CREDIT TRANSACTIONS

Group 4

Romero, Lea Steffi

Chan, Jayson Howard
Manguerra, Jerrold Jake
Liban, Jonas Vincent
Marquez, Richcelyn
Trivino, Reycy
Moncada, Kareen

YHT Realty Corp v CA - YELA

G.R. No. 126780
February 17, 2005

FACTS

On 30 Oct 1987, McLoughlin arrived from Australia and registered with Tropicana. He
rented a safety deposit box as his usual practice. The box required two keys, the guest had one
and one from the management. He placed US $10,000 in one envelope and US$5,000 in another,
AU$10,000 in another envelope and other envelopes with his passport and credit cards. On 12
Dec 1987, he took from the box the envelope with US$5,000 and the one with AU$10,000 to go
to Hong Kong for a short visit, because he was not checking out. When he arrived in HK, the
envelope with US$5,000 only contained US$3,000, but because he had no idea if the safety
deposit box has been tampered, he thought it was just bad accounting.

After returning to Manila, he checked out of the Tropicana on 18 Dec 1987 and left for
Australia. When he arrived he discovered that the envelope with US$10,000 was short of
US$5,000. He also noticed that the jewelry he bought in Hong Kong which he stored in the safety
deposit box upon his return to Tropicana was likewise missing, except for a diamond bracelet.

He went back to the Philippines on 4 Apr 1988 and asked Lainez (who had custody of
the management key) if some money was missing or returned to her, to which the latter
answered there was not. He again registered at the Tropicana and rented a safety deposit box.
He placed an envelope containing US$15,000, another of AU$10,000. On 16 Apr, he opened his
safety deposit box and noticed that US$2,000 and AU$4,500 was missing from the envelopes.

He immediately confronted Lainez and Payam who admitted that Tan opened the safety
deposit box with the key assigned to McLoughlin. McLoughlin went up to his room where Tan
was staying and confronted her. Tan admitted that she had stolen McLoughlin’s key and was
able to open the safety deposit box with the assistance of Lopez, Payam and Lainez. Lopez also
told McLoughlin that Tan stole the key assigned to McLoughlin while the latter was asleep.

McLoughlin requested the management for an investigation of the incident. Lopez got in
touch with Tan and arranged for a meeting with the police and McLoughlin. When the police did
not arrive, Lopez and Tan went to the room of McLoughlin at Tropicana and thereat, Lopez
wrote on a piece of paper a promissory note.

He made Lopez and Tan sign a promissory note for him for the loss. However, Lopez
refused liability on behalf of the hotel, reasoning that McLoughlin signed an "Undertaking for
the Use of Safety Deposit Box" which disclaims any liability of the hotel for things put inside the
box.
ISSUE:

Whether or not a hotel may evade liability for the loss of items left with it for
safekeeping by its guests, by having these guests execute written waivers holding the
establishment or its employees free from blame for such loss in light of Article 2003 of the Civil
Code which voids such waivers.

RULING

NO. Article 2003 was incorporated in the New Civil Code as an expression of public
policy precisely. The hotel business like the common carrier’s business is imbued with public
interest. Catering to the public, hotel-keepers are bound to provide not only lodging for hotel
guests and security to their persons and belongings. The twin duty constitutes the essence of
the business. The law in turn does not allow such duty to the public to be negated or diluted by
any contrary stipulation in so-called “undertakings” that ordinarily appear in prepared forms
imposed by hotel-keepers on guests for their signature

E. ZOBEL, INC., vs. CA.

G.R. No. 113931
May 6, 1998

Facts:

Respondent spouses Raul and Elea Claveria, doing business under the name "Agro
Brokers," applied for a loan with respondent Consolidated Bank and Trust Corporation (now
SOLIDBANK) in the amount of Two Million Eight Hundred Seventy Five Thousand Pesos
(P2,875,000.00) to finance the purchase of two (2) maritime barges and one tugboat which
would be used in their molasses business. The loan was granted subject to the condition that
respondent spouses execute a chattel mortgage over the three (3) vessels to be acquired and
that a continuing guarantee be executed by Ayala International Philippines, Inc., now herein
petitioner E. Zobel, Inc., in favor of SOLIDBANK. The respondent spouses agreed to the
arrangement. Consequently, a chattel mortgage and a Continuing Guaranty were executed.

Respondent spouses defaulted in the payment of the entire obligation upon maturity.
Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the
loan was extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued
that it has lost its right to be subrogated to the first chattel mortgage in view of SOLIDBANK's
failure to register the chattel mortgage with the appropriate government agency. SOLIDBANK
opposed the motion contending that Article 2080 is not applicable because petitioner is not a
guarantor but a surety.

ISSUE:

Whether or not petitioner under the “Continuing Guaranty” obligated itself to Solidbank
as guarantor or a surety?

HELD:
 Based on the aforementioned definitions, it appears that the contract executed by
petitioner in favor of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract
of surety. The terms of the contract categorically obligates petitioner as "surety" to induce
SOLIDBANK to extend credit to respondent spouses.

A surety is usually bound with his principal by the same instrument, executed at the
same time, and on the same consideration. He is an original promissor and debtor from the
beginning, and is held, ordinarily, to know every default of his principal. Usually, he will not be
discharged, either by the mere indulgence of the creditor to the principal, or by want of notice of
the default of the principal, no matter how much he may be injured thereby. On the other hand,
the contract of guaranty is the guarantor's own separate undertaking, in which the principal
does not join. It is usually entered into before or after that of the principal, and is often
supported on a separate consideration from that supporting the contract of the principal. The
original contract of his principal is not his contract, and he is not bound to take notice of its non-
performance. He is often discharged by the mere indulgence of the creditor to the principal, and
is usually not liable unless notified of the default of the principal.

Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of
the solvency of the debtor and thus binds himself to pay if the principal is unable to pay while a
surety is the insurer of the debt, and he obligates himself to pay if the principal does not pay.
The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty.
Authorities recognize that the word "guarantee" is frequently employed in business
transactions to describe not the security of the debt but an intention to be bound by a primary
or independent obligation. As aptly observed by the trial court, the interpretation of a contract
is not limited to the title alone but to the contents and intention of the parties. SOLIDBANK's
failure to register the chattel mortgage did not release petitioner from the obligation. In the
Continuing Guaranty executed in favor of SOLIDBANK, petitioner bound itself to the contract
irrespective of the existence of any collateral. It even released SOLIDBANK from any fault or
negligence that may impair the contract.

PHILIPPINE BLOOMING MILLS, INC., and ALFREDO CHING, vs. COURT OF APPEALS and
TRADERS ROYAL BANK
G. R. No. 142381
October 15, 2003

Facts:

A Deed of Suretyship dated July 21, 1997 was signed by petitioner Ching in his personal
capacity and not as a corporate officer of PBM wherein he was the Senior Vice President of PBM
binding himself as follows:
xxx as primary obligor(s) and not as mere guarantor(s), hereby warrant to the TRADERS
ROYAL BANK, its successors and assigns, the due and punctual payment by the following
individuals and/or companies/firms, hereinafter called the DEBTOR(S), of such
amounts whether due or not xxx

After sometime, additional loans were acquired by PBM from Traders Royal bank. When
PBM defaulted, its assets, liabilities, and obligations were placed by SEC under the rehabilitation
receivership of Kalaw, Escaler and Associates. Ching was sued in his personal capacity as a
surety for PBM by the Traders Royal Bank.
Issue:

Whether or not Ching was liable as a surety.

Held:
Yes. Ching is liable for credit obligations contracted by PBM against TRB before and after
the execution of the 21 July 1977 Deed of Suretyship. This is evident from the tenor of the deed
itself, referring to amounts PBM “may now be indebted or may hereafter become indebted” to
TRB.

The law expressly allows a suretyship for “future debts”. Article 2053 of the Civil Code
provides:
A guaranty may also be given as security for future debts, the amount of which is not yet
known; there can be no claim against the guarantor until the debt is liquidated. A
conditional obligation may also be secured.

INTERNATIONAL FINANCE CORP. vs. IMPERIAL TEXTILE MILLS

G.R. NO. 160324
November 15, 2005

Facts:

IFC and PPIC entered into a loan agreement wherein IFC extended to PPIC a loan of
US$7,000,000.00. On December 17, 1974, a Guarantee Agreement was executed with x x x
Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing Corporation (Grandtex) and IFC
as parties thereto. ITM and Grandtex agreed to guarantee PPICs obligations under the loan
agreement.

PPIC paid the installments due on June 1, 1977, December 1, 1977 and June 1, 1978. The
payments due on December 1, 1978, June 1, 1979 and December 1, 1979 were rescheduled as
requested by PPIC. Despite the rescheduling of the installment payments, however, PPIC
defaulted. By virtue of PPICs failure to pay, IFC, together with DBP, applied for the extrajudicial
foreclosure of mortgages on the real estate, buildings, machinery, equipment plant and all
improvements owned by PPIC, located at Calamba, Laguna, with the regional sheriff of Calamba,
Laguna.

Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the
outstanding balance. However, despite the demand made by IFC, the outstanding balance
remained unpaid.

ISSUE

Whether ITM is a surety, and thus solidarily liable with PPIC for the payment of the loan.

Held:
 THE CONTRACT IN HEREIN CASE IS A SURETY
While referring to ITM as a guarantor, the Agreement specifically stated that the corporation
was “jointly and severally” liable. To put emphasis on the nature of that liability, the Contract
further stated that ITM was a primary obligor, not a mere surety. Those stipulations meant only
one thing: that at bottom, and to all legal intents and purposes, it was a surety. Indubitably
therefore, ITM bound itself to be solidarily liable with PPIC for the la tter’s obligations under the
Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not be
deemed merely secondarily liable.

We note that the CA denied solidary liability, on the theory that the parties would not
have executed a Guarantee Agreement if they had intended to name ITM as a primary obligor.
The appellate court opined that ITM’s undertaking was collateral to and distinct from the Loan
Agreement. On this point, the Court stresses that a suretyship is merely an accessory or a
collateral to a principal obligation. Although a surety contract is secondary to the principal
obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a
regular party to the undertaking. A surety becomes liable to the debt and duty of the principal
obligor even without possessing a direct or personal interest in the obligations constituted by
the latter.

With the present finding that ITM is a surety, it is clear that the CA erred in declaring the
former secondarily liable. A surety is considered in law to be on the same footing as the
principal debtor in relation to whatever is adjudged against the latter. Evidently, the dispositive
portion of the assailed Decision should be modified to require ITM to pay the amount adjudged
in favor of IFC.

