1. SECURITY BANK AND TRUST COMPANY, Inc. vs. RODOLFO M.

CUENCA
DOCTRINE:
An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the
guaranty. 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
Agreeement, which had alledgedly 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.
An essential alteration in the terms of a Loan Agreement without the consent of the surety extinguishes the
latters obligation. The submission that only the borrower, not the surety, is entitled to be notified of any
modification in the original loan accommodation is untenable-such theory is contrary to the to the principle
that a surety cannot assume an obligation more onerous than that of the principal. That the Indemnity
Agreement is a continuing surety does not authorize the lender to extend the scope of the principal obligation
inordinately; A continuing guaranty is one which covers all transaction, including those arising in the future,
which are within the description or contemplation of the contract of guaranty, until the expiration or
termination thereof.
FACTS:
Security Bank granted a credit line in the amount of 8 million pesos in favour of Sta. Ines, a corporation
engaged in logging operations and in which Rodolfo Cuenca is the President. In order to secure payment,
Sta. Ines executed a chattel mortgage over some of its machineries and equipments and as an additional
security Cuenca executed an Indemnity Agreement where he bound himself jointly and severally with Sta.
Ines and without the benefit of excussion of whatever amount the client may be indebted to the bank by
virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases,
amendments, conversions and revivals of the aforesaid credit accommodation(s). After Cuenca resigned, Sta.
Ines was able to obtained a loan of 6 million pesos, but was unable to pay the amortization payments and
requested Security Bank a complete restructure of its indebtedness which was approved and without prior
notice to or consent of Cuenca. Despite that Sta. Ines was still unable to pay. As a result Security Bank made
failed attempts to demand from Sta. Ines and Cuenca the fulfillment of their obligation, thus a complaint was
filed and a decision in favour of Security Bank was rendered which held Cuenca liable. On appeal, Cuenca
contends that the original agreement of 8 million loan was extinguished by novation when the obligation
under the 6 million loan and subsequent restructuring was granted.
ISSUE:
Whether Cuenca is liable as a surety to the 6 million loan under the Indemnity Agreement?
HELD:
NO. The Indemnity Agreement is a continuing surety and as such does not authorize the bank to extend the
scope of the principal obligation inordinately. A surety 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.
2. Medel v. CA
Doctrine:
A CB Circular cannot repeal a law. Only a law can repeal another law. Jurisprudence provides that CB Circular
did not repeal nor in a way amend the Usury Law but simply suspended the latters effectivity (Security Bank
and Trust Co vs RTC). Usury has been legally non-existent in our jurisdiction. Interest can now be charged as
lender and borrower may agree upon.
Law: Article 2227, Civil Code
The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they
are iniquitous or unconscionable.
Note: While the Usury Law ceiling on interest rates was lifted by the CB Circular 905, nothing in the said
circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels
which would either enslave their borrowers or lead to a haemorrhaging of their assets (Almeda vs. CA, 256
SCRA 292 [1996]).
Facts:
Defendants obtained a loan from Plaintiff in the amount P50, 000.00, payable in 2 months and executed a
promissory note. Plaintiff gave only the amount of P47, 000.00 to the borrowers and retained P3, 000.00 as
advance interest for 1 month at 6% per month.
Defendants obtained another loan from Defendant in the amount of P90, 000.00, payable in 2 months, at 6%

interest per month. They executed a promissory note to evidence the loan and received only P84, 000.00 out
of the proceeds of the loan.
For the third time, Defendants secured from Plaintiff another loan in the amount of P300, 000.00, maturing
in 1 month, and secured by a real estate mortgage. They executed a promissory note in favor of the Plaintiff.
However, only the sum of P275, 000.00, was given to them out of the proceeds of the loan. Upon maturity of
the three promissory notes, Defendants failed to pay the indebtedness. Defendants consolidated all their
previous unpaid loans totalling P440, 000.00, and sought from Plaintiff another loan in the amount of P60,
000.00, bringing their indebtedness to a total of P50,000.00. They executed another promissory note in favor
of Plaintiff to pay the sum of P500, 000.00 with a 5.5% interest per month plus 2% service charge per
annum, with an additional amount of 1% per month as penalty charges.
On maturity of the loan, the Defendants failed to pay the indebtedness which prompt the Plaintiffs to file with
the RTC a complaint for collection of the full amount of the loan including interests and other charges.
Declaring that the due execution and genuineness of the four promissory notes has been duly proved, the
RTC ruled that although the Usury Law had been repealed, the interest charged on the loans was
unconscionable and revolting to the conscience and ordered the payment of the amount of the first 3 loans
with a 12% interest per annum and 1% per month as penalty.
On appeal, Plaintiff-appellants argued that the promissory note, which consolidated all the unpaid loans of
the defendants, is the law that governs the parties. The Court of Appeals ruled in favor of the Plaintiffappellants on the ground that the Usury Law has become legally inexistent with the promulgation by the
Central Bank in 1982 of Circular No. 905, the lender and the borrower could agree on any interest that may
be charged on the loan, and ordered the Defendants to pay the Plaintiffs the sum of P500,000, plus 5.5% per
month interest and 2& service charge per annum , and 1% per month as penalty charges.
Defendants filed the present case via petition for review on certiorari.
Issue: WON the stipulated 5.5% interest rate per month on the loan in the sum of P500, 000.00 is usurious.
Held:
No. A stipulated rate of interest at 5.5% per month on the P500, 000.00 loan is excessive, iniquitous,
unconscionable and exorbitant, but it cannot be considered usurious because Central Bank Circular No. 905
has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now
legally inexistent.
3. Republic vs Bagtas
Doctrine:
Commodatum is essentially gratuitous. If there is compensation, then it shall be treated as a lease. Lessee is
liable as possessor in bad faith because the period already lapsed. Even if this is a commodatum, the bailee
is still liable for the loss of the thing, even if it should be through a fortuitous event, as provided in Art. 1942
of the Civil Code as when the period stipulated already expired and he is liable because the thing loaned was
delivered with appraisal of value and there was no contrary stipulation regarding his liability in case there is a
fortuitous event.
Facts:
Bagtas borrowed three bulls from the Bureau of Animal Industry for one year for breeding purposes subject
to payment of breeding fee of 10% of book value of the bull. Upon expiration, Bagtas asked for renewal. The
renewal was granted only to one bull. Bagtas offered to buy the bulls at its book value less depreciation but
the Bureau refused. The Bureau said that Bagtas should either return or buy it at book value. Bagtas proved
that he already returned two of the bulls, and the other bull died during a Huk raid, hence, obligation already
extinguished. He claims that the contract is a commodatum hence, loss through fortuitous event should be
borne by the owner.
Issue: WON Bagtas is liable for the death of the bull.
Held:
Yes. Commodatum is essentially gratuitous. However, in this case, there is a 10% charge. If this is
considered compensation, then the case at bar is a lease. Lessee is liable as possessor in bad faith because
the period already lapsed. Even if this is a commodatum, Bagtas is still liable because the fortuitous event
happened when he held the bull and the period stipulated already expired and he is liable because the thing
loaned was delivered with appraisal of value and there was no contrary stipulation regarding his liability in
case there is a fortuitous event.
4. REPUBLIC OF THE PHILIPPINES vs. JOSE GRIJALDO
Doctrine:
"By a contract of (simple) loan, one of the parties delivers to another ... money or other consumable thing
upon the condition that the same amount of the same kind and quality shall be paid."
(Article 1933, Civil Code) The obligation, under the promissory notes evidencing the loans, is to pay the
value thereof; that is, to deliver a sum of money a clear case of an obligation to deliver, a generic thing.
Article 1263 of the Civil Code provides:
In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not

