property was adequate because the
property was not productive. 13On the other hand, respondents aver that the
transaction between the Spouses Alano and petitioner is not one of sale but
one of equitable mortgage. Respondents stress that they continued to be in
possession of the property even after the alleged execution of the Deed of
Sale and they claim that the P7,000 consideration is grossly inadequate for
the market value of the property. Respondents further stated that they paid
P500 interest annually for the loan. 14
In our considered view, the appellate court did not err in sustaining the
decision of the trial court holding that the transaction between the parties is an
equitable mortgage.
An equitable mortgage is one which, although lacking in some formality,
or form, or words, or other requisites demanded by a statute, nevertheless
reveals the intention of the parties to charge real property as security for a
debt, and contains nothing impossible or contrary to law. 15
Articles 1602 and 1604 of the Civil Code of the Philippines state:
ART. 1602. The contract shall be presumed to be an equitable
mortgage, in any of the following cases:
(1) When the price of the sale with right to repurchase is unusually
inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another
instrument extending the period of redemption or granting a new period
is executed;
 (4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any case where it may be fairly inferred that the real intention of
the parties is that the transaction shall secure the payment of a debt or
the performance of any other obligation. SAHITC

In any of the foregoing case, any money, fruits, or other benefit to be

received by the vendee as rent or otherwise shall be considered as
interest which shall be subject to the usury laws.
ART. 1604. The provisions of Article 1602 shall also apply to a contract
purporting to be an absolute sale.
In the instant case, the RTC, as affirmed by the Court of Appeals,
correctly found that more than one of the circumstances enumerated in Article
1602 are present, to wit: the inadequacy of the selling price of the properties
in relation to its true value; the vendors (Spouses Alano) remained in
possession as lessee or otherwise; respondents paid the real property taxes;
and the spouses secured the payment of the principal debt owed to petitioner
with said properties. 16 On this score, we are in agreement that the parties
intended an equitable mortgage and not a contract of sale.
On the third issue, petitioner claims that the complaint was barred by
extinctive prescription as it was filed only on January 24, 1991, or almost 13
years from March 7, 1978 when the TCTs were issued in favor of petitioner.
Petitioner argues that the prescriptive period for reconveyance of land based
on implied or constructive trust is 10 years. 17 Respondents counter that since
the deed of sale and the certificates of title in the name of petitioner are all null
and void, prescription, laches or estoppel has not set in. 18
Again, we find for the respondents. Where there is no consent given by
one party in a purported contract, such contract was not perfected; therefore,
there is no contract to speak of. The deed of sale relied upon by petitioner is
deemed a void contract. This being so, the action based on said deed of sale
shall not prescribe in accordance with Article 1410 19 of the Civil Code.
On the issue of damages, petitioner contends that the award of
exemplary damages and attorney's fees were not justified under the law and
the facts obtaining in this case. 20 Respondents, on their part, state that
petitioner having acted in bad faith to the damage and prejudice of
respondents, it is but proper that she should pay for such deception and
unlawful acts. 21
We do not find any cogent reason to disturb the findings of the RTC on
this point as affirmed by the Court of Appeals with respect to the award of
damages and attorney's fees. As correctly held by the RTC, the act of
petitioner of inducing her two trusting old relatives to sign blank pieces of
 paper purporting to be a deed of sale so that the certificates of title of their
properties could be transferred in her name is a fraudulent act. Exemplary
damages were rightfully imposed in order to deter persons similarly disposed
from committing such acts of fraud. Consequently, with the grant of exemplary
damages, attorney's fees should likewise be awarded. 22 SEAHcT

WHEREFORE, the Decision dated September 8, 2004 and the

Resolution dated January 4, 2006 of the Court of Appeals in CA-G.R. CV No.
64164 are AFFIRMED.
Costs against petitioner.
SO ORDERED.
(Deheza-Inamarga v. Alano, G.R. No. 171321, [December 18, 2008], 595 PHIL
|||

294-304

SPOUSES UY TONG & KHO PO GIOK, petitioners, vs. HONORABLE

COURT OF APPEALS, HONORABLE BIENVENIDO C. EJERCITO,
Judge of the Court of First Instance of Manila, Branch XXXVII and
BAYANIHAN AUTOMOTIVE CORPORATION, respondents.

Platon A. Baysa for petitioner.

Manuel T. Ubarra for respondents.

SYLLABUS

1. CIVIL LAW; CONTRACTS; PACTUM COMMISSORIUM; ELEMENTS. —

Article 2088, Civil Code furnishes the two elements for pactum commissorium to
exist: (1) that there should be a pledge or mortgage wherein a property is
pledged or mortgaged by way of security for the payment of the principal
obligation; and (2) that there should be a stipulation for an automatic
appropriation by the creditor of the thing pledged or mortgaged in the event of
non-payment of the principal obligation within the stipulated period.
2. REMEDIAL LAW; CIVIL PROCEDURE; ACTIONABLE DOCUMENT;
FAILURE TO DENY UNDER OATH SPECIFICALLY THE GENUINENESS AND
DUE EXECUTION OF DEED, AN ADMISSION. — The SPOUSES take
exception to the ruling of the Court of Appeals that their failure to deny the
genuineness and due execution of the deed of assignment was deemed an
admission thereof. The basis for this exception is the SPOUSES' insistence that
the deed of assignment having been borne out of pactum commissorium is not
subject to ratification and its invalidity cannot be waived. There is no compelling
reason to reverse the abovementioned ruling of the appellate court. Considering
this Court's above conclusion that the deed of assignment is not invalid, it follows
that when an action founded on this written instrument is filed, the rule on
contesting its genuineness and due execution must be followed.
3. ID.; SUPREME COURT; NOT A TRIER OF FACTS. — The issue presented
involves a question of fact which is not within this Court's competence to look
into. Suffice it to say that this Court is of the view that findings and conclusion of
the trial court and the Court of Appeals on the question of whether there was
compliance by BAYANIHAN of its obligation under the decision in Civil Case No.
80420 to pay the SPOUSES the sum of P3,535.00 is supported by the evidence
on record.