Development Bank of the Philippines vs. Court of Appeals

G.R. NO. 137916
December 8, 2004

Facts:

Private respondent Lydia Cuba is a grantee of a fishpond lease agreement from the
Government. She later obtained a loan from DBP in the amounts of P109, 000, P109, 000, and
P98, 700 under the terms stated in the three promissory notes. As a security for the said loan
Cuba executed a two Deed of Assignment of her Leasehold Rights. Then she failed to pay her
loan when it became due in accordance with the terms of the promissory notes. DBP in turn
appropriated the leasehold rights of Cuba over the fishpond, without foreclosure proceedings,
whether judicial or extrajudicial. After appropriating the said leasehold rights DBP executed a
Deed of Conditional Sale of the Leasehold Rights in favor of respondent Cuba over the same
fishpond, to which Cuba agreed. Respondent Cuba failed to pay the amortizations stipulated in
the Deed of Conditional Sale, however she was able enter with DBP a temporary arrangement
with DBP for the Deferment Notarial Rescission of Deed of Conditional Sale. However, a Notice
of Rescission thru Notarial Act was sent the DBP to Cuba, then it took possession of the fishpond
in question. After it took possession of the said fishpond, DBP disposed the property in favor of
Agripina Caperal through a deed of conditional sale. Then a new fishpond lease agreement was
awarded by the Government to Caperal.
 Lydia Cuba filed an action with the Regional Trial Court of Pangasinan for the
declaration of nullity of DBP’s appropriation of her leaseholds over the subject fishpond, for the
annulment of the Deed of Conditional Sale executed in her favor by DBP, the annulment of DBP’s
sale of the fishpond to Caperal, and the restoration of her rights over the said fishpond and for
damages. The RTC ruled in favor of Cuba, declaring that DBP’s taking possession and ownership
of the subject property without foreclosure was violative of Art. 2088 of the Civil Code, and that
condition No. 12 of the Assignment of the Leasehold Rights was void for being a clear case of
pactum commissorium.

Both Cuba and DBP elevated the case to the CA, with Cuba seeking an increase in the
amount of damages, while DBP questioned the findings of fact and law of the RTC. The CA
reversed the ruling of the RTC with regards to the validity of the acts of DBP.

Issue:

Whether or not the two Deed of Assignment executed by Cuba in favor of DBP would
operate as a mortgage or some other contract.

Held:

Lydia executed the 2 Deeds of Assignment as a security for the loans that she obtained
from DBP, according the case of People’s Bank and Trust Co. vs. Odom an assignment to guaranty
an obligation is in effect a mortgage. And it was also indicated in the provisions of the
promissory note executed by Cuba, that her assigned leasehold rights were referred to as
mortgaged properties and the instrument itself a mortgage contract.

Bustamante vs Rosel
G. R. No. 126800
November 29, 1999

Facts:

Respondent Rosel entered into a loan agreement with petitioner spouses Bustamante
wherein the latter borrowed P100,000 payable in 2 years. To guarantee payment, the spouses
put as collateral 70 sqm of their lot inclusive of the apartment therein. In the event of borrowers
default, contract states the lender has the option to buy or purchase the collateral for P200,000.
Then the loan was about to mature on March 1, 1989, respondents proposed to buy the said
portion at the pre-set price. Petitioners, however, refused and requested for extension of time to
pay the loan. On the due date, petitioners tendered payment of the loan to respondents which
the latter refused to accept. On March 4, 1990, respondents sent a demand letter asking
petitioner to sell the collateral pursuant to the option to buy embodied in the loan agreement.
Prior to that, they filed with the RTC an action for specific performance in February.

Issue:

Is the respondent justified in compelling petitioners to sell the portion of the lot
pursuant to the stipulation in the loan?

Held:
 Not doing so is tantamount to pactum commissorium.The elements of pactum
commissorium are as follows: (1) there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in case of non-payment of the principal
obligation within the stipulated period.In this case, the intent to appropriate the property given
as collateral in favor of the creditor appears to be evident, for the debtor is obliged to dispose of
the collateral at the pre-agreed consideration amounting to practically the same amount as the
loan. In effect, the creditor acquires the collateral in the event of nonpayment of the loan. This is
within the concept of pactum commissorium. Such stipulation is void

ONG vs. ROBAN LENDING CORPORATION

G.R. NO. 172592
July 9, 2008

FACTS:

On various dates, petitioner Spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong
obtained several loans from respondent Roban Lending Corporation in the total amount of P4,
000,000. These loans were secured by real estate mortgage on Spouses Ong‘s parcel of lands.
Later Spouses Ong and Roban executed several agreements – an amendment to the amended
Real Estate Mortgage which consolidated their loans amounting to P5, 916,117.50; dacion in
payment wherein spouses Ong assigned their mortgaged properties to Roban to settle their total
obligation and Memorandum of Agreement (MOA) in which the dacion in payment agreement
will be automatically enforced in case spouses Ong fail to pay within one year from the execution
of the agreement. Spouses Ong filed a complaint before Regional Trial Court of Tarlac City to
declare the mortgage contract, dacion in payment agreement, and MOA void. Spouses Ong allege
that the dacion in payment agreement is pactum commissorium, and therefore void. In its
Answer with counterclaim, Roban alleged that the dacion in payment agreement is valid because
it is a special form of payment recognized under Article 1245 of the Civil Code. RTC ruled in
favor of Roban, finding that there was no pactum commissorium. The Court of Appeals upheld
the RTC decision.

