[G.R. No. 117660.

December 18, 2000]

AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners, vs. THE HON. COURT OF
APPEALS and REGENT SAVINGS and LOAN BANK, INC., respondents.
DECISION
QUISUMBING, J.:
This is a petition for review challenging the decision [1] dated October 17, 1994 of the Court of
Appeals in CA-G.R. No. 32933, which affirmed in toto the judgment of the Manila Regional Trial Court,
Branch 27, in consolidated Cases Nos. 86-37374, 86-37388, 86-37543.
This petition springs from three complaints for sums of money filed by respondent bank against
herein petitioners. In the decision of the Court of Appeals, petitioners were ordered to pay respondent
bank, as follows:
Wherefore, judgment is hereby rendered in favor of plaintiff and against defendants, as follows:
1) In Civil Case No. 86-37374, defendants [petitioners, herein] are ordered jointly and
severally, to pay to plaintiff the amount of P78,212.29, together with interest and
service charge thereon, at the rates of 14% and 3% per annum, respectively,
computed from November 10, 1982, until fully paid, plus stipulated penalty on unpaid
principal at the rate of 6% per annum, computed from November 10, 1982, plus 15%
as liquidated damage plus 10% of the total amount due, as attorneys fees, plus costs;
2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff the amount of
P632,911.39, together with interest and service charge thereon at the rate of 14% and
3% per annum, respectively, computed from January 15, 1983, until fully paid, plus
stipulated penalty on unpaid principal at the rate of 6% per annum, computed from
January 15, 1983, plus liquidated damages equivalent to 15% of the total amount
due, plus attorneys fees equivalent to 10% of the total amount due, plus costs; and
3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff, on the first cause of
action, the amount of P510,000.00, together with interest and service charge thereon,
at the rates of 14% and 2% per annum, respectively, computed from March 13, 1983,
until fully paid, plus a penalty of 6% per annum, based on the outstanding principal of
the loan, computed from March 13, 1983, until fully paid; and on the second cause of
action, the amount of P494,936.71, together with interest and service charge thereon
at the rates of 14% and 2%, per annum, respectively, computed from March 30, 1983,
until fully paid, plus a penalty charge of 6% per annum, based on the unpaid principal,
computed from March 30, 1983, until fully paid, plus (on both causes of action) an
amount equal to 15% of the total amounts due, as liquidated damages, plus attorneys
fees equal to 10% of the total amounts due, plus costs. [2]
Based on the records, the following are the factual antecedents.
On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels of land to
Wonderland Food Industries, Inc. In their Memorandum of Agreement, [3] the parties covenanted that the
purchase price of Five Million (P5,000,000.00) Pesos would be settled by the vendee, under the
following terms and conditions: (1) One Million (P1,000,000.00) Pesos shall be paid in cash upon the
signing of the agreement; (2) Two Million (P2,000,000.00) Pesos worth of common shares of stock of the
Wonderland Food Industries, Inc.; and (3) The balance of P2,000,000.00 shall be paid in four equal
installments, the first installment falling due, 180 days after the signing of the agreement and every six
months thereafter, with an interest rate of 18% per annum, to be advanced by the vendee upon the
signing of the agreement.

On July 19, 1982, the vendor, the vendee, and the respondent bank Regent Savings & Loan
Bank (formerly Summa Savings & Loan Association), executed an Addendum [4]to the previous
Memorandum of Agreement.The new arrangement pertained to the revision of settlement of the initial
payments of P1,000,000.00 and prepaid interest of P360,000.00 (18% of P2,000,000.00) as follows:
Whereas, the parties have agreed to qualify the stipulated terms for the payment of the said ONE
MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS.
WHEREFORE, in consideration of the mutual covenant and agreement of the parties, they do further
covenant and agree as follows:
1. That the VENDEE instead of paying the amount of ONE MILLION THREE HUNDRED
SIXTY THOUSAND (P1,360,000.00) PESOS in cash, hereby authorizes the
VENDOR to obtain a loan from Summa Savings and Loan Association with office
address at Valenzuela, Metro Manila, being represented herein by its President, Mr.
Jaime Cario and referred to hereafter as Financier; in the amount of ONE MILLION
THREE HUNDRED SIXTY THOUSAND (P1,360,000.00)PESOS, plus interest
thereon at such rate as the VENDEE and the Financier may agree, which amount
shall cover the ONE MILLION (P1,000,000.00) PESOS cash which was agreed to be
paid upon signing of the Memorandum of Agreement, plus 18% interest on the
balance of two million pesos stipulated upon in Item No. 1(c) of the said agreement;
provided however, that said loan shall be made for and in the name of the VENDOR.
2. The VENDEE also agrees that the full amount of ONE MILLION THREE HUNDRED
SIXTY THOUSAND (P1,360,000.00) PESOS be paid directly to the VENDOR;
however, the VENDEE hereby undertakes to pay the full amount of the said loan to
the Financier on such terms and conditions agreed upon by the Financier and the
VENDOR, it being understood that while the loan will be secured from and in the
name of the VENDOR, the VENDEE will be the one liable to pay the entire proceeds
thereof including interest and other charges. [5]
This addendum was not notarized.
Consequently, petitioner Mario Soriano signed as maker several promissory notes, [6] payable to
the respondent bank. Thereafter, the bank released the proceeds of the loan to petitioners. However,
petitioners failed to meet their obligations as they fell due. During that time, the bank was experiencing
financial turmoil and was under the supervision of the Central Bank. Central Bank examiner and
liquidator Cordula de Jesus, endorsed the subject promissory notes to the banks counsel for
collection. The bank gave petitioners opportunity to settle their account by extending payment due
dates. Mario Soriano manifested his intention to re-structure the loan, yet did not show up nor submit his
formal written request.
Respondent bank filed three separate complaints before the Regional Trial Court of Manila for
Collection of Sums of money. The corresponding case histories are illustrated in the table below:

Dat Am Pa Pa
e oun y ym
of t m ent
Lo
en Ext
an
t en
Du sio
e n
Da Dat
te es
Civ
il P78 No Fe
Ca ,21 v. b.

se 2.2 10, 8,
86- 9 19 19
37
82 83
37
Ma
4
y 9,
Au
19
gus
83
t
Au
12,
g.
19
7,
82
19
83
Civ
il P63 Ja Ma
Ca 2,91n. y 1
se 1.3 15, 6,
86- 9 19 19
37
83 83
38
Au
8
g.
Jul
14,
y
19
19,
83
19
82
Civ
il P51 Ma Jun
Ca 0,0 rch e 1
se 00. 13, 1,
86- 00 19 19
37
83 83
54
Se
3 P49
pt.
Se 4,9 Ma 9,
pte 36. rch 19
mb 71 30, 83
er
19
14,
83 Jun
19
e2
82
8,
19
83
Oct
Se
ob
pt.
er
26,
1,
19
19
83
82
In their answer, petitioners interposed the defense of novation and insisted there was a valid substitution
of debtor. They alleged that the addendum specifically states that although the promissory notes were in
their names, Wonderland shall be responsible for the payment thereof.
The trial court held that petitioners are liable, to wit:
The evidences, however, disclose that Wonderland did not comply with its obligation under said
Addendum (Exh. S) as the agreement to turn over the farmland to it, did not materialize (57 tsn, May 29,
1990), and there was, actually no sale of the land (58 tsn, ibid). Hence, Wonderland is not
answerable. And since the loans obtained under the four promissory notes (Exhs. A, C, G, and E) have
not been paid, despite opportunities given by plaintiff to defendants to make payments, it stands to
reason that defendants are liable to pay their obligations thereunder to plaintiff. In fact, defendants failed
to file a third-party complaint against Wonderland, which shows the weakness of its stand that
Wonderland is answerable to make said payments.[7]

Petitioners appealed to the Court of Appeals. The trial courts decision was affirmed by the
appellate court.
Hence, this recourse, wherein petitioners raise the sole issue of:
WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE ADDENDUM, SIGNED
BY THE PETITIONERS, RESPONDENT BANK AND WONDERLAND INC., CONSTITUTES A
NOVATION OF THE CONTRACT BY SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE
PETITIONERS FROM ANY LIABILITY OVER THE PROMISSORY NOTES.
Revealed by the facts on record, the conflict among the parties started from a contract of sale of a
farmland between petitioners and Wonderland Food Industries, Inc. As found by the trial court, no such
sale materialized.
A contract of sale is a reciprocal transaction. The obligation or promise of each party is the cause
or consideration for the obligation or promise by the other. The vendee is obliged to pay the price, while
the vendor must deliver actual possession of the land. In the instant case the original plan was that the
initial payments would be paid in cash. Subsequently, the parties (with the participation of respondent
bank) executed an addendum providing instead, that the petitioners would secure a loan in the name of
Agro Conglomerates Inc. for the total amount of the initial payments, while the settlement of said loan
would be assumed by Wonderland.Thereafter, petitioner Soriano signed several promissory notes and
received the proceeds in behalf of petitioner-company.
By this time, we note a subsidiary contract of suretyship had taken effect since petitioners signed
the promissory notes as maker and accommodation party for the benefit of Wonderland. Petitioners
became liable as accommodation party. An accommodation party is a person who has signed the
instrument as maker, acceptor, or indorser, without receiving value therefor, and for the purpose of
lending his name to some other person and is liable on the instrument to a holder for value,
notwithstanding such holder at the time of taking the instrument knew (the signatory) to be an
accommodation party.[8] He has the right, after paying the holder, to obtain reimbursement from the party
accommodated, since the relation between them has in effect become one of principal and surety, the
accommodation party being the surety.[9] Suretyship is defined as the relation which exists where one
person has undertaken an obligation and another person is also under the obligation or other duty to the
obligee, who is entitled to but one performance, and as between the two who are bound, one rather than
the other should perform.[10] The suretys liability to the creditor or promisee of the principal is said to be
direct, primary and absolute; in other words, he is directly and equally bound with the principal. [11] And
the creditor may proceed against any one of the solidary debtors. [12]
We do not give credence to petitioners assertion that, as provided by the addendum, their
obligation to pay the promissory notes was novated by substitution of a new debtor,
Wonderland. Contrary to petitioners contention, the attendant facts herein do not make a case of
novation.
Novation is the extinguishment of an obligation by the substitution or change of the obligation by
a subsequent one which extinguishes or modifies the first, either by changing the object or principal
conditions, orby substituting another in place of the debtor, or by subrogating a third person in the rights
of the creditor.[13] In order that a novation can take place, the concurrence of the following
requisites[14] are indispensable:
1) There must be a previous valid obligation;
2) There must be an agreement of the parties concerned to a new contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.
In the instant case, the first requisite for a valid novation is lacking. There was no novation by
substitution of debtor because there was no prior obligation which was substituted by a new contract. It
will be noted that the promissory notes, which bound the petitioners to pay, were executed after the
addendum. The addendum modified the contract of sale, not the stipulations in the promissory notes
which pertain to the surety contract. At this instance, Wonderland apparently assured the payment of
future debts to be incurred by the petitioners.Consequently, only a contract of surety arose. It was wrong
for petitioners to presume a novation had taken place. The well-settled rule is that novation is never
presumed,[15] it must be clearly and unequivocally shown. [16]

As it turned out, the contract of surety between Wonderland and the petitioners was extinguished
by the rescission of the contract of sale of the farmland. With the rescission, there was confusion or
merger in the persons of the principal obligor and the surety, namely the petitioners herein. The
addendum which was dependent thereon likewise lost its efficacy.
It is true that the basic and fundamental rule in the interpretation of contract is that, if the terms
thereof are clear and leave no doubt as to the intention of the contracting parties, the literal meaning
shall control. However, in order to judge the intention of the parties, their contemporaneous and
subsequent acts should be considered.[17]
The contract of sale between Wonderland and petitioners did not materialize. But it was admitted
that petitioners received the proceeds of the promissory notes obtained from respondent bank.
Sec. 22 of the Civil Code provides:
Every person who through an act of performance by another, or any other means, acquires or comes
into possession of something at the expense of the latter without just or legal ground, shall return the
same to him.
Petitioners had no legal or just ground to retain the proceeds of the loan at the expense of private
respondent. Neither could petitioners excuse themselves and hold Wonderland still liable to pay the loan
upon the rescission of their sales contract. If petitioners sustained damages as a result of the rescission,
they should have impleaded Wonderland and asked damages. The non-inclusion of a necessary party
does not prevent the court from proceeding in the action, and the judgment rendered therein shall be
without prejudice to the rights of such necessary party. [18] But respondent appellate court did not err in
holding that petitioners are duty-bound under the law to pay the claims of respondent bank from whom
they had obtained the loan proceeds.
WHEREFORE, the petition is DENIED for lack of merit. The assailed decision of the Court of
Appeals dated October 17, 1994 is AFFIRMED. Costs against petitioners.
SO ORDERED.

[G.R. No. 121879. August 14, 1998]

EMPIRE INSURANCE COMPANY, petitioners, vs. NATIONAL LABOR RELATIONS COMMISSION
and MONERA ANDAL, respondents.
DECISION

She left for the said jobsite on May 17, 1991 and worked for a certain Abdullah Al Basha. But on
January 11, 1992, she was repatriated. Upon her repatriation, she lost no time in bringing her complaint
before the Philippine Overseas Employment Agency (POEA) for illegal dismissal, non-payment and
underpayment of salaries. Impleaded as a co-respondent in the complaint was the herein petitioner,
Empire Insurance Company, in its capacity as the surety of G & M Phils.
Subject complaint averred, inter alia, that:
...she was not paid for four months and underpaid for four months; that she was forced to
preterminate her contract due to unbearable treatment in the hands of her employer and the
non-payment and underpayment of her salaries; and that she was constructively dismissed
from employment. In her affidavit, she alleged that she was unpaid for 3 1/2 months; that for
four months she was paid only US $150.00 instead of the agreed rate of US $200.00; that
her employer resented her effort to collect her delayed salaries and, in retaliation, made her
work long hours, allowing her to sleep only five hours daily and requiring her to render
services for his relatives and friends without giving her additional compensation; that after
serving her employer for 7 1/2 months, she sought the help of the Philippine Embassy; that
her employer terminated her employment due to her insistent demand for the payment of her
claims; and that she was repatriated at her own expense. On May 14, 1992, she testified that
the wife of her employer always beat her and that her employer gave her US $450.00
representing her salaries for three (3) months. In her position paper, she reiterated the
sufferings she allegedly underwent in the course of her employment and alleged, further, that
the efforts of the Philippine Embassy to mediate and/or to settle her claims failed; that her
services were abruptly terminated by her employer; and she was forced to depart at her own
expense (arriving in the Philippines with only whatever clothing she had on). (pp.2-4, NLRC
decision dated November 22, 1994)
Empire Insurance Company, now the petitioner, theorized that the complainant, Monera Andal,
was without any cause of action against it for the alleged reason that the liability of its principal and corespondent had not been established. It further argued that its liability, if any, for the money claims sued
upon was merely subsidiary.
In its answer to the complaint, respondent G & M (Phil.), Inc., stated that it had no knowledge of
complainants unpaid and underpaid salaries, her working conditions and of the proceedings at the
Philippine Embassy. It denied the charge of illegal dismissal, reasoning out that the complainant
abandoned her job. In its position paper, it contended that the complainants money claims in dispute are
not meritorious as the same are not supported by substantial evidence. It also capitalized on what it
branded as the inconsistencies in the complainants pleadings with her admission that the Philippine
Embassy mediated her claims, which development could have meant that subject claims had been
settled.
On July 13, 1993, POEA Administrator Felicisimo O. Joson decided the claims in
question; disposing, as follows:

PURISIMA, J.:
This is a Petition of a surety company disowning solidary liability with its principal, a recruitment
agency, on the monetary claims of an overseas contract worker for illegal dismissal, non-payment and
underpayment of salaries.
The antecedent facts and proceedings can be capsulized, as follows:
Private respondent Monera Andal applied with G & M Phils., Inc. for an overseas employment as
a domestic helper in Riyadh, Kingdom of Saudi Arabia. She was hired for a term of two years at a
monthly basic salary of US $200.00.

WHEREFORE, in the light of the foregoing premises, respondents are hereby ordered to pay
complainant the following:
1. US $200.00 or its peso equivalent representing complainants salary differentials for four
(4) months for the period May 17, 1991 to September 17, 1991 computed at US $50.00 a
month;
2. US $3,300.00 or its peso equivalent representing the payment of salaries for 16.5 months
as the unexpired portion of the contract.
SO ORDERED.

From the aforesaid decision adverse to it, petitioner Empire Insurance Company appealed to
the National Labor Relations Commission; posing as issues, that:
1. Complainant (Monera Andal) had no cause of action against petitioner because the
liability of petitioners principal and co-respondent (G&M) had not been
established.
2. Petitioners liability, if any, was merely subsidiary.
On November 22, 1994, the NLRC came out with a judgment of affirmance, upholding the POEA,
and holding, thus:
The argument that respondent Empire Insurance Company is only subsidiarily liable for the
judgment award is unmeritorious. It is settled that a surety is considered in law as being the
same party as the debtor in relation to whatever is adjudged touching the obligation of the
latter, and their liabilities are interwoven as to be inseparable...
WHEREFORE, the decision appealed from is hereby AFFIRMED.
SO ORDERED.
Undaunted by the denial of its motion for reconsideration, petitioner found its way to this court via
the present petition, raising the pivotal issue of whether or not respondent NLRC erred in adjudging it
(petitioner) jointly liable with its principal, G & M Phils., Inc., for the payment of private respondents
monetary claims.
Petitioner faults respondent NLRC for holding that G & M Phils., Inc. failed to comply with the
rules and regulations of the Department of Labor and Employment. It is petitioners submission that there
is no basis forholding it liable as surety under the premises.
Although it concedes that the burden of proof in cases of illegal dismissal rests on the employer,
petitioner argues that when private respondent Monera Andal asked the Philippine Embassy in Riyadh,
Saudi Arabia to mediate her claims with her employer, such a move on the part of private respondent
shifted the onus probandito her to substantiate her claim.
Private respondents Comment sought the dismissal of the petition for being a wrong mode of
appeal from the NLRC decision. It is private respondents stance that appeal from decisions of the
National Labor Relations Commission to the Supreme Court is by a special civil action
for certiorari under Rule 65 of the Revised Rules of Court. Not a petition for review under Rule 45.
The Solicitor General, as counsel for respondent NLRC, joined private respondent in stressing on
such procedural defect. Furthermore, the Solicitor General pointed out that the errors assigned by
petitioner deal primarily with factual findings and, as such, are unavailing under the well-entrenched rule
that findings of fact by administrative agencies and quasi-judicial bodies are generally accorded not only
respect but finality, and are not to be disturbed on appeal.
We find for respondents.
Before delving into the merits of the petition, the procedural objection of respondents should first
be resolved. Private respondent and the Solicitor General have correctly pointed out the elementary rule
of procedure with regard to review of decisions rendered by the National Labor Relations Commission.
The only way a labor case may reach the Supreme Court is through a petition for certiorari under Rule
65 of the Revised Rules of Court. [1] A petition for certiorari which is a special civil action under Rule 65
should be distinguished from a petition for review on certiorari which is a mode of appeal under Rule

45. Under Rule 65, only questions of jurisdiction or grave abuse of discretion amounting to lack or
excess of jurisdiction may be entertained by the reviewing court. Therefore, only decisions of the
National Labor Relations Commission tainted with grave abuse of discretion or jurisdictional errors may
be elevated to this court.
Findings and/or conclusions of fact cannot be assailed in a petition for certiorari.[2] The inquiry in
such a petition is limited exclusively to the issue of whether or not the respondent official acted without or
in excess of jurisdiction. Consequently, petitioner cannot assail the finding arrived at by public
respondent NLRC that the employer involved violated pertinent POEA rules and regulations.
However, while an appeal to the Supreme Court from decisions of the National Labor Relations
Commission should be pursued as a special civil action for certiorari, in a number of cases this court has
treated as special civil actions for certiorari petitions erroneously captioned as petitions for review
on certiorari in the interest of justice.[3]
In the case of Peoples Security, Inc. vs. NLRC,[4] this Court held that:
Dismissal of appeal purely on technical grounds is frowned upon where the policy of the courts is to
encourage hearings of appeal on their merits. The rules of procedure ought not to be applied in a very
rigid technical sense, rules of procedure are used only to help secure, not override substantial justice. If
a technical and rigid enforcement of the rules is made, their aim would be defeated. (Tamayo v. Court of
Appeals, 209 SCRA 518, 522 [1992] citing Gregorio v. Court of Appeals, 72 SCRA 120
[1976] ). Consequently, in the interest of justice, the instant petition for review shall be treated as a
special civil action on certiorari.
The single issue posed for resolution by this court here is - whether or not the petitioning surety
company is jointly liable with its principal, G & M Phils, Inc., a recruitment agency, for the payment of
respondent employees monetary claims in litigation.
We rule in the affirmative. Petitioner is solidarily liable with its principal, G & M Phils., Inc., under
the attendant facts and circumstances.
Suretyship is a contractual relation resulting from an agreement whereby one person, the surety,
engages to be answerable for the debt, default or miscarriage of another, known as the principal.[5]
Where the surety bound itself solidarily with the principal obligor, the former is so dependent on
the principal debtor such that the surety is considered in law as being the same party as the debtor in
relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven
as to be inseparable.[6] The suretys liability is solidary but the nature of its undertaking is such that unless
and until the principal debtor is held liable it does not incur liability.
When the herein petitioner, Empire Insurance Company, entered into a suretyship agreement with
G & M Phils., Inc., it bound itself to answer for the debt or default of the latter. And, since the POEA and
NLRC found the said recruitment agency liable to private respondent, petitioners liability likewise
proceeds from such a finding. As a surety, petitioner is primarily liable to private respondent, as judgment
creditor, for her monetary claims against its principal, G & M Phils., Inc., and is immediately bound to pay
and satisfy the same.
Time and again, this court has pronounced that claims of overseas workers should be acted upon
with sympathy, and allowed if warranted, conformably to the constitutional mandate for the protection of
the working class.[7] Private employment agencies are held to be jointly and severally liable with the
foreign-based employer for any violation of the recruitment agreement or contract of employment.[8]
POEA has thus promulgated a rule requiring private recruitment agencies to set up cash and
surety bonds. The purpose of the required surety bond is to insure that if the rights of overseas workers

are violated by their employer, recourse would still be available to them against the local companies
that recruited them for the foreign principal.[9]
It bears stressing that surety companies may be ordered impleaded by the Philippine Overseas
Employment Administration (POEA) in administrative complaints against recruitment agencies, on surety
bonds posted, and are bound by the judgment of POEA. [10] This Court discerns no reason why the said
rule should not apply to herein petitioner.
WHEREFORE, the petition under consideration is hereby DISMISSED and the appealed decision
of respondent NLRC AFFIRMED. No pronouncement as to costs.
SO ORDERED.
G.R. No. 84084 August 20, 1990
FINMAN GENERAL ASSURANCE CORPORATION, petitioner,
vs.
ABDULGANI SALIK, BALABAGAN AMPILAN ALI KUBA GANDHI PUA, DAVID MALANAO, THE
ADMINISTRATOR, PHILIPPINE OVERSEAS AND EMPLOYMENT ADMINISTRATION, THE
SECRETARY OF LABOR AND EMPLOYMENT, respondents.
David I. Unay, Jr. for petitioner.
Kamid D. Abdul for private respondents.

PARAS, J.:
This is a petition for certiorari seeking to annul 1) the Order dated March 28, 1988 of the
Honorable Secretary of Labor and Employment in POEA, LRO/RRD Case No. 87-09-1022-DP
entitled Abdulgani Salik, et al, v. Pan Pacific Overseas and Recruiting Services and Finman
General Assurance Corporation, which directed herein petitioner to pay jointly and severally with
Pan Pacific the claims of herein private respondents amounting to P25,000.00 and 2) the Order
dated June 7, 1988, which denied petitioner's motion for reconsideration (Rollo, p. 2).
The facts of the case are as follows:
Abdulgani Salik et al., private respondents, allegedly applied with Pan Pacific Overseas
Recruiting Services, Inc. (hereinafter referred to as Pan Pacific) on April 22, 1987 and were
assured employment abroad by a certain Mrs. Normita Egil. In consideration thereof, they
allegedly paid fees totalling P30,000.00. But despite numerous assurances of employment
abroad given by Celia Arandia and Mrs. Egil, they were not employed (Ibid., p. 15).
Accordingly, they filed a joint complaint with the Philippine Overseas Employment
Administration (herein referred to as POEA) against Pan Pacific for Violation of Articles 32 and
34(a) of the Labor Code, as amended, with claims for refund of a total amount of P30,000.00
(Ibid.).
The POEA motu proprio impleaded and summoned herein petitioner surety Finman General
Assurance Corporation (hereinafter referred to as Finman), in the latter's capacity as Pan
Pacific's bonding company.

Summons were served upon both Pan Pacific and Finman, but they failed to answer.
On October 9, 1987, a hearing was called, but only the private respondents appeared. Despite
being deemed in default for failing to answer, both Finman and Pan Pacific were still notified of
the scheduled hearing. Again they failed to appear. Thus, ex-parte proceedings ensued.
During the hearing, herein private respondents reiterated the allegations in their complaint that
they first paid P20,000.00 thru Hadji Usop Kabagani for which a receipt was issued signed by
Engineer Arandia and countersigned by Mrs. Egil and a certain Imelda who are allegedly
employed by Pan Pacific; that they paid another P10,000.00 to Engr. Arandia who did not issue
any receipt therefor; that the total payment of P30,000.00 allegedly represents payments for
herein private respondents in the amount of P5,000.00 each, and Abdulnasser Ali, who did not
file any complaint against Pan Pacific (Ibid., pp. 15-16).
Herein private respondents presented as their witness, Hadji Usop Kabagani who they Identified
as the one who actually financed their application and who corroborated their testimonies on all
material points including the non-issuance of a receipt for P10,000.00 by Engr. Arandia.
Herein petitioner, Finman, in an answer which was not timely filed, alleged, among others, that
herein private respondents do not have a valid cause of action against it; that Finman is not privy
to any transaction undertaken by Pan Pacific with herein private respondents; that herein private
respondents claims are barred by the statute of frauds and by the fact that they executed a
waiver; that the receipts presented by herein private respondents are mere scraps of paper; that
it is not liable for the acts of Mrs. Egil that Finman has a cashbond of P75,000.00 only which is
less than the required amount of P100,000.00; and that herein private respondents should
proceed directly against the cash bond of Pan Pacific or against Mrs. Egil (Ibid., pp. 1617).
On March 18,1988, the Honorable Franklin M. Drilon, then the Secretary of Labor and
Employment, upon the recommendation of the POEA hearing officer, issued an Order, the
dispositive portion of which reads:
WHEREFORE, premises considered, both respondents are hereby directed
to pay jointly and severally the claims of complainants, as follows:
1. Abdulgani Salik P5,000.00
2. Balabagan Ampilan 5,000.00
3. Ali Kuba 5,000.00
4. Gandhi Dua 5,000.00
5. David Malanao 5,000.00
Based on the records of this Administration, respondent agency is
presently serving a total period of suspension of seventeen (1 7) months
imposed in three (3) separate orders issued on June 2, 1987, August 17,
1987 and September 23, 1987. Under the new schedule of penalties
published on January 21, 1987 in the Philippine Inquirer, the penalty of
cancellation shall be imposed when the offender has been previously
penalized with suspension the total period of which is 12 months or more.
Moreover, the penalty imposable in the case at bar is two (2) months
suspension for each count of violation or a total period of suspension of
ten (10) months as the acts were committed in April 1987. Thus, whether
under the old schedule of penalties which required a total period of

suspension of twenty-four (24) months for cancellation to be imposed or

under the new schedule which provides for a twelve (12) month total
suspension period, the penalty of cancellation may be properly imposed
upon the herein respondent agency.
In view thereof, the license of Pan Pacific Overseas Recruiting Services is
hereby cancelled, effective immediately.
SO ORDERED. (Ibid., pp. 20-21).
A motion for reconsideration having been denied (Ibid., p. 22), herein petitioner instituted the
instant petition for certiorari, raising the following assigned errors:
I
THE HONORABLE ADMINISTRATOR AND THE HONORABLE, SECRETARY
OF LABOR ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO
LACK OF JURISDICTION IN MOTU PROPRIO IMPLEADING FINMAN AS CORESPONDENT OF PAN PACIFIC IN POEA LRO/RRD CASE NO. 87-09-1022
DP WHICH WAS FILED BY ABDULGANI SALIK, ET AL.;
II
THE HONORABLE SECRETARY OF LABOR ACTED WITHOUT OR IN
EXCESS OF JURISDICTION AND WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OF JURISDICTION IN DIRECTING FINMAN TO PAY
JOINTLY AND SEVERALLY WITH PAN PACIFIC THE CLAIMS OF PRIVATE
RESPONDENTS ON THE BASIS OF THE SURETYSHIP AGREEMENT
BETWEEN FINMAN AND PAN PACIFIC AND THE PHILIPPINE OVERSEAS
EMPLOYMENT ADMINISTRATION (POEA FOR SHORT); AND
III
THE FINDINGS OF FACT MADE BY THE POEA AND UPON WHICH THE
HONORABLE SECRETARY OF LABOR BASED ITS QUESTIONED ORDERS
ARE NOT SUPPORTED BY SUBSTANTIAL EVIDENCE AND ARE CONTRARY
TO LAW. (Ibid., p. 101)
As required by this Court, herein public respondents filed their memorandum on July 28, 1989
(Ibid., p. 84); while that of petitioner and private respondents were filed on September 11, 1989
(Ibid., p. 89) and March 16, 1990 (Ibid., p. 120), respectively.
The petition is devoid of merit.
In its first and second assigned errors, petitioner maintains that POEA has no jurisdiction to
directly enforce the suretyship undertaking of FINMAN (herein petitioner) under the surety bond
(Ibid., p. 104).
In the case at bar, it remains uncontroverted that herein petitioner and Pan Pacific entered into a
suretyship agreement, with the former agreeing that the bond is conditioned upon the true and
faithful performance and observance of the bonded principal (Pan Pacific) of its duties and
obligations. It was also understood that under the suretyship agreement, herein petitioner
undertook itself to be jointly and severally liable for all claims arising from recruitment violation

of Pan Pacific (Ibid., p. 23), in keeping with Section 4, Rule V, Book I of the Implementing Rules of
the Labor Code, which provides:
Section 4. Upon approval of the application, the applicant shall pay to the
Ministry (now Department) a license fee of P6,000.00, post a cash bond of
P50,000.00 or negotiable bonds of equivalent amount convertible to cash
issued by banking or financial institution duly endorsed to the Ministry
(now Department) as well as a surety bond of P150,000.00 from an
accredited bonding company to answer for valid and legal claims arising
from violations of the conditions of the license or the contracts of
employment and guarantee compliance with the provisions of the Code, its
implementing rules and regulations and appropriate issuances of the
Ministry (now Department). (Emphasis supplied)
Accordingly, the nature of Finman's obligation under the suretyship agreement makes it privy to
the proceedings against its principal (Pan Pacific). As such Finman is bound, in the absence of
collusion, by a judgment against its principal even though it was not a party to the
proceedings Leyson v. Rizal Surety and Insurance Co., 16 SCRA 551 (1966). Furthermore, in
Government of the Philippines v. Tizon (20 SCRA 1182 [1967]), this Court ruled that where the
surety bound itself solidarily with the principal obligor the former is so dependent on the
principal debtor "that the surety is considered in law as being the same party as the debtor in
relation to whatever is adjudged touching the obligation of the latter." Applying the foregoing
principles to the case at bar, it can be very well said that even if herein Finman was not
impleaded in the instant case, still it (petitioner) can be held jointly and severally liable for all
claims arising from recruitment violation of Pan Pacific. Moreover, as correctly stated by the
Solicitor General, private respondents have a legal claim against Pan Pacific and its insurer for
the placement and processing fees they paid, so much so that in order to provide a complete
relief to private respondents, petitioner had to be impleaded in the case (Rollo, p. 87).
Furthermore, Finman contends that herein respondent Secretary of Labor cannot validly assume
jurisdiction over the case at bar; otherwise, proceedings will be railroaded resulting in the
deprivation of the former of any remedial measures under the law.
The records of the case reveal that herein Finman filed a motion for reconsideration of the
adverse decision dated March 18, 1988 of respondent Secretary of Labor. In the said motion for
reconsideration, no jurisdictional challenge was made (Ibid., p. 22). It was only when it filed this
petition that it assailed the jurisdiction of the respondent Secretary of Labor, and that of the
POEA. But then, it was too late. Estoppel had barred herein petitioner from raising the issue,
regardless of its merits (Akay Printing Press v. Minister of Labor and Employment, 140 SCRA 381
[1985]).
Hence, Finman's contention that POEA's and respondent Secretary's actions in impleading and
directing herein petitioner to pay jointly and severally with Pan Pacific the claims of private
respondents constitute a grave abuse of discretion amounting to lack of jurisdiction has no
basis. (Ibid., p. 101.)
As regards the third assigned error, herein petitioner maintains that the findings of fact made by
the POEA upon which respondent Secretary of Labor based his questioned Orders are not
supported by substantial evidence and are contrary to law, is likewise untenable.
Herein petitioner, in raising this third issue, is, in effect, asking this Court to review the
respondent Secretary's findings of facts.
Well-settled is the rule that findings of facts of the respondent Secretary are generally accorded
great weight unless there was grave abuse of discretion or lack of jurisdiction in arriving at such
findings (Asiaworld Publishing House, Inc. vs. Ople, 152 SCRA 219 (1987).

In the case at bar, it is undisputed that when the case was first set for hearing, only the private
respondents appeared, despite summons having been served upon both herein petitioner and
Pan Pacific. This, notwithstanding, both herein petitioner and Pan Pacific were again notified of
the scheduled hearing, but, as aforestated they also' failed to a pear (Rollo, p. 15). Accordingly,
owing to the absence of any controverting evidence, respondent Secretary of Labor admitted and
considered private respondents' testimonies and evidence as substantial. Under the
circumstances, no justifiable reason can be found to justify disturbance of the findings of facts
of the respondent Secretary of Labor, supported as they are by substantial evidence and in the
absence of grave abuse of discretion (Asiaworld Publishing House, Inc. v. Ople, supra); and in
line with the well established principle that the findings of administrative agencies which have
acquired expertise because their jurisdiction is confined to specific matters are generally
accorded not only respect but at times even finality. (National Federation of Labor Union (NAFLU)
v. Ople, 143 SCRA 124 [1986])
PREMISES CONSIDERED, the questioned Orders of respondent Secretary of Labor are hereby
AFFIRMED in toto,
SO ORDERED.
G.R. No. L-22137

We find no merit in this appeal. The mere recital in the body of the instrument, "We, Manila Railroad
Company, et al., as principal and the Standard Insurance Co., ... as Surety", does not suffice to make the
contract binding on the Manila Railroad Company unless it is shown that the same was authorized by it;
and neither the signature nor the acknowledgment indicates that the act was that of the Railroad
Company, or that the latter had empowered Julian C. Chaves or the Manila Port Service to execute the
bond in its behalf. But there is something worse. Since the signatures to the bond are only those of the
Manila Port Service and the Surety Company, and, according to paragraph 13 of the petition
for mandamus
Manila Port Service being only the name and style by which it is conducted its arrastre
service with no legal personality of its own to be sued, and for the purposes of the suit can
not be considered a juridical person under Art. 41 of the Civil Code of the Philippines in
relation to Section 1, Rule 3.
the result would be that the appeal bond, Annex "C" of the petition, is void and unenforceable for lack of
a principal debtor or obligation. While the surety bound itself to pay, jointly and severally, such an
undertaking presupposes that the obligation is to be enforceable against someone else besides the
surety, and the latter could always claim that it was never its intention to be the sole person obligated
thereby.

May 19, 1966

MANILA RAILROAD COMPANY and MANILA PORT SERVICE, petitioners,

vs.
HONORABLE CARMELINO ALVENDIA, Judge, Court of First Instance of Manila and BATAAN
REFINING CORPORATION, respondents.
D. F. Macaranas and Amorto Caete for petitioners.
Bengzon, Villegas and Zarraga for respondents.
REYES, J.B.L., J.:
The Manila Railroad Company and the Manila Port Service petition for a writ of mandamus to compel
the Court of First Instance of Manila to give due course to petitioners appeal in its Case No. 49831.
Reversing a decision of the Municipal Court of Manila duly appealed to it, the Court of First Instance,
Branch XVI, with Judge Carmelino Alvendia presiding, on March 21, 1963 sentenced the defendants
(petitioners herein) to pay the private respondent, Bataan Refining Corporation, the sum of P1,140.24,
plus interest at the legal rate from February 11, 1961, and costs. Receiving notice of the decision on April
1, 1963, defendants, through counsel, filed notice of appeal on April 26, 1963 accompanied by an appeal
bond in the sum of P60.00, followed by a record on appeal on April 30, 1963. Noticing that the appeal
bond (Exh. C, petition) was executed only by "Manila Port Service by (Sgd) Julian C. Chaves, Manager",
and "Standard Insurance Co., Inc., by (Sgd) Primo A. Cruz, Vice-President" the trial court, by order of
May 27, 1963, rejected the tendered record on appeal, declaring that the decision had become final as
to the Manila Railroad Company for failure to file its appeal bond. Motions for reconsideration having
proved unavailing, the present petitioners resorted to this Supreme Court for a writ
ofmandamus.1wph1.t

It follows that the respondent court committed no error in declaring that the judgment had become final
against petitioner Manila Railroad Co., because the latter had not filed any appeal bond in due time.
Wherefore, the writ of mandamus applied for should be, and it hereby is, denied. Costs against
petitioners.
G.R. No. L-30096 September 27, 1977
CONRADO SINGSON, plaintiff,
vs.
DAVID BABIDA, RAMON ANTONIO, JAIME PERALTA, FELINO GARCIA, JOSE MARCOS,
RICARDO RABAGO. JAIME BIBIS, FELICIANO TUGADE, BONIFACIO CALPITO, ALFREDO
PERALTA, ALFREDO GARCIA and FELICIANO GARCIA, defendants. MATIAS BABIDA, VICTOR
GARCIA, JULIAN PACURSA, NICOLAS AGATEP, DOROT'EO BALLESTEROS and PEDRO
AGAT'EP, bondsmen and petitioners-appellants, vs. CONRADO SINGSON and NEMESIO T.
ORATE, respondents-appellees.
Conrado V. Singson for plaintiff and respondents-appellees.
Alfredo J. Donato for bonsdmen and petitioners-appellants.
Molina & Agbisit for defendants.

AQUINO, J.:
No issue exists is to the timeliness of the notice, bond and record of appeal.
It is contended by petitioners that the Manila Port Service, being a mere subsidiary or department of the
Manila Railroad Company, without legal personality of its own, the bond filed by the former (Pet., Exh. C)
should be considered as a bond for the Manila Railroad Co., and that the appeal of the latter should
have been given due course.

In a nutshell, this is a case about execution against the supersedes bonds in an ejectment suit. The
bondsmen-appellants contend that the bonds are void and that the judgment in favor of the landowner
had already been satisfied and, therefore, the execution, allegedly vitiated by some irregularities, was
uncalled for.
Actually, as revealed in the 250-page record on appeal, the objective in this appeal of the appellants,
who are poor and ignorant farmers, is to annul the execution sales of their nine parcels of agricultural
land, with a total area of thirty-three (33) hectares and an aggregate assessed value of P6,190. The

judicial sales (now alleged to be final by the judgment creditor) were made in order to satisfy a judgment
for only P1,460, the value of 146 cavans of palay.
The gross inadequacy of the price carries with it implications of capacity and unjust enrichment. It is
noteworthy that those 33 hectares, which apparently constitute appellants' only source of livelihood,
would become the property of the judgment creditor in satisfaction of a judgment credit of P1,460. These
aspects of the case have alerted us to be vigilant for the protection of the appellants who are
disadvantaged or handicapped by their obvious indigence and ignorance (Art. 24, Civil Code).
Facts. Conrado V. Singson, a lawyer, claims that a certain 24 hectare homestead, located at Barrio
Malinta (Finugo), Lasam, formerly Gattaran, Cagayan, was conveyed to him in 1936 by Pedro Babida as
payment of his attomey's fees in a murder case wherein Babida was the accused. Babida, who died in
1950, was the applicant- possessor of the homestead. He was not able to obtain a homestead patent.
Singson's application for a free patent for the land was denied by the Director of Lands.
On January 22, 1957 Singson filed a forcible entry action in the justice of the peace court of Lasam
against David Babida, Ramon Antonio, Jose Marcos, Ricardo Rabago, Jaime Bibis, Bonifacio Calpito,
Feliciano Tugade Jaime Peralta, Alfredo Peralta, Alfredo Garcia, Felino Garcia, and FeWmo Garcia. He
alleged that the twelve defendants entered the land in September, 1956 and by means of collective force
ousted his tenants.
The defendants in their answer averred that the homestead belonged to David Babida and his coheirs
who had continuously possessed it even before the war. (David was the son of Pedro Babida.)
The justice of the peace court in its decision of September 14, 1957 ordered the defendants to vacate
the land and allowed Singson to withdraw from Domingo Gerardo, the depositary, "the canons of the
land" or the owner's share of the harvests (Civil Case No. 34).

Jaime Bibis, Ramon Antonio, Fee Tugade Felino Garcia and Jaime Peralta or 158 cavans in all
According to Singson's Gerardo did not deliver.the 55 cavans of palay to Singson's overseer. The
sheriff's return is silent on that point. So, the defendant's remaining obligation under the judgment was to
deriver the balance of 134 cavans of palay out of the 292 cavans due from them for four crop. years,
1956-57 to 1959-60.
The 134 cavans of palay had an aggregate value of P1,340 at ten a cavan, the value fixed by the trial
court in its decision. That sum of P1,340 and the expenses of execution would constitute defendants'
liability as of May 6, 1960.
Presumably, to enforce that remaining liability, the sheriff on May 17, 1960 levied upon the lands of
defendants Ramon Antonio June Bible, Bonifacio Calpito and Alfredo Peralta. The sheriff scheduled the
sale of their lands on August 31, 1960.
On August. 10, 1960 Singson ordered a motion to suspend the auction sale of the properties of Antonio,
Bibis, Calpito and peralta and to include in the auction sale the properties of the six bondsmen, Victor
Garcia, Matias Julian Pacursa, Doroteo Ballesteros, Nicolas Agatep and Pedro Agatep "on the
understanding that the properties of the defendants be first sold" "and, if insufficient, then the properties
of the bondmen" should be sold (89-91, Record on Appeal). did not indicate in that ration the balance still
due from the defendants.
In filing that motion, Singson did not bother to consider that the lands of the said four defendants, which
had already been levied upon and which have an aggregate area of ten (10) hectares and a total value
of P3,590, were more than sufficient to satisfy the sum of P1,340 as the unpaid of the judgment.
The six bondsmen opposed Simpson's motion on the grounds that the bonds are void and that execution
cannot be had againts the bondsmen because no judgment against them had been "in the ordinary
manner" (Green vs. Del Rosario, 43 Phil. 547).

The defendants appealed to the Court of First Instance of Cagayn. In their answer they denied that
Singson was in on of the land. They claimed to be the possessors of the land as tenants of Pedro
Babida. They reiterated their defense that the land belonged to the'heirs of Pedro Babida (Civil Case No.
923-A).

The counsel for the bondsmen, like Singson, did not realize that an execution against them, in addition
to the levy on the tenth lands of the four defendants, would be unnecessary since, as already stated,
those ten are more than sufficient for the payment of the judgement.

To stay the execution of the inferior court's decision, while the appeal in the Court of First Instance was
pending, Matias Babida, Victor Garcia, Julian Pacursa and Nicolas Agatep (who are not defendants)
executed on March 27, 1958 a "counterload for the amount of P3,000 to answer for damages (which) the
plaintiff might sustain by reason of the crops or produce which they pray to be disposed (of) and
deposited". That counterbond is known as the "first supersedeas bond".

The lower court granted Singson's motion in its order of September 10, 1960 but because neither
Singson nor the sheriff informed the court of the exact balance still due from the defendants, and the
sheriff's return was overred, the court acted under the impression that the amount due from the
defendants and their bondsmen was in the sum of P730 only. That was the value of the owner's sham of
the harvests for one crop-year.

After a de novo, the lower court in its decision of August 4, 1958 ordered the defendants to restore the
possession of the land to Singson and to deriver to him 73 cavans of palay yearly from September, 1956
until the ion is restored to Singson, and, "in default thereof, the sum of P730" as the value of 73 cavans.
The depositary was ordered to deriver to Singson 55 cavans of palay to be deducted from the 73 cavans
corresponding to the owner's share of the harvests for the crop-year 1956-57.

Undoubtedly, the lower court would not have granted motion had it been apprised that the ten belonging
to the aforenamed four defendants, which had already been levied upon, were more than adequate to
answer for the liability of P730. The above-mentioned order of September 10, 1960, an order of
execution supplementing the original order of execution of February 23, 1960, reads as follows:

The twelve defendants appealed to the Court of Appeals. To stay execution pending appeal, Doroteo
Ballesteros and Pedro Agatep (not parties to the case) separately executed supersedeas bonds in the
sum of P2,000 wherein they undertook "to pay to the plaintiff whatever damages he might sustain as a
result of" the case. Those under are known as the "second supersedeas bond".
On July 3, 1959 the Court of Appeals dismissed defendants' appeal because of their failure to pay the
docket fee and to deposit the estimated cost of printing their record on appeal. The record was returned
to the lower court which ordered the execution of its judgment. A writ of execution was issued on April 11,
1960. By virtue of that writ, the deputy sheriff on April 26, 1960 placed Singson's representative in ion of
the disputed land.
In compliance with the writ of execution, Singson's representative received 20 cavans of palay from
defendant Jaime Peralta on April 26, 1960 and 138 cavans on May 6, 1960 from Bonifacio Calpito,

As prayed for, the deputy sheriff is hereby directed to include in the notice of sale
the properties of the sureties in the supersedeas bond who are held liable jointly
and severally with the defendants to the plaintiff in the sum of P730 but before
collecting this sum from the sureties, the properties of the principals not exempt
from execution must first be exhausted and whatever amount remains unpaid
shall be chargeable to the sureties but in no case shalt it exceed P731 (134, 183,
Record on Appeal).
Plaintiff Singson and the defendants accepted the said order as correct. However, the sheriff did not
immediately implement it.
On September 14, 1960, he asked the court that he should be to make first a levy on the properties of
the bondsmen and that he be required to self the bondmen's properties only "in the event that the
proceeds of the sale of the properties of the principals are not sufficient to satisfy the judgment" (94,

Record on Appeal). However, the sheriff did not specify the balance of the judgment for which the levy
should be made. The court did not act on the sheriff's motion.

commission in the sum of P19.80. It should be noted that the sheriff did not comply with the mandate in
the writ that he should first require the twelve defendants to pay the said sum of P730.

On January 9, 1961 Singson filed a motion for execution against the first supersedeas bond which,
according to him, was involuntarily omitted in the aforementioned order of September 10, 1960. Again
Singson, like the sheriff, did not state how much was still due from the defendants. Singson averred in
his motion that the first supersedeas bond covered "the damages occasioned to the plaintiff from the
filing of the complaint in the justice of the peace court up to August 4, 1958" when the Court of First
Instance rendered its decision, and that the second supesedeas bond covered the damages from
August 4, 1958 up to the time the appeal was dismissed by the Court of Appeals (96-97, Record on
Appeal).

As the four sureties did not heed his demand, the sheriff on March 28, 1961 levied upon the lands of
three of the sureties described in the first supersedeas bond and in the writ of execution.

The bondsmen opposed the motion on the ground that the supersedeas bond was not necessary since
the justice of the peace court did not adjudge any compensation for the use and occupation of the
homestead, citing Alandy vs. San Jose, 79 Phil. 811.
The bondsmen did not invite the attention of the lower court to the misleading character of Sinson's
motion. It seemed to be misleading because the order of September, 10, 1960 does not indicate that it is
an order of execution against the second supersedeas bond and that it is not applicable to the first
supersedeas bond.
The lower court in its order of January 28, 1961, manifestly disregarding the clarification in Singson's
motion, explained that the second "Supersedes bond would answer for the value of the produce from the
land during the pendency of the appeal- in the "amount of P730" (1959-1960 crop-year), while the first
supersedeas bond would not answer for the produce of the land from September, 1956 but would
answer only for the produce of the land from March 27, 1958 (when it was approved) up to January 13,
1959 when the second supersedeas bond was approved, or for the owner's share for the 1958-1959
crop-year.
The lower court categorically ordered the execution against the first supersedeas bond only for the sum
of P730(as in the case of the second supe bond) on condition that "before the (first sure ) bond is
executed, the Principals must fust be directed to pay the said sum and if they fail to pay, execution shall
issue against the sureties for theamount of P730" (103, Record on Appeal).
Thus the trial court, by reason of the motion of Singson, the judgment creditor, and with his tacit
acquiescence, notated its final and executory judgment by reducing the obligations covered by the two
supersedeas bonds to P730 each. The trial court made it unmistakably clear that the liability of the
bondsmen was only subsidiary to that of the defendants as principals, meaning that the bondsmen are
entitled to the beneficium excussionis or the right to have the properties of their principals exhausted
before they could be liable on their bonds.
The trial court's act of fixing the liabilities of the six bondsmen at P1,460 is directly attributable to the
failure of the sheriff and Singson (inadvertently or deliberately) to call the court's attention to the fact that
158 cavans had already been delivered to Singson and to apprise it of the exact amount still due from
the twelve judgment debtors.
On March 3, 1961 another writ of execution (the first was issued on April 12, 1960 and it was
supplemented by the order of September 10, 1960) was issued, directing the sheriff to require the twelve
defendants to pay the sum of P730 to Singson and, should they fail to pay, to enforce payment against
the so-called "first supersedeas bond" filed by Matias Babida, Victor Garcia, Julian Pacursa and Nicolas
Agatep.
To do justice in this case, it is necessary to recount in detail the proceedings conducted by the sheriff
under the two writs of execution so. that the validity of the execution sales on June 27 and 30, 1961,
which is the main issue, may be judiciously resolved.
Execution sale on June 27, 1961 involving the first supersedeas bond. To implement the writ of
execution of March 3, 1961 against the first supersedeas bond, the sheriff served a written demand on
March 8, 1961 upon the four aforenamed sureties to pay the sum of P730 plus the expenses and

The sheriff inexplicably did not levy on the land of Nicolas Agatep, the fourth surety. The sheriff
scheduled on June 27, 1961 the sale of the lands of the three sureties, Babida, Garcia and Pacursa. In
the notice of sale, announcing the auction sale on June 27, 1961, the sheriff, in quoting the writ of
execution of March 3, 1961, omitted the court's order requiring him to first direct the twelve principals or
defendants to pay the sum of P730 (which order is found in the writ of execution and which omission has
been capital upon by the bondsmen in this appeal as an irregularity vitiating the execution proceedings).
On June 27, 1961, the day of the auction sale, Singson was the only bidder. His bid was as follows:
P300 for the land of Babida; P50 for the land of Garcia, and P569.30 for the land of Pacursa or P919.30
in all. He had adjusted his' bids in such a way that they would equal that sum of P919.30, the amount for
which the execution sale was to be held, consisting of P730 as principal obligation, P167.50 as
publication expenses, and P21.80 as sheriff's commission and other expenses.
Thus, the three parcels of land of the sureties, Babida, Garcia and Pacursa, with a total area of more
than 21 hectares and an aggregate assessed value of P2,780, were sold to Singson for P919.30 only.
The execution sale on June 30, 1961 involving the second supersedeas bond. The judicial sale on
June 30, 1961 was based on the first or original writ of execution of April 11, 1970 (as to which the sheriff
had made a return on July 16, 1960).
It should be recalled that to satisfy that writ of execution Singson was placed in ion of the 24-hectare
homestead on April 12, 1960 and the defendants delivered to his overseer on April 26 and May 6, 1960
158 cavans of palay, thus leaving an unsatisfied balance of 134 cavans of palay valued at P1,340.
The life of that writ of execution was prolonged because, as noted earlier, on May 17, 1960 or within the
reglementary sixty-day Period (see sec. II, Rule 39, Rules of Court), the sheriff, apparently to satisfy the
said balance of P1,340 a levy on ten hectares of land belonging to defendants Antonio, Bibis, Calpito
and Alfredo Peralta, with a total assessed value of P3,590.
That writ of execution was supplemented by the lower court's aforequoted order of September 10, 1960
which allowed the sheriff to make a further levy on the lands of Doroteo Ballesteros and Pedro Agatep,
the sureties on the "second supersedeas bond", to satisfy an obligation amounting to P730 only, the
judgment debtors' supposed liability for Singson's share of the harvests for the 1959-60 crop-year.
The confusion in the exact amount of the judgment still unsatisfied was due to the failure of the sheriff,
Singson the lawyers for the defendants and the six bondsmen to call the attention of the trial court to the
fact that the balance still due amounted only to P1,340.
The trial court itself was probably unaware that 158 cavans of palay (138 only according to Singson
because the 20 cavans of Jaime Peralta were allegedly receipted for twice by his overseer) worth
P1,580 had already been delivered to Singson's overseer.
The sheriff sent a sort of demand letter dated September 19, 1960 to Doroteo Ballesteros and Pedro
Agatep, the sureties in the "second supersedeas bond", apprising them of the order of September 10,
1960 and impliedly requiring them to make a "deposit" but not particularizing on the nature of the deposit
which was required. The sheriff did not specify the amount of the judgment still unpaid. In that demand
letter, as in his prior actuations, the sheriff was not candid as to the exact balance of the judgment which
should be satisfied. So, he did not specify what Ballesteros and Agatep should deposit or pay to his
office.
For several months, the sheriff did not follow up his demand letter. The record does not show whether he
made any levy on the lands of Ballesteros and Pedro Agatep.

Then, in a notice of sale dated April 25, 1961 (more than a year after the issuance of the writ of
execution under which he was acting), he announced that the properties of Ballesteros, Pedro Agatep
and Alfredo Peralta would be sold at public auction on June 30, 1961.
Alfredo Peralta is one of the twelve defendants. The sheriff on May 17, 1960 levied upon his riceland
with an area of 26,797 square meters and on his residential land with an area of 990 square meters and
on his residential land with an area of 990 square meters, or an aggregate area of 27,787 square
meters. The two parcels of land have a total assessed value of P1,180 in 1961.
As already noted, in that levy of May 17, 1960, the sheriff also levied upon (a) the sugarland and orchard
of Ramon Antonio with a total area of four hectares and an assesed value of P1,000; (b) the sugariand
of Jaime Bibis, with an area of two hectares and an assesed value of P850, and (c) the sugarland,
orchard and riceland of Bonifacio Calpito with an area of 15,000 square meters and a total assessed
valued of P560.
Without any explanation, the sheriff abandoned the levy on the lands of Antonio, Bibis and Calpito and
continued with the levy on the land of Alfredo Peralta (not Garcia), which, as above stated, he advertised
for sale together with the lands of Ballesteros and Pedro Agatep.
The land of Ballesteros has an area of 20,019 square meters and an assesed value of P640 while the
three (3) parcels of land of Agatep have a total area of 78,380 square meters and a total assessed value
of P1,590.
In the notice of sale the sheriff stated that Peralta's land was being sold "in order to satisfy the different
amounts specified" in the writ of execution. He did not mention the writ of execution he was referring to
nor the exact amount to be satisfied.
On the other hand, in the same notice of sale, he stated that he was going to sell the lands of
Ballesteros and Pedro Agatep in order to satisfy the sum of P730, as indicated in the order of September
10, 1960. The sheriff also stated that that amount of P730 should first be collected from the twelve
defendants or principal debtorsbut he did not state whether he had exhausted the properties of the said
principals.

Note that for the execution sale on June 27, 1960 in connection with the "first supersedeas bond", the
sheriff stated with certitude that he was going to sell the lands of the three sureties, Babida, Garcia and
Pacursa, to satisfy the principal obligation of P730, plus P1 67.50 as publication expenses and P21.80
as his other expenses, or for a total sum of P919.30.
In contrast, for the execution sale on June 30, 1961, which was made for the sum of P1,264.77, the
sheriff specified that he was going to sell the lands of the judgment debtor Peralta and the two sureties,
Ballesteros and Agatep, to satisfy the principal obligation of P730 and the publication expenses
amounting to P227.50. But the record does not show what expenses incurred by the sheriff constitute
the remainder of P307.27.
The two notices dated April 19 and 25, 1961, scheduling the sales on June 27 and 30, 1961,
respectively, were both published in the Manila Chronicle. Two publication fees in the sums of P167.50
and P227.50 were paid. Confusion could have been avoided and expenses could have been reduced if
Singson, the sheriff and the lawyers of the parties had taken the trouble of apprising the trial court of the
true balance still due from the twelve judgment debtors after 158 cavans of palay (138 according to
Singson) had been delivered to the judgment creditor on April 26 and May 6, 1960.
The proceedings under the two exedution sales involving the nine parcels of land may be recapitulated
as follows:

Owner Nature
of

Area
in

Assesse
d

Bid

Land

Sq.
Meters

Value

Price

P1,480.
00

P300.00

P150.00

P50.00

In fact, in the same notice of sale, he stated that he was going to sell the property of Alfredo Peralta, a
defendant or principal debtor, which land, as already stressed, has an area of 27,787 square meters and
an value of P1,180 and which, ordinarily, would suffice (even as dation in payment) to satisfy the
principal obligation of P730.
On the other hand, the lands of Ballesteros and Agatep were also more than sufficient for the payment of
the said sum of P730, thus rendering unnecessary the sale of Peralta's land.
In that same notice of sale the sheriff ambiguously or meaning stated that the proceeds of the execution
sale on June 30, 1960 would be "applied for the judgment and order" whatever that means. In contrast,
in the notice for the execution sale scheduled on June 27, 1960, the sheriff categorically stated that the
properties of the sureties, Matias Babida, Victor Garcia and Julian Pacursa would be sold "to satisfy the
import of the execution and other expenses incident thereto" or the sum of P730 and the costs of
execution.
As repeatedly stated, the sheriff scheduled the auction sale of the lands of Peralta, Ballesteros and
Agatep on June 30, 1960. At that auction sale, the only bidder was Singson. The lands were sold to him.
The obligations for which the five parcels of land were to be sold amounted to P1,264.77 (not P1,254.77)
consisting of (a) P730 as the value of 73 cavans of palay (the basic obligation), (b) P227.50 as
publication expenses, and (c) P307.27 presumably for the other expenses of the sheriff.
As in the previous sale on June 27, 1961, Singson adjusted his bids for the five parcels of land so that
his total bid would not exceed P1,264.77. Thus, he made the following bids: P394.49 for Alfredo
Peralta's land; P217.57 for the land of Ballesteros and P217.57 also for each of the three parcels of land
of Pedro Agatep.

MATIAS
BARIDA Riceland and

Orchard

52,682

VICTOR
GARCIA Riceland

5,000

JULIAN
PACURSA Orchard and

Riceland

339,18
8

155,32
0

P1,150.
00

P569.30

P6,190.
00

P2,184.0
7

Other proceedings. On June 27 and 30, 1961 the sheriff executed the respective certificates of sale in
favor of Singson for the nine parcels of land. He specified that the period of redemption would expire
"within one (1) year, counted from this date of sale". The two certificates of sale were registered on
August 18, 1961.
The sheriffs two returns, dated July 7 and August 8, 1961, for the two execution sales, were filed in court
only on August 12, 1961.

ALFREDO
PERALTA Riceland

26,767
)

(not Garcia)
Res. land

990)

P394.49
In a final certificate of sale dated July 3, 1962 the sheriff conveyed to Singson the parcels of land of the
sureties Babida, Garcia and Pacursa. He noted that the one-year period of redemption had already
expired and they had not made any redemption. That final deed of sale was registered on July 26, 1962.
A copy of the final deed for the lands of Peralta, Ballesteros and Agatep was not included in the record
on appeal.
P1,180.
00

On August 15, 1962, Singson filed an ex parte motion for a writ of possession. He alleged that the final
deeds of sale for the lands sold to him on June 27 and 30, 1961 were executed in his favor by the
sheriff. The twelve defendants or judgment debtors and the six bondsmen opposed that ex parte motion.
On September 5, 1962 the defendants and the bondsmen filed a lengthy "supplementary pleading"
wherein they prayed that the execution sales held on June 27 and 30, 1961 be declared void because
the obligations of the sureties may be regarded as extinguished with the delivery of the 158 cavans of
palay to Singson's overseer and because the sureties were not given the benefit of exhaustion of the
principal debtors' properties. Singson opposed that supplementary pleading.

DOROTEO

BALLESTER
OS Farmland

20,019

P640.00

P217.57

The trial court in its order of September 20, 1962 denied the motion of the bondsmen and the
defendants and granted Singson's motion for a writ of possession. The motion for the reconsideration of
that order was denied by the trial court in its order of November 14, 1962. The twelve defendants did not
appeal.
The six bondsmen appealed to the Court of Appeals. That Court in its resolution of November 29, 1968
certified the appeal to this Court because the appeal involves a question of law, which is the legality of
the execution sales on June 27 and 30, 1961 (CA-G.R. No. 32008-R).

PEDRO
AGATEP Riceland

21,380
)

P620.00

P217.57

Cornland

28,500
)

P750.00

P217.57

Farmland

28,500
)

P220.00

P217.57

Issues. The main issue is the validity of the execution sales. The bondsmen contend that the sales
are void because (1) their liabilities on their supersedeas bonds had already been extinguished before
the sales were made; (2) the sheriff did not comply with the courts order that the properties of the
principals should first be exhausted, and (3) the sale on June 27, 1961 was in contravention of the writ of
execution while the sale on June 30, 1961 was not based at all on any writ of execution.
Singson did not file any appeflee's brief, thus giving the impression that, after he had attained his
objective of recovering possession of the disputed homestead and after receiving 158 cavans of palay,
any adjudication in this appeal adverse to him would not make his position worse.
That inference is strengthened by his failure to controvert the lower court's orders of September 10,
1960 and January 28, 1961, reducing his claim for the owner's share of the harvests to 146 cavans only
or for only two crop-years.
Ruling. It should be clear by now that this is not a typical ejectment suit involving urband land. This is
a controversy between the person claiming to be the rightful possessor of a homestead (seventeen
hectares of which are ricelands) and the cultivators thereof who claim to be tenants of the deceased
former possessor and who drove away the second possessor's tenants.

The case, involving as it did the use and cultivation of agricultural land, could have come within the
jurisdiction of the Court of Agrarian Relations (Sec. 7, Republic Act No. 1267; Ojo vs. Jamito 83 Phil.
764).
However, as the case was tried on the theory that it was an ordinary forcible entry case, failing within the
exclusive original jurisdiction of the inferior court, it should be assumed that the lower courts had
rightfully exercised jurisdiction over the case.
(1) The appeal can be disposed of by holding that the two so-called supersedeas bonds, which gave rise
to the execution sales under attack, are void because they were not signed by the twelve defendants or
judgment debtors as principal obligors They were signed only by the six sureties. Not having been
signed by the principal debtors, the supersedeas bonds do not evidence any Principal obligation and are
devoid of consideration as to the sureties who have no privity with the judgment creditor nor any liability
to him. (Manila Railroad Company vs. Alvendia, L-22137, May 19, 1966, 17 SCRA 154; School Dist. No.
80 vs.Lapping too Minn. 130, 110 N.W. 849).
(2) Other reasons for holding the two supersedeas bonds void are that the first supersedeas bond was
not warranted under the judgment of the justice of the peace court and the second supersedeas bond
was required in the trial court's order which was issued when it had no more jurisdiction over the case.
A supersedeas bond in an ejectment case is usually filed in the inferior court and approved by it and
"executed to the plaintiff to enter the action in the Court of First Instance". It covers "the rents, damages
and costs down to the time of the final judgment" (Sec. 8, Rule 72, old Rules of Court, now sec. 8, Rule
70).
The supersedeas bond answers only for the rentals or the reasonable compensation for the use and
occupation of the premises as fixed in the judgment of the inferior court (De Laureano vs- Adil, L-43345,
July 29, 1976, 72 SCRA 148, 155).
In the instant case, the justice of the peace court did not adjudge any rentals or reasonable
compensation for the use and occupation of the homestead. That court allowed "the plaintiff to withdraw
the canons of the land" from the depositary. Hence, there was no occasion or justification for requiring a
supersedeas bond. For that reason, the "first supersedeas bond" was not necessary and is, therefore, a
nullity. Any execution against it would likewise be a nullity.
With respect to the "second supersedeas bond". it should be underscored that the lower court approved
defendants' record on appeal in its order of September 6, 1958, wherein it directed the clerk of court to
elevate the same to the Court of Appeals. The appeal was deemed perfected on that date.
On September 23, 1958, or seventeen days after the perfection of the appeal, Singson filed a motion for
execution. The lower court, instead of granting that motion, required the defendants in its order of
September 27, 1958 to file a supersedeas bond.
It is incontestable that the lower court had no more jurisdiction to issue that order because after the
perfection of the appeal "this trial court loses its jurisdiction over the case, except to issue orders for the
protection and preservation of the rights of the parties which do not involve any matter litigated by the
appeal" (Sec. 9, Rule 41, Rules of Court).
Applying section 9, Rule 41, it was held that after the perfection of the appeal the trial court cannot order
the execution of its judgment pending appeal because execution is a proceeding affecting the rights of
the parties which are the subject matter of the judgment, from which appeal is taken, and its purpose is
not to protect and preserve the subject matter of the litigation Cabilao vs. Judge of the Court of First
Instance of Zamboanga, L-18454, August 29, 1966, 17 SCRA 992; 2 Moran's Comments on the Rules of
Court, 1970 Edition, pp. 434-6).
It follows that the and supersedeas bond" which Doroteo Ballesteros and Pedro Agatep executed, as
required in the lower court's invalid order of September 27, 1958, is void ab initio. The execution sale
based on that supersedeas bond is likewise void.

(3) Other aspects of the supersedeas bonds may be pointed out to show their void character. The bonds
are in English and might not have been understood by the ignorant sureties (See art. 1332, Civil Code).
The first supersedeas bond was fried "to answer for damages (which) the plaintiff might sustain by
reason of the crops or produce which they (the defendants) pray to be disposed of and deposited"
whatever that means. In that bond, the sureties solidarily 'undertake to pay to the plaintiff whatever
damage he might sustain as a result of the produce (sic), but not to exceed the amount of P3,000", and,
"for the payment thereof", the defendants "encumber and constitute a first lien in favor of the plaintiff
upon" certain real properties.
In the second supersedeas bond, the sureties bound themselves 'to pay to the plaintiff whatever
damages he might sustain as a result" of the ejectment case and, for that purpose, the sureties
encumbered and constituted a first lien in favor of the plaintiff upon their real properties.
The two bonds were supposed to answer for the damages caused to Singson by the defendants. But the
tenor and provisions of the two bonds do not define unequivocally the nature of the sureties liability to
Singson. The judgments of the justice of the peace court and the Court of First Instance, which were
supposed to be stayed by the said bonds, are not quoted or recited in the said bonds.
It should be home in mind that the justice of the peace court and the Court of First Instance did not
require the defendants to pay "damages" to Singson. The lower court required the defendants to deriver
to Singson 73 cavans yearly from September, 1956 until the possession of the homestead was restored
to him. Those 73 cavans were not "damages" but Singson's share of the harvests as owner or
possessor of the homestead.
It is exceedingly doubtful if the vague and uncertain provisions of the supersedeas bonds justified the
execution against the properties of the sureties.
(4) There is some basis for appellant's contention that the execution sales in question were invalid
because the judgment debtors' obligation was extinguished by the lower court's orders of September 10,
1960 and January 28, 1961, reducing their liability for the owner's share of the harvests to 146 cavans of
palay or P1,460.
In those two orders, the trial court had novated its judgment without any protest on the part of the
judgment creditor. It is an undisputed fact that, as heretofore repeatedly emphasized, the judgment
debtors had delivered to Singson's overseer 158 cavans of palay valued at P1,580, an amount which is
more than the reduced liability of P1,460. That explains why the defendants and the sureties contended
in the lower court that its judgment had already been satisfied and that, therefore, further execution was
not in order.
(5) But even if the supersedeas bonds could be proper bases for selling at public auction the properties
of the five sureties, to satisfy the defendants' liability to deliver 146 cavans of palay to Singson or to pay
him P1,460, it would not follow that the execution sales are valid.
The two execution sales are void because of gross inadequacy of price which is shocking to the
conscience (Director of Lands vs. Abarca, 61 Phil. 70; Warner, Barnes 8 Co. vs. Santos, 14 Phil. 446,
449; Philippine National Bank vs. Gonzalez, 45 Phil. 693).
Nine parcels of land, with a total area of more than 33 hectares and an aggregate assessed value of
P6,190 were sold to satisfy total obligations amounting to P2,184.07 (of which P1,460 constituted the
main obligation). Thirty-three hectares of land were ceded to the judgment creditor to satisfy a judgment
for 146 cavans of palay.
If we sustain the execution sales, the iniquitous and oppressive result would be that Singson, after
recovering ion of the 24-hectare homestead and receiving 158 cavans of palay, out of the 292 cavans of
palay adjudged in his favor, would, in addition, be awarded 33 hectares of land (presumably more
valuable than the 24-hectare homestead in litigation to satisfy the balance of the judgment in the sum of
P1,460, according to the trial court's computation).

While this Court sits that patent injustice cannot be tolerated.

WHEREFORE, the execution sales held on June 27 and 30, 1961 are declared void and the trial court's
orders of September 20 and November 14, 1962, denying the petition to set aside those sales and
granting Singson's motion for a writ of possession, are reversed and set aside. Costs against
respondent-appellee Singson.
SO ORDERED
G.R. No. L-158025

November 5, 1920

CARMEN CASTELLVI DE HIGGINS and HORACE L. HIGGINS, plaintiffs-appellants,

vs.
GEORGE C. SELLNER, defendant-appellee.
Wolfson, Wolfson and Schwarzkopf for appellants.
William and Ferrier for appellee.

MALCOLM, J.:
This is an action brought by plaintiffs to recover from defendant the sum of P10,000. The brief decision
of the trial court held that the suit was premature, and absolved the defendant from the complaint, with
the costs against the plaintiffs.
The basis of plaintiff's action is a letter written by defendant George C. Sellner to John T. Macleod, agent
for Mrs. Horace L. Higgins, on May 31, 1915, of the following tenor:lawph!l.net
DEAR SIR: I hereby obligate and bind myself, my heirs, successors and assigns that if the
promissory note executed the 29th day of May, 1915 by the Keystone Mining Co., W.H.
Clarke, and John Maye, jointly and severally, in your favor and due six months after date for
Pesos 10,000 is not fully paid at maturity with interest, I will, within fifteen days after notice of
such default, pay you in cash the sum of P10,000 and interest upon your surrendering to me
the three thousand shares of stock of the Keystone Mining Co. held by you as security for
the payment of said note.
Respectfully,
(Sgd.) GEO. C. SELLNER.
Counsel for both parties agree that the only point at issue is the determination of defendant's status in
the transaction referred to. Plaintiffs contend that he is a surety; defendant contends that he is a
guarantor. Plaintiffs also admit that if defendant is a guarantor, articles 1830, 1831, and 1834 of the Civil
Code govern.
In the original Spanish of the Civil Code now in force in the Philippine Islands, Title XIV of Book IV is
entitled "De la Fianza." The Spanish word "fianza" is translated in the Washington and Walton editions of
the Civil Code as "security." "Fianza" appears in the Fisher translation as "suretyship." The Spanish
world "fiador" is found in all of the English translations of the Civil Code as "surety." The law of guaranty
is not related of by that name in the Civil Code, although indirect reference to the same is made in the
Code of Commerce. In terminology at least, no distinction is made in the Civil Code between the
obligation of a surety and that of a guarantor.