DECISION

CORTES, J : p

In the present petition, petitioners assail the validity of a deed of assignment over
an apartment unit and the leasehold rights over the land on which the building
housing the said apartment stands for allegedly being in the nature of a pactum
commissorium.
The facts are not disputed.
Petitioners Uy Tong (also known as Henry Uy) and Kho Po Giok (SPOUSES)
used to be the owners of Apartment No. 307 of the Ligaya Building, together with
the leasehold right for ninety-nine (99) years over the land on which the building
stands. The land is registered in the name of Ligaya Investments, Inc. as
evidenced by Transfer Certificate of Title No. 79420 of the Registry of Deeds of
the City of Manila. It appears that Ligaya Investments, Inc. owned the building
which houses the apartment units but sold Apartment No. 307 and leased a
portion of the land in which the building stands to the SPOUSES.
In February, 1969, the SPOUSES purchased from private respondent Bayanihan
Automotive, Inc. (BAYANIHAN) seven (7) units of motor vehicles for a total
amount of P47,700.00 payable in three (3) installments. The transaction was
evidenced by a written "Agreement" wherein the terms of payment had been
specified as follows:
That immediately upon signing of this Agreement, the VENDEE shall pay
unto the VENDOR the amount of Seven Thousand Seven Hundred
 (P7,700.00) Pesos, Philippine Currency, and the amount of Fifteen
Thousand (P15,000.00) Pesos shall be paid on or before March 30,
1969 and the balance of Twenty Five Thousand (P25,000.00) Pesos
shall be paid on or before April 30, 1969, the said amount again to be
secured by another postdated check with maturity on April 30, 1969 to
be drawn by the VENDEE;
That it is fully understood that should the two (2) aforementioned checks
be not honored on their respective maturity dates, herein VENDOR will
give VENDEE another sixty (60) days from maturity dates, within which
to pay or redeem the value of the said checks;
That if for any reason the VENDEE should fail to pay her aforementioned
obligation to the VENDOR, the latter shall become automatically the
owner of the former's apartment which is located at No. 307, Ligaya
Building, Alvarado St., Binondo, Manila, with the only obligation on its
part to pay unto the VENDEE the amount of Three Thousand Five
Hundred Thirty Five (P3,536 00) Pesos, Philippine Currency; and in such
event the VENDEE shall execute the corresponding Deed of Absolute
Sale in favor of the VENDOR and/or Assignment of Leasehold
Rights. [Emphasis supplied]. (Quoted in Decision in Civil Case No.
80420, Exhibit "A" of Civil Case No. 131532].
After making a downpayment of P7,700.00, the SPOUSES failed to pay the
balance of P40,000.00. Due to these unpaid balances, BAYANIHAN filed an
action for specific performance against the SPOUSES docketed as Civil Case
No. 80420 with the Court of First Instance of Manila.
On October 28, 1978, after hearing, judgment was rendered in favor of
BAYANIHAN in a decision the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered, ordering the defendants,
jointly and severally, to pay the plaintiffs, the sum of P40,000.00, with
interest at the legal rate from July 1, 1970 until full payment. In the event
of their failure to do so within thirty (30) days from notice of this
judgment, they are hereby ordered to execute the corresponding deed of
absolute sale in favor of the plaintiff and/or the assignment of leasehold
rights over the defendants' apartment located at 307 Ligaya Building,
Alvarado Street, Binondo, Manila, upon the payment by the plaintiff to
the defendants of the sum of P3,535.00. [Emphasis supplied].
Pursuant to said judgment, an order for execution pending appeal was issued by
the trial court and a deed of assignment dated May 27, 1972, was executed by
the SPOUSES [Exhibit "B", CFI Records, p. 127] over Apartment No. 307 of the
Ligaya Building together with the leasehold right over the land on which the
building stands. The SPOUSES acknowledged receipt of the sum of P3,000.00
more or less, paid by BAYANIHAN pursuant to the said judgment.
Notwithstanding the execution of the deed of assignment, the SPOUSES
remained in possession of the premises. Subsequently, they were allowed to
remain in the premises as lessees for a stipulated monthly rental until November
30, 1972.
Despite the expiration of the said period, the SPOUSES failed to surrender
possession of the premises in favor of BAYANIHAN. This prompted BAYANIHAN
to file an ejectment case against them in the City Court of Manila docketed as
Civil Case No. 240019. This action was however dismissed on the ground that
BAYANIHAN was not the real party in interest, not being the owner of the
building.
On February 7, 1979, after demands to vacate the subject apartment made by
BAYANIHAN's counsel was again ignored by the SPOUSES, an action for
recovery of possession with damages was filed with the Court of First Instance of
Manila, docketed as Civil Case No. 121532 against the SPOUSES and
impleading Ligaya Investments, Inc. as party defendant. On March 17, 1981,
decision in said case was rendered in favor of BAYANIHAN ordering the
following:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendants spouses UY TONG and KHO PO GIOK and
defendant Ligaya Investment, Inc., dismissing defendants' counterclaim
and ordering:
1. The defendants spouses UY TONG and KHO PO GIOK and any and
or persons claiming right under them, to vacate, surrender and deliver
possession of Apartment 307, Ligaya Building, located at 64 Alvarado
Street, Binondo, Manila to the plaintiff;
2. Ordering defendant Ligaya Investment, Inc. to recognize the right of
ownership and possession of the plaintiff over Apartment No. 307,
Ligaya Building;
3. Ordering Ligaya Investment, Inc. to acknowledge plaintiff as
assignee-lessee in lieu of defendants spouses Uy Tong and Kho Po
Giok over the lot on which the building was constructed;
4. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay to
the plaintiff the sum of P200.00 commencing from June, 1971 to
November 30, 1972, or a total amount of P3,400.00 as rental for the
apartment, and the sum of P200.00 from December 1, 1972 until the
premises are finally vacated and surrendered to the plaintiff, as
reasonable compensation for the use of the apartment; and
5. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay
P3,000.00 as and for attorney's fees to the plaintiff, and the costs of this
suit.
Not satisfied with this decision, the SPOUSES appealed to the Court of Appeals.
On October 2, 1984, the respondent Court of Appeals affirmed in toto the
decision appealed from [Petition, Annex "A", Rollo, pp. 15-20]. A motion for
reconsideration of the said decision was denied by the respondent Court in a
resolution dated February 11, 1987 [Petition, Annex "C", Rollo, pp. 31-34].
Petitioners-SPOUSES in seeking a reversal of the decision of the Court of
Appeals rely on the following reasons:
I. The deed of assignment is null and void because it is in the nature of
a pactum commissorium and/or was borne out of the same.
II. The genuineness and due execution of the deed of assignment was
not deemed admitted by petitioner.
III. The deed of assignment is unenforceable because the condition for
its execution was not complied with.
IV. The refusal of petitioners to vacate and surrender the premises in
question to private respondent is justified and warranted by the
circumstances obtaining in the instant case.
I. In support of the first argument, petitioners bring to the fore the contract
entered into by the parties whereby petitioner Kho Po Giok agreed that the
apartment in question will automatically become the property of private
respondent BAYANIHAN upon her mere failure to pay her obligation. This
agreement, according to the petitioners is in the nature of a pactum
commissorium which is null and void, hence, the deed of assignment which was
borne out of the same agreement suffers the same fate.

The prohibition on pactum commissorium stipulations is provided for by Article

2088 of the Civil Code:
Art. 2088. The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of the same. Any stipulation to the
contrary is null and void.
The aforequoted provision furnishes the two elements for pactum
commissorium to exist: (1) that there should be a pledge or mortgage wherein a
property is pledged or mortgaged by way of security for the payment of the
principal obligation; and (2) that there should be a stipulation for an automatic
appropriation by the creditor of the thing pledged or mortgaged in the event of
non-payment of the principal obligation within the stipulated period.
A perusal of the terms of the questioned agreement evinces no basis for the
application of the pactum commissorium provision. First, there is no indication of
any contract of mortgage entered into by the parties. It is a fact that the parties
agreed on the sale and purchase of trucks.
Second, there is no case of automatic appropriation of the property by
BAYANIHAN. When the SPOUSES defaulted in their payments of the second
and third installments of the trucks they purchased, BAYANIHAN filed an action
in court for specific performance. The trial court rendered favorable judgment for
BAYANIHAN and ordered the SPOUSES to pay the balance of their obligation
and in case of failure to do so, to execute a deed of assignment over the property
involved in this case. The SPOUSES elected to execute the deed of assignment
pursuant to said judgment. cdphil