ISSUE:

Whether or not the dacion in payment agreement entered into by Spouses Ong and
Roban constitutes pactum commissorium

HELD:

The Court finds that the Memorandum of Agreement and Dacion in Payment constitute
pactum commissorium, which is prohibited under Article 2088 of the Civil Code which provides
that the creditor cannot appropriate the things given by way of pledge or mortgage, or dispose
of them. Any stipulation to the contrary is null and void

The elements of pactum commissorium, which enables the mortgagee to acquire

ownership of the mortgaged property without the need of any foreclosure proceedings, are: (1)
there should be a property mortgaged by way of security for the payment of the principal
obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of
the thing mortgaged in case of non-payment of the principal obligation within the stipulated
period.

Here, Memorandum of Agreement and the Dacion in Payment contain no provisions for
foreclosure proceedings nor redemption. Under the Memorandum of Agreement, the failure by
the petitioners to pay their debt within the one-year period gives respondent the right to
enforce the Dacion in Payment transferring to it ownership of the properties covered by TCT No.
297840. Respondent, in effect, automatically acquires ownership of the properties upon
Spouses Ong’s failure to pay their debt within the stipulated period. In a true dacion en pago, the
assignment of the property extinguishes the monetary debt.

Here, the alienation of the properties was by way of security, and not by way of
satisfying the debt. The Dacion in Payment did not extinguish Spouses Ong’s obligation to
Roban. On the contrary, under the Memorandum of Agreement executed on the same day as the
Dacion in Payment, petitioners had to execute a promissory note for P5, 916, 117.50 which they
were to pay within one year

PARAY v. RODRIGUEZ, ET AL.,

G.R. No. 132287
JANUARY 24, 2006

FACTS:

Respondents were the owners of shares of stock in Quirino -Leonor-Rodriguez Realty

Inc. In 1979 to 1980, respondents secured by way of pledge of some of their shares of stock to
petitioners Bonifacio and Faustina Paray the payment of certain loan obligations. When the
Parays attempted to foreclose the pledges on account of respondents’ failure to pay their loans,
respondents filed complaints with RTC of Cebu City. The actions sought the declaration of nullity
of the pledge agreements, among others. However the RTC dismissed the complaint and gave
due course to the foreclosure and sale at public auction of the various pledges. This decision
attained finality after it was affirmed by the Court of Appeals and the Supreme Court.

Respondents then received Notices of Sale which indicated that the pledged shares were to
be sold at public auction. However, before the scheduled date of auction, all of respondents
caused the consignation with the RTC Clerk of Court of various amounts. It was claimed that
respondents had attempted to tender payments to the Parays, but had been rejected.
Notwithstanding the consignations, the public auction took place as scheduled, with petitioner
Vidal Espeleta successfully bidding for all of the pledged shares. None of respondents
participated or appeared at the auction.

Respondents instead filed a complaint with the RTC seeking the declaration of nullity of
the concluded public auction. Respondents argued that their tender of payment and subsequent
consignations served to extinguish their loan obligations and discharged the pledge contracts.
Petitioners countered that the auction sale was conducted pursuant to a final and executory
judgment and that the tender of payment and consignations were made long after their
obligations had fallen due. They pointed out that the amounts consigned could not extinguish
the principal loan obligations of respondents since they were not sufficient to cover the interests
due on the debt. They likewise argued that the essential procedural requisites for the auction
sale had been satisfied.

ISSUES:

Whether or not the consignations made by respondents prior to the auction sale are
sufficient to extinguish the loan obligations and the subject pledged contracts.

HELD:

No. There is no doubt that if the principal obligation is satisfied, the pledges should be
terminated as well. Article 2098 of the Civil Code provides that the right of the creditor to retain
possession of the pledged item exists only until the debt is paid. Article 2105 of the Civil Code
further clarifies that the debtor cannot ask for the return of the thing pledged against the will of
the creditor, unless and until he has paid the debt and its interest. At the same time, the right of
the pledgee to foreclose the pledge is also established under the Civil Code. When the credit has
not been satisfied in due time, the creditor may proceed with the sale by public auction under
the procedure provided under Article 2112 of the Code.

In order that the consignation could have the effect of extinguishing the pledge
contracts, such amounts should cover not just the principal loans, but also the monthly interests
thereon.

In the case at bar, while the amounts consigned by respondents could answer for their
respective principal loan obligations, they were not sufficient to cover the interests due on these
loans, which were pegged at the rate of 5% per month or 60% per annum

Medida vs. CA
G.R. No. 98334
May 8, 1992

FACTS:

Plaintiff spouses alarmed of losing their right of redemption over the disputed lot from
Mr. Juan Gandioncho, purchaser of the aforesaid lot at the foreclosure sale of the previous
mortgage in favor of Cebu Devt. Bank, went to Teotimo Abellana, president of defendant
Association, to obtain a loan of P30, 000.00. Prior thereto, their son Teofredo Dolino filed a
similar loan application for P25, 000.00 with the disputed lot offered as security for the P30,
000.00 loan from defendant association. Subsequently, they executed a promissory note in favor
of defendant association. When the loan became due and demandable without plaintiff paying
the same, defendant association caused the extrajudicial foreclosure of the mortgage. After the
posting and publication requirements were complied with, the land was sold at public auction to
defendant association being the highest bidder.