extinguish the obligation.

FACTS:
In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bank of Taiwan,
Ltd. in Bacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per annum, compounded
quarterly. These loans are evidenced by five promissory notes executed by the appellant in favor of the Bank
of Taiwan, Ltd., as follows: On June 1, 1943, P600.00; on June 3, 1943, P159.11; on June 18, 1943, P22.86;
on August 9, 1943,P300.00; on August 13, 1943, P200.00, all notes without due dates, but because the
loans were due one year after they were incurred. To secure the payment of the loans the appellant executed
a chattel mortgage on the standing crops on his land, Lot No. 1494 known as Hacienda Campugas in
Hinigiran, Negros Occidental.
By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided for in the
Trading with the Enemy Act, as amended, the assets in the Philippines of the Bank of Taiwan, Ltd. were
vested in the Government of the United States. Pursuant to the Philippine Property Act of 1946 of the United
States, these assets, including the loans in question, were subsequently transferred to the Republic of the
Philippines by the Government of the United States under Transfer Agreement dated July 20, 1954. These
assets were among the properties that were placed under the administration of the Board of Liquidators
created under Executive Order No. 372, dated November 24, 1950, and in accordance with Republic Acts
Nos. 8 and 477 and other pertinent laws.
On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman of the Board
of Liquidators, made a written extrajudicial demand upon the appellant for the payment of the account in
question. The record shows that the appellant had actually received the written demand for payment, but he
failed to pay.
On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of Hinigaran, Negros
Occidental, to collect from the appellant the unpaid account in question. The Justice of the Peace Of
Hinigaran, after hearing, dismissed the case on the ground that the action had prescribed. The appellee
appealed to the Court of First Instance of Negros Occidental and on March 26, 1962 the court a quo rendered
a decision ordering the appellant to pay the appellee the sum of P2,377.23 as of December 31, 1959, plus
interest at the rate of 6% per annum compounded quarterly from the date of the filing of the complaint until
full payment was made. The appellant was also ordered to pay the sum equivalent to 10% of the amount due
as attorney's fees and costs.
The appellant appealed directly to this Court. During the pendency of this appeal the appellant Jose Grijaldo
died. Upon motion by the Solicitor General this Court, in a resolution of May 13, 1963, required Manuel
Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are the legal heirs of Jose Grijaldo to
appear and be substituted as appellants in accordance with Section 17 of Rule 3 of the Rules of Court.
ISSUE: Whether or not the obligation to pay is extinguished.
The appellant likewise maintains, in support of his contention that the appellee has no cause of action, that
because the loans were secured by a chattel mortgage on the standing crops on a land owned by him and
these crops were lost or destroyed through enemy action his obligation to pay the loans was thereby
extinguished.
HELD:
This argument is untenable. The terms of the promissory notes and the chattel mortgage that the appellant
executed in favor of the Bank of Taiwan, Ltd. do not support the claim of appellant. The obligation of the
appellant under the five promissory notes was not to deliver a determinate thing namely, the crops to be
harvested from his land, or the value of the crops that would be harvested from his land. Rather, his
obligation was to pay a generic thing the amount of money representing the total sum of the five loans,
with interest. The transaction between the appellant and the Bank of Taiwan, Ltd. was a series of five
contracts of simple loan of sums of money. "By a contract of (simple) loan, one of the parties delivers to
another ... money or other consumable thing upon the condition that the same amount of the same kind and
quality shall be paid." (Article 1933, Civil Code) The obligation of the appellant under the five promissory
notes evidencing the loans in questions is to pay the value thereof; that is, to deliver a sum of money a
clear case of an obligation to deliver, a generic thing. Article 1263 of the Civil Code provides:
In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not
extinguish the obligation.
The chattel mortgage on the crops growing on appellant's land simply stood as a security for the fulfillment
of appellant's obligation covered by the five promissory notes, and the loss of the crops did not extinguish his
obligation to pay, because the account could still be paid from other sources aside from the mortgaged crops.
5. People vs. Dick Ong, 204 SCRA 942
Doctrine:
Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest. All
kinds of bank deposits, whether fixed, savings, or current are to be treated loans and are to be covered by
the law on loans. Current and savings deposits are loans to a bank because it can use the same.
Facts:
Accused Dick Ong opened a savings account with HSBTC with an initial deposit of P22.14 in cash and
P10,000.00 in check. Ong was allowed to withdraw from his savings account with the Bank the sum of