Clearly, there was no automatic vesting of title on BAYANIHAN because it took

the intervention of the trial court to exact fulfillment of the obligation, which, by its
very nature is ".. anathema to the concept ofpacto commissorio" [Northern
Motors, Inc. v. Herrera, G.R. No. L-32674, February 22, 1973, 49 SCRA 392].
And even granting that the original agreement between the parties had the
badges of pactum commissorium, the deed of assignment does not suffer the
same fate as this was executed pursuant to a valid judgment in Civil Case No.
80420 as can be gleaned from its very terms and conditions:
DEED OF ASSIGNMENT
KNOW ALL MEN BY THESE PRESENTS:
This deed made and entered into by Uy Tiong also known as Henry Uy
and Kho Po Giok, both of legal age, husband and wife, respectively, and
presently residing at 307 Ligaya Bldg., Alvarado St., Binondo, Manila,
and hereinafter to be known and called as the ASSIGNORS, in favor of
Bayanihan Automotive Corporation, an entity duly organized and existing
under the laws of the Philippines, with principal business address at
1690 Otis St., Paco, Manila and hereinafter to be known and called the
ASSIGNEE;
—witnesseth—
WHEREAS, the ASSIGNEE has filed a civil complaint for "Specific
Performance with Damages" against the ASSIGNORS in the Court of
First Instance of Manila, Branch V, said case having been docketed as
Civil Case No. 80420;
WHEREAS, the ASSIGNEE was able to obtain a judgment against the
ASSIGNOR wherein the latter was ordered by the court as follows, to
wit:
WHEREFORE, judgment is hereby rendered ordering the
defendants, jointly and severally to pay the plaintiff the sum of
P40,000.00, with interest at the legal rate from July 31, 1970 until
full payment. In the event of their failure to do so within thirty (30)
 days from notice of this judgment, they are hereby ordered to
execute the corresponding deed of absolute sale in favor of the
plaintiff and/or the assignment of leasehold, rights over the
defendants' apartment located at No. 307 Ligaya Building,
Alvarado Street, Binondo, Manila, upon the payment by the
plaintiff to the defendants the sum of P3,535.00.
The defendants shall pay the costs.
WHEREAS, the court, upon petition by herein ASSIGNEE and its
deposit of sufficient bond, has ordered for the immediate execution of
the said decision even pending appeal of the aforesaid decision;
WHEREAS, the ASSIGNORS have elected to just execute the
necessary deed of sale and/or assignment of leasehold rights over the
apartment mentioned in the decision in favor of the herein ASSIGNEE;
NOW, THEREFORE, for and in consideration of the foregoing premises,
the ASSIGNORS have transferred assigned and ceded, and by these
presents do hereby transfer, assign and cede all their rights and
interests over that place known as Apartment No. 307 at the Ligaya
Building which is located at No. 864 Alvarado St., Binondo, Manila,
together with the corresponding leasehold rights over the lot on which
the said building is constructed, in favor of the herein ASSIGNEE, its
heirs or assigns.
IN WITNESS WHEREOF, We have hereunto signed our names this 27th
day of May, 1971 at Manila, Philippines.
UY TONG/HENRY UY KHO PO GIOK
Assignor Assignor
ACR-2151166 Manila 1/13/51 ACR-C-001620 Manila March 3,
1965.
This being the case, there is no reason to impugn the validity of the said deed of
assignment.
II. The SPOUSES take exception to the ruling of the Court of Appeals that their
failure to deny the genuineness and due execution of the deed of assignment
was deemed an admission thereof. The basis for this exception is the SPOUSES'
insistence that the deed of assignment having been borne out of pactum
commissorium is not subject to ratification and its invalidity cannot be waived.
There is no compelling reason to reverse the abovementioned ruling of the
appellate court. Considering this Court's above conclusion that the deed of
assignment is not invalid, it follows that when an action founded on this written
instrument is filed, the rule on contesting its genuineness and due execution
must be followed. cdrep
That facts reveal that the action in Civil Case No. 121532 was founded on the
deed of assignment. However, the SPOUSES, in their answer to the complaint,
failed to deny under oath and specifically the genuineness and due execution of
the said deed. Perforce, under Section 8, Rule 8 of the Revised Rules of Court,
the SPOUSES are deemed to have admitted the deed's genuineness and due
execution. Besides, they themselves admit that ". . . the contract was duly
executed and that the same is genuine" [Sur-Rejoinder, Rollo, p. 67]. They
cannot now claim otherwise.
III. The SPOUSES also question the enforceability of the deed of assignment.
They contend that the deed is unenforceable because the condition for its
execution was not complied with. What petitioners SPOUSES refer to is that
portion of the disposition in Civil Case No. 80420 requiring BAYANIHAN to pay
the former the sum of P3,535.00. To buttress their claim of non-compliance, they
invoke the following receipt issued by the SPOUSES to show that BAYANIHAN
was P535.00 short of the complete payment.
RECEIPT
This is to acknowledge the fact that the amount of THREE THOUSAND
(P3,000.00) PESOS, more or less as indicated in the judgment of the
Hon. Conrado Vasquez, Presiding Judge of the Court of First Instance of
Manila, Branch V, in Civil Case entitled "Bayanihan Automotive Corp. v.
Pho (sic) Po Giok, etc." and docketed as Civil Case No. 80420 has been
applied for the payment of the previous rentals of the property which is
the subject matter of the aforesaid judgment. [Emphasis supplied.]
(Sgd.) Pho (sic) Po Giok
(Sgd.) Henry Uy
August 21, 1971
The issue presented involves a question of fact which is not within this Court's
competence to look into. Suffice it to say that this Court is of the view that
findings and conclusion of the trial court and the Court of Appeals on the
question of whether there was compliance by BAYANIHAN of its obligation under
the decision in Civil Case No. 80420 to pay the SPOUSES the sum of P3,535.00
is borne by the evidence on record. The Court finds merit in the following findings
of the trial court:
". . . Defendants' contention that the P3,535.00 required in the decision
in Civil Case No. 80420 as a condition for the execution of the deed of
assignment was not paid by the plaintiff to the defendants is belied by
the fact that the defendants acknowledged payment of P3,000.00, more
or less, in a receipt dated August 21, 1971. This amount was expressly
mentioned in this receipt as indicated in the judgment of the Honorable
Conrado Vasquez, presiding Judge of the CFI of Manila, Branch V, in
Civil Case entitled Bayanihan Automotive Corp. versus Kho Po Giok,
 docketed as Civil Case No. 80420, and also expressly mentioned as
having been applied for the payment of the previous rentals of the
property subject matter of the said judgment. Nothing could be more
explicit. The contention that there is still a difference of P535.00 is hard
to believe because the spouses Kho Po Giok and Uy Tong executed the
deed of assignment without first demanding from the plaintiff the
payment of P535.00. Indeed, as contended by the plaintiff, for it to refuse
to pay this small amount and thus gave defendants a reason not to
execute the Deed of Assignment. is hard to believe. Defendants further
confirm by the joint manifestation of plaintiff and defendants, duly
assisted by counsel, Puerto and Associates, dated September, 1971,
Exhibit "O", wherein it was stated that plaintiff has fully complied with its
obligation to the defendants caused upon it (sic) by the pronouncement
of the judgment as a condition for the execution of their (sic) leasehold
rights of defendants, as evidenced by the receipt duly executed by the
defendants, and which was already submitted in open court for the
consideration of the sum of P3,535.00. [Emphasis supplied]. [Decision,
Civil Case No. 121532, pp. 3-4].
This Court agrees with private respondent BAYANIHAN's reasoning that
inasmuch as the decision in Civil Case No. 80420 imposed upon the parties
correlative obligations which were simultaneously demandable so much so that if
private respondent refused to comply with its obligation under the judgment to
pay the sum of P3,535.00 then it could not compel petitioners to comply with their
own obligation to execute the deed of assignment over the subject premises. The
fact that petitioners executed the deed of assignment with the assistance of their
counsel leads to no other conclusion that private respondent itself had paid the
full amount.

IV. Petitioners attempt to justify their continued refusal to vacate the premises
subject of this litigation on the following grounds:
(a) The deed of assignment is in the nature of a pactum
commissorium and, therefore, null and void.
(b) There was no full compliance by private respondent of the condition
imposed in the deed of assignment.
(c) Proof that petitioners have been allowed to stay in the premises, is
the very admission of private respondent who declared that petitioners
were allowed to stay in the premises until November 20, 1972. This
admission is very significant. Private respondent merely stated that there
was a term — until November 30, 1972 — in order to give a semblance
of validity to its attempt to dispossess herein petitioners of the subject
premises. In short, this is one way of rendering seemingly illegal
petitioners' possession of the premises after November 30, 1972.
The first two classifications are mere reiterations of the arguments presented by
the petitioners and which had been passed upon already in this decision. As
regards the third ground, it is enough to state that the deed of assignment has
vested in the private respondent the rights and interests of the SPOUSES over
the apartment unit in question including the leasehold rights over the land on
which the building stands. BAYANIHAN is therefore entitled to the possession
thereof. These are the clear terms of the deed of assignment which cannot be
superseded by bare allegations of fact that find no support in the record.
WHEREFORE, the petition is hereby DENIED for lack of merit and the decision
of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.
Fernan, Gutierrez, Jr. and Feliciano, JJ., concur.
||| (Tong v. Court of Appeals, G.R. No. 77465, [May 21, 1988], 244 PHIL 403-413)

ANTI CHRESIS;

DIONISIA VALENCIA ET AL., plaintiffs-appellants, vs. HONORIO

ACALA ET AL., defendants-appellees.

Aurelio Palileo for appellants.

Francisco Alfonso for appellees.

SYLLABUS

CONTRACTS; ANTICHRESIS. — In an action for redemption, the

following agreement was presented in evidence: "We, Daniel Adepueng and
Dionisia Valencia, acknowledge being indebted to Severino Agbagala in the
sum of P6.75, which we will pay with the fruits of the land and the possession
of which we now turn over to him. We have mortgaged it for P6.75, it being
covenanted that we may redeem it by paying the same price, without taking
into account the fruits of the land and the interest of the money." Held: That
such a contract is not one of purchase and sale with light to repurchase, but
one of antichresis, as there was a sum of money delivered as a loan by virtue
of which the debtor turned over to the creditor the possession of a realty to
hold it in usufruct, compensating the interest of the money with the fruits of the
land. (De la Vega vs. Ballilos, 34 Phil., 683.)
 DECISION