ISSUE:

Whether or not a mortgagor, whose property has been extrajudicially foreclosed and
sold at the corresponding foreclosure sale, may validly execute a mortgage contract over the
same property in favor of a third party during the period of redemption.
RULING:

The mortgagor does not have the unconditional power to absolutely sell the land since
the same is encumbered by a lien of a third person which, if unsatisfied, could result in a
consolidation of ownership in the lienholder but only after the lapse of the period of
redemption. Even on that score, it may plausibly be argued that what is delimited is not the
mortgagor’s jus dispodendi, as an attribute of ownership, but merely the rights conferred by
such act of disposal which may correspondingly be restricted.

What actually is effected where redemption is seasonably exercised by the judgment or

mortgage debtor is not the recovery of ownership of his land, which ownership he never lost,
but the elimination from his title thereto of the lien created by the levy on attachment or
judgment or the registration of a mortgage thereon. The American rule is similarly to the effect
that the redemption of property sold under a foreclosure sale defeats the inchoate right of the
purchaser and restores the property to the same condition as if no sale had been attempted.
Further, it does not give to the mortgagor a new title, but merely restores to him the title freed of
the encumbrance of the lien foreclosed.

Spouses Suico vs. Philippine National Bank

G.R. No. 170215
August 28, 2007

Facts:

The Sps. Suico defaulted on a loan secured with a real estate mortgage over several
properties. A foreclosure sale was held where PNB was the loan bidder. The amount of the bid
was about P8.5M. The spouses allege that the outstanding debt was only about P2M. PNB did
not deliver or tender its payment or the excess of the bid against the debt. The spouses assail
the validity of the sale on the grounds that the notice of the sale was invalid because there was
misrepresentation as to the amount of the outstanding debt and because PNB failed to pay or
tender the price of the bid.

Issue:

Whether or not the extrajudicial foreclosure is valid.

Held:

Yes.The application of the proceeds from the sale of the mortgaged property to the
mortgagor's obligation is an act of payment, not payment by dacion; hence, it is the mortgagee's
duty to return any surplus in the selling price to the mortgagor. Perforce, a mortgagee who
exercises the power of sale contained in a mortgage is considered a custodian of the fund and,
being bound to apply it properly, is liable to the persons entitled thereto if he fails to do so. And
even though the mortgagee is not strictly considered a trustee in a purely equitable sense, but as
far as concerns the unconsumed balance, the mortgagee is deemed a trustee for the mortgagor
or owner of the equity of redemption. Thus it has been held that if the mortgagee is retaining
more of the proceeds of the sale than he is entitled to, this fact alone will not affect the validity of
the sale but simply give the mortgagor a cause of action to recover such surplus.
HUERTA ALBA RESORT, INC. vs. CA & SYNDICATED MANAGEMENT GROUP, INC.
G.R. No. 128567
September 1, 2000

FACTS:

Private respondent instituted a civil case as mortgagee-assignee of a loan amounting to

P8.5 million obtained by petitioner from Intercon. In a complaint for judicial foreclosure of
mortgage private respondent sought the foreclosure of (4) parcels of land mortgaged by
petitioner to Intercon Fund Resource, Inc. (“Intercon”), which was granted by the CA. On
September 6, 1994, private respondent was declared the highest bidder during the auction sale
and the Certificate of Sale issued in its favor was registered on October 21, 1994. in opposition
to the Motion for Issuance of Writ of Possession, petitioner filed a Motion to Compel Private
Respondent to Accept Redemption on May 2, 1995 ,invoking for the very first time its alleged
right to redeem subject properties under to Section 78 of R.A. No. 337 (General Banking Act).

Section 78 of R.A. No. 337 provides that “in case of a foreclosure of a mortgage in favor of
a bank, banking or credit institution, whether judicially or extrajudicially, the mortgagor shall
have the right, within one year after the sale of the real estate as a result of the foreclosure of the
respective mortgage, to redeemthe property.”

ISSUE:

Whether petitioner had the right of redemption or equity of redemption over subject
properties.

HELD:

From the various decisions, resolutions and orders a quo , petitioner has been adjudged
to have was only the equity of redemption over subject properties. The right of redemption in
relation to a mortgage - understood in the sense of a prerogative to re-acquire mortgaged
property after registration of the foreclosure sale - exists only in the case of the extrajudicial
foreclosure of the mortgage. No such right is recognized in a judicial foreclosure except only
where the mortgagee is the Philippine National Bank or a bank or banking institution. Where a
mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption
within one (1) year from the registration of the sheriff’s certificate of foreclosure sale.

In light of the aforestated facts, it was too late in the day for petitioner to invoke a right
to redeem under Section 78 of R.A. No. 337. Thus, the claim that petitioner is entitled to the
beneficial provisions of the said law - since private respondent’s predecessor-in-interest is a
credit institution - is in the nature of a compulsory counterclaim which should have been
averred in petitioner’s answer to the compliant for judicial foreclosure.

There then existed only what is known as the equity of redemption, which is simply the
right of the petitioner to extinguish the mortgage and retain ownership of the property by
paying the secured debt within the 90-day period after the judgment became final. There being
an explicit finding on the part of the CA - that the petitioner failed to exercise its equity of
redemption within the prescribed period, redemption can no longer be effected.