P5,000.00, without his check undergoing the usual and reglementary clearance, which normally takes about
5 working days. The withdrawal slip was signed and approved by Lino Morfe, then the Branch Manager, and
accused Lucila Talabis, the Branch Cashier. Subsequently, Ong deposited eleven checks in his savings account
with the Bank and from which he made again a withdrawal against said checks before they were cleared with
the approval of Talabis. However, when the Bank presented the eleven checks to their respective drawee
banks for payment, they were all dishonored for lack or insufficiency of funds.
The Bank filed a criminal action for Estafa against Ong, and the Banks officer in charge Villaran and
Talabis.Talabis testified that the approval of the withdrawals of Ong against his uncleared checks was in
accordance with the instruction of their then bank manager and that it is a kind of accommodation given to
Ong and also a common practice in branches of the Bank. RTC ruled Ong as guilty for the crime of estafa but
acquitted Villarin and Talabis as their guilt were not proven beyond reasonable doubt. CA affirmed RTCs
decisions.
Issues:
1.What is the nature of bank deposits?
2.Wether or not Ong is guilty of Estafa.
Ruling:
1. The Supreme Court held in several cases, that bank deposits are in the nature of irregular deposits. They
are really loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are
to be treated loans and are to be covered by the law on loans. Current and savings deposits are loans to a
bank because it can use the same
2. The elements of this kind of estafa are the following:
(1) postdating or issuance of a check in payment of anobligation contracted at the time the
check was issued;
(2) lack or insufficiency of funds to cover the check; and
(3) damage to the payee thereof.
In this case, the fact was established that Ong either issued or indorsed the subject checks. However, it must
be remembered that the reason for the conviction of an accused of the crime of estafa is his guilty knowledge
of thefact that he had no funds in the bank when he negotiated the spurious check. In the present case,
however, the prosecution failed to prove that Ong had knowledge with respect to the checks he indorsed. In
additon, it has also been proven that it was the Bank which granted him to draw against uncollected
deposit(DAUD) without the need of any pretensions on his part. This privilege was not only for the subject
checks, but for other past transactions. If he indeed acted fraudulently, he could not have done so without
the active cooperation of the Banks employees. Since Talabis andVillaran were declared innocent of the
crimes charged against them, the same should be said for the Ong
Thus, Ong cannot be held criminally liable against the Bank. He can only be held civilly liable as the Bank
incurred damages.
6. Investors Finance Corporation vs. Autoworld Sales Corporation, et. al., G.R. NO. 128990 ;
SEPTEMBER 21, 2000
Doctrine:
Generally, the courts only need to rely on the face of written contracts to determine the intention of the
parties. "However, the law will not permit a usurious loan to hide itself behind a legal form. Parol evidence is
admissible to show that a written document though legal in form was in fact a device to cover usury. If from
a construction of the whole transaction it becomes apparent that there exists a corrupt intention to violate
the Usury Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of
usury.
Indeed, the Usury Law recognizes the legitimate purchase of negotiable mercantile paper by innocent
purchasers. But even the law has anticipated the potential abuse of such transactions to conceal usurious
loans. Thus, the law itself made a qualification. It would recognize legitimate purchase of negotiable
mercantile paper, whether usurious or otherwise, only if the purchaser had no intention of evading the
provisions of the Usury Law and that the purchase was not apart of the original usurious transaction.
Otherwise, the law would not hesitate to annul such contracts. Thus, Art. 1957 of the Civil Code provides
Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws on usury
shall be void. The borrower may recover in accordance with the laws on usury.
FACTS:
Anthony Que, in behalf of AUTOWORLD, applied for a direct loan with FNCB. However, since the Usury Law
imposed an interest rate ceiling at that time, FNCB informed Anthony Que that it was not engaged in direct
lending; consequently, AUTOWORLD's request for loan wasdenied. But however remedied to extend funds by
purchasing any of its outstanding receivables at a discount, the parties agreed to execute an Installment
Paper Purchase ("IPP") transaction to enable AUTOWORLD to acquire the additional capital it needed. The
parties signed three contracts to implement the "IPP" transaction.
After which it was concluded AUTOWORLD started paying the monthly installments to FNCB. After
paying nineteen (19) monthly installments on the first transaction ("IPP" worth P6,980,000.00) and three (3)
monthly installments on the second transaction (loan worth P3,000,000.00), AUTOWORLD advised FNCB that
it intended to pre-terminate the two (2) transactions by paying their outstanding balances in full. It then
requested FNCB to provide a computation of the remaining balances. FNCB sent AUTOWORLD its
computation requiring it to pay a total amount ofP10,026,736.78.

AUTOWORLD disagreed with the latter's computation of its outstanding balances. However, FNCB
replied that it would only be willing to reconcile its accounting records with AUTOWORLD upon payment of
the amounts demanded. Thus, despite its objections, AUTOWORLD reluctantly paid.
AUTOWORLD asked FNCB for a refund of its overpayments in the total amount of P3,082,021.84.
According to AUTOWORLD, it overpaidP2,586,035.44 to settle the first transaction and P418,262.00 to settle
the second transaction.
The parties attempted to reconcile their accounting figures butthe subsequent negotiations broke
down prompting AUTOWORLD to file anaction before the Regional Trial Court of Makati to annul the
Contractto Sell, the
Deed of Assignment and the Real Estate Mortgage all dated 9 February 1981. It likewise prayed for the
nullification of the Promissory Note dated 18 June 1982 and the Real Estate Mortgage dated 24 June 1982.
In its complaint, AUTOWORLD alleged that the aforementioned contracts were only perfected to
facilitate a usurious loan and therefore should be annulled. FNCB should refund the amounts ofP2,586,035.44
as excess payment for the first transaction andP418,262.00 as excess payment for the second transaction.
FNCB argued that the contracts were not executed to hide a usurious loan. Instead, the parties
entered into a legitimate Installment Paper Purchase ("IPP") transaction, or purchase of receivables at a
discount, which FNCB could legally engage in as a financing company. With regard to the second transaction,
the existence of a usurious interest rate had no bearing on the P3,000,000.00 loan since at the time it was
perfected on 18 January 1982 Central Bank Circular No. 871 dated 21 July 1981 had effectively lifted the
ceiling rates for loans having a period of more than three hundred sixty-five(365) days.
The Regional Trial Court of Makati ruled in favor of FNCB. The Court of Appeals modified the decision
of the trial court and concluded that the "IPP" transaction, comprising of the three (3) contracts perfected on
9 February 1981, was merely a scheme employed by the parties to disguise a usurious loan. It ordered the
annulment of the contracts and required FNCB to reimburse AUTOWORLD P2,586,035.44 as excess interest
payments over the 12% ceiling rate. However, with regard to the second transaction, the appellate court
ruled that at the time it was executed the ceiling rates imposed by the Usury Law had already been lifted
thus allowing the parties to stipulate any rate of interest. The appellate court deleted the award of
P50,000.00 as attorney's fees in favor of FNCB explaining that the filing of the complaint against FNCB was
exercised in good faith. Hence, this petition of FNCB.
ISSUE: Whether the three (3) contracts that were executed to implement a legitimate Installment Paper
Purchase ("IPP") transaction are concealment to a usurious loan.
HELD:
We stress at the outset that this petition concerns itself only with the first transaction involving the alleged'
"IPP" worth P6,980,000.00, which was implemented through the three 3 contracts of 9February 1981. As to
the second transaction, which involves the P3,000,000.00 loan, we agree with the appellate court that it was
executed when the ceiling rates of interest had already been removed, hence the parties were free to fix any
interest rate.
Generally, the courts only need to rely on the face of written contracts to determine the intention of
the parties. "However, the law will not permit a usurious loan to hide itself behind a legal form. Parol
evidence is admissible to show that a written document though legal in form was in fact a device to cover
usury. If from a construction of the whole transaction it becomes apparent that there exists a corrupt
intention to violate the Usury Law, the courts should and will permit no scheme, however ingenious, to
becloud the crime of usury. The following circumstances show that such scheme was indeed.
Thus, although the three (3) contracts seemingly show at face value that petitioner only entered into
a legitimate discounting of receivables, the circumstances cited prove that the P6,980,000.00 was really a
usurious loan extended to AUTOWORLD.
Indeed, the Usury Law recognizes the legitimate purchase of negotiable mercantile paper by innocent
purchasers. But even the law has anticipated the potential abuse of such transactions to conceal usurious
loans. Thus, the law itself made a qualification. It would recognize legitimate purchase of negotiable
mercantile paper, whether usurious or otherwise, only if the purchaser had no intention of evading the
provisions of the Usury Law and that the purchase was not apart of the original usurious transaction.
Otherwise, the law would not hesitate to annul such contracts. Thus, Art. 1957 of the Civil Code provides
Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws on usury
shall be void. The borrower may recover in accordance with the laws on usury.
In the case at bar, the attending factors surrounding the execution of the three (3) contracts on 9
February 1981 clearly establish that the parties intended to transact a usurious loan. These contracts should
therefore be declared void.
7. CA Agro-Industrial vs CA, G.R. No. 90027 March 3, 1993
Doctrine:
The Civil Code provides that the depositary would be liable if, in performing its obligation, it is found guilty of
fraud, negligence, delay or contravention of the tenor of the agreement. In the absence of any stipulation,