As has been done in the State of Louisiana, where, like in the Philippines, the substantive law has a civil
law origin, we feel free to supplement the statutory law by a reference to the precepts of the law
merchant.
The points of difference between a surety and a guarantor are familiar to American authorities. A surety
and a guarantor are alike in that each promises to answer for the debt or default of another. A surety and
a guarantor are unlike in that the surety assumes liability as a regular party to the undertaking, while the
liability as a regular party to upon an independent agreement to pay the obligation if the primary pay or
fails to do so. A surety is charged as an original promissory; the engagement of the guarantor is a
collateral undertaking. The obligation of the surety is primary; the obligation of the guarantor is
secondary. (See U.S. vs. Varadero de la Quinta [1919], 40 Phil., 48; Lachman vs. Block [1894], 46 La.
Ann., 649; Bedford vs. Kelley [1913], 173 Mich., 492; Brandt, on Suretyship and Guaranty, sec. 1, cited
approvingly by many authorities.)
Turning back again to our Civil Code, we first note that according to article 1822 "By fianza (security or
suretyship) one person binds himself to pay or perform for a third person in case the latter should fail to
do so." But "If the surety binds himself in solidum with the principal debtor, the provisions of Section
fourth, Chapter third, Title first, shall be applicable." What the first portion of the cited article provides is,
consequently, seen to be somewhat akin to the contract of guaranty, while what is last provided is
practically equivalent to the contract of suretyship. When in subsequent articles found in section 1 of
Chapter II of the title concerning fianza, the Code speaks of the effects of suretyship between surety and
creditor, it has, in comparison with the common law, the effect of guaranty between guarantor and
creditor. The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and
the civil law relationship existing between codebtors liable in solidum is similar to the common law
suretyship.
It is perfectly clear that the obligation assumed by defendant was simply that of a guarantor, or, to be
more precise, of the fiador whose responsibility is fixed in the Civil Code. The letter of Mr. Sellner recites
that if the promissory note is not paid at maturity, then, within fifteen days after notice of such default and
upon surrender to him of the three thousand shares of Keystone Mining Company stock, he will assume
responsibility. Sellner is not bound with the principals by the same instrument executed at the same time
and on the same consideration, but his responsibility is a secondary one found in an independent
collateral agreement, Neither is Sellner jointly and severally liable with the principal debtors.
With particular reference, therefore, to appellants assignments of error, we hold that defendant Sellner is
a guarantor within the meaning of the provisions of the Civil Code.
There is also an equitable aspect to the case which reenforces this conclusion. The note executed by
the Keystone Mining Company matured on November 29, 1915. Interest on the note was not accepted
by the makers until September 30, 1916. When the note became due, it is admitted that the shares of
stock used as collateral security were selling at par; that is, they were worth pesos 30,000. Notice that
the note had not been paid was not given to and when the Keyston Mining Company stock was
worthless. Defendant, consequently, through the laches of plaintiff, has lost possible chance to recoup,
through the sale of the stock, any amount which he might be compelled to pay as a surety or guarantor.
The "indulgence," as this word is used in the law of guaranty, of the creditors of the principal, as
evidenced by the acceptance of interest, and by failure promptly to notify the guarantor, may thus have
served to discharge the guarantor.
For quite different reasons, which, nevertheless, arrive at the same result, judgment is affirmed, with
costs of this instance against the appellants. So ordered.

G.R. No. L-16666

April 10, 1922

ROMULO MACHETTI, plaintiff-appelle,

vs.

HOSPICIO DE SAN JOSE, defendant-appellee, and

FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant
Ross and Laurence and Wolfson & Scwarzkopf for appellant.
Gabriel La O for appellee Hospicio de San Jose.
No appearance for the other appellee.
OSTRAND, J.:
It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written agreement
undertook to construct a building on Calle Rosario in the city of Manila for the Hospicio de San Jose, the
contract price being P64,000. One of the conditions of the agreement was that the contractor should
obtain the "guarantee" of the Fidelity and Surety Company of the Philippine Islands to the amount of
P128,800 and the following endorsement in the English language appears upon the contract:
MANILA, July 15, 1916.
For value received we hereby guarantee compliance with the terms and conditions as
outlined in the above contract.

of suretyship but such circumstances do not exist in the present case; on the contrary it appear
affirmatively that the contract is the guarantor's separate undertaking in which the principal does not join,
that its rests on a separate consideration moving from the principal and that although it is written in
continuation of the contract for the construction of the building, it is a collateral undertaking separate and
distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to
pay if the principal cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of
the debtor. (Saintvs. Wheeler & Wilson Mfg. Co., 95 Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70;
Castellvi de Higgins and Higgins vs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.)
This latter liability is what the Fidelity and Surety Company assumed in the present case. The
undertaking is perhaps not exactly that of afianza under the Civil Code, but is a perfectly valid contract
and must be given the legal effect if ordinarily carries. The Fidelity and Surety Company having bound
itself to pay only the event its principal, Machetti, cannot pay it follows that it cannot be compelled to pay
until it is shown that Machetti is unable to pay. Such ability may be proven by the return of a writ of
execution unsatisfied or by other means, but is not sufficiently established by the mere fact that he has
been declared insolvent in insolvency proceedings under our statutes, in which the extent of the
insolvent's inability to pay is not determined until the final liquidation of his estate.
The judgment appealed from is therefore reversed without costs and without prejudice to such right of
action as the cross-complainant, the Hospicio de San Jose, may have after exhausting its remedy
against the plaintiff Machetti. So ordered.

FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.

G.R. No. L-49401 July 30, 1982
(Sgd) OTTO VORSTER,
Vice-President.
Machetti constructed the building under the supervision of architects representing the Hospicio de San
Jose and, as the work progressed, payments were made to him from time to time upon the
recommendation of the architects, until the entire contract price, with the exception of the sum of the
P4,978.08, was paid. Subsequently it was found that the work had not been carried out in accordance
with the specifications which formed part of the contract and that the workmanship was not of the
standard required, and the Hospicio de San Jose therefore answered the complaint and presented a
counterclaim for damages for the partial noncompliance with the terms of the agreement
abovementioned, in the total sum of P71,350. After issue was thus joined, Machetti, on petition of his
creditors, was, on February 27, 1918, declared insolvent and on March 4, 1918, an order was entered
suspending the proceeding in the present case in accordance with section 60 of the Insolvency Law, Act
No. 1956.

RIZAL COMMERCIAL BANKING CORPORATION, petitioner,

vs.
HON. JOSE P. ARRO, Judge of the Court of First instance of Davao, and RESIDORO
CHUA, respondents.
Laurente C. Ilagan for petitioner.
Victor A. Clapano for respondents.

DE CASTRO, J.:
The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and Surety
Company be made cross-defendant to the exclusion of Machetti and that the proceedings be continued
as to said company, but still remain suspended as to Machetti. This motion was granted and on February
7, 1920, the Hospicio filed a complaint against the Fidelity and Surety Company asking for a judgement
for P12,800 against the company upon its guaranty. After trial, the Court of First Instance rendered
judgment against the Fidelity and Surety Company for P12,800 in accordance with the complaint. The
case is now before this court upon appeal by the Fidelity and Surety Company form said judgment.
As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San Jose
defendant, has been converted into an action in which the Hospicio de San Jose is plaintiff and the
Fidelity and Surety Company, the original plaintiff's guarantor, is the defendant, Machetti having been
practically eliminated from the case.
But in this instance the guarantor's case is even stronger than that of an ordinary surety. The contract of
guaranty is written in the English language and the terms employed must of course be given the
signification which ordinarily attaches to them in that language. In English the term "guarantor" implies
an undertaking of guaranty, as distinguished from suretyship. It is very true that notwithstanding the use
of the words "guarantee" or "guaranty" circumstances may be shown which convert the contract into one

Petition for certiorari to annul the orders of respondent judge dated October 6, 1978 and November 7,
1978 in Civil Case No. 11-154 of the Court of First Instance of Davao, which granted the motion filed by
private respondent to dismiss the complaint of petitioner for a sum of money, on the ground that the
complaint states no cause of action as against private respondent.
After the petition had been filed, petitioner, on December 14, 1978 mailed a manifestation and motion
requesting the special civil action for certiorari be treated as a petition for review. 1 Said manifestation
and motion was noted in the resolution of January 10, 1979. 2
It appears that on October 19, 1976 Residoro Chua and Enrique Go, Sr. executed a comprehensive
surety agreements 3 to guaranty among others, any existing indebtedness of Davao Agricultural
Industries Corporation (referred to therein as Borrower, and as Daicor in this decision), and/or induce the
bank at any time or from time to time thereafter, to make loans or advances or to extend credit in other
manner to, or at the request, or for the account of the Borrower, either with or without security, and/or to
purchase on discount, or to make any loans or advances evidenced or secured by any notes, bills,
receivables, drafts, acceptances, checks or other evidences of indebtedness (all hereinafter called

"instruments") upon which the Borrower is or may become liable, provided that the liability shall not
exceed at any one time the aggregate principal sum of P100,000.00.
On April 29, 1977 a promissory note 4 in the amount of P100,000.00 was issued in favor of petitioner
payable on June 13, 1977. Said note was signed by Enrique Go, Sr. in his personal capacity and in
behalf of Daicor. The promissory note was not fully paid despite repeated demands; hence, on June 30,
1978, petitioner filed a complaint for a sum of money against Daicor, Enrique Go, Sr. and Residoro
Chua. A motion to dismiss dated September 23, 1978 was filed by respondent Residoro Chua on the
ground that the complaint states no cause of action as against him. 5 It was alleged in the motion that he
can not be held liable under the promissory note because it was only Enrique Go, Sr. who signed the
same in behalf of Daicor and in his own personal capacity.
In an opposition dated September 26, 1978 6 petitioner alleged that by virtue of the execution of the
comprehensive surety agreement, private respondent is liable because said agreement covers not
merely the promissory note subject of the complaint, but is continuing; and it encompasses every other
indebtedness the Borrower may, from time to time incur with petitioner bank.
On October 6, 1978 respondent court rendered a decision granting private respondent's motion to
dismiss the complaint. 7 Petitioner filed a motion for reconsideration dated October 12, 1978 and on
November 7, 1978 respondent court issued an order denying the said motion. 8
The sole issue resolved by respondent court was the interpretation of the comprehensive surety
agreement, particularly in reference to the indebtedness evidenced by the promissory note involved in
the instant case, said comprehensive surety agreement having been signed by Enrique Go, Sr. and
private respondent, binding themselves as solidary debtors of said corporation not only to existing
obligations but to future ones. Respondent court said that corollary to that agreement must be another
instrument evidencing the obligation in a form of a promissory note or any other evidence of
indebtedness without which the said agreement serves no purpose; that since the promissory notes,
which is primarily the basis of the cause of action of petitioner, is not signed by private respondent, the
latter can not be liable thereon.
Contesting the aforecited decision and order of respondent judge, the present petition was filed before
this Court assigning the following as errors committed by respondent court:
1. That the respondent court erred in dismissing the complaint against Chua
simply on the reasons that 'Chua is not a signatory to the promissory note" of
April 29, 1977, or that Chua could not be held liable on the note under the
provisions of the comprehensive surety agreement of October 29, 1976; and/or
2. That the respondent court erred in interpreting the provisions of the
Comprehensive Surety Agreement towards the conclusion that respondent Chua
is not liable on the promissory note because said note is not conformable to the
Comprehensive Surety Agreement; and/or
3. That the respondent court erred in ordering that there is no cause of action
against respondent Chua in the petitioner's complaint.
The main issue involved in this case is whether private respondent is liable to pay the obligation
evidence by the promissory note dated April 29,1977 which he did not sign, in the light of the provisions
of the comprehensive surety agreement which petitioner and private respondent had earlier executed on
October 19, 1976.
We find for the petitioner. The comprehensive surety agreement was jointly executed by Residoro Chua
and Enrique Go, Sr., President and General Manager, respectively of Daicor, on October 19, 1976 to
cover existing as well as future obligations which Daicor may incur with the petitioner bank, subject only

to the proviso that their liability shall not exceed at any one time the aggregate principal sum of
P100,000.00. Thus, paragraph I of the agreement provides:
For and in consideration of any existing indebtedness to you of Davao
Agricultural Industries Corporation with principal place of business and postal
address at 530 J. P. Cabaguio Ave., Davao City (hereinafter called the
"Borrower), and/or in order to induce, you in your discretion, at any time or from
time to time hereafter, to make loans or advances or to extend credit in any other
manner to, or at he request or for the account of the Borrower, either with or
without security, and/or to purchase or discount or to make any loans or
advances evidenced or secured by any notes, bills, receivables, drafts,
acceptances, checks or other instruments or evidences of indebtedness (all
hereinafter called "instruments") upon which the Borrower is or may become
liable as maker, endorser, acceptor, or otherwise) the undersigned agrees to
guarantee, and does hereby guarantee in joint and several capacity, the punctual
payment at maturity to you of any and all such instruments, loans, advances,
credits and/or other obligations herein before referred to, and also any and all
other indebtedness of every kind which is now or may hereafter become due or
owing to you by the Borrower, together with any and all expenses which may be
incurred by you in collecting an such instruments or other indebtedness or
obligations hereinbefore referred to ..., provided, however, that the liability of the
undersigned shag not exceed at any one time the aggregate principal sum of
P100,000.00 ...
The agreement was executed obviously to induce petitioner to grant any application for a loan Daicor
may desire to obtain from petitioner bank. The guaranty is a continuing one which shall remain in full
force and effect until the bank is notified of its termination.
This is a continuing guaranty and shall remain in fun force and effect until written
notice shall have been received by you that it has been revoked by the
undersigned, ... 9
At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of having an
additional capital for buying and selling coco-shell charcoal and importation of activated carbon, 10 the
comprehensive surety agreement was admittedly in full force and effect. The loan was, therefore,
covered by the said agreement, and private respondent, even if he did not sign the promisory note, is
liable by virtue of the surety agreement. The only condition that would make him liable thereunder is that
the Borrower "is or may become liable as maker, endorser, acceptor or otherwise". There is no doubt
that Daicor is liable on the promissory note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an
accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained by
Daicor as evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was
the surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual
payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen that the surety
agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally
allowable under the Civil Code. Thus
Article 2053. 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.
In view of the foregoing, the decision (which should have been a mere "order"), dismissing the complaint
is reversed and set side. The case is remanded to the court of origin with instructions to set aside the
motion to dismiss, and to require defendant Residoro Chua to answer the complaint after which the case
shall proceed as provided by the Rules of Court. No costs.

SO ORDERED.

c) For costs of suit.

The action was brought by the petitioner to recover from the respondent company P20,570.24 worth of
renewal premiums and costs of documentary stamps on various surety bonds posted by petitioner
Plaridel Surety and Insurance Co., in behalf of respondent Artex Development Co. Inc., as principal in
favor of the Republic of the Philippines through the Bureau of Customs and the Board of Industries.
These surety bonds were posted pursuant to Republic Act No. 4086 and its implementing Rules and
Regulations No. 1-64 particularly paragraph 9, which provides:
Par. 9. Withdrawal Under Bond. Persons or firms who or which have pending
applications for tax exemption privileges under the Act and whose imported raw
materials, chemicals, dyestuffs and spare parts are actually within the Bureau of
Customs jurisdiction, may withdraw such raw materials chemicals, dyestuffs and
spare parts from the customs house upon the posting of a bond equivalent to the
customs duties and taxes due thereon in accordance with the rules and
regulations of the Department of Finance and the Bureau of Customs.
Consequently, the respondent withdrew from the Bureau of Customs' custody shipments of imported raw
materials, chemicals, dyestuffs and spare parts which were then subject to customs duties, special
import taxes, sales and/or compensating taxes because the respondent's applications for tax exemption
of these items were not then approved by the Board of Industries.

G.R. No. L-30554 February 28, 1983

PLARIDEL SURETY & INSURANCE COMPANY, petitioner,
vs.
ARTEX DEVELOPMENT COMPANY, INC., and HON. JESUS P. MORFE, Presiding Judge, Branch
XIII, Court of First Instance of Manila, respondents.
Bonifacio L. Hilario and Arturo Topacio, Jr., for petitioner.
Norberto Quisumbing for respondents.

In consideration of the obligation assumed by the petitioner, the private respondent agreed to pay the
premiums and cost of documentary stamps due thereon as per stipulations contained in the separate
agreement of counter-guaranty:
(a) PREMIUM To pay to the Surety Company at its principal offices in the sum
of ... in advance as premiums of same for each period of (12) mos. beginning
March 1965 or fraction thereof, to be computed from this date until said bonds
and its renewals, extensions or substitutions be cancelled in full by the person or
entity guaranteed thereby, or by a court of competent jurisdiction.
It is an admitted fact that the premiums due and costs of documentary stamps for the first year duration
of the undertaking under these surety bonds, which was from March 1965 to March 1966, were paid in
accordance with the agreements of counter-guaranty.
On December 19, 1966, respondent Artex Development Co. Inc., was granted tax exemption by the
Board of Industries (BOI Certificate No. 22). Thereafter, the respondent stopped paying premiums and
costs of documentary stamps to the petitioner.

GUTIERREZ, JR., J.:

This is a petition for review on certiorari of the orders of the respondent judge dismissing the complaint
in Civil Case No. 73904 and denying a motion for reconsideration of the dismissal order. The petitioner
filed with the Court of First Instance of Manila a complaint for a sum of money against respondent Artex
Development Co. Inc., wherein it prayed that judgment be rendered in its favor as follows:
a) Ordering the respondent (defendant) Artex Development Co. Inc. to pay
plaintiff the sum of P20,570.24, plus interest thereon at the rate of 12% per
annum computed monthly and automatically accumulated to the outstanding
capital and shall bear the same interests as said capital until fully paid;
b) Ordering the defendant to pay plaintiff, the sum equivalent to 15% per centum
of the amount due as and for attorneys fees; and

On September 11, 1968, the private respondent filed its motion to dismiss petitioner's complaint on the
ground that it states no cause of action and/or that the claim or demand setforth therein has been
extinguished. The petitioner filed its opposition to the motion to dismiss followed by the respondent's
filing its reply to the opposition.
Acting on the motion to dismiss, the respondent judge issued one of the assailed orders which reads as
follows:
After careful consideration of defendant's motion to dismiss, dated 9 September,
1968, plaintiff's opposition thereto, dated September 12, 1968, and movant's
closing written arguments (Reply to Opposition, dated 20 September 1968), this
Court finds said motion to dismiss to be well taken.

WHEREFORE, said motion to dismiss, dated 9 September, 1968 is hereby

granted, and plaintiff's action or complaint is hereby dismissed, without
pronouncement as to costs.

caracteristica de su esencia pues sin dicha obligacion

principal no se concibe la existencia de la fianza, y por
eso es siempre un contrato accesorio, dependiente de
otro para cuya seguridad se constituye.

The respondent judge later issued the other assailed order denying petitioner's motion for
reconsideration.

En este concepto puede definirse la fianza, diciendo que es un contrato

mediante el cual uno de los contratantes da su garantia personal para asegurar
el cumplimento de una obligacion contraida por otra distinta persona,
comprometiendose a cumplirla por ella, si esta no lo hiciere en el tiempo y en la
forma en que se obligo a Ilevarla a efecto.

The private respondent contents that the grant of tax exemption by the Board of Industries on December
19, 1966 rendered null and void and extinguished the surety bonds and agreement of counter guaranty.
It argues that guaranty and suretyship are accessory to and dependent upon the principal obligation
guaranteed or secured by them and cannot exist without a valid obligation. Therefore, as a necessary
consequence, the obligation of defendant to pay premiums and cost of documentary stamps allegedly
due on the extinguished agreements of counter guaranty has likewise been rendered of no force and
effect.

Recordando las indicaciones consignadas en la introduccion al presente titulo,

facil es precisar la naturaleza y aun la extension de la fianza en el concepto en
que ha de ser objects de nuestro estudio. En cuanto a la primera, tres son los
caracteres que la distinguen y diferencian determinando la razon de su
especialidad, drivada del objeto mismo de dicho contrato. Esos caracteres, son:
1 , la cualidad accesoria y subsidiara de la obligacion contraida 2 , la condicion
unilateral de la misma y 3, la circumstancia de haber ser el fiador persona
distinta del principal obligado.

Petitioner, on the other hand, maintains that, granting arguendo that the grant of tax exemption in favor
of respondent corporation had the effect of releasing the surety bonds involved, still the petitioner had
the valid and subsisting right to claim unpaid renewal premiums and costs of documentary stamps that
had accrued in its favor prior to the grant of tax exemptions. Petitioner maintains that it had renewed the
surety bonds in March 1966, more or less eight months before the application for tax exemption was
granted by the Board of Industries.

Es accesoria la obligacion contraida, porque careceria de objeto sin otro principal

cuyo cumplimiento asegure y garantice, hasta el punto de que sin esta no se
concibe su existencia. Ha de vivir pues, unida a la convencion a que debe su
nacimiento y no puede asumir los caracteres de una obligacion principal,
independiente y con vida propia ...

With respect to accrued premiums and costs of documentary stamps on renewals of the surety bonds
made after the grant of tax exemptions to the respondent corporation, the petitioner maintains that the
surety bonds which were renewed subsequent thereto should continue in full force and effect until the
Chairman of the Board of Industries shall order their cancellation.
Petitioner submits that the mere grant of tax exemptions would not discharge the surety bonds because
it is possible that the grantee may have violated some of the terms and conditions imposed by the Board
of Industries in connection with authority granted to it to withdraw the items from customs' custody under
bond.
We agree with the private respondents. We note that Condition No. 2 of the original surety bonds reads:
2. That in case the application (of respondent Artex Development Co. Inc. for tax
exemption) is approved by the Board of Industries. then this bond shall be null
and void and of no force and effect.
The petitioner could not possibly be liable for any violation under the original surety bonds which were
already void and of no force and effect. Suretyship cannot exist without a valid obligation, (Municipality of
Gasan v. Marasigan, et al., 63 Phil. 510). As stated in Visayan Surety and Insurance corporation v.
Laperal (69 Phil. 688):
Segun el articulo 1822 del Codigo Civil la fianza es un contrato accesorio y la
responsabilidad que contrae el fiador es subsidiaria.Por ella el fiador se obliga a
pagar o a cumplir por un tercero, solamente en el caso de no hacerlo este.
Explicando la naturaleza y efectos de la fianza Manresa en sus comentarios al
Codigo Civil, Tomo XII, paginas 137, 138 y 140, dice:
Dos son las acepciones que en el tecnicismo juridico
tiene la palabra fianza uno, lato, amplio y extenso que
comprende, dentro de sus terminos todos los contratos
de garantia; y otro restringido y estricto, que es lo que
constituye la fianza propiamente dicha. En ambos
sentidos, denota el aseguramiento por medios
subsidiarios de una obligacion principal, que es la

Insofar as the complaint seeks recovery of the payment for one year renewed premiums and costs of
documentary stamps from March 1966 to March 1967, petitioner cannot recover for the simple reason
that private respondent had already paid them in advance. Petitioner never disputed the payment made
by private respondent. Consequently, whatever obligation of private respondent to remit premiums and
costs of documentary stamps from March 1966 to March 1967 had already been extinguished.
As to the alleged obligation to remit the premiums for the period March 1967 to March 1969, the
purported renewals were without any consideration at all Petitioner incurred no risk from the time
respondent's tax exemption application was approved. Any renewals were void from the beginning
because the cause or object of said renewals did not exist at the time of the purported transaction (Arts,
1409, 1352, and 1353, Civil Code).
The lower court correctly ruled that "upon approval of defendant's (respondent's) application for tax
exemption on December 19, 1966, any purported renewal of the original bond after that was, therefore,
without consideration and will not warrant the collection of premiums and the payment of cost of
documentary stamps."
We also see no need for a formal release of the surety bonds by the Board of Industries or the Bureau of
Customs. By express stipulation of the parties themselves, the surety bonds became null and void upon
the grant of tax exemption.
The complaint was correctly dismissed by the respondent judge.
WHEREFORE, the petition for review on certiorari is dismissed for lack of merit. The questioned orders
of the respondent judge are affirmed. Costs against the petitioner.
SO ORDERED.
G.R. No. 89775 November 26, 1992

JACINTO UY DIO and NORBERTO UY, petitioners,

vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY, respondents.

the former agreed to deliver to METROBANK the entrusted goods in the event of
non-sale or, if sold, the proceeds of the sale thereof, on or before September 2,
1979.
However, UTEFS did not acquiesce to the obligatory stipulations in the trust
receipt. As a consequence, METROBANK sent letters to the said principal obligor
and its sureties, Norberto Uy and Jacinto Uy Dio, demanding payment of the
amount due. Informed of the amount due, UTEFS made partial payments to the
Bank which were accepted by the latter.

DAVIDE, JR., J.:

Continuing Suretyship Agreements signed by the petitioners set off this present controversy.
Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No. 17724 1 which reversed the
2 December 1987 Decision of Branch 45 of the Regional Trial Court (RTC) of Manila in a collection suit
entitled "Metropolitan Bank and Trust Company vs. Uy Tiam, doing business under the name of "UY
TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto Uy Dio and Norberto Uy" and docketed as
Civil Case No. 82-9303. They likewise challenge public respondent's Resolution of 21 August
1989 2 denying their motion for the reconsideration of the former.
The impugned Decision of the Court summarizes the antecedent facts as follows:
It appears that in 1977, Uy Tiam Enterprises and Freight Services (hereinafter
referred to as UTEFS), thru its representative Uy Tiam, applied for and obtained
credit accommodations (letter of credit and trust receipt accommodations) from
the Metropolitan Bank and Trust Company (hereinafter referred to as
METROBANK) in the sum of P700,000.00 (Original Records, p. 333). To secure
the aforementioned credit accommodations Norberto Uy and Jacinto Uy Dio
executed separate Continuing Suretyships (Exhibits "E" and "F" respectively),
dated 25 February 1977, in favor of the latter. Under the aforesaid agreements,
Norberto Uy agreed to pay METROBANK any indebtedness of UTEFS up to the
aggregate sum of P300,000.00 while Jacinto Uy Dio agreed to be bound up to
the aggregate sum of P800,000.00.
Having paid the obligation under the above letter of credit in 1977, UTEFS,
through Uy Tiam, obtained another credit accommodation from METROBANK in
1978, which credit accommodation was fully settled before an irrevocable letter
of credit was applied for and obtained by the abovementioned business entity in
1979 (September 8, 1987, tsn, pp. 14-15).
The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the
sum of P815, 600.00, covered UTEFS' purchase of "8,000 Bags Planters Urea
and 4,000 Bags Planters 21-0-0." It was applied for and obtain by UTEFS without
the participation of Norberto Uy and Jacinto Uy Dio as they did not sign the
document denominated as "Commercial Letter of Credit and Application." Also,
they were not asked to execute any suretyship to guarantee its payment. Neither
did METROBANK nor UTEFS inform them that the 1979 Letter of Credit has
been opened and the Continuing Suretyships separately executed in February,
1977 shall guarantee its payment (Appellees brief, pp. 2-3; rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid
Planters Products the amount of P815,600.00 which payment was covered by a
Bill of Exchange (Exhibit "C"), dated 4 June 1979, in favor of (Original Records,
p. 331).
Pursuant to the above commercial transaction, UTEFS executed and delivered to
METROBANK and Trust Receipt (Exh. "D"), dated 4 June 1979, whereby the
former acknowledged receipt in trust from the latter of the aforementioned goods
from Planters Products which amounted to P815, 600.00. Being the entrusted,

Answering one of the demand letters, Dio, thru counsel, denied his liability for
the amount demanded and requested METROBANK to send him copies of
documents showing the source of his liability. In its reply, the bank informed him
that the source of his liability is the Continuing Suretyship which he executed on
February 25, 1977.
As a rejoinder, Dio maintained that he cannot be held liable for the 1979 credit
accommodation because it is a new obligation contracted without his
participation. Besides, the 1977 credit accommodation which he guaranteed has
been fully paid.
Having sent the last demand letter to UTEFS, Dio and Uy and finding resort to
extrajudicial remedies to be futile, METROBANK filed a complaint for collection of
a sum of money (P613,339.32, as of January 31, 1982, inclusive of interest,
commission penalty and bank charges) with a prayer for the issuance of a writ of
preliminary attachment, against Uy Tiam, representative of UTEFS and
impleaded Dio and Uy as parties-defendants.
The court issued an order, dated 29 July 1983, granting the attachment writ,
which writ was returned unserved and unsatisfied as defendant Uy Tiam was
nowhere to be found at his given address and his commercial enterprise was
already non-operational (Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Dio (sureties-defendant herein)
filed a motion to dismiss the complaint on the ground of lack of cause of action.
They maintained that the obligation which they guaranteed in 1977 has been
extinguished since it has already been paid in the same year. Accordingly, the
Continuing Suretyships executed in 1977 cannot be availed of to secure Uy
Tiam's Letter of Credit obtained in 1979 because a guaranty cannot exist without
a valid obligation. It was further argued that they can not be held liable for the
obligation contracted in 1979 because they are not privies thereto as it was
contracted without their participation (Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to the motion to dismiss.
Invoking the terms and conditions embodied in the comprehensive suretyships
separately executed by sureties-defendants, the bank argued that suretiesmovants bound themselves as solidary obligors of defendant Uy Tiam to both
existing obligations and future ones. It relied on Article 2053 of the new Civil
Code which provides: "A guaranty may also be given as security for future debts,
the amount of which is not yet known; . . . ." It was further asserted that the
agreement was in full force and effect at the time the letter of credit was obtained
in 1979 as sureties-defendants did not exercise their right to revoke it by giving
notice to the bank. (Ibid., pp. 51-54).
Meanwhile, the resolution of the aforecited motion to dismiss was held in
abeyance pending the introduction of evidence by the parties as per order dated
February 21, 1986 (Ibid., p. 71).

Having been granted a period of fifteen (15) days from receipt of the order dated
March 7, 1986 within which to file the answer, sureties-defendants filed their
responsive pleading which merely rehashed the arguments in their motion to
dismiss and maintained that they are entitled to the benefit of excussion (Original
Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the complaint against
defendant Uy Tiam on the ground that it has no information as to the heirs or
legal representatives of the latter who died sometime in December, 1986, which
motion was granted on the following day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion of which reads:
The evidence and the pleadings, thus, pose the querry (sic):
Are the defendants Jacinto Uy Dioand Norberto Uy liable
for the obligation contracted by Uy Tiam under the Letter
of Credit (Exh. B) issued on March 30, 1987 by virtue of
the Continuing Suretyships they executed on February
25, 1977?
Under the admitted proven facts, the Court finds that they
are not.
a) When Uy and Dio executed the continuing
suretyships, exhibits E and F, on February 25, 1977, Uy
Tiam was obligated to the plaintiff in the amount of
P700,000.00 and this was the obligation which both
obligation which both defendants guaranteed to pay. Uy
Tiam paid this 1977 obligation and such payment
extinguished the obligation they assumed as
guarantors/sureties.
b) The 1979 Letter of Credit (Exh. B) is different from the
1977 Letter of Credit which covered the 1977 account of
Uy Tiam. Thus, the obligation under either is apart and
distinct from the obligation created in the other as
evidenced by the fact that Uy Tiam had to apply anew for
the 1979 transaction (Exh. A). And Dio and Uy, being
strangers thereto, cannot be answerable thereunder.
c) The plaintiff did not serve notice to the defendants Dio
and Uy when it extended to Credit at least to inform
them that the continuing suretyships they executed on
February 25, 1977 will be considered by the plaintiff to
secure the 1979 transaction of Uy Tiam.
d) There is no sufficient and credible showing that Dio
and Uy were fully informed of the import of the Continuing
Suretyships when they affixed their signatures thereon
that they are thereby securing all future obligations which
Uy Tiam may contract the plaintiff. On the contrary, Dio
and Uy categorically testified that they signed the blank
forms in the office of Uy Tiam at 623 Asuncion Street,
Binondo, Manila, in obedience to the instruction of Uy
Tiam, their former employer. They denied having gone to
the office of the plaintiff to subscribe to the documents

(October 1, 1987, tsn, pp. 5-7, 14; October 15, 1987, tsn,
pp. 3-8, 13-16). (Records, pp. 333-334). 3
xxx xxx xxx
In its Decision, the trial court decreed as follows:
PREMISES CONSIDERED, judgment is hereby rendered:
a) dismissing the COMPLAINT against JACINTO UY DIO and NORBERTO UY;
b) ordering the plaintiff to pay to Dio and Uy the amount of P6,000.00 as
attorney's fees and expenses of litigation; and
c) denying all other claims of the parties for want of legal and/or factual basis.
SO ORDERED. (Records, p. 336)

From the said Decision, the private respondent appealed to the Court of Appeals. The case was
docketed as CA-G.R. CV No. 17724. In support thereof, it made the following assignment of errors in its
Brief:
I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND HOLDING
THAT DEFENDANTS-APPELLEES JACINTO UY DIO AND NORBERTO UY
ARE SOLIDARILY LIABLE TO PLAINTIFF-APPELLANT FOR THE OBLIGATION
OF DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT ISSUED ON
MARCH 30, 1979 BY VIRTUE OF THE CONTINUING SURETYSHIPS THEY
EXECUTED ON FEBRUARY 25, 1977.
II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT
IS ANSWERABLE TO DEFENDANTS-APPELLEES JACINTO UY DIO AND
NORBERTO UY FOR ATTORNEY'S FEES AND EXPENSES OF LITIGATION. 5
On 22 June 1989, public respondent promulgated the assailed Decision the dispositive portion of which
reads:
WHEREFORE, premises considered, the judgment appealed from is hereby
REVERSED AND SET, ASIDE. In lieu thereof, another one is rendered:
1) Ordering sureties-appellees Jacinto Uy Dio and
Norberto Uy to pay, jointly and severally, to appellant
METROBANK the amount of P2,397,883.68 which
represents the amount due as of July 17, 1987 inclusive
of principal, interest and charges;
2) Ordering sureties-appellees Jacinto Uy Dio and
Norberto Uy to pay, jointly and severally, appellant
METROBANK the accruing interest, fees and charges
thereon from July 18, 1987 until the whole monetary
obligation is paid; and

3) Ordering sureties-appellees Jacinto Uy Dio and

Norberto Uy to pay, jointly and severally, to plaintiff
P20,000.00 as attorney's fees.
With costs against appellees.

1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam
to METROBANK by virtue of the Continuing Suretyship Agreements they
separately signed in 1977; and
2. On the assumption that they are, what is the extent of their liabilities for said
1979 obligations.

SO ORDERED. 6
In ruling for the herein private respondent (hereinafter METROBANK), public respondent held that the
Continuing Suretyship Agreements separately executed by the petitioners in 1977 were intended to
guarantee payment of Uy Tiam's outstanding as well as future obligations; each suretyship arrangement
was intended to remain in full force and effect until METROBANK would have been notified of its
revocation. Since no such notice was given by the petitioners, the suretyships are deemed outstanding
and hence, cover even the 1979 letter of credit issued by METROBANK in favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing Decision. They questioned the public respondent's
construction of the suretyship agreements and its ruling with respect to the extent of their liability
thereunder. They argued the even if the agreements were in full force and effect when METROBANK
granted Uy Tiam's application for a letter of credit in 1979, the public respondent nonetheless seriously
erred in holding them liable for an amount over and above their respective face values.
In its Resolution of 21 August 1989, public respondent denied the motion:
. . . considering that the issues raised were substantially the same grounds
utilized by the lower court in rendering judgment for defendants-appellees which
We upon appeal found and resolved to be untenable, thereby reversing and
setting aside said judgment and rendering another in favor of plaintiff, and no
new or fresh issues have been posited to justify reversal of Our decision herein, .
. . .7
Hence, the instant petition which hinges on the issue of whether or not the petitioners may be held liable
as sureties for the obligation contracted by Uy Tiam with METROBANK on 30 May 1979 under and by
virtue of the Continuing Suretyship Agreements signed on 25 February 1977.
Petitioners vehemently deny such liability on the ground that the Continuing Suretyship Agreements
were automatically extinguished upon payment of the principal obligation secured thereby, i.e., the letter
of credit obtained by Uy Tiam in 1977. They further claim that they were not advised by either
METROBANK or Uy Tiam that the Continuing Suretyship Agreements would stand as security for the
1979 obligation. Moreover, it is posited that to extend the application of such agreements to the 1979
obligation would amount to a violation of Article 2052 of the Civil Code which expressly provides that a
guaranty cannot exist without a valid obligation. Petitioners further argue that even granting, for the sake
of argument, that the Continuing Suretyship Agreements still subsisted and thereby also secured the
1979 obligations incurred by Uy Tiam, they cannot be held liable for more than what they guaranteed to
pay because it s axiomatic that the obligations of a surety cannot extend beyond what is stipulated in the
agreement.
On 12 February 1990, this Court resolved to give due course to the petition after considering the
allegations, issues and arguments adduced therein, the Comment thereon by the private respondent
and the Reply thereto by the petitioners; the parties were required to submit their respective
Memoranda.
The issues presented for determination are quite simple:

Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may
not known at the time the guaranty is
executed. 8 This is the basis for contracts denominated as continuing guaranty or suretyship. A
continuing guaranty is one which is not limited to a single transaction, but which contemplates a future
course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is
prospective in its operation and is generally intended to provide security with respect to future
transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue,
the guarantor becomes liable. 9 Otherwise stated, a continuing guaranty is one which covers all
transactions, including those arising in the future, which are within the description or contemplation of
the contract, of guaranty, until the expiration or termination thereof. 10 A guaranty shall be construed as
continuing when by the terms thereof it is evident that the object is to give a standing credit to the
principal debtor to be used from time to time either indefinitely or until a certain period, especially if the
right to recall the guaranty is expressly reserved. Hence, where the contract of guaranty states that the
same is to secure advances to be made "from time to time" the guaranty will be construed to be a
continuing one. 11
In other jurisdictions, it has been held that the use of particular words and expressions such as payment
of "any debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or
money to be furnished the principal debtor "at any time," or "on such time" that the principal debtor may
require, have been construed to indicate a continuing guaranty. 12
In the case at bar, the pertinent portion of paragraph I of the suretyship agreement executed by
petitioner Uy provides thus:
I. For and in consideration of any existing indebtedness to the BANK of UY TIAM
(hereinafter called the "Borrower"), for the payment of which the SURETY is now
obligated to the BANK, either as guarantor or otherwise, and/or in order to induce
the BANK, in its discretion, at any time or from time to time hereafter, to make
loans or advances or to extend credit in any other manner to, or at the request,
or for the account of the Borrower, either with or without security, and/or to
purchase or discount, or to make any loans or advances evidence or secured by
any notes, bills, receivables, drafts, acceptances, checks, or other instruments or
evidences of indebtedness (all hereinafter called "instruments") upon which the
Borrower is or may become liable as maker, endorser, acceptor, or otherwise,
the SURETY agrees to guarantee, and does hereby guarantee, the punctual
payment at maturity to the loans, advances credits and/or other obligations
hereinbefore referred to, and also any and all other indebtedness of every kind
which is now or may hereafter become due or owing to the BANK by the
Borrower, together with any and all expenses which may be incurred by the
BANK in collecting all or any such instruments or other indebtedness or
obligations herein before referred to, and/or in enforcing any rights hereunder,
and the SURETY also agrees that the BANK may make or cause any and all
such payments to be made strictly in accordance with the terms and provisions of
any agreement(s) express or implied, which has (have) been or may hereafter be
made or entered into by the Borrow in reference thereto, regardless of any law,
regulation or decree, unless the same is mandatory and non-waivable in
character, nor or hereafter in effect, which might in any manner affect any of the
terms or provisions of any such agreement(s) or the Bank's rights with respect
thereto as against the Borrower, or cause or permit to be invoked any alteration
in the time, amount or manner of payment by the Borrower of any such
instruments, obligations or indebtedness; provided, however, that the liability of
the SURETY hereunder shall not exceed at any one time the aggregate principal

sum of PESOS: THREE HUNDRED THOUSAND ONLY (P300,000.00)

(irrespective of the currenc(ies) in which the obligations hereby guaranteed are
payable), and such interest as may accrue thereon either before or after any
maturity(ies) thereof and such expenses as may be incurred by the BANK as
referred to above. 13
Paragraph I of the Continuing Suretyship Agreement executed by petitioner Dio contains identical
provisions except with respect to the guaranteed aggregate principal amount which is EIGHT
THOUSAND PESOS (P800,000.00). 14
Paragraph IV of both agreements stipulate that:
VI. This is a continuing guaranty and shall remain in full force and effect until
written notice shall have been received by the BANK that it has been revoked by
the SURETY, but any such notice shall not release the SURETY, from any liability
as to any instruments, loans, advances or other obligations hereby guaranteed,
which may be held by the BANK, or in which the BANK may have any interest at
the time of the receipt (sic) of such notice. No act or omission of any kind on the
BANK'S part in the premises shall in any event affect or impair this guaranty, nor
shall same (sic) be affected by any change which may arise by reason of the
death of the SURETY, or of any partner(s) of the SURETY, or of the Borrower, or
of the accession to any such partnership of any one or more new partners. 15
The foregoing stipulations unequivocally reveal that the suretyship agreement in the case at bar are
continuing in nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they
denied the fact that they had not revoked the suretyship agreements. Accordingly, as correctly held by
the public respondent:
Undoubtedly, the purpose of the execution of the Continuing Suretyships was to
induce appellant to grant any application for credit accommodation (letter of
credit/trust receipt) UTEFS may desire to obtain from appellant bank. By its
terms, each suretyship is a continuing one which shall remain in full force and
effect until the bank is notified of its revocation.
xxx xxx xxx
When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from
appellant bank, for the purpose of obtaining goods (covered by a trust receipt)
from Planters Products, the continuing suretyships were in full force and effect.
Hence, even if sureties-appellees did not sign the "Commercial Letter of Credit
and Application, they are still liable as the credit accommodation (letter of
credit/trust receipt) was covered by the said suretyships. What makes them liable
thereunder is the condition which provides that the Borrower "is or may become
liable as maker, endorser, acceptor or otherwise." And since UTEFS which (sic)
was liable as principal obligor for having failed to fulfill the obligatory stipulations
in the trust receipt, they as insurers of its obligation, are liable thereunder. 16
Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made applicable
to the 1979 obligation because the latter was not yet in existence when the agreements were executed
in 1977; under Article 2052 of the Civil Code, a guaranty "cannot exist without a valid obligation." We
cannot agree. First of all, the succeeding article provides that "[a] guaranty may also be given as security
for future debts, the amount of which is not yet known." Secondly, Article 2052 speaks about a valid
obligation, as distinguished from a void obligation, and not an existing or current obligation. This
distinction is made clearer in the second paragraph of Article 2052 which reads:
Nevertheless, a guaranty may be constituted to guarantee the performance of a
voidable or an unenforceable contract. It may also guarantee a natural obligation.

As to the amount of their liability under the Continuing Suretyship Agreements, petitioners contend that
the public respondent gravely erred in finding them liable for more than the amount specified in their
respective agreements, to wit: (a) P800,000.00 for petitioner Dio and (b) P300,000.00 for petitioner Uy.
The limit of the petitioners respective liabilities must be determined from the suretyship agreement each
had signed. It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye,
and the rule is settled that the obligation of the surety cannot be extended by implication beyond its
specified limits. To the extent, and in the manner, and under the circumstances pointed out in his
obligation, he is bound, and no farther.17
Indeed, the Continuing Suretyship Agreements signed by petitioner Dio and petitioner Uy fix the
aggregate amount of their liability, at any given time, at P800,000.00 and P300,000.00, respectively. The
law is clear that a guarantor may bond himself for less, but not for more than the principal debtor, both
as regards the amount and the onerous nature of the conditions. 18 In the case at bar, both agreements
provide for liability for interest and expenses, to wit:
. . . and such interest as may accrue thereon either before or after any
maturity(ies) thereof and such expenses as may be incurred by the BANK
referred to above. 19
They further provide that:
In the event of judicial proceedings being instituted by the BANK against the
SURETY to enforce any of the terms and conditions of this undertaking, the
SURETY further agrees to pay the BANK a reasonable compensation for and as
attorney's fees and costs of collection, which shall not in any event be less than
ten per cent (10%) of the amount due (the same to be due and payable
irrespective of whether the case is settled judicially or extrajudicially). 20
Thus, by express mandate of the Continuing Suretyship Agreements which they had signed,
petitioners separately bound themselves to pay interest, expenses, attorney's fees and costs.
The last two items are pegged at not less than ten percent (10%) of the amount due.
Even without such stipulations, the petitioners would, nevertheless, be liable for the interest and judicial
costs. Article 2055 of the Civil Code provides: 21
Art. 2055. A guaranty is not presumed; it must be express and cannot extend to
more than what is stipulated therein.
If it be simple or indefinite, it shall comprise not only the principal obligation, but
also all its accessories, including the judicial costs, provided with respect to the
latter, that the guarantor shall only be liable for those costs incurred after he has
been judicially required to pay.
Interest and damages are included in the term accessories. However, such interest should
run only from the date when the complaint was filed in court. Even attorney's fees may be
imposed whenever appropriate, pursuant to Article 2208 of the Civil Code. Thus, in Plaridel
Surety & Insurance Co., Inc. vs.P.L. Galang Machinery Co., Inc., 22 this Court held:
Petitioner objects to the payment of interest and attorney's fees because: (1) they
were not mentioned in the bond; and (2) the surety would become liable for more
than the amount stated in the contract of suretyship.
xxx xxx xxx

The objection has to be overruled, because as far back as the year 1922 this
Court held in Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on a
suretyship bond may recover from the surety as part of their damages, interest at
the legal rate even if the surety would thereby become liable to pay more than
the total amount stipulated in the bond. The theory is that interest is allowed only
by way of damages for delay upon the part of the sureties in making payment
after they should have done so. In some states, the interest has been charged
from the date of the interest has been charged from the date of the judgment of
the appellate court. In this jurisdiction, we rather prefer to follow the general
practice, which is to order that interest begin to run from the date when the
complaint was filed in court, . . .
Such theory aligned with sec. 510 of the Code of Civil Procedure which was
subsequently recognized in the Rules of Court (Rule 53, section 6) and with
Article 1108 of the Civil Code (now Art. 2209 of the New Civil Code).

WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged decision has to be
modified with respect to the extend of petitioners' liability. As modified, petitioners JACINTO UY DIO
and NORBERTO UY are hereby declared liable for and are ordered to pay, up to the maximum limit only
of their respective Continuing Suretyship Agreement, the remaining unpaid balance of the principal
obligation of UY TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under Irrevocable Letter of
Credit No. SN-Loc-309, dated 30 March 1979, together with the interest due thereon at the legal rate
commencing from the date of the filing of the complaint in Civil Case No. 82-9303 with Branch 45 of the
Regional Trial Court of Manila, as well as the adjudged attorney's fees and costs.
All other dispositions in the dispositive portion of the challenged decision not inconsistent with the above
are affirmed.
SO ORDERED.

In other words the surety is made to pay interest, not by reason of the contract,
but by reason of its failure to pay when demanded and for having compelled the
plaintiff to resort to the courts to obtain payment. It should be observed that
interest does not run from the time the obligation became due, but from
the filing of the complaint.
As to attorney's fees. Before the enactment of the New Civil Code, successful
litigants could not recover attorney's fees as part of the damages they suffered by
reason of the litigation. Even if the party paid thousands of pesos to his lawyers,
he could not charge the amount to his opponent (Tan Ti vs. Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of attorney's fees in eleven cases
enumerated in Article 2208, among them, "where the court deems it just and
equitable that attorney's (sic) fees and expenses of litigation should be
recovered" or "when the defendant acted in gross and evident bad faith in
refusing to satisfy the plaintiff's plainly valid, just and demandable claim." This
gives the courts discretion in apportioning attorney's fees.
The records do not reveal the exact amount of the unpaid portion of the principal obligation of Uy Tiam to
MERTOBANK under Irrevocable Letter of Credit No. SN-Loc-309 dated 30 March 1979. In referring to
the last demand letter to Mr. Uy Tiam and the complaint filed in Civil Case No. 82-9303, the public
respondent mentions the amount of "P613,339.32, as of January 31, 1982, inclusive of interest
commission penalty and bank charges."23 This is the same amount stated by METROBANK in its
Memorandum. 24 However, in summarizing Uy Tiam's outstanding obligation as of 17 July 1987, public
respondent states:
Hence, they are jointly and severally liable to appellant METROBANK of UTEFS'
outstanding obligation in the sum of P2,397,883.68 (as of July 17, 1987)
P651,092.82 representing the principal amount, P825,133.54, for past due
interest (5-31-82 to 7-17-87) and P921,657.32, for penalty charges at 12% per
annum (5-31-82 to 7-17-87) as shown in the Statement of Account (Exhibit I). 25
Since the complaint was filed on 18 May 1982, it is obvious that on that date, the outstanding
principal obligation of Uy Tiam, secured by the petitioners' Continuing Suretyship
Agreements, was less than P613,339.32. Such amount may be fully covered by the
Continuing Suretyship Agreement executed by petitioner Dio which stipulates an aggregate
principal sum of not exceeding P800,000.00, and partly covered by that of petitioner Uy
which pegs his maximum liability at P300,000.00.
Consequently, the judgment of the public respondent shall have to be modified to conform to the
foregoing exposition, to which extent the instant petition is impressed with partial merit.

G.R. No. 80078 May 18, 1993

ATOK FINANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B.
ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, respondents.
Syquia Law Offices for petitioner.
Batino, Angala, Allaga & Zara Law Offices for private respondents.

FELICIANO, J.:
Atok Finance Corporation ("Atok Finance") asks us to review and set aside the Decision of the Court of
Appeals which reversed a decision of the trial court ordering private respondents to pay jointly and
severally to petitioner Atok Finance certain sums of money.
On 27 July 1979, private respondents Sanyu Chemical corporation ("Sanyu Chemical") as principal and
Sanyu Trading Corporation ("Sanyu Trading") along with individual private stockholders of Sanyu
Chemical, namely, private respondent spouses Danilo E. Halili and Pablico Bermundo as sureties,
executed in the continuing Suretyship Agreement in favor of Atok Finance as creditor. Under this

Agreement, Sanyu Trading and the individual private respondents who were officers and stockholders of
Sanyu Chemical did:
(1) For valuable and/or other consideration . . ., jointly and severally
unconditionally guarantee to ATOK FINANCE CORPORATION (hereinafter called
Creditor), the full, faithful and prompt payment and discharge of any and all
indebtedness of [Sanyu Chemical] . . . (hereinafter called Principal) to the
Creditor. The word "indebtedness" is used herein in its most comprehensive
sense and includes any and all advances, debts, obligations and liabilities of
Principal or any one or more of them,here[to]fore, now or hereafter made,
incurred or created, whether voluntary or involuntary andhowever arising,
whether direct or acquired by the Creditor by assignment or succession, whether
due or not due, absolute or contingent, liquidated or unliquidated, determined or
undetermined and whether the Principal may be may be liable individually of
jointly with others, or whether recovery upon such indebtedness may be or
hereafter become barred by any statute of limitations, or whether such
indebtedness may be or otherwise become unenforceable. 1 (Emphasis supplied)
Other relevant provisions of the Continuing Suretyship Agreement follow:
(2) This is a continuing suretyship relating to any indebtedness, including that
arising under successive transactions which shall either continue the
indebtedness from time to time or renew it after it has been satisfied. This
suretyship is binding upon the heirs, successors, executors, administrators and
assigns of the surety, and the benefits hereof shall extend to and include the
successors and assigns of the Creditor.
(3) The obligations hereunder are joint and several and independent of the
obligations of the Principal. A separate action or actions may be prosecuted
against the Principal and whether or not the Principal be joined in any such
action or actions.
xxx xxx xxx.
(6) In addition to liens upon, and rights of set-off against the moneys, securities
or other property of the Surety given to the Creditor by law, the Creditor shall
have the lien upon and a right of self-off against all moneys, securities, and other
property of the Surety now and hereafter in the possession of the Creditor; and
every such lien or right of self-off may be exercised without need of demands
upon or notice to the Surety. No lien or right of set-off shall be deemed to have
been waived by any act, omission or conduct on the part of the Creditor, or by
any neglect to exercise such right of set-off or to enforce such lien, or by any
delay in so doing, and every right of set-off or lien shall continue in full force and
effect until such right of set-off of lien is specifically waived or released by an
instrument in writing executed by the Creditor.
(7) Any indebtedness of the Principal now or hereafter held by the Surety is
hereby subordinated to the indebtedness of the Principal to the Creditor; and if
the Creditor so requests, such indebtedness of the Principal of the Surety shall
be collected, enforced and shall be paid over to the Creditor and shall be paid
over to the Creditor and shall be paid over to the Creditor on account of the
indebtedness of the Principal to the Creditor but without reducing or affecting in
any manner the liability of the Surety under the provisions of this suretyship.
xxx xxx xxx 2
(Emphases supplied)

On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding as of 27 November
1981 with a total face value of P125,871.00, to Atok Finance in consideration of receipt from Atok
Finance of the amount of P105,000.00. The assigned receivables carried a standard term of thirty (30)
days; it appeared, however, that the standard commercial practice was to grant an extension up to one
hundred twenty (120) days without penalties. The relevant portions of this Deed of Assignment read as
follows:
1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL, TRANSFER and
ASSIGN all his/its rights, title and interest in the contracts, receivables, accounts,
notes, leases, deeds of sale with reservation of title, invoices, mortgages,
checks, negotiable instruments and evidences of indebtedness listed in the
schedule forming part hereinafter called "Contract" or "Contracts."
2. To induce the ASSIGNEE to purchase the above Contracts, the ASSIGNOR
does hereby certify,warrant and represent that :
(a). He/It is the sole owner of the
assigned Contracts free and clear
of claims of any other party except
the herein ASSIGNEE and has the
right to transfer absolute title
thereto the ASSIGNEE;
(b). Each assigned Contract is
bonafide and the amount owing
and to become due on each
contract is correctly stated upon
the schedule or other evidences of
the Contract delivered pursuant
thereto;
(c). Each assigned Contract arises
out of the sale of merchandise/s
which had been delivered and/or
services which have been
rendered and none of the Contract
is now, nor will at any time
become, contingent upon the
fulfillment of any contract or
condition whatsoever, or subject to
any defense, offset or
counterclaim;
(d). No assigned Contract is
represented by any note or other
evidence of indebtness or other
security document except such as
may have been endorsed,
assigned and delivered by the
ASSIGNOR to the ASSIGNEE
simultaneously with the
assignment of such Contract;
(e). No agreement has been
made, or will be made, with any
debtor for any deduction discount
or return of merchandise, except
as may be specifically noted at the

time of the assignment of the

Contract;
(f). None of the terms or provisions
of the assigned Contracts have
been amended, modified or
waived;
(g). The debtor/s under the
assigned Contract/s are solvent
and his/its/their failure to pay the
assigned Contracts and/or any
installment thereon upon maturity
thereof shall be conclusively
considered as a violation of this
warranty; and
(h). Each assigned Contract is a
valid obligation of the buyer of the
merchandise and/or service
rendered under the Contract And
that no Contract is overdue.
The foregoing warranties and representations are in addition to those provided
for in the Negotiable Instruments Law and other applicable laws. Any violation
thereof shall render the ASSIGNOR immediately and unconditionally liable to pay
the ASSIGNEE jointly and severally with the debtors under the assigned
contracts, the amounts due thereon.

At the trial, Sanyu Chemical and the individual private respondents failed to present any evidence on
their behalf, although the individual private respondents submitted a memorandum in support of their
argument. After trial, on 1 April 1985, the trial court rendered a decision in favor of Atok Finance. The
dispositive portion of this decision reads as follows:
ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff ATOK
FINANCE CORPORATION; and against the defendants SANYU CHEMICAL
CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO
BERMUNDO and LEOPOLDO HALILI, ordering the said defendants, jointly and
severally, to pay the plaintiff:
(1) P120,240.00 plus P0.03 for each peso for each month from September 1,
1983 until the whole amount is fully paid;
(2) P50,000.00 as attorney's fees; and
(3) To pay the costs.
SO ORDERED. 4
Private respondents went on appeal before the then Intermediate Appellate Court ("IAC"), and the
appeal was there docketed as AC-G.R. No. 07005-CV. The case was raffled to the Third Civil Cases
Division of the IAC. In a resolution dated 21 March 1986, that Division dismissed the appeal upon the
ground of abandonment, since the private respondents had failed to file their appeal brief
notwithstanding receipt of the notice to do so. On 4 June 1986, entry of judgment was made by the Clerk
of Court of the IAC. Accordingly, Atok Finance went before the trial court and sought a writ of execution
to enforce the decision of the trial court of 1 April 1985. The trial court issued a writ of execution on 23
July 1986. 5 Petitioner alleged that the writ of execution was served on private respondents. 6

xxx xxx xxx

4. The ASSIGNOR shall without compensation or cost, collect and receive in trust
for the ASSIGNEE all payments made upon the assigned contracts and shall
remit to the ASSIGNEE all collections on the said Contracts as follows :
P5,450.00 due on January 2, 1982 on every 15th day
(semi-monthly) until November 1, 1982.
P110,550.00 balloon payment after 12
months. 3 (Emphasis supplied)
Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance with a total face
value of P100,378.45.
On 13 January 1984, Atok Finance commenced action against Sanyu Chemical, the Arrieta spouses,
Pablito Bermundo and Leopoldo Halili before the Regional Trial Court of Manila to collect the sum of
P120,240.00 plus penalty charges amounting to P0.03 for every peso due and payable for each month
starting from 1 September 1983. Atok Finance alleged that Sanyu Chemical had failed to collect and
remit the amount due under the trade receivables.
Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground
that such claim had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The
private respondents contended that the Continuing Suretyship Agreement, being an accessory contract,
was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due
to Atok Finance.

However, on 27 August 1986, private respondents filed a Petition for Relief from Judgment before the
Court of Appeals. This Petition was raffled off to the 15th Division of the Court of Appeals. In that
Petition, private respondents claimed that their failure to file their appeal brief was due to excusable
negligence, that is, that their previous counsel had entrusted the preparation and filing of the brief to one
of his associates, which associate, however, had unexpectedly resigned from the law firm without
returning the records of cases he had been handling, including the appeal of private respondents. Atok
Finance opposed the Petition for Relief arguing that no valid ground existed for setting aside the
resolution of the Third Division of the then IAC.
The 15th Division of the Court of Appeals nonetheless granted the Petition for Relief from Judgment "in
the paramount interest of justice," 7 set aside the resolution of the Third Civil Cases Division of the then
IAC, and gave private respondents a non-extendible period of fifteen (15) days within which to file their
appeal brief. Private respondents did file their appeal brief.
The 15th Division, on 18 August 1987, rendered a Decision on the merits of the appeal, and reversed
and set aside the decision of the trial court and entered a new judgment dismissing the complaint of Atok
Finance, ordering it to pay private respondents P3,000.00 as attorney's fees and to pay the costs.
Atok Finance moved to set aside the decision of the 15th Division of the Court of Appeals, inviting
attention to the resolution of the IAC's Third Civil Cases Division of 21 March 1986 originally dismissing
private respondent's appeal for abandonment thereof. In a resolution dated 18 August 1987, the 15th
Division denied Atok Finance's motion stating that it had granted the Petition for Relief from Judgment
and given private respondents herein fifteen (15) days within which to file an appeal brief, while Atok
Finance did not file an appellee's brief, and that its decision was arrived at "on the basis of appellant's
brief and the original records of the appeal case."

In the present Petition for Review, Atok Finance assigns the following as errors on the part of the Court
of Appeals in rendering its decision of 18 August 1987:
(1) that it had erred in ruling that a continuing suretyship agreement cannot be
effected to secure future debts;
(2) that it had erred in ruling that the continuing suretyship agreement was null
and void for lack of consideration without any evidence whatsoever [being]
adduced by private respondents;
(3) that it had erred in granting the Petition for Relief from Judgment while
execution proceedings [were] on-going on the trial court. 8 (Emphasis in the
original)
As a preliminary matter, we note that a Division of the Court of Appeals is co-equal with any other
Division of the same court. Accordingly, a Division of the Court of Appeals has no authority to consider
and grant a petition for relief from a judgment rendered by another Division of the same court. In the
case at bar, however, we must note that an intervening event had occurred between the resolution of 21
March 1986 of the Third Civil Cases Division of the IAC dismissing private respondents' appeal and the
30 September 1986 order of the 15th Division of the Court of Appeals granting the Petition for Relief
from Judgment. On 28 July 1986, the old Intermediate Appellate Court went out of existence and a new
court, the Court of Appeals, came into being, was organized and commenced functioning. 9 This event,
and the probability that some confusion may have accompanied the period of transition from the IAC to
the Court of Appeals, lead us to believe that the defect here involved should be disregarded as being of
secondary importance. At the same time, nothing in this decision should be read as impliedly holding
that a petition from relief judgment is available in respect of a decision rendered by the Court of Appeals;
this issue is best reserved for determination in some future cases where it shall have been adequately
argued by the parties.
We turn, therefore, to a consideration of the first substantive issue addressed by the Court of Appeals in
rendering its Decision on the merits of the appeal: whether the individual private respondents may be
held solidarily liable with Sanyu Chemical under the provisions of the Continuing Suretyship Agreement,
or whether that Agreement must be held null and void as having been executed without consideration
and without a pre-existing principal obligation to sustain it.

There is no proof that when the suretyship agreement was entered into, there
was a pre-existing obligation which served the principal obligation between the
parties. Furthermore, the "future debts" alluded to in Article 2053 refer to debts
already existing at the time of the constitution of the agreement but the amount
thereof is unknown, unlike in the case at bar where the obligation was acquired
two years after the agreement. 10 (Emphasis supplied).
We consider that the Court of Appeals here was in serious error. It is true that a serious guaranty or a
suretyship agreement is an accessory contract in the sense that it is entered into for the purpose of
securing the performance of another obligation which is denominated as the principal obligation. It is
also true that Article 2052 of the Civil Code states that "a guarantee cannot exist without a valid
obligation." This legal proposition is not, however, like most legal principles, to be read in an absolute
and literal manner and carried to the limit of its logic. This is clear from Article 2052 of the Civil Code
itself:
Art. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the performance of a
voidable or an unenforceable contract. It may also guaranty a natural obligation."
(Emphasis supplied).
Moreover, Article 2053 of the Civil Code states:
Art. 2053. 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. (Emphasis
supplied)
The Court of Appeals apparently overlooked our caselaw interpreting Articles 2052 and 2053 of the Civil
Code. InNational Rice and Corn Corporation (NARIC) v. Jose A. Fojas and Alto Surety Co., Inc., 11 the
private respondents assailed the decision of the trial court holding them liable under certain surety bonds
filed by private respondent Fojas and issued by private respondent Alto Surety Co. in favor of petitioner
NARIC, upon the ground that those surety bonds were null and void "there being no principal obligation
to be secured by said bonds." In affirming the decision of the trial court, this Court, speaking through Mr.
Justice J.B.L. Reyes, made short shrift of the private respondents' doctrinaire argument:

The Court of Appeals held on this first issue as follows:

It is the contention of private appellants that the suretyship agreement is null and
void because it is not in consonance with the laws on guaranty and security. The
said agreement was entered into by the parties two years before the Deed of
Assignment was executed. Thus, allegedly, it ran counter to the provision that
guaranty cannot exist independently because by nature it is merely an accessory
contract. The law on guaranty is applicable to surety to some extent Manila
Surety and Fidelity Co. v.Baxter Construction & Co., 53 O.G. 8836; and, Arran
v. Manila Fidelity & Surety Co., 53 O.G. 7247.
We find merit in this contention.
Although obligations arising from contracts have the force of law between the
contracting parties, (Article 1159 of the Civil Code) this does not mean that the
law is inferior to it; the terms of the contract could not be enforces if not valid. So,
even if, as in this case, the agreement was for acontinuing suretyship to include
obligations enumerated in paragraph 2 of the agreement, the same could not be
enforced. First, because this contract, just like guaranty, cannot exist without a
valid obligation (Art. 2052, Civil Code); and, second, although it may be given as
security for future debt(Art. 2053, C.C.), the obligation contemplated in the case
at bar cannot be considered "future debt" as envisioned by this law.

Under his third assignment of error, appellant Fojas questions the validity of the
additional bonds(Exhs. D and D-1) on the theory that when they were executed,
the principal obligation referred to in said bonds had not yet been entered into, as
no copy thereof was attached to the deeds of suretyship. This defense is
untenable, because in its complaint the NARIC averred, and the appellant did not
deny that these bonds were posted to secure the additional credit that Fojas has
applied for, and the credit increase over his original contract was sufficient
consideration for the bonds. That the latter were signed and filed before the
additional credit was extended by the NARIC is no ground for complaint. Article
1825 of the Civil Code of 1889, in force in 1948, expressly recognized that "a
guaranty may also be given as security for future debts the amount of which is
not yet known." (Emphasis supplied)
In Rizal Commercial Banking Corporation v. Arro, 12 the Court was confronted again with the same issue,
that is, whether private respondent was liable to pay a promissory note dated 29 April 1977 executed by
the principal debtor in the light of the provisions of a comprehensive surety agreement which petitioner
bank and the private respondent had earlier entered into on 19 October 1976. Under the comprehensive
surety agreement, the private respondents had bound themselves as solidary debtors of the Diacor
Corporation not only in respect of existing obligations but also in respect of future ones. In holding
private respondent surety (Residoro Chua) liable under the comprehensive surety agreement, the Court
said:

The surety agreement which was earlier signed by Enrique Go, Sr. and private
respondent, is an accessory obligation, it being dependent upon a principal one,
which, in this case is the loan obtained by Daicor as evidenced by a promissory
note. What obviously induced petitioner bank to grant the loan was the surety
agreement whereby Go and Chua bound themselves solidarily to guaranty the
punctual payment of the loan at maturity. By terms that are unequivocal, it can be
clearly seen thatthe surety agreement was executed to guarantee future debts
which Daicor may incur with petitioner, as is legally allowable under the Civil
Code. Thus
Article 2053. A guarantee 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. 13 (Emphasis supplied)
It is clear to us that the Rizal Commercial Banking Corporation and the NARIC cases rejected the
distinction which the Court of Appeals in the case at bar sought to make with respect to Article 2053, that
is, that the "future debts" referred to in that Article relate to "debts already existing at the time of the
constitution of the agreement but the amount [of which] is unknown," and not to debts not yet incurred
and existing at that time. Of course, a surety is not bound under any particular principal obligation until
that principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the
suretyship agreement itself is valid and binding even before the principal obligation intended to be
secured thereby is born, any more that there would be in saying that obligations which are subject to a
condition precedent are valid and binding before the occurrence of the condition precedent. 14
Comprehensive or continuing surety agreements are in fact quite commonm place in present day
financial and commercial practice. A bank or a financing company which anticipates entering into a
series of credit transactions with a particular company, commonly requires the projected principal debtor
to execute a continuing surety agreement along with its sureties. By executing such an agreement, the
principal places itself in a position to enter into the projected series of transactions with its creditor; with
such surety agreement, there would be no need to execute a separate surety contract or bond for each
financing or credit accommodation extended to the principal debtor. As we understand it, this is precisely
what happened in the case at bar.
We turn to the second substantive issue, that is, whether private respondents are liable under the Deed
of Assignment which they, along with the principal debtor Sanyu Chemical, executed in favor of
petitioner, on the receivables thereby assigned.
The contention of Sanyu Chemical was that Atok Finance had no cause of action under the Deed of
Assignment for the reason that Sanyu Chemical's warranty of the debtors' solvency had ceased. In
submitting this contention, Sanyu Chemical relied on Article 1629 of the Civil Code which reads as
follows:
Art. 1629. In case the assignor in good faith should have made himself
responsible for the solvency of the debtor, and the contracting parties should not
have agreed upon the duration of the liability, it shall last for one year only, from
the time of the assignment if the period had already expired.
If the credit should be payable within a term or period which has not yet expired,
the liability shall cease one year after maturity.
Once more, the Court of Appeals upheld the contention of private respondents and held that Sanyu
Chemical was free from liability under the Deed of Assignment. The Court of Appeals said:

. . . Article 1629 provides for the duration of assignor's warranty of debtor's

solvency depending on whether there was a period agreed upon for the
existence of such warranty, analyzing the law thus:
(1) if there is a period (or length of time) agreed upon, then for such period;
(2) if no period (or length of time) was agreed upon, then:
(a) one year from assignment if debt was due at the
time of the assignment
(b) one year from maturity if debt was not yet due at
the time of the assignment..
The debt referred to in this law is the debt under the assigned contract or the
original debts in favor of the assignor which were later assigned to the assignee.
The debt alluded to in the law, is not the debt incurred by the assignor to the
assignee as contended by the appellant.
Applying the said law to the case at bar, the records disclose that none of the
assigned receivables had matured on November 27, 1981 when the Deed of
Assignment was executed. The oldest debt then existing was that contracted on
November 3, 1981 and the latest was contracted on December 4, 1981.
Each of the invoices assigned to the assignee contained a term of 30 days
(Exhibits B-3-A to 5 and extended by the notation which appeared in the
"Schedule of Assigned Receivables" which states that the ". . . the terms stated
on our invoices were normally extended up to a period of 120 days
. . ." (Exhibit B-2). Considering the terms in the invoices plus the ordinary
practice of the company, thus, the assigned debts matured between April 3, 1982
to May 4, 1982. The assignor's warranty for debtor's warranty, in this case, would
then be from the maturity period up to April 3, 1983 or May 4, 1983 to cover all of
the receivables in the invoices.
The letter of demand executed by appellee was dated August 29, 1983 (Exhibit
D) and the complaint was filed on January 13, 1984. Both dates were beyond the
warranty period.
In effect, therefore, company-appellant was right when it claimed that appellee
had no cause of action against it or had lost its cause of
action. 15 (Emphasis supplied)

be conclusively considered as a violation of this warranty;

and . . .

PROMISSORY NOTE

The foregoing warranties and representations are in

addition to those provided for in the Negotiable
Instruments Law and other applicable laws. Any violation
thereof shall render the ASSIGNOR immediately and
unconditionally liable to pay the ASSIGNEE jointly and
severally with the debtors under the assigned contracts,
the amounts due thereon.

P5,000.00

xxx xxx xxx

Manila, January 4, 1957

(Emphasis supplied)
We, the Spouses ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, jointly and severally promise to pay the Magdalena
Estates, Inc., or order, at its offices in the City of Manila, without any demand the sum of FIVE THOUSAND PESOS (P5,000.00),
Philippine currency, with interest at the rate of Nine Per Cent 9% per annum, within sixty (60) days from January 7, 1957. The
sum of P5,000.00 represents the balance of the purchase price of the parcel of land known as Lot 7-K-2-G, Psd. 26193,
containing an area of 2,191 square meters, Quezon City.

(Sgd.)
Antonio A.
Rodriguez
(T)
ANTONIO A.
RODRIGUEZ
(Sgd.)
Herminia C.
Rodriguez
(T)
HERMINIA
C.
RODRIGUEZ

Signed in the Presence of:

(Sgd.) ILLEGIBLE
(Sgd.) ILLEGIBLE

Once again, however, we consider that the Court of Appeals was in reversible error in so concluding.
The relevant provision of the Deed of Assignment may be quoted again in this connection:
2. To induce the ASSIGNEE [Atok Finance] to purchase the above contracts, the ASSIGNOR [Sanyu
Chemical] does hereby certify, warrant and represent that . . .
(g) the debtor/s under the assigned contract/s are solvent
and his/its/their failure to pay the assigned contract/s
and/or any installment thereon upon maturity thereof shall

It may be stressed as a preliminary matter that the Deed of Assignment was valid and
binding upon Sanyu Chemical. Assignment of receivables is a commonplace
commercial transaction today. It is an activity or operation that permits the assignee to
monetize or realize the value of the receivables before the maturity thereof. In other
words, Sanyu Chemical received from Atok Finance the value of its trade receivables
it had assigned; Sanyu Chemical obviously benefitted from the assignment. The
payments due in the first instance from the trade debtors of Sanyu Chemical would
represent the return of the investment which Atok Finance had made when it paid
Sanyu Chemical the transfer value of such receivables.
Article 1629 of the Civil Code invoked by private respondents and accepted by the
Court of Appeals is not, in the case at bar, material. The liability of Sanyu Chemical to
Atok Finance rests not on the breach of the warranty of solvency; the liability of Sanyu
Chemical was not ex lege (ex Article 1629) but rather ex contractu. Under the Deed of
Assignment, the effect of non-payment by the original trade debtors was breach of
warranty of solvency by Sanyu Chemical, resulting in turn in the assumption of
solidary liability by the assignor under the receivables assigned. In other words, the
assignor Sanyu Chemical becomes a solidary debtor under the terms of the
receivables covered and transferred by virtue of the Deed of Assignment. And
because assignor Sanyu Chemical became, under the terms of the Deed of
Assignment, solidary obligor under each of the assigned receivables, the other private
respondents (the Arrieta spouses, Pablito Bermundo and Leopoldo Halili), became
solidarily liable for that obligation of Sanyu Chemical, by virtue of the operation of the
Continuing Suretyship Agreement. Put a little differently, the obligations of individual
private respondent officers and stockholders of Sanyu Chemical under the Continuing
Suretyship Agreement, were activated by the resulting obligations of Sanyu Chemical
as solidary obligor under each of the assigned receivables by virtue of the operation of
the Deed of Assignment. That solidary liability of Sanyu Chemical is not subject to the
limiting period set out in Article 1629 of the Civil Code.