PEOPLE’S BANK AND TRUST CO. vs DAHICAN LUMBER COMPANY

GR No. L-17500
May 16, 1967

FACTS:
Atlantic Gulf & Pacific Company of Manila (ANLANTIC) sold and assigned all its right in the
Dahican Lumber concession to Dahican Lumber Company (DALCO). To develop the concession,
DALCO obtained various loans from the People’s Bank & Trust Company (BANK). As security for
the payment of the loans, DALCO executed in favour of the BANK - the latter acting for itself and
as trustee for the Export-Import Bank of Washington D.C. - a deed of mortgage covering five
parcels of land together with all the buildings and other improvements existing thereon and all
the personal properties of the mortgagor located in its place of business. DALCO also executed a
second mortgage on the same properties in favor of ATLANTIC to secure payment of the unpaid
balance of the sale price of the lumber concession. Both deeds contained a provision extending
the mortgage lien to properties to be subsequently acquired.

On the date of execution of the mortgage, DALCO purchased various machineries,

equipment, spare parts and supplies. Pursuant to the provision of the mortgage deeds regarding
“after acquired properties,” the BANK requested DALCO to submit complete lists of said
properties but the latter failed to do so.

ISSUE:

Whether or not the “after acquired properties” were subject to the deed of mortgage.

HELD:

Yes, they are subject to the deeds of mortgage.

Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property
of every nature and description taken in exchange or replacement, as well as all buildings,
machineries, fixtures, tools, equipments, and other property that the mortgagor may acquire,
construct, install, attach; or use in, to upon, or in connection with the premises — that is, its
lumber concession — "shall immediately be and become subject to the lien" of both mortgages
in the same manner and to the same extent as if already included therein at the time of their
execution. As the language thus used leaves no room for doubt as to the intention of the parties,
We see no useful purpose in discussing the matter extensively. Suffice it to say that the
stipulation referred to is common, and We might say logical, in all cases where the properties
given as collateral are perishable or subject to inevitable wear and tear or were intended to be
sold, or to be used — thus becoming subject to the inevitable wear and tear — but with the
understanding — express or implied — that they shall be replaced with others to be thereafter
acquired by the mortgagor. Such stipulation is neither unlawful nor immoral, its obvious
purpose being to maintain, to the extent allowed by circumstances, the original value of the
properties given as security. Indeed, if such properties were of the nature already referred to, it
would be poor judgment on the part of the creditor who does not see to it that a similar
provision is included in the contract.

Article 415 does not define real property but enumerates what are considered as such,
among them being machinery, receptacles, instruments or replacements intended by owner of
the tenement for an industry or works which may be carried on in a building or on a piece of
land, and shall tend directly to meet the needs of the said industry or works.
 On the strength of the above -quoted legal provisions, the lower court held that inasmuch
as "the chattels were placed in the real properties mortgaged to plaintiffs, they came within the
operation of Art. 415, paragraph 5 and Art. 2127 of the New Civil Code".

It is not disputed in the case at bar that the "after acquired properties" were purchased by
DALCO in connection with, and for use in the development of its lumber concession and that
they were purchased in addition to, or in replacement of those already existing in the premises
on July 13, 1950. In Law, therefore, they must be deemed to have been immobilized, with the
result that the real estate mortgages involved herein — which were registered as such — did not
have to be registered a second time as chattel mortgages in order to bind the "after acquired
properties" and affect third parties.

Makati Leasing & Finance Corp. v. Wearever Textile Mills

G.R. No. L-58469.
May 16, 1983

FACTS:

Wearever Textile Mills, Inc. discounted and assigned several receivables with Makati
Leasing and Financial Corp. under a Receivable Purchase Agreement so that the latter would
lend money to the former. In order to secure the collection of the receivables assigned, Wearever
executed a Chattel Mortgage over certain raw materials inventory as well as a machinery (Artos
Aero Dryer Stentering Range). Upon default of Wearever in paying what is due, Makati Leasing
filed a petition for extrajudicial foreclosure of the properties mortgaged to it.

The Sheriff assigned to execute such foreclosure, however, failed to enter the premises of
Wearever to effect the seizure of the machinery. After which, petitioner filed a complaint for a
judicial foreclosure with the RTC of Rizal which was granted. Enforcing then the writ of seizure
issued by the lower court, the Sheriff removed the main drive motor of the machinery.

Upon appeal, CA reversed the ruling of the RTC and ordered the return of the motor to
Wearever since the said machinery cannot be the subject of a replevin and chattel mortgage for
it is a real property pursuant to Art. 415 (3) of the NCC. CA argued that the machinery is
attached to the ground by means of bolts and the only way to remove it from the respondent’s
plant would be to drill out or destroy the concrete floor – which is why all that the sheriff could
do to enforce the writ was to take the main drive motor of the machinery. Hence, this petition
for certiorari.

ISSUE:

Whether or not the subject machinery is a real property or a personal property to

subject it to chattel mortgage

HELD:

By destination, it is a real property but by virtue of the intention of the parties stipulated
in their chattel mortgage contract, the machinery was intended to be a personal property. The
Court made reference to its ruling in Tumalad v. Vicencio and Standard Oil Co. of New York v.
Jaramillo where it held that a real property may be considered as a personal property for
purposes of executing a chattel mortgage thereon as long as the parties to the contract so agree
and no innocent third party will be prejudiced thereby, and once the parties so agreed, they are
already estopped from claiming otherwise. The characterization of an immovable as chattel by
the parties in the contract is indicative of intention and impresses upon the property the
character determined by the parties. It is undeniable that the parties to a contract may by
agreement treat as personal property that which by nature would be real property, as long as no
interest of third parties would be prejudiced thereby.