the diligence of a good father of a family is to be observed.

Any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on
account of fraud, negligence or delay would be void for being contrary to law and public policy.
Facts:
Petitioner (through its President) purchased 2 parcels of land from spouses Pugao for P350 K with a
downpayment of P75 K.
Per agreement, the land titles will be transferred upon full payment and will be placed in a safety deposit
box (SBDB) of any bank. Moreover, the same could be withdrawn only upon the joint signatures of a
representative of the Petitioner and the Pugaos upon full payment of the purchase price.
Thereafter, Petitioner and spouses placed the titles in SDB of Respondent Security Bank and signed a lease
contract which substantially states that the Bank will not assume liability for the contents of the SDB.
Subsequently, 2 renter's keys were given to the renters one to the Petitioner and the other to the Pugaos.
A guard key remained in the possession of the Respondent Bank. The SDB can only be opened using
these 2 keys simultaneously.
Afterwards, a certain Mrs. Ramos offered to buy from the Petitioner the 2 lots that would yield a profit of
P285K.
Mrs. Ramos demanded the execution of a deed of sale which necessarily entailed the production of the
certificates of title. Thus, Petitioner with the spouses went to Respondent Bank to retrieve the titles.
However, when opened in the presence of the Bank's representative, the SDB yielded no such certificates.
Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the
lots; as a consequence, the Petitioner allegedly failed to realize the expected profit of P285K.
Hence, Petitioner filed a complaint for damages against Respondent Bank.
Lower courts ruled in favour of Respondent Bank. Thus, this petition.
Issues:
Whether or not the disputed contract is an ordinary contract of lease?
Whether or not the provisions of the cited contract are valid?
Whether or not Respondent Bank is liable for damages?
Ruling:
No. SC ruled that it is a special kind of deposit because:
the full and absolute possession and control of the SDB was not given to the joint renters the Petitioner
and the Pugaos.
The guard key of the box remained with the Respondent Bank; without this key, neither of the renters could
open the box and vice versa.
In this case, the said key had a duplicate which was made so that both renters could have access to the
box.
Moreover, the renting out of the SDBs is not independent from, but related to or in conjunction with, the
principal function of a contract of deposit the receiving in custody of funds, documents and other
valuable objects for safekeeping.
NO. SC opined that it is void.
Generally, the Civil Code provides that the depositary (Respondent Bank) would be liable if, in performing its
obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement.
In the absence of any stipulation, the diligence of a good father of a family is to be observed.
Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing
deposited on account of fraud, negligence or delay would be void for being contrary to law and public
policy (which is present in the disputed contract)
Said provisions are inconsistent with the Respondent Bank's responsibility as a depositary under Section
72(a) of the General Banking Act.
NO. SC ruled that:
no competent proof was presented to show that Respondent Bank was aware of the private agreement
between the Petitioner and the Pugaos that the Land titles were withdrawable from the SDB only upon
both parties' joint signatures,
and that no evidence was submitted to reveal that the loss of the certificates of title was due to the fraud or
negligence of the Respondent Bank.
8. BPI Investment Corp vs CA
Doctrine:
A loan contract is not a consensual contract but a real contract. It is perfected only upon the delivery of the
object of the contract. It is a basic principle in reciprocal obligations that neither party incurs in delay, if the
other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Only
when a party has performed his part of the contract can he demand that the other party also fulfills his own
obligation and if the latter fails, default sets in.
FACTS:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of BPIIC, for the construction of a house on his lot. Said
house and lot were mortgaged to AIDC to secure the loan. Roa sold the house and lot to private respondents
ALS and Antonio Litonjua for P850,000. They paid P350,000 in cash and assumed the P500,000 balance of
Roas indebtedness with AIDC. The latter, however, was not willing to extend the old interest rate to private
respondents and proposed to grant them a new loan of P500,000 to be applied to Roas debt and secured by
the same property. Consequently, in March 1981, private respondents executed a mortgage deed with the
provision that payment of the monthly amortization shall commence on May 1, 1981. On August 1982, ALS
and Litonjua updated Roas arrearages by paying BPIIC. On September 1982, BPIIC released to private