It follows that at the time the original complaint was filed by Atok Finance in the trial
court, it had a valid and enforceable cause of action against Sanyu Chemical and the
other private respondents. We also agree with the Court of Appeals that the original
obligors under the receivables assigned to Atok Finance remain liable under the terms
of such receivables.
WHEREFORE, for all the foregoing, the Petition for Review is hereby GRANTED DUE COURSE, and
the Decision of the Court of Appeals dated 18 August 1987 and its Resolution dated 30 September 1987
are hereby REVERSED and SET ASIDE. A new judgment is hereby entered REINSTATING the Decision
of the trial court in Civil Case No. 84-22198 dated 1 April 1985, except only that, in the exercise of this
Court's discretionary authority equitably to mitigate the penalty clause attached to the Deed of
Assignment, that penalty is hereby reduced to eighteen percent (18%) per annum (instead of P0.03 for

every peso monthly [or 36% per annum]). As so modified, the Decision of the trial court is hereby
AFFIRMED. Costs against private respondents.
SO ORDERED.
G.R. No. L-18411

December 17, 1966

MAGDALENA ESTATES, INC., plaintiff-appellee,

vs.
ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, defendants-appellants.
Roxas and Sarmiento for plaintiff-appelle.
Somero, Baclig and Savello for defendants-appellants.
REGALA, J.:
Appeal from the decision of the Court of First Instance of Manila ordering the defendants-appellants to
pay jointly and severally to the plaintiff-appellee the sum of P655.89, plus legal interest thereon from
date of the judicial demand, the sum of P100.00 as attorney's fees, and to pay the costs.
The appellants bought from the appellee a parcel of land in Quezon City known as Lot 7-K-2-G, Psd26193. In view of an unpaid balance of P5,000.00 on account of the purchase price of the lot, the
appellants executed on January 4, 1957, the following promissory note representing the said account:
On the same date, the appellants and the Luzon Surety Co., Inc. executed a bond in favor of the
appellee, the undertaking thereof being embodied therein as follows:
. . . comply with the obligation to pay the amount of P5,000.00 representing balance of the
purchase price of a parcel of land known as Lot 7-K-2-G, Psd-26193, with an area of 2191
square meters, Quezon City, covered by Transfer Certificate of Title No. 13 (6947), Quezon
City, within a period of sixty (60) days from January 7, 1957; That the Surety shall be notified
in writing within Ten (10) days from moment of default otherwise, this undertaking is
automatically null and void.
On June 20, 1958, when the obligation of the appellants became due and demandable, the Luzon
Surety Co., Inc. paid to the appellee the sum of P5,000.00. Subsequently, the appellee demanded from
the appellants the payment of P655.89 corresponding to the alleged accumulated interests on the
principal of P5,000.00. Due to the refusal of the appellants to pay the said interest, the appellee started
this suit in the Municipal Court of Manila to enforce the collection thereof. The said court, on February 5,
1959, rendered judgment in favor of the appellee and against the appellants, ordering the latter to pay
jointly and severally the appellee the sum of P655.89 with interest thereon at the legal rate from
November 10, 1958, the date of the filing of the complaint, until the whole amount is fully paid. Not
satisfied with that judgment, appellants appealed to the Court of First Instance of Manila, where the case
was submitted for decision on the pleadings. The Court of First Instance of Manila rendered the
judgment stated at the outset of this decision.
On appeal directly to this Court, the following errors are assigned:
I. The lower court erred in concluding as a fact from the pleadings that the plaintiff-appellee
demanded, and the Luzon Surety Co., Inc. refused, the payment of interest in the amount of
P655.89, and in not finding and declaring that said plaintiff-appellee waived or condoned the
said interests.
II. The lower court erred in not finding and declaring that the obligation of the defendantsappellants in favor of the plaintiff-appellee was totally extinguished by payment and/or
condonation.

III. The lower court erred in not finding and declaring that the promissory note executed by
the defendants-appellants in favor of the plaintiff-appellee was, insofar as the said document
provided for the payment of interests, novated when the plaintiff-appellee unqualifiedly
accepted the surety bond which merely guaranteed payment of the principal in the sum of
P5,000.00.
Appellants claim that the pleadings do not show that there was demand made by the appellee for the
payment of accrued interest and what could be deduced therefrom was merely that the appellee
demanded from the Luzon Surety Co., Inc., in the capacity of the latter as surety, the payment of the
obligation of the appellants, and said appellee accepted unqualifiedly the amount of P5,000.00 as
performance by the obligor and/or obligors of the obligation in its favor. It is further claimed that the
unqualified acceptance of payment made by the Luzon Surety Co., Inc. of P5,000.00 or only the amount
of the principal obligation and without exercising its (appellee's) right to apply a portion of P655.89
thereof to the payment of the alleged interest due despite its presumed knowledge of its right to do so,
the appellee showed that it waived or condoned the interests due, because Articles 1235 and 1253 of
the Civil Code provide:
ART. 1235. When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with.
ART. 1253. If the debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been recovered.
We do not agree with the contention of the appellants. It is very clear in the promissory note that the
principal obligation is the balance of the purchase price of the parcel of land known as Lot 7-K-2-G, Psd26193, which is the sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc. undertook
"to pay the amount of P5,000.00 representing balance of the purchase price of a parcel of land known
as Lot 7-K-2-G, Psd-26193, . . . ." The appellee did not protest nor object when it accepted the payment
of P5,000.00 because it knew that that was the complete amount undertaken by the surety as appearing
in the contract. The liability of a surety is not extended, by implication, beyond the terms of his
contract.1 It is for the same reason that the appellee cannot apply a part of the P5,000.00 as payment for
the accrued interest. Appellants are relying on Article 1253 of the Civil Code, but the rules contained in
Articles 1252 to 1254 of the Civil Code apply to a person owing several debts of the same kind of a
single creditor. They cannot be made applicable to a person whose obligation as a mere surety is both
contingent and singular; his liability is confined to such obligation, and he is entitled to have all payments
made applied exclusively to said application and to no other.2 Besides, Article 1253 of the Civil Code is
merely directory, and not mandatory.3 Inasmuch as the appellee cannot protest for non-payment of the
interest when it accepted the amount of P5,000.00 from the Luzon Surety Co., Inc., nor apply a part of
that amount as payment for the interest, we cannot now say that there was a waiver or condonation on
the interest due.
It is claimed that there was a novation and/or modification of the obligation of the appellants in favor of
the appellee because the appellee accepted without reservation the subsequent agreement set forth in
the surety bond despite its failure to provide that it also guaranteed payment of accruing interest.
The rule is settled that novation by presumption has never been favored. To be sustained, it needs to be
established that the old and new contracts are incompatible in all points, or that the will to novate
appears by express agreement of the parties or in acts of similar import. 4
An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by
changing only the terms of payment and adding other obligations not incompatible with the old one, 5 or
wherein the old contract is merely supplemented by the new one. 6 The mere fact that the creditor
receives a guaranty or accepts payments from a third person who has agreed to assume the obligation,
when there is no agreement that the first debtor shall be released from responsibility does not constitute
a novation, and the creditor can still enforce the obligation against the original debtor. (Straight v. Haskel,
49 Phil. 614; Pacific Commercial Co. v. Sotto, 34 Phil. 237; Estate of Mota v. Serra, 47 Phil. 464; Dugo
v. Lopena, supra ). In the instant case, the surety bond is not a new and separate contract but an
accessory of the promissory note.

WHEREFORE, the judgment appealed from should be, as it is hereby, affirmed, with costs against the
appellants.

G.R. No. L-20980

November 29, 1965

PHILIPPINES INTERNATIONAL SURETY COMPANY, INC., petitioner,

vs.
COMMISSIONER OF CUSTOMS, respondent.
Tolentino, Garcia & D. R. Cruz for petitioner.
Office of the Solicitor General for respondent.
BENGZON, J.P., J.:
On August 17, 1955 the following cargoes:
87 bales of cotton textiles, Reg. No. 968, Entry No. 71545, series of 1955 valued at
US$33,000.00.
100 bales of cotton textiles, Reg. No. 968, Entry No. 71546, series of 1955 valued at
US$33,000.00.
arrived in the Port of Manila on board S/S "Henrik" from Tah Shun Company, Hongkong consigned to
Rosol Dry Goods. The cargoes were accompanied by bills of lading and commercial invoices but were
not covered by a consular invoice and Central Bank release certificate required by Central Bank
Circulars Nos. 44 and 45.
For want of a Central Bank release certificate the stated goods were subjected to seizure proceedings
under Seizure Identification Nos. 3811 and 3812 for violation of Central Bank Circulars Nos. 44 and 45 in
relation to Section 1363 (f) and 1250 of the Revised Administrative Code. 1 Meanwhile, said goods were
released from customs custody under bond with the Philippines International Surety Company, Inc. as
surety. On December 24, 1956 the Collector of Customs declared the 187 bales of cotton textiles subject
to seizure, decreed the bonds forfeited in favor of the Government and ordered Rosol Dry Goods and
Philippines International Surety Company, Inc., jointly and severally, to pay the sum of P247,952.15
representing the appraised value of the goods. Both claimant and surety appealed to the Commissioner
of Customs.
The Commissioner of Customs affirmed the decision of the Collector of Customs on December 11, 1959
and in due time Philippines International Surety Company, Inc. appealed to the Court of Tax Appeals.
Rosol Dry Goods, the claimant, did not appeal.
In the Court of Tax Appeals, the Commissioner of Customs moved to dismiss the appeal of Philippines
International Surety Company, Inc. on the ground that being a mere surety, the latter has no legal
capacity to file an appeal in the Court of Tax Appeals for it was not "adversely affected" by the appealed
decision within the contemplation of Section 11 of Republic Act 1125. The motion was granted and the
surety's petition for review was dismissed. Hence, this appeal by the Philippines International Surety
Company, Inc.
The issue is whether or not the surety of a claimant-consignee of an importation in a seizure proceeding
appeal from the decision of the Commissioner of Customs to the Court of Tax Appeals.
The pertinent law is the first paragraph of Section 11 of Republic Act 1125 which we quote hereunder:

SEC. 11. Who may appeal; effect of appeal. Any person, association or corporation
adversely affected by a decision or ruling of the Collector of Internal Revenue, the Collector
of Customs or any provincial or city Board of Assessment Appeals may file an appeal in the
Court of Tax Appeals within thirty days after the receipt of such decision or ruling. (Emphasis
supplied).
Any person, association or corporation adversely affected by a decision of the Commissioner of Internal
Revenue Commissioner of Customs and any provincial or city Board of Assessment Appeals may file an
appeal in the Court of Tax Appeals. In two previous decisions, we held that the city can appeal to the Tax
Court from the decision of the Board of Assessment Appeals for it stood to lose a yearly income
equivalent to the realty tax involved in the decision. 2 In this case, appellant has been declared
liable, jointly and severally with Rosol Dry Goods, for the payment of P247,952.15, which is, no doubt,
adverse to its proprietary and pecuniary interest.
It may be noteworthy to observe that the 187 bales of cotton textiles were released from customs
custody and in their place Rosol Dry Goods put up appellant's bonds. When the Collector of Customs,
therefore, ordered the seizure and forfeiture of the importation, it was the bonds, not the cotton textiles,
which were ordered confiscated. And, since appellant is the bondsman, it has to answer for the liability
by reason of the forfeiture. In this wise, appellant is just as adversely affected as the claimant/consignee.
Being a person pecuniarily affected adversely by the decision of the Commissioner of Customs, we find
no difficulty in seeing appellant's right to appeal from said decision in accordance with Section 11 of
Republic Act 1125 aforequoted. For, the law does not limit the right of appeal to an importer, consignee
or claimant of the importation subject of the seizure and forfeiture. Section 11 is worded in broad terms
and the Philippines International Surety Company, Inc. comes within its purview.
Moreover, if it was the intention of Congress to allow only the importer, consignee or claimant of the
goods to appeal to the Tax Court, it would have said so.
Furthermore, as aforestated the decision of the Commissioner of Customs ordered appellant, jointly and
severally with Rosol Dry Goods, to pay the sum of P247,952.15. If appellant were not allowed to appeal
from said decision to the courts of justice, we would be depriving it of its day in court and its property
without due process of law.
We are not unmindful of our decision in Philippine International Surety Company, Inc. v. Commissioner
of Customs.3 In said case, we ruled that since the surety failed to appeal from the decision of the
Collector of Customs, said decision became final and executory as against it. Consequently, it could not
be allowed to appeal from the decision of the Commissioner of Customs to the Court of Tax Appeals.
Said case, therefore, is not applicable here.
WHEREFORE, the resolution appealed from is hereby reversed and set aside. Let this case be
remanded to the Court of Tax Appeals for further proceedings. So ordered.

G.R. No. L-29588

December 29, 1928

STANDARD OIL CO. OF NEW YORK, plaintiff-appellant,

vs.
CHO SIONG, ET AL., defendants-appellees.
-----------------------------------G.R. No. L-29753

December 29, 1928

According to the above, excluding the debt of the former agent Tong Kuan, the only balance against the
defendant Cho Siong on his own contract of agency with the plaintiff is the sum of P64.46. Since the
plaintiff has the P1,000 belonging to the defendant Cho Siong, which may be applied to the payment of
the sums owed by the latter, it follows that, as to Cho Siong's agency, he has incurred no liabiliy, for out
of the P1,000 deposited with the plaintiff he still has P935.54 in his favor. Consequently, Ong Guan Can,
as a surety for those debts which Cho Siong might incur upon the contract of agency, does not answer
for anything, the principal not having incurred any liability. It is plain under the terms of the bond signed
by Ong Guan Can that he did not answer for Cho Siong, save for the latter's act by virtue of the contract
of agency. He cannot be held liable for the debt of agent Tong Kuan which Cho Siong assumed by virtue
of another contract of which said Ong Guan Can was not even aware. A contract of suretyship is to be
strictly interpreted and is not to be extended beyond its terms.

ONG GUAN CAN, plaintiff-appellant,

vs.
STANDARD OIL CO. OF NEW YORK, defendant-appellee.

The amount of P750 for attorney's fees and court costs, which Cho Siong bound himself to pay to the
plaintiff, was agreed upon in the contract of agency, and as Cho Siong did not incur any liability with
respect to this contract he cannot be ordered to pay this sum.

Powell and Hill for appellant in case No. 29588, and for appellee in case No. 29753.
Padilla, Trenas and Magalona for appellees in case No. 29588 and for appellant in case No. 29753.

In the instrument by which Cho Siong assumed the debt of the former agent, Tong Kuan, no stipulation
was made as to attorney's fees and as it is on this contract that Cho Siong failed to perform his obligaion
it is also clear that he is not liable for any amount as attorney's fees.

AVANCEA, C. J.:
These two case, 29588 and 29753 were jointly prosecuted in the court below and only one judgment
was rendered in both.
In case 29588, the plaintiff, Standard Oil Co. of New York, sued the defendants, Cho Siong and Ong
Guan Can, for the amount of P2,197.42, with interest, plus P750 as attorney's fees. The trial court
ordered the defendants Cho Siong and Ong Guan Can to pay the plaintiff the amount of P64.46, with
legal interest from the date when the complaint was filed until full payment, plus P200 by way of
attorney's fees; and defendant Cho Siong to pay the plaintiff the sum of P2,132.96, with legal interest
thereon from the date when the complaint was filed until fully paid, plus P500 as attorney's
fees.1awphi1.net
On January 27, 1926, the plaintiff and defendant Cho Siong entered into a contract whereby Cho Siong
obligated himself to sell as agent, plaintiff's petroleum products. He guaranteed the fulfilment of his
obligation by giving a personal bond in the sum of P3,000, subscribed by Ong Guan Can, and with the
sum of P1,000 in cash which he delivered to the plaintiff, with the right to apply it to the payment of any
amount in which he might become indebted. Cho Siong also bound himself to pay such attorney's fees,
costs, and other expenses, as might be occasioned the plaintiff should it be under the necessity of filing
suit for the recovery of any amount to which it might be entitled pursuant to this contract in a sum equal
to 10 per cent of the amount owed.
By virtue of this contract, Cho Siong received from the plaintiff petroleum to the value of P14,136.79, and
made good to said plaintiff the total amount of P14,027.33, thus leaving a balance of P64.46 in favor of
the plaintiff and against the defendant Cho Siong.
But it appears that on the same day (January 27, 1926), when the plaintiff and defendant Cho Siong
entered into the contract to agency and when the other defendant, Ong Guan Can subscribed the
P3,000 bond, the defendant Cho Siong signed an instrument in favor of the plaintiff in which he assumed
responsibility for all the accounts that might be owing to the plaintiff by the former agent, Tong Kuan, and
for all goods the latter might have in his possession at the time when the agency was transferred to Cho
Siong. According to the plaintiff's evidence, the amount then owed by Tong Kuan was P3,132.96. Adding
P64.46 to this amount, we have the total debt of P3,197.42. Deducting from this the P1,000 in cash
which Cho Siong deposited with the plaintiff to be applied upon his liabilities, it leaves a debit balance of
P2,197.42 which is the amount claimed in the complaint.

In view of the foregoing, the appealed judgment is modified as to case No. 29588 and the defendant
Cho Siong is ordered to pay the plaintiff the amount of P2,197.42 only, the other defendant Ong Guan
Can being relieved from all liability.
In case No. 29753 Ong Guan Can claims the sum of P15,000 from the Standard Oil Co., of New York. In
the former case No. 29588, the Standard Oil Co., of New York secured a preliminary attachmet against
Ong Guan Can, which was levied on some of his lands. This attachment consisted simply in the
annotation thereof in the transfer certificate of tile entered on November 17, 1927, which attachment was
dissolved and the annotation cancelled on the 19th of the same month. The attachment, therefore, only
lasted two days. The amount of P15,000 which Ong Guan Can claims of the Standard Oil Co., of New
York is the amount of damages he alleges were, caused him by this attachment.
The trial court finding that no damage proven to have been suffered by Ong Guan Can on account of
said attachment, absolved the Standard Oil Co., of New York from this claim in case No. 29753.
Without considering the other question raised in this case, and accepting the trial court's conclusions
that no damage was occasioned Ong Guan Can by said attachment which only lasted two days, the
judgment appealed from is affirmed, with costs against the appellant. So ordered.

G.R. No. L-8086

8. The DISTRIBUTOR shall only sell the products of the COMPANY and in case he sells the
products of other persons or firms, the COMPANY shall be at liberty to terminate this
contract;

October 31, 1957

PACIFIC TOBACCO CORPORATION, plaintiff-appellee,

vs.
RICARDO D. LORENZANA and VISAYAN SURETY & INSURANCE CORPORATION, defendants.
VISAYAN SURETY & INSURANCE CORPORATION, cross claimant and third party plaintiff-appellant,
vs.
RICARDO D. LORENZANA, cross defendant,
CALIXTO C. LORENZANA, JOSE M. LORENZANA and BENIGNO GUTIERREZ, third party
defendants.
Sycip, Quisumbing, Solicitor Salazar & Associates for appellee.
Enrico I. de la Cruz for appellant.
Edgar C. Melia for cross-defendant and appellee.

9. The DISTRIBUTOR binds himself for the COMPANY not less than TWENTY THOUSAND
ONLY PESOS (P20,000.00) worth of cigarettes and other Tobacco products every
month and should be fail to meet this quota, the COMPANY shall have the opinion to
terminate this contract upon twenty (20) day's notice;
xxx

xxx

xxx.

11. To guarantee the faithful performance on his part of the terms and conditions of this
contract, the DISTRIBUTOR shall post a surety bond in favor of the COMPANY in the
amount of EIGHT THOUSAND ONLY PESOS (P8,000.00 signed by him and a
reputable surety company acceptable to the COMPANY, THREE THOUSAND PESOS
(P3,000.00) of which bond shall answer for the faithful settlement of the account of the
DISTRIBUTOR with the COMPANY, and FIVE THOUSAND PESOS (5,000.00) for the return
of the aforementioned truck to the COMPANY in the same condition that the
DISTRIBUTOR received it, . . . (Exhibit A).

FELIX, J.:
The Pacific Tobacco Corporation is a duly organized domestic corporation with offices at Grace Park,
Caloocan, Rizal, engaged in the business of manufacturing and distributing cigarettes, cigars and other
tobacco products.
On January 16, 1952, Ricardo D. Lorenzana and said corporation entered into an agreement, the
pertinent provisions of which as follows:
WITNESSETH: That
WHEREAS, the Company manufactures cigarette, cigars, and other tobacco products which
it desires to sell and distribute throughout the Philippines; .
WHEREAS, the DISTRIBUTOR (Lorenzana) is willing to sell and distribute the said products
of the COMPANY in the territory of Manila and Rizal Province under the terms and conditions
herein below set forth;
NOW, THEREFORE for and in consideration of the premises herein contained, the parties
hereto have agreed and covenanted, as follows:
1. The DISTRIBUTOR shall sell and distribute solely the cigarettes, cigars and other tobacco
products of the COMPANY in the abovementioned territory;
2. The Company shall, from time to time, deliver to the DISTRIBUTOR, for sale, cigarettes
and other tobacco products, provided that the balance of the account of the DISTRIBUTOR
with the COMPANY shall not at any time exceed THREE THOUSAND ONLY PESOS
(3,000.00);
3. All accounts of the Distributor with the Company shall be due and payable in the office of
the latter within thirty (30) days from and after the date of the sales invoice issued by the
COMPANY;
xxx

xxx

xxx.

In accordance thereto, Lorenzana put up V.S. and I.C. bond No. E-JA-52/101 in the amount of P3,000
with the Visayan Surety and Insurance Corporation, as surety to guarantee the faithful fulfillment of the
principal's (Lorenzana's) part in the contract with the Pacific Tobacco Corporation, which was "to sell and
distribute the latter's cigarettes, cigar and other tobacco products subject to the terms and conditions
stipulated in the said contract" (Exhibit B).
The record shows that on various occasions in 1952, The Philippine Tobacco Corporation delivered to
Lorenzana for distribution cigarettes, cigars, and other tobacco products amounting to P15,645.64, but
out of this amount the latters paid and was only credited with P13,559.33, leaving a balance of
P2,086.31. Upon demand by the corporation. Lorenzana proposed to settle his pending obligation by
giving P100 a month, which amount was later reduced to P25, to which arrangement the company
apparently agreed and Lorenzana actually made installments amounting to P250 (Exhibit G-6). As he
failed to make any further payment, the Philippine Tobacco Corporation filed a complaint with the Court
of First Instance of Manila on October 30, 1953, against Ricardo D. Lorenzana and the Visayan Surety
and Insurance Corporation for the recovery of the sum of P2,086.31, with legal interest thereon from the
date of filing of the complaint until fully paid; attorney's fees in the amount of P5000.00; costs, and for
such other remedy as may be deemed just and equitable in the premises.
Defendant Visayan Surety and Insurance Corporation answered this complaint, which it latter modified
with leave of Court by filing an amended answer with cross-claim against Ricardo D. Lorenzana and
third party complaint against Calixto D. Lorenzana, Jose Lorenzana and Benigno C. Gutierrez, denying
the material allegations of the complaint and setting up the affirmative defense that the bond could not
be held liable for damages and attorney's fees; that plaintiff Philippine Tobacco Corporation was bared
from presenting this action against the surety due to laches, waiver of claim and estoppel. It was thus
prayed that the complaint be dismissed as against said defendant; in the event that the surety would be
sentenced to pay the plaintiff, that a simultaneous order be issued ordering the cross-defendant and the
third-party defendants to pay the surety, jointly and severally, for whatever amount the latter may be
required to satisfy, with interest thereon at 12 per cent per annum from the date of payment until it was
fully reimbursed; that the said cross-defendant and third-party defendants be ordered to pay the surety,
jointly and severally, in accordance with the indemnity bond executed by them as counter-guarantors, 20
per cent of the amount involved as attorney's fees, and costs.
In his answer dated December 1, 1953, Ricardo D. Lorenzana denied the allegation of the complaint that
he refused or failed to pay the plaintiff, the true fact being that he had tendered to plaintiff certain sums in
accordance with their verbal agreement which allowed him to settle his obligation in installments until the
entire amount was fully satisfied; set up the defense that the agreement, Annex "A", was partially
modified when plaintiffs agreed and allowed him to sell the tobacco products not only in the City of
Manila and Rizal province but throughout the island of Luzon; that in virtue of such modification, he sold

plaintiff's products in places as far as the northern provinces; the most of defendant's transactions in
these provinces were on credit basis; that on August 2, 1952, when defendant arrived from his trip from
the Ilocos regions, plaintiff terminated his services on the ground that the corporation was losing without
giving him an advance notice of 30 days in accordance with the agreement; that as plaintiff took the
delivery truck which he was using in the distribution of plaintiff's products he was prevented from going
back to the provinces to collect from his customers their accounts; that he made several payments in
small amounts to settle remaining obligation which were accepted, but in November, 1953, plaintiff
refused to receive the same. Lorenzana claimed that because of plaintiff's failure to notify him in
advance that his services were terminated, he incurred and was incurring transportation expenses in
order to collect the accounts of hid former customers. He, therefore, prayed that the complaint be
dismissed and plaintiff be ordered to pay the amount that he incurred as transportation expenses. The
third-party defendants likewise filed their answer practically admitting all the averments of the third-party
complaint except the claim for 20 per cent of the amount involved as attorney's fees, on the ground that
it was excessive and that they should not be held liable for the payment of the pending obligation of
Lorenzana.
At the hearing defendant Lorenzana failed to appear and to adduce in support of his defense inspite of
the fact that he was duly notified. After hearing and after the other parts had filed their respective
memoranda, the Court rendered judgment dated May 12, 1954, finding that although on one occasion
plaintiff shipped cigarettes to defendant Lorenzana addressed at San Fernando, La Union (Exhibit C-18),
this fact alone would not release the surety from liability, for there was nothing in the contract Exhibit A
that expressly prohibited defendant Lorenzana from selling cigarettes outside Manila and Rizal. The
lower Court opined that what was guaranteed by the Visayan Surety and Insurance Corporation was the
faithful delivery by defendant Lorenzana of the price of the cigarettes to plaintiff within the time fixed in
the contract and as the sending of some cigarettes to San Fernando, La Union, caused the surety no
injury, said deviation will not relieve the surety from its liability under the bond. The court thus ordered
defendants Ricardo D. Lorenzana and the Visayan Surety and Insurance Corporation to pay, jointly and
severally, to the plaintiff Pacific Tobacco Corporation the sum of P2,086.31, with legal interest from the
date of the filing of the complaint, plus P500 as attorney's fees and costs. On the strength of the
indemnity bond (Exhibit "2") executed by the third-party defendants Calixto D. Lorenzana, Jose M.
Lorenzana and Benigno C. Gutierrez as counter-guarantors, they together with Ricardo D. Lorenzana,
were ordered to indemnify the Visayan Surety and Insurance Corporation for the amount which the latter
would actually pay plaintiff in case defendant Ricardo D. Lorenzana should fail to make the payment
himself and another sum of P500 as attorney's fees.
After the motion filed by the surety for the reconsideration of said division was denied, said defendant
brought the matter to this Court on appeal ascribing to the lower Court the commission of several errors.
But stripping them of unnecessaries and reducing the same to bare essentials, the only question at
issue in the case at bar is whether the delivery by the company of its products to defendant Lorenzana in
a place other than that mentioned in the agreement constitutes an alteration of said agreement that
would release the surety from its liability under the bond.
It appears on record that cigarettes valued at P1,870 were transported to Ricardo Lorenzana, c/o of Mrs.
Justo de Leon at San Fernando, Pampanga. Defendant surety tried to capitalize on this single act but it
failed to present evidence that these goods were actually sold and distributed in said places. It would
have been possible for the distributor to take a sojourn in that place and the company, knowing where he
could be reached, sent the merchandise to him. Defendant Lorenzana also alleged in his answer that
plaintiff allowed him to sell the latter's products even as far as the northern provinces but this defendant
was not able to substantiate such claim due to his failure to appear and testify to his effect at the trial,
despite the fact that he was duly represented by counsel. But even granting arguendo that the
merchandise thus delivered and presumably received at San Fernando, La Union, was actually sold and
distributed therein, this may not be considered as a deviation from the territory to be covered by the
agent or distributor was not prohibited by the agreement itself, nor does the record show that such
expansion of the territory was due to instructions from the plaintiff. While it is true that that contract
(Exhibit A) states that the distributor is willing to sell and distribute the products of the company in Manila
and Rizal, specification serves more as a manifestation that Lorenzana entered into the agreement with
the understanding that his sphere of activity would be for these places. But certainly nowhere in the
same agreement appears a restriction against the acceptance of additional territories, if he so desired.

Appellant surety argues that the bond guarantees only the payment of cigarettes, cigars or other tobacco
products that were delivered to and distributed by Lorenzana in Manila and Rizal and at no other place.
To adopt this line of reasoning would be to harness a pliant argument to suit appellant's purpose. The
agreement required the distributor to post a bond for P8,000, "P3,000 of which bond shall answer for the
faithful settlement of the account of the distributor with the Company." The bond put up by Lorenzana in
the amount of P3,000, undertaken by the Visayan Surety and Insurance Corporation, therefore, was only
to secure the prompt and faithful payment of the accounts of the distributor to the company. The mention
of Manila and Rizal in said agreement was designed more as a declaration or identification of these
places wherein the distributor was expressly authorized and assigned to sell the cigar, cigarettes and
tobacco products of the plaintiff, which is no obstacle to the distributor's acceptance or taking motu
proprio of additional territories in order to better to fulfill his obligation to sell monthly for the Company
not less than P20,000 worth of cigarettes and other tobacco products and could by no means alter his
liability to turn over the to the company payments therefor, and that is precisely his obligation secured by
the bond.
Appellant maintaining that the alleged modification of the agreement released the surety from its liability,
invokes the rule of strictissimi juris under which, it is claimed, surety bonds must be strictly construed
and cannot be extended beyond their terms. Although We might acknowledge that a surety is a favorite
of the law and his contract strictissimi juris, this rule has no bearing on the case at bar. Anyway, it
commonly refers to an accommodation surety and should not be extended to favor a compensated
surety, as is appellant in the instant case. The rationale of this doctrine is reasonable; an
accommodation surety acts without motive of pecuniary gain and, hence, should be protected against
unjust pecuniary impoverishment by imposing on the principal duties akin to those of a fiduciary. This
cannot be said of a compensated corporate surety which is a business association organized for the
purpose of assuming classified risks in large numbers, for profit and on an impersonal basis through the
medium of standardized written contractual forms drawn by its own representatives with the primary aim
of protecting its own interests (See Stearn's The Law of Suretyship, 4th ed., 402-403). American courts
in refusing to apply this rule on compensated sureties have expressed themselves in varying language.
Sometimes it is said that a corporate compensated surety is not entitled to the benefit of the rule
ofstrictissimi juris (U.S. vs. Gao, F. Pawling & Co. 297 F. 65); or that the contract is to be construed
against the surety and in favor of the promise (Consolidated Indem. & Ins. Co. vs. State, 184 Ark. 581,
43 S.W. [2d] 240); or that the contract is like one of the insurance, hence one or the other of the above
rules is to be applied (Lassetter vs. Backer, 26 Ariz. 224, 224 P. 810; Md. Cas. Co. vs. Dunlap, 68 F. [2d]
289), and it was even said:
The law does not have the same solicitude for corporations engaged in giving indemnity
bonds for profit as it does for individual surety who voluntarily undertakes to answer for the
obligations of another. Although calling themselves sureties, such corporations are in fact
insurers, and in determining their rights and liabilities the rules peculiar to suretyship do not
apply (Metropolitan Casualty Insurance Co. vs. United Brick & Tile Co. [1934], 29 P. [2d]
771).
Even assuming, however, for the sake of argument that the delivery of merchandise at a place other
than that appearing in the contract constitutes an alteration of the same, it is a material deviation that
would release the surety from its liability?.
A material alteration of a contract is such a change in the terms of the agreement as either imposes
some new obligation on the party promising or takes away some obligation already imposed. A change
in the form of the contract which does not affect one or the other of these results is immaterial, and will
not discharge the surety (Stearn's The Law of Suretyship, 4th ed., p.98). To be material an alteration
must change the legal effect of the original contract (New Amsterdam Casualty Co. vs. W.T. Taylor
Const. Co., 12 F. [2d] 972).
It cannot be denied that the obligation of the principal remained the same to settle his accounts to the
company at the specified time. The addition or diminution of the territories covered by his previous
assignment will not alter or affect that duty to make payments on time. Apart from the fact that the
alteration in the instant case, if there was any, is not material as to relieve the surety from its liability
under the bond, there is not even an iota to proof that such deviation caused the surety any loss or injury

or that such delivery caused the distributor's failure to pay his accounts. The weight of authority is to the
effect that:
A corporation engaged in the business of suretyship for profit cannot successfully defend a
suit merely by showing a change in the contract, whether beneficial or otherwise, as is the
rule in ordinary suretyship, but most prove that the change is material and prejudicial (City of
Philadelphia vs. Ray., 266 Pa. 345; 109 Alt. 689).
It is well-settled that the rule of stricticcimi juris, ordinarily applied in relief of an individual
surety, is not applied in case of compensated sureties; and that where a bonding company,
for a monetary consideration, has insured against failure of performance of a contract, it
must show that it has suffered some injury by reason of departure from the strict terms of
contract, before it can for that reason be discharged from its liability (Pickens County vs.
National Surety Co. 13 F. [2d] 758 [C.C.A.] 4th, 1926).
A departure from the terms of the contract will not have the effect of discharging a
compensated surety unless it appears that such departure has resulted in injury, loss or
prejudice to the surety (Chapman vs. Hoage, 296 U.S. 526).
It has been said that to allow compensated surety companies to collect and retrain premiums
for their services, graded according to the nature and extent of the risk, and then to repudiate
their obligations on slight pretexts which have no relation to the risk, would be most unjust
and immoral, and would be a perversion of the wise and just rules designed for the
protection of voluntary sureties (M. H. Waller Realty Co. vs. American Surety Co., 60 Utah,
435).
Wherefore, the decision appealed from is hereby affirmed, with costs against appellant. It is so ordered.
[G.R. No. 138544. October 3, 2000]
SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs. RODOLFO M. CUENCA,respondent.
DECISION

WHEREFORE, the judgment appealed from is hereby amended in the sense that defendant-appellant
Rodolfo M. Cuenca[herein respondent] is RELEASED from liability to pay any amount stated in the
judgment.
Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for lack of merit.
In all other respect[s], the decision appealed from is AFFIRMED.[2]
Also challenged is the April 14, 1999 CA Resolution, [3] which denied petitioners Motion for
Reconsideration.
Modified by the CA was the March 6, 1997 Decision [4] of the Regional Trial Court (RTC) of Makati
City (Branch 66) in Civil Case No. 93-1925, which disposed as follows:
WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation and
Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security Bank & Trust Company the sum
of P39,129,124.73 representing the balance of the loan as of May 10, 1994 plus 12% interest per annum
until fully paid, and the sum of P100,000.00 as attorneys fees and litigation expenses and to pay the
costs.
SO ORDERED.
The Facts

The facts are narrated by the Court of Appeals as follows: [5]

The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (Sta. Ines) is a
corporation engaged in logging operations. It was a holder of a Timber License Agreement issued by the
Department of Environment and Natural Resources (DENR).
On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines Melale
Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos (P8,000,000.00) to assist the
latter in meeting the additional capitalization requirements of its logging operations.

PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and
every doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require the
creditor to obtain the consent of the surety to any material alteration in the principal loan agreement, or
at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans
obtained in excess of the amount or beyond the period stipulated in the original agreement, absent any
clear stipulation showing that the latter waived his right to be notified thereof, or to give consent
thereto. This is especially true where, as in this case, respondent was no longer the principal officer or
major stockholder of the corporate debtor at the time the later obligations were incurred. He was thus no
longer in a position to compel the debtor to pay the creditor and had no more reason to bind himself
anew to the subsequent obligations.
The Case

This is the main principle used in denying the present Petition for Review under Rule 45 of the
Rules of Court.Petitioner assails the December 22, 1998 Decision [1] of the Court of Appeals (CA) in CAGR CV No. 56203, the dispositive portion of which reads as follows:

The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be effective
until 30 November 1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the
lines plus JSS of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein the
companys duly authorized signatory/ies;
3. Reasonable/compensating deposit balances in current account shall be maintained at all times; in this
connection, a Makati account shall be opened prior to availment on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the aforementioned terms and conditions upon written
notice to the Borrower.(Emphasis supplied.)

To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line,
SIMC executed a Chattel Mortgage dated 23 December 1980 (Exhibit A) over some of its machinery and
equipment in favor of [Petitioner] SBTC. As additional security for the payment of the loan, [Respondent]
Rodolfo M. Cuenca executed an Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of
[Petitioner] SBTC whereby he solidarily bound himself with SIMC as follows:
xxxxxxxxx
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC) in favor
of the bank for the payment, upon demand and without the benefit of excussion of whatever amount x x
x the client may be indebted to the bank x x x by virtue of aforesaid credit accommodation(s) including
the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the
aforesaid credit accommodation(s) x x x . (Emphasis supplied).
On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the P8M-Credit
Loan Facility, appellant SIMC made a first drawdown from its credit line with [Petitioner] SBTC in the
amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00). To cover said drawdown,
SIMC duly executed promissory Note No. TD/TLS-3599-81 for said amount (Exhibit C).
Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of Directors
of defendant-appellant Sta. Ines. Subsequently, the shareholdings of [Respondent] Cuenca in
defendant-appellant Sta. Ines were sold at a public auction relative to Civil Case No. 18021 entitled
Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M. Cuenca. Said shares were bought by
Adolfo Angala who was the highest bidder during the public auction.
Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from
[Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand
[n]ineteen and 50/100 [p]esos (P6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos.
DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to
cover the amounts of the abovementioned additional loans against the credit line.
Appellant SIMC, however, encountered difficulty[6] in making the amortization payments on its loans and
requested [Petitioner] SBTC for a complete restructuring of its indebtedness. SBTC accommodated
appellant SIMCs request and signified its approval in a letter dated 18 February 1988 (Exhibit G)
wherein SBTC and defendant-appellant Sta. Ines, without notice to or the prior consent of [Respondent]
Cuenca, agreed to restructure the past due obligations of defendant-appellant Sta. Ines. [Petitioner]
Security Bank agreed to extend to defendant-appellant Sta. Ines the following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos
(P8,800,000.00), to be applied to liquidate the principal portion of defendant-appellant Sta.
Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit G,
Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (P3,400,000.00),
to be applied to liquidate the past due interest and penalty portion of the indebtedness of
defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit G, Expediente, at Vol. II, p.
336; Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34).
It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to [Petitioner]
Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred
[t]housand [p]esos (P6,100,000.00), which was the only loan incurred prior to the expiration of the P8MCredit Loan Facility on 30 November 1981 and the only one covered by the Indemnity Agreement dated
19 December 1980 (Exhibit 3-Cuenca, Expediente, at Vol. II, p. 331), was not segregated from, but was
instead lumped together with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86
and DLS/74/47/86 (Exhibits D, E, and F, Expediente, at Vol. II, pp. 333 to 335) obtained by defendantappellant Sta. Ines which were not secured by said Indemnity Agreement.

Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank,
defendant-appellant Sta. Ines thus executed the following promissory notes, both dated 09 March 1988
in favor of [Petitioner] Security Bank:
PROMISSORY NOTE NO. AMOUNT
RL/74/596/88 P8,800,000.00
RL/74/597/88 P3,400,000.00
------------------TOTAL P12,200,000.00
(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).
To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines,
[Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan Agreement dated 31
October 1989 (Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan
Agreement dated 31 October 1989 provides:
1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of TWELVE
MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency (the
Loan). The loan shall be released in two (2) tranches of P8,800,000.00 for the first tranche (the First
Loan) and P3,400,000.00 for the second tranche (the Second Loan) to be applied in the manner and for
the purpose stipulated hereinbelow.
1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the Borrowers
present total outstanding indebtedness to the Lender (the indebtedness) while the Second Loan shall be
applied to liquidate the past due interest and penalty portion of the Indebtedness. (Underscoring
supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol. I, p. 33)
From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments to
[Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand
[p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to
165)
Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite
demands made upon appellant SIMC and CUENCA, the last of which were made through separate
letters dated 5 June 1991 (Exhibit K) and 27 June 1991 (Exhibit L), respectively.
Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed a
complaint for collection of sum of money on 14 June 1993, resulting after trial on the merits in a decision
by the court a quo, x x x from which [Respondent] Cuenca appealed.
Ruling of the Court of Appeals

In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had
novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines. Accordingly, such
novation extinguished the Indemnity Agreement, by which Cuenca, who was then the Board chairman
and president of Sta. Ines, had bound himself solidarily liable for the payment of the loans secured by
that credit accommodation. It noted that the 1989 Loan Agreement had been executed without notice to,
much less consent from, Cuenca who at the time was no longer a stockholder of the corporation.

The appellate court also noted that the Credit Approval Memorandum had specified that the credit
accommodation was for a total amount of P8 million, and that its expiry date was November 30,
1981. Hence, it ruled that Cuenca was liable only for loans obtained prior to November 30, 1981, and
only for an amount not exceeding P8 million.

substitution, renewal, extension, increase, amendment, conversion or revival of the said credit
accommodation. As preliminary matters, the procedural questions raised by respondent will also be
addressed.
The Courts Ruling

It further held that the restructuring of Sta. Ines obligation under the 1989 Loan Agreement was
tantamount to a grant of an extension of time to the debtor without the consent of the surety. Under
Article 2079 of the Civil Code, such extension extinguished the surety.

The Petition has no merit.

Preliminary Matters: Procedural Questions

The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided
to materially alter or modify the principal obligation after the expiry date of the credit accommodation.
Motion for Reconsideration Not Pro Forma

Hence, this recourse to this Court.

[7]

The Issues

Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in merely
rehashing the arguments already passed upon by the appellate court, was pro forma; that as such, it did
not toll the period for filing the present Petition for Review. [9] Consequently, the Petition was filed out of
time.[10]

In its Memorandum, petitioner submits the following for our consideration: [8]
A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca
from liability as surety under the Indemnity Agreement for the payment of the principal
amount of twelve million two hundred thousand pesos (P12,200,000.00) under
Promissory Note No. RL/74/596/88 dated 9 March 1988 and Promissory Note No.
RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties and other
charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling that
Respondent Cuencas liability under the Indemnity Agreement covered
only availments on SIMCs credit line to the extent of eight million
pesos (P8,000,000.00) and made on or before 30 November 1981;
ii. Whether or not the Honorable Court of Appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit
accommodation was tantamount to an extension granted to SIMC
without Respondent Cuencas consent, thus extinguishing his liability
under the Indemnity Agreement pursuant to Article 2079 of the Civil
Code;
iii. Whether or not the Honorable Court of appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit
accommodation constituted a novation of the principal obligation, thus
extinguishing Respondent Cuencas liability under the indemnity
agreement;
B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was
extinguished by the payments made by SIMC;

We disagree. A motion for reconsideration is not pro forma just because it reiterated the
arguments earlier passed upon and rejected by the appellate court. The Court has explained that a
movant may raise the same arguments, precisely to convince the court that its ruling was erroneous. [11]
Moreover, there is no clear showing of intent on the part of petitioner to delay the
proceedings. In Marikina Valley Development Corporation v. Flojo, [12] the Court explained that a pro
forma motion had no other purpose than to gain time and to delay or impede the proceedings. Hence,
where the circumstances of a case do not show an intent on the part of the movant merely to delay the
proceedings, our Court has refused to characterize the motion as simply pro forma. It held:
We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon
the reality and substance of the statutory right of appeal, that doctrine should be applied reasonably,
rather than literally. The right to appeal, where it exists, is an important and valuable right. Public policy
would be better served by according the appellate court an effective opportunity to review the decision of
the trial court on the merits, rather than by aborting the right to appeal by a literal application of the
procedural rules relating to pro forma motions for reconsideration.
Service by Registered Mail Sufficiently Explained

Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:

SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing of
pleadings and other papers shall be done personally. Except with respect to papers emanating from the
court, a resort to other modes must be accompanied by a written explanation why the service or filing
was not done personally. A violation of this Rule may be cause to consider the paper as not filed.
Respondent maintains that the present Petition for Review does not contain a sufficient written
explanation why it was served by registered mail.

C. Whether or not petitioners Motion for Reconsideration was pro-forma;

D. Whether or not service of the Petition by registered mail sufficiently complied with
Section 11, Rule 13 of the 1997 Rules of Civil Procedure.
Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989 Loan
Agreement novated the original credit accommodation and Cuencas liability under the Indemnity
Agreement; and (b) whether Cuenca waived his right to be notified of and to give consent to any

We do not think so. The Court held in Solar Entertainment v. Ricafort[13] that the aforecited rule
was mandatory, and that only when personal service or filing is not practicable may resort to other
modes be had, which must then be accompanied by a written explanation as to why personal service or
filing was not practicable to begin with.
In this case, the Petition does state that it was served on the respective counsels of Sta. Ines and
Cuenca by registered mail in lieu of personal service due to limitations in time and distance. [14] This
explanation sufficiently shows that personal service was not practicable. In any event, we find no

adequate reason to reject the contention of petitioner and thereby deprive it of the opportunity to fully
argue its cause.
First Issue: Original Obligation Extinguished by Novation

ART. 1296. When the principal obligation is extinguished in consequence of a novation, accessory
obligations may subsist only insofar as they may benefit third persons who did not give their consent.
Alleged Extension

An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which
reads as follows:

Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8
million original accommodation; it was not a novation. [25]

ART. 1292. In order that an obligation may be extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on
every point incompatible with each other.

This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated
that its purpose was to liquidate, not to renew or extend, the outstanding indebtedness. Moreover,
respondent did not sign or consent to the 1989 Loan Agreement, which had allegedly extended the
original P8 million credit facility. Hence, his obligation as a surety should be deemed extinguished,
pursuant to Article 2079 of the Civil Code, which specifically states that [a]n extension granted to the
debtor by the creditor without the consent of the guarantor extinguishes the guaranty. x x x. In an earlier
case,[26] the Court explained the rationale of this provision in this wise:

Novation of a contract is never presumed. It has been held that [i]n the absence of an express
agreement, novation takes place only when the old and the new obligations are incompatible on every
point.[15] Indeed, the following requisites must be established: (1) there is a previous valid obligation; (2)
the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a
valid new contract.[16]
Petitioner contends that there was no absolute incompatibility between the old and the new
obligations, and that the latter did not extinguish the earlier one. It further argues that the 1989
Agreement did not change the original loan in respect to the parties involved or the obligations
incurred. It adds that the terms of the 1989 Contract were not more onerous. [17] Since the original credit
accomodation was not extinguished, it concludes that Cuenca is still liable under the Indemnity
Agreement.
We reject these contentions. Clearly, the requisites of novation are present in this case. The 1989
Loan Agreement extinguished the obligation [18] obtained under the 1980 credit accomodation. This is
evident from its explicit provision to liquidate the principal and the interest of the earlier indebtedness, as
the following shows:
1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrowers present
total outstanding Indebtedness to the Lender (the Indebtedness) while the Second Loan shall be applied
to liquidate the past due interest and penalty portion of the Indebtedness. [19] (Italics supplied.)
The testimony of an officer [20] of the bank that the proceeds of the 1989 Loan Agreement were
used to pay-off the original indebtedness serves to strengthen this ruling. [21]
Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original
obligation demonstrate that the two cannot coexist. While the 1980 credit accommodation had stipulated
that the amount of loan was not to exceed P8 million,[22] the 1989 Agreement provided that the loan
was P12.2 million. The periods for payment were also different.
Likewise, the later contract contained conditions, positive covenants and negative covenants not
found in the earlier obligation. As an example of a positive covenant, Sta. Ines undertook from time to
time and upon request by the Lender, [to] perform such further acts and/or execute and deliver such
additional documents and writings as may be necessary or proper to effectively carry out the provisions
and purposes of this Loan Agreement. [23] Likewise, SIMC agreed that it would not create any mortgage
or encumbrance on any asset owned or hereafter acquired, nor would it participate in any merger or
consolidation.[24]
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the
Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant to Article
1296 of the Civil Code, which provides:

The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor
without the suretys consent would deprive the surety of his right to pay the creditor and to be
immediately subrogated to the creditors remedies against the principal debtor upon the maturity
date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or
the indemnitors becoming insolvent during the extended period.
Binding Nature of the Credit Approval Memorandum

As noted earlier, the appellate court relied on the provisions of the Credit Approval Memorandum
in holding that the credit accommodation was only for P8 million, and that it was for a period of one year
ending on November 30, 1981. Petitioner objects to the appellate courts reliance on that document,
contending that it was not a binding agreement because it was not signed by the parties. It adds that it
was merely for its internal use.
We disagree. It was petitioner itself which presented the said document to prove the
accommodation. Attached to the Complaint as Annex A was a copy thereof evidencing the
accommodation.[27] Moreover, in its Petition before this Court, it alluded to the Credit Approval
Memorandum in this wise:
4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted by the Bank a credit line in
the aggregate amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional
capitalization requirements for its logging operations. For this purpose, the Bank issued a Credit
Approval Memorandum dated 10 November 1980.
Clearly, respondent is estopped from denying the terms and conditions of the P8 million credit
accommodation as contained in the very document it presented to the courts. Indeed, it cannot take
advantage of that document by agreeing to be bound only by those portions that are favorable to it, while
denying those that are disadvantageous.
Second Issue: Alleged Waiver of Consent

Pursuing another course, petitioner contends that Respondent Cuenca impliedly gave his consent
to any modification of the credit accommodation or otherwise waived his right to be notified of, or to give
consent to, the same. [28] Respondents consent or waiver thereof is allegedly found in the Indemnity
Agreement, in which he held himself liable for the credit accommodation including [its]
substitutions, renewals, extensions, increases, amendments, conversions and revival. It explains that
the novation of the original credit accommodation by the 1989 Loan Agreement is merely
its renewal, which connotes cessation of an old contract and birth of another one x x x.[29]

At the outset, we should emphasize that an essential alteration in the terms of the Loan
Agreement without the consent of the surety extinguishes the latters obligation. As the Court held
in National Bank v. Veraguth,[30] [i]t is fundamental in the law of suretyship that any agreement between
the creditor and the principal debtor which essentially varies the terms of the principal contract, without
the consent of the surety, will release the surety from liability.
In this case, petitioners assertion - that respondent consented to the alterations in the credit
accommodation -- finds no support in the text of the Indemnity Agreement, which is reproduced
hereunder:
Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp., Alco
Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in consideration of the credit
accommodation in the total amount of eight million pesos (P8,000,000.00) granted by the SECURITY
BANK AND TRUST COMPANY, a commercial bank duly organized and existing under and by virtue of
the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro Manila hereinafter referred to as the BANK
in favor of STA. INES MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter referred to as the
CLIENT, with the stipulated interests and charges thereon, evidenced by that/those certain
PROMISSORY NOTE[(S)], made, executed and delivered by the CLIENT in favor of the BANK
hereby bind(s) himself/themselves jointly and severally with the CLIENT in favor of the BANK for the
payment , upon demand and without benefit of excussion of whatever amount or amounts the CLIENT
may be indebted to the BANK under and by virtue of aforesaid credit accommodation(s) including the
substitutions, renewals, extensions, increases, amendment, conversions and revivals of the aforesaid
credit accommodation(s), as well as of the amount or amounts of such other obligations that the CLIENT
may owe the BANK, whether direct or indirect, principal or secondary, as appears in the accounts, books
and records of the BANK, plus interest and expenses arising from any agreement or agreements that
may have heretofore been made, or may hereafter be executed by and between the parties thereto,
including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of
the aforesaid credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor
of the BANK for the faithful compliance of all the terms and conditions contained in the aforesaid credit
accommodation(s), all of which are incorporated herein and made part hereof by reference.
While respondent held himself liable for the credit accommodation or any modification thereof,
such clause should be understood in the context of the P8 million limit and the November 30, 1981
term. It did not give the bank or Sta. Ines any license to modify the nature and scope of the original
credit accommodation, without informing or getting the consent of respondent who was solidarily
liable. Taking the banks submission to the extreme, respondent (or his successors) would be liable for
loans even amounting to, say, P100 billion obtained 100 years after the expiration of the credit
accommodation, on the ground that he consented to all alterations and extensions thereof.
Indeed, it has been held that a contract of surety cannot extend to more than what is stipulated. It
is strictly construed against the creditor, every doubt being resolved against enlarging the liability of the
surety.[31] Likewise, the Court has ruled that it is a well-settled legal principle that if there is any doubt on
the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety x x
x. Ambiguous contracts are construed against the party who caused the ambiguity. [32] In the absence of
an unequivocal provision that respondent waived his right to be notified of or to give consent to any
alteration of the credit accommodation, we cannot sustain petitioners view that there was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly shows that the bank did
not have absolute authority to unilaterally change the terms of the loan accommodation. Indeed, it may
do so only upon notice to the borrower, pursuant to this condition:
5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written
notice to the Borrower.[33]
We reject petitioners submission that only Sta. Ines as the borrower, not respondent, was entitled
to be notified of any modification in the original loan accommodation. [34] Following the banks reasoning,
such modification would not be valid as to Sta. Ines if no notice were given; but would still be valid as to
respondent to whom no notice need be given. The latters liability would thus be more burdensome than

that of the former. Such untenable theory is contrary to the principle that a surety cannot assume an
obligation more onerous than that of the principal. [35]
The present controversy must be distinguished from Philamgen v. Mutuc,[36] in which the Court
sustained a stipulation whereby the surety consented to be bound not only for the specified period, but
to any extension thereafter made, an extension x x x that could be had without his having to be notified.
In that case, the surety agreement contained this unequivocal stipulation: It is hereby further
agreed that in case of any extension of renewal of the bond, we equally bind ourselves to the Company
under the same terms and conditions as herein provided without the necessity of executing another
indemnity agreement for the purpose and that we hereby equally waive our right to be notified of any
renewal or extension of the bond which may be granted under this indemnity agreement.
In the present case, there is no such express stipulation. At most, the alleged basis of
respondents waiver is vague and uncertain. It confers no clear authorization on the bank or Sta. Ines to
modify or extend the original obligation without the consent of the surety or notice thereto.
Continuing Surety

Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner
maintains that there was no need for respondent to execute another surety contract to secure the 1989
Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing surety does not
authorize the bank to extend the scope of the principal obligation inordinately. [37] In Dino v. CA,[38] the
Court held that a continuing guaranty is one which covers all transactions, including those arising in the
future, which are within the description or contemplation of the contract of guaranty, until the expiration
or termination thereof.
To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the
credit accommodation: (1) that the obligation should not exceed P8 million, and (2) that the
accommodation should expire not later than November 30, 1981. Hence, it was a continuing surety only
in regard to loans obtained on or before the aforementioned expiry date and not exceeding the total
of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on
November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980 credit
accommodation, that were obtained in 1986.Certainly, he could not have guaranteed the 1989 Loan
Agreement, which was executed after November 30, 1981 and which exceeded the stipulated P8 million
ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan
obtained after the payment of the original one, which was covered by a continuing surety agreement. At
the risk of being repetitious, we hold that in Dino, the surety Agreement specifically provided that each
suretyship is a continuing one which shall remain in full force and effect until this bank is notified of its
revocation. Since the bank had not been notified of such revocation, the surety was held liable even for
the subsequent obligations of the principal borrower.
No similar provision is found in the present case. On the contrary, respondents liability was
confined to the 1980 credit accommodation, the amount and the expiry date of which were set down in
the Credit Approval Memorandum.
Special Nature of the JSS

It is a common banking practice to require the JSS (joint and solidary signature) of a major
stockholder or corporate officer, as an additional security for loans granted to corporations. There are at
least two reasons for this.First, in case of default, the creditors recourse, which is normally limited to the
corporate properties under the veil of separate corporate personality, would extend to the personal
assets of the surety. Second, such surety would be compelled to ensure that the loan would be used for
the purpose agreed upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for the bank to have required the
JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the credit
accommodation was granted.There was no reason or logic, however, for the bank or Sta. Ines to
assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that time, he
was no longer an officer or a stockholder of the debtor-corporation. Verily, he was not in a position then
to ensure the payment of the obligation. Neither did he have any reason to bind himself further to a
bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent, without
even informing him, smacks of negligence on the part of the bank and bad faith on that of the principal
debtor. Since that Loan Agreement constituted a new indebtedness, the old loan having been already
liquidated, the spirit of fair play should have impelled Sta. Ines to ask somebody else to act as a surety
for the new loan.
In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who
was in a position to ensure the payment of the loan. Even a perfunctory attempt at credit investigation
would have revealed that respondent was no longer connected with the corporation at the time. As it is,
the bank is now relying on an unclear Indemnity Agreement in order to collect an obligation that could
have been secured by a fairly obtained surety. For its defeat in this litigation, the bank has only itself to
blame.
In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under the
1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which had been an accessory
to the 1980 credit accommodation, was also extinguished. Furthermore, we reject petitioners submission
that respondent waived his right to be notified of, or to give consent to, any modification or extension of
the 1980 credit accommodation.
In this light, we find no more need to resolve the issue of whether the loan obtained before the
expiry date of the credit accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.
[G.R. No. L-8437. November 28, 1956.]
ESTATE OF K. H. HEMADY, deceased, vs. LUZON SURETY CO., INC., claimant-Appellant.

guaranteed, the various principals in favor of different creditors. The twenty counterbonds, or indemnity
agreements, all contained the following stipulations:chanroblesvirtuallawlibrary
Premiums. As consideration for this suretyship, the undersigned jointly and severally, agree to pay
the COMPANY the sum of ________________ (P______) pesos, Philippines Currency, in advance as
premium there of for every __________ months or fractions thereof, this ________ or any renewal or
substitution thereof is in effect.
Indemnity. The undersigned, jointly and severally, agree at all times to indemnify the COMPANY and
keep it indemnified and hold and save it harmless from and against any and all damages, losses, costs,
stamps, taxes, penalties, charges, and expenses of whatsoever kind and nature which the COMPANY
shall or may, at any time sustain or incur in consequence of having become surety upon this bond or any
extension, renewal, substitution or alteration thereof made at the instance of the undersigned or any of
them or any order executed on behalf of the undersigned or any of them; chan roblesvirtualawlibraryand
to pay, reimburse and make good to the COMPANY, its successors and assigns, all sums and amount of
money which it or its representatives shall pay or cause to be paid, or become liable to pay, on account
of the undersigned or any of them, of whatsoever kind and nature, including 15% of the amount involved
in the litigation or other matters growing out of or connected therewith for counsel or attorneys fees, but
in no case less than P25. It is hereby further agreed that in case of extension or renewal of this
________ we equally bind ourselves for the payment thereof under the same terms and conditions as
above mentioned without the necessity of executing another indemnity agreement for the purpose and
that we hereby equally waive our right to be notified of any renewal or extension of this ________ which
may be granted under this indemnity agreement.
Interest on amount paid by the Company. Any and all sums of money so paid by the company shall
bear interest at the rate of 12% per annum which interest, if not paid, will be accummulated and added
to the capital quarterly order to earn the same interests as the capital and the total sum thereof, the
capital and interest, shall be paid to the COMPANY as soon as the COMPANY shall have become liable
therefore, whether it shall have paid out such sums of money or any part thereof or not.
xxx

xxx

xxx

Waiver. It is hereby agreed upon by and between the undersigned that any question which may arise
between them by reason of this document and which has to be submitted for decision to Courts of
Justice shall be brought before the Court of competent jurisdiction in the City of Manila, waiving for this
purpose any other venue. Our right to be notified of the acceptance and approval of this indemnity
agreement is hereby likewise waived.
xxx

xxx

xxx

Our Liability Hereunder. It shall not be necessary for the COMPANY to bring suit against the principal
upon his default, or to exhaust the property of the principal, but the liability hereunder of the undersigned
indemnitor shall be jointly and severally, a primary one, the same as that of the principal, and shall be
exigible immediately upon the occurrence of such default. (Rec. App. pp. 98- 102.)
The Luzon Surety Co., prayed for allowance, as a contingent claim, of the value of the twenty bonds it
had executed in consideration of the counterbonds, and further asked for judgment for the unpaid
premiums and documentary stamps affixed to the bonds, with 12 per cent interest thereon.
Before answer was filed, and upon motion of the administratrix of Hemadys estate, the lower court, by
order of September 23, 1953, dismissed the claims of Luzon Surety Co., on two
grounds:chanroblesvirtuallawlibrary (1) that the premiums due and cost of documentary stamps were not
contemplated under the indemnity agreements to be a part of the undertaking of the guarantor
(Hemady), since they were not liabilities incurred after the execution of the counterbonds; chan
roblesvirtualawlibraryand (2) that whatever losses may occur after Hemadys death, are not chargeable
to his estate, because upon his death he ceased to be guarantor.
Taking up the latter point first, since it is the one more far reaching in effects, the reasoning of the court
below ran as follows:chanroblesvirtuallawlibrary

DECISION
REYES, J. B. L., J.:
Appeal by Luzon Surety Co., Inc., from an order of the Court of First Instance of Rizal, presided by
Judge Hermogenes Caluag, dismissing its claim against the Estate of K. H. Hemady (Special
Proceeding No. Q-293) for failure to state a cause of action.
The Luzon Surety Co. had filed a claim against the Estate based on twenty different indemnity
agreements, or counter bonds, each subscribed by a distinct principal and by the deceased K. H.
Hemady, a surety solidary guarantor) in all of them, in consideration of the Luzon Surety Co.s of having

The administratrix further contends that upon the death of Hemady, his liability as a guarantor
terminated, and therefore, in the absence of a showing that a loss or damage was suffered, the claim
cannot be considered contingent. This Court believes that there is merit in this contention and finds
support in Article 2046 of the new Civil Code. It should be noted that a new requirement has been added
for a person to qualify as a guarantor, that is:chanroblesvirtuallawlibrary integrity. As correctly pointed out
by the Administratrix, integrity is something purely personal and is not transmissible. Upon the death of
Hemady, his integrity was not transmitted to his estate or successors. Whatever loss therefore, may
occur after Hemadys death, are not chargeable to his estate because upon his death he ceased to be a
guarantor.

Another clear and strong indication that the surety company has exclusively relied on the personality,
character, honesty and integrity of the now deceased K. H. Hemady, was the fact that in the printed form
of the indemnity agreement there is a paragraph entitled Security by way of first mortgage, which was
expressly waived and renounced by the security company. The security company has not demanded
from K. H. Hemady to comply with this requirement of giving security by way of first mortgage. In the
supporting papers of the claim presented by Luzon Surety Company, no real property was mentioned in
the list of properties mortgaged which appears at the back of the indemnity agreement. (Rec. App., pp.
407-408).
We find this reasoning untenable. Under the present Civil Code (Article 1311), as well as under the Civil
Code of 1889 (Article 1257), the rule is that
Contracts take effect only as between the parties, their assigns and heirs, except in the case where the
rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or
by provision of law.
While in our successional system the responsibility of the heirs for the debts of their decedent cannot
exceed the value of the inheritance they receive from him, the principle remains intact that these heirs
succeed not only to the rights of the deceased but also to his obligations. Articles 774 and 776 of the
New Civil Code (and Articles 659 and 661 of the preceding one) expressly so provide, thereby
confirming Article 1311 already quoted.
ART. 774. Succession is a mode of acquisition by virtue of which the property, rights and obligations
to the extent of the value of the inheritance, of a person are transmitted through his death to another or
others either by his will or by operation of law.
ART. 776. The inheritance includes all the property, rights and obligations of a person which are not
extinguished by his death.
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court ruled:chanroblesvirtuallawlibrary
Under the Civil Code the heirs, by virtue of the rights of succession are subrogated to all the rights and
obligations of the deceased (Article 661) and cannot be regarded as third parties with respect to a
contract to which the deceased was a party, touching the estate of the deceased (Barrios vs. Dolor, 2
Phil. 44).
xxx

xxx

xxx

The principle on which these decisions rest is not affected by the provisions of the new Code of Civil
Procedure, and, in accordance with that principle, the heirs of a deceased person cannot be held to be
third persons in relation to any contracts touching the real estate of their decedent which comes in to
their hands by right of inheritance; chan roblesvirtualawlibrarythey take such property subject to all the
obligations resting thereon in the hands of him from whom they derive their rights.
(See also Galasinao vs. Austria, 51 Off. Gaz. (No. 6) p. 2874 and de Guzman vs. Salak, 91 Phil., 265).
The binding effect of contracts upon the heirs of the deceased party is not altered by the provision in our
Rules of Court that money debts of a deceased must be liquidated and paid from his estate before the
residue is distributed among said heirs (Rule 89). The reason is that whatever payment is thus made
from the estate is ultimately a payment by the heirs and distributees, since the amount of the paid claim
in fact diminishes or reduces the shares that the heirs would have been entitled to receive.
Under our law, therefore, the general rule is that a partys contractual rights and obligations are
transmissible to the successors. The rule is a consequence of the progressive depersonalization of
patrimonial rights and duties that, as observed by Victorio Polacco, has characterized the history of
these institutions. From the Roman concept of a relation from person to person, the obligation has
evolved into a relation from patrimony to patrimony, with the persons occupying only a representative
position, barring those rare cases where the obligation is strictly personal, i.e., is contracted intuitu
personae, in consideration of its performance by a specific person and by no other. The transition is
marked by the disappearance of the imprisonment for debt.
Of the three exceptions fixed by Article 1311, the nature of the obligation of the surety or guarantor does
not warrant the conclusion that his peculiar individual qualities are contemplated as a principal
inducement for the contract. What did the creditor Luzon Surety Co. expect of K. H. Hemady when it
accepted the latter as surety in the counterbonds? Nothing but the reimbursement of the moneys that
the Luzon Surety Co. might have to disburse on account of the obligations of the principal debtors. This
reimbursement is a payment of a sum of money, resulting from an obligation to give; chan
roblesvirtualawlibraryand to the Luzon Surety Co., it was indifferent that the reimbursement should be
made by Hemady himself or by some one else in his behalf, so long as the money was paid to it.

The second exception of Article 1311, p. 1, is intransmissibility by stipulation of the parties. Being
exceptional and contrary to the general rule, this intransmissibility should not be easily implied, but must
be expressly established, or at the very least, clearly inferable from the provisions of the contract itself,
and the text of the agreements sued upon nowhere indicate that they are non-transferable.
(b) Intransmisibilidad por pacto. Lo general es la transmisibilidad de darechos y obligaciones; chan
roblesvirtualawlibraryle excepcion, la intransmisibilidad. Mientras nada se diga en contrario impera el
principio de la transmision, como elemento natural a toda relacion juridica, salvo las personalisimas. Asi,
para la no transmision, es menester el pacto expreso, porque si no, lo convenido entre partes trasciende
a sus herederos.
Siendo estos los continuadores de la personalidad del causante, sobre ellos recaen los efectos de los
vinculos juridicos creados por sus antecesores, y para evitarlo, si asi se quiere, es indespensable
convension terminante en tal sentido.
Por su esencia, el derecho y la obligacion tienden a ir ms all de las personas que les dieron vida, y a
ejercer presion sobre los sucesores de esa persona; chan roblesvirtualawlibrarycuando no se quiera
esto, se impone una estipulacion limitativa expresamente de la transmisibilidad o de cuyos tirminos
claramente se deduzca la concresion del concreto a las mismas personas que lo otorgon. (Scaevola,
Codigo Civil, Tomo XX, p. 541-542) (Emphasis supplied.)
Because under the law (Article 1311), a person who enters into a contract is deemed to have contracted
for himself and his heirs and assigns, it is unnecessary for him to expressly stipulate to that effect; chan
roblesvirtualawlibraryhence, his failure to do so is no sign that he intended his bargain to terminate upon
his death. Similarly, that the Luzon Surety Co., did not require bondsman Hemady to execute a
mortgage indicates nothing more than the companys faith and confidence in the financial stability of the
surety, but not that his obligation was strictly personal.
The third exception to the transmissibility of obligations under Article 1311 exists when they are not
transmissible by operation of law. The provision makes reference to those cases where the law
expresses that the rights or obligations are extinguished by death, as is the case in legal support (Article
300), parental authority (Article 327), usufruct (Article 603), contracts for a piece of work (Article 1726),
partnership (Article 1830 and agency (Article 1919). By contract, the articles of the Civil Code that
regulate guaranty or suretyship (Articles 2047 to 2084) contain no provision that the guaranty is
extinguished upon the death of the guarantor or the surety.
The lower court sought to infer such a limitation from Art. 2056, to the effect that one who is obliged to
furnish a guarantor must present a person who possesses integrity, capacity to bind himself, and
sufficient property to answer for the obligation which he guarantees. It will be noted, however, that the
law requires these qualities to be present only at the time of the perfection of the contract of guaranty. It
is self-evident that once the contract has become perfected and binding, the supervening incapacity of
the guarantor would not operate to exonerate him of the eventual liability he has contracted; chan
roblesvirtualawlibraryand if that be true of his capacity to bind himself, it should also be true of his
integrity, which is a quality mentioned in the article alongside the capacity.
The foregoing concept is confirmed
follows:chanroblesvirtuallawlibrary

by

the

next

Article

2057,

that

runs

as

ART. 2057. If the guarantor should be convicted in first instance of a crime involving dishonesty or
should become insolvent, the creditor may demand another who has all the qualifications required in the
preceding article. The case is excepted where the creditor has required and stipulated that a specified
person should be guarantor.
From this article it should be immediately apparent that the supervening dishonesty of the guarantor
(that is to say, the disappearance of his integrity after he has become bound) does not terminate the
contract but merely entitles the creditor to demand a replacement of the guarantor. But the step remains
optional in the creditor:chanroblesvirtuallawlibrary it is his right, not his duty; chan
roblesvirtualawlibraryhe may waive it if he chooses, and hold the guarantor to his bargain. Hence Article
2057 of the present Civil Code is incompatible with the trial courts stand that the requirement of integrity
in the guarantor or surety makes the latters undertaking strictly personal, so linked to his individuality
that the guaranty automatically terminates upon his death.
The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co. not being
rendered intransmissible due to the nature of the undertaking, nor by the stipulations of the contracts
themselves, nor by provision of law, his eventual liability thereunder necessarily passed upon his death
to his heirs. The contracts, therefore, give rise to contingent claims provable against his estate under
section 5, Rule 87 (2 Moran, 1952 ed., p. 437; chan roblesvirtualawlibraryGaskell & Co. vs. Tan Sit, 43
Phil. 810, 814).