VILLAMOR, J : p

This is an action for the redemption of certain land, which is described

in the complaint.
At the trial, the parties submitted to the court the following agreed
statement of facts:
"The parties agree that the land in question is the same lot that is
the subject of litigation in civil cause No. 966 of this court; and that in the
year 1891, the plaintiff herein, Dionisia Valencia, and her deceased
husband, Daniel Adepueng, conveyed to one Severino Agbagala and his
wife Francisca Cadapan the land in question, as evidenced by the
document marked Exhibit A of the plaintiffs, which is found on folio 24 of
civil cause No. 966 of this court.
"Later on in the year 1899 Francisca Cadapan, wife of Severino
Agbagala, conveyed this same property to Juan Cagayat and Josefa
Galendis, as shown by the memorandum appearing at the bottom of the
document marked Exhibit A of the plaintiffs, attached to the record of the
cause No. 966, folio 24.
"That the possession of the land passed to Pedro Acala, who is
one of the Acalas, the defendants in the present action. In the year 1912,
the herein defendants Acala sold the land unconditionally to the herein
defendant Bagayanan for the sum of P70."
The pertinent part of the contract Exhibit A reads thus:
"We, Daniel Adepueng and Dionisia Valencia, acknowledge being
indebted to Severino Agbagala in the sum of P6.75, which we will pay
with the fruits of the land the possession of which we now turn over to
him. We have mortgaged it for P6.75, it being covenanted that we may
redeem it by paying the same price, without taking into account the fruits
of the land and the interest on the money."
The memorandum mentioned in the agreement is as follows:
"I, the undersigned, declare that the lot mentioned in the
foregoing document (Exhibit A) was mortgaged by me to the spouses
Juan Cagayat and Josefa Galendis for the same amount above-
mentioned and with the same condition Paete, December 6, 1899. —
Francisca Cadapan —"
The judge a quo held that the contract in question was one of sale with
the right of repurchase, and decided: (a) That the defendants must be
absolved from the complaint; (b) that the contract (Exhibit A) and those that
were successively executed involving the lot in question are contracts of sale
 and not of mortgage or of loan with security; (c) that the action for the
redemption and annulment of the sale of the lot in question has prescribed;
(d) that the defendant Apolinario Bagayanan is at present the lawful owner of
the said lot; and (e) that the costs of the suit should be paid by the plaintiffs
jointly and severally to the defendants.
Upon examining the record before us, and bearing in mind the fact that,
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 clauses should prevail, we
are of the opinion that the contract herein above copied is a contract of
antichresis and not of sale with the right of repurchase.
In the case of De la Vega vs. Ballilos (34 Phil., 683), this court said:
"When money is loaned and the debtor places the creditor in
possession of a piece of real property as security for the sum loaned in
order that he may hold it in usufruct, in consideration for the said loan,
the contract is not one of mortgage, notwithstanding the terms thereof,
inasmuch as it is not of the nature of a public instrument, and even
though it were, it does not appear to have been recorded in the property
registry. Neither can such a contract be classified as one of sale
under pacto de retro, notwithstanding that it is set forth therein that the
debtor cedes and conveys to the creditor the ownership and possession
of the said real property. Therefore, such a contract should be classified
as one of antichresis, by means of which the creditor acquires the right
to collect the fruits of the real property turned over to him by his debtor,
but with the obligation to apply them to the payment of whatever interest
is due and the contracting parties may stipulate that he interest of the
debt be paid by the fruits of the property given in antichresis."
The legal nature of the contract in question having thus been
determined, it is evident that the antichretic creditor and his successors in
interest cannot acquire ownership by prescription of the realty given in
antichresis.
That the defendants Acala could not sell unconditionally the same land
to their codefendant Bagayanan, is proved by the agreed statement of facts
according to which the possession of the predecessor in interest of the Acala
people was the same precarious possession of his assignor Juan Cagayat.
The judgment appealed from is reversed, and it is ordered that the
defendants return the land in question to the plaintiffs upon payment by the
latter of the sum of P6.75, the redemption price of the land, without prejudice
to whatever right the defendant Bagayanan may have to recover from his
codefendants Acala the price he might have paid them for the land, without
special finding as to costs. So ordered.
||| (Valencia v. Acala, G.R. No. 16256, [September 28, 1921], 42 PHIL 177-180)
 CECILIO DIEGO, plaintiff-appellee, vs. SEGUNDO
FERNANDO, defendant-appellant.

Espinosa Law Offices for appellant.

N. L. Dasig and C. L. Francisco for appellee.

SYLLABUS

1. CONTRACTS; MORTGAGE NOT ANTICHRESIS; LOAN WITHOUT

INTEREST; POSSESSION TRANSFERRED TO MORTGAGEE; CASE AT
BAR. — If a contract of loan with security does not stipulate the payment of
interest like in the case at bar, and possession of the mortgaged property is
delivered to the mortgagee in order that the latter may gather its fruits, but
without stating that said fruits are to be applied to the payment of interest, if
any, and afterwards that of the principal, the contract is a mortgage and not
antichresis (Legaspi and Salcedo vs. Celestial, 66 Phil., 372).
2. ID.; ID.; LEGAL INTEREST; PAYMENT OF. — The court did not err
in so holding that appellant is liable to pay legal interest to appellee from the
filing of the complaint, because appellant has not up to the present discharged
his indebtedness, and the law (Art. 2209, New Civil Code; Art. 1108, old)
allows a creditor, in the absence of stipulation as to payment of interest, to
collect legal interest from the time of the debtor's default.

DECISION

REYES, J. B. L., J :p

Appeal by defendant Segundo Fernando from the judgment of the

Court of First Instance of Nueva Ecija in its Civil Case No. 1694 for
foreclosure of mortgage. The appeal was originally brought to the Court of
Appeals, but was certified to us by that tribunal because it raises only
questions of law.