An immovable may be considered as personal property for purposes of executing a chattel

mortgage thereon as long as the parties to the contract so agree and no innocent third party will
be prejudiced thereby. This is because one who has so agreed is estopped from denying the
existence of the chattel mortgage. The characterization of an immovable as chattel by the parties
in the contract is indicative of intention and impresses upon the property the character
determined by the parties. It is undeniable that the parties to a contract may by agreement
treat as personal property that which by nature would be real property, as long as no interest of
third parties would be prejudiced thereby.

DY V. CA
G.R. No. 92989
July 08, 1991

FACTS

A truck and tractor was bought by Wilfredo Dy bought from Libra Finance Corporation.
Both. In order to secure the loan obtained, both properties were mortgaged to Libra and the
latter took possession of it. Perfecto Dy and Carol Dy-Seno, the siblings of Wilfredo Dy, asked
Libra if they could be allowed to buy the property and assume the mortgage debt wherein Libra
agreed to the request.

Gelac Trading Inc. filed a collection suit against Wilfredo Dy. Through the writ of
execution, the tractor was obtained by the sheriff on the premises of Libra. Thereafter, the
tractor was sold in a public auction in which Gelac Trading was the lone bidder who
subsequently sold it to one of their stockholders.

At the time of the execution of the deed of sale, the respondents contented that there
was no constructive delivery effected since the consummation of the sale depended upon the
clearance and encashment of the check which was issued in payment of the subject tractor.

ISSUE

WON the William Dy is still the owner of the tractor when it was obtained through the
writ of execution.

HELD

No, William Dy is not anymore the owner of the tractor. When the sheriff took
possession of the tractor and sold it to William’s brother, William lost its possession over such
property. Even though the said property was mortgaged, William Dy never lost his right to sell
the property since in a mortgage contract, the mortgagor does not lose his ownership over the
property. In fact, he has the right to sell or dispose the property provided that the mortgagee
consented to such case. However, if there is no consent from the mortgagee, the sale is still
considered valid without prejudice to the criminal action against the mortgagor. In this case, the
payment of check extinguished the obligation.

Pameca Wood Treatment Plant v. CA

G.R. No. 106435.
July 14, 1999

Facts:

Pameca loaned P2million from DBP and executed a promissory note, secured by its
inventory of furniture and equipment. A month before the mortgage contract, its supposed
market value was P2.5milion. They defaulted, so DBP extra-judicially foreclosed on the chattels.
It was the only bidder so it was able to buy it for around P322,000. Then for the deficiency, it
filed a complaint against Pameca and its solidary debtors (Teveses and Pulido) according to the
promissory note it signed. The RTC-Makati ordered Pameca to pay the P4million. CA affirmed.

Issue:

Whether an action can be instituted for deficiency of a debt after foreclosure of the
chattel mortgage and whether public auction sale is void on the grounds of fraud and
inadequacy of price.

Held:

In pledge, the sale of the thing pledged extinguishes the entire principal obligation such
that the pledgor may no longer recover the proceeds of the sale in excess of the amount of the
principal obligation. Section 14 of the chattel mortgage law, on the other hand, expressly entitles
the mortgagor to the balance of the proceeds upon satisfaction of the principal obligation and
costs. Since the chattel mortgage law bars the creditor mortgagee from retaining the excess of
the sale proceeds, there is a corollary obligation on the part of the debtor-mortgagor to pay the
deficiency in case of a reduction in the price at public auction.
The mere fact that the mortgagee was the sole bidder for the mortgaged property in the
public sale does not warrant the conclusion that the transaction was attended with fraud. Fraud
is a serious allegation that requires full and convincing evidence.

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC vs. HON. COURT OF
APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY
G.R. No. 103576
August 22, 1996

FACTS:

Petitioner Chua Pac, the president and general manager of co-petitioner Acme executed
a chattel mortgage in favor of private respondent Producers Bank as a security for a loan of
P3,000,000. A provision in the chattel mortgage agreement was to this effect:

"In case the MORTGAGOR executes subsequent promissory note or notes either as a
renewal of the former note, as an extension thereof, or as a new loan, or is given any other kind
of accommodations such as overdrafts, letters of credit, acceptances and bills of exchange,
releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as security
for the payment of the said promissory note or notes and/or accommodations without the
necessity of executing a new contract and this mortgage shall have the same force and effect as if
the said promissory note or notes and/or accommodations were existing on the date thereof.
This mortgage shall also stand as security for said obligations and any and all other obligations
of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations
have been contracted before, during or after the constitution of this mortgage."

In due time, the loan ofP3,000,000.00 was paid. Subsequently it obtained additional loan
Totaling P2,700,000.00 which was also duly paid. Another loan was again extended
(P1,000,000.00) covered by four promissory notes for P250,000.00 each, but went unsettled
prompting the bank to apply for an extrajudicial foreclosure with the Sheriff.

ISSUE:

Whether or not it is valid and effective to have a clause in a chattel mortgage that
purports to likewise extend its coverage to obligations yet to be contracted or incurred?

HELD:

No. While a pledge, real estate mortgage, or antichresis may exceptionally secure after-
incurred obligations so long as these future debts are accurately described, a chattel mortgage,
however, can only cover obligations existing at the time the mortgage is constituted. Although a
promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a
binding commitment that can be compelled upon, the security itself, however, does not come
into existence or arise until after a chattel mortgage agreement covering the newly contracted
debt is executed either by concluding a fresh chattel mortgage or by amending the old contract
conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the
borrower to execute the agreement so as to cover the after-incurred obligation can constitute an
act of default on the part of the borrower of the financing agreement whereon the promise is
written but, of course, the remedy of foreclosure can only cover the debts extant at the time of
constitution and during the life of the chattel mortgage sought to be foreclosed.