The most common example of the contigent claim is that which arises when a person is bound as
surety or guarantor for a principal who is insolvent or dead. Under the ordinary contract of suretyship the
surety has no claim whatever against his principal until he himself pays something by way of satisfaction
upon the obligation which is secured. When he does this, there instantly arises in favor of the surety the
right to compel the principal to exonerate the surety. But until the surety has contributed something to the
payment of the debt, or has performed the secured obligation in whole or in part, he has no right of
action against anybody no claim that could be reduced to judgment. (May vs. Vann, 15 Pla.,
553; chan roblesvirtualawlibraryGibson vs. Mithell, 16 Pla., 519; chan roblesvirtualawlibraryMaxey vs.
Carter, 10 Yarg. [Tenn.], 521 Reeves vs. Pulliam, 7 Baxt. [Tenn.], 119; chan roblesvirtualawlibraryErnst
vs. Nou, 63 Wis., 134.)
For Defendant administratrix it is averred that the above doctrine refers to a case where the surety files
claims against the estate of the principal debtor; chan roblesvirtualawlibraryand it is urged that the rule
does not apply to the case before us, where the late Hemady was a surety, not a principal debtor. The
argument evinces a superficial view of the relations between parties. If under the Gaskell ruling, the
Luzon Surety Co., as guarantor, could file a contingent claim against the estate of the principal debtors if
the latter should die, there is absolutely no reason why it could not file such a claim against the estate of
Hemady, since Hemady is a solidary co-debtor of his principals. What the Luzon Surety Co. may claim
from the estate of a principal debtor it may equally claim from the estate of Hemady, since, in view of the
existing solidarity, the latter does not even enjoy the benefit of exhaustion of the assets of the principal
debtor.
The foregoing ruling is of course without prejudice to the remedies of the administratrix against the
principal debtors under Articles 2071 and 2067 of the New Civil Code.
Our conclusion is that the solidary guarantors liability is not extinguished by his death, and that in such
event, the Luzon Surety Co., had the right to file against the estate a contingent claim for
reimbursement. It becomes unnecessary now to discuss the estates liability for premiums and stamp
taxes, because irrespective of the solution to this question, the Luzon Suretys claim did state a cause of
action, and its dismissal was erroneous.
Wherefore, the order appealed from is reversed, and the records are ordered remanded to the court of
origin, with instructions to proceed in accordance with law. Costs against the
Administratrix- Appellee. SO ORDERED.

aforesaid quashed a writ of execution issued against the Times Surety & Insurance Co., Inc., and
cancelled the undertaking of said surety company.
The essential and uncontroverted facts of the case may be summarized as follows:
Luzon Steel Corporation has sued Metal Manufacturing of the Philippines and Jose O. Sia, the former's
manager, for breach of contract and damages. It obtained a writ of preliminary attachment of the
properties of the defendants, but the attachment was lifted upon a P25,000.00 counterbond executed by
the defendant Sia, as principal, and the Times Surety & Insurance Co., Inc. (hereinafter designated as
the surety), as solidary guarantor, in the following terms:
WHEREFORE, we JOSE O. SIA, as principal and the TIMES SURETY & INSURANCE CO.,
INC., as Surety, in consideration of the dissolution of attachment, hereby jointly and severally
bind ourselves in the sum of Twenty Five Thousand Pesos (P25,000.00), Philippine
Currency, to answer for the payment to the plaintiff of any judgment it may recover in the
action in accordance with Section 12, Rule 59, of the Rules of Court. (pp. 32, 45, Rec. on
Appeal.)
Issues having been joined, plaintiff and defendant (without intervention of the surety) entered into a
compromise whereby defendant Sia agreed to settle the plaintiff's claim in the following manner:
1. That the defendant shall settle with the Plaintiff the amount of TWENTY FIVE THOUSAND
(P25,000.00) PESOS, in the following manner: FIVE HUNDRED (P500.00) PESOS, monthly
for the first six (6) months to be paid at the end of every month and to commence in January,
1965, and within one month after paying the last installment of P500.00, the balance of
P22,000.00 shall be paid in lump sum, without interest. It is understood that failure of the
Defendant to pay one or any installment will make the whole obligation immediately due and
demandable and that a writ of execution will be issued immediately against Defendants
bond.lawphi1.et
The compromise was submitted to the court and the latter approved it, rendered judgment in conformity
therewith, and directed the parties to comply with the same (Record on Appeal, page 22).
Defendant having failed to comply, plaintiff moved for and obtained a writ of execution against defendant
and the joint and several counterbond. The surety, however, moved to quash the writ of execution
against it, averring that it was not a party to the compromise, and that the writ was issued without giving
the surety notice and hearing. The court, overruling the plaintiff's opposition, set aside the writ of
execution, and later cancelled the counterbond, and denied the motion for reconsideration. Hence this
appeal.

G.R. No. L-26449

May 15, 1969

LUZON STEEL CORPORATION, represented by TOMAS AQUINO CU, plaintiff-appellant,

vs.
JOSE O. SIA, defendant,
TIMES SURETY & INSURANCE CO. INC., surety-appellee.
German A. Sipin for plaintiff-appellant.
Galicano S. Calapatia for surety-appellee.

Main issues posed are (1) whether the judgment upon the compromise discharged the surety from its
obligation under its attachment counterbond and (2) whether the writ of execution could be issued
against the surety without previous exhaustion of the debtor's properties.
Both questions can be solved by bearing in mind that we are dealing with a counterbond filed
to discharge a levy on attachment. Rule 57, section 12, specifies that an attachment may be discharged
upon the making of a cash deposit or filing a counterbond "in an amount equal to the value of the
property attached as determined by the judge"; that upon the filing of the counterbond "the property
attached ... shall be delivered to the party making the deposit or giving the counterbond, or the person
appearing on his behalf, the deposit or counterbond aforesaid standing in place of the property so
released".

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

Direct appeal from two orders, dated 19 May and 5 June 1965, issued by the Court of First Instance of
Manila (Judge Francisco Arca presiding), in its Civil Case No. 54913, entitled Luzon Steel Corporation,
plaintiff vs. Metal Manufacturing of the Philippines, Inc., and Jose O. Sia, defendants, whereby the court

The italicized expressions constitute the key to the entire problem. Whether the judgment be rendered
after trial on the merits or upon compromise, such judgment undoubtedly may be made effective upon
the property released; and since the counterbond merely stands in the place of such property, there is no

reason why the judgment should not be made effective against the counterbond regardless of the
manner how the judgment was obtained.
Squarely on the point, and rebutting the appellee's apprehension that the compromise could be the
result of a collusion between the parties to injure the surety, is our decision in Anzures vs. Alto Surety &
Insurance Co., Inc., et al., 92 Phil. 742, where this Court, through former Chief Justice Paras, ruled as
follows:
Under section 12, Rule 59, of the Rules of Court, the bond filed, as in this case, for the
discharge of an attachment is "to secure the payment to the plaintiff of any judgment he may
recover in the action," and stands "in place of the property so released". It follows that the
order of cancellation issued by the respondent judge is erroneous. Indeed, judgment had
already been rendered by the Court of First Instance of Manila in civil case No. 11748,
sentencing Benjamin Aguilar to pay the sum of P3,500.00 to the petitioner; and it is not
pretended that said judgment is a nullity. There is no point in the contention of the
respondent Surety Company that the compromise was entered into without its knowledge
and consent, thus becoming as to it essentially fraudulent. The Surety is not a party to civil
case No. 11748 and, therefore, need not be served with notice of the petition for judgment.
As against the conjecture of said respondent that the parties may easily connive by means of
a compromise to prejudice it, there is also the likelihood that the same end may be attained
by parties acting in bad faith through a simulated trial. At any rate, it is within the power of the
Surety Company to protect itself against a risk of the kind.
Wherefore, the order of the respondent Judge cancelling the bond in question is set aside.
So ordered with costs against the respondent Alto Surety & Insurance Co., Inc.
The lower court and the appellee herein appear to have relied on doctrines of this Court concerning the
liability of sureties in bonds filed by a plaintiff for the issuance of writs of attachment, without
discriminating between such bonds and those filed by a defendant for the lifting of writs of attachment
already issued and levied. This confusion is hardly excusable considering that this Court has already
called attention to the difference between these kinds of bonds. Thus, in Cajefe vs. Judge Fernandez, et
al., L-15709, 19 October 1960, this Court pointed out that
The diverse rule in section 17 of Rule 59 for counterbonds posted to obtain the lifting of a writ
of attachment is due to these bonds being security for the payment of any judgment that the
attaching party may obtain; they are thus mere replacements of the property formerly
attached, and just as the latter may be levied upon after final judgment in the case in order to
realize the amount adjudged, so is the liability of the countersureties ascertainable after the
judgment has become final. This situation does not obtain in the case of injunction
counterbonds, since the sureties in the latter case merely undertake "to pay all damages that
the plaintiff may suffer by reason of the continuance ... of the acts complained of" (Rule 60,
section 6) and not to secure payment of the judgment recovered. 1
It was, therefore, error on the part of the court below to have ordered the surety bond cancelled, on the
theory that the parties' compromise discharged the obligation of the surety.
As declared by us in Mercado vs. Macapayag, 69 Phil. 403, 405-406, in passing upon the liability of
counter sureties in replevin who bound themselves to answer solidarily for the obligations of the
defendants to the plaintiffs in a fixed amount of P912.04, to secure payment of the amount that said
plaintiff be adjudged to recover from the defendants, 2
the liability of the sureties was fixed and conditioned on the finality of the judgment rendered
regardless of whether the decision was based on the consent of the parties or on the merits.
A judgment entered on a stipulation is nonetheless a judgment of the court because
consented to by the parties.

But the surety in the present case insists (and the court below so ruled) that the execution issued against
it was invalid because the writ issued against its principal, Jose O. Sia, et al., defendants below, had not
been returned unsatisfied; and the surety invoked in its favor Section 17 of Rule 57 of the Revised Rules
of Court (old Rule 59), couched in the following terms:
SEC. 17. When execution returned unsatisfied, recovery had upon bond. If the execution
be returned unsatisfied in whole or in part, the surety or sureties on any counterbond given
pursuant to the provisions of this rule to secure the payment of the judgment shall become
charged on such counter-bond, and bound to pay to the judgment creditor upon demand, the
amount due under the judgment, which amount may be recovered from such surety or
sureties after notice and summary hearing in the same action.
The surety's contention is untenable. The counterbond contemplated in the rule is evidently an ordinary
guaranty where the sureties assume a subsidiary liability. This is not the case here, because the surety
in the present case bound itself "jointly and severally" (in solidum) with the defendant; and it is
prescribed in Article 2059, paragraph 2, of the Civil Code of the Philippines that excusion (previous
exhaustion of the property of the debtor) shall not take place "if he (the guarantor) has bound himself
solidarily with the debtor". The rule heretofore quoted cannot be construed as requiring that an execution
against the debtor be first returned unsatisfied even if the bond were a solidary one; for a procedural rule
may not amend the substantive law expressed in the Civil Code, and further would nullify the express
stipulation of the parties that the surety's obligation should be solidary with that of the defendant.
A second reason against the stand of the surety and of the court below is that even if the surety's
undertaking were not solidary with that of the principal debtor, still he may not demand exhaustion of the
property of the latter, unless he can point out sufficient leviable property of the debtor within Philippine
territory. There is no record that the appellee surety has done so. Says Article 2060 of the Civil Code of
the Philippines:
ART. 2060. In order that the guarantor may make use of the benefit of excussion, he must
set it up against the creditor upon the latter's demand for payment from him, and point out to
the creditor available property of the debtor within Philippine territory, sufficient to cover the
amount of the debt.
A third reason against the thesis of appellee is that, under the rule and its own terms, the counter-bond
is only conditioned upon the rendition of the judgment. Payment under the bond is not made to depend
upon the delivery or availability of the property previously attached, as it was under Section 440 of the
old Code of Civil Procedure. Where under the rule and the bond the undertaking is to pay the judgment,
the liability of the surety or sureties attaches upon the rendition of the judgment, and the issue of an
execution and its return nulla bona is not, and should not be, a condition to the right to resort to the
bond. 3
It is true that under Section 17 recovery from the surety or sureties should be "after notice and summary
hearing in the same action". But this requirement has been substantially complied with from the time the
surety was allowed to move for the quashal of the writ of execution and for the cancellation of their
obligation.
WHEREFORE, the orders appealed from are reversed, and the court of origin is ordered to proceed with
the execution against the surety appellee, Times Surety & Insurance Co., Inc. Costs against said
appellee.

[G.R. No. 109941. August 17, 1999]

PACIONARIA C. BAYLON, petitioner, vs. THE HONORABLE COURT OF APPEALS (Former Ninth
Division) and LEONILA TOMACRUZ, respondents.

DECISION

withdraw it anytime after the due date add to it the fact that their friend, Pacionaria Baylon, expresses
her unequivocal gurarantee to the payment of the amount loaned.

GONZAGA-REYES, J.:
xxx xx xxx
This is a petition for review by way of certiorari under Rule 45 of the Revised Rules of Court of the
decision of the Court of Appeals[1] dated November 29, 1991 in CA-G.R. CV No. 27779 affirming the
decision[2]of the Regional Trial Court of Quezon City, Branch 88, dated June 14, 1990 in Civil Case No.
Q-89-2483 and the Resolution of the Court of Appeals dated April 27, 1993 denying petitioner's Motion
for Reconsideration.

WHEREFORE, premises considered, judgment is hereby rendered against the defendants Pacionaria C.
Baylon and Mariano Baylon, to pay the plaintiff the sum of P150,000.00, with interest at the legal rate
from the filing of this complaint until full payment thereof, to pay the total sum of P21,000.00 as attorneys
fees and costs of suit.[9]

The pertinent facts, as found by the trial court and affirmed by respondent court, are briefly
narrated as follows:

On appeal, the trial court's decision was affirmed by the Court of Appeals. Hence, this present
case wherein petitioner makes the following assignment of errors -

Sometime in 1986, petitioner Pacionaria C. Baylon introduced private respondent Leonila

Tomacruz, the co-manager of her husband at PLDT, to Rosita B. Luanzon. [3] Petitioner told private
respondent that Luanzon has been engaged in business as a contractor for twenty years and she invited
private respondent to lend Luanzon money at a monthly interest rate of five percent (5%), to be used as
capital for the latter's business. Private respondent, persuaded by the assurances of petitioner that
Luanzon's business was stable and by the high interest rate, agreed to lend Luanzon money in the
amount of P150,000.On June 22, 1987, Luanzon issued and signed a promissory note acknowledging
receipt of the P150,000 from private respondent and obliging herself to pay the former the said amount
on or before August 22, 1987. [4] Petitioner signed the promissory note, affixing her signature under the
word "guarantor." Luanzon also issued a postdated Solidbank check no. CA418437 dated August 22,
1987 payable to Leonila Tomacruz in the amount of P150,000. [5] Subsequently, Luanzon replaced this
check with another postdated Solidbank check no. 432945 dated December 22, 1987, in favor of the
same payee and covering the same amount. [6] Several checks in the amount of P7,500 each were also
issued by Luanzon and made payable to private respondent. [7]

I. RESPONDENT COURT ERRED IN HOLDING THAT THE PRIVATE RESPONDENT TOMACRUZ

WAS A CREDITOR OF DEFENDANT LUANZON AND NOT AN INVESTOR IN THE CONSTRUCTION
BUSINESS OF ART ENTERPRISES & CONSTRUCTION, INC.

Private respondent made a written demand upon petitioner for payment, which petitioner did not
heed. Thus, on May 8, 1989, private respondent filed a case for the collection of a sum of money with
the Regional Trial Court (RTC) of Quezon City, Branch 88, against Luanzon and petitioner herein,
impleading Mariano Baylon, husband of petitioner, as an additional defendant. However, summons was
never served upon Luanzon.
In her answer, petitioner denied having guaranteed the payment of the promissory note issued by
Luanzon. She claimed that private respondent gave Luanzon the money, not as a loan, but rather as an
investment in Art Enterprises and Construction, Inc. - the construction business of
Luanzon. Furthermore, petitioner avers that, granting arguendo that there was a loan and petitioner
guaranteed the same, private respondent has not exhausted the property of the principal debtor nor has
she resorted to all the legal remedies against the principal debtor as required by law. Finally, petitioner
claims that there was an extension of the maturity date of the loan without her consent, thus releasing
her from her obligation.[8]
After trial on the merits, the lower court ruled in favor of private respondent. In its Decision dated
June 14, 1990, it stated that The evidence and the testimonies on record clearly established a (sic) fact that the transaction between
the plaintiff and defendants was a loan with five percent (5%) monthly interest and not an investment. In
fact they all admitted in their testimonies that they are not given any stock certificate but only promissory
notes similar to Exhibit B wherein it was clearly stated that defendant Luanzon would pay the amount of
indebtedness on the date due. Postdated checks were issued simultaneously with the promissory notes
to enable the plaintiff and others to withdraw their money on a certain fixed time. This shows that they
were never participants in the business transaction of defendant Luanzon but were creditors.
The evidences presented likewise show that plaintiff and others loan their money to defendant Luanzon
because of the assurance of the monthly income of five percent (5%) of their money and that they could

II. GRANTING, WITHOUT ADMITTING, THAT PETITIONER-APPELLANT BAYLON WAS A

"GUARANTOR" AS APPEARING IN THE NOTE (EXH. "A") THE RESPONDENT COURT ERRED IN
RULING THAT PETITIONER-APPELLANT BAYLON IS LIABLE TO THE PRIVATE RESPONDENT
BECAUSE THE LATTER HAS NOT TAKEN STEPS TO EXHAUST THE PROPERTY OF THE
PRINCIPAL DEBTOR AND HAS NOT RESORTED TO ALL THE LEGAL REMEDIES PROVIDED BY
LAW AGAINST THE DEBTOR, DEFENDANT LUANZON.
III. GRANTING, WITHOUT ADMITTING THAT PETITIONER-APPELLANT BAYLON WAS A
GUARANTOR UNDER THAT NOTE (EXHIBIT "A") DATED JUNE 22, 1987, THE LOWER COURT
ERRED IN RESOLVING THAT SHE WAS NOT RELEASED FROM HER GUARANTY BY THE
SUBSEQUENT TRANSACTIONS BETWEEN THE RESPONDENT-APPELLANT AND DEFENDANT
LUANZON.
At the outset, we note that petitioners claim that the factual findings of the lower court, which were
affirmed by the Court of Appeals, were based on a misapprehension of facts and contradicted by the
evidence on records[10] is a bare allegation and devoid of merit. As a rule, the conclusions of fact of the
trial court, especially when affirmed by the Court of Appeals, are final and conclusive and cannot be
reviewed on appeal by the Supreme Court. [11] Although this rule admits of several exceptions, [12] none of
the exceptions are in point in the present case. The factual findings of the respondent court are borne
out by the record and are based on substantial evidence.
Petitioner claims that there is no loan to begin with; that private respondent gave Luanzon the
amount of P150,000, not as a loan, but rather as an investment in the construction project of the latter.
[13]
In support of her claim, petitioner cites the use by private respondent of the words investment,
dividends, and commission in her testimony before the lower court; the fact that private respondent
received monthly checks from Luanzon in the amount of P7,500 from July to December, 1987,
representing dividends on her investment; and the fact that other employees of the Development Bank
of the Philippines made similar investments in Luanzons construction business. [14]
However, all the circumstances mentioned by petitioner cannot override the clear and
unequivocal terms of the June 22, 1987 promissory note whereby Luanzon promised to pay private
respondent the amount of P150,000 on or before August 22, 1987. The promissory note states as
follows:
June 22, 1987
To Whom It May Concern:

For value received, I hereby promise to pay Mrs. LEONILA TOMACRUZ the amount of ONE HUNDRED
FIFTY THOUSAND PESOS ONLY (P150,000.00) on or before August 22, 1987.
The above amount is covered by _____ Check No. _____ dated August 22, 1987.
(signed)
ROSITA B. LUANZON
G U R AR AN T O R :

speak of a guarantor when no debtor has been held liable for the obligation which is allegedly secured
by such guarantee. Although the principal debtor Luanzon was impleaded as defendant, there is nothing
in the records to show that summons was served upon her. Thus, the trial court never even acquired
jurisdiction over the principal debtor. We hold that private respondent must first obtain a judgment
against the principal debtor before assuming to run after the alleged guarantor.
IN VIEW OF THE FOREGOING, the petition is granted and the questioned Decision of the Court
of Appeals dated November 29, 1991 and Resolution dated April 27, 1993 are SET ASIDE. No
pronouncement as to costs.
SO ORDERED.

(signed)

G.R. No. L-27249 July 31, 1970

PACIONARIA O. BAYLON
Tel. No. 801-28-00

MANILA SURETY & FIDELITY CO., INC., plaintiff-appellant,

vs.
NOEMI ALMEDA, doing business under the name and style of ALMEDA TRADING, GENEROSO
ESQUILLO and NATIONAL MARKETING CORPORATION, defendants-appellees.

18 P. Mapa St., DBP Village

De Santos & Delfino for plaintiff-appellant.

Almanza, Las Pinas, M.M.[15]

Government Corporate Counsel Leopoldo M. Abellera and Trial Attorney Arsenio J. Mepale for
defendant-appellee National Marketing Corporation.

If the terms of a contract are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning of its stipulation shall control. [16] Resort to extrinsic aids and other extraneous
sources are not necessary in order to ascertain the parties' intent when there is no ambiguity in the
terms of the agreement.[17] Both petitioner and private respondent do not deny the due execution and
authenticity of the June 22, 1987 promissory note. All of petitioner's arguments are directed at
uncovering the real intention of the parties in executing the promissory note, but no amount of
argumentation will change the plain import of the terms thereof, and accordingly, no attempt to read into
it any alleged intention of the parties thereto may be justified. [18] The clear terms of the promissory note
establish a creditor-debtor relationship between Luanzon and private respondent. The transaction at
bench is therefore a loan, not an investment.
It is petitioner's contention that, even though she is held to be a guarantor under the terms of the
promissory note, she is not liable because private respondent did not exhaust the property of the
principal debtor and has not resorted to all the legal remedies provided by the law against the debtor.
[19]
Petitioner is invoking the benefit of excussion pursuant to article 2058 of the Civil Code, which
provides that The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of
the debtor, and has resorted to all the legal remedies against the debtor.
It is axiomatic that the liability of the guarantor is only subsidiary. [20] All the properties of the
principal debtor must first be exhausted before his own is levied upon. Thus, the creditor may hold the
guarantor liable only after judgment has been obtained against the principal debtor and the latter is
unable to pay, for obviously the exhaustion of the principals property - the benefit of which the guarantor
claims - cannot even begin to take place before judgment has been obtained. [21] This rule is embodied in
article 2062 of the Civil Code which provides that the action brought by the creditor must be filed against
the principal debtor alone, except in some instances when the action may be brought against both the
debtor and the principal debtor.[22]
Under the circumstances availing in the present case, we hold that it is premature for this Court to
even determine whether or not petitioner is liable as a guarantor and whether she is entitled to the
concomitant rights as such, like the benefit of excussion, since the most basic prerequisite is wanting that is, no judgment was first obtained against the principal debtor Rosita B. Luanzon. It is useless to

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

This is an appeal from the ruling of the Court of First Instance of Manila, rendered in Civil Case No.
62518, that the insolvency of a debtor-principal does not release the surety from its obligation to the
creditor under the bond.
The lower court found that on 4 December 1961, Noemi Almeda, married to Generoso Esquillo, and
doing business under the name and style of Almeda Trading, entered into a contract with the National
Marketing Corporation (NAMARCO) for the purchase of goods on credit, payable in 30 days from the
dates of deliveries thereof. As required by' the NAMARCO, a bond for P5,000.00, undertaken by the
Manila Surety & Fidelity Co., Inc. (Exhibit "A"), was posted by the purchaser to secure the latter's faithful
compliance with the terms of the contract. The agreement was later supplemented on 17 October 1962
and a new bond for the same amount of P5,000.00, also undertaken by the Manila Surety & Fidelity Co.,
Inc. (Exhibit "C"), 1 was given in favor of the NAMARCO The bonds uniformly contained the following
provisions:
2. Should the Principal's account on any purchase be not paid on time, then the
Surety, shall, upon demand, pay said account immediately to the NAMARCO;
3. Should the account of the Principal exceed the amount of FIVE THOUSAND
(P5,000.00) PESOS, Philippine Currency, such excess up to twenty (20%) per
cent of said amount shall also be deemed secured by this Bond;
4. The Surety expressly waives its right to demand payment and notice of nonpayment and agreed that the liability of the Surety shall be direct and immediate
and not contingent upon the exhaustion by the NAMARCO of whatever remedies
it may have against the Principal and same shall be valid and continuous until the
obligation so guaranteed is paid in full; and

5. The Surety also waives its right to be notified of any extension of the terms of
payment which the NAMARCO may give to the Principal, it being understood that
were extension is given to satisfy the account, that such extension shall not
extinguish the guaranty unless the same is made against the express wish of the
Surety.
The records show that on 8 June 1965, the marketing firm demanded from the purchaser Almeda
Trading the settlement of its back accounts which, as of 15 May 1965, allegedly amounted to
P16,335.09. Furnished with copy of the NAMARCO's demand- letter, the surety company thereafter also
wrote to the said purchaser urging it to liquidate its unsettled accounts with the NAMARCO (Exhibit "E1"). It appears, however, that previous to this, or on 26 March 1965, Generoso Esquillo instituted
voluntary insolvency proceeding in the Court of First Instance of Laguna (Sp. Proc. No. SP-181), and by
order of said court of 6 April 1965, he was declared insolvent, with listed credits amounting to
P111,873.00 2 and properties valued at P39,0,00.00. In the meeting of the named creditors of the
insolvent held on 14 May 1965 for the purpose of electing the assignee of his properties, the NAMARCO
was represented and its contingent claim duly registered. 3
On 10 September 1965, the Manila Surety & Fidelity Co., Inc., commenced in the Court of First Instance
of Manila Civil Case No. 62518 against the spouses Noemi Almeda and Generoso Esquillo, and the
NAMARCO, to secure its release from liability under the bonds executed in favor of NAMARCO. The
action was based on the allegation that the defendant spouses had become insolvent and that
defendant NAMARCO had rescinded its agreement with them and had already demanded payment of
the outstanding accounts of the couple.
Defendant NAMARCO filed its answer denying the averments of the complaint and setting up, as
affirmative defenses, lack of cause of action and the court's want of jurisdiction. On 16 December 1966,
the court rendered judgment sustaining NAMARCO's contention that the insolvency of the debtorprincipal did not discharge the surety's liability under the bond. Thus, the complaint was dismissed and
plaintiff surety company was ordered to pay off the indebtedness of the defendant spouses to the
NAMARCO to the extent of its (the Surety's) undertaking, plus attorneys' fees and costs. From this
decision, plaintiff surety interposed the present appeal.
Plaintiff-appellant's action to secure its discharge from the suretyship was based on Article 2071 of the
Civil Code,4 Which provides the surety with certain protective remedies that may be resorted to before
he has paid, but after he has become liable to do so. 5
Upon the other hand, the lower court's ruling, now on appeal, is anchored on an equally explicit provision
of the Insolvency law ( Act 1956, as amended), to writ:.
SEC. 68. ...
No discharge (of the insolvent from his obligations) shall release, discharge or
affect any person liable for the same debt, for or with the debtor, either as
partner, joint contractor, indorser, surety, or otherwise.
The issue posed by this appeal, therefore, is whether a surety can avail itself of the relief, specifically
afforded in Article 2071 of the Civil Code and be released from its liability under the bonds,
notwithstanding a prior declaration of the insolvency of the debtor-principal in an insolvency proceeding.
We see no reversible error in the decision appealed.
There is no question that under the bonds posted in favor of the NAMARCO in this case, the surety
company assumed to make immediate payment to said firm of any due and unsettled accounts of the
debtor-principal, even without demand and notice of the debtor's non-payment, the surety, in fact,
agreeing that its liability to the creditor shall be direct, without benefit of exhaustion of the debtor's
properties, and to remain valid and continuous until the guaranteed obligation is fully satisfied. In short,

appellant secured to the creditor not just the payment by the debtor-principal of his accounts, but the
payment itself of such accounts. Clearly, a contract of suretyship was thus created, the appellant
becoming the insurer, not merely of the debtor's solvency or ability to pay, but of the debt itself. 6 Under
the Civil Code, with the debtor's insolvency having been judicially recognized, herein appellant's resort to
the courts to be released from the undertaking thus assumed would have been
appropriate. 7 Nevertheless, the guarantor's action for release can only be exercised against the principal
debtor and not against the creditor, as is apparent from the precise terms of the legal provision. "The
guarantor" (says Article 2071 of the Civil Code of the Philippines) "even before having paid,
may proceed against the principal debtor ------------------ to obtain a release from the guaranty
---------------." The juridical rule grants no cause of action against the creditor for a release of the
guaranty, before payment of the credit, for a plain reason: the creditor is not compellable to release the
guaranty (which is a property right) against his will. For, the release of the guarantor imports an
extinction of his obligation to the creditor; it connotes, therefore, either a remission or a novation by
subrogation, and either operation requires the creditor's assent for its validity (See Article 1270 and
Article 1301). Especially should this be the case where the principal debtor has become insolvent, for
the purpose of a guaranty is exactly to protect the creditor against such a contingency.
In what manner, then, can the article operate? Where the debtor can not make full payment, the release
of the guarantor can only be obtained with the assent of the creditor, by persuading the latter to accept
an equally safe security, either another suitable guaranty or else a pledge or mortgage. Absent the
creditor's consent, the principal debtor may only proceed to protect the demanding guarantor by a
counterbond or counter guaranty, as is authorized by the codal precept (Article 2071 in fine). To this
effect is the opinion of the Spanish commentator, Scaevola, in his explanations to Article 1843 of the
Spanish Civil Code (from which Article 2071 of our Code is derived). Says Scaevola:
Como se prestaran tales garantias al fiador? Lo contesta el aludido parrafo final
del Articulo 1843. Se hara por uno de estos dos modos: ora consiguiendo el
deudor que el acreedor abandone libremente aquella fianza, lo cual ocurrira
dandole el deudor otra garantia analoga, ya por razon de la persona fiadora, ya
ofreciendole el deudor al mismo fiador, pero continuando este como tal, una
garantia que lo ponga a cubierto de los procedimientos del acreedor y del peligro
de insolvencia del deudor. (Scaevola Codigo Civil, 2d Ed., Vol. 28, pp. 651652).
The appellant's troubles are compounded by the fact that when the complaint for release from suretyship
was filed in the Manila court on 10 September 1965, the insolvency case in the Laguna court was
already pending and the debtor-principal Generoso Esquillo had been judicially declared an insolvent.
By the time the appellant sued, therefore, the insolvency court had already acquired jurisdiction over all
the debtor's properties and of all claims by and against him, to the exclusion of any other court. 8 In the
circumstances, the lawful recourse of the guarantor of an obligation of the insolvent would be to file a
contingent claim in the insolvency proceeding, if his rights as such guarantor or surety are not to be
barred by the subsequent discharge of the insolvent debtor from all his liabilities. 9
In the case at bar, it is true that the guaranteed claim of NAMARCO was registered or filed in the
insolvency proceeding. But appellant can not utilize this fact in support of its petition for release from the
assumed undertaking. For one thing, it is almost a certainty that creditor NAMARCO can not secure full
satisfaction of its credit out of the debtor's properties brought into the insolvency proceeding.
Considering that under the contract of suretyship, which remains valid and subsisting, the entire
obligation may even be demanded directly against the surety itself, the creditor's act in resorting first to
the properties of the insolvent debtor is to the surety's advantage At least, the latter would be
answerable only for whatever amount may remain not covered or unsatisfied by the disposition of the
insolvent's properties, 1 0 with the right to go against debtor-principal after it has made the necessary
payment to the creditor. For another, the fact that the debtor- principal may be discharged from all his
outstanding obligations in the insolvency case would not benefit the surety, as to relieve it of its liability
under the surety agreement. That is so provided in Section 68 of the Insolvency Act which shall be
controlling in the case.
Finally, even supposing that the present action is not blocked by the insolvency proceedings because it
does not aim at reducing the insolvent's assets, but only at having the suretyship substituted by other
equivalent security, still it is difficult to see how the principal debtor, with his business, property and

assets impounded by the insolvency court, can obtain other securities with which to replace the guaranty
given by the plaintiff-appellant. The action at bar would seem, under the circumstances, destined to end
in futility.
WHEREFORE, with the modification that appellant's liability shall be limited to the payment of whatever
amount may remain due to the appellee NAMARCO and is unsatisfied in the insolvency proceeding, but
not to exceed the amount of the surety's undertaking under the bonds, the decision appealed from is
affirmed in all other respects. Costs against appellant surety company.

3) ACCRUAL OF ACTION: Notwithstanding the provision of the next preceding paragraph

where the obligation involves a liquidated amount for the payment of which the COMPANY
has become legally liable under the terms of the obligation and its suretyship undertaking, or
by the demand of the obligee or otherwise and the latter has merely allowed the COMPANY
a term or extension for payment of the latter's demand the full amount necessary to
discharge the COMPANY'S aforesaid liability irrespective of whether or not payment has
actually been made by the COMPANY, the COMPANY for the protection of its interest may
forthwith proceed against the undersigned or either of them by court action or otherwise to
enforce payment, even prior to making payment to the obligee which may hereafter be done
by the COMPANY;
It is not denied that because of appellant Reyes' failure, the amount of P10,645.38 became due and that,
as a result, appellee Cosmopolitan Insurance Co., Inc., became liable on its bond.
Appellant Reyes assails, however, the validity of paragraph 3 of the Indemnity Agreement, which he
contends is contrary to public policy. He argues that under Article 2071 of the Civil Code, when the debt
has become demandable "the action of the guarantor is to obtain release from the guaranty, or to
demand a security that shall protect him from any proceedings by the creditor and from the danger of
insolvency of the debtor" but not an action for indemnification.

G.R. No. L-20199

November 23, 1965

THE COSMOPOLITAN INSURANCE CO., INC., plaintiff-appellee,

vs.
ANGEL B. REYES, defendant-appellant.
M. Perez Cardenas and Apolonio Abola for plaintiff-appellee.
Francisco de la Fuente for defendant-appellant.

Elucidating further, the appellant raises the point that there is absolutely no authority in any existing law
allowing any person in his capacity as guarantor, as in this case, to obtain, to recover, to receive by way
of money judgment from the debtor the amount due to the creditor. The appellant further argues: What
security does appellant have, once the amount has been received by appellee from appellant, that the
same would be paid to the Collector of Internal Revenue?
All these points are squarely answered by the doctrine or principle laid down by this Court in the case
of Security Bank vs. Globe Assurance, 58 Off. Gaz. 3708 (April 30, 1962), where a similar indemnity
agreement of the parties is involved. In this case, the Supreme Court held that:

REGALA, J.:
This is an appeal from a decision of the Court of First Instance of Manila and certified to us by the Court
of Appeals as it involves only a question of law, ordering appellant Angel B. Reyes to pay the appellee
Cosmopolitan Insurance Co., Inc., the sum of P10,645.38 plus fifteen (15) per cent thereof, for attorney's
fees.
Indeed, the question presented is whether, under the Indemnity Agreement of the parties, the appellee,
as surety, can demand indemnification from appellant Reyes as principal, upon the latter's default, even
before the former has paid to the creditor.
It appears that appellee Cosmopolitan Insurance Co., Inc., filed a bond in favor of the Collector of
Internal Revenue to secure the payment in stated installments of the total amount of P25,422.85, which
appellant Reyes owed for income tax for the years, 1950, 1951, 1952 and 1953.
In consideration of the bond, appellant Reyes in turn signed an Indemnity Agreement whereby he bound
himself, among other things,
2) INDEMNITY: To indemnify the COMPANY upon its demand and keep it indemnified for
and to hold and save it harmless from and against, any and all payments, damage, cost,
losses, penalties, charges and expenses of whatever kind and nature which the COMPANY
as such surety shall or may, at any time make, sustain, incur and/or suffer or for which it has
or may become liable to the obligee, and to pay an additional amount as attorney's fees
equal to 20% of the amount due to the COMPANY by virtue hereof which in no case shall be
less than P50.00 and which shall be payable whether or not the case be extrajudicially
settled, it being understood that demand made upon anyone of the undersigned herein is
admitted as demand made on all of the signatories hereof.

The stipulation in the indemnity agreement allowing the surety to recover even before it paid
the creditor is enforceable. In accordance therewith, the surety may demand from the
indemnitors even before paying the creditors.
In the case of Alto Surety and Insurance Co., Inc. vs. Aguilar, et al., G.R. No. L-5625, March 16, 1954,
the Court laid down the following ruling:
The contention of appellants that the action of appellee (surety company) is premature or
that complaint fails to state a cause of action because it does not allege that the appellee has
paid to the bank the balance of their obligation, cannot be sustained. This is belied not only
by the allegations of the complaint but also by the agreement entered into between the
appellants and the appellee in favor of the bank. Thus, it appears from the complaint that the
renewed promissory note became due and payable on May 27, 1950 without the spouses
having paid any amount on the account in spite of the repeated demands, as a consequence
of which plaintiff surety became liable to pay the bank the amount of P1,150.00 plus
interests, under the terms of the Indemnity Agreement, the liability of the former as surety
became immediately demandable upon occurrence of the latter's (spouses) default.
Even after analyzing the provisions of the contract entered into between the parties, we are of the
opinion that they do not in any way militate against the public good or that they are contrary to the policy
of the law.
The other point raised by the appellant is that the attorney's fees awarded to the plaintiff are
unreasonable or unconscionable. This is also untenable. It is significant that the appellant did not raise
the issue of attorney's fees in his answer. Furthermore, we are of the opinion that the award of fifteen
(15) per cent attorney's fees in this case is not unreasonable. In fact, in one case before the Court of
Industrial Relations (Cruz vs. Court of Industrial Relations, et al., G.R. No. L-18277, August 31, 1963),

this Court sustained the award of attorney's fees to the petitioner computed at thirty (30) per cent, as
reasonable.
IN VIEW OF THE FOREGOING, the decision of the Court of First Instance is hereby affirmed.
WithoG.R. No. L-16550
January 31, 1962
ALLEN McCONN, plaintiff-appellant,
vs.
PAUL HARAGAN, ET AL., defendants,
ASSOCIATE INSURANCE and SURETY CO., INC., defendant-appellee.
Jose Desiderio, Jr., Andres E. Matias and Juan C. Nabong, Jr. for plaintiff-appellant.
M. Perez Cardenas for defendant-appellee.
CONCEPCION, J.:
On June 30, 1955 pending hearing of Civil Case No. 24790 of the Court of First Instance of Manila,
entitled "Morris McConn v. Paul Haragan", which was scheduled to take place on September 16, 1955
the Bureau of Immigration advised said court that defendant Paul Haragan had applied for an
immigration clearance and a re-entry permit to enable him to leave the Philippines for 15 days only and
requested information whether the court had any objection thereto. By an order dated July 11, 1955, the
court required Haragan to file a bond of P4,000 "to answer for his return to the Philippines and the
prosecution of his case against him, with the understanding, that upon his failure to return, said bond will
answer pro tanto for any judgment that may be rendered against him". Thereupon, or on July 12, 1955,
Haragan submitted a bond, subcribed by him and the Associated Insurance & Surety Co., as principal
and surety, respectively, reading: .
WHEREAS, the above-bounden PRINCIPAL, is intending to leave the Philippines on a
business trip to Hongkong and Tokyo, Japan, for a period of thirty (30) days from date of his
departure, in connection with his business;
WHEREAS, the above-bounden PRINCIPAL, has a pending case before the Court of First
Instance of Manila, Branch III, entitled: "Allen McConn, Plaintiff, vs. Paul Haragan,
Defendant", Civil Case No. 24790, which is scheduled for hearing on September 16, 1955;
WHEREAS, before the above-bounden PRINCIPAL could leave the Philippines for
Hongkong and Tokyo, Japan, the above-mentioned Court has required him to post a Surety
Bond, in the amount of PESOS FOUR THOUSAND ONLY (P4,000.00) Philippine Currency,
the guarantee that he will return to the Philippines on or before September 16, 1955;
NOW, THEREFORE, for and in consideration of the above premises, the PRINCIPAL and
the SURETY, hereby bind themselves, jointly and severally, in favor of the Republic of the
Philippines, or its authorized representatives, in the sum of PESOS FOUR THOUSAND
ONLY (P4,000.00) Philippine Currency, that the herein PRINCIPAL will return to the
Philippines on or before September 16, 1955 and that should he fail to do so, said bond will
answer pro tanto for any judgment that may be rendered against him.
Soon thereafter, or on July 19, 1955, the court issued an order stating that "in view of said bond, it would
have no objection" to Haragan's "departure from the Philippines for a short stay abroad" and that "formal
leave" was thereby given him. On the date set for the hearing of the case, Haragan's counsel moved for
continuance, whereupon, the hearing was postponed to November 14, 1955. On the date last
mentioned, the same counsel informed the court that Haragan had been unable to return to the
Philippines because the Philippine Consulate in Hongkong had advised Haragan of a communication
from our Department of Foreign Affairs banning him from returning to the Philippines. The court then
postponed the hearing to January 6, 1956. Subsequently, Herbert T. Fallis was impleaded as defendant
and, later on, one Inocencio Ortiz Luis Jr. was allowed to intervene. In due course, thereafter, or on

February 19, 1959, the court rendered judgment, which, inter alia, sentenced Haragan to pay to plaintiff
the sum of P5,500, with 6% interest thereon from December 8, 1954, until full payment, plus P1,000 as
attorney's fees and costs. After this judgment had become final and executory, plaintiff moved for the
execution of the aforementioned bond to satisfy said judgment against Haragan. The surety company
objected thereto upon several grounds and, after due hearing, the lower court issued an order dated
October 13, 1959, releasing said company from liability under the bond aforementioned and denying
plaintiff's motion. A reconsideration of this order having been denied, the case is now before us on
record on appeal filed by the plaintiff.1wph1.t
The issue is whether the Surety Company is liable to plaintiff under the bond quoted above, in view of
the failure of Haragan to return to the Philippines. The lower court decided the issue in the negative upon
the following ground: .
... A careful reading of the surety bond, Exhibit F, indicates that the surety's principal
commitment is 'to guarantee that he (Haragan) will return to the Philippines on or before
September 16, 1955' (See the third 'Whereas'). In the last paragraph of said surety bond,
Exhibit F, it appears that said bond was executed in favor of the Republic of the Philippines
or its duly authorized representatives to guarantee 'thatthe herein principal (Haragan) will
return to the Philippines on or before September 16, 1955 and that should he fail to do so,
said bond will answer pro tanto for any judgment that may be rendered against him.' As the
terms of the bond so state, it appears clearly that the bond will only answer for the judgment
which may be rendered against defendant, should he (defendant Haragan) fail to return to
the Philippines. In other words, if defendant Haragan should return to the Philippines on or
before September 16, 1955, said bond will not answer for the judgment. It is now the
contention of the Associated Insurance that since it was the Republic of the Philippines
(obligee under the bond) who rendered the return of defendantHaragan to the Philippines
impossible, said surety company is thereby released from its obligation, and cites in support
thereof Articles 1266 and 2076 of the New Civil Code. Upon a consideration of this
contention, the Court finds it tenable and well grounded, for as the surety company has so
well stated 'where the principal obligation (of returning to the Philippines) has been
extinguished by the action of the obligee, Philippine Government in preventing such return,
the accessory obligation of the surety is likewise extinguished and the bond released of its
liability.' Paraphrasing the last paragraph of the bond in a negative way, it will read thus:
'should he (not) fail to do so, said bond will (not) answer pro tanto for any judgment that may
be rendered against him.
We are fully in agreement with the foregoing view, which is in accord with the principle that:
The debtor in obligation to do shall also be released when the prestationbecomes legally or
physically impossible without the fault of the obligor. (Article 1266, Civil Code of the
Philippines.).
Thus, in Tabora vs. Lazatin, (G.R. No. L-5245, May 29, 1953), we said:
This Court finds that despite his efforts to secure the necessary building permit for the
reconstruction, he failed because of the disapproval or unfavorable attitude of the Urban
Planning Commission toward reconstruction unless they conformed to the plan of widening
the city streets. Finding that defendant had done all he could to secure the permit and to
comply with his obligations, but because of the refusal of the government authorities to issue
said permit, he failed to fulfill his undertaking, he should be absolved and released from said
obligation.
To same effect, substantially, is the decision of this Court in House vs. De La Costa (40 Off. Gaz. [3 S]
47).
WHEREFORE, the order appealed from is hereby affirmed, with the costs of this instance against
plaintiff-appellant. It is so ordered.

G.R. No. L-21109

June 26, 1967

NATIONAL SHIPYARDS & STEEL CORPORATION, plaintiff-appellee,

vs.
CARIDAD J. TORRENTO and MUTUAL SECURITY INSURANCE CORPORATION, defendantsappellants.
Manuel A. Cammayo for defendants-appellants.
Augusto D. Trinidad for plaintiff-appellee.
MAKALINTAL, J.:
On December 5, 1958 defendant Caridad J. Torrento applied with the National Shipyards & Steel
Corporation (hereinafter referred to as NASSCO) for the purchase on credit of 60 tons of steel bars, 3/8"
deformed or plain, at P430.00 per ton, for a 120-day period.
A contract of purchase and sale was executed on January 13, 1959, but was subsequently amended
when plaintiff exhausted its stock of 3/8" plain steel bars. As amended, the quantity of steel bars stated
to be 60 metric tons in the original contract was changed to 59.31 metric tons; the price was changed
from P430.00 to P435.00 per metric ton; and the specification of the steel bars was also changed from
"plain, round or corrugated" to "deformed."
Pursuant to the stipulation in the contract that the value of steel bars sold to defendant Torrento should
be secured by a surety bond issued by a reputable bonding company, defendant Torrento as principal
and Mutual Security Insurance Corporation, as surety executed in favor of plaintiff a surety bond (S.
1754) on January 23, 1960. When it was noted that the undertaking under the bond was only
P25,000.00, whereas the contract called for the payment of P25,800.00, defendant surety executed a
supplemental bond increasing the amount of P25,800.00.
On February 6, 1959, when NASSCO could no longer supply the steel bars called for in the contract of
purchase and sale inasmuch as its stock of 3/8" deformed steel bars had been exhausted, the plaintiff
and defendant Torrento executed a supplemental agreement, the pertinent provisions of which read:
. . . Whereas the NASSCO has agreed to sell to the vendee and the vendee has agreed to
buy from the NASSCO . . . Fifty Nine and thirty one hundredths (59-31) metric tons of steel
bars on credit basis for size and price as follows:
3/8 deformed 20 ft or
30 ft. at P435.00 per tons
Whereas, after consummation of said contract, only the following amount of steel bars were delivered to
the vendee, as follows:
20-67 M.T. 3/8" deformed
and that there were no more available stock of steel bars of size 3/8" x 20' or 30' deformed.
Now therefore, for and in consideration of the foregoing premises, the parties hereby agree to modify
and/or amend their said contract as follows:
1. That the NASSCO shall sell to the vendee and the vendee shall buy from the NASSCO, 38.50 tons of
steel bars on credit basis subject to availability of stock in the following sizes and prices, to wit:

25 M.T. 1/2" x 30 deformed at P440.00 per ton.

13.50 M.T. 5/8" x 30 deformed at P430.00 per ton
2. That aside from the above amendment and/or modification, the said contract shall not be affected,
altered, or modified in any way.
Pursuant to the contract of purchase and sale and the supplemental contract, NASSCO delivered to
defendant Torrento steel bars in the total value of P25,794.09. The 120-day period for payment lapsed.
Demand letters were sent, but defendant surety made no reply. Defendant Torrento did not question her
liability, but only asked for a 3-month extension to settle her account.
Action was brought to recover the unpaid contract price from defendant Torrento and her surety. On
October 18, 1960, the lower court rendered judgment: "ordering the defendants, jointly and severally, to
pay the plaintiff the sum of P25,794.09, with interest thereon at the rate of 12% per annum, from August
29, 1959 until full payment, and the costs of suit. On the cross-claim, judgment is hereby rendered,
ordering the cross-defendant Caridad J. Torrento to pay the cross-plaintiff Mutual Security Insurance
Corporation whatever sums the latter would pay the plaintiff by virtue of this judgment, with interest
thereon at the rate of 12% per annum, from the date of payment to plaintiff, until full payment, and the
costs of this suit."
Defendants interposed an appeal to the Court of Appeals, which later on certified the case to Us on the
ground that the errors assigned raise only questions of law.
Appellant Torrento maintains that plaintiff has no cause of action against her for the reason that
inasmuch as she had paid the corresponding premium on the surety bond, the right of action, in case of
her default, is exclusively against her surety. Further, with respect to the cross-claim of the Surety,
Torrento claims that it was error for the lower court to take cognizance of the same even before payment
by said surety to NASSCO had been made. In other words, Torrento argues that the cause of action
alleged in the cross-claim does not arise until after payment has been made by the surety to the plaintiff.
We find both arguments without merit. The surety bond (Exhibits C and C-1) states in very clear terms
that both principal and surety are held and firmly bound unto the NASSCO in the sum of P25,800.00 for
the payment of which they bind themselves, jointly and severally. "If a person binds himself solidarity
with the principal debtor, . . . the contract is called suretyship" (Art. 2047, C.C.) in which case the
provisions of the Civil Code with respect to joint and solidary obligations apply; and Article 1216 of the
Civil Code provides that "the creditor may proceed against any of the solidary debtors or all of them
simultaneously. . . ." It has been repeatedly held that although as a rule sureties . . . are only subsidiarily
liable for an obligation, nevertheless, if they bind themselves jointly and severally, or in solidum, with the
principal debtor, the creditor may bring an action against anyone of them, either alone or together with
the principal debtor (Molina vs. de la Riva, 7 Phil. 345; Chinese Chamber vs. Pua Te Ching, 16 Phil. 406;
La Yebana vs. Valenzuela, 67 Phil. 482; Chunaco vs. Tria, 63 Phil. 500).
With respect to the contention that the lower court erred in taking cognizance of the surety's cross-claim,
suffice it to say that this point was not raised in the court a quo and, consequently may not be raised for
the first time on appeal. Besides, as the lower court also stated in its decision, "defendant Torrento made
no effort to dispute this (cross-claim) of defendant surety and did not even bother to cross-examine the
witness who identified the said indemnity agreement," which is the basis of the cross-claim.1wph1.t
For its part, appellant surety company maintains that the execution of the supplemental agreement of
February 6, 1959 without its knowledge and consent released it from any liability under the surety bond
as there was a material alteration of the principal contract. We find the contention without merit. The
court a quo analyzed the factual set-up as follow:
x x x An examination and comparison of the contract and the supplemental agreement will
reveal that the only change or alteration consists of the following: Instead of the original

stipulation for the purchase and sale of 3/8, 20' or 30', deformed steel bars, at P435.00 per
ton, which kind of steel bars were no longer available in stock, the supplemental agreement
provides for the sale by the plaintiff to defendant Torrento of other sizes of deformed steel
bars at prices of P430.00 and P440.00 per metric ton. Specifically, the changes are in the
diameter of the steel bars which originally was 3/8", to 1/2 and 5/8"; and the price from
P435.00 per ton, to P430.00 per ton for the 1/211 bars. The amount of steel bars to be sold
to defendant Torrento remained the same. The length and the deformed quality of the bars
likewise remained unchanged. It is even specifically provided in Par. 2 of the supplemental
agreement that "aside from the above amendments and/or modifications, the said contract
(referring to the original contract) shall not be affected, altered or modified in any way." There
was no alteration in the principal condition of the contract. The period of payment was not
changed, and the amount of the liability of the principal debtor and of the surety was also
untouched. There was no added burden imposed upon or assumed by the buyer."
(Emphasis Supplied)
x x x In short, the supplemental agreement did not result in the principal debtor's assuming
more onerous conditions than those stipulated in the original contract, and for which the
surety furnished the bond. There was consequently, no material or essential alteration of the
original contract which could result in the release of the surety from the obligation under the
said bond.
We see no error in the ruling of the lower court just quoted.
In Pacific Tobacco Corporation vs. Lorenzana, et al., G.R. L-8086, October 31, 1961 it was held: "for
purposes of releasing a surety's obligation, there must be a material alteration of the contract in
connection with which the bond is given, a change which imposes some new obligation on the party
promising or takes away some obligation already imposed, changing the legal effect of the original
contract and not merely the form thereof . . . To allow compensated surety companies to collect and
retain premiums for their services and then repudiate their obligations on slight pretexts which have no
relation to the risk, would be most unjust and immoral, and would be a perversion of the wise and just
rules designed for the protection of voluntary sureties."

interest rate of 8 per cent per annum. To secure that credit, Florencio Gordillo and Isidro Martinez, on
September 30, 1919, executed the following bond:
BANK OF THE PHILIPPINE ISLANDS BOND
Known all men by these presents, that we, Albalajedo y Compania, S. en C., a copartnership
with principal place of business in the town of Legaspi, Province of Albay, P.I., as principal,
and Messrs, Gordillo and Isidro Martinez, both of legal age and residents of Manila, P.I., as
sureties, are hereby held and bound into the Bank of the Philippine Islands, of Manila, P.I., in
the sum of one hundred thousand pesos (P100,000), Philippine currency, for the payment of
which well and truly to be made, we hereby jointly and severally, bind ourselves, our heirs,
executors, administrators, and assigns, firmly by these presents.
The condition of this obligation are such, that:
Whereas the said Bank of the Philippine Islands has advanced to the said Albalajedo y
Compania, S. en C., by way of a credit incurrent account, the sum of one hundred thousand
pesos (P100,000);
Now therefore, if the said Albalajedo y Compania, S. en. C., shall duly pay, or cause to be
paid, to the said Bank of the Philippine Islands, three months after demand, the said sum
of one hundred thousands pesos (P100,000), last days of March, June, September and
December of each year, until the principal and interest are paid in full, interest on said sum
and all sums from time to time remaining unpaid at the rate of eight per cent (8%) per
annum, then this obligation shall be void, otherwise it shall remain in full force and effect.
In witness whereof, we have hereunto set out hands at Manila, P.I., this 30th day of
September, 1919.
ALBALADEJO Y COMPANIA, S. EN C.

While it is the rule that the liability of a surety is limited by the terms of the surety bond fixing its liability
and that such liability cannot be extended by implication, it should be noted in the present case that
although the technical specifications of the items to be purchased have been changed, it clearly appears
that such changes are not substantial and have not added any other liability to that originally assumed. A
surety is not released by a change in the contract which does not have the effect of making its obligation
more onerous (Visayan Distributors, Inc. vs. Flores, 92 Phil. 145).

By (Sgd.) PEDRO ALBALADEJO

Obligado principal
FLORENCIO GORDILLO
Fiador

Wherefore, the appealed decision is hereby affirmed, with costs against defendants-appellants.
G.R. No. L-30490

March 27, 1929

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
ALBALADEJO Y CIA., S. EN C., ET AL., defendants,
ISIDRO MARTINEZ, defendant-appellant.

ISIDRO MARTINEZ
Fiador
Witnesses:
EM. S. REYES
V.G. OPRECIO
(ACKNOWLEDGMENT)

Eduardo Gutierrez Repide and Leoncio B. Monzon for appellant.

Araneta and Zaragoza for appellee.
OSTRAND, J.:
On September 27, 1919, the defendant, Albaladejo and Co., a limited copartnership, obtained a current
account credit to the amount of no more than P100,000 from the Bank of the Philippine Islands at the

On April 16, 1920, the bank increased the rate of interest to 9 per cent per annum. The plaintiffs Exhibit
C indicates that interest was paid up to December 31, 1920, when the capital of the debt amounted to
P100,681.68, and after which date the payments ceased.
Failing to meet their obligations to the bank, the present action was brought on January 15, 1925,
against Albaladejo and Co. and the members of the partnership, Pedro Albaladejo the sureties, Florencio
Gordillo and Isidro Martinez, for the recovery of the sum of P136,586.26, the amount then due the bank
for the capital and the accrued interest at 9 per cent.

During the pendency of the action, Albaladejo and Co., as well as the partners of the company, were
declared insolvent and subsequently discharged from their debts, and as a consequence, the present
case was dismissed as against Albaladejo and Co., Mariano Albaladejo, Pedro Albaladejo, and Angel
Suarez, leaving only Florencio Gordillo and Isidoro Martinez as defendants.
Upon trial the court below rendered judgment in favor of the Bank of the Philippine Islands and against
Florencio Gordillo and Isidoro Martinez, jointly and severally for the sum of P136,533.26, with interest at
9 per cent per annum from the 1st of January, 1921, and with the costs. From this judgment only Isidoro
Martinez appealed and now presents the following assignments of error:
The lower court erred:
1. In holding that it is the duty of the sureties to investigate the account of the principal
debtors with the bank and ask if it would grant an extension of time for the payment of the
loan, and that if the said sureties are not agreeable to the extension they should have so
informed the credit bank.
2. In not holding that the facts of the case constitute a valid novation of the contract between
the debtors and the bank which releases the sureties from the obligation under the former
agreement.
3. In not holding that the extension granted by the bank to the principal debtors for the
payment of the loan, without the consent of the sureties extinguishes the latter's liability.
The first assignment of error is well taken but is of no importance as far as this case is concerned. The
expressions referred to in the assignment are merely obiter dicta and are not the basis of the decision of
the court below.

do, or unless he neglects, to the injury of the surety, to discharge his duty in any matter in
which he occupies the position of a trustees for the surety. Mere delay or negligence in
proceeding against the principal will not discharge a surety unless there is between the
creditor and principal debtor a valid and binding agreement therefore, one which tends to
prejudice him, or to deprive him of the power of obtaining indemnity by presenting a legal
obstacle, for the time, to the prosecution of an action on the original security. Positive and
wilful interference by a creditor, embarrassing the recovery of the claim against the principal,
will, however, release the surety. In some jurisdictions, moreover, the duty of active diligence
in the prosecution of suits, or of execution against the principal can be devolved on the
creditor by the surety, if he desires, by requesting it. Also, of course, if a delay in calling on
the principal for the money is the result of fraud, that surety will be exonerated. In extension
of the principle that the mere delay of the creditor to proceed against the principal will not
discharge the surety, it has been held that the surety is not discharged, even if the delay of
the creditor is such that his remedy against the principal becomes barred by imitation.
It has also uniformly been held that increases of interest rates on the debt do not affect the original
obligation of the sureties, though they may not be bound by the increase. Bank of the Philippine Islands
vs. Gooch and Redfern (45 Phil., 514.)
From what has been said, it follows that the appellant jointly and severally with the other surety,
Florencio Gordillo, is liable to the extent of P100,000, with interest at the rate of 8 per cent per annum.
The appealed judgment is therefore modified by limiting the plaintiff's recovery to the sum of P100,000
with interest at the rate of 8 per cent per annum from the first day of January, 1921, until paid. In every
other respect, the judgment of the court below is affirmed with the costs of this instance against the
appellant. So ordered.

The second assignment of error is rather indefinite, but from the argument of counsel, we gather that if
has reference to the fact that the plaintiff bank increased the interest rate from 8 per cent to 9 per cent
per annum without the express consent of the sureties. Taking this fact in connection with the extension
of time alleged to have been made by the bank, and discussed under the third assignment of error,
counsel for the defendant argues that these circumstances worked a novation of the original contract
and related the sureties from their obligations upon their bond.
This contention cannot be successfully maintained. There is no sufficient in the record to show that the
bank actually extended the time for the payment of the debt, but the appellant maintains that the long
delay on the part of the bank in enforcing its rights against the debtors is equivalent to an extension of
the time. Such is not the case. Beginning with the case of Banco Espanol Filipino vs. Donaldson Sim
and Co. (5 Phil., 418) this court has consistently held that delay in proceeding against the principal
debtor does not discharge the sureties from their liability. In the case of Clark vs. Seliner (42 Phil. 384),
action was deferred for over four years, but the sureties were never the less held liable. As said in 21 C.
L., 1032:
It is a general principle that a creditor is under no obligation to be actively diligent in pursuit
of his principal debtor. He may forbear the prosecution of his claim, and remain inactive,
without impairing his right to resort to the surety, particularly when his forebearance amounts
to no more than a mere inaction or passivity. Therefore the mere neglect of a creditor to sue
or to attempt to collect a debt a the time it falls due does not discharge the sureties, although
the principal had ample means at the time, and subsequently became insolvent. Similarly,
mere passiveness or mere delay in the prosecution of an execution against the principal
debtor after judgment, will not discharge the surety. The principal under consideration,
however, comprehends something more than mere passivity or inaction resulting from
negligence. Thus, a gratuitous indulgence of the principal, whether extended at his request
or without it, and whether it is yielded by the creditor from sympathy and from an inclination
to favor him, or is the result or mere passiveness, will not operate to discharge the surety,
unless he omits to do, when required by the surety, what the law or his duty enjoins him to

G.R. No. L-20567

July 30, 1965

PHILIPPINE NATIONAL BANK, petitioner,

vs.
MANILA SURETY and FIDELITY CO., INC. and THE COURT OF APPEALS (Second
Division), respondents.
Besa, Galang and Medina for petitioner.
De Santos and Delfino for respondents.
REYES, J.B.L., J.:
The Philippine National Bank petitions for the review and reversal of the decision rendered by the Court
of Appeals (Second Division), in its case CA-G.R. No. 24232-R, dismissing the Bank's complaint against
respondent Manila Surety & Fidelity Co., Inc., and modifying the judgment of the Court of First Instance
of Manila in its Civil Case No. 11263.

The material facts of the case, as found by the appellate Court, are as follows:
The Philippine National Bank had opened a letter of credit and advanced thereon $120,000.00 to
Edgington Oil Refinery for 8,000 tons of hot asphalt. Of this amount, 2,000 tons worth P279,000.00 were
released and delivered to Adams & Taguba Corporation (known as ATACO) under a trust receipt
guaranteed by Manila Surety & Fidelity Co. up to the amount of P75,000.00. To pay for the asphalt,
ATACO constituted the Bank its assignee and attorney-in-fact to receive and collect from the Bureau of
Public Works the amount aforesaid out of funds payable to the assignor under Purchase Order No.
71947. This assignment (Exhibit "A") stipulated that:
The conditions of this assignment are as follows:

From said decision, only the defendant Surety Company has duly perfected its appeal. The Central Bank
of the Philippines did not appeal, while defendant ATACO failed to perfect its appeal.
The Bank recoursed to the Court of Appeals, which rendered an adverse decision and modified the
judgment of the court of origin as to the surety's liability. Its motions for reconsideration having proved
unavailing, the Bank appealed to this Court.
The Court of Appeals found the Bank to have been negligent in having stopped collecting from the
Bureau of Public Works the moneys falling due in favor of the principal debtor, ATACO, from and after
November 18, 1948, before the debt was fully collected, thereby allowing such funds to be taken and
exhausted by other creditors to the prejudice of the surety, and held that the Bank's negligence resulted
in exoneration of respondent Manila Surety & Fidelity Company.

1. The same shall remain irrevocable until the said credit accomodation is fully liquidated.
2. The PHILIPPINE NATIONAL BANK is hereby appointed as our Attorney-in-Fact for us and
in our name, place and stead, to collect and to receive the payments to be made by virtue of
the aforesaid Purchase Order, with full power and authority to execute and deliver on our
behalf, receipt for all payments made to it; to endorse for deposit or encashment checks,
money order and treasury warrants which said Bank may receive, and to apply said
payments to the settlement of said credit accommodation.
This power of attorney shall also remain irrevocable until our total indebtedness to the said
Bank have been fully liquidated. (Exhibit E)
ATACO delivered to the Bureau of Public Works, and the latter accepted, asphalt to the total value of
P431,466.52. Of this amount the Bank regularly collected, from April 21, 1948 to November 18, 1948,
P106,382.01. Thereafter, for unexplained reasons, the Bank ceased to collect, until in 1952 its
investigators found that more moneys were payable to ATACO from the Public Works office, because the
latter had allowed mother creditor to collect funds due to ATACO under the same purchase order to a
total of P311,230.41.
Its demands on the principal debtor and the Surety having been refused, the Bank sued both in the
Court of First Instance of Manila to recover the balance of P158,563.18 as of February 15, 1950, plus
interests and costs.
On October 4, 1958, the trial court rendered a decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering defendants, Adams & Taguba Corporation and Manila Surety & Fidelity Co., Inc.,
to pay plaintiff, Philippines National Bank, the sum of P174,462.34 as of February 24, 1956,
minus the amount of P8,000 which defendant, Manila Surety Co., Inc. paid from March, 1956
to October, 1956 with interest at the rate of 5% per annum from February 25, 1956, until fully
paid provided that the total amount that should be paid by defendant Manila Surety Co., Inc.,
on account of this case shall not exceed P75,000.00, and to pay the costs;
2. Orderinq cross-defendant, Adams & Taguba Corporation, and third-party defendant, Pedro
A. Taguba, jointly and severally, to pay cross and third-party plaintiff, Manila Surety & Fidelity
Co., Inc., whatever amount the latter has paid or shall pay under this judgment;
3. Dismissing the complaint insofar as the claim for 17% special tax is concerned; and
4. Dismissing the counterclaim of defendants Adams & Taguba Corporation and Manila
Surety & Fidelity Co., Inc.

This holding is now assailed by the Bank. It contends the power of attorney obtained from ATACO was
merely in additional security in its favor, and that it was the duty of the surety, and not that of the creditor,
owed see to it that the obligor fulfills his obligation, and that the creditor owed the surety no duty of
active diligence to collect any, sum from the principal debtor, citing Judge Advocate General vs. Court of
Appeals, G.R. No. L-10671, October 23, 1958.
This argument of appellant Bank misses the point. The Court of Appeals did not hold the Bank
answerable for negligence in failing to collect from the principal debtor but for its neglect in collecting the
sums due to the debtor from the Bureau of Public Works, contrary to its duty as holder of an exclusive
and irrevocable power of attorney to make such collections, since an agent is required to act with the
care of a good father of a family (Civ. Code, Art. 1887) and becomes liable for the damages which the
principal may suffer through his non-performance (Civ. Code, Art. 1884). Certainly, the Bank could not
expect that the Bank would diligently perform its duty under its power of attorney, but because they could
not have collected from the Bureau even if they had attempted to do so. It must not be forgotten that the
Bank's power to collect was expressly made irrevocable, so that the Bureau of Public Works could very
well refuse to make payments to the principal debtor itself, and a fortiori reject any demands by the
surety.
Even if the assignment with power of attorney from the principal debtor were considered as mere
additional security still, by allowing the assigned funds to be exhausted without notifying the surety, the
Bank deprived the former of any possibility of recoursing against that security. The Bank thereby
exonerated the surety, pursuant to Article 2080 of the Civil Code:
ART. 2080. The guarantors, even though they be solidary, are released from their
obligation whenever by come act of the creditor they cannot be subrogated to the rights,
mortgages and preferences of the latter. (Emphasis supplied.)
The appellant points out to its letter of demand, Exhibit "K", addressed to the Bureau of Public Works, on
May 5, 1949, and its letter to ATACO, Exhibit "G", informing the debtor that as of its date, October 31,
1949, its outstanding balance was P156,374.83. Said Exhibit "G" has no bearing on the issue whether
the Bank has exercised due diligence in collecting from the Bureau of Public Works, since the letter was
addressed to ATACO, and the funds were to come from elsewhere. As to the letter of demand on the
Public Works office, it does not appear that any reply thereto was made; nor that the demand was
pressed, nor that the debtor or the surety were ever apprised that payment was not being made. The
fact remains that because of the Bank's inactivity the other creditors were enabled to collect
P173,870.31, when the balance due to appellant Bank was only P158,563.18. The finding of negligence
made by the Court of Appeals is thus not only conclusive on us but fully supported by the evidence.
Even if the Court of Appeals erred on the second reason it advanced in support of the decision now
under appeal, because the rules on application of payments, giving preference to secured obligations
are only operative in cases where there are several distinct debts, and not where there is only one that is
partially secured, the error is of no importance, since the principal reason based on the Bank's
negligence furnishes adequate support to the decision of the Court of Appeals that the surety was
thereby released.

WHEREFORE, the appealed decision is affirmed, with costs against appellant Philippine National Bank.

There is merit in the appeal.

G.R. No. L-17072

The right of plaintiff-appellee to foreclose her mortgage on the land in question depends not so much on
whether she could take said land within the prohibitive period of five years from the issuance of
defendants' patent for the satisfaction of the indebtedness in question, but on whether the deed of
mortgage Exhibit "A" is at all valid and enforceable, since the land mortgaged was apparently still part of
the public domain when the deed of mortgage was constituted. As it is an essential requisite for the
validity of a mortgage that the mortgagor be the absolute owner of the thing mortgaged (Art. 2085), the
mortgage here in question is void and ineffective because at the time it was constituted, the mortgagor
was not yet the owner of the land mortgaged and could not, for that reason, encumber the same to the
plaintiff-appellee. Nor could the subsequent acquisition by the mortgagor of title over said land through
the issuance of a free patent validate and legalize the deed of mortgage under the doctrine of estoppel
(cf. Art. 1434, New Civil Code,1 since upon the issuance of said patient, the land in question was thereby
brought under the operation of the Public Land Law that prohibits the taking of said land for the
satisfaction of debts contracted prior to the expiration of five years from the date of the issuance of the
patent (sec. 118, C.A. No. 141). This prohibition should include not only debts contracted during the fiveyear period immediately preceding the issuance of the patent but also those contracted before such
issuance, if the purpose and policy of the law, which is "to preserve and keep in the family of the
homesteader that portion of public land which the State has gratuitously given to him" (Pascua v. Talens,
45 O.G. No. 9 [Supp.] 413; De los Santos v. Roman Catholic Church of Midsayap, G.R. L-6088, Feb. 24,
1954), is to be upheld.

October 31, 1961

CRISTINA MARCELO VDA. DE BAUTISTA, plaintiff-appellee,

vs.
BRIGIDA MARCOS, ET AL., defendants-appellants.
Aladin B. Bermudez for defendants-appellants.
Cube and Fajardo for plaintiff-appellee.
REYES, J.B.L., J.:
The main question in this appeal is whether or not a mortgagee may foreclose a mortgage on a piece of
land covered by a free patent where the mortgage was executed before the patent was issued and is
sought to be foreclosed within five years from its issuance.
The facts of the case appear to be as follows:
On May 17, 1954, defendant Brigida Marcos obtained a loan in the amount of P2,000 from plaintiff
Cristina Marcel Vda. de Bautista and to secure payment thereof conveyed to the latter by way of
mortgage a two (2)-hectare portion of an unregistered parcel of land situated in Sta. Ignacia, Tarlac. The
deed of mortgage, Exhibit "A", provided that it was to last for three years, that possession of the land
mortgaged was to be turned over to the mortgagee by way of usufruct, but with no obligation on her part
to apply the harvests to the principal obligation; that said mortgage would be released only upon
payment of the principal loan of P2,000 without any interest; and that the mortgagor promised to defend
and warrant the mortgagee's rights over the land mortgaged.
Subsequently, or in July, 1956, mortgagor Brigida Marcos filed in behalf of the heirs of her deceased
mother Victoriana Cainglet (who are Brigida herself and her three sisters), an application for the
issuance of a free patent over the land in question, on the strength of the cultivation and occupation of
said land by them and their predecessor since July, 1915. As a result, Free Patent No. V-64358 was
issued to the applicants on January 25, 1957, and on February 22, 1957, it was registered in their
names under Original Certificate of Title No. P-888 of the office of Register of Deeds for the province of
Tarlac.
Defendant Brigida Marcos' indebtedness of P2,000 to plaintiff having remained unpaid up to 1959, the
latter, on March 4, 1959, filed the present action against Brigida and her husband (Civil Case No. 3382)
in the court below for the payment thereof, or in default of the debtors to pay, for the foreclosure of her
mortgage on the land give as security. Defendants moved to dismiss the action, pointing out that the
land in question is covered by a free patent and could not, therefore, under the Public Land Law, be
taken within five years from the issuance of the patent for the payment of any debts of the patentees
contracted prior to the expiration of said five-year period; but the lower court denied the motion to
dismiss on the ground that the law cited does not apply because the mortgage sought to be foreclosed
was executed before the patent was issued. Defendants then filed their answer, reiterating the defense
invoked in their motion to dismiss, and alleging as well that the real contract between the parties was an
antichresis and not a mortgage. Pre-trial of the case followed, after which the lower court rendered
judgment finding the mortgage valid to the extent of the mortgagor's pro-indiviso share of 15,333 square
meters in the land in question, on the theory that the Public Land Law does not apply in this case
because the mortgage in question was executed before a patent was issued over the land in question;
that the agreement of the parties could not be antichresis because the deed Exhibit "A" clearly shows a
mortgage with usufruct in favor of the mortgagee; and ordered the payment of the mortgage loan of
P2,000 to plaintiff or, upon defendant's failure to do so, the foreclosure of plaintiff's mortgage on
defendant Brigida Marcos' undivided share in the land in question. From this judgment, defendants
Brigida Marcos and her husband Osmondo Apolocio appealed to this Court.