The facts are not disputed. On May 26, 1950, the defendant Segundo
Fernando executed a deed of mortgage in favor of plaintiff Cecilio Diego over
two parcels of land registered in his name, to secure a loan of P2,000, without
interest, payable within four years from the date of the mortgage (Exhibit "A").
After the execution of the deed, possession of the mortgaged properties were
turned over to the mortgagee.
 The debtor having failed to pay the loan after four years, the mortgagee
Diego made several demands upon him for payment; and as the demands
were unheeded, Diego filed this action for foreclosure of mortgage.
Defendant Fernando's defense was that the true transaction between
him and plaintiff was one of antichresis and not of mortgage; and that as
plaintiff had allegedly received a total of 120 cavans of palay from the
properties given as security, which, at the rate of P10 a cavan, represented a
value of P5,200, his debt had already been paid, with plaintiff still owing him a
refund of some P2,720.00.
The Court below, however, found that there was nothing in the deed of
mortgage Exhibit "A" to show that it was not a true contract of mortgage, and
that the fact that possession of the mortgaged properties were turned over to
the mortgagee did not alter the transaction; that the parties must have
intended that the mortgagee would collect the fruits of the mortgaged
properties as interest on his loan, which agreement is not uncommon; and
that the evidence showed that plaintiff had already received 55 cavans of
palay from the properties during the period of his possession. Whereupon,
judgment was rendered for plaintiff in the amount of P2,000, the loan he gave
the defendant, with legal interest from the filing of the action until full payment,
plus P500 as attorney's fees and the costs; and in case of default in payment,
for the foreclosure of the mortgage. From this judgment, defendant took the
present appeal.
The main issue raised is whether the contract between the parties is
one of mortgage or of antichresis. Appellant, while admitting that the contract
Exhibit "A" shows a deed of mortgage, contends that the admitted fact that the
loan was without interest, coupled with the transfer of the possession of the
properties mortgaged to the mortgagee, reveals that the true transaction
between him and appellee was one of antichresis. As correctly pointed out by
appellee and the lower court, however, it is not an essential requisite of a
mortgage that possession of the mortgaged premises be retained by the
mortgagor (Legaspi and Salcedo vs. Celestial, 66 Phil., 372). To be
antichresis, it must be expressly agreed between creditor and debtor that the
former, having been given possession of the properties given as security, is to
apply their fruits to the payment of the interest, if owing, and thereafter to the
principal of his credit (Art. 2132, Civil Code, Barretto vs. Barretto, 37 Phil.,
234; Diaz vs. De Mendezona, 48 Phil., 666); so that if a contract of loan with
security does not stipulate the payment of interest but provides for the delivery
to the creditor by the debtor of the property given as security, in order that the
latter may gather its fruits, without stating that said fruits are to be applied to
the payment of interest, if any, and afterwards that of the principal, the
contract is a mortgage and not antichresis (Legaspi vs. Celestial,supra). The
court below, therefore, did not err in holding that the contract Exhibit "A" is a
true mortgage and not an antichresis.
The above conclusion does not mean, however, that appellee, having
received the fruits of the properties mortgaged, will be allowed to appropriate
them for himself and not be required to account for them to the appellant. For
the contract of mortgage Exhibit "A" clearly provides that the loan of P2,000
was "without interest within four (4) years from date of this instrument"; and
there being no evidence to show that the parties had intended to supersede
such stipulation when the possession of the mortgaged properties were
turned over to the appellee by another allowing the latter to collect, the fruits
thereof as interest on the loan, the trial court is not authorized to infer from
this transfer of possession alone that the parties had verbally modified their
written agreement that the loan was to be without interest for four years, and
substituted another giving appellee the right to receive the fruits of the
mortgaged properties as interests.
The true position of appellee herein under his contract with appellant is
a "mortgage in possession" as that term is understood in American equity
jurisprudence; that is, "one who has lawfully acquired actual or constructive
possession of the premises mortgaged to him, standing upon his rights as
mortgagee and not claiming under another title, for the purpose of enforcing
his security upon such property or making its income help to pay his debt"
(Diaz vs. De Mendezona, citing 27 Cyc. 1237, 48 Phil., 666). As such
mortgagee in possession, his rights and obligations are, as pointed out by this
Court in Macapinlacvs. Gutierrez Repide (43 Phil., 770), similar to those of an
antichretic creditor:
"The respective rights and obligations of the parties to a contract
of antichresis, under the Civil Code, appear to be similar and in many
respects identical with those recognized in the equity jurisprudence of
England and America as incident to the position of a mortgagee in
possession, in reference to which the following propositions may be
taken to be established, namely, that if the mortgagee acquires
possession in any lawful manner, he is entitled to retain such possession
until the indebtedness is satisfied and the property redeemed; that the
non-payment of the debt within the term agreed does not vest the
ownership of the property in the creditor; that the general duty of the
mortgagee in possession towards the premises is that of the ordinary
prudent owner; that the mortgagee must account for the rents and profits
of the land, or its value for purposes of use and occupation, any amount
thus realized going towards the discharge on the mortgage debt; that if
the mortgagee remains in possession after the mortgage debt has been
satisfied, he becomes a trustee for the mortgagor as to the excess of the
rents and profits over such debt; and lastly, that the mortgagor can only
 enforce his rights to the land by an equitable action for an account and to
redeem. (3 Pom. Eq. Jur. secs. 1215-1218)"
Similarly, in Enriquez vs. National Bank, 55 Phil., 414, we ruled that a
creditor with a lien on real property who took possession thereof with the
consent of the debtor, held it as an "antichretic creditor with the right to collect
the credit with interest from the fruits, returning to the antichretic debtor the
balance, if any, after deducting the expenses", because the fact that the
debtor consented and asked the creditor to take charge of managing his
property "does not entitle the latter to appropriate to itself the fruits thereof
unless the former has expressly waived his right thereto".
In the present case, the parties having agreed that the loan was to be
without interest, and the appellant not having expressly waived his right to the
fruits of the properties mortgaged during the time they were in appellee's
possession, the latter, like an antichretic creditor, must account for the value
of the fruits received by him, and deduct it from the loan obtained by
appellant. According to the findings of the trial court, appellee had received a
net share of 55 cavans of palay out of the mortgaged properties up to the time
he filed the present action; at the rate of P9.00 per cavan (a rate admitted by
the parties), the total value of the fruits received by appellee is P495.00.
Deducting this amount from the loan of P2,000 received by appellant from
appellee, the former has only P1,505.00 left to pay the latter.
Appellant also claims that the lower court erred in ordering him to pay
legal interest on his indebtedness to plaintiff from the filing of the action, since
the latter is, up to the present, still in the possession of the properties
mortgaged and still enjoying its fruits. The court did not err in so holding, since
at the time the action was filed and up to the present, appellant has not
discharged his indebtedness to appellee, and the law allows the latter, in the
absence of stipulation as to payment of interest, legal interest from the time of
the debtor's default (Art. 2209, New Civil Code, Art. 1108, old). However,
appellee should be made to account for the fruits he received from the
properties mortgaged from the time of the filing of this action until full payment
by appellant, which fruits should be deducted from the total amount due him
from appellant under this judgment.
Wherefore, the judgment of the court below is modified in the sense
that the amount of appellee's principal recovery is reduced to P1,505, with an
obligation on the part of appellee to render an accounting of all the fruits
received by him from the properties in question from the time of the filing of
this action until full payment, or in case of appellant's failure to pay, until
foreclosure of the mortgage thereon, the value of which fruits shall be
deducted from the total amount of his recovery. No costs in this instance.
||| (Diego v. Fernando, G.R. No. L-15128, [August 25, 1960], 109 PHIL 143-148)
CONCURRENCE AND PREFERENCE OF CREDITS;

DEVELOPMENT BANK OF THE

PHILIPPINES, petitioner, vs. THE NATIONAL LABOR
RELATIONS COMMISSION and MALAYANG SAMAHAN NG
MGA MANGGAGAWA SA ATLAS TEXTILE DEVELOPMENT
CORPORATION, respondents.

SYLLABUS

1. LABOR AND SOCIAL LEGISLATION; WORKER PREFERENCE IN CASE OF

BANKRUPTCY, MUST BE VIEWED AND READ IN CONSONANCE WITH THE
PROVISIONS OF THE CIVIL CODE ON CONCURRENCE AND PREFERENCE
OF CREDIT. — Article 110 of the Labor Code was later amended by Republic
Act No. 6715 which became effective on 21 March 1989. The effects of the
amendatory law were put to issue and passed upon in subsequent cases. In
Development Bank of the Philippines vs. National Labor Relations Commission,
183 SCRA 328, the Court, through Mme. Justice Melencio-Herrera, elucidated:
"The amendment expands worker preference to cover not only unpaid wages but
also other monetary claims to which even claims of the Government must be
deemed subordinate. . . . Notably, the terms `declaration' of bankruptcy or
'judicial' liquidation have been eliminated. Does this mean then that liquidation
proceedings have been done away with? We opine in the negative upon the
following considerations: 1. Because of its impact on the entire system of credit,
Article 110 of the Labor Code cannot be viewed in isolation but must be read in
relation to the Civil Code scheme on classification and preference of credits. . . .
2. In the same way that the Civil Code provisions on classification of credits and
the Insolvency Law have been brought into harmony, so also must the kindred
provisions of the Labor Law be made to harmonize with those laws. 3. In the
event of insolvency, a principal objective should be to effect an equitable
distribution of the insolvent's property among his creditors. To accomplish this
there must first be some proceeding where notice to all of the insolvent's
creditors may be given and where the claims of preferred creditors may be
bindingly adjudicated (De Barreto vs. Villanueva, No. L-14938, December 29,
1962, 6 SCRA 928). The rationale therefore has been expressed in the recent
case of DBP vs. Secretary of Labor (G.R. No. 79351, 28 November 1989), . . . 4.
A distinction should be made between a preference of credit and a lien. A
preference applies only to claims which do not attach to specific properties. A lien
creates a charge on a particular property. The right of first preference as regards
unpaid wages recognized by Article 110 does not constitute a lien on the
property of the insolvent debtor in favor of workers. It is but a preference of credit
in their favor, a preference in application. It is a method adopted to determine
and specify the order in which credits should be paid in the final distribution of the
proceeds of the insolvent's assets. It is a right to a first preference in the
discharge of the funds of the judgment debtor."
2. ID.; ID.; REQUIRES JUDICIAL PROCEEDINGS IN REM IN THE
ADJUDICATION OF CREDITORS CLAIMS AGAINST DEBTOR'S ASSETS. —
Even if Article 110 and its Implementing Rule, as amended, should be interpreted
to mean "absolute preference," the same should be given only prospective effect
in line with the cardinal rule that laws shall have no retroactive effect, unless the
contrary is provided (Article 4, Civil Code). Any infringement on the constitutional
guarantee on non-impairment of the obligation of contracts (Section 10, Article
III, 1987 Constitution) is thereby also avoided. In point of fact, DBP's mortgage
credit antedated by several years the amendatory law, RA No. 6715. To give
Article 110 retroactive effect would be to wipe out the mortgage in DBP's favor
and expose it to a risk which it sought to protect itself against by requiring a
collateral in the form of real property. In fine, the right of preference given to
workers under Article 110 of the labor Code cannot exist in any effective way
prior to the time of its presentation in distribution proceedings. It will find
application when, in such proceedings as insolvency, unpaid wages shall be paid
in full before the `claims of the Government and other creditors' may be paid. But,
for an orderly settlement of a debtor's assets, all creditors must be convened,
their claims ascertained and inventoried, and thereafter the preferences
determined in the course of judicial proceedings which have for their object the
subjection of the property of the debtor to the payment of his debts and other
lawful obligations. Hence, an orderly determination of preference of creditors'
claims is assured (Philippine Savings Bank vs. Lantin, No. L-33929, September
2, 1983, 124 SCRA 476); the adjudication made will be binding on all parties-in-
interest, since those proceedings are proceedings in rem; and the legal scheme
of classification, concurrence and preference of credits in the Civil Code, the
Insolvency Law, and the Labor Code is preserved in harmony."