Servicewide Specialist, Inc. vs CA

G.R. No. 116363
December 10, 1999

Facts:

Spouses Atty. Jesus and Elizabeth Ponce bought a vehicle from C. R. Tecson Enterprises and
executed a promissory note and a chattel mortgage in their favor. C.R. Tecson Enterprises, in
turn, executed a deed of assignment of said promissory note and chattel mortgage in favor of
Filinvest Credit Corporation with the conformity of the Spouses. In 1976, Spouses Ponce
transferred and delivered the vehicle to Conrado R. Tecson by way of sale with assumption of
mortgage. Subsequently, in 1978, Filinvest assigned all its rights and interest over the same
promissory note and chattel mortgage to petitioner Servicewide Specialists Inc. without notice
to respondents.
 A complaint for replevin was filed against the respondent due to its failure to pay the
installments under the promissory note from October 1977 to March 1978. Respondent Spouses
filed a third party complaint against Conrado Tecson praying that in case they are adjudged
liable to petitioner, Conrado Tecson should reimburse them. RTC rendered the Spouses jointly
and solidarily liable to petitioner, however, Conrado Tecson was ordered to reimburse the
respondent spouses for the sum that they would pay to petitioner. On appeal, the Court of
Appeals reversed and set aside the judgment of the court a quo on the principal ground that
respondent spouses were not notified of the assignment of the promissory note and chattel
mortgage to petitioner. Hence, this petition for review.

Issues:

Whether or not the consent of the creditor-mortgagee is necessary when the debtor-
mortgagor alienates the property to a third person.

Held:

Yes, as provided in Article 1293 of the Civil Code. Without such consent by the creditor,
the alienation made by respondent spouses is not binding on the former.

Insofar as Filinvest is concerned, the debtor is still respondent spouses because of the
absence of its consent to the sale. Worse, Filinvest was not even notified of such sale. Having
subsequently stepped into the shoes of Filinvest, petitioner acquired the same rights as the
former had against respondent spouses. The defenses that could have been invoked by Filinvest
against the spouses can be successfully raised by petitioner. Therefore, for failure of respondent
spouses to obtain the consent of Filinvest thereto, the sale of the vehicle to Conrado R. Tecson
was not binding on the former. When the credit was assigned by Filinvest to petitioner,
respondent spouses stood on record as the debtor-mortgagor.

VICTORIA YAU CHU v. COURT OF APPEALS, FAMILY SAVINGS BANK and/or CAMS TRADING
ENTERPRISES, INC.
GR 78519
Sept.26, 1989

FACTS:

Since 1980, Victoria Yau Chu had been purchasing cement on credit from CAMS Trading.
To guaranty payment for her cement withdrawals, she executed in favour of Cams Trading deeds
of assignment of her time deposits in the total sum of P320,000 in Family Savings Bank. Except
for the serial numbers and dates of the time deposit certificates, the deeds of assignment
provided that they will serve as a collateral or guarantee for the payment of the obligation on
account of cement withdrawals.

Cams Trading notified the bank that Chu had an unpaid account with it in the sum of
P314,639.75. It asked that it be allowed to encash the time deposit certificates assigned by Chu.
It submitted to the bank a letter of Chu admitting that her outstanding account with Cams
Trading was P404,500. After verbally advising Chu of the assignee’s request to encash her time
deposit certificates and obtaining her verbal conformity thereto, the bank agreed to encash the
certificates.
 It delivered to Cams Trading the sum of P283,737.75 only, as 1 time deposit certificate
(#0048120954) lacked the proper signatures. Upon being informed of the encashment, Chu
demanded from the bank and Cams Trading that her deposit be restored. When neither
complied, she filed a complaint to recover the sum of P283,737.75 from them. RTC dismissed the
complaint for lack of merit. Upon appeal, CA affirmed the dismissal.

ISSUE:

Whether or not the encashment of Chu’s time deposit certificates was a pactum
commissorium

HELD:

NO. CA found that the deeds of assignment were contracts of pledge, but, as the
collateral was also money or an exchange of peso for peso, the provision in Art. 2112 of the Civil
Code for the sale of the thing pledged at public auction to convert it into money to satisft the
pledgor’s obligation, did not have to be followed. All that had to be done to convert the pledgor’s
time deposit certificates into cash was to present them to the bank for encashment.

The encashment of the deposit certificates was not a pacto commissorio which is
prohibited under Art. 2088 of the Civil Code. A pacto commissorio is a provision for the
automatic appropriation of the pledged or mortgaged property by the creditor in payment of the
loan upon its maturity. The prohibition is intended to protect the obligor, pledger or mortgagor
against being overreached by his creditor who holds a pledge or mortgage over property whose
value is much more than the debt.

Where, as in this case, the security for the debt is also money deposited in a bank, the
amount of which is even less than the debt, it was not illegal for the creditor to encash the time
deposit certificates to pay the debtors’ overdue obligation, with latter’s consent.

As to whether the debt had already been paid, since the petitioner signed a letter
admitting her indebtedness to be in the sum of P404,500, and there is no proof of payment
made by her thereafter, the application of her time deposits was proper.