The invalidity of the mortgage Exhibit "A" does not, however, imply the concomitant invalidity of the
collate agreement in the same deed of mortgage whereby possession of the land mortgaged was
transferred to plaintiff-appellee in usufruct, without any obligation on her part to account for its harvests
or deduct them from defendants' indebtedness of P2,000. Defendant Brigida Marcos, who, together with
her sisters, was in possession of said land by herself and through her deceased mother before her since
1915, had possessory rights over the same even before title vested in her as co-owner by the issuance
of the free patent to her and her sisters, and these possessory right she could validly transfer and
convey to plaintiff-appellee, as she did in the deed of mortgage Exhibit "A". The latter, upon the other
hand, believing her mortgagor to be the owner of the land mortgaged and not being aware of any flaw
which invalidated her mode of acquisition, was a possessor in good faith (Art. 526, N.C.C.), and as such
had the right to all the fruits received during the entire period of her possession in good faith (Art. 544,
N.C.C.). She is, therefore, entitled to the full payment of her credit of P2,000 from defendants, without
any obligation to account for the fruits or benefits obtained by her from the land in question.
WHEREFORE, the judgment appealed from is reversed insofar as it orders the foreclosure of the
mortgage in question, but affirmed in all other respects. Costs again defendants-appellants.

G.R. No. L-53955 January 13, 1989

THE MANILA BANKING CORPORATION, plaintiff-appellee,
vs.
ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO, defendants-appellants.
Formoso & Quimbo Law Office for plaintiff-appellee.

Serafin P. Rivera for defendants-appellants.

(1) The title and right of possession to said accounts

receivable is to remain in the assignee, and it shall have
the right to collect the same from the debtor, and
whatsoever the Assignor does in connection with the
collection of said accounts, it agrees to do as agent and
representative of the Assignee and in trust for said
Assignee ;

BIDIN, J.:
This is an appeal from the decision* of the Court of First Instance of Manila, Branch XVII in Civil Case
No. 78178 for collection of sum of money based on promissory notes executed by the defendantsappellants in favor of plaintiff-appellee bank. The dispositive portion of the appealed decision (Record on
Appeal, p. 33) reads as follows:

xxx xxx xxx

(6) The Assignor guarantees the existence and legality of
said accounts receivable, and the due and punctual
payment thereof unto the assignee, ... on demand, ... and
further, that Assignor warrants the solvency and credit
worthiness of each and every account.

WHEREFORE judgment is hereby rendered (a) sentencing defendants,

Anastacio Teodoro, Jr. and Grace Anna Teodoro jointly and severally, to pay
plaintiff the sum of P15,037.11 plus 12% interest per annum from September 30,
1969 until fully paid, in payment of Promissory Notes No. 11487, plus the sum of
P1,000.00 as attorney's fees; and (b) sentencing defendant Anastacio Teodoro,
Jr. to pay plaintiff the sum of P8,934.74, plus interest at 12% per annum from
September 30, 1969 until fully paid, in payment of Promissory Notes Nos. 11515
and 11699, plus the sum of P500.00 an attorney's fees.

(7) The Assignor does hereby guarantee the payment

when due on all sums payable under the contracts giving
rise to the accounts receivable ... including reasonable
attorney's fees in enforcing any rights against the debtors
of the assigned accounts receivable and will pay upon
demand, the entire unpaid balance of said contract in the
event of non-payment by the said debtors of any monthly
sum at its due date or of any other default by said
debtors;

With Costs against defendants.

The facts of the case as found by the trial court are as follows:
On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and
severally, executed in favor of plaintiff a Promissory Note (No. 11487) for the sum
of P10,420.00 payable in 120 days, or on August 25, 1966, at 12% interest per
annum. Defendants failed to pay the said amount inspire of repeated demands
and the obligation as of September 30, 1969 stood at P 15,137.11 including
accrued interest and service charge.
On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father)
and Anastacio Teodoro, Jr. (Son) executed in favor of plaintiff two Promissory
Notes (Nos. 11515 and 11699) for P8,000.00 and P1,000.00 respectively,
payable in 120 days at 12% interest per annum. Father and Son made a partial
payment on the May 3, 1966 promissory Note but none on the June 20, 1966
Promissory Note, leaving still an unpaid balance of P8,934.74 as of September
30, 1969 including accrued interest and service charge.
The three Promissory Notes stipulated that any interest due if not paid at the end
of every month shall be added to the total amount then due, the whole amount to
bear interest at the rate of 12% per annum until fully paid; and in case of
collection through an attorney-at-law, the makers shall, jointly and severally, pay
10% of the amount over-due as attorney's fees, which in no case shall be leas
than P200.00.
It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed
of Assignment of Receivables from the Emergency Employment Administration in
the sum of P44,635.00. The Deed of Assignment provided that it was for and in
consideration of certain credits, loans, overdrafts and other credit
accommodations extended to defendants as security for the payment of said sum
and the interest thereon, and that defendants do hereby remise, release and
quitclaim all its rights, title, and interest in and to the accounts receivables.
Further.

xxx xxx xxx

(9) ... This Assignment shall also stand as a continuing
guarantee for any and all whatsoever there is or in the
future there will be justly owing from the Assignor to the
Assignee ...
In their stipulations of Fact, it is admitted by the parties that plaintiff extended
loans to defendants on the basis and by reason of certain contracts entered into
by the defunct Emergency Employment Administration (EEA) with defendants for
the fabrication of fishing boats, and that the Philippine Fisheries Commission
succeeded the EEA after its abolition; that non-payment of the notes was due to
the failure of the Commission to pay defendants after the latter had complied with
their contractual obligations; and that the President of plaintiff Bank took steps to
collect from the Commission, but no collection was effected.
For failure of defendants to pay the sums due on the Promissory Note, this action
was instituted on November 13, 1969, originally against the Father, Son, and the
latter's wife. Because the Father died, however, during the pendency of the suit,
the case as against him was dismiss under the provisions of Section 21, Rule 3
of the Rules of Court. The action, then is against defendants Son and his wife for
the collection of the sum of P 15,037.11 on Promissory Note No. 14487; and
against defendant Son for the recovery of P 8,394.7.4 on Promissory Notes Nos.
11515 and 11699, plus interest on both amounts at 12% per annum from
September 30, 1969 until fully paid, and 10% of the amounts due as attorney's
fees.
Neither of the parties presented any testimonial evidence and submitted the case
for decision based on their Stipulations of Fact and on then, documentary
evidence.

The issues, as defined by the parties are: (1) whether or not plaintiff claim is
already considered paid by the Deed of Assign. judgment of Receivables by the
Son; and (2) whether or not it is plaintiff who should directly sue the Philippine
Fisheries Commission for collection.' (Record on Appeal, p. 29- 32).
On April 17, 1972, the trial court rendered its judgment adverse to defendants. On June 8, 1972,
defendants filed a motion for reconsideration (Record on Appeal, p. 33) which was denied by the trial
court in its order of June 14, 1972 (Record on Appeal, p. 37). On June 23, 1972, defendants filed with
the lower court their notice of appeal together with the appeal bond (Record on Appeal, p. 38). The
record of appeal was forwarded to the Court of Appeals on August 22, 1972 (Record on Appeal, p. 42).
In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single assignment of error, that
is
THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL REMAKING
OF THE CONTRACT BETWEEN THE PARTIES, IN VIOLATION OF LAW;
HENCE, TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION.
As the appeal involves a pure question of law, the Court of Appeals, in its resolution promulgated on
March 6, 1980, certified the case to this Court (Rollo, p. 24). The record on Appeal was forwarded to this
Court on March 31, 1980 (Rollo, p. 1).
In the resolution of May 30, 1980, the First Division of this Court ordered that the case be docketed and
declared submitted for decision (Rollo, p. 33).
On March 7, 1988, considering the length of time that the case has been pending with the Court and to
determine whether supervening events may have rendered the case moot and academic, the Court
resolved (1) to require the parties to MOVE IN THE PREMISES within thirty days from notice, and in
case they fail to make the proper manifestation within the required period, (2) to consider the case
terminated and closed with the entry of judgment accordingly made thereon (Rollo, p. 40).
On April 27, 1988, appellee moved for a resolution of the appeal review interposed by defendantsappellants (Rollo, p. 41).
The major issues raised in this case are as follows: (1) whether or not the assignment of receivables has
the effect of payment of all the loans contracted by appellants from appellee bank; and (2) whether or
not appellee bank must first exhaust all legal remedies against the Philippine Fisheries Commission
before it can proceed against appellants for collections of loan under the promissory notes which are
plaintiffs bases in the action for collection in Civil Case No. 78178.
Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by
a legal cause, such as sale, dation in payment, exchange or donation, and without the need of the
consent of the debtor, transfers his credit and its accessory rights to another, known as the assignee,
who acquires the power to enforce it to the same extent as the assignor could have enforced it against
the debtor. ... It may be in the form of a sale, but at times it may constitute a dation in payment, such as
when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has against a
third person, or it may constitute a donation as when it is by gratuitous title; or it may even be merely by
way of guaranty, as when the creditor gives as a collateral, to secure his own debt in favor of the
assignee, without transmitting ownership. The character that it may assume determines its requisites
and effects. its regulation, and the capacity of the parties to execute it; and in every case, the obligations
between assignor and assignee will depend upon the judicial relation which is the basis of the
assignment: (Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. 5,
pp. 165-166).
There is no question as to the validity of the assignment of receivables executed by appellants in favor
of appellee bank.

The issue is with regard to its legal effects.

I
It is evident that the assignment of receivables executed by appellants on January 24, 1964 did not
transfer the ownership of the receivables to appellee bank and release appellants from their loans with
the bank incurred under promissory notes Nos. 11487,11515 and 11699.
The Deed of Assignment provided that it was for and in consideration of certain credits, loans,
overdrafts, and their credit accommodations in the sum of P10,000.00 extended to appellants by
appellee bank, and as security for the payment of said sum and the interest thereon; that appellants as
assignors, remise, release, and quitclaim to assignee bank all their rights, title and interest in and to the
accounts receivable assigned (lst paragraph). It was further stipulated that the assignment will also
stand as a continuing guaranty for future loans of appellants to appellee bank and correspondingly the
assignment shall also extend to all the accounts receivable; appellants shall also obtain in the future,
until the consideration on the loans secured by appellants from appellee bank shall have been fully paid
by them (No. 9).
The position of appellants, however, is that the deed of assignment is a quitclaim in consideration of their
indebtedness to appellee bank, not mere guaranty, in view of the following provisions of the deed of
assignment:
... the Assignor do hereby remise, release and quit-claim unto said assignee all
its rights, title and interest in the accounts receivable described hereunder.
(Emphasis supplied by appellants, first par., Deed of Assignment).
... that the title and right of possession to said account receivable is to remain in
said assignee and it shall have the right to collect directly from the debtor, and
whatever the Assignor does in connection with the collection of said accounts, it
agrees to do so as agent and representative of the Assignee and it trust for said
Assignee ...(Ibid. par. 2 of Deed of Assignment).' (Record on Appeal, p. 27)
The character of the transactions between the parties is not, however, determined by the language used
in the document but by their intention. Thus, the Court, quoting from the American Jurisprudence (68 2d,
Secured Transaction, Section 50) said:
The characters of the transaction between the parties is to be determined by their
intention, regardless of what language was used or what the form of the transfer
was. If it was intended to secure the payment of money, it must be construed as
a pledge. However, even though a transfer, if regarded by itself, appellate to have
been absolute, its object and character might still be qualified and explained by a
contemporaneous writing declaring it to have been a deposit of the property as
collateral security. It has been Id that a transfer of property by the debtor to a
creditor, even if sufficient on its farm to make an absolute conveyance, should be
treated as a pledge if the debt continues in existence and is not discharged by
the transfer, and that accordingly, the use of the terms ordinarily exporting
conveyance, of absolute ownership will not be given that effect in such a
transaction if they are also commonly used in pledges and mortgages and
therefore do not unqualifiedly indicate a transfer of absolute ownership, in the
absence of clear and ambiguous language or other circumstances excluding an
intent to pledge. (Lopez v. Court of Appeals, 114 SCRA 671 [1982]).
Definitely, the assignment of the receivables did not result from a sale transaction. It cannot be said to
have been constituted by virtue of a dation in payment for appellants' loans with the bank evidenced by
promissory note Nos. 11487, 11515 and 11699 which are the subject of the suit for collection in Civil
Case No. 78178. At the time the deed of assignment was executed, said loans were non-existent yet.
The deed of assignment was executed on January 24, 1964 (Exh. "G"), while promissory note No. 11487

is dated April 25, 1966 (Exh. 'A), promissory note 11515, dated May 3, 1966 (Exh. 'B'), promissory note
11699, on June 20, 1966 (Exh. "C"). At most, it was a dation in payment for P10,000.00, the amount of
credit from appellee bank indicated in the deed of assignment. At the time the assignment was executed,
there was no obligation to be extinguished except the amount of P10,000.00. Moreover, in order that an
obligation may be extinguished by another which substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligations be on every point incompatible
with each other (Article 1292, New Civil Code).
Obviously, the deed of assignment was intended as collateral security for the bank loans of appellants,
as a continuing guaranty for whatever sums would be owing by defendants to plaintiff, as stated in
stipulation No. 9 of the deed.
In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in
favor of pledge, the latter being the lesser transmission of rights and interests (Lopez v. Court of
Appeals, supra).
In one case, the assignments of rights, title and interest of the defendant in the contracts of lease of two
buildings as well as her rights, title and interest in the land on which the buildings were constructed to
secure an overdraft from a bank amounting to P110,000.00 which was increased to P150,000.00, then to
P165,000.00 was considered by the Court to be documents of mortgage contracts inasmuch as they
were executed to guarantee the principal obligations of the defendant consisting of the overdrafts or the
indebtedness resulting therefrom. The Court ruled that an assignment to guarantee an obligation is in
effect a mortgage and not an absolute conveyance of title which confers ownership on the assignee
(People's Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]).
II
As to whether or not appellee bank must have to exhaust all legal remedies against the Philippine
Fisheries Commission before it can proceed against appellants for collection of loans under their
promissory notes, must also be answered in the negative.
The obligation of appellants under the promissory notes not having been released by the assignment of
receivables, appellants remain as the principal debtors of appellee bank rather than mere guarantors.
The deed of assignment merely guarantees said obligations. That the guarantor cannot be compelled to
pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the
legal remedies against the debtor, under Article 2058 of the New Civil Code does not therefore apply to
them. It is of course of the essence of a contract of pledge or mortgage that when the principal obligation
becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to
the creditor (Article 2087, New Civil Code). In the instant case, appellants are both the principal debtors
and the pledgors or mortgagors. Resort to one is, therefore, resort to the other.
Appellee bank did try to collect on the pledged receivables. As the Emergency Employment Agency
(EEA) which issued the receivables had been abolished, the collection had to be coursed through the
Office of the President which disapproved the same (Record on Appeal, p. 16). The receivable became
virtually worthless leaving appellants' loans from appellee bank unsecured. It is but proper that after their
repeated demands made on appellants for the settlement of their obligations, appellee bank should
proceed against appellants. It would be an exercise in futility to proceed against a defunct office for the
collection of the receivables pledged.
WHEREFORE, the appeal is Dismissed for lack of merit and the appealed decision of the trial court is
affirmed in toto.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr. and Cortes, JJ., concur.

Separate Opinions

FELICIANO, J., concurring:

I quite agree with the general reasoning of and the results reached by my distinguished brother Bidin in
respect of both of the principal issues he addressed in his opinion.
I would merely wish to add a few lines in respect of the point made by Bidin, J., that "the character of the
transactions between the parties is not, however, determined by the language used in the document but
by their intention.' This statement is basically not exceptionable, so far as it goes. It might, however, be
borne in mind that the intent of the parties to the transaction is to be determined in the first instance, by
the very language which they use. The deed of assignment contains language which suggest that the
parties intended to effect a complete alienation of title to and rights over the receivables which are the
subject of the assignment. This language is comprised of works like "remise," "release and quitclaim"
and clauses like "the title and right of possession to said accounts receivable is to remain in said
assignee" who "shall have the right to collect directly from the debtor." The same intent is also suggested
by the use of the words "agent and representative of the assignee" in reffering to the assignor.
The point that appears to me to be worth making is that although in its form, the deed of assignment of
receivables partakes of the nature of a complete alienation of the receivables assigned, such form
should be taken in conjunction with, and indeed must be qualified and controlled by, other language
showing an intent of the parties that title to the receivables shall pass to the assignee for the limited
purpose of securing another, principal; obligation owed by the assignor to the assignee. Title moves from
assignor to asignee but that title is defeasible being designed to collateralize the principal obligation.
Operationally, what this means is that the assignee is burdened with an obligation of taking the proceeds
of the receivables assigned and applying such proceeds to the satisfaction of the principal obligation and
returning any balance remaining thereafter to the assignor.
The parties gave the deed of assignment the form of an absolute conveyance of title over the
receivables assigned, essentially for the convenience of the assignee. Without such formally unlimited
conveyance of title, the assignee would have to treat the deed of assignment as no more than a deed of
pledge or of chattel mortgage. In other words, in such hypothetical case, should the assignee seek to
realize upon the security given to him through the deed of assignment (which would then have to comply
with the documentation and registration requirements of a pledge or chattel mortgage), the assignee
would have to foreclose upon the securities or credits assigned and place them on public sale and there
acquire the same. It should be recalled that under the principle which forbids a pactum
commisorium Article 2088, Civil Code), a mortgagee or pledgee is prohibited from simply taking and
appropriating the personal property turned over to him as security for the payment of a principal
obligation. A deed of assignment by way of security avoids the necessity of a public sale impose by the
rule on pactum commisorium, by in effect placing the sale of the collateral up front. (Emphasis supplied)
The foregoing is applicable where, as in the present instance, the deed of assignment of receivables
combines elements of both a complete or absolute alienation of the credits being assigned and a
security arrangement to assure payment of a principal obligation. Where the second element is absent,
that is, where there is nothing to indicate that the parties intended the deed of assignment to function as
a security device, it would of course follow that the simple absolute conveyance embodied in the deed of
assignment would be operative; the assignment would constitute essentially a mode of payment
or dacion en pago. Put a little differently, in order that a deed of assignment of receivables which is in
form an absolute conveyance of title to the credits being assigned, may be qualified and treated as a
security arrangement, language to such effect must be found in the document itself and that language,

precisely, is embodied in the deed of assignment in the instant case. Finally, it might be noted that that
deed simply follows a form in standard use in commercial banking.

[G.R. No. 131679. February 1, 2000]

CAVITE DEVELOPMENT BANK and FAR EAST BANK AND TRUST COMPANY, petitioners, vs.
SPOUSES CYRUS LIM and LOLITA CHAN LIM and COURT OF APPEALS, respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the decision[1] of the Court of Appeals in C.A. GR CV No.
42315 and the order dated December 9, 1997 denying petitioners motion for reconsideration.
The following facts are not in dispute.
Petitioners Cavite Development Bank (CDB) and Far East Bank and Trust Company (FEBTC) are
banking institutions duly organized and existing under Philippine laws. On or about June 15, 1983, a
certain Rodolfo Guansing obtained a loan in the amount of P90,000.00 from CDB, to secure which he
mortgaged a parcel of land situated at No. 63 Calavite Street, La Loma, Quezon City and covered by
TCT No. 300809 registered in his name. As Guansing defaulted in the payment of his loan, CDB
foreclosed the mortgage. At the foreclosure sale held on March 15, 1984, the mortgaged property was
sold to CDB as the highest bidder. Guansing failed to redeem, and on March 2, 1987, CDB consolidated
title to the property in its name. TCT No. 300809 in the name of Guansing was cancelled and, in lieu
thereof, TCT No. 355588 was issued in the name of CDB.
On June 16, 1988, private respondent Lolita Chan Lim, assisted by a broker named Remedios
Gatpandan, offered to purchase the property from CDB. The written Offer to Purchase, signed by Lim
and Gatpandan, states in part:
We hereby offer to purchase your property at #63 Calavite and Retiro Sts., La
Loma, Quezon City for P300,000.00 under the following terms and conditions:
(1) 10% Option Money;
(2) Balance payable in cash;
(3) Provided that the property shall be cleared of illegal
occupants or tenants. Scjuris
Pursuant to the foregoing terms and conditions of the offer, Lim paid CDB P30,000.00 as Option Money,
for which she was issued Official Receipt No. 3160, dated June 17, 1988, by CDB. However, after some
time following up the sale, Lim discovered that the subject property was originally registered in the name
of Perfecto Guansing, father of mortgagor Rodolfo Guansing, under TCT No. 91148. Rodolfo succeeded
in having the property registered in his name under TCT No. 300809, the same title he mortgaged to
CDB and from which the latters title (TCT No. 355588) was derived. It appears, however, that the father,
Perfecto, instituted Civil Case No. Q-39732 in the Regional Trial Court, Branch 83, Quezon City, for the
cancellation of his sons title. On March 23, 1984, the trial court rendered a decision [2] restoring Perfectos
previous title (TCT No. 91148) and cancelling TCT No. 300809 on the ground that the latter was
fraudulently secured by Rodolfo. This decision has since become final and executory.

Aggrieved by what she considered a serious misrepresentation by CDB and its mother-company,
FEBTC, on their ability to sell the subject property, Lim, joined by her husband, filed on August 29, 1989
an action for specific performance and damages against petitioners in the Regional Trial Court, Branch
96, Quezon City, where it was docketed as Civil Case No. Q-89-2863. On April 20, 1990, the complaint
was amended by impleading the Register of Deeds of Quezon City as an additional defendant.
On March 10, 1993, the trial court rendered a decision in favor of the Lim spouses. It ruled that: (1) there
was a perfected contract of sale between Lim and CDB, contrary to the latters contention that the written
offer to purchase and the payment of P30,000.00 were merely pre-conditions to the sale and still subject
to the approval of FEBTC; (2) performance by CDB of its obligation under the perfected contract of sale
had become impossible on account of the 1984 decision in Civil Case No. Q-39732 cancelling the title in
the name of mortgagor Rodolfo Guansing; (3) CDB and FEBTC were not exempt from liability despite
the impossibility of performance, because they could not credibly disclaim knowledge of the cancellation
of Rodolfo Guansings title without admitting their failure to discharge their duties to the public as
reputable banking institutions; and (4) CDB and FEBTC are liable for damages for the prejudice caused
against the Lims.[3] Based on the foregoing findings, the trial court ordered CDB and FEBTC to pay
private respondents, jointly and severally, the amount of P30,000.00 plus interest at the legal rate
computed from June 17, 1988 until full payment. It also ordered petitioners to pay private respondents,
jointly and severally, the amounts of P250,000.00 as moral damages, P50,000.00 as exemplary
damages, P30,000.00 as attorneys fees, and the costs of the suit. [4]
Petitioners brought the matter to the Court of Appeals, which, on October 14, 1997, affirmed in toto the
decision of the Regional Trial Court. Petitioners moved for reconsideration, but their motion was denied
by the appellate court on December 9, 1997. Hence, this petition. Petitioners contend that - Jjlex
1. The Honorable Court of Appeals erred when it held that petitioners CDB and
FEBTC were aware of the decision dated March 23, 1984 of the Regional Trial
Court of Quezon City in Civil Case No. Q-39732.
2. The Honorable Court of Appeals erred in ordering petitioners to pay interest on
the deposit of THIRTY THOUSAND PESOS (P30,000.00) by applying Article
2209 of the New Civil Code.
3. The Honorable Court of Appeals erred in ordering petitioners to pay moral
damages, exemplary damages, attorneys fees and costs of suit.
I.
At the outset, it is necessary to determine the legal relation, if any, of the parties.
Petitioners deny that a contract of sale was ever perfected between them and private respondent Lolita
Chan Lim. They contend that Lims letter-offer clearly states that the sum of P30,000.00 was given as
option money, not as earnest money.[5] They thus conclude that the contract between CDB and Lim was
merely an option contract, not a contract of sale.
The contention has no merit. Contracts are not defined by the parties thereto but by principles of law. [6] In
determining the nature of a contract, the courts are not bound by the name or title given to it by the
contracting parties.[7] In the case at bar, the sum of P30,000.00, although denominated in the offer to
purchase as "option money," is actually in the nature of earnest money or down payment when
considered with the other terms of the offer. In Carceler v. Court of Appeals,[8] we explained the nature of
an option contract, viz. An option contract is a preparatory contract in which one party grants to the
other, for a fixed period and under specified conditions, the power to decide,
whether or not to enter into a principal contract, it binds the party who has given
the option not to enter into the principal contract with any other person during the

period designated, and within that period, to enter into such contract with the one
to whom the option was granted, if the latter should decide to use the option. It is
a separate agreement distinct from the contract to which the parties may enter
upon the consummation of the option. Newmiso
An option contract is therefore a contract separate from and preparatory to a contract of sale which, if
perfected, does not result in the perfection or consummation of the sale. Only when the option is
exercised may a sale be perfected.
In this case, however, after the payment of the 10% option money, the Offer to Purchase provides for the
payment only of the balance of the purchase price, implying that the "option money" forms part of the
purchase price. This is precisely the result of paying earnest money under Art. 1482 of the Civil Code. It
is clear then that the parties in this case actually entered into a contract of sale, partially consummated
as to the payment of the price. Moreover, the following findings of the trial court based on the testimony
of the witnesses establish that CDB accepted Lims offer to purchase:
It is further to be noted that CDB and FEBTC already considered plaintiffs offer
as good and no longer subject to a final approval. In his testimony for the
defendants on February 13, 1992, FEBTCs Leomar Guzman stated that he was
then in the Acquired Assets Department of FEBTC wherein plaintiffs offer to
purchase was endorsed thereto by Myoresco Abadilla, CDBs senior vicepresident, with a recommendation that the necessary petition for writ of
possession be filed in the proper court; that the recommendation was in accord
with one of the conditions of the offer, i.e., the clearing of the property of illegal
occupants or tenants (tsn, p. 12); that, in compliance with the request, a petition
for writ of possession was thereafter filed on July 22, 1988 (Exhs. 1 and 1-A);
that the offer met the requirements of the banks; and that no rejection of the offer
was thereafter relayed to the plaintiffs (p. 17); which was not a normal procedure,
and neither did the banks return the amount of P30,000.00 to the plaintiffs. [9]
Given CDBs acceptance of Lims offer to purchase, it appears that a contract of sale was perfected and,
indeed, partially executed because of the partial payment of the purchase price. There is, however, a
serious legal obstacle to such sale, rendering it impossible for CDB to perform its obligation as seller to
deliver and transfer ownership of the property. Acctmis
Nemo dat quod non habet, as an ancient Latin maxim says. One cannot give what one does not have. In
applying this precept to a contract of sale, a distinction must be kept in mind between the "perfection"
and "consummation" stages of the contract.
A contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the
object of the contract and upon the price.[10] It is, therefore, not required that, at the perfection stage, the
seller be the owner of the thing sold or even that such subject matter of the sale exists at that point in
time.[11] Thus, under Art. 1434 of the Civil Code, when a person sells or alienates a thing which, at that
time, was not his, but later acquires title thereto, such title passes by operation of law to the buyer or
grantee. This is the same principle behind the sale of "future goods" under Art. 1462 of the Civil Code.
However, under Art. 1459, at the time of delivery or consummation stage of the sale, it is required that
the seller be the owner of the thing sold. Otherwise, he will not be able to comply with his obligation to
transfer ownership to the buyer. It is at the consummation stage where the principle of nemo dat quod
non habet applies.
In Dignos v. Court of Appeals,[12] the subject contract of sale was held void as the sellers of the subject
land were no longer the owners of the same because of a prior sale. [13] Again, in Nool v. Court of
Appeals,[14] we ruled that a contract of repurchase, in which the seller does not have any title to the
property sold, is invalid:
We cannot sustain petitioners view. Article 1370 of the Civil Code is applicable
only to valid and enforceable contracts. The Regional Trial Court and the Court of

Appeals ruled that the principal contract of sale contained in Exhibit C and the
auxiliary contract of repurchase in Exhibit D are both void. This conclusion of the
two lower courts appears to find support in Dignos v. Court of Appeals, where the
Court held:
"Be that as it may, it is evident that when petitioners sold
said land to the Cabigas spouses, they were no longer
owners of the same and the sale is null and void."
In the present case, it is clear that the sellers no longer had any title to the
parcels of land at the time of sale. Since Exhibit D, the alleged contract of
repurchase, was dependent on the validity of Exhibit C, it is itself void. A void
contract cannot give rise to a valid one. Verily, Article 1422 of the Civil Code
provides that (a) contract which is the direct result of a previous illegal contract, is
also void and inexistent."
We should however add that Dignos did not cite its basis for ruling that a "sale is
null and void" where the sellers "were no longer the owners" of the property.
Such a situation (where the sellers were no longer owners) does not appear to
be one of the void contracts enumerated in Article 1409 of the Civil Code.
Moreover, the Civil Code itself recognizes a sale where the goods are to be
acquired x x x by the seller after the perfection of the contract of sale, clearly
implying that a sale is possible even if the seller was not the owner at the time of
sale, provided he acquires title to the property later on. Misact
In the present case, however, it is likewise clear that the sellers can no longer
deliver the object of the sale to the buyers, as the buyers themselves have
already acquired title and delivery thereof from the rightful owner, the DBP. Thus,
such contract may be deemed to be inoperative and may thus fall, by analogy,
under item No. 5 of Article 1409 of the Civil Code: Those which contemplate an
impossible service. Article 1459 of the Civil Code provides that "the vendor must
have a right to transfer the ownership thereof [subject of the sale] at the time it is
delivered." Here, delivery of ownership is no longer possible. It has become
impossible.[15]
In this case, the sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo Guansing must,
therefore, be deemed a nullity for CDB did not have a valid title to the said property. To be sure, CDB
never acquired a valid title to the property because the foreclosure sale, by virtue of which the property
had been awarded to CDB as highest bidder, is likewise void since the mortgagor was not the owner of
the property foreclosed.
A foreclosure sale, though essentially a "forced sale," is still a sale in accordance with Art. 1458 of the
Civil Code, under which the mortgagor in default, the forced seller, becomes obliged to transfer the
ownership of the thing sold to the highest bidder who, in turn, is obliged to pay therefor the bid price in
money or its equivalent. Being a sale, the rule that the seller must be the owner of the thing sold also
applies in a foreclosure sale. This is the reason Art. 2085 [16] of the Civil Code, in providing for the
essential requisites of the contract of mortgage and pledge, requires, among other things, that the
mortgagor or pledgor be the absolute owner of the thing pledged or mortgaged, in anticipation of a
possible foreclosure sale should the mortgagor default in the payment of the loan.
There is, however, a situation where, despite the fact that the mortgagor is not the owner of the
mortgaged property, his title being fraudulent, the mortgage contract and any foreclosure sale arising
therefrom are given effect by reason of public policy. This is the doctrine of "the mortgagee in good faith"
based on the rule that all persons dealing with property covered by a Torrens Certificate of Title, as
buyers or mortgagees, are not required to go beyond what appears on the face of the title. [17] The public
interest in upholding the indefeasibility of a certificate of title, as evidence of the lawful ownership of the
land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what
appears on the face of the certificate of title. Sdjad

This principle is cited by petitioners in claiming that, as a mortgagee bank, it is not required to make a
detailed investigation of the history of the title of the property given as security before accepting a
mortgage.
We are not convinced, however, that under the circumstances of this case, CDB can be considered a
mortgagee in good faith. While petitioners are not expected to conduct an exhaustive investigation on
the history of the mortgagors title, they cannot be excused from the duty of exercising the due diligence
required of banking institutions. In Tomas v. Tomas,[18] we noted that it is standard practice for banks,
before approving a loan, to send representatives to the premises of the land offered as collateral and to
investigate who are the real owners thereof, noting that banks are expected to exercise more care and
prudence than private individuals in their dealings, even those involving registered lands, for their
business is affected with public interest. We held thus:
We, indeed, find more weight and vigor in a doctrine which recognizes a better
right for the innocent original registered owner who obtained his certificate of title
through perfectly legal and regular proceedings, than one who obtains his
certificate from a totally void one, as to prevail over judicial pronouncements to
the effect that one dealing with a registered land, such as a purchaser, is under
no obligation to look beyond the certificate of title of the vendor, for in the latter
case, good faith has yet to be established by the vendee or transferee, being the
most essential condition, coupled with valuable consideration, to entitle him to
respect for his newly acquired title even as against the holder of an earlier and
perfectly valid title. There might be circumstances apparent on the face of the
certificate of title which could excite suspicion as to prompt inquiry, such as when
the transfer is not by virtue of a voluntary act of the original registered owner, as
in the instant case, where it was by means of a self-executed deed of extrajudicial settlement, a fact which should be noted on the face of Eusebia Tomas
certificate of title. Failing to make such inquiry would hardly be consistent with
any pretense of good faith, which the appellant bank invokes to claim the right to
be protected as a mortgagee, and for the reversal of the judgment rendered
against it by the lower court.[19]
In this case, there is no evidence that CDB observed its duty of diligence in ascertaining the validity of
Rodolfo Guansings title. It appears that Rodolfo Guansing obtained his fraudulent title by executing an
Extra-Judicial Settlement of the Estate With Waiver where he made it appear that he and Perfecto
Guansing were the only surviving heirs entitled to the property, and that Perfecto had waived all his
rights thereto. This self-executed deed should have placed CDB on guard against any possible defect in
or question as to the mortgagors title. Moreover, the alleged ocular inspection report [20] by CDBs
representative was never formally offered in evidence. Indeed, petitioners admit that they are aware that
the subject land was being occupied by persons other than Rodolfo Guansing and that said persons,
who are the heirs of Perfecto Guansing, contest the title of Rodolfo. [21] Sppedsc
II.
The sale by CDB to Lim being void, the question now arises as to who, if any, among the parties was at
fault for the nullity of the contract. Both the trial court and the appellate court found petitioners guilty of
fraud, because on June 16, 1988, when Lim was asked by CDB to pay the 10% option money, CDB
already knew that it was no longer the owner of the said property, its title having been cancelled.
[22]
Petitioners contend that: (1) such finding of the appellate court is founded entirely on speculation and
conjecture; (2) neither CDB nor FEBTC was a party in the case where the mortgagors title was
cancelled; (3) CDB is not privy to any problem among the Guansings; and (4) the final decision
cancelling the mortgagors title was not annotated in the latters title.
As a rule, only questions of law may be raised in a petition for review, except in circumstances where
questions of fact may be properly raised. [23] Here, while petitioners raise these factual issues, they have
not sufficiently shown that the instant case falls under any of the exceptions to the above rule. We are
thus bound by the findings of fact of the appellate court. In any case, we are convinced of petitioners
negligence in approving the mortgage application of Rodolfo Guansing.

III.
We now come to the civil effects of the void contract of sale between the parties. Article 1412(2) of the
Civil Code provides:
If the act in which the unlawful or forbidden cause consists does not constitute a
criminal offense, the following rules shall be observed:
....
(2).......When only one of the contracting parties is at fault,
he cannot recover what he has given by reason of the
contract, or ask for the fulfillment of what has been
promised him. The other, who is not at fault, may demand
the return of what he has given without any obligation to
comply with his promise.
Private respondents are thus entitled to recover the P30,000.00 option money paid by them. Moreover,
since the filing of the action for damages against petitioners amounted to a demand by respondents for
the return of their money, interest thereon at the legal rate should be computed from August 29, 1989,
the date of filing of Civil Case No. Q-89-2863, not June 17, 1988, when petitioners accepted the
payment. This is in accord with our ruling in Castillo v. Abalayan[24] that in case of a void sale, the seller
has no right whatsoever to keep the money paid by virtue thereof and should refund it, with interest at
the legal rate, computed from the date of filing of the complaint until fully paid. Indeed, Art. 1412(2) which
provides that the non-guilty party "may demand the return of what he has given" clearly implies that
without such prior demand, the obligation to return what was given does not become legally
demandable. Sccalr
Considering CDBs negligence, we sustain the award of moral damages on the basis of Arts. 21 and
2219 of the Civil Code and our ruling in Tan v. Court of Appeals[25] that moral damages may be recovered
even if a banks negligence is not attended with malice and bad faith. We find, however, that the sum of
P250,000.00 awarded by the trial court is excessive. Moral damages are only intended to alleviate the
moral suffering undergone by private respondents, not to enrich them at the expense of the petitioners.
[26]
Accordingly, the award of moral damages must be reduced to P50,000.00.
Likewise, the award of P50,000.00 as exemplary damages, although justified under Art. 2232 of the Civil
Code, is excessive and should be reduced to P30,000.00. The award of P30,000.00 attorneys fees
based on Art. 2208, pars. 1, 2, 5 and 11 of the Civil Code should similarly be reduced to P20,000.00.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the MODIFICATION as to the
award of damages as above stated.
SO ORDERED.2/29/00 2:19 PM
G.R. No. L-34404 June 25, 1980
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE HON. COURT OF APPEALS (SPECIAL FIRST DIVISION), PEDRO BITANGA, FERNANDO
BITANGA, GREGORIO BITANGA, GUILLERMO BITANGA, CLARITA BITANGA together with her
husband AGRIPINO L. RABAGO and MELITONA LAGPACAN, assisted by her husband JORGE
MALACAS, respondents.

GUERRERO, J.:
This is a petition for review of the decision of the Court of Appeals, promulgated on September 30, 1971
in CA-G.R. No. 29868-R entitled "Pedro Bitanga, et al., Plaintiffs-Appellees, versus Philippine National
Bank, et al.,Defendants-Appellants, Melitona Lagpacan, assisted by her husband, Jorge Malacas,
Intervenors Appellees which decision 1 affirmed with certain modifications the judgment of the Court of
First Instance of Ilocos Norte in favor of plaintiffs-appellants, now the herein respondents.
This case was commenced on May 17, 1954 when herein respondents Pedro, Fernando, Gregorio,
Guillermo and Clarita, all surnamed Bitanga, filed a complaint before the Court of First Instance of Ilocos
Norte against the Philippine National Bank, the Register of Deeds of Ilocos Norte and Felizardo Reyes,
for reconveyance of real property and damages, with a prayer for the issuance of an ex-parte writ of pre
injunction restraining and enjoining the PNB and Felizardo Reyes from consummating the sale of the
property in question and prohibiting the Register of Deeds from registering the sale in favor of Felizardo
Reyes. As prayed for, the writ of preliminary injunction was issued. All three of the defendants named in
the complaint filed their respective Answers. During the pendency of the case, herein respondentspouses, Melitona Lagpacan and Jorge Maracas, filed a Motion to admit their complaint in intervention,
alleging that they had a legal interest in the subject matter of the case, and the same was granted.
The factual background of this case as recited in the decision of respondent court under review is as
follows:
It is not disputed that the property in question originally belonged to the spouses
Iigo Bitanga and Rosa Ver as their conjugal property. At the cadastral
proceedings during which the said property was submitted for adjudication, the
Cadastral Court rendered a decision dated December 27, 1934, by virtue of
which a decree of registration of the said lot bearing date of September 14, 1937
was issued. Thereafter, a corresponding title in the name of the spouses Iigo
Bitanga and Rosa Ver was likewise issued and in the Registry Books of the
Register of Deeds of Ilocos Norte on December 15, 1937 (Exhibit "A").
Before the issuance of the said original certificate of tale (Exhibit "A"), however,
death came to Iigo Bitanga on September 25, 1935, and was survived by his
wife, Rosa Ver, and his children, the plaintiffs herein. A little over a year from the
death of her husband, or on October 20, 1936, to be exact Rosa Ver mortgaged
the entire property covered by Exhibit "A" (also known as Exhibit 1-Lagpacan) in
favor of the Philippine National Bank for the with of FIVE HUNDRED PESOS
(P500.00) as shown in Exhibit 1-Lagpacan. The mortgage document was
registered in the day book of the Register of Deeds of Ilocos Norte on November
12, 1936; this said mortgage lien was, however, not annotated in the day book of
the Register of Deeds, when the original certificate of title (Exhibit "A"), was
issued. Nevertheless, the power of attorney dated October 20, 1936 in favor of
the mortgagee Philippine National Bank "to take possession of, and retain the
property herein mortgaged, to sell or lease the same or any part thereof, and to
do such other acts as necessary in the performance of the power granted to the
mortgagee should the mortgagor fail or violate the term of the mortgage" was
annotated on said Exhibit "A" some five years from October 20, 1936, i.e. on
February 27, 1941, to be precise (Exhibit "A").
In the meantime, Rosa Ver had defaulted in the fulfillment of her obligation with
the Manila Trading Company. So the said company levied upon her share in the
lot in question on December 13, 1939, and had the attachment annotated on the
title on February 14, 1940 (Exhibit "A-3"). Rosa Ver's interest in the lot in question
was afterwards sold at public auction, at which the Manila Trading Company was
the highest bidder; that was on March 19, 1940, and the deed of sale in favor of
the Manila Trading Company was annotated on the title on May 25, 1940 (Exhibit
"A-4").

On November 14, 1940, the Manila Trading Company sold its rights over the lot
in question to Santiago Sambrano, who secured the annotation of the said sale
on the title on March 20, 1941 (Exhibit "A-5"). Thereafter, as stated, one-half of
the said property passed into the hands of the intervenors as a result of Civil
Case No. 1846 (Exhibits 7, 8, 9, and 9-A).
Because Rosa Ver failed to settle her obligation with the Philippine National
Bank, the latter sold at public auction the whole lot that the former had
mortgaged to it, and in the same auction sale, the Philippine National Bank
emerged as the highest bidder (Exhibits 2, 3, 4 and 5); and, after the period of
redemption had expired without the property having been redeemed, the
Philippine National Bank consolidated its title over it. The document of
consolidation was, however, not annotated upon the owner's duplicate certificate
of title as Rosa Ver failed to surrender the same.
So it was that on November 25, 1950, the Philippine National Bank presented a
petition before the trial court (Exhibit 14) asking, on the one hand, that the
owner's certificate of title No. 7683 (Exhibit A), be declared null and void, and
praying, on the other, that a new certificate of title be issued in its name. Acting
favorably on the petition, the Court, in an order dated October 2, 1951 (Exhibit
19-A), ordered the Register of Deeds of the Province of Ilocos Norte to cancel
the owner's duplicate certificate of title No. 7683 (Exhibit A), and to issue a new
owner's duplicate certificate of title in the name of the petitioner Philippine
National Bank. As issued, the new owner's duplicate certificate of title carried the
number-description T-2701 (Exhibit B or 23).
Sometime later, that is, on May 24, 1954, the Philippine National Bank sold the
property in question to Felizardo Reyes (Exhibit 16-A),.as a result of which a new
owner's duplicate certificate of title, No. T-3944 (Exhibit 6), was issued in the
latter's name. 2
It further appears from the evidence that by virtue of the judgment obtained by the Manila Trading and
Supply Company against the defendants Rosa Ver and Guillermo Bitanga in Civil Case No. 121519 in
the Municipal Court of the City of Manila (Exhibit "2-Lagpacan"), the property in question was sold by the
Provincial Sheriff per Certificate of Sale (Exhibit 4-Lagpacan) to the Manila Trading and Supply
Company as the highest and only bidder at the auction sale, the latter acquiring therefor "all the rights,
title, interest and participation which the defendants Guillermo Bitanga and Rosa Ver de Bitanga have or
might have in the property. " The sale was registered in the back of the Certificate of Title No. 7683
(Exhibit 4-A Lagpacan) under Entry No. 5100 dated May 25, 1940.
On November 16, 1960, the trial court rendered a decision in favor of the plaintiffs and intervenors
below, the Court finding and holding that: (a) The lot in question is a conjugal partnership property, onehalf of which must go to the heirs of the late Iigo Bitanga, the plaintiffs herein; (b) The other half goes to
Rosa Ver as her share. The mortgage executed by her of her one-half portion in favor of the Philippine
National Bank is not an existing hen on the said portion because it did not have a "special mention in the
decree of registration." It follows, therefore, that the acquisition of the said portion by the Manila Trading
Company in the manner above-described was valid and legal. Consequently, the sale made by the said
Company to Santiago Sambrano over the one-half portion must also be valid and legal. In connection
with Civil Case No. 1846 in which the intervenors were the plaintiffs and Santiago Sambrano was the
defendant, what the intervenors had attached and sold in a public auction in which they (intervenors)
were the highest bidders was the very said portion sold by the Manila Trading Company to Santiago
Sambrano; (c) That Felizardo Reyes is not a purchaser of a registered land for value and in good faith,
and (d) Since the issuance of Transfer Certificate of Title No. 3944 in favor of the Philippine National
Bank, exhibit "B", and Owner's Duplicate Certificate of Title No. 3944, Exhibit "16", in favor of Felizardo
Reyes were without legal basis, they are, therefore, declared nun and void and cancelled. With costs
against the defendants. 3
On appeal by PNB and Felizardo Reyes to the Court of Appeals, respondent Court affirmed the
judgment appealed from in all respects except letter (d) thereof which was modified to read as follows:

(d) Since the issuance of Transfer Certificate of Title No. T2701, Exhibit "B" in
favor of the Philippine National Bank, and Transfer Certificate of Title No. T-3944,
Exhibit "16", in favor of Felizardo Reyes, was without legal basis, they are,
therefore, declared null and void and cancelled. The Register of Deeds is hereby
ordered to issue in lieu of the foregoing transfer certificate of titles another
certificate of title in the names of the plaintiffs and intervenors as follows:
Undivided one-half () share to Pedro Bitanga, married to Agripina Purisima,
Fernando Bitanga, single, Gregorio Bitanga single, Guillermo Bitanga, single,
Clarita Bitanga, married to Agripino L. Rabago, and of legal age, Filipino citizens,
and residents of Laoag, Ilocos Norte, and the remaining undivided one-half ()
share to the spouses Jorge Maracas and Melitona Lagpacan, both of legal age,
Filipino citizens, and residents of Burgos, Ilocos Norte, free from incumbrance
regarding the claims of the Philippine National Bank and Felizardo Reyes, after
payment of lawful fees. 4
Petitioner, not satisfied with the Decision of respondent Court of Appeals and its Resolution denying the
motion for its reconsideration, now comes to Us and submits the following assignment of errors:
I. The Court of Appeals erred in holding that the mortgage deed (Exhibit 1-Bank)
is valid and existing only with respect to the one-half portion of the lot in question
allegedly belonging to the mortgagor Rosa Ver as her share in the conjugal
partnership with her husband Iigo Bitanga.
II. The Court of Appeals erred in holding that the mortgage deed (Exhibit 1-Bank)
executed by Rosa Ver was no longer subsisting simply because the same was
not annotated on the face of original certificate of title No. 7683 (Exhibit A).
III. The Court of Appeals erred in holding that estoppel and/or laches has not
stepped in to defeat the right of respondents Bitanga's and Rabago over the lot in
question, specifically to the one-half portion thereof representing their undivided
share of the lot as their inheritance from their father Iigo Bitanga.
|li720IV. The Court of Appeals erred in holding that the acquisition of the other half portion of the lot in
question by the intervenors spouses Melitona Lagpacan and Jorge Malacas bears the earmarks of
validity and regularity.
Upon being required to comment on this petition, respondents filed a Motion to Dismiss on the grounds
that the decision of respondent court sought to be reviewed had become final and executory on account
of the failure of Felizardo Reyes, the real party in interest, to join the PNB in this petition, and that the
issues presented are questions of fact and not of law, hence, not proper for review by this Court.
By Resolution of January 10, 1972, this Court denied the petition for lack of merit.
On January 25, 1972, the PNB moved to reconsider the denial contending that at least the validity of the
mortgage deed as to the share of herein respondent-heirs should be upheld because of their
acquiescence thereto, and that the bank still has an interest over the case for the reason that although it
had already sold its interests over the property which is the subject matter of this litigation to Felizardo
Reyes, it still stands to be affected in the event that this case is finally decided in favor of respondents. In
other words, it is the contention of PNB that it has the personality to bring this petition, even without
Felizardo Reyes, since it still has an interest in the final outcome of this case.
On March 2, 1972, this Court reconsidered the Resolution of January 10, 1972 and resolved to give due
course to the petition.

On the first assigned error, PNB contends that the mortgage constituted by Rosa Ver in its favor on
October 20, 1936 is valid and covers the entire property known as Lot 9068 for the reasons that: (1) the
valid execution, existence and registration of said real estate mortgage under Act No. 3344 are not
denied; and (2) the fact that Tax Declaration No. 120225-A then covering the mortgaged property was
issued in the exclusive name of mortgagor Rosa Ver was likewise not denied but in fact admitted by
herein respondents and, therefore, the latter in effect admitted the genuineness and due execution of
said Tax Declaration.
There is no dispute that the document of mortgage executed by Rosa Ver was in accordance with the
formalities required by law and that was register in the day book of the Register of Deeds of Ilocos Norte
within a month after its execution. What is here contested is whether Rosa Ver could, as she did in fact,
m the entire Lot 9068 to petitioner PNB. In other words, the issue refers to the intrinsic vanity of the
mortgage, as distinguished from its formal sufficiency.
The trial court found and so held that Lot 9068 belonged to the conjugal partnership of the spouse lingo
Bitanga and Rosa Ver. Therefore, when Inigo died on September 25, 1936, his one-half share in said lot
was transmitted to his heirs (Article 777, New Civil Code; Article 657, old Civil Code) 5 and a coownership was established between them and Iigo's surviving spouse Rosa Ver. Hence, on October 20,
1936, a little over a year after Iigo's death, Rosa Ver, by herself alone, could not have validly mortgaged
the whole of Lot 9068 to PNB.
Under Article 2085, New Civil Code (Art. 1857, Old Civil Code), one of the essential requisites to the
contract of pledge and mortgage is that the pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged. And under Article 493, New Civil Code (Art. 399, Old Civil Code), each co-owner
shall have the full ownership of his part and of the fruits and benefits pertaining thereto, and he may
therefore alienate, assign or mortgage it, and even substitute another person in its enjoyment, except
when personal rights are involved. But the effect of the alienation or the mortgage, with respect to the
co-owners, shag be limited to the portion which may be allotted to him in the division upon the
termination of the co-ownership.
Hence, We fully agree with the trial court and the respondent Court and affirm the holding that "what the
Philippine National Bank had acquired from Rosa Ver by virtue of the mortgage was simply one-half ()
of the entire property, for this was all she had in her power to convey the other half being, as it still is,
the lawful share of the plaintiffs-appellees as inheritance from their father, Iigo Bitanga. Nemo date
quod non habet One cannot give what is not his. 6
Applying the provisions of the Old Civil Code 7 the law in force at the time of Inigo Bitanga's death in
1935, Rosa Ver, as surviving spouse, cannot take part legally in the sharing of the estate left by her
deceased husband (one-half () of Lot 9068) with respect to which she only had usufructuary rights.
"The usufructuary not being an owner, cannot alienate or dispose of the objects included in the usufruct.
Thus, he cannot ... mortgage or pledge the thing ... 8
It is not disputed that Tax Declaration No. 120225-A, then covering Lot 9068, was in the exclusive name
of Rosa Ver. Such fact, however, even if expressly admitted by herein respondent-heirs does not and
cannot alter the conjugal character of the lot in question, much less would it affect the mortgage in favor
of petitioner PNB. We have already held in several cases that declarations of ownership for purposes of
taxation are not sufficient evidence of title. 9 If petitioner relied upon Tax Declaration No. 120225-A in
assuming that the whole property belonged exclusively to mortgagor Rosa Ver, such erroneous
assumption should not prejudice the rights of the other co-owners, herein respondent-heirs As far as the
latter are concerned, their respective shares were not included m the mortgage in favor of PNB.
We, therefore, reject PNB's contention that the mortgage constituted by Rosa Ver in its favor on October
20, 1936 is valid and covers the entire property known as Lot 9068.
In the second assignment of error, petitioner maintains that the respondent appellate court erred in
holding that the mortgage deed (Exhibit 1-Bank) executed by Rosa Ver was no longer subsisting simply
because the same was not annotated on the face of original certificate of title No. 7683 (Exhibit A).

Petitioner argues that Rosa Ver, being the one who constituted the mortgage deed and has full
knowledge of the existence of the same as well as the respondent Bitanga's and Rabago in their
capacity as heirs, subscribing witnesses and as notary public, respectively, having also full knowledge of
the existence of the mortgage contract, have the legal duty to apprise petitioner Philippine National Bank
of the impending registration proceedings covering the lot in question as well as to the issuance of the
original certificate of title No. 7683, in line with Section 19 of the Land Registration Act, paragraph 2 (b)
that the mortgagor shall not make application without the consent in writing of the mortgagee, and
paragraph 3 which requires that the decree of registration in case the mortgagor does not consent to the
making of the application shall state that registration is made subject to such mortgage, describing it ...
Petitioner further argues that no notice whatsoever, either verbal or in writing, having been made by the
mortgagor Rosa Ver and/or the respondents Bitanga's and Rabago, petitioner could not have taken any
action to annotate its mortgage lien on the lot in question on the face of original certificate of title No.
7683 and, therefore, should not be blamed for its failure to annotate the mortgage lien on the lot within a
period of one (1) year from the issuance of the decree on September 14, 1937 since under Section 19 of
Act 496, it is specifically provided that the decree of registration in such a case shall state that the
registration is subject to such mortgage. Petitioner concludes that if the mortgage is not so annotated on
the face of original certificate of title No. 7683 within a period of one (1) year from September 14, 1937,
then it is not a fatal defect for the enforcement of the said mortgage lien.
Petitioner further buttresses its stand in distinguishing the requirements of the law as embodied in
Sections 19 and 21 of the Land Registration Act from the "general notice" contemplated under Section
31 in relation to Section 35 of the same Act in that the notice required in Sections 19 and 21 are specific
while in the latter, the notice is merely constructive. And to cap his argument, petitioner contends that
mortgagor Rosa Ver and her heirs had already benefitted from the loan and the mortgage transaction
and that they should not be allowed to enrich themselves at the expense of the petitioner.
Petitioner's theory is clearly untenable and cannot be sustained for otherwise it would do violence to the
fundamental and basic foundation of the Torrens system which is the indefeasibility of a Torrens title
under Sections 38, 39 and 47 of Act 496, which provide as follows:
Sec 38. If the court after hearing finds that the applicant or adverse claimant has
title as stated in his application or adverse claim and proper for registration, a
decree of confirmation and registration shall be entered. Every decree of
registration shall bind the land, and quiet title thereto, subject only to the
exceptions stated in the following section. It shall be conclusive upon and against
all persons, including the Insular Government and all the branches thereof,
whether mentioned by name in the application, notice, or citation, or included in
the general description "To all whom it may concern." Such decree shall not be
opened by reason of the absence, infancy, or other disability of any person
affected thereby, nor by any proceeding in any court for reversing judgments or
decrees; subject, however, to the right of any person deprived of land or any
estate or interest therein by decree of registration obtained by fraud to file in the
competent Court of First Instance a petition for review within one year after entry
of the decree provided no innocent purchaser for value has acquired an
interest. Upon the expiration of said term of one year, every decree or certificate
of title issued in accordance with this section shall be incontrovertible. If there is
any such purchaser, the decree of registration shall not be opened, but shall
remain in full force and effect forever, subject only to the right of all hereinbefore
provided: Provided, however, That no decree or certificate of title issued to
persons not parties to the appeal shall be cancelled or annulled. But any person
aggrieved by such decree in any case may pursue his remedy by action for
damages against the applicant or any other person for fraud in procuring the
decree. Whenever the phrase "innocent purchaser for value" or an equivalent
phrase occurs in this Act, it shall be deemed to include an innocent lessee,
mortgagee, or other encumbrances for value. (As amended by Sec. 3, Act No.
3621; and Sec. 1, Act No. 3630).
Sec. 39. Every person receiving a certificate of title in purchase office of a decree
of registration, and every subsequent purchaser of registered land who takes a
certificate of title for value in good faithshall hold the same five of all

encumberance except those noted on mid certificate and any of the following
encumbrances which may be sub existing, namely:
First. Liens or rights arising or existing under the laws or Constitution of the
United States or of the Philippine Islands which the statues of the Philippine
Islands cannot require to appear of record in the registry.
Second. Taxes within two years after the same become due and payable.
Third. Any public highway, way, private way established by law, or any
Government irrigation canal or lateral thereof, where the certificate of title does
not state that the boundaries of such highway, way, or irrigation canal or lateral
thereof, have been determined.
But if there are easements or other rights appurtenant to a Parcel of registered
land which for any reason have failed to be registered, such easements or rights
shall remain so appurtenant notwithstanding such failure, and shall be held to
pass with the land until cut off or extinguished by the registration of the servient
estate, or in any other manner. (As amended by Act No. 2011, and Sec. 4, Act
No. 3621).
Sec. 47. The original certificate in the registration book, any copy thereof duly
certified under the signature of the clerk, or of the register of deeds of the
province or city where the land is situated and the seal of the court, and also the
owner's duplicate certificate shag be received as evidence in all the courts of the
Philippine Islands and shall be conclusive as to all matters contained
therein except so far as otherwise provided in this Act.
Parenthetically, it may be stated that Presidential Decree No. 1529 which amends and codifies the laws
relative to registration of property reiterates the provisions cited above under the Land Registration Act,
Act No. 496. Thus, Section 38 of Act 496 is reiterated by Sections 29, 30, 31 and 32 of P.D. No. 1529,
while Section 39 of Act 496 is repeated under Section 44 of P.D. No. 1529. Section 47 of Act 496 is
substantially repeated in paragraph 2 of Sec. 31 of the Presidential Decree.
It is well-settled in Our jurisprudence that a decree of registration, after the lapse of the one-year period
from its entry, becomes indefeasible and conclusive. (Garcia, et al. vs. Bello, et al., L-21355, April 30,
1965, 13 SCRA 769, 770; Baldoz vs. Papa, et al., L-18150, July 30, 1965, 14 SCRA 691; Ylarde, et all
vs. Lichauco, et al., L-22115, Dec. 29, 1971, 42 SCRA 641, 650). The reason for the rule is succinctly
stated in Gestosani et al., vs. Insular Development Company, et al., L-21166, September 15, 1967, 21
SCRA 114 by the Supreme Court, speaking through Justice Dizon, thus:
At the risk of stating what is obvious, We say that land registration proceedings
under Act 496 are in rem and that such proceedings, as well as the title issued as
a result thereof, are binding and conclusive upon the whole world. Upon the
expiration of one year within which a petition to review the decree of registration
may be filed, said decree and the title issued pursuant thereto become
incontrovertible (Sec. 38, Act 496), and the same may no longer be changed,
altered or modified, much less set, aside (Director of Lands vs. Gutierrez David,
50 Phil. 797). This has to be the rule, for if even after the ownership of a property
has been decreed by a land registration court in favor of a particular person, the
title issued may still be annulled, changed, altered or modified after the lapse of
the one year period fixed by the legal provision mentioned above, the object of
the Torrens system, namely, to guarantee the indefeasibility of the title to the
property, would be defeated (Cabanos vs. Register of Deeds, 40 Phil. 620).
We agree with the ruling of both the trial and the appellate courts in their adherence to the doctrine laid
down by Us in Snyder vs. the Provincial Fiscal of Cebu and Jose Avila No. 17132, February 8, 1922, 42

Phil. 761, which presented a nearly Identical situation as that in the case at bar, where the issue decided
was whether or not a lease contract entered into prior to the original registration of the land subject of
the lease and existing pending the registration proceedings could be registered or recorded after such
original registration. Like the mortgage executed by Rosa Ver in the instant petition, the contract of lease
was entered into prior to the issuance of the decree of registration and the Supreme Court held, thus:
It will be noted from the provisions of section 38, above quoted, that the decree
of registration cannot be opened or altered even by reason of the absence,
infancy, or other disability of any person affected thereby; and it can only be
reviewed or modified upon the petition, filed within one year after the entry of the
decree, of any person who has been deprived of land or of any estate or interest
therein through fraud.
xxxxxxxxx
If, under the Land Registration Act, an owner of land, as against third parties, and
after the lapse of one year, by failing to appear and claim such ownership duly
the registration proceeding, thereby loses the same, with equal or greater reason
does a lessee, mortgagee, or other person having an interest in said land lose
such interest or right, so far as the land is concerned by not claiming the same
during the registration proceeding and by allowing said land to be registered free
of all encumbrances ... (Emphasis supplied)
Since a clean title was issued in the name of the spouse Iigo Bitanga and Rosa Ver by virtue of the
decree of registration entered on September 14, 1937, and said decree not having been contested or
reopened for a period of one year, the same became incontrovertible. We must reiterate here the
rationale of the doctrine We laid dwn in William H. Anderson and Co. vs. Garcia, 64 Phil. 506, 514-515,
after an analysis of the Apparently conflicting decisions in the cases of Worcester vs. Ocampo and
Ocampo, 34 Phil. 646; Lanci vs Yangco, 52 Phil. 563; andLaxamana vs. Carlos, 57 Phil. 722 thus:
Whatever might have been generally or unqualifiedly stated in the cases
heretofore decided by this court, We hold that under the Torrens system
registration is the operative act that gives validity to the transfer or creates a lien
upon the land (Secs. 50 and 51, Land Registration Act). A person dealing with
registered land is not required to go behind the register to determine the
condition of the property. He is only charged with notice of the burdens on the
property which are noted on the face of the register or the certificate of title. To
require him to do more is to defeat one of the pry objects of the Torrens system.
A bona fide purchaser for value of such property at an auction sale acquires good
title as against a prior transferee of the same property if such transfer was
unrecorded at the time of the auction sale. ...
In the instant case, there is no showing that the Manila Trading Company (MTC) had any knowledge or
notice of the prior mortgage in favor of the PNB, hence, it may be safely presumed that it (MTC)
acquired the rights of Rosa Ver and Guillermo Bitanga as an innocent purchaser for value and free from
all incumbrances. From the MTC, the aforesaid rights of Rosa and Guillermo passed to Santiago
Sambrano, and from the latter, to herein intervenors. There is no question, therefore, as to intervenors'
rights over the property, as against the PNB or its transferee, Felizardo Reyes. The intervenors merely
stepped into the shoes of MTC, a prior purchaser in good faith, and thereby became entitled to an the
defenses available to said Company, including those arising from the acquisition of the property in good
faith and for value. (Granados vs. Monton, L-1698, April 8, 1950, 86 Phil. 42).
Upon the clear and explicit provisions of the Land Registration Act and the jurisprudence on the
indefeasibility of the Torrens title after the lapse of one year as reiterated and emphasized in the
unbroken line of authorities, We hold that the respondent court committed no error in holding that "the
lien by reason or on account of the mortgage executed by Rosa Ver over the entire parcel on October
20, 1936, which was not annotated on the original certificate of title, could not have attached to the land.
Otherwise stated, the failure of the interested party to appear during the registration proceeding and

claim such interest in the land barred him from thereafter having such interest annotated on the
certificate of title."
The third assignment of error assails the respondent court in holding that estoppel and/or laches has not
stepped in to defeat the right of respondents Bitangas and Rabago over the lot in question, specifically
to the one-half (1/2) portion thereof representing their undivided share of the lot as their in. inheritance
from their father, Inigo Bitanga.
In rejecting appellant's defense of estoppel or laches, the respondent Court of Appeals ruled:
Corollary to the foregoing, appellants cannot maintain that estoppel or laches has
stepped in to defeat the right of the plaintiffs-appellees to institute an action to
indicate their right. And the reason is basic in its simplicity: the mortgage contract
entered into by Rosa Ver respecting the other half of the lot in question having
been null and void ab initio, lapse of time could not have validated or ratified it,
and an action, predicated upon the indubitable nullity of the contract constituted
may always be maintained by the aggrieved party to set it aside. (pp. 13-14, CA
Decision).
Petitioner argues that respondents Bitangas and Rabago, as heirs and/or successors-in-interest of Rosa
Ver are bound by the mortgage and may not be permitted to question the validity of the same, and
assuming that Rosa Ver does not have any right to constitute a mortgage on the other half of the lot in
question, petitioner contends that nonetheless the validity Of the mortgage deed constituted by her over
the share of her husband should be upheld as well as its acquisition by the petitioner because
respondents Bitangas and Rabago are likewise estopped to question the validity of the same by reason
of acquisence On their Part in that Guillermo Bitanga together with Mary Bitanga Castillo signed as
witness to the mortgage deed executed by their mother on the whole portion of the lot in question on
October 20, 1936 while respondent Atty. Agripino L. Rabago, the son-in-law of the mortgagor Rosa Ver,
notarized the said mortgage deed. Petitioner also points to the fact that respondent Pedro Bitanga
offered to repurchase the whole portion of the property from the petitioner, which offer is an admission,
conclusive upon him that the PNB is the absolute and legal owner of the lot in question and have the
right to dispose of the same. And citing the case of Cruz vs Ilagan 81 Phil. 554, and authority quoted
from 21 Am. Jur. 756, petitioner concludes that respondents Bitangas and Rabago, as heirs of the
deceased husband, by their conduct, in effect bound themselves to the real estate mortgage contract
over the share of the husband, as completely and effectively as though they themselves signed the
document as mortgagors over the share of the husband.
Petitioner also stresses that respondents Bitangas and Rabago filed the complaint for reconveyance and
annulment of mortgage on May 17,1954, after nineteen (19) solid years have already elapsed from the
time the mortgage was executed on October 20, 1936 by Rosa Ver, and the lot in question had been the
subject of several transactions during which time said respondents never did anything in assuming or
vindicating their right to institute a suit against the petitioner though with ample opportunity to do so and,
therefore, said respondents slept on or neglected in asserting their right, hence they are guilty of laches.
Petitioner's contention is without merit. First, it must be clarified that not all the respondent heirs signed
the mortgage deed as instrumental witnesses. An examination of the mortgage contract (Exhibit "1") that
of the five (5) Bitanga respondents, namely, Pedro, Fernando, Gregorio, Guillermo and Clarita only
Guillermo Bitanga signed as one of the instrumental witnesses, the first being Mary B. Castillo.
Even as regards Guillermo Bitanga, who signed as witness of the deed of mortgage, PNB's reliance
upon the case of Vda de la Cruz vs. Ilagan is unavailing. In the De la Cruz case, the heirs of the
decedent, who were the es sought to be estopped from questioning the validity of the sale made by their
co-heir and the administrator of the decedent's estate, did not merely sign as witnesses to the deed of
sale. In the words of Justice Zaldivar who penned the decision, they "gave their approval and conformity
to the made and to the administrator's motion by signing with appropriate expressions both papers."
(Cruz vs. Ilagan, 81 Phil. 554, 556). Thus, that the heirs gave their consent to the sale could not be
doubted, as in fact it was expressed in words in the deed itself and in the motion submitted to the court
for judicial approval of the sale, and on the basis of this express approval and conformity, the Court held

them in estoppel and bound as co-vendors. In the instant case, on the other hand, the party sought to be
estopped signed merely as an instrumental witness. A distinction should be made, as indeed there is,
between one who signs a document merely as an instrumental witness, and one who affixes his
signature as proof of his consent to, approval of, and conformity with, the contents of the deed or
document. The former simply attests that the party or parties to the instrument signed the same in his
presence, so that he is frequently referred to as a "Witness to the signature," and he is not bound to
know or be aware of the contents of the document; while the latter is not only presumed to know the
subject matter of the deed, but more importantly, binds himself thereto as effectively as the party if would
be bound thereby.
The foregoing distinction makes clear the inapplicability of the ruling in Vda de la Cruz vs. Ilagan to the
facts obtaining in the case at bar. We cannot hold Guillermo Bitanga in estoppel by declaring that he
bound himself to the mortgage as effectively as the mortgagor Rosa Ver when he signed the mortgage
deed as a witness in the absence of clear proof that he was in fact aware of the contents of the
document at the time of its execution. We can only go as far as stating that the deed was signed by the
parties thereto in his presence.
Moreover, there is no allegation nor evidence on record to show that petitioner-mortgagee relied upon
the signature of Guillermo Bitanga on the mortgage deed, or that he made any representations with the
PNB for the acceptance of the mortgage. On the contrary, PNB states that Rosa Ver mortgaged the
entire lot "on the basis and strength of Tax Declaration No. 120225-A" which "was issued and declared in
her exclusive name. 10 As held by this Court, speaking through Justice Zaldivar, in the case of Kalalo vs.
Luz, L-27782, July 31, 1970, 34 SCRA 337, 346-347:
An essential element of estoppel is that the person invoking it has been
influenced and has relied on the representations or conduct of the person sought
to be estopped, and this element is wanting in the instant case ... And in Republic
of the Philippines vs. Garcia, et al. (91 Phil. 46, 49 ), this Court ruled that there is
no estoppel where the statement or action invoked as its basis did not mislead
the adverse party. Estoppel has been characterized as harsh or odious and not
favored by law (Coronet, et al. vs. C.I.R., et al., 24 SCRA 990, 996) ... Estoppel
cannot be sustained by mere argument or doubtful inference; it must be clearly
proved in all its essential elements by clear, convincing and satisfactory evidence
(Rivers vs. Metropolitan Life Ins. Co. of New York, 6 N.Y., 2d, 3, 5) ...
Consequently, there is no estoppel where there is no reliance upon representations and where there is
no deliberate misleading of another. Intention to mislead is an important element of estoppel, as well as
the lead party's reliance upon the declaration, act or omission of the party sought to be estopped. Both
elements have not been proved in the instant case, hence again, estoppel does not lie against Guillermo
Bitanga.
Under this same ground of estoppel, petitioner makes capital of the fact that it was Atty. Agripino L.
Rabago, son-in-law of mortgagor Rosa Ver and husband of one of herein respondent-heirs, Clarita
Bitanga Rabago, who notarized the mortgage deed. It is contended that since Atty. Rabago acted as the
judicial administrator and lawyer of the Bitanga family estate at the time of the execution of the
mortgage, he should have prevailed upon his mother-in-law Rosa Ver not to mortgage the entire lot but
only half thereof to PNB when he was approached to notarize the Hipoteca de Bienes Immuebles
(Exhibit 1). Furthermore, knowing that the property was already the subject of original registration
proceedings under Act No. 496, he should have informed the bank thereof.
Again, this contention of petitioner is untenable. Assuming that Atty. Rabago was the lawyer for the
Bitanga family administrator of its estate of which the trial and appellate courts made no such finding, his
acts, declarations and omissions in the performance of his duties as such, whether deliberate or not,
cannot adversely affect herein respondent hers as to deprive them of their right to umpugn a contract
which was prejudicial to their interests. Under the circumstances of the case at bar, that Atty. Rabago
could have or should have done a particular thing which he did not do is his own responsibility. The
settled rule in Philippines Jurisprudence that a client is bound by his 's actions, negligence, mistakes
and/or shortcomings enunciated in a number of cases 11 presupposes the existence of a ending litigation
whether in court or in an administrative body, and refers only to matters to the conduct of such case.