DECISION

VITUG, J : p

This "petition for review on certiorari" (in reality a petition for certiorari), filed by
the Development Bank of the Philippines ("DBP"), seeks the reversal of the
decision of the National Labor Relations Commission ("NLRC"), affirming that of
the Labor Arbiter, which holds the petitioner, along with Atlas Textile
Development Corporation ("ATLAS"), liable to the private respondents for wage
differentials, "illegal" salary deductions, separation pay, and similar money
claims.Cdpr

The private respondents were employees of ATLAS, a textile firm, which

hypothecated its certain assets to DBP. After ATLAS defaulted in its obligations,
DBP foreclosed on the mortgage in March 1985. The latter acquired the
mortgaged assets by virtue of the foreclosure sale. LLjur

The private respondents filed their aforementioned claim, on 30 October 1985,

against both ATLAS and DBP. The Labor Arbiter ruled for the private
respondents. On appeal by DBP, the decision was sustained by the NLRC.
Hence, the instant petition.
The petitioner contends that it is error on the part of the public respondent to
consider the workers' preference under Article 110 of the Labor Code over that of
DBP's mortgage lien.
The issue has been put to fore in a number of cases brought to and decided by
this Court.
In Republic vs. Peralta, 150 SCRA 37, the Court, through Mr. Justice Feliciano,
ruled:
"Article 110 of the Labor Code does not purport to create a lien in favor
of workers or employees for unpaid wages either upon all of the
properties or upon any particular property owned by their employer.
Claims for unpaid wages do not therefore fall at all within the category of
specially preferred claims established under Articles 2241 and 2242 of
the Civil Code, except to the extent that such claims for unpaid wages
are already covered by Article 2241, number 6: 'claims for laborers'
wages, on the goods manufactured or the work done;' or by Article 2242,
number 3: 'claims of laborers and other workers engaged in the
construction, reconstruction or repair of buildings, canals and other
works upon said buildings, canals or other works.' To the extent that
claims for unpaid wages fall outside the scope of Article 2241, number 6
and 2242, number 3, they would come within the ambit of the category of
ordinary preferred credits under Article 2244. Applying Article 2241,
number 6 to the instant case, the claims of the Unions for separation pay
of their members constitute liens attaching to the processed leaf
tobacco, cigars and cigarettes and other products produced or
manufactured by the Insolvent, but not to other assets owned by the
Insolvent. And even in respect of such tobacco and tobacco products
produced by the Insolvent, the claims of the Unions may be given effect
only after the Bureau of Internal Revenue's claim for unpaid tobacco
inspection fees shall have been satisfied out of the products so
manufactured by the Insolvent."
Article 110 of the Labor Code was later amended by Republic Act No.
6715 which became effective on 21 March 1989. And so modified, the provision
thenceforth provided:
"Article 110. Worker preference in case of bankruptcy. — In the event of
bankruptcy or liquidation of an employer's business, his workers shall
enjoy first preference as regards their unpaid wages and other monetary
claims, any provision of law to the contrary notwithstanding. Such unpaid
wages, and monetary claims shall be paid in full before the claims of the
Government and other creditors may be paid." LLpr

The effects of the amendatory law were put to issue and passed upon in
subsequent cases. In Development Bank of the Philippines vs. National Labor
Relations Commission, 183 SCRA 328, the Court, through Mme. Justice
Melencio-Herrera, elucidated:
"The amendment expands worker preference to cover not only unpaid
wages but also other monetary claims to which even claims of the
Government must be deemed subordinate.
xxx xxx xxx
"Notably, the terms 'declaration' of bankruptcy or 'judicial' liquidation
have been eliminated. Does this mean then that liquidation proceedings
have been done away with?
"We opine in the negative upon the following considerations:
"1. Because of its impact on the entire system of credit, Article 110 of the
Labor Code cannot be viewed in isolation but must be read in relation to
the Civil Code scheme on classification and preference of credits.
xxx xxx xxx
"2. In the same way that the Civil Code provisions on classification of
credits and the Insolvency Law have been brought into harmony, so also
must the kindred provisions of the Labor Law be made to harmonize with
those laws.
"3. In the event of insolvency, a principal objective should be to effect an
equitable distribution of the insolvent's property among his creditors. To
accomplish this there must first be some proceeding where notice to all
of the insolvents's creditors may be given and where the claims of
preferred creditors may be bindingly adjudicated (De Barretto vs.
Villanueva, No. L-14938, December 29, 1962, 6 SCRA 928). The
rationale therefore has been expressed in the recent case of DBP vs.
Secretary of Labor (G.R. No. 79351, 28 November 1989), . . .
 "4. A distinction should be made between a preference of credit and a
lien. A preference applies only to claims which do not attach to specific
properties. A lien creates a charge on a particular property. The right of
first preference as regards unpaid wages recognized by Article 110 does
not constitute a lien on the property of the insolvent debtor in favor of
workers. It is but a preference of credit in their favor, a preference in
application. It is a method adopted to determine and specify the order in
which credits should be paid in the final distribution of the proceeds of
the insolvent's assets. It is a right to a first preference in the discharge of
the funds of the judgment debtor. LLphil

xxx xxx xxx

"6. Even if Article 110 and its Implementing Rule, as amended, should
be interpreted to mean "absolute preference," the same should be given
only prospective effect in line with the cardinal rule that laws shall have
no retroactive effect, unless the contrary is provided (Article 4, Civil
Code). Thereby, any infringement on the constitutional guarantee on
non-impairment of the obligation of contracts (Section 10, Article III,1987
Constitution) is also avoided. In point of fact, DBP's mortgage credit
antedated by several years the amendatory law, RA No. 6715. To give
Article 110 retroactive effect would be to wipe out the mortgage in DBP's
favor and expose it to a risk which it sought to protect itself against by
requiring a collateral in the form of real property.
"In fine, the right of preference given to workers under Article 110 of the
Labor Code cannot exist in any effective way prior to the time of its
presentation in distribution proceedings. It will find application when, in
proceedings such as insolvency, such unpaid wages shall be paid in full
before the 'claims of the Government and other creditors' may be paid.
But, for an orderly settlement of a debtor's assets, all creditors must be
convened, their claims ascertained and inventoried, and thereafter the
preferences determined in the course of judicial proceedings which have
for their object the subjection of the property of the debtor to the
payment of his debts and other lawful obligations. Thereby, an orderly
determination of preference of creditors' claims is assured (Philippine
Savings Bank vs. Lantin, No. L-33929, September 2, 1983, 124 SCRA
476); the adjudication made will be binding on all parties-in-interest,
since those proceedings are proceedings in rem; and the legal scheme
of classification, concurrence and preference of credits in the Civil Code,
the Insolvency Law, and the Labor Code is preserved in harmony."
The ruling was reiterated in Development Bank of the Philippines vs. National
Labor Relations Commission, 186 SCRA 841, as well as cases thereafter, and
just recently in Development Bank of the Philippines vs. NLRC, 218 SCRA
183.cdrep
The case at bench concerns monetary claims of workers that are not involved in
judicial proceedings in rem in adjudication of claims of creditors vis-a-vis the
assets of the debtor, nor have such claims accrued after the effectivity
of Republic Act 6715. The petition thus raises issues heretofore squarely
resolved in our aforequoted decisions. To recapitulate:
(1) Article 110 of the Labor Code, as amended, must be viewed and read in
conjunction with the provisions of the Civil Code on concurrence and preferences
of credits;
(2) The aforesaid provisions of the Civil Code, including Article 110 of the Labor
Code, require judicial proceedings in rem in adjudication of creditors' claims
against the debtor's assets to become operative;
(3) Republic Act No. 6715 has the effect of expanding the "worker preference" to
cover not only unpaid wages but also other monetary claims of laborers, to which
even claims of the Government must be deemed subordinate; and
(4) The amendatory provisions of Republic Act 6715, which took effect on 21
March 1989, should only be given prospective application. cdphil

WHEREFORE, the petition is GRANTED. The assailed decision of public

respondent, National Labor Relations Commission and that of the Labor Arbiter,
insofar as the latter holds the petitioner liable for monetary claims of the private
respondents, are hereby REVERSED and SET ASIDE.
SO ORDERED.
(Development Bank of the Phils. v. National Labor Relations Commission, G.R.
|||

No. 86227, [January 19, 1994], 299 PHIL 349-355)

CENTRAL BANK OF THE PHILIPPINES as Liquidator of the

FIDELITY SAVINGS BANK, petitioner, vs. HONORABLE JUDGE
JESUS P. MORFE, as Presiding Judge of Branch XIII, Court of
First Instance of Manila, Spouses AUGUSTO and ADELAIDA
PADILLA and Spouses MARCELA and JOB
ELIZES, respondents.