respondents P7,146.87, purporting to be what was left of their loan after full payment of Roas loan. In June
1984, BPIIC instituted foreclosure proceedings against private respondents on the ground that they failed to
pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984. ALS and Litonjua filed a Civil Case
against BPIIC. They alleged, among others, that they were not in arrears in their payment, but in fact made
an overpayment as of June 30, 1984. They maintained that they should not be made to pay amortization
before the actual release of the P500,000 loan in August and September 1982. BPIIC on the other hand
claims that a contract of loan is a consensual contract, and a loan contract is perfected at the time the
contract of mortgage was executed, which in this case, was on March 1981
ISSUE: Whether or not a contract of loan is a consensual contract.
HELD:
No. A loan contract is not a consensual contract but a real contract. It is perfected only upon the
delivery of the object of the contract. In the present case, the loan contract between BPI, on the one hand,
and ALS and Litonjua, on the other, was perfected only on September 13, 1982, the date of the second
release of the loan. A contract of loan involves a reciprocal obligation, wherein the obligation or promise of
each party is the consideration for that of the other. It is a basic principle in reciprocal obligations that
neither party incurs in delay, if the other does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. Only when a party has performed his part of the contract can he demand that
the other party also fulfills his own obligation and if the latter fails, default sets in. Consequently, petitioner
could only demand for the payment of the monthly amortization after September 13, 1982 for it was only
then when it complied with its obligation under the loan contract.
9. ROMAN V. ASIA BANKING CORPORATION
Doctrine:
As provided by the Warehouse Receipts Act, in case the warehouse man fails to mark it as non-negotiable,
a holder of the receipt who purchase if for value supposing it to be negotiable may, at his option, treat such
receipt as imposing upon the warehouseman the same liabilities he would have incurred had the receipt been
negotiable. This appears to have given any warehouse receipt not marked non-negotiable practically the
same effect as a receipt which, by its terms, is negotiable provided the holder of such unmarked receipt
acquired it for value supposing it to be negotiable, circumstances which admittedly exist in the present case.
FACTS:
U. de Poli, for value received, issued a quedan convering the 576 bultos of tobacco to the Asia Banking
Corporation (claimant & appellant). It was executed as a security for a loan. The aforesaid 576 butlos are
part and parcel of the 2, 766 bultos purchased by U. de Poli from Felisa Roman (claimant & appellee).
The quedan was marked as Exhibit D which is a warehouse receipt issued by the warehouse of U. de Poli for
576 bultos of tobacco. In the left margin of the face of the receipt, U. de Poli certifies that he is the sole
owner of the merchandise therein described. The receipt is endorsed in blank; it is not marked nonnegotiable or not negotiable.
Since a sale was consummated between Roman and U. de Poli, Romans claim is a vendors lien. The lower
court ruled in favor of Roman on the theory that since the transfer to Asia Banking Corp. (ASIA) was neither
a pledge nor a mortgage, but a security for a loan, the vendors lien of Roman should be accorded preference
over it.
However, if the warehouse receipt issued was non-negotiable, the vendors lien of Roman cannot prevail
against the rights of ASIA as indorsee of the receipt.
ISSUE: WON the quedan issued by U. de Poli in favor of ASIA. Is negotiable, despite failure to mark it as not
negotiable?
HELD:
YES. The warehouse receipt in question is negotiable. It recited that certain merchandise deposited in the
ware house por orden of the depositor instead of a la orden, there was no other direct statement showing
whether the goods received are to be delivered to the bearer, to a specified person, or to a specified order or
his order. However, the use of por orden was merely a clerical or grammatical error and that the receipt
was negotiable.
As provided by the Warehouse Receipts Act, in case the warehouse man fails to mark it as non-negotiable,
a holder of the receipt who purchase if for value supposing it to be negotiable may, at his option, treat such
receipt as imposing upon the warehouseman the same liabilities he would have incurred had the receipt been
negotiable. This appears to have given any warehouse receipt not marked non-negotiable practically the
same effect as a receipt which, by its terms, is negotiable provided the holder of such unmarked receipt
acquired it for value supposing it to be negotiable, circumstances which admittedly exist in the present case.
Hence, the rights of the indorsee, ASIA, are superior to the vendors lien.
10. PICZON V. PICZON, GR No. L-29139, November 15, 1974
Doctrine:
Under Art.2048 of the Civil Code, a guaranty is gratuitous, unless there is a stipulation to the contrary.
Facts: Sosing-Lobos & Co. obtained loan from Piczon Co. Esteban Piczon (president of borrowing firm) bound
himself as guarantor to pay plaintiffs-appellants the sum of P12,500 with 12% interest from August 6, 1964
until said principal amount shall have been duly paid. The parties also agreed to the use of the loan as surety

cash deposit for the registration with the SEC. Consuelo Piczon (lending firm) brought action to recover the
amount loaned. Court ruled in favor of Consuelo Piczon and ordered Esteban Piczon and Sosing-Lobos to pay
him as guarantor the amount of the loan plus interest.
Issue: WON Esteban Piczon is a surety or a guarantor?
Held:
Under the terms of the contract Esteban Piczon expressly bound himself only as guarantor. A guaranty must
express, and it would be violative of the law to consider a party to be bound as surety when the very word
used in the agreement is guarantor.
11. Legaspi vs Celestial, G.R. Nos. L-43673 and 43674, October 24, 1938
Doctrine:
When a contracts of loan with security does not stipulate the payment of interest but provides for the
delivery to the creditor by the debtor of the real property constituted as security for the payment thereof, in
order that the creditor may administer the same and avail himself of its fruits, without stating that said fruits
are to be applied to the payment of interest, if any, and afterwards to that of the principal of the credit, the
contract shall be considered to be one of mortgage and not of antichresis.
Facts:
On January 17, 1935, the plaintiffs brought an action against the defendant Damaso Celestial in the justice of
the peace court of Kawit, Cavite, praying that judgment be rendered, ordering said defendant to pay to the
abovenamed plaintiffs the sum of P556.160, plus the corresponding legal interest thereon from the date of
the filing of the complaint, until fully paid, and the costs.
The defendant, answering the complaint, admitted the essential facts alleged therein, stating that he was
disposed to pay what he should appear still to be indebted and, by way of counterclaim and cross-complaint,
claimed that, the contract entered into between him and the plaintiffs being an antichresis, the latter were
bound to render an account of the products of the five salt beds, the total production of which was from 300
to 350 cavans of salt at P1 a cavan.
Legaspi et al brought an action against Celestial to pay a certain obligation plus the interests. Celestial,
contends, among others, that the contract entered into between them was an antichresis, thus, Legaspi et al
are bound to render an account of the products.
Issue: Whether or not the contract was an antichresis.
Held:
No. It was a mortgage. It appears therefore that the debtor, instead of paying a certain per cent of the
principal of the loan as compensation for the sacrifice made by the creditors in depriving themselves of the
use of their principal and the enjoyment of its fruits, so as to give them to the debtor, has delivered to them
the property constituted as a security for the payment of the loan, so that they may administer and use it,
enjoying its fruits, by way of compensation for their said sacrifice in lending said debtor their money.
Therefore, the contracts, which are the subject matter of this action, have all the essential requisites of a
mortgage, enumerated in article 1857 of the Civil Code and, consequently, are mortgage contracts.
When a contracts of loan with security does not stipulate the payment of interest but provides for the
delivery to the creditor by the debtor of the real property constituted as security for the payment thereof, in
order that the creditor may administer the same and avail himself of its fruits, without stating that said fruits
are to be applied to the payment of interest, if any, and afterwards to that of the principal of the credit, the
contract shall be considered to be one of mortgage and not of antichresis.
12. Saura Import &Export Co., Inc v. DBP, G.R. No. L-24968 April 27, 1972
Doctrine:
It is a concept derived from the principle that since mutual agreement can create a contract, mutual
disagreement by the parties can cause its extinguishment. In view of such extinguishment, said perfected
consensual contract to deliver did not constitute a real contract of loan.
Facts:
Saura Inc. applied to the Rehabilitation Finance Corp (before its conversion to DBP) for a loan of 500k
secured by a first mortgage of the factory building to finance for the construction of a jute mill factory and
purchase of factory implements. RFC accepted and approved the loan application subject to some conditions
which Saura admitted it could not comply with. Without having received the amount being loaned, and
sensing that it could not at anyway obtain the full amount of loan, Saura Inc. then asked for cancellation of
the mortgage which RFC also approved. Nine years after the cancellation of the mortgage, Saura sued RFC
for damages for its non-fulfillment of obligations arguing that there was indeed a perfected consensual
contract between them.
Issue: Was there a perfected consensual contract? Was there a real contract of loan which would warrant
recovery of damages arising out of breach of such contract?
Held:

On the first issue, yes, there was indeed a perfected consensual contract, as recognized in Article 1934 of the
Civil Code. There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan
of P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was executed
and registered. But this fact alone falls short of resolving the second issue and the basic claim that the
defendant failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages. The action
thus taken by both partiesSaura's request for cancellation and RFC's subsequent approval of such
cancellationwas in the nature of mutual desistance what Manresa terms "mutuo disenso" which is a
mode of extinguishing obligations. It is a concept derived from the principle that since mutual agreement can
create a contract, mutual disagreement by the parties can cause its extinguishment. In view of such
extinguishment, said perfected consensual contract to deliver did not constitute a real contract of loan.
13. Cesar Sulit vs. CA and Iluminada Cayco, G.R. No. 119247, February 17, 1997, 268 SCRA
441.
Doctrine:
The general rule that mere inadequacy of price is not sufficient to set aside a foreclosure sale is based on the
theory that the lesser the price the easier it will be for the owner to effect the redemption. The same thing
cannot be said where the amount of the bid is in excess of the total mortgage debt.
The application of the proceeds for the sale of the mortgaged property to the mortgagors obligation is an act
of payment, not payment by dation; hence, it is mortgagees duty to return any surplus on the selling to the
mortgagor. It is stated that the motgagee is deemed trustee for the mortgagor of the equity of redemption.
Facts:
Iluminada Cayco executed a Real Estate Mortgage in favor of Cesar Sulit over Lot 2630 located in Caloocan
City to secure a loan worth P4Million. Upon default within the stipulated period, Sulit executed an
extrajudicial foreclosure and was able to purchase the land for P7Million through the public auction held by a
Notary Public. Sulit then filed for the issuance of the writ or possession to the RTC of Caloocan which was
granted. Cayco filed a motion to set aside the foreclosure proceeding on the ground that there is infirmities in
the procedural of the proceedings. RTC denied the motion that prompted the filing of the petition for
certiorari with Preliminary Injunction and/or TRO before the CA. The CA issued a decision ordering Sulit to
pay Cayco with the surplus money and upon failure to pay the same declare tha foreclosure proceeding as
deemed canceled.
Issue: w/n the purchaser is an extrajudicial foreclosure sale is entitled to the issuance of a writ of
possession over the mortgaged property despite failure to pay the surplus proceeds of the sale to the
mortgagor or person entitle thereto?
Held:
No. The application of the proceeds for the sale of the mortgaged property to the mortgagors obligation is an
act of payment, not payment by dation; hence, it is mortgagees duty to return any surplus on the selling to
the mortgagor. It is stated that the motgagee is deemed trustee for the mortgagor of the equity of
redemption. The general rule that mere inadequacy of price is not sufficient to set aside a foreclosure sale is
based on the theory that the lesser the price the easier it will be for the owner to effect the redemption. The
same thing cannot be said where the amount of the bid is in excess of the total mortgage debt. The reason is
that in case the mortgagor decides to exercise his right of redemption, Section 30 of Rule 39 provides that
the redemption price should be equivalent to the amount of the purchase price, plus one per cent monthly
interest up to the time of the redemption, together with the amount of any assessments or taxes which the
purchaser may have paid thereon after purchase, and interest on such last-named amount at the same rate.
Applying the same to the present case would be highly iniquitous if the amount of redemption be based to
P7Million because that would be unjustifiably higher than the amount of the mortgage debt. Thereby,
prejudicial to Caycos Right of Redemption. Where the redemptioner chooses to exercise the right of
redemption, it is the policy of the law to aid rather than to defeat his right. It stands to reason that
redemption should be looked with favor and where no injury will follow, a liberal construction will be given to
our redemption laws, specifically to the right of redemption. Low auction price is tolerated by the Court as
long as it is not shocking to the conscience of the Court because it is in favor to the right of the mortgagor to
redeem the property based on that low price. The Court will not, thereby, tolerate high auction price that will
make the redemptioner to elect his right to redemption because of the high price, as in this case.
14. PNB vs Sayo, Noahs Ark Sugar Refinery, et. al. GR No. 129918, July 9, 1998
Doctrine:
The loss of the warehouseman's 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.
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.
Facts:
In accordance with Act No. 2137, the Warehouse Receipts Law, Noah's Ark Sugar Refinery issued on several
dates, 5 Warehouse Receipts. The receipts are substantially in the form, and contains the terms, prescribed
for negotiable warehouse receipts by Section 2 of the law.