Precisely said rule requires the existence of an attorney-client relationship, while herein, there is merely
a single, independent transaction, that of a mortgage, which was in no way con. connected with any
pending litigation at the time of its execution. Therefore, the above-stated rule finds no application in the
instant case.
We likewise disagree with the contention that Pedro Bitanga's offer to buy the lot in question, as
contained in his letter to the PNB dated September 14, 1949 (Exhibit 10), is a conclusive admission on
his part that the bank was the absolute and legal owner of the property so as to estop him from
contesting the validity of the mortgage (Exhibit 1) and the title (TCT T-2701) procured by the bank over
the property. For in the aforesaid letter, Bitanga categorically wrote: "1. That I offer the amount of
P800.00 to buy said lot, and please consider that the rights which the bank had purchased was the
property and shares of my mother and brother, Guillermo, and that my rights as well as the rights of my
other brothers and sisters were not sold to the bank;" There can be no estoppel arising from said
vehement and assertive claim. If he offered to buy the entire property despite such expressed claim, his
purpose may well be that he wished to avoid a long-drawn, expensive litigation and not necessarily to
admit that petitioner was the absolute and legal owner of the property.
As to petitioner's contention that respondents are guilty of laches for having slept on or neglected in
asserting their right to the land after the lapse of more than nineteen (19) years from the time the
mortgage was executed on October 20, 1936 by Rosa Ver, the ruling in Angeles, et al., vs. Court of
Appeals, et al., 102 Phil. 1006, declares that "where the sale of a homestead is null and void, the action
to recover the same does not prescribe because mere lapse of the time Cannot give efficacy to the
contracts that are null and void and inexistent." This is a principle recognized since Tipton vs. Velasco, 6
Phil. 67, that "mere lapse of time to give efficacy to contracts that are null and void cited in Eugenie vs.
Perdido et al., 97 Phil. 41.
As to the fourth assignment of error faulting the respondent appellate court in holding that the acquisition
of the other half portion of the lot in question by the intervenors-spouses Melitona Lagpacan and Jorge
Maracas bears the earmarks of validity and registry petitioner theorizes that the mortgage executed by
Rosa Ver on the lot in question in its entirety was valid and that said mortgage was very much ahead
than that of the levy made by the Manila Trading & Supply Co. since the mortgage was registered on
November 12, 1936 under Act 3344 as then the property mortgaged was still an unregistered land. On
the other hand, the levy made by the Manila Trading & Supply Co. was noted in the first Torrens title of
the land after its registration under the Torrens system, on February 14, 1940. And being first in time,
herein petitioner maintains it should be first in right and the mortgage should enjoy preference over the
levy.
It must be noted, however, that in Our resolution of the first assignment of error, We ruled that the
mortgage deed was valid and existing only with respect to the one-half portion of the lot in question
belonging to the mortgagor Rosa Ver as her share in the conjugal partnership with her husband Iigo
Bitanga. Hence, petitioner's assumption that the mortgage of the whole lot was valid, is erroneous. What
this Court held is that the mortgagor, Rosa Ver, as surviving spouse, could convey in mortgage to the
petitioner bank one-half () of the entire property being her share in the conjugal partnership with her
deceased husband, the other half being the lawful share of the respondent heirs as inheritance from
their deceased father, Iigo Bitanga.
And resolving the secnd assignment of error, We have ruled likewise that the respondent court
committed no error in holding that the mortgage lien executed by Rosa Ver over the entire parcel of land
on October 20, 1936 which was not annotated on the original certificate of title could not have attached
to the land. Stated otherwise, the failure of the petitioner bank to appear during the registration
proceedings and claim such interest in the land, and further to do so after more than a year after the
issuance of the decree of registration which rendered the title undefeasible and free from any collateral
attack by any person g title to or interest in the land prior to registration proceedings, has resulted into
the petitioner bank being virtually deprived of its mortgage. It follows, therefore, that the acquisition of
the other half portion of the lot in question by the intervenors-spouses Melitona Lagpacan and Jorge
Macalas into whose hands said one-half () passed as a result of Civil Case No. 1846 of the Court of
First Instance of Ilocos Norte entitled "Jorge Maracas, et al., vs. Alfredo Formoso, et al." was valid and
regular, which holding of the Court of Appeals is correct and We affirm the same.

To recapitulate, the mortgage executed by Rosa Ver in favor of the PNB was valid only as regards her
one-half () conjugal share in Lot 9068. On the other hand, the intervenors-spouses Melitona Lagpacan
and Jorge Malacas acquired their right to the shares of Rosa Ver and Guillermo Bitanga in the same lot
from the Manila Trading Co., another creditor of Rosa Ver, which acquired "all the rights, title, interests
and participations which ... Guillermo Bitanga and Row Ver de Bitanga have or might have" over Lot
9068 (Exh 4-Lagpacan) more than two (2) years after the decree of registration was entered in the name
of the Bitanga spouses on September 14, 1937. Since Original Certificate of Title No. 7683 covering the
land in question was issued on December 15, 1937 free from any mortgage lien and no such lien was
recorded thereafter even until May 25, 1940 when the certificate of sale in favor of the Manila Trading
Co. as highest bidder of the shares of Rosa and Guillermo was annotated on the title (Exh. A-4), it is
quite clear that as between the PNB and the Manila Trading Co., the latter had the better rights.
One further point that militates against the claim of the petitioner bank who now prosecutes its claim or
mortgage lien in behalf of Felizardo Reyes to whom the bank sold the property on May 24, 1954, is the
finding of the appellate court that said Felizardo Reyes is a purchaser in bad faith, a notice of lis
pendens having been annotated on the certificate of title cover. ing the property sometime before the de
thereof was made by the Philippine National Bank in favor of F o Reyes. This finding of fact is conclusive
and binding upon Us and bad faith We can neither condone nor reward.
The judgment of the Court of Appeals must, however, be modified. Paragraph (d) of the dispositive
portion of the decision appealed from directed the Register of Deeds to issue in lieu of Transfer
Certificate of Title Nos. T-2701 and T-3944 another certificate of title in the names of the plaintiffs and in.
intervenors as follows:
Undivided behalf () share to Pedro Bitanga married to Agripina . Fernando
Bitanga single Gregorio Bitanga single, Guillermo Bitanga, single, Clarita
Bitanga, married to Agripino L. Rabago, all of legal age, Filipino citizens, and
residents of Laoag, Ilocos Norte, and the remaining undivided one-half (1/2) re to
the spouses Jorge Malacas and Melitona Lagpacan, both of legal age, Filipino
citizens, and residents of Burgos, Ilocos Norte free from incumbrance regarding
the claims of the Philippine National Bank and Felizardo Reyes, after payment of
lawful fees.
As We have hereinbefore ruled that the Manila Trading Company acquired not only the rights, title,
interests and participation of Rosa Ver to one-half () of Lot 9068 but also that pertaining to Guillermo
Bitanga or one-fifth (1/5) of the other half of the lot which the latter shared with his sister and three (3)
brothers, each one having one-fifth (1/5) share each, the intervenor spouses as successors-in-interest of
the Manila Trading Company are entitled to six-tenths (6/10) or three-fifths (3/5) of the entire lot, and not
merely one-half () thereof as held by the lower court and the appellate court. The undivided two-fifths
(2/5) share only should appertain to Pedro Bitanga, Fernando Bitanga, Gregorio Bitanga and Clarita
Bitanga.
WHEREFORE, IN VIEW OF THE FOREGOING, the judgment of the Court of Appeals is hereby affirmed
with modification in the sense that paragraph (d) is hereby amended to read as follows:
(d) Since the issuance of Transfer Certificate of Title No. T2701, Exhibit "D" in favor of the Philippine
National Bank, and Transfer Certificate of Title No. T-3944, Exhibit "16", in favor of Felizardo Reyes, was
without legal basis, they are, therefore, declared null and void and cancelled. The Register of Deeds is
hereby ordered to issue in hell of the foregoing transfer certificates of title another certificate of title in the
names of the private respondents as follows:
Undivided two-fifths (2/5) share to Pedro Bitanga, married to Agripina, Purisima Fernando Bitanga,
single, Gregorio Bitanga, single, and Clarita Bitanga, married to Agripino L. Rabago, all of legal age,
Filipino citizens, and residents of Laoag, Ilocos Norte, and the remaining undivided three-fifths (3/5)
share to the spouses Jorge Maracas and Melitona Lagpacan, both of legal age, Filipino citizens, and
residents of Burgos, Ilocos Norte, free from incumbrance regarding the claims of the Philippine National
Bank and Felizardo Reyes, after payment of lawful fees.

Costs against the petitioner.

SO ORDERED.
G.R. No. L-64159 September 10, 1985
CIRCE S. DURAN and ANTERO S. GASPAR, petitioners,
vs.
INTERMEDIATE APPELLATE COURT, ERLINDA B. MARCELO TIANGCO and RESTITUTO
TIANGCO,respondents.

RELOVA, J.:
The respondent then Court of Appeals rendered judgment, modifying the decision of the then Court of
First Instance of Rizal, which reads as follows:
(1) the complaint of the plaintiffs (herein petitioners) is hereby DISMISSED;
(2) the defendants-appellants spouses Erlinda B. Marcelo Tiangco and Restituto
Tiangco (herein private respondents) are hereby declared the lawful owners of
the two (2) parcels of land and all the improvements thereon including the 12door apartment thereon described in the complaint, in the counterclaim, in the
cross-claim, and in the Sheriff's Certificate of Sale;
(3) the plaintiffs-appellants and the defendant-appellee Fe S. Duran are hereby
ordered to deliver to (the Tiangcos) the two parcels of land and all the
improvements thereon including the 12-door apartment thereon, subject matter of
the complaint, counterclaim, and cross-claim, and in the Sheriff's Certificate of
Sale;
(4) the plaintiffs-appellants and the defendant-appellee Fe S. Duran are hereby
ordered to pay solidarily to the Tiangcos the sum of Two Thousand Four Hundred
Pesos (P2,400) a month from May 16, 1972 until delivery of possession of the
properties in question to said Tiangco spouses, representing rentals collected by
plaintiffs-appellants and defendant- appellee Fe S. Duran;
(5) the plaintiffs-appellants and defendant-appellee Fe S. Duran are hereby
ordered to pay solidarily to the spouses Tiangco the sum of Twenty Thousand
Pesos (P20,000) as damages for attorney's fees, and the sum of Twenty-Five
Thousand Pesos (P25,000) for moral damages, and the costs. (pp. 149-150,
Rollo)
The antecedent facts showed that petitioner Circe S. Duran owned two (2) parcels of land (Lots 5 and 6,
Block A, Psd 32780) covered by Transfer Certificate of Title No. 1647 of the Register of Deeds of
Caloocan City which she had purchased from the Moja Estate. She left the Philippines in June 1954 and
returned in May 1966.
On May 13, 1963, a Deed of Sale of the two lots mentioned above was made in favor of Circe's mother,
Fe S. Duran who, on December 3, 1965, mortgaged the same property to private respondent Erlinda B.
Marcelo-Tiangco. When petitioner Circe S. Duran came to know about the mortgage made by her
mother, she wrote the Register of Deeds of Caloocan City informing the latter that she had not given her
mother any authority to sell or mortgage any of her properties in the Philippines. Failing to get an answer

from the registrar, she returned to the Philippines. Meanwhile, when her mother, Fe S. Duran, failed to
redeem the mortgage properties, foreclosure proceedings were initiated by private respondent Erlinda B.
Marcelo Tiangco and, ultimately, the sale by the sheriff and the issuance of Certificate of Sale in favor of
the latter.
Petitioner Circe S. Duran claims that the Deed of Sale in favor of her mother Fe S. Duran is a forgery,
saying that at the time of its execution in 1963 she was in the United States. On the other hand, the
adverse party alleges that the signatures of Circe S. Duran in the said Deed are genuine and,
consequently, the mortgage made by Fe S. Duran in favor of private respondent is valid.
With respect to the issue as to whether the signature of petitioner Circe S. Duran in the Deed of Sale is a
forgery or not, respondent appellate court held the same to be genuine because there is the
presumption of regularity in the case of a public document and "the fact that Circe has not been able to
satisfactorily prove that she was in the United States at the time the deed was executed in 1963. Her
return in 1966 does not prove she was not here also in 1963, and that she did not leave shortly after
1963. She should have presented her old passport, not her new one. But even if the signatures were a
forgery, and the sale would be regarded as void, still it is Our opinion that the Deed of Mortgage is
VALID, with respect to the mortgagees, the defendants-appellants. While it is true that under Art. 2085 of
the Civil Code, it is essential that the mortgagor be the absolute owner of the property mortgaged, and
while as between the daughter and the mother, it was the daughter who still owned the lots, STILL
insofar as innocent third persons are concerned the owner was already the mother (Fe S. Duran)
inasmuch as she had already become the registered owner (Transfer Certificates of Title Nos. 2418 and
2419). The mortgagee had the right to rely upon what appeared in the certificate of title, and did not have
to inquire further. If the rule were otherwise, the efficacy and conclusiveness of Torrens Certificate of
Titles would be futile and nugatory. Thus the rule is simple: the fraudulent and forged document of sale
may become the root of a valid title if the certificate has already been transferred from the name of the
true owner to the name indicated by the forger (See De la Cruz v. Fable, 35 Phil. 144; Blondeau et al. v.
Nano et al., 61 Phil. 625; Fule et al. v. Legare et al., 7 SCRA 351; see also Sec. 55 of Act No. 496, the
Land Registration Act). The fact that at the time of the foreclosure sale proceedings (1970-72) the
mortgagees may have already known of the plaintiffs' claim is immaterial. What is important is that at the
time the mortgage was executed, the mortgagees in good faith actually believed Fe S. Duran to be the
owner, as evidenced by the registration of the property in the name of said Fe S. Duran (pp. 146-147,
Rollo)."
In elevating the judgment of the respondent appellate court to Us for review, petitioners discussed
questions of law which, in effect and substance, raised only one issue and that is whether private
respondent Erlinda B. Marcelo-Tiangco was a buyer in good faith and for value.
Guided by previous decisions of this Court, good faith consists in the possessor's belief that the person
from whom he received the thing was the owner of the same and could convey his title (Arriola vs.
Gomez dela Serna, 14 Phil. 627). Good faith, while it is always to be presumed in the absence of proof
to the contrary, requires a well-founded belief that the person from whom title was received was himself
the owner of the land, with the right to convey it (Santiago vs. Cruz, 19 Phil. 148). There is good faith
where there is an honest intention to abstain from taking any unconscientious advantage from another
(Fule vs. Legare, 7 SCRA 351). Otherwise stated, good faith is the opposite of fraud and it refers to the
state of mind which is manifested by the acts of the individual concerned. In the case at bar, private
respondents, in good faith relied on the certificate of title in the name of Fe S. Duran and as aptly stated
by respondent appellate court "[e]ven on the supposition that the sale was void, the general rule that the
direct result of a previous illegal contract cannot be valid (on the theory that the spring cannot rise higher
than its source) cannot apply here for We are confronted with the functionings of the Torrens System of
Registration. The doctrine to follow is simple enough: a fraudulent or forged document of sale may
become the ROOT of a valid title if the certificate of title has already been transferred from the name of
the true owner to the name of the forger or the name indicated by the forger." (p. 147, Rollo)
Thus, where innocent third persons relying on the correctness of the certificate of title issued, acquire
rights over the property, the court cannot disregard such rights and order the total cancellation of the
certificate for that would impair public confidence in the certificate of title; otherwise everyone dealing
with property registered under the torrens system would have to inquire in every instance as to whether
the title had been regularly or irregularly issued by the court. Indeed, this is contrary to the evident

purpose of the law. Every person dealing with registered land may safely rely on the correctness of the
certificate of title issued therefor and the law will in no way oblige him to go behind the certificate to
determine the condition of the property. Stated differently, an innocent purchaser for value relying on a
torrens title issued is protected. A mortgagee has the right to rely on what appears in the certificate of
title and, in the absence of anything to excite suspicion, he is under no obligation to look beyond the
certificate and investigate the title of the mortgagor appearing on the face of said certificate.
Likewise, We take note of the finding and observation of respondent appellate court in that petitioners
were guilty of estoppel by laches "in not bringing the case to court within a reasonable period. Antero
Gaspar, husband of Circe, was in the Philippines in 1964 to construct the apartment on the disputed lots.
This was testified to by Circe herself (tsn., p. 41, Nov. 27, 1973). In the process of construction,
specifically in the matter of obtaining a building permit, he could have discovered that the deed of sale
sought to be set aside had been executed on May 13, 1963 (the building permit needed an application
by the apparent owner of the land, namely, Circe's mother, Fe S. Duran). And then again both plaintiffs
could have intervened in the foreclosure suit but they did not. They kept silent until almost the last
moment when they finally decided, shortly before the sheriff's sale, to file a third-party claim. Clearly, the
plaintiffs can be faulted for their estoppel by laches." (p. 148, Rollo)
IN VIEW OF THE FOREGOING, We find the petition without merit and hereby AFFIRMED in toto the
decision of respondent appellate court promulgated on August 12, 1981.
SO ORDERED.
G.R. No. L-32116 April 2l, 1981
RURAL BANK OF CALOOCAN, INC. and JOSE O. DESIDERIO, JR., petitioners,
vs.
THE COURT OF APPEALS and MAXIMA CASTRO, respondents.

DE CASTRO, * J.:
This is a petition for review by way of certiorari of the decision 1 of the Court of Appeals in CA-G.R. No.
39760-R entitled "Maxima Castro, plaintiff-appellee, versus Severino Valencia, et al., defendants; Rural
Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes, defendants-appellants," which
affirmed in toto the decision of the Court of First Instance of Manila in favor of plaintiff- appellee, the
herein private respondent Maxima Castro.
On December 7, 1959, respondent Maxima Castro, accompanied by Severino Valencia, went to the
Rural Bank of Caloocan to apply for an industrial loan. It was Severino Valencia who arranged
everything about the loan with the bank and who supplied to the latter the personal data required for
Castro's loan application. On December 11, 1959, after the bank approved the loan for the amount of
P3,000.00, Castro, accompanied by the Valencia spouses, signed a promissory note corresponding to
her loan in favor of the bank.
On the same day, December 11, 1959, the Valencia spouses obtained from the bank an equal amount of
loan for P3,000.00. They signed a promissory note (Exhibit "2") corresponding to their loan in favor of
the bank and had Castro affixed thereon her signature as co-maker.
The two loans were secured by a real-estate mortgage (Exhibit "6") on Castro's house and lot of 150
square meters, covered by Transfer Certificate of Title No. 7419 of the Office of the Register of Deeds of
Manila.

On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy Sheriff Basilio Magsambol, sent a
notice of sheriff's sale addressed to Castro, announcing that her property covered by T.C.T. No. 7419
would be sold at public auction on March 10, 1961 to satisfy the obligation covering the two promissory
notes plus interest and attorney's fees.
Upon request by Castro and the Valencias and with conformity of the bank, the auction sale that was
scheduled for March 10, 1961 was postponed for April 10, 1961. But when April 10, 1961 was
subsequently declared a special holiday, the sheriff of Manila sold the property covered by T.C.T. No.
7419 at a public auction sale that was held on April 11, 1961, which was the next succeeding business
day following the special holiday.
Castro alleged that it was only when she received the letter from the Acting Deputy Sheriff on February
13, 1961, when she learned for the first time that the mortgage contract (Exhibit "6") which was an
encumbrance on her property was for P6.000.00 and not for P3,000.00 and that she was made to sign
as co-maker of the promissory note (Exhibit "2") without her being informed of this.
On April 4, 1961, Castro filed a suit denominated "Re: Sum of Money," against petitioners Bank and
Desiderio, the Spouses Valencia, Basilio Magsambol and Arsenio Reyes as defendants in Civil Case No.
46698 before the Court of First Instance of Manila upon the charge, amongst others, that thru mistake
on her part or fraud on the part of Valencias she was induced to sign as co-maker of a promissory note
(Exhibit "2") and to constitute a mortgage on her house and lot to secure the questioned note. At the time
of filing her complaint, respondent Castro deposited the amount of P3,383.00 with the court a quo in full
payment of her personal loan plus interest.
In her amended complaint, Castro prayed, amongst other, for the annulment as far as she is concerned
of the promissory note (Exhibit "2") and mortgage (Exhibit "6") insofar as it exceeds P3,000.00; for the
discharge of her personal obligation with the bank by reason of a deposit of P3,383.00 with the court a
quo upon the filing of her complaint; for the annulment of the foreclosure sale of her property covered by
T.C.T. No. 7419 in favor of Arsenio Reyes; and for the award in her favor of attorney's fees, damages
and cost.
In their answers, petitioners interposed counterclaims and prayed for the dismissal of said complaint,
with damages, attorney's fees and costs. 2
The pertinent facts arrived from the stipulation of facts entered into by the parties as stated by
respondent Court of Appeals are as follows:
Spawning the present litigation are the facts contained in the following stipulation
of facts submitted by the parties themselves:
1. That the capacity and addresses of all the parties in this case are admitted .
2. That the plaintiff was the registered owner of a residential house and lot
located at Nos. 1268-1270 Carola Street, Sampaloc, Manila, containing an area
of one hundred fifty (150) square meters, more or less, covered by T.C.T. No.
7419 of the Office of the Register of Deeds of Manila;
3. That the signatures of the plaintiff appearing on the following documents are
genuine:
a) Application for Industrial Loan with the Rural Bank of Caloocan, dated
December 7, 1959 in the amount of P3,000.00 attached as Annex A of this partial
stipulation of facts;

b) Promissory Note dated December 11, 1959 signed by the plaintiff in favor of
the Rural Bank of Caloocan for the amount of P3,000.00 as per Annex B of this
partial stipulation of facts;
c) Application for Industrial Loan with the Rural Bank of Caloocan, dated
December 11, 1959, signed only by the defendants, Severino Valencia and
Catalina Valencia, attached as Annex C, of this partial stipulation of facts;
d) Promissory note in favor of the Rural Bank of Caloocan, dated December 11,
1959 for the amount of P3000.00, signed by the spouses Severino Valencia and
Catalina Valencia as borrowers, and plaintiff Maxima Castro, as a co-maker,
attached as Annex D of this partial stipulation of facts;
e) Real estate mortgage dated December 11, 1959 executed by plaintiff Maxima
Castro, in favor of the Rural Bank of Caloocan, to secure the obligation of
P6,000.00 attached herein as Annex E of this partial stipulation of facts;
All the parties herein expressly reserved their right to present any evidence they
may desire on the circumstances regarding the execution of the abovementioned documents.
4. That the sheriff of Manila, thru Acting Chief Deputy Sheriff, Basilio Magsambol,
sent a notice of sheriff's sale, address to the plaintiff, dated February 13, 1961,
announcing that plaintiff's property covered by TCT No. 7419 of the Register of
Deeds of the City of Manila, would be sold at public auction on March 10, 1961 to
satisfy the total obligation of P5,728.50, plus interest, attorney's fees, etc., as
evidenced by the Notice of Sheriff's Sale and Notice of Extrajudicial Auction Sale
of the Mortgaged property, attached herewith as Annexes F and F-1, respectively,
of this stipulation of facts;
5. That upon the request of the plaintiff and defendants-spouses Severino
Valencia and Catalina Valencia, and with the conformity of the Rural Bank of
Caloocan, the Sheriff of Manila postponed the auction sale scheduled for March
10, 1961 for thirty (30) days and the sheriff re-set the auction sale for April 10,
1961;
6. That April 10, 1961 was declared a special public holiday; (Note: No. 7 is
omitted upon agreement of the parties.)
8. That on April 11, 1961, the Sheriff of Manila, sold at public auction plaintiff's
property covered by T.C.T. No. 7419 and defendant, Arsenio Reyes, was the
highest bidder and the corresponding certificate of sale was issued to him as per
Annex G of this partial stipulation of facts;
9. That on April 16, 1962, the defendant Arsenio Reyes, executed an Affidavit of
Consolidation of Ownership, a copy of which is hereto attached as Annex H of
this partial stipulation of facts;
10. That on May 9, 1962, the Rural Bank of Caloocan Incorporated executed the
final deed of sale in favor of the defendant, Arsenio Reyes, in the amount of
P7,000.00, a copy of which is attached as Annex I of this partial stipulation of
facts;
11. That the Register of Deeds of the City of Manila issued the Transfer
Certificate of Title No. 67297 in favor of the defendant, Arsenio Reyes, in lieu of

Transfer Certificate of Title No. 7419 which was in the name of plaintiff, Maxima
Castro, which was cancelled;
12. That after defendant, Arsenio Reyes, had consolidated his title to the property
as per T.C.T. No. 67299, plaintiff filed a notice of lis pendens with the Register of
Deeds of Manila and the same was annotated in the back of T.C.T. No. 67299 as
per Annex J of this partial stipulation of facts; and
13. That the parties hereby reserved their rights to present additional evidence on
matters not covered by this partial stipulation of facts.
WHEREFORE, it is respectfully prayed that the foregoing partial stipulation of
facts be approved and admitted by this Honorable Court.
As for the evidence presented during the trial, We quote from the decision of the Court of Appeals the
statement thereof, as follows:
In addition to the foregoing stipulation of facts, plaintiff claims she is a 70-year old
widow who cannot read and write the English language; that she can speak the
Pampango dialect only; that she has only finished second grade (t.s.n., p. 4,
December 11, 1964); that in December 1959, she needed money in the amount
of P3,000.00 to invest in the business of the defendant spouses Valencia, who
accompanied her to the defendant bank for the purpose of securing a loan of
P3,000.00; that while at the defendant bank, an employee handed to her several
forms already prepared which she was asked to sign on the places indicated,
with no one explaining to her the nature and contents of the documents; that she
did not even receive a copy thereof; that she was given a check in the amount of
P2,882.85 which she delivered to defendant spouses; that sometime in February
1961, she received a letter from the Acting Deputy Sheriff of Manila, regarding
the extrajudicial foreclosure sale of her property; that it was then when she
learned for the first time that the mortgage indebtedness secured by the
mortgage on her property was P6,000.00 and not P3,000.00; that upon
investigation of her lawyer, it was found that the papers she was made to sign
were:
(a) Application for a loan of P3,000.00 dated December 7, 1959 (Exh. B-1 and
Exh. 1);
(b) Promissory note dated December 11, 1959 for the said loan of P3,000.00
(Exh- B-2);
(c) Promissory note dated December 11, 1959 for P3,000.00 with the defendants
Valencia spouses as borrowers and appellee as co-maker (Exh. B-4 or Exh. 2).
The auction sale set for March 10, 1961 was postponed co April 10, 1961 upon
the request of defendant spouses Valencia who needed more time within which
to pay their loan of P3,000.00 with the defendant bank; plaintiff claims that when
she filed the complaint she deposited with the Clerk of Court the sum of
P3,383.00 in full payment of her loan of P3,000.00 with the defendant bank, plus
interest at the rate of 12% per annum up to April 3, 1961 (Exh. D).
As additional evidence for the defendant bank, its manager declared that
sometime in December, 1959, plaintiff was brought to the Office of the Bank by
an employee- (t.s.n., p 4, January 27, 1966). She wept, there to inquire if she
could get a loan from the bank. The claims he asked the amount and the purpose
of the loan and the security to he given and plaintiff said she would need

P3.000.00 to be invested in a drugstore in which she was a partner (t.s.n., p. 811.

She offered as security for the loan her lot and house at Carola St., Sampaloc,
Manila, which was promptly investigated by the defendant bank's inspector. Then
a few days later, plaintiff came back to the bank with the wife of defendant
Valencia A date was allegedly set for plaintiff and the defendant spouses for the
processing of their application, but on the day fixed, plaintiff came without the
defendant spouses. She signed the application and the other papers pertinent to
the loan after she was interviewed by the manager of the defendant. After the
application of plaintiff was made, defendant spouses had their application for a
loan also prepared and signed (see Exh. 13). In his interview of plaintiff and
defendant spouses, the manager of the bank was able to gather that plaintiff was
in joint venture with the defendant spouses wherein she agreed to invest
P3,000.00 as additional capital in the laboratory owned by said spouses (t.s.n.,
pp. 16-17) 3
The Court of Appeals, upon evaluation of the evidence, affirmed in toto the decision of the Court of First
Instance of Manila, the dispositive portion of which reads:
FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment
and:
(1) Declares that the promissory note, Exhibit '2', is invalid as against plaintiff
herein;
(2) Declares that the contract of mortgage, Exhibit '6', is null and void, in so far as
the amount thereof exceeds the sum of P3,000.00 representing the principal
obligation of plaintiff, plus the interest thereon at 12% per annum;
(3) Annuls the extrajudicial foreclosure sale at public auction of the mortgaged
property held on April 11, 1961, as well as all the process and actuations made in
pursuance of or in implementation thereto;
(4) Holds that the total unpaid obligation of plaintiff to defendant Rural Bank of
Caloocan, Inc., is only the amount of P3,000.00, plus the interest thereon at 12%
per annum, as of April 3, 1961, and orders that plaintiff's deposit of P3,383.00 in
the Office of the Clerk of Court be applied to the payment thereof;
(5) Orders defendant Rural Bank of Caloocan, Inc. to return to defendant Arsenio
Reyes the purchase price the latter paid for the mortgaged property at the public
auction, as well as reimburse him of all the expenses he has incurred relative to
the sale thereof;
(6) Orders defendants spouses Severino D. Valencia and Catalina Valencia to
pay defendant Rural Bank of Caloocan, Inc. the amount of P3,000.00 plus the
corresponding 12% interest thereon per annum from December 11, 1960 until
fully paid; and
Orders defendants Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and
spouses Severino D. Valencia and Catalina Valencia to pay plaintiff, jointly and
severally, the sum of P600.00 by way of attorney's fees, as well as costs.
In view of the conclusion that the court has thus reached, the counterclaims of
defendant Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes
are hereby dismissed, as a corollary

The Court further denies the motion of defendant Arsenio Reyes for an Order
requiring Maxima Castro to deposit rentals filed on November 16, 1963,
resolution of which was held in abeyance pending final determination of the case
on the merits, also as a consequence of the conclusion aforesaid. 4
Petitioners Bank and Jose Desiderio moved for the reconsideration 5 of respondent court's decision. The
motion having been denied, 6 they now come before this Court in the instant petition, with the following
Assignment of Errors, to wit:
I
THE COURT OF APPEALS ERRED IN UPHOLDING THE PARTIAL
ANNULMENT OF THE PROMISSORY NOTE, EXHIBIT 2, AND THE
MORTGAGE, EXHIBIT 6, INSOFAR AS THEY AFFECT RESPONDENT MAXIMA
CASTRO VIS-A-VIS PETITIONER BANK DESPITE THE TOTAL ABSENCE OF
EITHER ALLEGATION IN THE COMPLAINT OR COMPETENT PROOF IN THE
EVIDENCE OF ANY FRAUD OR OTHER UNLAWFUL CONDUCT COMMITTED
OR PARTICIPATED IN BY PETITIONERS IN PROCURING THE EXECUTION
OF SAID CONTRACTS FROM RESPONDENT CASTRO.
II
THE COURT OF APPEALS ERRED IN IMPUTING UPON AND CONSIDERING
PREJUDICIALLY AGAINST PETITIONERS, AS BASIS FOR THE PARTIAL
ANNULMENT OF THE CONTRACTS AFORESAID ITS FINDING OF FRAUD
PERPETRATED BY THE VALENCIA SPOUSES UPON RESPONDENT
CASTRO IN UTTER VIOLATION OF THE RES INTER ALIOS ACTA RULE.

THE COURT OF APPEALS ERRED IN NOT DECLARING AS VALID AND

BINDING UPON RESPONDENT CASTRO THE HOLDING OF THE SALE ON
FORECLOSURE ON THE BUSINESS DAY NEXT FOLLOWING THE
ORIGINALLY SCHEDULED DATE THEREFOR WHICH WAS DECLARED A
HOLIDAY WITHOUT NECESSITY OF FURTHER NOTICE THEREOF.
The issue raised in the first three (3) assignment of errors is whether or not respondent court correctly
affirmed the lower court in declaring the promissory note (Exhibit 2) invalid insofar as they affect
respondent Castro vis-a-vis petitioner bank, and the mortgage contract (Exhibit 6) valid up to the amount
of P3,000.00 only.
Respondent court declared that the consent of Castro to the promissory note (Exhibit 2) where she
signed as co-maker with the Valencias as principal borrowers and her acquiescence to the mortgage
contract (Exhibit 6) where she encumbered her property to secure the amount of P6,000.00 was
obtained by fraud perpetrated on her by the Valencias who had abused her confidence, taking
advantage of her old age and ignorance of her financial need. Respondent court added that "the
mandate of fair play decrees that she should be relieved of her obligation under the contract" pursuant to
Articles 24 7 and 1332 8 of the Civil Code.
The decision in effect relieved Castro of any liability to the promissory note (Exhibit 2) and the mortgage
contract (Exhibit 6) was deemed valid up to the amount of P3,000.00 only which was equivalent to her
personal loan to the bank.
Petitioners argued that since the Valencias were solely declared in the decision to be responsible for the
fraud against Castro, in the light of the res inter alios acta rule, a finding of fraud perpetrated by the
spouses against Castro cannot be taken to operate prejudicially against the bank. Petitioners concluded
that respondent court erred in not giving effect to the promissory note (Exhibit 2) insofar as they affect
Castro and the bank and in declaring that the mortgage contract (Exhibit 6) was valid only to the extent
of Castro's personal loan of P3,000.00.

III
THE COURT OF APPEAL ERRED IN NOT HOLDING THAT, UNDER THE
FACTS FOUND BY IT, RESPONDENT CASTRO IS UNDER ESTOPPEL TO
IMPUGN THE REGULARITY AND VALIDITY OF HER QUESTIONED
TRANSACTION WITH PETITIONER BANK.
IV
THE COURT OF APPEALS ERRED IN NOT FINDING THAT, BETWEEN
PETITIONERS AND RESPONDENT CASTRO, THE LATTER SHOULD SUFFER
THE CONSEQUENCES OF THE FRAUD PERPETRATED BY THE VALENCIA
SPOUSES, IN AS MUCH AS IT WAS THRU RESPONDENT CASTRO'S
NEGLIGENCE OR ACQUIESCENSE IF NOT ACTUAL CONNIVANCE THAT
THE PERPETRATION OF SAID FRAUD WAS MADE POSSIBLE.

The records of the case reveal that respondent court's findings of fraud against the Valencias is well
supported by evidence. Moreover, the findings of fact by respondent court in the matter is deemed
final. 9 The decision declared the Valencias solely responsible for the defraudation of Castro. Petitioners'
contention that the decision was silent regarding the participation of the bank in the fraud is, therefore,
correct.
We cannot agree with the contention of petitioners that the bank was defrauded by the Valencias. For
one, no claim was made on this in the lower court. For another, petitioners did not submit proof to
support its contention.

At any rate, We observe that while the Valencias defrauded Castro by making her sign the promissory
note (Exhibit 2) and the mortgage contract (Exhibit 6), they also misrepresented to the bank Castro's
personal qualifications in order to secure its consent to the loan. This must be the reason which
prompted the bank to contend that it was defrauded by the Valencias. But to reiterate, We cannot agree
with the contention for reasons above-mentioned. However, if the contention deserves any consideration
at all, it is in indicating the admission of petitioners that the bank committed mistake in giving its consent
to the contracts.

THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF THE

DEPOSIT BY RESPONDENT CASTRO OF P3,383.00 WITH THE COURT
BELOW AS A TENDER AND CONSIGNATION OF PAYMENT SUFFICIENT TO
DISCHARGE SAID RESPONDENT FROM HER OBLIGATION WITH
PETITIONER BANK.

Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted by the
Valencias both Castro and the bank committed mistake in giving their consents to the contracts. In other
words, substantial mistake vitiated their consents given. For if Castro had been aware of what she
signed and the bank of the true qualifications of the loan applicants, it is evident that they would not have
given their consents to the contracts.

VI

Pursuant to Article 1342 of the Civil Code which provides:

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless
such misrepresentation has created substantial mistake and the same is mutual.
We cannot declare the promissory note (Exhibit 2) valid between the bank and Castro and the mortgage
contract (Exhibit 6) binding on Castro beyond the amount of P3,000.00, for while the contracts may not
be invalidated insofar as they affect the bank and Castro on the ground of fraud because the bank was
not a participant thereto, such may however be invalidated on the ground of substantial mistake mutually
committed by them as a consequence of the fraud and misrepresentation inflicted by the Valencias.
Thus, in the case of Hill vs. Veloso, 10this Court declared that a contract may be annulled on the ground
of vitiated consent if deceit by a third person, even without connivance or complicity with one of the
contracting parties, resulted in mutual error on the part of the parties to the contract.
Petitioners argued that the amended complaint fails to contain even a general averment of fraud or
mistake, and its mention in the prayer is definitely not a substantial compliance with the requirement of
Section 5, Rule 8 of the Rules of Court. The records of the case, however, will show that the amended
complaint contained a particular averment of fraud against the Valencias in full compliance with the
provision of the Rules of Court. Although, the amended complaint made no mention of mistake being
incurred in by the bank and Castro, such mention is not essential in order that the promissory note
(Exhibit 2) may be declared of no binding effect between them and the mortgage (Exhibit 6) valid up to
the amount of P3,000.00 only. The reason is that the mistake they mutually suffered was a mere
consequence of the fraud perpetrated by the Valencias against them. Thus, the fraud particularly averred
in the complaint, having been proven, is deemed sufficient basis for the declaration of the promissory
note (Exhibit 2) invalid insofar as it affects Castro vis-a-vis the bank, and the mortgage contract (Exhibit
6) valid only up to the amount of P3,000.00.
The second issue raised in the fourth assignment of errors is who between Castro and the bank should
suffer the consequences of the fraud perpetrated by the Valencias.
In attributing to Castro an consequences of the loss, petitioners argue that it was her negligence or
acquiescence if not her actual connivance that made the fraud possible.
Petitioners' argument utterly disregards the findings of respondent Court of Appeals wherein petitioners'
negligence in the contracts has been aptly demonstrated, to wit:
A witness for the defendant bank, Rodolfo Desiderio claims he had subjected the
plaintiff-appellee to several interviews. If this were true why is it that her age was
placed at 61 instead of 70; why was she described in the application (Exh. B-1-9)
as drug manufacturer when in fact she was not; why was it placed in the
application that she has income of P20,000.00 when according to plaintiffappellee, she his not even given such kind of information -the true fact being that
she was being paid P1.20 per picul of the sugarcane production in her hacienda
and 500 cavans on the palay production. 11
From the foregoing, it is evident that the bank was as much , guilty as Castro was, of negligence in
giving its consent to the contracts. It apparently relied on representations made by the Valencia spouses
when it should have directly obtained the needed data from Castro who was the acknowledged owner of
the property offered as collateral. Moreover, considering Castro's personal circumstances her lack of
education, ignorance and old age she cannot be considered utterly neglectful for having been
defrauded. On the contrary, it is demanded of petitioners to exercise the highest order of care and
prudence in its business dealings with the Valencias considering that it is engaged in a banking business
a business affected with public interest. It should have ascertained Castro's awareness of what she
was signing or made her understand what obligations she was assuming, considering that she was
giving accommodation to, without any consideration from the Valencia spouses.
Petitioners further argue that Castro's act of holding the Valencias as her agent led the bank to believe
that they were authorized to speak and bind her. She cannot now be permitted to deny the authority of

the Valencias to act as her agent for one who clothes another with apparent authority as her agent is not
permitted to deny such authority.
The authority of the Valencias was only to follow-up Castro's loan application with the bank. They were
not authorized to borrow for her. This is apparent from the fact that Castro went to the Bank to sign the
promissory note for her loan of P3,000.00. If her act had been understood by the Bank to be a grant of
an authority to the Valencia to borrow in her behalf, it should have required a special power of attorney
executed by Castro in their favor. Since the bank did not, We can rightly assume that it did not entertain
the notion, that the Valencia spouses were in any manner acting as an agent of Castro.
When the Valencias borrowed from the Bank a personal loan of P3,000.00 evidenced by a promissory
note (Exhibit 2) and mortgaged (Exhibit 6) Castro's property to secure said loan, the Valencias acted for
their own behalf. Considering however that for the loan in which the Valencias appeared as principal
borrowers, it was the property of Castro that was being mortgaged to secure said loan, the Bank should
have exercised due care and prudence by making proper inquiry if Castro's consent to the mortgage
was without any taint or defect. The possibility of her not knowing that she signed the promissory note
(Exhibit 2) as co-maker with the Valencias and that her property was mortgaged to secure the two loans
instead of her own personal loan only, in view of her personal circumstances ignorance, lack of
education and old age should have placed the Bank on prudent inquiry to protect its interest and that
of the public it serves. With the recent occurrence of events that have supposedly affected adversely our
banking system, attributable to laxity in the conduct of bank business by its officials, the need of extreme
caution and prudence by said officials and employees in the discharge of their functions cannot be overemphasized.
Question is, likewise, raised as to the propriety of respondent court's decision which declared that
Castro's consignation in court of the amount of P3,383.00 was validly made. It is contended that the
consignation was made without prior offer or tender of payment to the Bank, and it therefore, not valid. In
holding that there is a substantial compliance with the provision of Article 1256 of the Civil Code,
respondent court considered the fact that the Bank was holding Castro liable for the sum of P6,000.00
plus 12% interest per annum, while the amount consigned was only P3,000.00 plus 12% interest; that at
the time of consignation, the Bank had long foreclosed the mortgage extrajudicially and the sale of the
mortgage property had already been scheduled for April 10, 1961 for non-payment of the obligation, and
that despite the fact that the Bank already knew of the deposit made by Castro because the receipt of
the deposit was attached to the record of the case, said Bank had not made any claim of such deposit,
and that therefore, Castro was right in thinking that it was futile and useless for her to make previous
offer and tender of payment directly to the Bank only in the aforesaid amount of P3,000.00 plus 12%
interest. Under the foregoing circumstances, the consignation made by Castro was valid. if not under the
strict provision of the law, under the more liberal considerations of equity.
The final issue raised is the validity or invalidity of the extrajudicial foreclosure sale at public auction of
the mortgaged property that was held on April 11, 1961.
Petitioners contended that the public auction sale that was held on April 11, 1961 which was the next
business day after the scheduled date of the sale on April 10, 1961, a special public holiday, was
permissible and valid pursuant to the provisions of Section 31 of the Revised Administrative Code which
ordains:
Pretermission of holiday. Where the day, or the last day, for doing any act
required or permitted by law falls on a holiday, the act may be done on the next
succeeding business day.
Respondent court ruled that the aforesaid sale is null and void, it not having been carried out in
accordance with Section 9 of Act No. 3135, which provides:
Section 9. Notice shall be given by posting notices of the sale for not less than
twenty days in at least three public places of the municipality or city where the
property is situated, and if such property is worth more than four hundred pesos,

such notice shall also be published once a week for at least three consecutive
weeks in a newspaper of general circulation in the municipality or city.
We agree with respondent court. The pretermission of a holiday applies only "where the day, or the last
day for doing any act required or permitted by law falls on a holiday," or when the last day of a given
period for doing an act falls on a holiday. It does not apply to a day fixed by an office or officer of the
government for an act to be done, as distinguished from a period of time within which an act should be
done, which may be on any day within that specified period. For example, if a party is required by law to
file his answer to a complaint within fifteen (15) days from receipt of the summons and the last day falls
on a holiday, the last day is deemed moved to the next succeeding business day. But, if the court fixes
the trial of a case on a certain day but the said date is subsequently declared a public holiday, the trial
thereof is not automatically transferred to the next succeeding business day. Since April 10, 1961 was
not the day or the last day set by law for the extrajudicial foreclosure sale, nor the last day of a given
period but a date fixed by the deputy sheriff, the aforesaid sale cannot legally be made on the next
succeeding business day without the notices of the sale on that day being posted as prescribed in
Section 9, Act No. 3135.
WHEREFORE, finding no reversible error in the judgment under review, We affirm the same in toto. No
pronouncement as to cost.

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 (P7,000.00)
Pesos, Philippine Currency, and the amount of Fifteen Thousand (P15,000.00)
Pesos shah 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;

SO ORDERED.

G.R. No. 77465 May 21, 1988

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. Ybarra for respondents.

CORTES, J.:
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

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 (P3,535.00) Pesos,
Philippine Currency; and in such event the VENDEE shall execute the
corresponding Deed of absolute Sale in favor of the VENDOR and or the
Assignment of Leasehold Rights. [emphasis supplied]. (Quoted in Decision in
Civil Case No. 80420, Exhibit "A" of Civil Case No. 1315321].
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 defendant's 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:

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:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against

the defendants spouses UY TONG and KHO GIOK and defendant Ligaya
Investment, Inc., dismissing defendants' counterclaim and ordering:
1. The defendants spouses UY TONG and KHO PO GIOK and any andlor
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 liue 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].

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.
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
of pacto 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:

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
commissoriumand/or was borne out of the same.
II. The genuineness and due Prosecution 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.

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 P
3,535.00. The defendants shall pay the costs.

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.
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 P 3,535.00. 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

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;

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 Glok

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 hererein
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 commissorio is not subject to ratification and its invalidity cannot be waived.

(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 P 3,535.00 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 had 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].

The case before the Court is a petition for review on certiorari [1] to annul the decision of the Court
of Appeals,[2]reversing and setting aside the decision of the Regional Trial Court, [3], dated November 10,
1992, Judge Teodoro P. Regino. 3Quezon City, Branch 84, in an action for specific performance with
consignation.

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 P 3,535.00 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.

On March 8, 1987, at Quezon City, Norma Rosel entered into a loan agreement with petitioner
Natalia Bustamante and her late husband Ismael C. Bustamante, under the following terms and
conditions:

IV. Petitioners attempt to justify their continued refusal to vacate the premises subject of this litigation on
the following grounds:
(a) The deed of assingnment 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, 1972in 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.

1. That the borrowers are the registered owners of a parcel of land, evidenced by TRANSFER
CERTIFICATE OF TITLE No. 80667, containing an area of FOUR HUNDRED TWENTY THREE (423)
SQUARE Meters, more or less, situated along Congressional Avenue.
2. That the borrowers were desirous to borrow the sum of ONE HUNDRED THOUSAND (P100,000.00)
PESOS from the LENDER, for a period of two (2) years, counted from March 1, 1987, with an interest of
EIGHTEEN (18%) PERCENT per annum, and to guaranty the payment thereof, they are putting as a
collateral SEVENTY (70) SQUARE METERS portion, inclusive of the apartment therein, of the
aforestated parcel of land, however, in the event the borrowers fail to pay, the lender has the option to
buy or purchase the collateral for a total consideration of TWO HUNDRED THOUSAND (P200,000.00)
PESOS, inclusive of the borrowed amount and interest therein;
3. That the lender do hereby manifest her agreement and conformity to the preceding paragraph, while
the borrowers do hereby confess receipt of the borrowed amount. [4]
When the loan was about to mature on March 1, 1989, respondents proposed to buy at the preset price of P200,000.00, the seventy (70) square meters parcel of land covered by TCT No. 80667,
given as collateral to guarantee payment of the loan. Petitioner, however, refused to sell and requested
for extension of time to pay the loan and offered to sell to respondents another residential lot located at
Road 20, Project 8, Quezon City, with the principal loan plus interest to be used as down
payment. Respondents refused to extend the payment of the loan and to accept the lot in Road 20 as it
was occupied by squatters and petitioner and her husband were not the owners thereof but were mere
land developers entitled to subdivision shares or commission if and when they developed at least one
half of the subdivision area.[5]
Hence, on March 1, 1989, petitioner tendered payment of the loan to respondents which the latter
refused to accept, insisting on petitioners signing a prepared deed of absolute sale of the collateral.
On February 28, 1990, respondents filed with the Regional Trial Court, Quezon City, Branch 84, a
complaint for specific performance with consignation against petitioner and her spouse. [6]
Nevertheless, 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.

SO ORDERED.
[G. R. No. 126800. November 29, 1999]
NATALIA P. BUSTAMANTE, petitioner vs. SPOUSES RODITO F. ROSEL and NORMA A.
ROSEL, respondents.
RESOLUTION

On the other hand, on March 5, 1990, petitioner filed in the Regional Trial Court, Quezon City a
petition for consignation, and deposited the amount of P153,000.00 with the City Treasurer of Quezon
City on August 10, 1990.[7]
When petitioner refused to sell the collateral and barangay conciliation failed, respondents
consigned the amount ofP47,500.00 with the trial court.[8] In arriving at the amount deposited,
respondents considered the principal loan of P100,000.00 and 18% interest per annum thereon, which
amounted to P52,500.00.[9] The principal loan and the interest taken together amounted to P152,500.00,
leaving a balance of P 47,500.00. [10]

PARDO, J. :
After due trial, on November 10, 1992, the trial court rendered decision holding:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Denying the plaintiffs prayer for the defendants execution of the Deed of Sale to Convey the collateral
in plaintiffs favor;
2. Ordering the defendants to pay the loan of P100,000.00 with interest thereon at 18% per annum
commencing on March 2, 1989, up to and until August 10, 1990, when defendants deposited the amount
with the Office of the City Treasurer under Official Receipt No. 0116548 (Exhibit 2); and

given the right to purchase the property or apartment for P200,000.00, which is not contrary to law,
morals, good customs, public order or public policy. [19]
Upon due consideration of petitioners motion, we now resolve to grant the motion for
reconsideration.
The questions presented are whether petitioner failed to pay the loan at its maturity date and
whether the stipulation in the loan contract was valid and enforceable.

3. To pay Attorneys Fees in the amount of P 5,000.00, plus costs of suit.

SO ORDERED.
Quezon City, Philippines, November 10, 1992.

We rule that petitioner did not fail to pay the loan.

The loan was due for payment on March 1, 1989. On said date, petitioner tendered payment to
settle the loan which respondents refused to accept, insisting that petitioner sell to them the collateral of
the loan.
When respondents refused to accept payment, petitioner consigned the amount with the trial

TEODORO P. REGINO

court.

Judge[11]

We note the eagerness of respondents to acquire the property given as collateral to guarantee
the loan. The sale of the collateral is an obligation with a suspensive condition. [20] It is dependent upon
the happening of an event, without which the obligation to sell does not arise. Since the event did not
occur, respondents do not have the right to demand fulfillment of petitioners obligation, especially where
the same would not only be disadvantageous to petitioner but would also unjustly enrich respondents
considering the inadequate consideration (P200,000.00) for a 70 square meter property situated at
Congressional Avenue, Quezon City.

On November 16, 1992, respondents appealed from the decision to the Court of Appeals. [12] On
July 8, 1996, the Court of Appeals rendered decision reversing the ruling of the Regional Trial Court. The
dispositive portion of the Court of Appeals decision reads:
IN VIEW OF THE FOREGOING, the judgment appeal (sic) from is REVERSED and SET ASIDE and a
new one entered in favor of the plaintiffs ordering the defendants to accept the amount of P 47,000.00
deposited with the Clerk of Court of Regional Trial Court of Quezon City under Official Receipt No.
0719847, and for defendants to execute the necessary Deed of Sale in favor of the plaintiffs over the 70
SQUARE METER portion and the apartment standing thereon being occupied by the plaintiffs and
covered by TCT No. 80667 within fifteen (15) days from finality hereof. Defendants, in turn, are allowed
to withdraw the amount of P153,000.00 deposited by them under Official Receipt No. 0116548 of the
City Treasurers Office of Quezon City. All other claims and counterclaims are DISMISSED, for lack of
sufficient basis. No costs.
SO ORDERED.[13]
Hence, this petition.[14]
On January 20, 1997, we required respondents to comment on the petition within ten (10) days
from notice.[15] On February 27, 1997, respondents filed their comment. [16]
On February 9, 1998, we resolved to deny the petition on the ground that there was no reversible
error on the part of respondent court in ordering the execution of the necessary deed of sale in
conformity the with the parties stipulated agreement. The contract is the law between the parties thereof
(Syjuco v. Court of Appeals, 172 SCRA 111, 118, citing Phil. American General Insurance v. Mutuc, 61
SCRA 22; Herrera v. Petrophil Corporation, 146 SCRA 360).[17]
On March 17, 1998, petitioner filed with this Court a motion for reconsideration of the denial
alleging that the real intention of the parties to the loan was to put up the collateral as guarantee similar
to an equitable mortgage according to Article 1602 of the Civil Code. [18]
On April 21, 1998, respondents filed an opposition to petitioners motion for reconsideration. They
contend that the agreement between the parties was not a sale with right of re-purchase, but a loan with
interest at 18% per annum for a period of two years and if petitioner fails to pay, the respondent was

Respondents argue that contracts have the force of law between the contracting parties and must
be complied with in good faith. [21] There are, however, certain exceptions to the rule, specifically Article
1306 of the Civil Code, which provides:
Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or
public policy.
A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to acquire the
property given as security for the loan. This is embraced in the concept of pactum commissorium, which
is proscribed by law.[22]
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.[23]
In Nakpil vs. Intermediate Appellate Court,[24] we said:
The arrangement entered into between the parties, whereby Pulong Maulap was to be considered sold
to him (respondent) xxx in case petitioner fails to reimburse Valdes, must then be construed as
tantamount to pactum commissorium which is expressly prohibited by Art. 2088 of the Civil Code. For,
there was to be automatic appropriation of the property by Valdes in the event of failure of petitioner to
pay the value of the advances. Thus, contrary to respondents manifestation, all the elements of a
pactum commissorium were present: there was a creditor-debtor relationship between the parties; the
property was used as security for the loan; and there was automatic appropriation by respondent
of Pulong Maulap in case of default of petitioner.

A significant task in contract interpretation is the ascertainment of the intention of the parties and
looking into the words used by the parties to project that intention. 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 non payment of the loan. This is
within the concept of pactum commissorium. Such stipulation is void.[25]

3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of
her Leasehold Rights;

All persons in need of money are liable to enter into contractual relationships whatever the
condition if only to alleviate their financial burden albeit temporarily. Hence, courts are duty bound to
exercise caution in the interpretation and resolution of contracts lest the lenders devour the borrowers
like vultures do with their prey.

5. Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP

appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in
question;

WHEREFORE, we GRANT petitioners motion for reconsideration and SET ASIDE the Courts
resolution of February 9, 1998. We REVERSE the decision of the Court of Appeals in CA-G. R. CV No.
40193. In lieu thereof, we hereby DISMISS the complaint in Civil Case No. Q-90-4813.

4. Plaintiff failed to pay her loan on the scheduled dates thereof in accordance with the
terms of the Promissory Notes;

6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba over
the fishpond in question, defendant DBP, in turn, executed a Deed of Conditional
Sale of the Leasehold Rights in favor of plaintiff Lydia Cuba over the same
fishpond in question;
7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to the
Manager DBP, Dagupan City dated November 6, 1979 and December 20,
1979. DBP thereafter accepted the offer to repurchase in a letter addressed to
plaintiff dated February 1, 1982;

No costs.
SO ORDERED.
[G.R. No. 118342. January 5, 1998]
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and LYDIA
CUBA, respondents.
[G.R. No. 118367. January 5, 1998]
LYDIA P. CUBA, petitioner, vs. COURT OF APPEALS, DEVELOPMENT BANK OF THE
PHILIPPINES and AGRIPINA P. CAPERAL, respondents.
DECISION
DAVIDE, JR., J.:
[1]

These two consolidated cases stemmed from a complaint filed against the Development Bank
of the Philippines (hereafter DBP) and Agripina Caperal filed by Lydia Cuba (hereafter CUBA) on 21 May
1985 with the Regional Trial Court of Pangasinan, Branch 54. The said complaint sought (1) the
declaration of nullity of DBPs appropriation of CUBAs rights, title, and interests over a 44-hectare
fishpond located in Bolinao, Pangasinan, for being violative of Article 2088 of the Civil Code; (2) the
annulment of the Deed of Conditional Sale executed in her favor by DBP; (3) the annulment of DBPs
sale of the subject fishpond to Caperal; (4) the restoration of her rights, title, and interests over the
fishpond; and (5) the recovery of damages, attorneys fees, and expenses of litigation.
After the joinder of issues following the filing by the parties of their respective pleadings, the trial
court conducted a pre-trial where CUBA and DBP agreed on the following facts, which were embodied in
the pre-trial order:[2]
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new)
dated May 13, 1974 from the Government;
2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines in
the amounts ofP109,000.00; P109,000.00; and P98,700.00 under the terms stated
in the Promissory Notes dated September 6, 1974; August 11, 1975; and April 4,
1977;

8. After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a new
Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was issued by the
Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only, excluding her
husband;
9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of Conditional
Sale;
10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of Conditional
Sale, she entered with the DBP a temporary arrangement whereby in
consideration for the deferment of the Notarial Rescission of Deed of Conditional
Sale, plaintiff Lydia Cuba promised to make certain payments as stated in
temporary Arrangement dated February 23, 1982;
11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated March
13, 1984, and which was received by plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took possession of the Leasehold
Rights of the fishpond in question;
13. That after defendant DBP took possession of the Leasehold Rights over the fishpond
in question, DBP advertised in the SUNDAY PUNCH the public bidding dated June
24, 1984, to dispose of the property;
14. That the DBP thereafter executed a Deed of Conditional Sale in favor of defendant
Agripina Caperal on August 16, 1984;
15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-A
on December 28, 1984 by the Ministry of Agriculture and Food.
Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the pre-trial order.
Trial was thereafter had on other matters.

[3]

The principal issue presented was whether the act of DBP in appropriating to itself CUBAs
leasehold rights over the fishpond in question without foreclosure proceedings was contrary to Article
2088 of the Civil Code and, therefore, invalid. CUBA insisted on an affirmative resolution. DBP stressed
that it merely exercised its contractual right under the Assignments of Leasehold Rights, which was not a
contract of mortgage. Defendant Caperal sided with DBP.
The trial court resolved the issue in favor of CUBA by declaring that DBPs taking possession and
ownership of the property without foreclosure was plainly violative of Article 2088 of the Civil Code which
provides as follows:
ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of
them.Any stipulation to the contrary is null and void.
It disagreed with DBPs stand that the Assignments of Leasehold Rights were not contracts of mortgage
because (1) they were given as security for loans, (2) although the fishpond land in question is still a
public land, CUBAs leasehold rights and interest thereon are alienable rights which can be the proper
subject of a mortgage; and (3) the intention of the contracting parties to treat the Assignment of
Leasehold Rights as a mortgage was obvious and unmistakable; hence, upon CUBAs default, DBPs
only right was to foreclose the Assignment in accordance with law.

2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and between the
defendant Development Bank of the Philippines and plaintiff (Exh. E and Exh. 1) and the
acts of notarial rescission of the Development Bank of the Philippines relative to said sale
(Exhs. 16 and 26) as void and ineffective;
3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and between
the Development Bank of the Philippines and defendant Agripina Caperal (Exh. F and Exh.
21), the Fishpond Lease Agreement No. 2083-A dated December 28, 1984 of defendant
Agripina Caperal (Exh. 23) and the Assignment of Leasehold Rights dated February 12,
1985 executed by defendant Agripina Caperal in favor of the defendant Development Bank
of the Philippines (Exh. 24) as void ab initio;
4. ORDERING defendant Development Bank of the Philippines and defendant Agripina Caperal,
jointly and severally, to restore to plaintiff the latters leasehold rights and interests and right
of possession over the fishpond land in question, without prejudice to the right of defendant
Development Bank of the Philippines to foreclose the securities given by plaintiff;
5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff the following
amounts:

The trial court also declared invalid condition no. 12 of the Assignment of Leasehold Rights for
being a clear case of pactum commissorium expressly prohibited and declared null and void by Article
2088 of the Civil Code.It then concluded that since DBP never acquired lawful ownership of CUBAs
leasehold rights, all acts of ownership and possession by the said bank were void. Accordingly, the Deed
of Conditional Sale in favor of CUBA, the notarial rescission of such sale, and the Deed of Conditional
Sale in favor of defendant Caperal, as well as the Assignment of Leasehold Rights executed by Caperal
in favor of DBP, were also void and ineffective.

a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED PESOS

(P1,067,500.00), as and for actual damages;

As to damages, the trial court found ample evidence on record that in 1984 the representatives of
DBPejected CUBA and her caretakers not only from the fishpond area but also from the adjoining big
house; and that when CUBAs son and caretaker went there on 15 September 1985, they found the said
house unoccupied and destroyed and CUBAs personal belongings, machineries, equipment, tools, and
other articles used in fishpond operation which were kept in the house were missing. The missing items
were valued at about P550,000. It further found that when CUBA and her men were ejected by DBP for
the first time in 1979, CUBA had stocked the fishpond with 250,000 pieces of bangus fish (milkfish), all of
which died because the DBP representatives prevented CUBAs men from feeding the fish. At the
conservative price of P3.00 per fish, the gross value would have been P690,000, and after deducting
25% of said value as reasonable allowance for the cost of feeds, CUBA suffered a loss of P517,500. It
then set the aggregate of the actual damages sustained by CUBA atP1,067,500.

d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as and for
attorneys fees;

The trial court further found that DBP was guilty of gross bad faith in falsely representing to the
Bureau of Fisheries that it had foreclosed its mortgage on CUBAs leasehold rights. Such representation
induced the said Bureau to terminate CUBAs leasehold rights and to approve the Deed of Conditional
Sale in favor of CUBA. And considering that by reason of her unlawful ejectment by DBP, CUBA suffered
moral shock, degradation, social humiliation, and serious anxieties for which she became sick and had
to be hospitalized the trial court found her entitled to moral and exemplary damages. The trial court also
held that CUBA was entitled to P100,000 attorneys fees in view of the considerable expenses she
incurred for lawyers fees and in view of the finding that she was entitled to exemplary damages.
In its decision of 31 January 1990,

[4]

the trial court disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

1. DECLARING null and void and without any legal effect the act of defendant Development Bank
of the Philippines in appropriating for its own interest, without any judicial or extra-judicial
foreclosure, plaintiffs leasehold rights and interest over the fishpond land in question under
her Fishpond Lease Agreement No. 2083 (new);

b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral damages;

c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary damages;

6. And ORDERING defendant Development Bank of the Philippines to reimburse and pay to
defendant Agripina Caperal the sum of ONE MILLION FIVE HUNDRED THIRTY-TWO
THOUSAND SIX HUNDRED TEN PESOS AND SEVENTY-FIVE CENTAVOS
(P1,532,610.75) representing the amounts paid by defendant Agripina Caperal to
defendant Development Bank of the Philippines under their Deed of Conditional Sale.
CUBA and DBP interposed separate appeals from the decision to the Court of Appeals. The
former sought an increase in the amount of damages, while the latter questioned the findings of fact and
law of the lower court.
In its decision [5] of 25 May 1994, the Court of Appeals ruled that (1) the trial court erred in
declaring that the deed of assignment was null and void and that defendant Caperal could not validly
acquire the leasehold rights from DBP; (2) contrary to the claim of DBP, the assignment was not a
cession under Article 1255 of the Civil Code because DBP appeared to be the sole creditor to CUBA cession presupposes plurality of debts and creditors; (3) the deeds of assignment represented the
voluntary act of CUBA in assigning her property rights in payment of her debts, which amounted to a
novation of the promissory notes executed by CUBA in favor of DBP; (4) CUBA was estopped from
questioning the assignment of the leasehold rights, since she agreed to repurchase the said rights under
a deed of conditional sale; and (5) condition no. 12 of the deed of assignment was an express authority
from CUBA for DBP to sell whatever right she had over the fishpond. It also ruled that CUBA was not
entitled to loss of profits for lack of evidence, but agreed with the trial court as to the actual damages
of P1,067,500. It, however, deleted the amount of exemplary damages and reduced the award of moral
damages from P100,000 to P50,000 and attorneys fees, from P100,000 to P50,000.

The Court of Appeals thus declared as valid the following: (1) the act of DBP in appropriating
Cubas leasehold rights and interest under Fishpond Lease Agreement No. 2083; (2) the deeds of
assignment executed by Cuba in favor of DBP; (3) the deed of conditional sale between CUBA and
DBP; and (4) the deed of conditional sale between DBP and Caperal, the Fishpond Lease Agreement in
favor of Caperal, and the assignment of leasehold rights executed by Caperal in favor of DBP. It then
ordered DBP to turn over possession of the property to Caperal as lawful holder of the leasehold rights
and to pay CUBA the following amounts: (a) P1,067,500 as actual damages; P50,000 as moral
damages; and P50,000 as attorneys fees.
Since their motions for reconsideration were denied, [6] DBP and CUBA filed separate petitions for
review.
In its petition (G.R. No. 118342), DBP assails the award of actual and moral damages and
attorneys fees in favor of CUBA.
Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the Court of Appeals
erred (1) in not holding that the questioned deed of assignment was a pactum commissorium contrary to
Article 2088 of the Civil Code; (b) in holding that the deed of assignment effected a novation of the
promissory notes; (c) in holding that CUBA was estopped from questioning the validity of the deed of
assignment when she agreed to repurchase her leasehold rights under a deed of conditional sale; and
(d) in reducing the amounts of moral damages and attorneys fees, in deleting the award of exemplary
damages, and in not increasing the amount of damages.
We agree with CUBA that the assignment of leasehold rights was a mortgage contract.
It is undisputed that CUBA obtained from DBP three separate loans totalling P335,000, each of
which was covered by a promissory note. In all of these notes, there was a provision that: In the event of
foreclosure of the mortgage securing this notes, I/We further bind myself/ourselves, jointly and severally,
to pay the deficiency, if any. [7]
Simultaneous with the execution of the notes was the execution of Assignments of Leasehold
Rights [8]where CUBA assigned her leasehold rights and interest on a 44-hectare fishpond, together with
the improvements thereon. As pointed out by CUBA, the deeds of assignment constantly referred to the
assignor (CUBA) as borrower; the assigned rights, as mortgaged properties; and the instrument itself, as
mortgage contract. Moreover, under condition no. 22 of the deed, it was provided that failure to comply
with the terms and condition of any of the loans shall cause all other loans to become due and
demandable and all mortgages shall be foreclosed. And, condition no. 33 provided that if foreclosure is
actually accomplished, the usual 10% attorneys fees and 10% liquidated damages of the total obligation
shall be imposed. There is, therefore, no shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment was by way of
security for the payment of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her
Leasehold Rights.
In Peoples Bank & Trust Co. vs. Odom,[9] this Court had the occasion to rule that an assignment
to guarantee an obligation is in effect a mortgage.
We find no merit in DBPs contention that the assignment novated the promissory notes in that the
obligation to pay a sum of money the loans (under the promissory notes) was substituted by the
assignment of the rights over the fishpond (under the deed of assignment). As correctly pointed out by
CUBA, the said assignment merely complemented or supplemented the notes; both could stand
together. The former was only an accessory to the latter. Contrary to DBPs submission, the obligation to
pay a sum of money remained, and the assignment merely served as security for the loans covered by
the promissory notes. Significantly, both the deeds of assignment and the promissory notes were

executed on the same dates the loans were granted. Also, the last paragraph of the assignment stated:
The assignor further reiterates and states all terms, covenants, and conditions stipulated in the
promissory note or notes covering the proceeds of this loan, making said promissory note or notes, to all
intent and purposes, an integral part hereof.
Neither did the assignment amount to payment by cession under Article 1255 of the Civil Code for
the plain and simple reason that there was only one creditor, the DBP. Article 1255 contemplates the
existence of two or more creditors and involves the assignment of all the debtors property.
Nor did the assignment constitute dation in payment under Article 1245 of the civil Code, which
reads:Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money,
shall be governed by the law on sales. It bears stressing that the assignment, being in its essence a
mortgage, was but a security and not a satisfaction of indebtedness. [10]
We do not, however, buy CUBAs argument that condition no. 12 of the deed of assignment
constitutedpactum commissorium. Said condition reads:
12. That effective upon the breach of any condition of this assignment, the Assignor hereby appoints the
Assignee his Attorney-in-fact with full power and authority to take actual possession of the property
above-described, together with all improvements thereon, subject to the approval of the Secretary of
Agriculture and Natural Resources, to lease the same or any portion thereof and collect rentals, to make
repairs or improvements thereon and pay the same, to sell or otherwise dispose of whatever rights the
Assignor has or might have over said property and/or its improvements and perform any other act which
the Assignee may deem convenient to protect its interest. All expenses advanced by the Assignee in
connection with purpose above indicated which shall bear the same rate of interest aforementioned are
also guaranteed by this Assignment. Any amount received from rents, administration, sale or disposal of
said property may be supplied by the Assignee to the payment of repairs, improvements, taxes,
assessments and other incidental expenses and obligations and the balance, if any, to the payment of
interest and then on the capital of the indebtedness secured hereby. If after disposal or sale of said
property and upon application of total amounts received there shall remain a deficiency, said Assignor
hereby binds himself to pay the same to the Assignee upon demand, together with all interest thereon
until fully paid. The power herein granted shall not be revoked as long as the Assignor is indebted to
the Assignee and all acts that may be executed by the Assignee by virtue of said power are hereby
ratified.
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. [11]
Condition no. 12 did not provide that the ownership over the leasehold rights would automatically
pass to DBP upon CUBAs failure to pay the loan on time. It merely provided for the appointment of DBP
as attorney-in-fact with authority, among other things, to sell or otherwise dispose of the said real rights,
in case of default by CUBA, and to apply the proceeds to the payment of the loan. This provision is a
standard condition in mortgage contracts and is in conformity with Article 2087 of the Civil Code, which
authorizes the mortgagee to foreclose the mortgage and alienate the mortgaged property for the
payment of the principal obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment. As
admitted by it during the pre-trial, it had [w]ithout foreclosure proceedings, whether judicial or
extrajudicial, appropriated the [l]easehold [r]ights of plaintiff Lydia Cuba over the fishpond in question. Its
contention that it limited itself to mere administration by posting caretakers is further belied by the deed
of conditional sale it executed in favor of CUBA. The deed stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its favor by the herein
vendees [Cuba spouses] the former acquired all the rights and interest of the latter over the abovedescribed property;

The title to the real estate property [sic] and all improvements thereon shall remain in the name of the
Vendoruntil after the purchase price, advances and interest shall have been fully paid. (Emphasis
supplied).

Except as provided by law or by stipulation, one is entitled to an adequate compensation only for such
pecuniary loss suffered by him as he has duly proved. Such compensation is referred to as actual or
compensatory damages.

It is obvious from the above-quoted paragraphs that DBP had appropriated and taken ownership
of CUBAs leasehold rights merely on the strength of the deed of assignment.