F.E. Evangelista & Agapito S. Fajardo for petitioner.

Juan C. Nabong, Jr. for respondent Spouses Augusto and Adelaida Padilla.
Albert R. Palacio for respondent spouses Marcela and Job Elizes.
 SYNOPSIS

Private respondents secured against Savings Bank, after the same had been
declared insolvent, final judgments for the recovery of the balance of their time
deposits. Payment of the same as preferred credits evidenced by final judgments
in accordance with Article 2244 (14) (b) of the Civil Code was directed by the
liquidation court. From this order, the Central Bank appealed by certiorari.
The Supreme Court held that Art. 2244 (14) (b) of the Civil Code does not apply
and the judgments obtained by the respondents against the involvent savings
bank do not enjoy preference.
Orders of the lower court reversed and set aside.

SYLLABUS

1. BANKS: CLAIMS AND CREDITS AGAINST AN INSOLVENT BANK;

JUDGMENT OBTAINED AFTER DECLARATION OF INSOLVENCY NOT A
PREFERRED CLAIM. — Article 2244 (14)(b) of the Civil Code on preferred
credits does not apply to judgments for the payment of the deposits in an
insolvent savings bank which obtained after the declaration of insolvency.
2. ID.; ID.; ID.; RATIONALE. — A contrary rule on practice would be productive
of injustice, mischief and confusion. To recognize such judgments as entitled to
priority would mean that depositors in insolvent banks, after learning that the
bank is insolvent as shown by the fact that it can no longer pay withdrawals or
that it has closed its doors or has been enjoined by the Monetary Board from
doing business, would rush to the courts to secure judgments for the payment of
their deposits. In such eventuality, the courts would be swamped with suits of
that character. Some of the judgments would be default judgment. Depositors
armed with such judgments would pester the liquidation court with claims for
preference on the basis of Article 2244 (14)(b) of the Civil Code. Less alert
depositors would be prejudiced. That inequitable situation could not have been
contemplated by the framers of section 29 of the General Banking Law on the
proceedings upon insolvency.
3. ID.; ID.; ASSETS OF INSOLVENT BANK HELD IN TRUST FOR THE EQUAL
BENEFIT OF ALL CREDITORS. — "The general principle of equality that the
assets of an insolvent are to be distributed ratably among general creditors
applies with full force to the distribution of the assets of a bank. A general
depositor of a bank is merely a general creditor, and, as such, is not entitled to
any preference or priority over other general creditors. The assets of a bank in
process of liquidation are held in trust for the equal benefit of all creditors, and
one cannot be permitted to obtain an advantage or preference over, another by
an attachment, execution or otherwise.
4. ID.; ID.; EFFECT OF JUDGMENT OBTAINED BY A CREDITOR.— The effect
of a judgment obtained against it by a creditor is only to fix the amount of debt.
He can acquire no lien which will give him any preference or advantage over
other general creditors.

DECISION

AQUINO, J : p

This case involves the question of whether a final judgment for the payment of a
time deposit in a savings bank, which judgment was obtained after the bank was
declared insolvent, is a preferred claim against the bank. The question arises
under the following facts:
On February 18, 1969 the Monetary Board found the Fidelity Savings Bank to be
insolvent. The Board directed the Superintendent of Banks to take charge of its
assets, forbade it to do business, and instructed the Central Bank Legal Counsel
to take appropriate legal actions (Resolution No. 350).
On December 9, 1969 the Board resolved to seek the court's assistance and
supervision in the liquidation of the bank. The resolution was implemented only
on January 25, 1972 when the Central Bank of the Philippines filed the
corresponding petition for assistance and supervision in the Court of First
Instance of Manila (Civil Case No. 86005 assigned to Branch XIII).
Prior to the institution of the liquidation proceeding but after the declaration of
insolvency, or, specifically, sometime in March, 1971, the spouses Job Elizes
and Marcela P. Elizes filed a complaint in the Court of First Instance of Manila
against the Fidelity Savings Bank for the recovery of the sum of P50,584 as the
balance of their time deposits (Civil Case No. 82520 assigned to Branch I).
In the judgment rendered in that case on December 13, 1972 the Fidelity Savings
Bank was ordered to pay the Elizes spouses the sum of P50,584 plus
accumulated interest.
In another case, assigned to Branch XXX of the Court of First Instance of Manila,
the spouses Augusto A. Padilla and Adelaida Padilla secured on April 14, 1972 a
judgment against the Fidelity Savings Bank for the sums of P80,000 as the
balance of their time deposits, plus interests, P70,000 as moral and exemplary
damages and P9,600 as attorney's fees (Civil Case No. 84200 where the action
was filed on September 6, 1971).
In its orders of August 20, 1973 and February 25, 1974, the lower court (Branch
XIII having cognizance of the liquidation proceeding), upon motions of the Elizes
and Padilla spouses and over the opposition of the Central Bank, directed the
latter, as liquidator, to pay their time deposits as preferred credits, evidenced by
final judgments, within the meaning of article 2244(14)(b) of the Civil Code, if
there are enough funds in the liquidator's custody in excess of the credits more
preferred under section 30 of the Central Bank Law in relation to articles 2244
and 2251 of the Civil Code.
From the said order, the Central Bank appealed to this Court by certiorari. It
contends that the final judgments secured by the Elizes and Padilla spouses do
not enjoy any preference because (a) they were rendered after the Fidelity
Savings Bank was declared insolvent and (b) under the charter of the Central
Bank and the General Banking Law, no final judgment can be validly obtained
against an insolvent bank.
Republic Act No. 265 provides:
"SEC. 29. Proceedings upon insolvency. — Whenever, upon
examination by the Superintendent or his examiners or agents into the
condition of any banking institution, it shall be disclosed that the
condition of the same is one of insolvency, or that its continuance in
business would involve probable loss to its depositors or creditors, it
shall be the duty of the Superintendent forthwith, in writing, to inform the
Monetary Board of the facts, and the Board, upon finding the statements
of the Superintendent to be true, shall forthwith forbid the institution to do
business in the Philippines and shall take charge of its assets and
proceeds according to law.
"The Monetary Board shall thereupon determine within thirty days
whether the institution may be reorganized or otherwise placed in such a
condition so that it may be permitted to resume business with safety to
its creditors and shall prescribe the conditions under which such
resumption of business shall take place. In such case the expenses and
fees in the administration of the institution shall be determined by the
Board and shall be paid to the Central Bank out of the assets of such
banking institution.
"At any time within ten days after the Monetary Board has taken charge
of the assets of any banking institution, such institution may apply to the
Court of First Instance for an order requiring the Monetary Board to show
cause why it should not be enjoined from continuing such charge of its
assets, and the court may direct the Board to refrain from further
proceedings and to surrender charge of its assets.
"If the Monetary Board shall determine that the banking institution cannot
resume business with safety to its creditors, it shall, by the Solicitor
General, file a petition in the Court of First Instance reciting the
 proceedings which have been taken and praying the assistance and
supervision of the court in the liquidation of the affairs of the same. The
Superintendent shall thereafter, upon order of the Monetary Board and
under the supervision of the court and with all convenient speed, convert
the assets of the banking institution to money.
"SEC. 30. Distribution of assets. — In case of liquidation of a banking
institution, after payment of the costs of the proceedings, including
reasonable expenses and fees of the Central Bank to be allowed by the
court, the Central Bank shall pay the debts of such institution, under the
order of the court, in accordance with their legal priority."
The General Banking Act, Republic Act No. 337, provides:
"SEC. 85. Any director or officer of any banking institution who receives
or permits or causes to be received in said bank any deposit, or who
pays out or permits or causes to be paid out any funds of said bank, or
who transfers or permits or causes to be transferred any securities or
property of said bank, after said bank becomes insolvent, shall be
punished by fine of not less than one thousand nor more than ten
thousand pesos and by imprisonment for not less than two nor more
than ten years."
The Civil Code provides:
"ART. 2237. Insolvency shall be governed by special laws insofar as
they are not inconsistent with this Code. (n)
"ART. 2244. With reference to other property, real and personal, of the
debtor, the following claims or credits shall be preferred in the order
named:
xxx xxx xxx
(14) Credits which, without special privilege, appear in (a) a public
instrument; or (b) in a final judgment, if they have been the subject of
litigation. These credits shall have preference among themselves in the
order of priority of the dates of the instruments and of the judgments,
respectively. ( 1924a)