Two of the Warehouse Receipts were negotiated and endorsed to Luis T. Ramos, and 3 of the Warehouse
Receipts were negotiated and endorsed to Cresencia K. Zoleta. Ramos and Zoleta then used the quedans as
security for two loan agreements 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 Noah's Ark Sugar Refinery
demanding delivery of the sugar stocks covered by the quedans endorsed to it by Zoleta and Ramos. Noah's
Ark Sugar Refinery refused to comply with the demand alleging ownership thereof.
Issue: Is Noahs Arks refusal to deliver the goods to PNB a valid exercise of his lien on the goods stored?
Should Noahs Ark deliver the sugar stocks to PNB prior to the satisfaction of its warehouse lien?
Held:
The refusal of private respondents to deliver the goods was not anchored on a valid excuse, i.e., nonsatisfaction of the warehouseman's lien over the goods, but on an adverse claim of ownership. Private
respondents justified their refusal to deliver the goods 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 warehouseman's 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 Noah's Ark to heed the lawful demand by petitioner for the release of the goods (1990).
As per the SC decision in an earlier case, PNB vs Hon. Pres. Judge Benito, Noahs Ark Sugar Refinery, et. al.
(GR 119231, April 18, 1996), affirming the findings of the Court of Appeals that the Philippine National
Bank is the owner of said sugar stocks covered by the Warehouse Receipts. As owner/possessor of the
Warehouse Receipt, 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.
15. DBP vs. Zaragoza, G.R. No. L-23493 August 23,1978
Doctrine:
In extrajudicial foreclosure of mortgage, where the proceeds of the sale is insufficient to cover the debt, the
mortgagee is entitled to claim the deficiency from the debtor. Under the Mortgage Law, the mortgagee has
the right to claim for the deficiency resulting from the price obtained in the sale of the real property at public
auction and the outstanding obligation at the time of the foreclosure proceedings.
It is true that the provision under Rules of Court (Sec. 6, Rule 70) refers to a judicial foreclosure, but the
underlying principle is the same, that the mortgage is but a security and not a satisfaction of indebtedness.
Facts:
Jovencio A. Zaragoza and Avelina E. Zaragoza, defendants-appellants, obtained a loan of P30,000 on July 19,
1949 from the Development Bank of the Philippines, appellee. The loan was secured by a real estate
mortgage. It was stipulated that upon failure of appellants to pay the amortization due, according to the
terms and conditions thereof, appellee shall have the authority to foreclose extra-judicially the mortgaged
property, pursuant to Republic Act No. 3135, as amended. Conformably to this stipulation, upon breach of
the conditions of the mortgage, appellee foreclosed extra-judicially the mortgage on December 10, 1952, and
the Provincial Sheriff of Pangasinan posted the requisite notice of the sale at public auction of the mortgaged
property.
On June 10, 1957, the property was sold at public auction to the appellee, being the highest bidder therein,
for the sum of P21,035.00. After applying the proceeds of the sale to satisfy the outstanding balance of the
indebtedness in the amount of P28,914.36, it was found that appellants still owed the appellee in the amount
of P7,779.36. Suit for the deficiency with preliminary attachment was filed by appellee against appellants on
June 20, 1961. In their answer, appellants averred that after an extrajudicial foreclosure of property, no
deficiency judgment would lie and that from the date of the foreclosure to the sale of said property, the
mortgagor is no longer liable for the interest on the loan. The aforesaid contentions of appellants were
overruled by the trial court, who thereupon rendered the aforesaid judgment in favor of the appellee.
Issue: Whether or not the mortgagee is entitled to claim the deficiency in extrajudicial foreclosure of
mortgage
Held:
The Supreme Court, in Philippine Bank of Commerce v. Tomas de Vera, ruled that in extrajudicial foreclosure
of mortgage, where the proceeds of the sale is insufficient to cover the debt, the mortgagee is entitled to
claim the deficiency from the debtor. Under the Mortgage Law, the mortgagee has the right to claim for the
deficiency resulting from the price obtained in the sale of the real property at public auction and the
outstanding obligation at the time of the foreclosure proceedings. Under the Rules of Court (Sec. 6, Rule 70),
'Upon the sale of any real property, under an order for a sale to satisfy a mortgage or other encumbrance
thereon, if there be a balance due to the plaintiff after applying the Proceeds of the sale, the court, upon

motion, should render a judgment against the defendant for any such balance for which by the record of the
case, he may be personally liable to the plaintiff, ...' It is true that this refers to a judicial foreclosure, but the
underlying principle is the same, that the mortgage is but a security and not a satisfaction of indebtedness.
16. DEVELOPMENT BANK OF THE PHILIPPINES, Plaintiff-Appellee, v. DIONISIO MIRANG,
Defendant-Appellant.
Doctrine:
The bank, as creditor, can recover the balance of the indebtedness; When the Legislature intends to bar or
occlude a creditor from suing for any deficiency after foreclosing and selling the security given for the
obligation, it makes express provisions to that effect, as it did in Article 2115 of the Civil Code on pledge.
Although the predicament of the mortgagor, whose failure to pay the loan was due to the fact that the
plantation which was being financed was attacked by mosaic disease, may evoke sympathy, it does not
justify a disregard of the terms of the contract he entered into. His obligation thereunder is neither
conditional nor aleatory; its terms are clear and subject to no exception.
Facts:
Dionisio Mirang obtained a P14,000.00 loan from the Rehabilitation Finance Corporation (now Development
Bank of the Philippines) for the development of his plantation. After he had obtained P13,000.00 the bank
refused to make any further releases on the ground that the plantation was attacked by mosaic disease
which destroyed the abaca plants, By reason of his failure to pay the yearly amortization, the mortgaged
property was sold at public auction in which the bank was the highest bidder for P2,010.00. Mirang was duly
advised of the sale with the information that the same was subject to his right of redemption within one year.
This right was not exercised and the Development Bank of the Philippines filed the complaint to recover the
balance of the indebtedness. The trial court directed him to pay the total unpaid obligation. He appealed.
Issues:
Whether the bank has a right to recover the balance of his indebtedness after the mortgaged property had
been sold
Whether he should be exempted from paying since the abaca was destroyed by mosaic disease; and
Whether he should pay only the price paid at the auction sale.
Held:
The Supreme Court ruled that:
(1) The bank, as creditor, can recover the balance of the indebtedness; When the Legislature intends to bar
or occlude a creditor from suing for any deficiency after foreclosing and selling the security given for the
obligation, it makes express provisions to that effect, as it did in Article 2115 of the Civil Code on pledge.
Hence, in the absence of a similar provision in Act 3135, as amended, it cannot be concluded that the
creditor loses his right given him under the Mortgage Law and recognized in the Rules of Court, to take
action for the recovery of any unpaid balance on the principal obligation, simply because he has chosen to
foreclose his mortgage extrajudicially, pursuant to a special power of attorney given him by the mortgagor in
the mortgage contract.
(2) he is not exempted from paying the balance; Although the predicament of the mortgagor, whose failure
to pay the loan was due to the fact that the plantation which was being financed was attacked by mosaic
disease, may evoke sympathy, it does not justify a disregard of the terms of the contract he entered into. His
obligation thereunder is neither conditional nor aleatory; its terms are clear and subject to no exception and;
(3) to redeem his homestead, he must pay, not merely obligation still and owing to the bank. In the
foreclosed property, the mortgagor or debtor to the Development Bank of the Philippines should pay the
entire amount he owed the bank on the date of sale, with interest thereon at the rate agreed upon, pursuant
to Section 31, Com. Act 459 which provides that mortgagor or debtor shall, within one year . . . have the
right to redeem the real property by paying to the Bank all the amount he owed the latter on the date of
sale, with interest on the total indebtedness at the rate agreed upon in the obligation from said date.
17. ARNEL SY, vs. HONORABLE COURT OF APPEALS, STATE INVESTMENT HOUSE, INC. and THE
REGISTER OF DEEDS OF RIZAL
G.R. No. 83139 April 12, 1989; 172 SCRA 125
Doctrine:
Section 78 of the General Banking Act, as amended by P.D. No. 1828, states that:
... In the event of foreclosure, whether judicially or extra-judicially, of any mortgage on real estate which is
security for any loan granted before the passage of this Act or under the provisions of this Act, the mortgagor
or debtor whose real property has been sold at public auction, judicially or extra-judicially, for the full or
partial payment of an obligation to any bank, banking or credit institution, within the purview of this Act shall
have the right, within one year after the sale of the real estate as a result of the foreclosure of the respective
mortgage, to redeem the property by paying the amount fixed by the court in the order of execution, or the
amount due under the mortgage deed, as the case may be, with interest thereon at the rate specified in the
mortgage and all the costs, and judicial and other expenses incurred by the bank or institution concerned by
reason of the execution and sale and as a result of the custody of said property less the income received
from the property.