Actual or compensatory damages cannot be presumed, but must be proved with reasonable
degree of certainty.[16] A court cannot rely on speculations, conjectures, or guesswork as to the fact and
amount of damages, but must depend upon competent proof that they have been suffered by the injured
party and on the best obtainable evidence of the actual amount thereof. [17] It must point out specific facts
which could afford a basis for measuring whatever compensatory or actual damages are borne. [18]

DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its act of
appropriating the leasehold rights. As stated earlier, condition no. 12 did not provide that CUBAs default
would operate to vest in DBP ownership of the said rights. Besides, an assignment to guarantee an
obligation, as in the present case, is virtually a mortgage and not an absolute conveyance of title which
confers ownership on the assignee.[12]
At any rate, DBPs act of appropriating CUBAs leasehold rights was violative of Article 2088 of the
Civil Code, which forbids a creditor from appropriating, or disposing of, the thing given as security for the
payment of a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did not
estop her from questioning DBPs act of appropriation. Estoppel is unavailing in this case. As held by this
Court in some cases,[13] estoppel cannot give validity to an act that is prohibited by law or against public
policy. Hence, the appropriation of the leasehold rights, being contrary to Article 2088 of the Civil Code
and to public policy, cannot be deemed validated by estoppel.
Instead of taking ownership of the questioned real rights upon default by CUBA, DBP should
have foreclosed the mortgage, as has been stipulated in condition no. 22 of the deed of
assignment. But, as admitted by DBP, there was no such foreclosure. Yet, in its letter dated 26 October
1979, addressed to the Minister of Agriculture and Natural Resources and coursed through the Director
of the Bureau of Fisheries and Aquatic Resources, DBP declared that it had foreclosed the mortgage
and enforced the assignment of leasehold rights on March 21, 1979 for failure of said spouses [Cuba
spouces] to pay their loan amortizations. [14] This only goes to show that DBP was aware of the necessity
of foreclosure proceedings.
In view of the false representation of DBP that it had already foreclosed the mortgage, the Bureau
of Fisheries cancelled CUBAs original lease permit, approved the deed of conditional sale, and issued a
new permit in favor of CUBA. Said acts which were predicated on such false representation, as well as
the subsequent acts emanating from DBPs appropriation of the leasehold rights, should therefore be set
aside. To validate these acts would open the floodgates to circumvention of Article 2088 of the Civil
Code.
Even in cases where foreclosure proceedings were had, this Court had not hesitated to nullify the
consequent auction sale for failure to comply with the requirements laid down by law, such as Act No.
3135, as amended.[15] With more reason that the sale of property given as security for the payment of a
debt be set aside if there was no prior foreclosure proceeding.
Hence, DBP should render an accounting of the income derived from the operation of the
fishpond in question and apply the said income in accordance with condition no. 12 of the deed of
assignment which provided: Any amount received from rents, administration, may be applied to the
payment of repairs, improvements, taxes, assessment, and other incidental expenses and obligations
and the balance, if any, to the payment of interest and then on the capital of the indebtedness.
We shall now take up the issue of damages.
Article 2199 provides:

In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual damages
consisting ofP550,000 which represented the value of the alleged lost articles of CUBA and P517,500
which represented the value of the 230,000 pieces of bangus allegedly stocked in 1979 when DBP first
ejected CUBA from the fishpond and the adjoining house. This award was affirmed by the Court of
Appeals.
We find that the alleged loss of personal belongings and equipment was not proved by clear
evidence. Other than the testimony of CUBA and her caretaker, there was no proof as to the existence of
those items before DBP took over the fishpond in question. As pointed out by DBP, there was not
inventory of the alleged lost items before the loss which is normal in a project which sometimes, if not
most often, is left to the care of other persons. Neither was a single receipt or record of acquisition
presented.
Curiously, in her complaint dated 17 May 1985, CUBA included losses of property as among the
damages resulting from DBPs take-over of the fishpond. Yet, it was only in September 1985 when her
son and a caretaker went to the fishpond and the adjoining house that she came to know of the alleged
loss of several articles. Such claim for losses of property, having been made before knowledge of the
alleged actual loss, was therefore speculative. The alleged loss could have been a mere afterthought or
subterfuge to justify her claim for actual damages.
With regard to the award of P517,000 representing the value of the alleged 230,000 pieces of
bangus which died when DBP took possession of the fishpond in March 1979, the same was not called
for. Such loss was not duly proved; besides, the claim therefor was delayed unreasonably. From 1979
until after the filing of her complaint in court in May 1985, CUBA did not bring to the attention of DBP the
alleged loss. In fact, in her letter dated 24 October 1979, [19] she declared:
1. That from February to May 1978, I was then seriously ill in Manila and within the same period I
neglected the management and supervision of the cultivation and harvest of the produce of the aforesaid
fishpond thereby resulting to the irreparable loss in the produce of the same in the amount of
about P500,000.00 to my great damage and prejudice due to fraudulent acts of some of my fishpond
workers.
Nowhere in the said letter, which was written seven months after DBP took possession of the
fishpond, did CUBA intimate that upon DBPs take-over there was a total of 230,000 pieces of bangus,
but all of which died because of DBPs representatives prevented her men from feeding the fish.
The award of actual damages should, therefore, be struck down for lack of sufficient basis.
In view, however, of DBPs act of appropriating CUBAs leasehold rights which was contrary to law
and public policy, as well as its false representation to the then Ministry of Agriculture and Natural
Resources that it had foreclosed the mortgage, an award of moral damages in the amount of P50,000 is
in order conformably with Article 2219(10), in relation to Article 21, of the Civil Code. Exemplary or
corrective damages in the amount ofP25,000 should likewise be awarded by way of example or
correction for the public good. [20] There being an award of exemplary damages, attorneys fees are also
recoverable.[21]

WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No. 26535 is
hereby REVERSED, except as to the award of P50,000 as moral damages, which is hereby
sustained. The 31 January 1990 Decision of the Regional Trial Court of Pangasinan, Branch 54, in Civil
Case No. A-1574 is MODIFIED setting aside the finding that condition no. 12 of the deed of assignment
constituted pactum commissorium and the award of actual damages; and by reducing the amounts of
moral damages from P100,000 to P50,000; the exemplary damages, from P50,000 to P25,000; and the
attorneys fees, from P100,000 to P20,000. The Development Bank of the Philippines is hereby ordered
to render an accounting of the income derived from the operation of the fishpond in question.
Let this case be REMANDED to the trial court for the reception of the income statement of DBP,
as well as the statement of the account of Lydia P. Cuba, and for the determination of each partys
financial obligation to one another.

cancellation of same shall be for the account of Defendants-Borrowers.

"(g) If Defendants-Borrowers shall perform the full obligation above stated according to the terms
thereof, then this obligation shall be null and void, otherwise, it shall remain in full force and
effect."cralaw virtua1aw library
The defendants violated the Loan & Mortgage Agreement, they having paid but one installment in the
amount of P3,816, of which P1,250 was applied to interest, and the remaining P2,566 to the principal
obligation. The defendants likewise failed to buy the quantities of products as required in the Sales
Agreement (exh. D). The plaintiff made due demand (exh. I), which the defendant Dayrit answered,
acknowledging his liability in his letter exh. I-1.
On November 17, 1967, after trial and after the parties had submitted their memoranda, 1 the trial court
rendered its decision, the dispositive portion of which reads:jgc:chanrobles.com.ph

[G.R. No. L-29388. December 28, 1970.]

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants Vincent
Dayrit, Leonila T. Sumbillo and Reynaldo Angeles, ordering them to pay to the plaintiff one-third each of
the sum of P147,434.00 with interest of 10% per annum from the time it fell due according to agreement,
and in default of such payment, the properties put up in collateral shall be sold in foreclosure sale in
accordance with law, the proceeds to be applied in payment of the amount due to the plaintiff from the
defendants as claimed in the complaint provided that, as to Dayrit, his liability shall in no case exceed
1/3 of the total obligation.

VINCENT P. DAYRIT, Petitioner, v. THE COURT OF APPEALS, HON. FRANCISCO ARCA, Judge of
the Court of First Instance of Manila, Branch I, MOBIL OIL PHILIPPINES, INC., and ELADIO
YLAGAN, Special Sheriff, Respondents.

"The defendants are likewise ordered to pay to the plaintiff, in the same proportion of 1/3 each, 25% of
the obligation as attorneys fees as provided in the contract; and P300.60 for the registration of the
contract.

SO ORDERED.

Ramon Quisumbing, Jr., for Petitioner.

Faylona, Cruz, Berroya, Norte & Nentanilla for respondent Mobil Oil Philippines, Inc.
"Each of the three said defendants shall also pay 1/3 of the costs."cralaw virtua1aw library
DECISION

No appeal having been interposed by the defendants, the above decision became final and executory.

CASTRO, J.:

Petition for certiorari by way of appeal from the Court of Appeals minute resolution of June 14, 1968
dismissing the petition for certiorari in CA-G.R. No. 41359-R, as well as its resolutions of July 9, 1968
and August 5, 1968 denying the first and second motions for reconsideration, respectively, in the same
case.
On July 21, 1965, the defendants Vincent Dayrit, Leonila T. Sumbillo and Reynaldo Angeles entered into
a contract with the Mobil Oil Philippines, Inc., entitled "LOAN & MORTGAGE AGREEMENT," providing,
among others, that:jgc:chanrobles.com.ph
"(a) For and in consideration of Sales Agreement dated July 21, 1965 among, the parties herein, Mobil
grants a loan of P150,000 to borrowers.
"(b) Defendants-Borrowers shall repay Mobil the whole amount of P150,000 plus 10% interest per
annum on the diminishing balance for 48 months.
"(c) To secure the prompt repayment of such loan by defendants-borrowers to Mobil and the faithful
performance by Borrowers of that Sales Agreement, Defendants-Borrowers hereby transfer in favor of
Mobil by way of first mortgage lands covered by TCT No. 45169 and TCT No. 45170, together with the
improvements existing in said two (2) parcels of land.
"(d) In case of default of Defendants-Borrowers in payment of any of the installments and/or their failure
to purchase the quantity of products stated therein Mobil shall have the right to foreclose this mortgage.
"(e) Mobil, in case of default and foreclosure, shall be entitled to attorneys fees and cost of collection
equivalent to not less than 25% of total indebtedness remaining unpaid.
"(f) All expenses in connection with the preparation and registration of this mortgage as well as

An undated Mobils motion for execution of the decision and for the appointment of Eladio Ylagan as
special sheriff (annex D) was received by the herein petitioner Dayrit on February 8, 1968. Whereupon,
he filed his opposition and motion to stay execution, alleging that before the finality of the aforesaid
judgment, he and the plaintiff had agreed not to appeal and/or file any motion for reconsideration, the
petitioner offering to pay his one-third share with a reasonable discount, if possible, in so far as the
interests and the award for attorneys fees were concerned, with the corresponding release of the
mortgage on all his properties, and praying, in view thereof, for a 30-day grace period within which to
pay the plaintiff. The 30-day grace period was granted by the court in its order of February 24, 1968.
On March 25, 1968 the petitioner filed another motion for 20 days extension within which to pay his onethird share of the judgment obligation and to submit the corresponding compromise agreement for the
satisfaction of the judgment. The said motion was granted on April 1, 1968.
Thereafter, the respondent Mobil filed an "Urgent Reply to Opposition and Motion to Stay Execution
dated Feb. 21, 1968 and Motion dated March 25, 1968," alleging therein that the respondent agreed to
release the mortgage or collateral for the entire judgment obligation only if "the whole principal
mortgaged debt plus the whole accrued interest" were fully paid. Mobil further prayed for a writ of
execution to be issued against the petitioner after the lapse of 20 days from March 25, 1968, if by then
the parties shall not have submitted to compromise agreement for the satisfaction of the judgment; Mobil
also reiterated its prayer for the appointment of respondent Eladio Ylagan as special sheriff.
On April 3, 1968 the petitioner filed a manifestation and motion, praying that he be allowed to deposit
with the Clerk of Court the amount corresponding to his one-third share of the obligation under the
decision of November 17, 1967, and that thereupon the collateral or mortgage over petitioners
properties or lands be ordered released or cancelled.
On April 10, 1968 the court a quo ordered all pending incidents set for hearing on April 19, 1968, "so that
the Court may have the opportunity to confer with the parties to thresh out the settlement of this case."
At this hearing Mobil did not appear; the court reset the hearing for May 23, 1968.
Under date of May 8, 1968, Mobil filed an addendum to its reply dated April 1, 1968 and opposition to
petitioners motion dated April 3, 1968, praying that the motion of petitioner Dayrit that the entire

mortgaged collateral be released upon his payment of mere 1/3 of the loan obligation, be denied and
instead a writ of execution against him in accordance with the dispositive portion of the decision and
sections 2 and 3 of Rule 68 of the Revised Rules of Court be issued.
On May 18, 1968 the petitioner filed his rejoinder to respondent Mobils aforesaid addendum and
opposition.
On May 23, 1968, after hearing oral argument, the court denied the manifestation and motion of Dayrit
filed thru counsel and dated April 3, 1968; the court further ruled that "There is no further need to issue
an order for the issuance of a writ of execution and appointment of special sheriff . . . considering that
the Court, in its order of February 24, 1968, has already ordered the issuance of a writ of execution for
the satisfaction of the judgment."cralaw virtua1aw library
The petitioner then filed his petition for certiorari with the Court of Appeals, dated May 30, 1968, alleging
that "respondent Judge Arca acted without or in excess of his jurisdiction and/or with grave abuse of
discretion, in denying petitioners motion to allow him to pay or deposit his one-third share of the
judgment obligation" as well as the consequent release or cancellation of the mortgage on his
properties.
The Court of Appeals, however, in its minute resolution of June 14, 1968, dismissed the petition
forcertiorari, in the following words:jgc:chanrobles.com.ph
"Upon consideration of the petition for certiorari filed in this case, the Court RESOLVED TO DISMISS the
petition, there being no abuse of discretion in ordering the execution of a final judgment. Details of
execution for satisfaction of Vincent Dayrits liability will be worked out in connection with the sale of the
collateral for mortgaged debt, and the judgment in Civil Case No. 64138 of the CFI-Manila will control
the disposition and application of the collateral."cralaw virtua1aw library
The petitioner filed a motion for reconsideration dated June 9, 1968 which the Court of Appeals denied in
its resolution of July 9, 1968, as follows:jgc:chanrobles.com.ph
"Both the petition and the motion for reconsideration are based on a misapprehension of the terms of the
judgment. The mortgage obligation is one and indivisible. it was executed to assure payment of the total
indebtedness of the three defendants in Civil Case No. 64138, and not merely one-third (1/3) thereof
corresponding to petitioner Vincent P. Dayrits liability."cralaw virtua1aw library
The petitioners second motion for reconsideration of July 25, 1968 was summarily dismissed on August
5, 1968, for lack of merit.
The petitioner, in his present petition, tenders the following issues for resolution:jgc:chanrobles.com.ph
"1) Whether or not respondent Judge [CFI-Manila] acted without or in excess of his jurisdiction, and/or
with grave abuse of discretion in denying petitioners motion to allow him to exercise his clearly legal
right to pay or deposit his one-third share of the judgment obligation;

The rule appears to be inflexible in the sense that no more than one motion for reconsideration shall be
filed without express leave of court. The requirement that the second motion for reconsideration must be
presented, with leave of court, within fifteen days from notice of the order or judgment, deducting the
time during which the first motion was pending, is to afford the court sufficient time to evaluate whether
there is prima facie merit therein, so that, "if the court finds merit prima facie in the motion for re-hearing
or reconsideration, the adverse party shall be given time to answer, after which the court, in its
discretion, may set the case for oral argument." 4 And only upon compliance with the above stated
requirements may the second motion for reconsideration stay the final order or judgment sought to be
re-examined. 5
The Court of Appeals gave due course to the second motion for reconsideration of the herein petitioner,
but nevertheless, dismissed the same summarily for lack of merit.
However, even assuming, that the ex parte second motion for reconsideration was properly filed so as to
toll the reglementary period within which to appeal, it appears that the petition for certiorari filed with this
Court on August 20, 1968 was time-barred. From the date of denial of the petitioners ex parte first
motion for reconsideration received by him on July 15, 1968 assuming that the period was interrupted
by the ex parte second motion for reconsideration from July 26, 1968 to August 9, 1968 (15 days) to
the elevation of the said case to this Court on August 20, 1968, 36 days had elapsed. Deducting the 15
days during which the ex parte second motion for reconsideration was pending from the total period of
36 days leaves 21 days. This means that the present petition was filed with this Court six days late,
contrary to and in violation of section 1, Rule 45, which specifically provides that a petition
for certiorari under such Rule should be filed within 15 days from notice of judgment or denial of motion
for reconsideration. Hence, the present petition may be dismissed on the aforestated ground.
But we opt, nevertheless, to consider the merits of this case, if only to demonstrate to the petitioner his
error.
2. The decision of the lower court, let it not be forgotten, has admittedly become final and executory. The
controverted judgment ordered the defendants (Dayrit, Sumbillo and Angeles) "to pay to the plaintiff onethird each of the sum of P147,434.00 with interest of 10% per annum from the time it fell due according
to agreement, and in default of such payment, the properties put up in collateral shall be sold in
foreclosure sale in accordance with law, the proceeds to be applied in payment of the amount due to the
plaintiff from the defendants as claimed in the complaint, provided that, as to Dayrit, his liability shall in
no case exceed 1/3 of the total obligation."cralaw virtua1aw library
In sum, the issue that must be resolved in the instant case is, whether or not the Court of First Instance
of Manila erred in ordering the sale at public auction of the mortgaged properties to answer for the entire
P147,434 principal obligation after the defendants (Dayrit, Sumbillo and Angeles) had failed to pay their
respective one-third shares of the obligation to the respondent Mobil; otherwise stated, whether or not
the respondents Court of First Instance and the Court of Appeals erred in refusing to allow the alleged
proposed deposit of a sum equivalent to 1/3 of the loan agreed upon and in refusing to release forever
the collaterals owned by Dayrit, although the other 2/3 portion of the loan obligation had not been
satisfied due to insolvency of the other two co-defendants.

"2) The next issue was that brought about by the Court of Appeals resolution dismissing the petition
for certiorari, and which was raised in petitioners motion dated June 19, 1968 for reconsideration of said
resolution, contending that the ground for dismissal did not jibe with the issue raised in the petition
for certiorari

To begin with, the prayer of the complaint filed with the respondent Court of First Instance recites as
follows:jgc:chanrobles.com.ph

"3) And lastly the Court of Appeals resolution of July 9, 1968 denying said motion for reconsideration
injected the issue of alleged misapprehension on the part of petitioner of the terms of the judgment of
respondent judge."cralaw virtua1aw library

"a) Ordering the defendants to pay the sum of P147,434 with 10% interest per annum from the time it fell
due as agreed upon and that in default of such payment, the above described properties be sold and the
proceeds of sale be applied to the payment of the amount due to the plaintiff from the defendant under
this complaint."cralaw virtua1aw library

1. The question raised by the respondent Mobil that the present petition for certiorari was filed way
beyond the reglementary period of 15 days from appellants receipt of notice of judgment or of the denial
of his motion for reconsideration pursuant to section 1, Rule 45 of the Revised Rules of Court, 2 needs
to be resolved before consideration of this case on the merits. Admittedly, the ex parte first motion for
reconsideration filed by the herein petitioner was denied, and copy of such denial was received by the
petitioner on July 15, 1968. Still not satisfied, petitioner filed another ex parte motion for reconsideration
on July 26, 1968, notice of the denial of which, under CA resolution dated August 5, 1968, was received
by said petitioner on August 9, 1968.
Respondent Mobil contends that the second motion for reconsideration filed by the petitioner was a
mere scrap of paper and pro-forma since it was filed ex parte and without express leave of court,
contrary to the mandate of section 1, Rule 52 of the Rules of Court. 3

"WHEREFORE, it is respectfully prayed that judgment be rendered

The complaint, in effect, is a collection suit with damages and foreclosure of mortgage against the three
defendants, Leonila Sumbillo, Reynaldo Angeles and Vincent Dayrit. Although the Loan and Mortgage
Agreement was signed by the three defendants as mortgagors, the properties being foreclosed belong
solely to, and are registered solely in the name of, the petitioner Vincent Dayrit.
The pertinent dispositive portion of the decision rendered by the lower court
reads:jgc:chanrobles.com.ph
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants Vincent
Dayrit, Leonila T. Sumbillo and Reynaldo Angeles, ordering them to pay to the plaintiff one-third each of
the sum of P147,434 with interest of 10% per annum from the time it fell due according to agreement,
and in default of such payment, the properties put up in collateral shall be sold in foreclosure sale in

accordance with law, the proceeds to be applied in payment of the amount due to the plaintiff from the
defendants as claimed in the complaint, provided that, as to Dayrit, his liability shall in no case exceed
1/3 of the total obligation."cralaw virtua1aw library
The petitioner contends that the said judgment is a simple money judgment and not a foreclosure
judgment, and that because the respondent Mobil resorted to the remedy of enforcing his right by a
complaint against the defendant-petitioner for collection of a sum of money, with the consequent simple
money judgment, the satisfaction of his 1/3 share of the joint obligation would release all the mortgaged
properties put up as collateral to secure the payment of the whole obligation. The reason advanced by
the petitioner is that the decision rendered being a simple money judgment and not a mortgageforeclosure judgment, the distinction in its execution is decisive, that is, whereas in mortgage foreclosure
the judgment should conform to the requirement, embodied in section 2, Rule 68 of the Rules of Court,
that the order of payment be made into the court "within a period not less than ninety (90) days . . . and
in default of such payment, the property mortgaged be sold to realize" the indebtedness, in a simple
money judgment, upon satisfaction of part in the instant case his 1/3 share) of the joint obligation, the
mortgaged properties should be released from such mortgage contract.
This contention of the petitioner is clearly devoid of merit.
The decision which the petitioner describes as a simple money judgment orders the defendants Vincent
Dayrit, Leonila T. Sumbillo and Reynaldo Angeles to pay the plaintiff the sum of P147,434, and in default
of such payment, the properties put up in collateral shall be sold in foreclosure sale in accordance with
law, the proceeds to be applied in payment of the amount due to the plaintiff from the defendants as
claimed in the complaint. While it is true that the obligation is merely joint and each of the defendants is
obliged to pay only his/her 1/3 share of the joint obligation, the undisputed fact remains that the intent
and purpose of the Loan and Mortgage Agreement was to secure, inter alia, the entire loan of P150,000
that the respondent Mobil extended to the defendants. The court below found that the defendants had
violated the Loan and Mortgage Agreement, they having paid but one installment. The undisputed fact
also remains that the petitioner alone benefited from the proceeds of the loan of P150,000, the said
amount having been paid directly to the Bank of the Philippines to bail out the same properties from a
mortgage that was about to be foreclosed. In effect, Mobil merely stepped into the shoes of the Bank of
the Philippines.
The petitioner insists that the dispositive portion of the judgment declaring the obligation merely joint with
the proviso that "as to Dayrit, his liability shall in no case exceed 1/3 of the total obligation," should be
construed in the light of the opinion of the lower court that "said collateral must answer in full but only to
the extent of Dayrits liability which as above determined" is 1/3 of the obligation," thereby entitling him to
pay or deposit in court his corresponding share of the joint obligation in satisfaction thereof, with the
automatic release of all the mortgaged properties.
A judgment must be distinguished from an opinion. The latter is the informal expression of the views of
the court and cannot prevail against its final order or decision. "While the two may be combined in one
instrument, the opinion forms no part of the judgment. There is a distinction between the findings and
conclusion of a court and its judgment. While they may constitute its decision and amount to a rendition
of a judgment they are not the judgment itself. They amount to nothing more than an order for judgment
which must be distinguished from the judgment Only the dispositive portion may be executed." 6
Besides, well-entrenched in law is the rule that a mortgage directly and immediately subjects the
property upon which it is imposed, 7 the same being indivisible even though the debt may be divided, 8
and such indivisibility likewise being unaffected by the fact that the debtors are not solidarily liable. 9 As
Tolentino, in his Commentaries and Jurisprudence on the Civil Code of the Philippines, 10 puts it
"When several things are pledged or mortgaged, each thing for a determinate portion of the debt, the
pledges or mortgages are considered separate from each other. But when the several things are given
to secure the same debt in its entirety, all of them are liable for the debt, and the creditor does not have
to divide his action by distributing the debt among the various things pledged or mortgaged. Even when
only a part of the debt remains unpaid, all the things are still liable for such balance. Hence, a mortgage
voluntarily constituted by the debtor on two or more parcels of land is one and indivisible, and the
mortgagee has the right to have either or both parcels, jointly or singly, sold to satisfy his claim. In case
the mortgaged properties are a house and lot, it can not be claimed that the lot and the house should be
sold separately and not together."cralaw virtua1aw library
But then there is this other seeming posture of the petitioner: that the judgment which has become final
and executory either modified or superseded the Loan and Mortgage Agreement between the parties,
and since the obligation is merely joint, upon payment thereof, as in attachment, the properties
mortgaged are released from liability. The decision under consideration, however, did nothing of the sort.
The petitioner conveniently refuses to recognize the true import of the dispositive portion of the

judgment. The said portion unequivocally states that "in default of such payment, the properties put up in
collateral shall be sold in foreclosure sale in accordance with law, the proceeds to be applied in payment
of the amount due to the plaintiff as claimed in the complaint." And the claim in the complaint was the full
satisfaction of the total indebtedness of P147,434; therefore, the release of all the mortgaged properties
may be authorized only upon the full payment of the above-stated amount secured by the said
mortgage.
With respect to the provisions of section 2 of Rule 68 of the Rules of Court giving the petitioner a period
of 90 days within which he might voluntarily pay the debt before the sale of the collateral at public
auction was ordered, we agree that the trial court failed to provide such period. However, this failure can
be regarded as having resulted in mere damnum absque injuria. From November 17, 1967 when the
decision was rendered to May 23, 1968 when the final order to sell the mortgaged properties was
issued, a period of more than six months had passed, which is considerably much more than the 90-day
period of grace allowed the petitioner to validly tender the proper payment.
ACCORDINGLY, the petition is denied, at petitioners cost.
[G.R. No. 117604. March 26, 1997]
CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, and VALLEY GOLF and
COUNTRY CLUB, INC., respondents.
DECISION
KAPUNAN, J.:
Through a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner
China Banking Corporation seeks the reversal of the decision of the Court of Appeals dated 15 August
1994 nullifying the Securities and Exchange Commission's order and resolution dated 4 June 1993 and
7 December 1993, respectively, for lack of jurisdiction. Similarly impugned is the Court of Appeals'
resolution dated 4 September 1994 which denied petitioner's motion for reconsideration.
The case unfolds thus:
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder of private
respondent Valley Golf & Country Club, Inc. (VGCCI, for brevity), pledged his Stock Certificate No. 1219
to petitioner China Banking Corporation (CBC, for brevity). [1]
On 16 September 1974, petitioner wrote VGCCI requesting that the aforementioned pledge
agreement be recorded in its books. [2]
In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by
Calapatia in petitioner's favor was duly noted in its corporate books. [3]
On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner, payment of which
was secured by the aforestated pledge agreement still existing between Calapatia and petitioner. [4]
Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed a petition for
extrajudicial foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the latter to
conduct a public auction sale of the pledged stock.[5]
On 14 May 1985, petitioner informed VGCCI of the above-mentioned foreclosure proceedings
and requested that the pledged stock be transferred to its (petitioner's) name and the same be recorded
in the corporate books. However, on 15 July 1985, VGCCI wrote petitioner expressing its inability to
accede to petitioner's request in view of Calapatia's unsettled accounts with the club. [6]

Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 and
petitioner emerged as the highest bidder at P20,000.00 for the pledged stock. Consequently, petitioner
was issued the corresponding certificate of sale.[7]
On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue
account in the amount of P18,783.24. [8] Said notice was followed by a demand letter dated 12 December
1985 for the same amount[9] and another notice dated 22 November 1986 for P23,483.24.[10]
On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a notice of
auction sale of a number of its stock certificates, to be held on 10 December 1986 at 10:00 a.m.
Included therein was Calapatia's own share of stock (Stock Certificate No. 1219).
Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination of his
membership due to the sale of his share of stock in the 10 December 1986 auction. [11]
On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's Stock Certificate
No. 1219 by virtue of being the highest bidder in the 17 September 1985 auction and requested that a
new certificate of stock be issued in its name. [12]
On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at
the public auction held on 10 December 1986 for P25,000.00.[13]
On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of stock and
thereafter filed a case with the Regional Trial Court of Makati for the nullification of the 10 December
1986 auction and for the issuance of a new stock certificate in its name. [14]
On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack of
jurisdiction over the subject matter on the theory that it involves an intra-corporate dispute and on 27
August 1990 denied petitioner's motion for reconsideration.
On 20 September 1990, petitioner filed a complaint with the Securities and Exchange
Commission (SEC) for the nullification of the sale of Calapatia's stock by VGCCI; the cancellation of any
new stock certificate issued pursuant thereto; for the issuance of a new certificate in petitioner's name;
and for damages, attorney's fees and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI,
stating in the main that "(c)onsidering that the said share is delinquent, (VGCCI) had valid reason not to
transfer the share in the name of the petitioner in the books of (VGCCI) until liquidation of
delinquency."[15] Consequently, the case was dismissed.[16]

SO ORDERED.[18]
VGCCI sought reconsideration of the abovecited order. However, the SEC denied the same in its
resolution dated 7 December 1993. [19]
The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On 15 August
1994, the Court of Appeals rendered its decision nullifying and setting aside the orders of the SEC and
its hearing officer on ground of lack of jurisdiction over the subject matter and, consequently, dismissed
petitioner's original complaint. The Court of Appeals declared that the controversy between CBC and
VGCCI is not intra-corporate. It ruled as follows:
In order that the respondent Commission can take cognizance of a case, the controversy must pertain to
any of the following relationships: (a) between the corporation, partnership or association and the public;
(b) between the corporation, partnership or association and its stockholders, partners, members, or
officers; (c) between the corporation, partnership or association and the state in so far as its franchise,
permit or license to operate is concerned, and (d) among the stockholders, partners or associates
themselves (Union Glass and Container Corporation vs. SEC, November 28, 1983, 126 SCRA 31). The
establishment of any of the relationship mentioned will not necessarily always confer jurisdiction over the
dispute on the Securities and Exchange Commission to the exclusion of the regular courts. The
statement made in Philex Mining Corp. vs. Reyes, 118 SCRA 602, that the rule admits of no exceptions
or distinctions is not that absolute. The better policy in determining which body has jurisdiction over a
case would be to consider not only the status or relationship of the parties but also the nature of the
question that is the subject of their controversy (Viray vs. Court of Appeals, November 9, 1990, 191
SCRA 308, 322-323).
Indeed, the controversy between petitioner and respondent bank which involves ownership of the stock
that used to belong to Calapatia, Jr. is not within the competence of respondent Commission to decide. It
is not any of those mentioned in the aforecited case.
WHEREFORE, the decision dated June 4, 1993, and order dated December 7, 1993 of respondent
Securities and Exchange Commission (Annexes Y and BB, petition) and of its hearing officer dated
January 3, 1992 and April 14, 1992 (Annexes S and W, petition) are all nullified and set aside for lack of
jurisdiction over the subject matter of the case. Accordingly, the complaint of respondent China Banking
Corporation (Annex Q, petition) is DISMISSED. No pronouncement as to costs in this instance.
SO ORDERED.[20]
Petitioner moved for reconsideration but the same was denied by the Court of Appeals in its
resolution dated 5 October 1994.[21]
Hence, this petition wherein the following issues were raised:

On 14 April 1992, Hearing Officer Perea denied petitioner's motion for reconsideration. [17]
II
Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission issued an order
reversing the decision of its hearing officer. It declared thus:
The Commission en banc believes that appellant-petitioner has a prior right over the pledged share and
because of pledgor's failure to pay the principal debt upon maturity, appellant-petitioner can proceed with
the foreclosure of the pledged share.
WHEREFORE, premises considered, the Orders of January 3, 1992 and April 14, 1992 are hereby SET
ASIDE. The auction sale conducted by appellee-respondent Club on December 10, 1986 is declared
NULL and VOID. Finally, appellee-respondent Club is ordered to issue another membership certificate in
the name of appellant-petitioner bank.

ISSUES
WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former Eighth Division) GRAVELY
ERRED WHEN:
1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993 AND ORDER
DATED DECEMBER 07, 1993 OF THE SECURITIES AND EXCHANGE
COMMISSION EN BANC, AND WHEN IT DISMISSED THE COMPLAINT OF
PETITIONER AGAINST RESPONDENT VALLEY GOLF ALL FOR LACK OF
JURISDICTION OVER THE SUBJECT MATTER OF THE CASE;

2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND EXCHANGE

COMMISSION EN BANC DATED JUNE 04, 1993 DESPITE PREPONDERANT
EVIDENCE SHOWING THAT PETITIONER IS THE LAWFUL OWNER OF
MEMBERSHIP CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT
VALLEY GOLF.
The petition is granted.
The basic issue we must first hurdle is which body has jurisdiction over the controversy, the
regular courts or the SEC.

Applying the foregoing principles in the case at bar, to ascertain which tribunal has jurisdiction we
have to determine therefore whether or not petitioner is a stockholder of VGCCI and whether or not the
nature of the controversy between petitioner and private respondent corporation is intra-corporate.
As to the first query, there is no question that the purchase of the subject share or membership
certificate at public auction by petitioner (and the issuance to it of the corresponding Certificate of Sale)
transferred ownership of the same to the latter and thus entitled petitioner to have the said share
registered in its name as a member of VGCCI. It is readily observed that VGCCI did not assail the
transfer directly and has in fact, in its letter of 27 September 1974, expressly recognized the pledge
agreement executed by the original owner, Calapatia, in favor of petitioner and has even noted said
agreement in its corporate books.[25] In addition, Calapatia, the original owner of the subject share, has
not contested the said transfer.

P.D. No. 902-A conferred upon the SEC the following pertinent powers:
SECTION 3. The Commission shall have absolute jurisdiction, supervision and control over all
corporations, partnerships or associations, who are the grantees of primary franchises and/or a license
or permit issued by the government to operate in the Philippines, and in the exercise of its authority, it
shall have the power to enlist the aid and support of and to deputize any and all enforcement agencies
of the government, civil or military as well as any private institution, corporation, firm, association or
person.
xxx
SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
a) Devices or schemes employed by or any acts of the board of directors, business associates, its
officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest
of the public and/or of the stockholders, partners, members of associations or organizations registered
with the Commission.
b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates, respectively; and between such
corporation, partnership or association and the State insofar as it concerns their individual franchise or
right to exist as such entity;
c) Controversies in the election or appointment of directors, trustees, officers, or managers of such
corporations, partnerships or associations.
d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of
payments in cases where the corporation, partnership or association possesses property to cover all of
its debts but foresees the impossibility of meeting them when they respectively fall due or in cases
where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is
under the Management Committee created pursuant to this Decree.
The aforecited law was expounded upon in Viray v. CA[22] and in the recent cases of Mainland
Construction Co., Inc. v. Movilla[23] and Bernardo v. CA,[24] thus:
. . . The better policy in determining which body has jurisdiction over a case would be to consider not
only the status or relationship of the parties but also the nature of the question that is the subject of their
controversy.

By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder of VGCCI and,
therefore, the conflict that arose between petitioner and VGCCI aptly exemplies an intra-corporate
controversy between a corporation and its stockholder under Sec. 5(b) of P.D. 902-A.
An important consideration, moreover, is the nature of the controversy between petitioner and
private respondent corporation. VGCCI claims a prior right over the subject share anchored mainly on
Sec. 3, Art VIII of its by-laws which provides that "after a member shall have been posted as delinquent,
the Board may order his/her/its share sold to satisfy the claims of the Club . . ." [26] It is pursuant to this
provision that VGCCI also sold the subject share at public auction, of which it was the highest bidder.
VGCCI caps its argument by asserting that its corporate by-laws should prevail. The bone of contention,
thus, is the proper interpretation and application of VGCCI's aforequoted by-laws, a subject which
irrefutably calls for the special competence of the SEC.
We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz:[27]
6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative
commissions and boards the power to resolve specialized disputes in the field of labor (as in
corporations, public transportation and public utilities) ruled that Congress in requiring the Industrial
Court's intervention in the resolution of labor-management controversies likely to cause strikes or
lockouts meant such jurisdiction to be exclusive, although it did not so expressly state in the law. The
Court held that under the "sense-making and expeditious doctrine of primary jurisdiction . . . the courts
cannot or will not determine a controversy involving a question which is within the jurisdiction of an
administrative tribunal, where the question demands the exercise of sound administrative discretion
requiring the special knowledge, experience, and services of the administrative tribunal to determine
technical and intricate matters of fact, and a uniformity of ruling is essential to comply with the purposes
of the regulatory statute administered."
In this era of clogged court dockets, the need for specialized administrative boards or commissions with
the special knowledge, experience and capability to hear and determine promptly disputes on technical
matters or essentially factual matters, subject to judicial review in case of grave abuse of discretion, has
become well nigh indispensable. Thus, in 1984, the Court noted that "between the power lodged in an
administrative body and a court, the unmistakable trend has been to refer it to the former. 'Increasingly,
this Court has been committed to the view that unless the law speaks clearly and unequivocably, the
choice should fall on [an administrative agency.]'" The Court in the earlier case of Ebon v. De Guzman,
noted that the lawmaking authority, in restoring to the labor arbiters and the NLRC their jurisdiction to
award all kinds of damages in labor cases, as against the previous P.D. amendment splitting their
jurisdiction with the regular courts, "evidently,. . . had second thoughts about depriving the Labor Arbiters
and the NLRC of the jurisdiction to award damages in labor cases because that setup would mean
duplicity of suits, splitting the cause of action and possible conflicting findings and conclusions by two
tribunals on one and the same claim."
In this case, the need for the SEC's technical expertise cannot be over-emphasized involving as it does
the meticulous analysis and correct interpretation of a corporation's by-laws as well as the applicable
provisions of the Corporation Code in order to determine the validity of VGCCI's claims. The SEC,
therefore, took proper cognizance of the instant case.

VGCCI further contends that petitioner is estopped from denying its earlier position, in the first
complaint it filed with the RTC of Makati (Civil Case No. 90-1112) that there is no intra-corporate
relations between itself and VGCCI.
VGCCI's contention lacks merit.
In Zamora v. Court of Appeals,[28] this Court, through Mr. Justice Isagani A. Cruz, declared that:
It follows that as a rule the filing of a complaint with one court which has no jurisdiction over it does not
prevent the plaintiff from filing the same complaint later with the competent court. The plaintiff is not
estopped from doing so simply because it made a mistake before in the choice of the proper forum . . .
We remind VGCCI that in the same proceedings before the RTC of Makati, it categorically stated
(in its motion to dismiss) that the case between itself and petitioner is intra-corporate and insisted that it
is the SEC and not the regular courts which has jurisdiction. This is precisely the reason why the said
court dismissed petitioner's complaint and led to petitioner's recourse to the SEC.

case, albeit unresolved by the courts below, should now be settled specially as they involved pure
questions of law. Furthermore, the pleadings of the respective parties on file have amply ventilated their
various positions and arguments on the matter necessitating prompt adjudication.
In the case at bar, since we already have the records of the case (from the proceedings before
the SEC) sufficient to enable us to render a sound judgment and since only questions of law were raised
(the proper jurisdiction for Supreme Court review), we can, therefore, unerringly take cognizance of and
rule on the merits of the case.
The procedural niceties settled, we proceed to the merits.
VGCCI assails the validity of the pledge agreement executed by Calapatia in petitioner's favor. It
contends that the same was null and void for lack of consideration because the pledge agreement was
entered into on 21 August 1974[33] but the loan or promissory note which it secured was obtained by
Calapatia much later or only on 3 August 1983.[34]
VGCCI's contention is unmeritorious.

Having resolved the issue on jurisdiction, instead of remanding the whole case to the Court of
Appeals, this Court likewise deems it procedurally sound to proceed and rule on its merits in the same
proceedings.
It must be underscored that petitioner did not confine the instant petition for review on certiorari
on the issue of jurisdiction. In its assignment of errors, petitioner specifically raised questions on the
merits of the case. In turn, in its responsive pleadings, private respondent duly answered and countered
all the issues raised by petitioner.
Applicable to this case is the principle succinctly enunciated in the case of Heirs of Crisanta
Gabriel-Almoradie v. Court of Appeals,[29] citing Escudero v. Dulay[30] and The Roman Catholic
Archbishop of Manila v. Court of Appeals:[31]
In the interest of the public and for the expeditious administration of justice the issue on infringement
shall be resolved by the court considering that this case has dragged on for years and has gone from
one forum to another.
It is a rule of procedure for the Supreme Court to strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future litigation. No useful purpose will be
served if a case or the determination of an issue in a case is remanded to the trial court only to have its
decision raised again to the Court of Appeals and from there to the Supreme Court.
We have laid down the rule that the remand of the case or of an issue to the lower court for further
reception of evidence is not necessary where the Court is in position to resolve the dispute based on the
records before it and particularly where the ends of justice would not be subserved by the remand
thereof. Moreover, the Supreme Court is clothed with ample authority to review matters, even those not
raised on appeal if it finds that their consideration is necessary in arriving at a just disposition of the
case.
In the recent case of China Banking Corp., et al. v. Court of Appeals, et al.,[32] this Court, through
Mr. Justice Ricardo J. Francisco, ruled in this wise:
At the outset, the Court's attention is drawn to the fact that that since the filing of this suit before the trial
court, none of the substantial issues have been resolved. To avoid and gloss over the issues raised by
the parties, as what the trial court and respondent Court of Appeals did, would unduly prolong this
litigation involving a rather simple case of foreclosure of mortgage. Undoubtedly, this will run counter to
the avowed purpose of the rules, i.e., to assist the parties in obtaining just, speedy and inexpensive
determination of every action or proceeding. The Court, therefore, feels that the central issues of the

A careful perusal of the pledge agreement will readily reveal that the contracting parties explicitly
stipulated therein that the said pledge will also stand as security for any future advancements (or
renewals thereof) that Calapatia (the pledgor) may procure from petitioner:
xxx
This pledge is given as security for the prompt payment when due of all loans, overdrafts, promissory
notes, drafts, bills or exchange, discounts, and all other obligations of every kind which have heretofore
been contracted, or which may hereafter be contracted, by the PLEDGOR(S) and/or DEBTOR(S) or any
one of them, in favor of the PLEDGEE, including discounts of Chinese drafts, bills of exchange,
promissory notes, etc., without any further endorsement by the PLEDGOR(S) and/or Debtor(s) up to the
sum of TWENTY THOUSAND (P20,000.00) PESOS, together with the accrued interest thereon, as
hereinafter provided, plus the costs, losses, damages and expenses (including attorney's fees) which
PLEDGEE may incur in connection with the collection thereof. [35] (Emphasis ours.)
The validity of the pledge agreement between petitioner and Calapatia cannot thus be held
suspect by VGCCI. As candidly explained by petitioner, the promissory note of 3 August 1983 in the
amount of P20,000.00 was but a renewal of the first promissory note covered by the same pledge
agreement.
VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had the
right to sell the share in question in accordance with the express provision found in its by-laws.
Private respondent's insistence comes to naught. It is significant to note that VGCCI began
sending notices of delinquency to Calapatia after it was informed by petitioner (through its letter dated 14
May 1985) of the foreclosure proceedings initiated against Calapatia's pledged share, although
Calapatia has been delinquent in paying his monthly dues to the club since 1975. Stranger still,
petitioner, whom VGCCI had officially recognized as the pledgee of Calapatia's share, was neither
informed nor furnished copies of these letters of overdue accounts until VGCCI itself sold the pledged
share at another public auction. By doing so, VGCCI completely disregarded petitioner's rights as
pledgee. It even failed to give petitioner notice of said auction sale. Such actuations of VGCCI thus belie
its claim of good faith.
In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It
argues in this wise:

The general rule really is that third persons are not bound by the by-laws of a corporation since they are
not privy thereto (Fleischer v. Botica Nolasco, 47 Phil. 584). The exception to this is when third persons
have actual or constructive knowledge of the same. In the case at bar, petitioner had actual knowledge
of the by-laws of private respondent when petitioner foreclosed the pledge made by Calapatia and when
petitioner purchased the share foreclosed on September 17, 1985. This is proven by the fact that prior
thereto, i.e., on May 14, 1985 petitioner even quoted a portion of private respondent's by-laws which is
material to the issue herein in a letter it wrote to private respondent. Because of this actual knowledge of
such by-laws then the same bound the petitioner as of the time when petitioner purchased the share.
Since the by-laws was already binding upon petitioner when the latter purchased the share of Calapatia
on September 17, 1985 then the petitioner purchased the said share subject to the right of the private
respondent to sell the said share for reasons of delinquency and the right of private respondent to have
a first lien on said shares as these rights are provided for in the by-laws very very clearly.[36]
VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.:[37]
And moreover, the by-law now in question cannot have any effect on the appellee. He had no knowledge
of such by-law when the shares were assigned to him. He obtained them in good faith and for a valuable
consideration. He was not a privy to the contract created by said by-law between the shareholder
Manuel Gonzales and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a
purchaser.
"An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to the
corporation for a period of thirty days is not binding upon an assignee of the stock as a personal
contract, although his assignor knew of the by-law and took part in its adoption." (10 Cyc., 579;
Ireland vs. Globe Milling Co., 21 R.I., 9.)
"When no restriction is placed by public law on the transfer of corporate stock, a purchaser is not
affected by any contractual restriction of which he had no notice." (Brinkerhoff-Farris Trust & Savings Co.
vs. Home Lumber Co., 118 Mo., 447.)
"The assignment of shares of stock in a corporation by one who has assented to an unauthorized by-law
has only the effect of a contract by, and enforceable against, the assignor; the assignee is not bound by
such by-law by virtue of the assignment alone." (Ireland vs. Globe Milling Co., 21 R.I., 9.)
"A by-law of a corporation which provides that transfers of stock shall not be valid unless approved by
the board of directors, while it may be enforced as a reasonable regulation for the protection of the
corporation against worthless stockholders, cannot be made available to defeat the rights of third
persons." (Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.) (Underscoring ours.)
In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the
time the transaction or agreement between said third party and the shareholder was entered into, in this
case, at the time the pledge agreement was executed. VGCCI could have easily informed petitioner of
its by-laws when it sent notice formally recognizing petitioner as pledgee of one of its shares registered
in Calapatia's name. Petitioner's belated notice of said by-laws at the time of foreclosure will not suffice.
The ruling of the SEC en banc is particularly instructive:
By-laws signifies the rules and regulations or private laws enacted by the corporation to regulate, govern
and control its own actions, affairs and concerns and its stockholders or members and directors and
officers with relation thereto and among themselves in their relation to it. In other words, by-laws are the
relatively permanent and continuing rules of action adopted by the corporation for its own government
and that of the individuals composing it and having the direction, management and control of its affairs,
in whole or in part, in the management and control of its affairs and activities. (9 Fletcher 4166. 1982
Ed.)
The purpose of a by-law is to regulate the conduct and define the duties of the members towards the
corporation and among themselves. They are self-imposed and, although adopted pursuant to statutory
authority, have no status as public law. (Ibid.)

Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except when
they have knowledge of the provisions either actually or constructively. In the case of Fleisher v. Botica
Nolasco, 47 Phil. 584, the Supreme Court held that the by-law restricting the transfer of shares cannot
have any effect on the the transferee of the shares in question as he "had no knowledge of such by-law
when the shares were assigned to him. He obtained them in good faith and for a valuable
consideration. He was not a privy to the contract created by the by-law between the shareholder x x
x and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as a purchaser."
(Underscoring supplied.)
By analogy of the above-cited case, the Commission en banc is of the opinion that said case is
applicable to the present controversy. Appellant-petitioner bank as a third party can not be bound by
appellee-respondent's by-laws. It must be recalled that when appellee-respondent communicated to
appellant-petitioner bank that the pledge agreement was duly noted in the club's books there was no
mention of the shareholder-pledgor's unpaid accounts. The transcript of stenographic notes of the June
25, 1991 Hearing reveals that the pledgor became delinquent only in 1975. Thus, appellant-petitioner
was in good faith when the pledge agreement was contracted.
The Commission en banc also believes that for the exception to the general accepted rule that third
persons are not bound by by-laws to be applicable and binding upon the pledgee, knowledge of the
provisions of the VGCCI By-laws must be acquired at the time the pledge agreement was contracted.
Knowledge of said provisions, either actual or constructive, at the time of foreclosure will not affect
pledgee's right over the pledged share. Art. 2087 of the Civil Code provides that it is also of the essence
of these contracts that when the principal obligation becomes due, the things in which the pledge or
mortgage consists maybe alienated for the payment to the creditor.
In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., the Commission issued an opinion
to the effect that:
According to the weight of authority, the pledgee's right is entitled to full protection without surrender of
the certificate, their cancellation, and the issuance to him of new ones, and when done, the pledgee will
be fully protected against a subsequent purchaser who would be charged with constructive notice that
the certificate is covered by the pledge. (12-A Fletcher 502)
The pledgee is entitled to retain possession of the stock until the pledgor pays or tenders to him the
amount due on the debt secured. In other words, the pledgee has the right to resort to its collateral for
the payment of the debts. (Ibid, 502)
To cancel the pledged certificate outright and the issuance of new certificate to a third person who
purchased the same certificate covered by the pledge, will certainly defeat the right of the pledgee to
resort to its collateral for the payment of the debt. The pledgor or his representative or registered
stockholders has no right to require a return of the pledged stock until the debt for which it was given as
security is paid and satisfied, regardless of the length of time which have elapsed since debt was
created. (12-A Fletcher 409)
A bona fide pledgee takes free from any latent or secret equities or liens in favor either of the corporation
or of third persons, if he has no notice thereof, but not otherwise. He also takes it free of liens or claims
that may subsequently arise in favor of the corporation if it has notice of the pledge, although no demand
for a transfer of the stock to the pledgee on the corporate books has been made. (12-A Fletcher 5634,
1982 ed., citing Snyder v. Eagle Fruit Co., 75 F2d739)[38]
Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws because of Art.
2099 of the Civil Code which stipulates that the creditor must take care of the thing pledged with the
diligence of a good father of a family, fails to convince. The case of Cruz & Serrano v. Chua A. H . Lee,
[39]
is clearly not applicable:
In applying this provision to the situation before us it must be borne in mind that the ordinary pawn ticket
is a document by virtue of which the property in the thing pledged passes from hand to hand by mere

delivery of the ticket; and the contract of the pledge is, therefore, absolvable to bearer. It results that one
who takes a pawn ticket in pledge acquires domination over the pledge; and it is the holder who must
renew the pledge, if it is to be kept alive.

"Tugboat CARBPM" of 27/42 gross tonnage 13.87 net tonnage, one (1) deck, no
mast, 13.77 mt. long, 4.32 mt. broad, 1.73 mt. steep, with Certificate of
Ownership No. 1283 and Certificate of Registration No. 6886.

It is quite obvious from the aforequoted case that a membership share is quite different in
character from a pawn ticket and to reiterate, petitioner was never informed of Calapatia' s unpaid
accounts and the restrictive provisions in VGCCI's by-laws.

MSC Barge No. 601, of 372.28 gross tonnage, 361.96 net tonnage, 120 mt. long,
32 mt. broad, 10 ft. deep, with Certificate of Ownership No. 6213, Certificate No.
127-68. (Ibid.)

Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against which
the corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot be
utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription,
and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from
any other transaction."[40]In the case at bar, the subscription for the share in question has been fully paid
as evidenced by the issuance of Membership Certificate No. 1219. [41] What Calapatia owed the
corporation were merely the monthly dues. Hence, the aforequoted provision does not apply.

Madrigal Shipping Co., Inc. failed to pay its obligation to the Solidbank. The creditor bank had to sell the
pledged properties. Nevertheless, when the pledgee bank was to sell the pledged properties, it found out
that the tugboat and the barge had surreptitiously been taken from the Tanque Bodega, Pasig River,
Manila, where the vessels were moored and towed to Pier 2, North Harbor, Manila, without the
knowledge and consent of the Solidbank (Rollo, p. 62).

WHEREFORE, premises considered, the assailed decision of the Court of Appeals

is REVERSED and the order of the SEC en banc dated 4 June 1993 is hereby AFFIRMED.

Meanwhile, on August 1, 1979, petitioner Honesto Ong bought one (1) MSC Barge No. 601 with 300 net
tonnage, the same barge which was subject of the pledge from Santiago S. Ocampo, a successful
bidder in a public auction by virtue of a writ of execution issued by the National Labor Relations
Commission (NLRC) in a case entitled "Union de Marinos v. Madrigal Shipping Co., Inc.". (Rollo, Annex
"A", p. 23).

SO ORDERED.
G.R. No. 74073 September 13, 1991
HONESTO ONG, RENATO LLOBRERA, AVELINO DE GRACIA, JR., ALFONSO ONG, and
SANTIAGO OCAMPO, petitioners,
vs.
HON. INTERMEDIATE APPELLATE COURT, HON. RICARDO D. DIAZ, as Judge of the RTC of
Manila, Branch XXVII and CONSOLIDATED BANK AND TRUST CORPORATION (SOLID
BANK), respondents.
Joaquin P. Yuseco, Jr. for petitioners.
C.M. De los Reyes & Associates for SOLID BANK
PARAS, J.:
This is a petition for review on certiorari seeking to reverse and set aside: (a) the decision * of the
Intermediate Appellate Court dated January 31, 1986 in AC-G.R. SP No. 05490 entitled "Honesto Ong,
et al. v. Hon. Ricardo D. Diaz, et al." which dismissed the petition for lack of merit and (b) the resolution
dated March 26, 1986 denying the motion for reconsideration.

On August 6, 1979, private respondent (Solidbank) filed a complaint against Honesto Ong, et al. for
Replevin with Damages before the defunct Court of First Instance (now Regional Trial Court) and was
docketed as Civil Case No. 125651 (Rollo, pp. 42-46).
On August 7, 1979, the respondent court (CFI) issued an order for the seizure of the above described
personal property upon posting of a bond in the sum of P1,000,000.00 (Rollo, p. 23; pp. 75-76).
On August 8, 1979, petitioner Honesto Ong filed a Motion to Lift Order of Seizure, claiming great and
irreparable damage would be suffered by him if the Court would not recall the above stated order. In the
same motion, petitioner Honesto Ong maintained that he purchased in good faith MSC Barge No. 601
and even offered to post a counterbond in an amount to be determined by respondent Court of First
Instance (Rollo, p. 24).
On August 13, 1979, private respondent Solidbank, filed an opposition to lift order of seizure and
accused the petitioner Honesto Ong of being a purchaser in bad faith. In its opposition, the private
respondent outlined numerous circumstances pointing to an alleged conspiracy where the petitioners
resorted to foul schemes to place the subject barge beyond the reach of the plaintiff Solidbank (Rollo, p.
9).
On August 31, 1979, the petitioners, Honesto Ong and Alfonso Ong filed their answer, and set forth their
specific denials and affirmative defenses to the complaint filed by Solidbank (Rollo, pp. 156-164).

The undisputed facts of the case are as follows:

On September 7, 1979, a reply and answer to the counterclaim was filed by the private respondent
Solidbank, where additional issues and matters were averred as against the petitioners (Rollo, p. 24).

On July 27, 1977, Madrigal Shipping Co., Inc. applied for and was granted a loan by the Consolidated
Bank and Trust Corporation (Solidbank for short) in the amount of P2,094,000.00 payable on or before
July 27, 1978 at ten (10%) percent interest per annum as evidenced by Promissory Note No. 57884
(Rollo, p. 61).

On September 25, 1979, the respondent court (CFI) issued an order lifting the order of seizure and
ordered the sheriff to return the MSC Barge No. 601 to the petitioner-defendant Honesto Ong (Rollo, p.
166).

To secure the fulfillment of the obligations of Madrigal Shipping Co., Inc. to the Solidbank, and credit
accommodations which the former may from time to time obtain from the latter both parties executed a
document denominated as "Pledge Agreement" dated December 4, 1978 (Rollo, pp. 77-78).
Under the said Pledge Agreement, Madrigal Shipping, Co., Inc. gave additional securities or collaterals
in the form of a pledge in favor of the bank, its barge and tugboat particularly described, as follows:

On September 28, 1979, a motion for reconsideration was filed by the private respondent Bank (Rollo, p.
115).
On December 16, 1980, after an opposition to the motion for reconsideration and a reply to the
opposition had been filed by the parties, the Court of First Instance denied the motion for reconsideration
but ordered the petitioners Alfonso Ong and Honesto Ong to post a counterbond of P400,000.00

executed to the herein plaintiff-private respondent. The pertinent part of the order and its dispositive
portion reads:
The alleged Pledge Agreement between plaintiff and Madrigal Shipping
Company covering the vessel (barge) in question was not registered in the
registry of vessels. Considering that plaintiff does not charge private defendants
with knowledge of such pledge (see par. 8, complaint), said defendants, being
third persons, cannot be said to be bound by said pledge. Plaintiff therefore, visa-vis private defendants and third persons, cannot be considered, at this stage of
the action, to be entitled to possession of the vessel for purposes of maintaining
the efficacy of the writ of replevin earlier issued and pursuant to the law
applicable and pertinent to the matter, the defendants, Alfonso L. Ong and
Honesto Ong, are ordered to put up a counterbond of P400,000.00 which is
double the value of the subject vessel (barge), executed to the herein plaintiff if
such delivery be adjudged in favor of the plaintiff.

Acting on the second motion for reconsideration and supplement filed by the defendants Ongs, as well
as, the opposition interposed by the plaintiff Solidbank the lower court denied the second motion for
reconsideration. (Rollo, p. 65)
The defendants Alfonso Ong and Honesto Ong filed with the Intermediate Appellate Court a petition for
certiorari docketed as AC-G.R. No. 05490 (Rollo, Ibid.).
On January 31, 1986, the Intermediate Appellate Court rendered a decision, dismissing the petition for
lack of merit, the dispositive portion reading:
WHEREFORE, the petition is hereby DISMISSED for lack of merit. The
restraining order previously issued is dissolved, lifted and set aside. No costs.
SO ORDERED. (Rollo, p. 34).

WHEREFORE, the motion for reconsideration is hereby DENIED for lack of

merit.

Petitioner Ong's motion for reconsideration of said decision was denied. (Rollo, p. 48)

SO ORDERED. (Rollo, p. 50) (Emphasis supplied).

Hence, this petition.

On January 1, 1981, Solidbank filed a motion to release the properties subject matter of replevin for
failure of the petitioners to post the required counterbond (Rollo, p. 10).

This Court, in its resolution dated April 6, 1987 gave due course to the petition and required both parties
to file their respective memoranda (rollo, petition, pp. 7-20- Resolution, p. 100).

On March 3, 1981, a motion for clarification and opposition to the motion to release properties was filed
by the petitioners (Rollo, p. 25).

The main issues in this case are: (1) whether or not the contract of pledge entered into by and between
Solidbank and Madrigal Shipping Co., Inc. is binding on the petitioners Ong (2) whether or not there is a
necessity for the Ongs to post a counterbond in the amount of P400,000.00.

On February 21, 1983, the respondent Court (CFI) issued an order stating that its order dated December
16, 1981 is clear and needs no clarification, and that the order requiring the petitioners to post a
counterbond is reiterated. The dispositive portion reads:
WHEREFORE, the defendants, Alfonso Ong and Honesto Ong, are hereby
ordered to put up a counterbond of P400,000.00 executed in favor of the plaintiff
within ten (10) days from receipt of this order. Otherwise, the plaintiffs motion to
release properties subject matter of replevin will be granted. (Rollo, p. 26).
On April 21, 1983, a motion for reconsideration to the above stated order was filed by the petitioners
Ong (Ibid.).
On October 27, 1983, the respondent court (CFI) issued an order directing petitioners Alfonso Ong and
Honesto Ong to deliver and release the barge in question. In the same order, the motion for
reconsideration filed by the petitioners was denied for lack of merit. Plaintiff's motion, in short, dated
January 22, 1981 was granted. The dispositive portion of the order reads:
WHEREFORE, defendants Alfonso Ong and Honesto Ong are hereby ordered to
deliver and/or release the barge in question (MSC Barge No. 601) to herein
plaintiff from receipt (hereof) of this order.
SO ORDERED. (Rollo, pp. 51-53).
On June 11, 1984, the new counsel filed a second motion for reconsideration in behalf of the petitioners
to the above stated order (Rollo, pp. 167-170). And on June 21, 1984, a supplement to the second
motion for reconsideration was filed again by the counsel of the petitioners (Rollo, pp. 172-175).

I.
Undoubtedly, petitioners rely heavily on the fact that the contract of pledge by and between Solidbank
and Madrigal Shipping Co., Inc. was not recorded under Sections 804 and 809 of the Tariff and Customs
Code and argue that it is not binding on third persons like the petitioners.
It is, however, stated under Article 2096 of the Civil Code that for a pledge to take effect against third
persons, it should be in a public instrument which must contain the description of the thing pledged and
the date of the pledge.
In the case of Bachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681 (1937), Art. 2096 has been
interpreted in the sense that for the contract to affect third persons, apart from being in a public
instrument, possession of the thing pledged must in addition be delivered to the pledgee.
All these requirements have been complied with, in the case at bar. The pledge agreement is a public
instrument, the same having been notarized and under the notarial seal of Vicente A. Casim, as Doc.
No. 1487; Page No. 179; Book V and Series of 1978. Subject of the pledge (MSC Barge No. 601) was
delivered to the Solidbank which had it moored at Tanque Bodega, Pasig River, Manila, where it was
guarded by a security guard. (Rollo, pp. 69-70).
Undeniably, Madrigal Shipping co., Inc., owner of MSC Barge No. 601, pledged said vessel and tugboat
to secure the shipping company's obligation to the creditor bank (Solidbank) in the amount of
P2,094,000.00, and no payment was made by Madrigal Shipping Co., Inc., as pledgor. Therefore the
Solidbank has the light of retention of the barge in question pledged to it until it is paid. The Civil Code
expressly provides;

Art. 2090. The contract of pledge gives right to the creditor to retain the thing in
his possession or in that of a third person to whom it has been delivered, until the
debt is paid.
Applying these concepts in the case at bar, the pledgee is obviously a lawful and rightful possessor of
the personal property pledged.

LORETA SERRANO, petitioner,

vs.
COURT OF APPEALS and LONG LIFE PAWNSHOP, INC., respondents.
Cecilio D. Ignacio for petitioner.
Hildawa & Gomez for private respondent.

II.
As to the second issue of whether or not there is necessity for the Ongs to post a counterbond, the
provisions of the Rules are clear. This Court has explained that a defendant in a replevin suit,
(petitioners Ong in this case) may demand the return of possession of the property replevined by filing a
redelivery bond executed to the plaintiff in double the value of the property as stated in the plaintiff s
affidavit, within the periods specified in Sections 5 and 6 of Rule 60 of the Rules of Court. Under Section
D, petitioner may "at any time before the delivery of the property to the plaintiff' require the return of the
property; in Section 6, he may do so, "within five (5) days after the taking of the property by the officer."
Both these periods are mandatory in character. Thus, a lower court which approves a counterbond filed
beyond the statutory periods, acts in excess of jurisdiction (Yang v. Valdez, 177 SCRA 143 [1989]).
As correctly explained by the Intermediate Appellate Court (.now Court of Appeals):
... The intent of the law requiring the posting of the bond by the applicant is clear
and manifest, which is to cover and insulate the defendant's interest from undue
damage. ...
To forestall the possession by the plaintiff of the property our procedural law
provides that the defendant must post a counterbond and must furnish the
plaintiff with the copy of the undertaking. (Chan vs. Villanueva, L-3420. April 30,
1982; Sections 5 & 6, Rule 60, Revised Rules of Court) Again, if only for the
purpose of emphasis, this is required to protect the plaintiff, should his action be
adjudged meritorious. We need not mention, that this procedure was purposely
formulated to allow the defendant to continue possessing the property. Not to
require him to post any bond would likewise, be counter to the objectives and
intent sought by the framers of the law. In short, whoever holds the property must
post the bond to stand as security to the non-holder pending the final
determination of the case. (Rollo, pp. 33-34)
Verily, respondent Appellate Court aptly observed that the questioned orders reveal that the Court a quo
exercised prudence in the highest degree. Solidbank was required and has already posted a bond in
favor of the Ongs should the suit for replevin be declared improper. Conversely, petitioner Ong must post
a bond if he seeks the continued possession of the property, in favor of Solidbank should the suit for
replevin prosper.
Under the circumstances, the court a quo's orders which were affirmed by the Court of Appeals cannot
be faulted.
PREMISES CONSIDERED, the petition is DISMISSED for lack of merit, and the assailed decision dated
January 31, 1986 of the Intermediate Appellate Court is AFFIRMED.
SO ORDERED.
G.R. No. 45125

April 22, 1991

RESOLUTION
FELICIANO, J.:
Sometime in early March 1968, petitioner Loreta Serrano bought some pieces of jewelry for P48,500.00
from Niceta Ribaya. On 21 March 1968, petitioner, then in need of money, instructed her private
secretary, Josefina Rocco, to pawn the jewelry. Josefina Rocco went to private respondent Long Life
Pawnshop, Inc. ("Long Life"), pledged the jewelry for P22,000.00 with its principal owner and General
Manager, Yu An Kiong, and then absconded with said amount and the pawn ticket. The pawnshop ticket
issued to Josefina Rocco stipulated that it was redeemable "on presentation by the bearer."
Three (3) months later, Gloria Duque and Amalia Celeste informed Niceta Ribaya that a pawnshop ticket
issued by private respondent was being offered for sale. They told Niceta the ticket probably covered
jewelry once owned by the latter which jewelry had been pawned by one Josefina Rocco. Suspecting
that it was the same jewelry she had sold to petitioner, Niceta informed the latter of this offer and
suggested that petitioner go to the Long Life pawnshop to check the matter out. Petitioner claims she
went to private respondent pawnshop, verified that indeed her missing jewelry was pledged there and
told Yu An Kiong not to permit anyone to redeem the jewelry because she was the lawful owner thereof.
Petitioner claims that Yu An Kiong agreed.
On 9 July 1968, petitioner went to the Manila Police Department to report the loss, and a complaint first
for qualified theft and later changed to estafa was subsequently filed against Josefina Rocco. On the
same date, Detective Corporal Oswaldo Mateo of the Manila Police also claims to have gone to the
pawnshop, showed Yu An Kiong petitioner's report and left the latter a note asking him to hold the
jewelry and notify the police in case some one should redeem the same. The next day, on 10 July 1968,
Yu An Kiong permitted one Tomasa de Leon, exhibiting the appropriate pawnshop ticket, to redeem the
jewelry.
On 4 October 1968, petitioner filed a complaint with the then Court of First Instance of Manila for
damages against private respondent Long Life for failure to hold the jewelry and for allowing its
redemption without first notifying petitioner or the police. After trial, the trial judge, Hon. Luis B. Reyes,
rendered a decision in favor of petitioner, awarding her P26,500.00 as actual damages, with legal
interest thereon from the date of the filing of the complaint, P2,000.00 as attorney's fees, and the costs
of the suit.
Judge L.B. Reyes' decision was reversed on appeal and the complaint dismissed by the public
respondent Court of Appeals in a Decision promulgated on 26 September 1976.
The Court of Appeals gave credence to Yu An Kiong's testimony that neither petitioner nor Detective
Mateo ever apprised him of the misappropriation of petitioner's loan, or obtained a commitment from him
not to permit redemption of the jewelry, prior to 10 July 1968. Yu An Kiong claims to have become aware
of the loan's misappropriation only on 16 August 1968 when a subpoena duces tecum was served by the
Manila Fiscal's Office requiring him to bring the record of the pledge in connection with the preliminary
investigation of the estafa charge against Josefina Rocco. Consequently, the appellate court ruled, there
could have been no negligence, much less a grave one amounting to bad faith, imputable to Yu An
Kiong as the basis for an award of damages.

In this Petition for Review, petitioner seeks reversal of the Public respondent's findings relating to the
credibility of witnesses and the restoration of the trial court's decision.
Deliberating on the present Petition for Review, the Court considers that the public respondent Court of
Appeals committed reversible error in rendering its questioned Decision.
It is a settled principle of civil procedure that the conclusions of the trial court regarding the credibility of
witnesses are entitled to great respect from the appellate courts because the trial court had an
opportunity to observe the demeanor of witnesses while giving testimony which may indicate their
candor or lack thereof.1 While the Supreme Court ordinarily does not rule on the issue of credibility of
witnesses, that being a question of fact not properly raised in a petition under Rule 45, the Court has
undertaken to do so in exceptional situations where, for instance, as here, the trial court and the Court of
Appeals arrived at divergent conclusions on questions of fact and the credibility of witnesses. 2
The Court of Appeals rejected what it considered to be the incredible testimony of petitioner and
Detective Mateo. It faulted petitioner for failing to report to the police authorities the loss of her jewelry
immediately on 21 March 1968 when Josefina Rocco failed to return to her either the loan proceeds or
the jewelry. But it must be noted that Josefina Rocco simply disappeared without a trace on said date.
Petitioner had no way of knowing if Josefina had misappropriated her jewelry, or had first pledged the
jewelry as instructed and then misappropriated the proceeds of the loan. In the latter case, which was in
fact what had occurred, petitioner could have had no idea as to the identity of the pawnbroker. Moreover,
this Court has several times recognized that different people may have diverse reasons for failing to
report promptly to the police their having been victimized by some criminal or fraudulent scheme and
that such failure does not by itself render their subsequent testimony unworthy of credence. 3
The Court of Appeals also found it hard to believe that Detective Mateo had failed to obtain a written
acknowledgment from Yu An Kiong of the receipt of the note as corroboration for his testimony. However,
absent evidence that it was an established practice for police officers to obtain such acknowledgment in
situations like the one here, it is difficult to see why Detective Mateo's behavior should be considered
unbelievable. On the other hand, as the trial court pointed out, it would not have been sensible for
Detective Mateo to leave a note reminding Yu An Kiong to hold unto the jewelry if the latter had in
fact then told the policeman that the jewelry had already been redeemed.
The public respondent apparently believed petitioner had failed to establish her ownership of the jewelry
pledged by Josefina Rocco, such failure purportedly engendering doubt that Tomasa de Leon may have
redeemed jewelry different from that owned by petitioner. This is curious and untenable because the
record on appeal indicates that Yu An Kiong had admitted in his answer and memorandum before the
trial court that he received pledged jewelry from Josefina Rocco and, in his memorandum, that such
jewelry had been entrusted to Josefina by petitioner as the latter's employer. It is clear from these judicial
admissions that he considered petitioner to have been the true owner of the jewelry.
Finally, the Court of Appeals did not believe petitioner's testimony because of a claimed material
inconsistency therein.1wphi1 On direct examination, petitioner said she "immediately" went to the
private respondent's establishment upon being informed by Niceta Ribaya of the possible whereabouts
of her jewelry. On cross-examination, she said she went to the establishment "a few days later." If this is
an inconsistency, it relates to an unimportant detail. What is clear is that in any event, petitioner testified
that she went to the respondent's pawnshop to meet Yu An Kiong and notify him of the
misappropriation before anyone had redeemed the jewelry.
We must also note that the Court of Appeals apparently over-looked a fact of substance which did not
escape the attention of the trial court. Petitioner's version of events was corroborated by Police Detective
Mateo and by Niceta Ribaya. These were two (2) individuals who had nothing to gain from the outcome
of the case. Certainly, their disinterested testimony should have been accorded more probative weight
than the negative, uncorroborated and self-serving testimony of Yu An Kiong, which presented a
diametrically opposed version of events calculated to show that in permitting redemption of the jewelry,
he was acting in good faith.4
The testimony of Detective Mateo was moreover supported by the presumption that he had acted in the
regular performance of his official duty as a police officer, a presumption that Yu An Kiong did not try to
rebut.