"ART. 2251. Those credits which do not enjoy any preference with
respect to specific property, and those which enjoy preference, as to the
amount not paid, shall be satisfied according to the following rules:
(1) In the order established in article 2244;(2) Common credits referred
to in article 2246 shall be paid pro rata regardless of dates. (1929a)".
The trial court or, to be exact, the liquidation court noted that there is no provision
in the charter of the Central Bank and in the General Banking Law (Republic Acts
Nos. 265 and 337, respectively) which suspends or abates civil actions against
an insolvent bank pending in courts other than the liquidation court. It reasoned
out that, because such actions are not suspended, judgments against insolvent
banks could be considered as preferred credits under article 2244(14)(b) of the
Civil Code. It further noted that, in contrast with the Central Bank Act, section 18
of the Insolvency Law provides that upon the issuance by the court of an order
declaring a person insolvent, "all civil proceedings against the said insolvent shall
be stayed".
The liquidation court directed the Central Bank to honor the writs of execution
issued by Branches I and XXX for the enforcement of the judgments obtained by
the Elizes and Padilla spouses. It suggested that, after satisfaction of the
judgments, the Central Bank, as liquidator, should include said judgments in the
list of preferred credits contained in the "Project of Distribution" "with the notation
'already paid'".
On the other hand, the Central Bank argues that after the Monetary Board has
declared that a bank is insolvent and has ordered it to cease operations, the
Board becomes the trustee of its assets "for the equal benefit of all the creditors,
including the depositors". The Central Bank cites the ruling that "the assets of an
insolvent banking institution are held in trust for the equal benefit of all creditors,
and after its insolvency, one cannot obtain an advantage or a preference over
another by an attachment, execution or otherwise" (Rohr vs. Stanton Trust &
Savings Bank, 76 Mont. 248, 245 Pac. 947).
The stand of the Central Bank is that all depositors and creditors of the insolvent
bank should file their actions with the liquidation court. In support of that view it
cites the provision that the Insolvency Law does not apply to banks (last
sentence, sec. 52 of Act No. 1956).
It also invokes the provision penalizing a director or officer of a hank who
disburses, or allows disbursement, of the funds of the bank after it becomes
insolvent (Sec. 85, General Banking Act, Republic Act No. 337). It cites the ruling
that "a creditor of an insolvent state bank in the hands of a liquidator who
recovered a judgment against it is not entitled to a preference for (by) the mere
fact that he is a judgment creditor" (Thomas H. Briggs & Sons, Inc. vs. Allen, 207
N. Carolina 10, 175 S. E. 838, Braver, Liquidation of Financial Institutions, p.
922).
It should be noted that fixed, savings, and current deposits of money in banks
and similar institutions are not true deposits. They are considered simple loans
and, as such, are not preferred credits (Art. 1980, Civil Code; In re Liquidation of
Mercantile Bank of China: Tan Tiong Tick vs. American Apothecaries Co., 65
Phil. 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association, 65 Phil.
375; Fletcher American National Bank vs. Ang Cheng Lian, 65 Phil. 385; Pacific
Commercial Co. vs. American Apothecaries Co., 65 Phil. 429; Gopoco Grocery
vs. Pacific Coast Biscuit Co., 65 Phil. 443).
The aforequoted section 29 of the Central Bank's charter explicitly provides that
when a bank is found to be insolvent, the Monetary Board shall forbid it to do
business and shall take charge of its assets. The Board in its Resolution No. 350
dated February 18, 1969 banned the Fidelity Savings Bank from doing business.
It took charge of the bank's assets. Evidently, one purpose in prohibiting the
insolvent bank from doing business is to prevent some depositors from having an
undue or fraudulent preference over other creditors and depositors.
That purpose would be nullified if, as in this case, after the bank is declared
insolvent, suits by some depositors could be maintained and judgments would be
rendered for the payment of their deposits and then such judgments would be
considered preferred credits under article 2244(14)(b) of the Civil Code.
We are of the opinion that such judgments cannot be considered preferred and
that article 2244(14)(b) does not apply to judgments for the payment of the
deposits in an insolvent savings bank which were obtained after the declaration
of insolvency.
A contrary rule or practice would be productive of injustice, mischief and
confusion. To recognize such judgments as entitled to priority would mean that
depositors in insolvent banks, after learning that the bank is insolvent as shown
by the fact that it can no longer pay withdrawals or that it has closed its doors or
has been enjoined by the Monetary Board from doing business, would rush to the
courts to secure judgments for the payment of their deposits.
In such an eventuality, the courts would be swamped with suits of that character.
Some of the judgments would be default judgments. Depositors armed with such
judgments would pester the liquidation court with claims for preference on the
basis of article 2244(14)(b). Less alert depositors would be prejudiced. That
inequitable situation could not have been contemplated by the framers of section
29.
The Rohr case (supra) supplies some illumination on the disposition of the
instant case. It appears in that case that the Stanton Trust & Savings Bank of
Great Falls closed its doors to business on July 9, 1923. On November 7, 1924
the bank (then already under liquidation) issued to William Rohr a certificate
stating that he was entitled to claim from the bank $1,191.72 and that he was
entitled to dividends thereon. Later, Rohr sued the bank for the payment of his
claim. The bank demurred to the complaint. The trial court sustained the
demurrer. Rohr appealed. In affirming the order sustaining the demurrer, the
Supreme Court of Montana said:
 "The general principle of equity that the assets of an insolvent are to be
distributed ratably among general creditors applies with full force to the
distribution of the assets of a bank. A general depositor of a bank is
merely a general creditor, and, as such, is not entitled to any preference
or priority over other general creditors.
"The assets of a bank in process of liquidation are held in trust for the
equal benefit of all creditors. and one cannot be permitted to obtain an
advantage or preference over another by an attachment, execution or
otherwise. A disputed claim of a creditor may be adjudicated, but those
whose claims are recognized and admitted may not successfully
maintain action thereon. So to permit would defeat the very purpose of
the liquidation of a bank whether being voluntarily accomplished or
through the intervention of a receiver.
xxx xxx xxx
"The available assets of such a bank are held in trust, and so conserved
that each depositor or other creditor shall receive payment or dividend
according to the amount of his debt, and that none of equal class shall
receive any advantage or preference over another."
And with respect to a national bank under voluntary liquidation, the court noted in
the Rohr case that the assets of such a bank "become a trust fund, to be
administered for the benefit of all creditors pro rata,and, while the bank retains its
corporate existence, and may be sued, the effect of a judgment obtained against
it by a creditor is only to fix the amount of debt. He can acquire no lien which will
give him any preference or advantage over other general creditors." (245 Pac.
249) **
Considering that the deposits in question, in their inception, were not preferred
credits, it does not seem logical and just that they should be raised to the
category of preferred credits simply because the depositors, taking advantage of
the long interval between the declaration of insolvency and the filing of the
petition for judicial assistance and supervision, were able to secure judgments for
the payment of their time deposits.
The judicial declaration that the said deposits were payable to the depositors, as
indisputably they were due, could not have given the Elizes and Padilla spouses
a priority over the other depositors whose deposits were likewise indisputably
due and owing from the insolvent bank but who did not want to incur litigation
expenses in securing a judgment for the payment of the deposits.
The circumstance that the Fidelity Savings Bank, having stopped operations
since February 19, 1969, was forbidden to do business (and that ban would
include the payment of time deposits) implies that suits for the payment of such
deposits were prohibited. What was directly prohibited should not be
encompassed indirectly. (See Maurello vs. Broadway Bank & Trust Co. of
Paterson, 176 Atl. 391, 114 N.J.L. 167).
It is noteworthy that in the trial court's order of October 3, 1972, which contains
the Bank Liquidation Rules and Regulations, it indicated in Step III the procedure
for processing the claims against the insolvent bank. In Step IV, the court
directed the Central Bank, as liquidator, to submit a Project of Distribution which
should include "a list of the preferred credits to be paid in full in the order of
priorities established in Articles 2241, 2242, 2243, 2246 and 2247" of the Civil
Code (note that article 2244 was not mentioned). There is no cogent reason why
the Elizes and Padilla spouses should not adhere to the procedure outlined in the
said rules and regulations.
WHEREFORE, the lower court's orders of August 20, 1973 and February 25,
1974 are reversed and set aside. No costs.
SO ORDERED
(Central Bank of the Philippines v. Morfe, G.R. No. L-38427, [March 12, 1975],
|||

159 PHIL 727-737)