This being a civil case, it was enough for petitioner to show, by a preponderance of evidence, that her
version of events did in fact occur. We agree with the trial court that this burden of proof had been
discharged by petitioner because her evidence was direct and more credible and persuasive than that
propounded by Yu An Kiong,5 and corroborated by disinterested witnesses.
Turning to the substantive legal rights and duties of the parties, we believe and so hold that, having been
notified by petitioner and the police that jewelry pawned to it was either stolen or involved in an
embezzlement of the proceeds of the pledge, private respondent pawnbroker became duty bound to
hold the things pledged and to give notice to petitioner and the police of any effort to redeem them. Such
a duty was imposed by Article 21 of the Civil Code.6 The circumstance that the pawn ticket stated that
the pawn was redeemable by the bearer, did not dissolve that duty. The pawn ticket was not a negotiable
instrument under the Negotiable Instruments Law nor a negotiable document of title under Articles
1507 et seq. of the Civil Code. If the third person Tomasa de Leon, who redeemed the things pledged a
day after petitioner and the police had notified Long Life, claimed to be owner thereof, the prudent
recourse of the pawnbroker was to file an interpleader suit, impleading both petitioner and Tomasa de
Leon. The respondent pawnbroker was, of course, entitled to demand payment of the loan extended on
the security of the pledge before surrendering the jewelry, upon the assumption that it had given the loan
in good faith and was not a "fence" for stolen articles and had not conspired with the faithless Josefina
Rocco or with Tomasa de Leon. Respondent pawnbroker acted in reckless disregard of that duty in the
instant case and must bear the consequences, without prejudice to its right to recover damages from
Josefina Rocco.
The trial court correctly held that private respondent was liable to petitioner for actual damages which
corresponded to the difference in the value of the jewelry (P48,500.00) and the amount of the loan
(P22,000.00), or the sum of P26,500.00. Petitioner is entitled to collect the balance of the value of the
jewelry, corresponding to the amount of the loan, in an appropriate action against Josefina Rocco.
Private respondent Long Life in turn is entitled to seek reimbursement from Josefina Rocco of the
amount of the damages it must pay to petitioner.
ACCORDINGLY, the Petition is GRANTED. The Decision of the Court of Appeals dated 23 September
1976 is hereby REVERSED and SET ASIDE. The Decision of the Court of First Instance dated 22 May
1970 is hereby REINSTATED in toto. No pronouncement as to costs.
G.R. No. L-19227

February 17, 1968

DIOSDADO YULIONGSIU, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.
Vicente Jaime, Regino Hermosisima & E. Lumontad, Sr. for plaintiff-appellant.
Tomas Besa, R. B. de los Reyes and C. E. Medina for defendant-appellee.
BENGZON, J.P., J.:
Plaintiff-appellant Diosdado Yuliongsiu 1 was the owner of two (2) vessels, namely: The M/S
Surigao, valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated the FS-203,
valued at P210,672.24, which was purchased by him from the Philippine Shipping Commission, by
installment or on account. As of January or February, 1943, plaintiff had paid to the Philippine Shipping
Commission only the sum of P76,500 and the balance of the purchase price was payable at P50,000 a
year, due on or before the end of the current year. 2
On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant Philippine National
Bank, Cebu Branch. To guarantee its payment, plaintiff pledged the M/S Surigao, M/S Don Dino and its
equity in the FS-203 to the defendant bank, as evidenced by the pledge contract, Exhibit "A" & "1-Bank",
executed on the same day and duly registered with the office of the Collector of Customs for the Port of
Cebu. 3

Subsequently, plaintiff effected partial payment of the loan in the sum of P20,000. The remaining
balance was renewed by the execution of two (2) promissory notes in the bank's favor. The first note,
dated December 18, 1947, for P20,000, was due on April 16, 1948 while the second, dated February 26,
1948, for P10,000, was due on June 25, 1948. These two notes were never paid at all by plaintiff on
their respective due dates. 4
On April 6, 1948, the bank filed criminal charges against plaintiff and two other accused for estafa
thru falsification of commercial documents, because plaintiff had, as last indorsee, deposited with
defendant bank, from March 11 to March 31, 1948, seven Bank of the Philippine Islands checks
totalling P184,000. The drawer thereof one of the co-accused had no funds in the drawee bank.
However, in connivance with one employee of defendant bank, plaintiff was able to withdraw the amount
credited to him before the discovery of the defraudation on April 2, 1948. Plaintiff and his co-accused
were convicted by the trial court and sentenced to indemnify the defendant bank in the sum of P184,000.
On appeal, the conviction was affirmed by the Court of Appeals on October 31, 1950. The corresponding
writ of execution issued to implement the order for indemnification was returned unsatisfied as plaintiff
was totally insolvent. 5
Meanwhile, together with the institution of the criminal action, defendant bank took physical
possession of three pledged vessels while they were at the Port of Cebu, and on April 29, 1948, after the
first note fell due and was not paid, the Cebu Branch Manager of defendant bank, acting as attorney-infact of plaintiff pursuant to the terms of the pledge contract, executed a document of sale, Exhibit "4",
transferring the two pledged vessels and plaintiff's equity in FS-203, to defendant bank for P30,042.72. 6
The FS-203 was subsequently surrendered by the defendant bank to the Philippine Shipping
Commission which rescinded the sale to plaintiff on September 8, 1948, for failure to pay the remaining
installments on the purchase price thereof. 7 The other two boats, the M/S Surigao and the M/S Don Dino
were sold by defendant bank to third parties on March 15, 1951.
On July 19, 1948, plaintiff commenced action in the Court of First Instance of Cebu to recover the
three vessels or their value and damages from defendant bank. The latter filed its answer, with a
counterclaim for P202,000 plus P5,000 damages. After issues were joined, a pretrial was held resulting
in a partial stipulation of facts dated October 2, 1958, reciting most of the facts above-narrated. During
the course of the trial, defendant amended its answer reducing its claim from P202,000 to
P8,846.01, 8 but increasing its alleged damages to P35,000.
The lower court rendered its decision on February 13, 1960 ruling: (a) that the bank's taking of
physical possession of the vessels on April 6, 1948 was justified by the pledge contract, Exhibit "A" & "1Bank" and the law; (b) that the private sale of the pledged vessels by defendant bank to itself without
notice to the plaintiff-pledgor as stipulated in the pledge contract was likewise valid; and (c) that the
defendant bank should pay to plaintiff the sums of P1,153.99 and P8,000, as his remaining account
balance, or set-off these sums against the indemnity which plaintiff was ordered to pay to it in the
criminal cases.
When his motion for reconsideration and new trial was denied, plaintiff brought the appeal to Us,
the amount involved being more than P200,000.00.
In support of the first assignment of error, plaintiff-appellant would have this Court hold that Exhibit
"A" & "1-Bank" is a chattel mortgage contract so that the creditor defendant could not take possession of
the chattels object thereof until after there has been default. The submission is without merit. The parties
stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract
3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant Bank,
and the plaintiff obtained and received from the said Bank the sum of P50,000.00, and in
order to guarantee the payment of this loan, the pledge contract, Exhibit "A" & Exhibit "1Bank", was executed and duly registered with the Office of the Collector of Customs for the
Port of Cebu on the date appearing therein; (Emphasis supplied)1wph1.t

Necessarily, this judicial admission binds the plaintiff. Without any showing that this was made thru
palpable mistake, no amount of rationalization can offset it. 9
The defendant bank as pledgee was therefore entitled to the actual possession of the vessels.
While it is true that plaintiff continued operating the vessels after the pledge contract was entered into,
his possession was expressly made "subject to the order of the pledgee." 10 The provision of Art. 2110 of
the present Civil Code 11being new cannot apply to the pledge contract here which was entered into
on June 30, 1947. On the other hand, there is an authority supporting the proposition that the pledgee
can temporarily entrust the physical possession of the chattels pledged to the pledgor without
invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely
as trustee for the pledgee. 12
Plaintiff-appellant would also urge Us to rule that constructive delivery is insufficient to make
pledge effective. He points to Betita v. Ganzon, 49 Phil. 87 which ruled that there has to be actual
delivery of the chattels pledged. But then there is also Banco Espaol-Filipino v. Peterson, 7 Phil. 409
ruling that symbolic delivery would suffice. An examination of the peculiar nature of the things pledged in
the two cases will readily dispel the apparent contradiction between the two rulings. In Betita v. Ganzon,
the objects pledged carabaos were easily capable of actual, manual delivery unto the pledgee.
In Banco Espaol-Filipino v. Peterson, the objects pledged goods contained in a warehouse were
hardly capable of actual, manual delivery in the sense that it was impractical as a whole for the particular
transaction and would have been an unreasonable requirement. Thus, for purposes of showing the
transfer of control to the pledgee, delivery to him of the keys to the warehouse sufficed. In other words,
the type of delivery will depend upon the nature and the peculiar circumstances of each case. The
parties here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold said
property subject to the order of the pledgee." Considering the circumstances of this case and the nature
of the objects pledged, i.e., vessels used in maritime business, such delivery is sufficient.
Since the defendant bank was, pursuant to the terms of pledge contract, in full control of the
vessels thru the plaintiff, the former could take actual possession at any time during the life of the pledge
to make more effective its security. Its taking of the vessels therefore on April 6, 1948, was not unlawful.
Nor was it unjustified considering that plaintiff had just defrauded the defendant bank in the huge sum of
P184,000.
The stand We have taken is not without precedent. The Supreme Court of Spain, in a similar case
involving Art. 1863 of the old Civil Code, 13 has ruled: 14
Que si bien la naturaleza del contrato de prenda consiste en pasar las cosas a poder
del acreedor o de un tercero y no quedar en la del deudor, como ha sucedido en el caso de
autos, es lo cierto que todas las partes interesadas, o sean acreedor, deudor y Sociedad,
convinieron que continuaran los coches en poder del deudor para no suspender el trafico, y
el derecho de no uso de la prenda pertenence al deudor, y el de dejar la cosa bajo su
responsabilidad al acreedor, y ambos convinieron por creerlo util para las partes
contratantes, y estas no reclaman perjuicios no se infringio, entre otros este articulo.
In the second assignment of error imputed to the lower court plaintiff-appellant attacks the validity
of the private sale of the pledged vessels in favor of the defendant bank itself. It is contended first, that
the cases holding that the statutory requirements as to public sales with prior notice in connection with
foreclosure proceedings are waivable, are no longer authoritative in view of the passage of Act 3135, as
amended; second, that the charter of defendant bank does not allow it to buy the property object of
foreclosure in case of private sales; and third, that the price obtained at the sale is unconscionable.
There is no merit in the claims. The rulings in Philippine National Bank v. De Poli, 44 Phil. 763
and El Hogar Filipino v. Paredes, 45 Phil. 178 are still authoritative despite the passage of Act 3135. This
law refers only, and is limited, to foreclosure of real estate mortgages. 15 So, whatever formalities there
are in Act 3135 do not apply to pledge. Regarding the bank's authority to be the purchaser in the
foreclosure sale, Sec. 33 of Act 2612, as amended by Acts 2747 and 2938 only states that if the sale is
public, the bank could purchase the whole or part of the property sold " free from any right of redemption
on the part of the mortgagor or pledgor." This even argues against plaintiff's case since the import

thereof is this if the sale were private and the bank became the purchaser, the mortgagor or pledgor
could redeem the property. Hence, plaintiff could have recovered the vessels by exercising this right of
redemption. He is the only one to blame for not doing so.
Regarding the third contention, on the assumption that the purchase price was unconscionable,
plaintiff's remedy was to have set aside the sale. He did not avail of this. Moreover, as pointed out by the
lower court, plaintiff had at the time an obligation to return the P184,000 fraudulently taken by him from
defendant bank.
The last assignment of error has to do with the damages allegedly suffered by plaintiff-appellant
by virtue of the taking of the vessels. But in view of the results reached above, there is no more need to
discuss the same.
On the whole, We cannot say the lower court erred in disposing of the case as it did. Plaintiffappellant was not all-too-innocent as he would have Us believe. He did defraud the defendant bank first.
If the latter countered with the seizure and sale of the pledged vessels pursuant to the pledge contract, it
was only to protect its interests after plaintiff had defaulted in the payment of the first promissory note.
Plaintiff-appellant did not come to court with clean hands.
WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs against plaintiffappellant. So ordered.

G.R. No. L-21069

October 26, 1967

MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee,

vs.
RODOLFO R. VELAYO, defendant-appellant.
Villaluz Law Office for plaintiff-appellee.
Rodolfo R. Velayo for and in his own behalf as defendant-appellant.
REYES, J.B.L., J.:
Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No. 49435) sentencing
appellant Rodolfo Velayo to pay appellee Manila Surety & Fidelity Co., Inc. the sum of P2,565.00 with
interest at 12-% per annum from July 13, 1954; P120.93 as premiums with interest at the same rate
from June 13, 1954: attorneys' fees in an amount equivalent to 15% of the total award, and the costs.
Hub of the controversy are the applicability and extinctive effect of Article 2115 of the Civil Code of the
Philippines (1950).
The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of Rodolfo Velayo,
executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita
Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila. Velayo undertook to
pay the surety company an annual premium of P112.00; to indemnify the Company for any damage and
loss of whatsoever kind and nature that it shall or may suffer, as well as reimburse the same for all
money it should pay or become liable to pay under the bond including costs and attorneys' fees.

As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety
Company "for the latter's further protection", with power to sell the same in case the surety paid or
become obligated to pay any amount of money in connection with said bond, applying the proceeds to
the payment of any amounts it paid or will be liable to pay, and turning the balance, if any, to the persons
entitled thereto, after deducting legal expenses and costs (Rec. App. pp. 12-15).
Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution
having been returned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to
recoup from Velayo; and upon the latter's failure to do so, the surety caused the pledged jewelry to be
sold, realizing therefrom a net product of P235.00 only. Thereafter and upon Velayo's failure to pay the
balance, the surety company brought suit in the Municipal Court. Velayo countered with a claim that the
sale of the pledged jewelry extinguished any further liability on his part under Article 2115 of the 1950
Civil Code, which recites:
Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or
not the proceeds of the sale are equal to the amount of the principal obligation, interest and
expenses in a proper case. If the price of the sale is more than said amount, the debtor shall
not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less,
neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation
to the contrary.
The Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed to the
Court of First Instance, the defense was once more overruled, and the case decided in the terms set
down at the start of this opinion.
Thereupon, Velayo resorted to this Court on appeal.
The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-72):
It is thus crystal clear that the main agreement between the parties is the Indemnity
Agreement and if the pieces of jewelry mentioned by the defendant were delivered to the
plaintiff, it was merely as an added protection to the latter. There was no understanding that,
should the same be sold at public auction and the value thereof should be short of the
undertaking, the defendant would have no further liability to the plaintiff. On the contrary, the
last portion of the said agreement specifies that in case the said collateral should diminish in
value, the plaintiff may demand additional securities. This stipulation is incompatible with the
idea of pledge as a principal agreement. In this case, the status of the pledge is nothing
more nor less than that of a mortgage given as a collateral for the principal obligation in
which the creditor is entitled to a deficiency judgment for the balance should the collateral not
command the price equal to the undertaking.
It appearing that the collateral given by the defendant in favor of the plaintiff to secure this
obligation has already been sold for only the amount of P235.00, the liability of the defendant
should be limited to the difference between the amounts of P2,800.00 and P235.00 or
P2,565.00.
We agree with the appellant that the above quoted reasoning of the appealed decision is unsound. The
accessory character is of the essence of pledge and mortgage. As stated in Article 2085 of the 1950 Civil
Code, an essential requisite of these contracts is that they be constituted to secure the fulfillment of a
principal obligation, which in the present case is Velayo's undertaking to indemnify the surety company
for any disbursements made on account of its attachment counterbond. Hence, the fact that the pledge
is not the principal agreement is of no significance nor is it an obstacle to the application of Article 2115
of the Civil Code.
The reviewed decision further assumes that the extinctive effect of the sale of the pledged chattels must
be derived from stipulation. This is incorrect, because Article 2115, in its last portion, clearly establishes

that the extinction of the principal obligation supervenes by operation of imperative law that the parties
cannot override:

The factual antecedents until the commencement of G.R. No. 119231 were summarized in our
decision therein, as follows:

If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency
notwithstanding any stipulation to the contrary.

In accordance with Act No. 2137, the Warehouse Receipts Law, Noahs Ark Sugar Refinery issued on
several dates, the following Warehouse Receipts (Quedans): (a) March 1, 1989, Receipt No. 18062,
covering sugar deposited by Rosa Sy; (b) March 7, 1989, Receipt No. 18080, covering sugar deposited
by RNS Merchandising (Rosa Ng Sy); (c) March 21, 1989, Receipt No. 18081, covering sugar deposited
by St. Therese Merchandising; (d) March 31, 1989, Receipt No. 18086, covering sugar deposited by St.
Therese Merchandising; and (e) April 1, 1989, Receipt No. 18087, covering sugar deposited by RNS
Merchandising. The receipts are substantially in the form, and contains the terms, prescribed for
negotiable warehouse receipts by Section 2 of the law.

The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the articles
pledged, instead of suing on the principal obligation, the creditor has waived any other remedy, and must
abide by the results of the sale. No deficiency is recoverable.
It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the legal
prescription contained in Article 1484(3) of the same Code, concerning the effect of a foreclosure of a
chattel mortgage constituted to secure the price of the personal property sold in installments, and which
originated in Act 4110 promulgated by the Philippine Legislature in 1933.
WHEREFORE, the decision under appeal is modified and the defendant absolved from the complaint,
except as to his liability for the 1954 premium in the sum of P120.93, and interest at 12-1/2% per
annum from June 13, 1954. In this respect the decision of the Court below is affirmed. No costs. So
ordered.

Subsequently, Warehouse Receipts Nos. 18080 and 18081 were negotiated and endorsed to Luis T.
Ramos, and Receipts Nos. 18086, 18087 and 18062 were negotiated and endorsed to Cresencia K.
Zoleta. Ramos and Zoleta then used the quedans as security for two loan agreements one for P15.6
million and the other for P23.5 million obtained by them from the Philippine National Bank. The
aforementioned quedans were endorsed by them to the Philippine National Bank.
Luis T. Ramos and Cresencia K. Zoleta failed to pay their loans upon maturity on January 9,
1990.Consequently, on March 16, 1990, the Philippine National Bank wrote to Noahs Ark Sugar Refinery
demanding delivery of the sugar stocks covered by the quedans endorsed to it by Zoleta and
Ramos. Noahs Ark Sugar Refinery refused to comply with the demand alleging ownership thereof, for
which reason the Philippine National Bank filed with the Regional Trial Court of Manila a verified
complaint for Specific Performance with Damages and Application for Writ of Attachment against Noahs
Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go, the last three being identified as
the sole proprietor, managing partner, and Executive Vice President of Noahs Ark, respectively.
Respondent Judge Benito C. Se, Jr., [to] whose sala the case was raffled, denied the Application for
Preliminary Attachment. Reconsideration therefor was likewise denied.
Noahs Ark and its co-defendants filed an Answer with Counterclaim and Third-Party Complaint in which
they claimed that they [were] the owners of the subject quedans and the sugar represented therein,
averring as they did that:

[G.R. No. 129918. July 9, 1998]

PHILIPPINE NATIONAL BANK, petitioner, vs. HON. MARCELINO L. SAYO, JR., in his capacity as
Presiding Judge of the Regional Trial Court of Manila (Branch 45), NOAHS ARK
SUGAR REFINERY, ALBERTO T. LOOYUKO, JIMMY T. GO and WILSON T.
GO, respondents.
DECISION
DAVIDE, JR., J.:
In this special civil action for certiorari, actually the third dispute between the same private parties
to have reached this Court, [1] petitioner asks us to annul the orders [2] of 15 April 1997 and 14 July 1997
issued in Civil Case No. 90-53023 by the Regional Trial Court, Manila, Branch 45. The first
order[3] granted private respondents motion for execution to satisfy their warehousemans lien against
petitioner, while the second order[4] denied, with finality, petitioners motion for reconsideration of the first
order and urgent motion to lift garnishment, and private respondents motion for partial reconsideration.

9. *** In an agreement dated April 1, 1989, defendants agreed to sell to Rosa Ng Sy of RNS
Merchandising and Teresita Ng of St. Therese Merchandising the total volume of sugar indicated in the
quedans stored at Noahs Ark Sugar Refinery for a total consideration of P63,000,000.00, *** The
corresponding payments in the form of checks issued by the vendees in favor of defendants were
subsequently dishonored by the drawee banks by reason of payment stopped and drawn against
insufficient funds, *** Upon proper notification to said vendees and plaintiff in due course, defendants
refused to deliver to vendees therein the quantity of sugar covered by the subject quedans.
10. *** Considering that the vendees and first endorsers of subject quedans did not acquire ownership
thereof, the subsequent endorsers and plaintiff itself did not acquire a better right of ownership than the
original vendees/first endorsers.
The Answer incorporated a Third-Party Complaint by Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go,
doing business under the trade name and style Noahs Ark Sugar Refinery against Rosa Ng Sy and
Teresita Ng, praying that the latter be ordered to deliver or return to them the quedans (previously
endorsed to PNB and the subject of the suit) and pay damages and litigation expenses.
The Answer of Rosa Ng Sy and Teresita Ng, dated September 6, 1990, one of avoidance, is essentially
to the effect that the transaction between them, on the one hand, and Jimmy T. Go, on the other,
concerning the quedans and the sugar stocks covered by them was merely a simulated one being part
of the latters complex banking schemes and financial maneuvers, and thus, they are not answerable in
damages to him.
On January 31, 1991, the Philippine National Bank filed a Motion for Summary Judgment in favor of the
plaintiff as against the defendants for the reliefs prayed for in the complaint.

On May 2, 1991, the Regional Trial Court issued an order denying the Motion for Summary
Judgment.Thereupon, the Philippine National Bank filed a Petition for Certiorari with the Court of
Appeals, docketed as CA-G.R. SP No. 25938 on December 13, 1991.

On September 29, 1993, private respondents moved for reconsideration of this decision. A
Supplemental/Second Motion for Reconsideration with leave of court was filed by private respondents
on November 8, 1993. We denied private respondents motion on January 10, 1994.

Pertinent portions of the decision of the Court of Appeals read:

Private respondents filed a Motion Seeking Clarification of the Decision, dated September 1, 1993. We
denied this motion in this manner:

In issuing the questioned Orders, the respondent Court ruled that questions of law should be resolved
after and not before, the questions of fact are properly litigated. A scrutiny of defendants affirmative
defenses does not show material questions of fact as to the alleged nonpayment of purchase price by
the vendees/first endorsers, and which nonpayment is not disputed by PNB as it does not materially
affect PNBs title to the sugar stocks as holder of the negotiable quedans.
What is determinative of the propriety of summary judgment is not the existence of conflicting claims
from prior parties but whether from an examination of the pleadings, depositions, admissions and
documents on file, the defenses as to the main issue do not tender material questions of fact (see
Garcia vs. Court of Appeals, 167 SCRA 815) or the issues thus tendered are in fact sham, fictitious,
contrived, set up in bad faith or so unsubstantial as not to constitute genuine issues for trial. (See
Vergara vs. Suelto, et al., 156 SCRA 753; Mercado, et al. vs. Court of Appeals, 162 SCRA 75). [sic] The
questioned Orders themselves do not specify what material facts are in issue. (See Sec. 4, Rule 34,
Rules of Court).
To require a trial notwithstanding pertinent allegations of the pleadings and other facts appearing on the
record, would constitute a waste of time and an injustice to the PNB whose rights to relief to which it is
plainly entitled would be further delayed to its prejudice.
In issuing the questioned Orders, We find the respondent Court to have acted in grave abuse of
discretion which justify holding null and void and setting aside the Orders dated May 2 and July 4, 1990
of respondent Court, and that a summary judgment be rendered forthwith in favor of the PNB against
Noahs Ark Sugar Refinery, et al., as prayed for in petitioners Motion for Summary Judgment.
On December 13, 1991, the Court of Appeals nullified and set aside the orders of May 2 and July 4,
1990 of the Regional Trial Court and ordered the trial court to render summary judgment in favor of the
PNB. On June 18, 1992, the trial court rendered judgment dismissing plaintiffs complaint against private
respondents for lack of cause of action and likewise dismissed private respondents counterclaim against
PNB and of the Third-Party Complaint and the Third-Party Defendants Counterclaim. On September 4,
1992, the trial court denied PNBs Motion for Reconsideration.
On June 9, 1992, the PNB filed an appeal from the RTC decision with the Supreme Court, G.R. No.
107243, by way of a Petition for Review on Certiorari under Rule 45 of the Rules of Court. This Court
rendered judgment on September 1, 1993, the dispositive portion of which reads:
WHEREFORE, the trial judges decision in Civil Case No. 90-53023, dated June 18, 1992, is reversed
and set aside and a new one rendered conformably with the final and executory decision of the Court of
Appeals in CA-G.R. SP No. 25938, ordering the private respondents Noahs Ark Sugar Refinery, Alberto
T. Looyuko, Jimmy T. Go and Wilson T. Go, jointly and severally:
(a) to deliver to the petitioner Philippine National Bank, the sugar stocks covered by the Warehouse
Receipts/Quedans which are now in the latters possession as holder for value and in due course; or
alternatively, to pay (said) plaintiff actual damages in the amount of P39.1 million, with legal interest
thereon from the filing of the complaint until full payment; and
(b) to pay plaintiff Philippine National Bank attorneys fees, litigation expenses and judicial costs hereby
fixed at the amount of One Hundred Fifty Thousand Pesos (P150,000.00) as well as the costs.
SO ORDERED.

It bears stressing that the relief granted in this Courts decision of September 1, 1993 is precisely that set
out in the final and executory decision of the Court of Appeals in CA-G.R. SP No. 25938, dated
December 13, 1991, which was affirmed in toto by this Court and which became unalterable upon
becoming final and executory.
Private respondents thereupon filed before the trial court an Omnibus Motion seeking among others the
deferment of the proceedings until private respondents [were] heard on their claim for warehousemans
lien. On the other hand, on August 22, 1994, the Philippine National Bank filed a Motion for the Issuance
of a Writ of Execution and an Opposition to the Omnibus Motion filed by private respondents.
The trial court granted private respondents Omnibus Motion on December 20, 1994 and set reception of
evidence on their claim for warehousemans lien. The resolution of the PNBs Motion for Execution was
ordered deferred until the determination of private respondents claim.
On February 21, 1995, private respondents claim for lien was heard and evidence was received in
support thereof. The trial court thereafter gave both parties five (5) days to file respective memoranda.
On February 28, 1995, the Philippine National Bank filed a Manifestation with Urgent Motion to Nullify
Court Proceedings. In adjudication thereof, the trial court issued the following order on March 1, 1995:
WHEREFORE, this court hereby finds that there exists in favor of the defendants a valid
warehousemans lien under Section 27 of Republic Act 2137 and accordingly, execution of the judgment
is hereby ordered stayed and/or precluded until the full amount of defendants lien on the sugar stocks
covered by the five (5) quedans subject of this action shall have been satisfied conformably with the
provisions of Section 31 of Republic Act 2137.[5]
Unsatisfied with the trial courts order of 1 March 1995, herein petitioner filed with us G.R. No.
119231, contending:
I
PNBS RIGHT TO A WRIT OF EXECUTION IS SUPPORTED BY TWO FINAL AND
EXECUTORY DECISIONS: THE DECEMBER 13, 1991 COURT OF APPEALS [sic]
DECISION IN CA-G.R. SP NO. 25938; AND, THE NOVEMBER 9, 1992 SUPREME
COURT DECISION IN G.R. NO. 107243. RESPONDENT RTCS MINISTERIAL AND
MANDATORY DUTY IS TO ISSUE THE WRIT OF EXECUTION TO IMPLEMENT
THE DECRETAL PORTION OF SAID SUPREME COURT DECISION.
II
RESPONDENT RTC IS WITHOUT JURISDICTION TO HEAR PRIVATE
RESPONDENTS OMNIBUS MOTION. THE CLAIMS SET FORTH IN SAID MOTION:
(1) WERE ALREADY REJECTED BY THE SUPREME COURT IN ITS MARCH 9,
1994 RESOLUTION DENYING PRIVATE RESPONDENTS MOTION FOR
CLARIFICATION OF DECISION IN G.R. NO. 107243; AND (2) ARE BARRED
FOREVER BY PRIVATE RESPONDENTS FAILURE TO INTERPOSE THEM IN
THEIR ANSWER, AND FAILURE TO APPEAL FROM THE JUNE 18, 1992 DECISION
IN CIVIL CASE NO. 90-52023.
III
RESPONDENT RTCS ONLY JURISDICTION IS TO ISSUE THE WRIT TO EXECUTE
THE SUPREME COURT DECISION. THUS, PNB IS ENTITLED TO: (1) A WRIT
OF CERTIORARI TO ANNUL THE RTC RESOLUTION DATED DECEMBER 20,

1994 AND THE ORDER DATED FEBRUARY 7, 1995 AND ALL PROCEEDINGS
TAKEN BY THE RTC THEREAFTER; (2) A WRIT OF PROHIBITION TO PREVENT
RESPONDENT RTC FROM FURTHER PROCEEDING WITH CIVIL CASE NO. 9053023 AND COMMITTING OTHER ACTS VIOLATIVE OF THE SUPREME COURT
DECISION IN G.R. NO. 107243; AND (3) A WRIT OF MANDAMUS TO COMPEL
RESPONDENT RTC TO ISSUE THE WRIT TO EXECUTE THE SUPREME COURT
JUDGMENT IN FAVOR OF PNB.
In our decision of 18 April 1996 in G.R. No. 119231, we held against herein petitioner as to these
issues and concluded:
In view of the foregoing, the rule may be simplified thus: While the PNB is entitled to the stocks of sugar
as the endorsee of the quedans, delivery to it shall be effected only upon payment of the storage fees.
Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because, in
accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon
goods by surrendering possession thereof. In other words, the lien may be lost where the
warehouseman surrenders the possession of the goods without requiring payment of his lien, because a
warehousemans lien is possessory in nature.

3.27 The court a quo, this time presided by herein public respondent, Hon. Marcelino L. Sayo Jr.,
granted private respondents Motion for Execution. In its questioned Order dated 15 April 1997 (Annex
A), the court a quo ruled in this wise:
Accordingly, the computation of accrued storage fees and preservation charges presented in evidence
by the defendants, in the amount of P734,341,595.06 as of January 31, 1995 for the 86,356.41 50 kg.
bags of sugar, being in order and with sufficient basis, the same should be granted. This Court
consequently rejects PNBs claim of no sugar no lien, since it is undisputed that the amount of the
accrued storage fees is substantially in excess of the alternative award of P39.1 Million in favor of PNB,
including legal interest and P150,000.00 in attorneys fees, which PNB is however entitled to be credited
x x x.
xxxxxxxxx
WHEREFORE, premises considered and finding merit in the defendants motion for execution of their
claim for lien as warehouseman, the same is hereby GRANTED. Accordingly, let a writ of execution
issue for the amount of P662,548,611.50, in accordance with the above disposition.
SO ORDERED. (Emphasis supplied.)

We, therefore, uphold and sustain the validity of the assailed orders of public respondent, dated
December 20, 1994 and March 1, 1995.
In fine, we fail to see any taint of abuse of discretion on the part of the public respondent in issuing the
questioned orders which recognized the legitimate right of Noahs Ark, after being declared as
warehouseman, to recover storage fees before it would release to the PNB sugar stocks covered by the
five (5) Warehouse Receipts. Our resolution, dated March 9, 1994, did not preclude private respondents
unqualified right to establish its claim to recover storage fees which is recognized under Republic Act
No. 2137. Neither did the Court of Appeals decision, dated December 13, 1991, restrict such right.
Our Resolutions reference to the decision by the Court of Appeals, dated December 13, 1991, in CAG.R. SP No. 25938, was intended to guide the parties in the subsequent disposition of the case to its
final end. We certainly did not foreclose private respondents inherent right as warehouseman to collect
storage fees and preservation expenses as stipulated on the face of each of the Warehouse Receipts
and as provided for in the Warehouse Receipts Law (R.A. 2137). [6]

3.28 On 23 April 1997, PNB was immediately served with a Writ of Execution for the amount
of P662,548,611.50 in spite of the fact that it had not yet been served with the Order of the court a
quo dated 15 April 1997. PNB thus filed an Urgent Motion dated 23 April 1997 seeking the deferment of
the enforcement of the Writ of Execution. A photocopy of the Writ of Execution is attached hereto as
Annex J.
3.29 Nevertheless, the Sheriff levied on execution several properties of PNB. Firstly, a Notice of Levy
dated 24 April 1997 on a parcel of land with an area of Ninety-Nine Thousand Nine Hundred Ninety-Nine
(99,999) square meters, covered by Transfer Certificate of Title No. 23205 in the name of PNB, was
served upon the Register of Deeds of Pasay City. Secondly, a Notice of Garnishment dated 23 April
1997 on fund deposits of PNB was served upon the Bangko Sentral ng Pilipinas. Photocopies of the
Notice of Levy and the Notice of Garnishment are attached hereto as Annexes K and L, respectively.
3.30 On 28 April 1997, petitioner filed a Motion for Reconsideration with Urgent Prayer for Quashal of
Writ of Execution dated 15 April 1997. Petitioners Motion was based on the following grounds:

Petitioners motion to reconsider the decision in G.R. No. 119231 was denied.
After the decision in G.R. No. 119231 became final and executory, various incidents took place
before the trial court in Civil Case No. 90-53023. The petition in this case summarizes these as follows:

(1) Noahs Ark is not entitled to a warehousemans lien in the humongous amount
of P734,341,595.06 because the same has been waived for not having been
raised earlier as either counterclaim or defense against PNB;

3.24 Pursuant to the abovementioned Supreme Court Decision, private respondents filed a Motion for
Execution of Defendants Lien as Warehouseman dated 27 November 1996. A photocopy of said Motion
for Execution is attached hereto as Annex I.

(2) Assuming said lien has not been waived, the same, not being registered, is already
barred by prescription and/or laches;

3.25 PNB opposed said Motion on the following grounds:

(a) The lien claimed by Noahs Ark in the unbelievable amount of P734,341,595.06
is illusory; and
(b) There is no legal basis for execution of defendants lien as warehouseman
unless and until PNB compels the delivery of the sugar stocks.
3.26 In their Reply to Opposition dated 18 January 1997, private respondents pointed out that a lien
existed in their favor, as held by the Supreme Court. In its Rejoinder dated 7 February 1997, PNB
countered private respondents argument, pointing out that the dispositive portion of the court a
quos Order dated 1 March 1995 failed to state the amount for which execution may be granted and,
thus, the same could not be the subject of execution; and (b) private respondents should instead file a
separate action to prove the amount of its claim as warehouseman.

(3) Assuming further that said lien has not been waived nor barred, still there was no
complaint ever filed in court to effectively commence this entirely new cause of
action;
(4) There is no evidence on record which would support and sustain the claim
of P734,341,595.06 which is excessive, oppressive and unconscionable;
(5) Said claim if executed would constitute unjust enrichment to the serious prejudice of
PNB and indirectly the Philippine Government, who innocently acquired the sugar
quedans through assignment of credit;
(6) In all respects, the decisions of both the Supreme Court and of the former Presiding
Judge of the trial court do not contain a specific determination and/or computation
of warehousemans lien, thus requiring first and foremost a fair hearing of PNBs

evidence, to include the true and standard industry rates on sugar storage fees,
which if computed at such standard rate of thirty centavos per kilogram per month,
shall result in the sum of about Three Hundred Thousand Pesos only.
3.31 In its Motion for Reconsideration, petitioner prayed for the following reliefs:
1. PNB be allowed in the meantime to exercise its basic right to present evidence in order to prove the
above allegations especially the true and reasonable storage fees which may be deducted from PNBs
judgment award of P39.1 Million, which storage fees if computed correctly in accordance with standard
sugar industry rates, would amount to only P300 Thousand Pesos, without however waiving or
abandoning its (PNBs) legal positions/contentions herein abovementioned.
2. The Order dated April 15, 1997 granting the Motion for Execution by defendant Noahs Ark be set
aside.
3. The execution proceedings already commenced by said sheriffs be nullified at whatever stage of
accomplishment.
A photocopy of petitioners Motion for Reconsideration with Urgent Prayer for Quashal of Writ of
Execution is attached hereto and made integral part hereof as Annex M.
3.32 Private respondents filed an Opposition with Motion for Partial Reconsideration dated 8 May
1997. Still discontented with the excessive and staggering amount awarded to them by the court a quo,
private respondents Motion for Partial Reconsideration sought additional and continuing storage fees
over and above what the court a quo had already unjustly awarded. A photocopy of private respondents
Opposition with Motion for Partial Reconsideration dated 8 May 1997 is attached hereto as Annex N.
3.32.1 Private respondents prayed for the further amount of P227,375,472.00 in storage fees from 1
February 1995 until 15 April 1997, the date of the questioned Order granting their Motion for Execution.
3.32.2 In the same manner, private respondents prayed for a continuing amount of P345,424.00 as daily
storage fees after 15 April 1997 until the total amount of the storage fees is satisfied.
3.33 On 19 May 1997, PNB filed its Reply with Opposition (To Defendants Opposition with Partial Motion
for Reconsideration), containing therein the following motions: (i) Supplemental Motion for
Reconsideration; (ii) Motion to Strike out the Testimony of Noahs Arks Accountant Last February 21,
1995; and (iii) Motion for the Issuance of a Writ of Execution in favor of PNB. In support of its pleading,
petitioner raised the following:
(1) Private respondents failed to pay the appropriate docket fees either for its principal
claim or for its additional claim, as said claims for warehousemans lien were not at
all mentioned in their answer to petitioners Complaint;
(2) The amount awarded by the court a quo was grossly and manifestly unreasonable,
excessive, and oppressive;
(3) It is the dispositive portion of the decision which shall be controlling in any execution
proceeding. If no specific award is stated in the dispositive portion, a writ of
execution supplying an amount not included in the dispositive portion of the
decision being executed is null and void;
(4) Private respondents failed to prove the existence of the sugar stocks in Noahs Arks
warehouses.Thus, private respondents claims are mere paper liens which cannot
be the subject of execution;

(5) The attendant circumstances, particularly Judge Ses Order of 1 March 1995 onwards,
were tainted with fraud and absence of due process, as PNB was not given a fair
opportunity to present its evidence on the matter of the warehousemans
lien. Thus, all orders prescinding thereform, including the questioned Order dated
15 April 1997, must perforce be set aside and the execution proceedings against
PNB be permanently stayed.
3.34 On 6 May 1997, petitioner also filed an Urgent Motion to Lift Garnishment of PNB Funds with
Bangko Sentral ng Pilipinas.
3.35 On 14 July 1997, respondent Judge issued the second Order (Annex B), the questioned part of the
dispositive portion of which states:
WHEREFORE, premises considered, the plaintiff Philippine National Banks subject Motion for
Reconsideration With Urgent Prayer for Quashal of Writ of Execution dated April 28, 1997 and undated
Urgent Motion to Lift Garnishment of PNB Funds With Bangko Sentral ng Pilipinas filed on May 6, 1997,
together with all its related Motions are all DENIED with finality for lack of merit.
xxxxxxxxx
The Order of this Court dated April 15, 1997, the final Writ of Execution likewise dated April 15, 1997 and
the corresponding Garnishment all stand firm.
SO ORDERED.[7]
Aggrieved thereby, petitioners filed this petition, alleging as grounds therefor, the following:
A. THE COURT A QUO ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR
WITH GRAVE ABUSE OF DISCRETION WHEN IT ISSUED A WRIT OF EXECUTION IN
FAVOR OF DEFENDANTS FOR THE AMOUNT OF P734,341,595.06.
4.1 The court a quo had no authority to issue a writ of execution in favor of private respondents
as there was no final and executory judgment ripe for execution.
4.2 Public respondent judge patently exceeded the scope of his authority in making a
determination of the amount of storage fees due private respondents in a mere interlocutory
order resolving private respondents Motion for Execution.
4.3 The manner in which the court a quo awarded storage fees in favor of private respondents
and ordered the execution of said award was arbitrary and capricious, depriving petitioner of its
inherent substantive and procedural rights.
B. EVEN ASSUMING ARGUENDO THAT THE COURT A QUO HAD AUTHORITY TO
GRANT PRIVATE RESPONDENTS MOTION FOR EXECUTION, THE COURT A
QUO ACTED WITH GRAVE ABUSE OF DISCRETION IN AWARDING THE HIGHLY
UNREASONABLE,
UNCONSCIONABLE,
AND
EXCESSIVE
AMOUNT
OF P734,341,595.06 IN FAVOR OF PRIVATE RESPONDENTS.
4.4 There is no basis for the court a quos award of P734,341,595.06 representing private
respondents alleged warehousemans lien.
4.5 PNB has sufficient evidence to show that the astronomical amount claimed by private
respondents is very much in excess of the industry rate for storage fees and preservation
expenses.

C. PUBLIC RESPONDENT JUDGES GRAVE ABUSE OF DISCRETION BECOMES

MORE PATENT AFTER A CLOSE PERUSAL OF THE QUESTIONED ORDER DATED 14
JULY 1997.
4.6 The court a quo resolved a significant and consequential matter entirely relying on documents
submitted by private respondents totally disregarding clearly contrary evidence submitted by
PNB.
4.7 The court a quo misquoted and misinterpreted the Supreme Court Decision dated 18 April
1997.
D. THE COURT A QUO ACTED WITH GRAVE ABUSE OF DISCRETION IN NOT
HOLDING THAT PRIVATE RESPONDENTS HAVE LONG WAIVED THEIR RIGHT TO
CLAIM ANY WAREHOUSEMANS LIEN.
4.8 Private respondents raised the matter of their entitlement to a warehousemans lien for
storage fees and preservation expenses for the first time only during the execution proceedings
of the Decision in favor of PNB.
4.9 Private respondents claim for warehousemans lien is in the nature of a compulsory
counterclaim which should have been included in private respondents answer to the
Complaint. Private respondents failed to include said claim in their answer either as a
counterclaim or as an alternative defense to PNBs Complaint.
4.10 Private respondents claim is likewise lost by virtue of a specific provision of the Warehouse
Receipts Law and barred by prescription and laches.
E. PUBLIC RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF DISCRETION IN
REFUSING TO LIFT THE ORDER OF GARNISHMENT OF THE FUNDS OF PNB WITH
THE BANGKO SENTRAL NG PILIPINAS.
4.11 Public respondent judge failed to consider PNBs arguments in support of its Urgent Motion
to Lift Garnishment.[8]
In arguing its cause, petitioner explained that this Courts decision in G.R. No. 119231 merely
affirmed the trial courts resolutions of 20 December 1994 and 1 March 1995. The earlier resolution set
private respondents reception of evidence for hearing to prove their warehousemans lien and, pending
determination thereof, deferred petitioners motion for execution of the summary judgment rendered in
petitioners favor in G.R. No. 107243. The subsequent resolution recognized the existence of a valid
warehousemans lien without, however, specifying the amount, and required its full satisfaction by
petitioner prior to the execution of the judgment in G.R. No. 107243.
Under said circumstances, petitioner reiterated that neither this Courts decision nor the trial
courts resolutions specified any amount for the warehousemans lien, either in the bodies or dispositive
portions thereof. Petitioner therefore questioned the propriety of the computation of the warehousemans
lien in the assailed order of 15 April 1997.
Petitioner further characterized as highly irregular the trial courts final determination of such lien
in a mere interlocutory order without explanation, as such should or could have been done only by way
of a judgment on the merits. Petitioner likewise reasoned that a writ of execution was proper only to
implement a final and executory decision, which was not present in the instant case. Petitioner then cited
the cases of Edward v. Arce, where we ruled that the only portion of the decision which could be the
subject of execution was that decreed in the dispositive part, [9] and Ex-Bataan Veterans Security Agency,
Inc. v. National Labor Relations Commission, [10] where we held that a writ of execution should conform to
the dispositive portion to be executed, otherwise, execution becomes void if in excess of and beyond the
original judgment.
Petitioner likewise emphasized that the hearing of 21 February 1995 was marred by procedural
infirmities, narrating that the trial court proceeded with the hearing notwithstanding the urgent motion for
postponement of petitioners counsel of record, who attended a previously scheduled hearing in

Pampanga. However, petitioners lawyer-representative was sent to confirm the allegations in said
motion. To petitioners dismay, instead of granting a postponement, the trial court allowed the
continuance of the hearing on the basis that there was nothing sensitive about [the presentation of
private respondents evidence].[11] At the same hearing, the trial court admitted all the documentary
evidence offered by private respondents and ordered the filing of the parties respective memoranda.
Hence, petitioner was virtually deprived of its right to cross-examine the witness, comment on or object
to the offer of evidence and present countervailing evidence. In fact, to date, petitioners urgent motion to
nullify the court proceedings remains unresolved.
To stress its point, petitioner underscores the conflicting views of Judge Benito C. Se, Jr., who
heard and tried almost the entire proceedings, and his successor, Judge Marcelino L. Sayo, Jr., who
issued the assailed orders. In the resolution [12] of 1 March 1995, Judge Se found private respondents
claim for warehouse lien in the amount of P734,341,595.06 unacceptable, thus:
In connection with [private respondents] claim for payment of warehousing fees and expenses, this
Court cannot accept [private respondents] pretense that they are entitled to storage fees and
preservation expenses in the amount of P734,341,595.06 as shown in their Exhibits 1 to 11. There
would, however, appear to be legal basis for their claim for fees and expenses covered during the period
from the time of the issuance of the five (5) quedans until demand for their delivery was made by
[petitioner] prior to the institution of the present action. [Petitioner] should not be made to shoulder the
warehousing fees and expenses after the demand was made. xxx [13]
Since it was deprived of a fair opportunity to present its evidence on the warehousemans lien due
Noahs Ark, petitioner submitted the following documents: (1) an affidavit of petitioners credit
investigator[14] and his report[15] indicating that Noahs Ark only had 1,490 50kg. bags, and not 86,356.41
50kg. bags, of sugar in its warehouse; (2) Noahs Arks reports [16] for 1990-94 showing that it did not have
sufficient sugar stock to cover the quantity specified in the subject quedans; (3) Circular Letter No. 18 (s.
1987-88)[17] of the Sugar Regulatory Administration requiring sugar mill companies to submit reports at
weeks end to prevent the issuance of warehouse receipts not covered by actual inventory; and (4) an
affidavit of petitioners assistant vice president [18]alleging that Noahs Arks daily storage fee of P4/bag
exceeded the prevailing industry rate.
Petitioner, moreover, laid stress on the fact that in the questioned order of 14 July 1997, the trial
court relied solely on the Annual Synopsis of Production & Performance Date/Annual Compendium of
Performance by Philippine Sugar Refineries from 1989 to 1994, in disregard of Noahs Arks certified
reports that it did not have sufficient sugar stock to cover the quantity specified in the
subject quedans. Between the two, petitioner urged, the latter should have been accorded greater
evidentiary weight.
Petitioner then argued that the trial courts second assailed order of 14 July 1997 misinterpreted
our decision in G.R. No. 119231 by ruling that the Refining Contract under which the subject sugar stock
was produced bound the parties. According to petitioner, the Refining Contract never existed, it having
been denied by Rosa Ng Sy; thus, the trial court could not have properly based its computation of the
warehousemans lien on the Refining Contract. Petitioner maintained that a separate trial was necessary
to settle the issue of the warehousemans lien due Noahs Ark, if at all proper.
Petitioner further asserted that Noahs Ark could no longer recover its lien, having raised the issue
for the first time only during the execution proceedings of this Courts decision in G.R. No. 107243. As
said claim was a separate cause of action which should have been raised in private respondents answer
with counterclaim to petitioners complaint, private respondents failure to raise said claim should have
been deemed a waiver thereof.
Petitioner likewise insisted that under Section 29 [19] of the Warehouse Receipts Law, private
respondents were barred from claiming the warehousemans lien due to their refusal to deliver the goods
upon petitioners demand. Petitioner further raised that private respondents failed to timely assert their
claim within the five-year prescriptive period, citing Article 1149 [20] of the New Civil Code.
Finally, petitioner questioned the trial courts refusal to lift the garnishment order considering that
the levy on its real property, with an estimated market value of P6,000,000,000, was sufficient to satisfy
the judgment award; and contended that the garnishment was contrary to Section 103 [21] of the Bangko
Sentral ng Pilipinas Law (Republic Act No. 7653).
On 8 August 1997, we required respondents to comment on the petition and issued a temporary
restraining order enjoining the trial court from implementing its orders of 15 April and 14 July 1997.

In their comment, private respondents first sought the lifting of the temporary restraining order,
claiming that petitioner could no longer seek a stay of the execution of this Courts decision in G.R. No.
119231 which had become final and executory; and the petition raised factual issues which had long
been resolved in the decision in G.R. No. 119231, thereby rendering the instant petition moot and
academic. They underscored that CA-G.R. No. SP No. 25938, G.R. No. 107243 and G.R. No. 119231 all
sustained their claim for a warehousemans lien, while the storage fees stipulated in the Refining
Contract had the approval of the Sugar Regulatory Authority.Likewise, under the Warehouse Receipts
Law, full payment of their lien was a pre-requisite to their obligation to release and deliver the sugar
stock to petitioner.
Anent the trial courts jurisdiction to determine the warehousemans lien, private respondents
maintained that such had already been established. Accordingly, the resolution of 1 March 1995
declared that they were entitled to a warehousemans lien, for which reason, the execution of the
judgment in favor of petitioner was stayed until the latters full payment of the lien. This resolution was
then affirmed by this Court in our decision in G.R. No. 119231. Even assuming the trial court erred, the
error could only have been in the wisdom of its findings and not of jurisdiction, in which case, the proper
remedy of petitioner should have been an appeal and certiorari did not lie.
Private respondents also raised the issue of res judicata as a bar to the instant petition, i.e., the
March resolution was already final and unappealable, having been resolved in G.R. No. 119231, and the
orders assailed here were issued merely to implement said resolution.
Private respondents then debunked the claim that petitioner was denied due process. In that
February hearing, petitioner was represented by counsel who failed to object to the presentation and
offer of their evidence consisting of the five quedans, Refining Contracts with petitioner and
other quedan holders, and the computation resulting in the amount of P734,341,595.06, among other
documents. Private respondents even attached a copy of the transcript of stenographic notes [22] to their
comment. In refuting petitioners argument that no writ of execution could issue in absence of a specific
amount in the dispositive portion of this Courts decision in G.R. No. 119231, private respondents argued
that any ambiguity in the decision could be resolved by referring to the entire record of the case, [23] even
after the decision had become final.
Private respondents next alleged that the award of P734,341,595.06 to satisfy their
warehousemans lien was in accordance with the stipulations provided in the quedans and the
corresponding Refining Contracts, and that the validity of said documents had been recognized by this
Court in our decision in G.R. No. 119231. Private respondents then questioned petitioners failure to
oppose or rebut the evidence they presented and bewailed its belated attempts to present contrary
evidence through its pleadings. Nonetheless, said evidence was even considered by the trial court when
petitioner sought a reconsideration of the first assailed order of 15 April 1997, thus further precluding any
claim of denial of due process.
Private respondents next pointed to the fact that they consistently claimed that they had not been
paid for storing the sugar stock, which prompted them to file criminal charges of estafa and violation of
Batas Pambansa (BP) Blg. 22 against Rosa Ng Sy and Teresita Ng. In fact, Sy was eventually convicted
of two counts of violation of BP Blg. 22. Private respondents, moreover, incurred, and continue to incur,
expenses for the storage and preservation of the sugar stock; and denied having waived their
warehousemans lien, an issue already raised and rejected by this Court in G.R. No. 119231.
Private respondents further claimed that the garnishment order was proper, only that it was
rendered ineffective. In a letter[24] received by the sheriff from the Bangko Sentral ng Pilipinas, it was
stated that thegarnishment could not be enforced since petitioners deposits with the Bangko Sentral ng
Pilipinas consisted solely of legal reserves which were exempt from garnishment. Petitioner therefore
suffered no damage from said garnishment. Private respondents likewise deemed immaterial petitioners
argument that the writ of execution issued against its real property in Pasay City was sufficient,
considering its prevailing market value ofP6,000,000,000 was in excess of the warehousemans lien; and
invoked Rule 39 of the 1997 Rules of Civil Procedure, which provided that the sheriff must levy on all the
property of the judgment debtor, excluding those exempt from execution, in the execution of a money
judgment.
Finally, private respondents accused petitioner of coming to court with unclean hands, specifically
citing its misrepresentation that the award of the warehousemans lien would result in the collapse of its
business. This claim, private respondents asserted, was contradicted by petitioners 1996 Audited
Financial Statement indicating that petitioners assets amounted to billions of pesos, and its 1996 Annual
Report to its stockholders where petitioner declared that the pending legal actions arising from their
normal course of business will not materially affect the Groups financial position. [25]

In reply, petitioner advocated that resort to the remedy of certiorari was proper since the assailed
orders were interlocutory, and not a final judgment or decision. Further, that it was virtually deprived of its
constitutional right to due process was a valid issue to raise in the instant petition; and not even the
doctrine of res judicatacould bar this petition as the element of a final and executory judgment was
lacking. Petitioner likewise disputed the claim that the resolution of 1 March 1995 was final and
executory, otherwise private respondents would not have filed an opposition and motion for partial
reconsideration[26] two years later. Petitioner also contended that the issues raised in this petition were
not resolved in G.R. No. 119231, as what was resolved there was private respondents mere entitlement
to a warehousemans lien, without specifying a corresponding amount. In the instant petition, the issues
pertained to the amount and enforceability of said lien based on the arbitrary manner the amount was
determined by the trial court.
Petitioner further argued that the refining contracts private respondents invoked could not bind
the former since it was not a party thereto. In fact, said contracts were not even attached to
the quedans when negotiated; and that their validity was repudiated by a supposed party thereto, Rosa
Ng Sy, who claimed that the contract was simulated, thus void pursuant to Article 1345 of the New Civil
Code. Should the refining contracts in turn be declared void, petitioner advocated that any determination
by the court of the existence and amount of the warehousemans lien due should be arrived at using the
test of reasonableness. Petitioner likewise noted that the other refining contracts [27] presented by private
respondents to show similar storage fees were executed between the years 1996 and 1997, several
years after 1989. Thus, petitioner concluded, private respondents could not claim that the more recent
and increased rates where those which prevailed in 1989.
Finally, petitioner asserted that in the event that this Court should uphold the trial courts
determination of the amount of the warehousemans lien, petitioner should be allowed to exercise its
option as a judgment obligor to specify which of its properties may be levied upon, citing Section 9(b),
Rule 39 of the 1997 Rules of Civil Procedure. Petitioner claimed to have been deprived of this option
when the trial court issued the garnishment and levy orders.
The petition was set for oral argument on 24 November 1997 where the parties addressed the
following issues we formulated for them to discuss:
(1) Is this special civil action the appropriate remedy?
(2) Has the trial court the authority to issue a writ of execution on Noahs Arks claims for storage fees
considering that this Court in G.R. No. 119231 merely sustained the trial courts order of 20 December
1994 granting the Noahs Ark Omnibus Motion and setting the reception of evidence on its claims for
storage fees, and of 1 March 1995 finding that there existed in favor of Noahs Ark a warehousemans lien
under Section 27 of R.A. No. 2137 and directing that the execution of the judgment in favor of PNB be
stayed and/or precluded until the full amount of Noahs Arks lien is satisfied conformably with Section 31
of R.A. No. 2137?
(3) Is [petitioner] liable for storage fees (a) from the issuance of the quedans in 1989 to Rosa Sy, St.
Therese Merchandising and RNS Merchandising, up to their assignment by endorsees Ramos and
Zoleta to [petitioner] for their loan; or (b) after [petitioner] has filed an action for specific performance and
damages (Civil Case No. 90-53023) against Noahs Ark for the latters failure to comply with [petitioners]
demand for the delivery of the sugar?
(4) Did respondent Judge commit grave abuse of discretion as charged? [28]
In our resolution of 24 November 1997, we summarized the positions of the parties on these
issues, thus:
Expectedly, counsel for petitioner submitted that certiorari under Rule 65 of the Rules of Court is the
proper remedy and not an ordinary appeal, contending, among others, that the order of execution was
not final. On the other hand, counsel for respondents maintained that petitioner PNB disregarded the
hierarchy of courts as it bypassed the Court of Appeals when it filed the instant petition before this Court.
On the second issue, counsel for petitioner submitted that the trial court had no authority to issue the writ
of execution or if it had, it denied PNB due process when it held PNB liable for the astronomical amount
ofP734,341,595.06 as warehousemans lien or storage fees. Counsel for respondent, on the other hand,
contended that the trial courts authority to issue the questioned writ of execution is derived from the

decision in G.R. No. 119231 which decision allegedly provided for ample or sufficient parameters for the
computation of the storage fees.
On the third issue, counsel for petitioner while presupposing that PNB may be held to answer for storage
fees, contended that the same should start from the time the endorsees of the sugar quedans defaulted
in their payments, i.e., 1990 because before that, respondent Noahs Arks claim was that it was the
owner of the sugar covered by the quedans. On the other hand, respondents counsel pointed out that
PNBs liability should start from the issuance of the quedans in 1989.
The arguments on the fourth issue, hinge on the parties arguments for or against the first three
issues. Counsel for petitioner stressed that the trial court indeed committed a grave abuse of discretion,
while respondents counsel insisted that no grave abuse of discretion was committed by the trial court. [29]
Private respondents likewise admitted that during the pendency of the case, they failed to avail of
their options as a warehouseman. Concretely, they could have enforced their lien through the
foreclosure of the goods or the filing of an ordinary civil action. Instead, they sought to execute this
Courts judgment in G.R. No. 119231. They eventually agreed that petitioners liability for the
warehousemans lien should be reckoned from the time it stepped into the shoes of the original
depositors.[30]
In our resolution of 24 November 1997, we required the parties to simultaneously submit their
respective memoranda within 30 days or, in the alternative, a compromise agreement should a
settlement be achieved. Notwithstanding efforts exerted by the parties, no mutually acceptable solution
was reached.
In their respective memoranda, the parties reiterated or otherwise buttressed the arguments
raised in their previous pleadings and during the oral arguments on 24 November 1997, especially on
the formulated issues.
The petition is meritorious.
We shall take up the formulated issues in seriatim.
A. This Special Civil Action is an Appropriate Remedy.
A careful perusal of the first assailed order shows that the trial court not only granted the motion
for execution, but also appreciated the evidence in the determination of the warehousemans lien;
formulated its computation of the lien; and adopted an offsetting of the parties claims. Ineluctably, the
order as in the nature of a final order for it left nothing else to be resolved thereafter. Hence, petitioners
remedy was to appeal therefrom.[31] Nevertheless, petitioner was not precluded from availing of the
extraordinary remedy of certiorari under Rule 65 of the Rules of Court. It is well-settled that the
availability of an appeal does not foreclose recourse to the extraordinary remedies of certiorari or
prohibition where appeal is not adequate, or equally beneficial, speedy and sufficient. [32]
Petitioner assailed the challenged orders as having been issued without or in excess of
jurisdiction or with grave abuse of discretion and alleged that it had no other plain, speedy and adequate
remedy in the ordinary course of law. As hereafter shown, these claims were not unfounded, thus the
propriety of this special civil action is beyond question.
This Court has original jurisdiction, concurrent with that of Regional Trial Courts and the Court of
Appeals, over petitions for certiorari, prohibition, mandamus, quo warranto and habeas corpus,[33] and
we entertain direct resort to us in cases where special and important reasons or exceptional and
compelling circumstances justify the same.[34] These reasons and circumstances are present here.
B. Under the Special Circumstances in This Case, Private Respondents May Enforce
Their Warehousemans Lien in Civil Case No. 90-53023.
The remedies available to a warehouseman, such as private respondents, to enforce his
warehousemans lien are:
(1)To refuse to deliver the goods until his lien is satisfied, pursuant to Section 31 of the
Warehouse Receipt Law;
(2) To sell the goods and apply the proceeds thereof to the value of the lien pursuant to
Sections 33 and 34 of the Warehouse Receipts Law; and

(3) By other means allowed by law to a creditor against his debtor, for the collection from
the depositor of all charges and advances which the depositor expressly or impliedly
contracted with the warehouseman to pay under Section 32 of the Warehouse
Receipt Law; or such other remedies allowed by law for the enforcement of a lien
against personal property under Section 35 of said law. The third remedy is sought
judicially by suing for the unpaid charges.[35]
Initially, private respondents availed of the first remedy. However, when petitioner moved to
execute the judgment in G.R. No. 107243 before the trial court, private respondents, in turn, moved to
have the warehouse charges and fees due them determined and thereafter sought to collect these from
petitioners. While the most appropriate remedy for private respondents was an action for collection, in
G.R. No. 119231, we alreadyrecognized their right to have such charges and fees determined in Civil
Case No. 90-53023. The import of our holding in G.R. No. 119231 was that private respondents were
likewise entitled to a judgment on their warehouse charges and fees, and the eventual satisfaction
thereof, thereby avoiding having to file another action to recover these charges and fees, which would
only have further delayed the resolution of the respective claims of the parties, and as a corollary
thereto, the indefinite deferment of the execution of the judgment in G.R. No. 107243. Thus we note that
petitioner, in fact, already acquiesced to the scheduled dates previously set for the hearing on private
respondents warehousemans charges.
However, as will be shown below, it would be premature to execute the order fixing the
warehousemans charges and fees.
C. Petitioner is Liable for Storage Fees.
We confirmed petitioners liability for storage fees in G.R. No. 119231. However, petitioners status
as to thequedans must first be clearly defined and delineated to be able to determine the extent of its
liability.
Petitioner insisted, both in its petition and during the oral arguments on 24 November 1997, that it
was a mere pledgee as the quedans were used to secure two loans it granted. [36] In our decision in G.R.
No. 107243, we upheld this contention of petitioner, thus:
Zoleta and Ramos then used the quedans as security for loans obtained by them from the
Philippine National Bank (PNB) as security for loans obtained by them in the amounts of P23.5
million and P15.6 million, respectively. These quedans they indorsed to the bank.[37]
As such, Martinez v. Philippine National Bank[38] becomes relevant:
In conclusion, we hold that where a warehouse receipt or quedan is transferred or endorsed to a creditor
only to secure the payment of a loan or debt, the transferee or endorsee does not automatically become
the owner of the goods covered by the warehouse receipt or quedan but he merely retains the right to
keep and with the consent of the owner to sell them so as to satisfy the obligation from the proceeds of
the sale, this for the simple reason that the transaction involved is not a sale but only a mortgage or
pledge, and that if the property covered by the quedans or warehouse receipts is lost without the fault or
negligence of the mortgagee or pledgee or the transferee or endorsee of the warehouse receipt or
quedan, then said goods are to be regarded as lost on account of the real owner, mortgagor or pledgor.
The indorsement and delivery of the warehouse receipts (quedans) by Ramos and Zoleta to
petitioner was not to convey title to or ownership of the goods but to secure (by way of pledge) the loans
granted to Ramos and Zoleta by petitioner. The indorsement of the warehouse receipts (quedans), to
perfect the pledge,[39] merely constituted a symbolical or constructive delivery of the possession of the
thing thus encumbered.[40]
The creditor, in a contract of real security, like pledge, cannot appropriate without foreclosure the
things given by way of pledge. [41] Any stipulation to the contrary, termed pactum commissorio, is null and
[42]
void. The law requires foreclosure in order to allow a transfer of title of the good given by way of
security from its pledgor,[43] and before any such foreclosure, the pledgor, not the pledgee, is the owner
of the goods. In Philippine National Bank v. Atendido,[44] we said:
The delivery of the palay being merely by way of security, it follows that by the nature of the transaction
its ownership remains with the pledgor subject only to foreclosure in case of non-fulfillment of the
obligation. By this we mean that if the obligation is not paid upon maturity the most that the pledgee can
do is to sell the property and apply the proceeds to the payment of the obligation and to return the

balance, if any, to the pledgor (Art. 1872, Old Civil Code [Art. 2112, New Civil Code]). This is the
essence of this contract, for, according to law, a pledgee cannot become the owner of, nor appropriate to
himself, the thing given in pledge (Article 1859, Old Civil Code [Art. 2088, New Civil Code]) The fact that
the warehouse receipt covering palay was delivered, endorsed in blank, to the bank does not alter the
situation, the purpose of such endorsement being merely to transfer the juridical possession of the
property to the pledgees and to forestall any possible disposition thereof on the part of the pledgor. This
is true notwithstanding the provisions of the Warehouse Receipt Law.
The warehouseman, nevertheless, is entitled to the warehousemans lien that attaches to the
goods invokable against anyone who claims a right of possession thereon.

(3) That the warehouseman has legally set up the title or right of third persons as lawful
defense for non-delivery of the goods as follows:
(a) Where the warehouseman has been requested, by or on behalf of the person lawfully entitled to a
right of property of or possession in the goods, not to make such delivery (Sec. 10, Act No. 2137), in
which case, the warehouseman may, either as a defense to an action brought against him for
nondelivery of the goods, or as an original suit, whichever is appropriate, require all known claimants to
interplead (Sec. 17, Act No. 2137);

Sections 8, 29 and 31 of the Warehouse Receipts Law now come to fore. They provide, as
follows:

(b) Where the warehouseman had information that the delivery about to be made was to one not lawfully
entitled to the possession of the goods (Sec. 10, Act No. 2137), in which case, the warehouseman shall
be excused from liability for refusing to deliver the goods, either to the depositor or person claiming
under him or to the adverse claimant, until the warehouseman has had a reasonable time to ascertain
the validity of the adverse claims or to bring legal proceedings to compel all claimants to interplead (Sec.
18, Act No. 2137); and

SECTION 8. Obligation of warehousemen to deliver. A warehouseman, in the absence of some lawful

excuse provided by this Act, is bound to deliver the goods upon a demand made either by the holder of a
receipt for the goods or by the depositor, if such demand is accompanied with:

(c) Where the goods have already been lawfully sold to third persons to satisfy a warehousemans lien,
or have been lawfully sold or disposed of because of their perishable or hazardous nature. (Sec. 36, Act
No. 2137).

(a) An offer to satisfy warehousemans lien;

(4) That the warehouseman having a lien valid against the person demanding the goods refuses to
deliver the goods to him until the lien is satisfied. (Sec. 31, Act No. 2137)

The next issue to resolve is the duration of time the right of petitioner over the goods may be held
subject to the warehousemans lien.

(b) An offer to surrender the receipt, if negotiable, with such indorsements as would
be necessary for the negotiation of the receipt; and
(c) A readiness and willingness to sign, when the goods are delivered, an
acknowledgment that they have been delivered, if such signature is
requested by the warehouseman.
In case the warehouseman refuses or fails to deliver the goods in compliance with a demand by the
holder or depositor so accompanied, the burden shall be upon the warehouseman to establish the
existence of a lawful excuse for such refusal.
SECTION 29. How the lien may be lost. A warehouseman loses his lien upon goods;
(a) By surrendering possession thereof, or
(b) By refusing to deliver the goods when a demand is made with which he is bound to
comply under the provisions of this Act.
SECTION 31. Warehouseman need not deliver until lien is satisfied. A warehouseman having a lien valid
against the person demanding the goods may refuse to deliver the goods to him until the lien is satisfied.
Simply put, where a valid demand by the lawful holder of the quedans for the delivery of the
goods is refused by the warehouseman, despite the absence of a lawful excuse provided by the statute
itself, the warehousemans lien is thereafter concomitantly lost. As to what the law deems a valid
demand, Section 8 enumerates what must accompany a demand; while as regards the reasons which a
warehouseman may invoke to legally refuse to effect delivery of the goods covered by the quedans,
these are:
(1) That the holder of the receipt does not satisfy the conditions prescribed in Section 8 of
the Act. (See Sec. 8, Act No. 2137)
(2) That the warehouseman has legal title in himself on the goods, such title or right being
derived directly or indirectly from a transfer made by the depositor at the time of or subsequent to
the deposit for storage, or from the warehousemans lien. (Sec. 16, Act No. 2137)

(5) That the failure was not due to any fault on the part of the warehouseman, as by showing that, prior
to demand for delivery and refusal, the goods were stolen or destroyed by fire, flood, etc., without any
negligence on his part, unless he has contracted so as to be liable in such case, or that the goods have
been taken by the mistake of a third person without the knowledge or implied assent of the
warehouseman, or some other justifiable ground for non-delivery. (67 C.J. 532)[45]
Regrettably, the factual settings do not sufficiently indicate whether the demand to obtain
possession of the goods complied with Section 8 of the law. The presumption, nevertheless, would be
that the law was complied with, rather than breached, by petitioner. Upon the other hand, it would
appear that the refusal of private respondents to deliver the goods was not anchored on a valid
excuse, i.e., non-satisfaction of the warehousemans lien over the goods, but on an adverse claim of
ownership. Private respondents justified their refusal to deliver the goods, as stated in their Answer with
Counterclaim and Third-Party Complaint in Civil Case No. 90-53023, by claiming that they are still the
legal owners of the subject quedans and the quantity of sugar represented therein. Under the
circumstances, this hardly qualified as a valid, legal excuse. The loss of the warehousemans lien,
however, does not necessarily mean the extinguishment of the obligation to pay the warehousing fees
and charges which continues to be a personal liability of the owners, i.e., the pledgors, not the pledgee,
in this case. But even as to the owners-pledgors, the warehouseman fees and charges have ceased to
accrue from the date of the rejection by Noahs Ark to heed the lawful demand by petitioner for the
release of the goods.
The finality of our denial in G.R. No. 119231 of petitioners petition to nullify the trial courts order of
01 March 1995 confirms the warehousemans lien; however, such lien, nevertheless, should be confined
to the fees and charges as of the date in March 1990 when Noahs Ark refused to heed PNBs demand
for delivery of the sugar stocks and in no event beyond the value of the credit in favor of the pledgee
(since it is basic that, in foreclosures, the buyer does not assume the obligations of the pledgor to his
other creditors even while such buyer acquires title over the goods less any existing preferred lien
thereover).[46] The foreclosure of the thing pledged, it might incidentally be mentioned, results in the full
satisfaction of the loan liabilities to the pledgee of the pledgors. [47]
D. Respondent Judge Committed Grave Abuse of Discretion.
We hold that the trial court deprived petitioner of due process in rendering the challenged order of
15 April 1996 without giving petitioner an opportunity to present its evidence. During the final hearing of
the case, private respondents commenced and concluded their presentation of evidence as to the matter
of the existence of and amount owing due to their warehousemans lien. Their exhibits were duly marked
and offered, and the trial court thereafter ruled, to wit:
Court: Order.

With the admission of Exhibits 1 to 11, inclusive of submarkings, as part of the testimony of Benigno
Bautista, the defendant [private respondents] is given five (5) days from today to file its
memorandum. Likewise, plaintiff [petitioner] is given five (5) days, from receipt of defendants [private
respondents] memorandum, to file its comment thereto. Thereafter the same shall be deemed submitted
for decision.
SO ORDERED.[48]
Nowhere in the transcript of stenographic notes, however, does it show that petitioner was
afforded an opportunity to comment on, much less, object to, private respondents offer of exhibits, or
even present its evidence on the matter in dispute. In fact, petitioner immediately moved to nullify the
proceedings conducted during that hearing, but its motion was ignored and never resolved by the trial
court. Moreover, it cannot be said that petitioners filing of subsequent pleadings, where it attached its
affidavits and documents to contest the warehousemans lien, was sufficient to fully satisfy the
requirements of due process. The subsequent pleadings were filed only to show that petitioner had
evidence to refute the claims of private respondents or that the latter were not entitled thereto, but could
not have adequately substituted for a full-blown opportunity to present its evidence, given the exorbitant
amounts involved. This, when coupled with the fact that the motion to postpone the hearing filed by
petitioners counsel was not unreasonable, leads us to conclude that petitioners right to fully present its
case was rendered nugatory. It is thus evident to us that there was undue and unwarranted haste on the
part of respondent court to rule in favor of private respondents. We do not hesitate to say that any tilt of
the scales of justice, no matter how slight, evokes suspicion and erodes a litigants faith and hope in
seeking recourse before courts of law.
Likewise do we refuse to give credence to private respondents allegation that the parties agreed
that petitioners presentation of evidence would be submitted on the basis of affidavits, [49] without,
however, specifying any order or written agreement to that effect.
It is interesting to note that among the evidence petitioner wanted to present were reports
obtained from Noahs Ark, disclosing that the latter failed to maintain a sufficient inventory to satisfy the
sugar stock covered by the subject quedans. This was a serious allegation, and on that score alone, the
trial court should have allowed a hearing on the matter, especially in light of the magnitude of the claims
sought. If it turns out to be true that the stock of sugar Noahs Ark had in possession was below the

quantities specified in the quedans, then petitioner should not be made to pay for storage and
preservation expenses for non-existent goods.
It was likewise grave abuse of discretion on the part of respondent court to order immediate
execution of the 15 April 1997 order. We ruled earlier that said order was in the nature of a final order
fixing the amount of the warehousemans charges and fees, and petitioners net liability, after the set-off
of the money judgment in its favor in G.R. No. 107243. Section 1 of Rule 39 of the Rules of Court
explicitly provides that execution shall issue as a matter of right, on motion, upon a judgment or order
that disposes of the action or proceeding upon the expiration of the period to appeal therefrom if no
appeal has been duly perfected. Execution pending appeal is, however, allowed in Section 2 thereof, but
only on motion with due notice to the adverse party, more importantly, only upon good reasons shown in
a special order. Here, there is no showing that a motion for execution pending appeal was filed and that
a special order was issued by respondent court. Verily, the immediate execution only served to further
strengthen our perception of undue and unwarranted haste on the part of respondent court in resolving
the issue of the warehousemans lien in favor of private respondents.
In light of the above, we need not rule anymore on the fourth formulated issue.
WHEREFORE, the petition is GRANTED. The challenged orders of 15 April and 14 July 1997,
including the notices of levy and garnishment, of the Regional Trial Court of Manila, Branch 45, in Civil
Case No. 90-53023 are REVERSED and SET ASIDE, and said court is DIRECTED to conduct further
proceedings in said case:
(1) to allow petitioner to present its evidence on the matter of the warehousemans lien;
(2) to compute the petitioners warehousemans lien in light of the foregoing observations;
and
(3) to determine whether, for the relevant period, Noahs Ark maintained a sufficient
inventory to cover the volume of sugar specified in the quedans.
Costs against private respondents.
SO ORDERED.