FACTS:
Carlos Coquinco executed in favor of SIHI a real estate mortgage over a parcel of land as security of a loan in
the amount of P1,000,000.00. For failure to pay his balance of P1,126,220.56 the mortgaged property was
extrajudicially foreclosed and sold at public auction for P760,000.00 to SIHI.
Sy acquired by a deed of assignment Coquinco's right of redemption for and in consideration of P500,000.00.
Before the expiration of the one-year redemption period, petitioner offered to redeem the foreclosed property
from SIHI by tendering to the latter 2 manager's checks, one for P760,000.00 representing the purchase
price, and another for P91,200.00 representing interest at the rate of 1% per month for 12 months, totaling
P851,200.00. SIHI rejected this offer.
Petitioner filed an action for consignation to compel SIHI to accept the payment, to order SIHI to surrender
the title over the property and to issue a certificate of redemption in favor of petitioner.
A day before the expiration of the redemption period, petitioner decided to redeem the foreclosed property
directly from the Sheriff who accepted and issued to him the corresponding certificate of redemption.
The court dismissed petitioner's complaint holding that it stated no cause of action because petitioner failed
to effect a valid redemption as required the General Banking Act.
ISSUE: Whether or not a valid redemption was effected
HELD:
No, there was not.
Petitioner insists the case is governed by Act No. 3135, as amended, in relation to Section 30, Rule 39 of the
Revised Rules of Court which provides in part:
SEC. 30. Time and manner of, and amounts payable on, successive redemptions. Notice to be given and
filed. The judgment debtor, or redemptioner,, may redeem the property from the purchaser, at any time
within twelve months after the sale on paying the purchaser the amount of his purchase, with one per
centum per month interest thereon in addition, up to the time of redemption, together with the amount of
any assessments or taxes which the purchaser may have paid thereon after purchase, and interest on such
last-named amount at the same rate...
Respondent appellate court, applied the General Banking Act, held that no valid redemption was effected
because the amount was insufficient, it being less than the amount due under the real estate mortgage
contract of Coquinco or the latter's outstanding balance, with interest mortgage contract plus expenses
incurred by SIHI by reason of the foreclosure and the sale.
It must be emphasized that Section 78 of the General Banking Act, as amended by P.D. No. 1828 is
applicable not only to "banks and banking institutions," but also to "credit institutions." And, as certified by
the Central Bank,* SIHI is a credit institution.
Had Coquinco attempted to redeem the subject foreclosed property, he would have had to pay "the amount
due under the mortgage deed ... with interest thereon at the rate specified in the mortgage and all costs ...
and other expenses incurred . . . by reason of the execution (or foreclosure) and sale and as a result of the
custody of said property less the income received from the property . . ." pursuant to the General Banking
Act in order to effect a valid redemption. Since petitioner merely stepped into the shoes of Coquinco his
assignor, petitioner should have tendered and paid the same amount in order to redeem the property.
18. LIGUTAN vs. CA, GR# 138677
Doctrine:
Though penalty cannot be removed due to the agreement between the parties, except when there is
substantial performance in good faith by the obligor, the courts may equitably reduce (1) if it is iniquitous or
unconscionable, (2) if the principal obligation has been partly or irregularly complied with.
FACTS:
Ligutan and dela Llana, obtained a loan from Security Bank and Trust Co. executing a promissory note
binding themselves jointly and severally to pay the sum borrowed with an interest of 15.89% per annum
upon maturity, a penalty of 5% every month on the outstanding principal and interest in case of default, and
10% of the total amount due by way of attorneys fees if the matter were indorsed to a lawyer for collection
or if a suit were instituted to enforce payment. The debtors failed to settle the debt. A complaint for recovery
of the amount due was filed with the RTC. The court held, among others, the borrowers were liable for a 3%
per month penalty (instead of 5%) and 10% of the total amount of the indebtedness for attorneys fee, in
addition to the principal loan. When case was pending for appeal, debtor Ligutan and his wife mortgaged
their real estate for security of the existing loan and in effect novating the contract between them and the
bank. Said Mortgage was foreclosed extrajudicially without the mortgagors knowledge. Not satisfied with the
decision of the appellate court, the debtors, herein petitioners, filed a petition for review on certiorari.
ISSUE: Whether or not the interest, penalty and attorneys fee decided are still exorbitant, iniquitous and
unconscionable
HELD:
The penalty clause is recognized in Art. 1226 of the New Civil Code. The SC said it is an accessory
undertaking (1) to assume greater liability on the part of an obligor in case of breach of an obligation (2) to
strengthen the coercive force of the obligation, and (3) to provide, in effect, for what could be the liquidated
damages resulting from such a breach. Though penalty cannot be removed due to the agreement between
the parties, except when there is substantial performance in good faith by the obligor, the courts may

equitably reduce (1) if it is iniquitous or unconscionable, (2) if the principal obligation has been partly or
irregularly complied with.
In this case, the SC sees no cogent ground to modify the ruling of CA in reducing the penalty. Penalty cannot
be set aside for this has been agreed by the parties and due to the fact that debtors repeatedly breached
their contractual obligation. Reduction was proper since debtor made a partial fulfillment of the obligation.
The SC also ruled that the interest does not appear as being excessive because:
1) the payment of interest is not exactly the same as that of a surcharge or a penalty for a penalty
stipulation is not necessarily preclusive of interest; and
2) a penalty stipulation is not necessarily preclusive of interest the two being distinct concepts which may
separately be demanded.
Hence, petition is denied.
1. SUMERARIZ V DBP
Doctrine:
It may not be amiss to note that, unlike Section 30 of Rule 39 of the Rules of Court, which permits the
extension of the period of redemption of mortgaged properties, Section 3 of Commonwealth Act No. 459, in
relation to Section 9 of Republic Act No. 85, which governs the redemption of property mortgaged to the
Bank, does not contain a similar provision.
FACTS:
Spouses Sumerariz constituted, in favor of the Rehabilitation Finance Corporation now Development Bank
of the Philippines a real estate mortgage of two (2) parcels of land forming part of San Andres Subdivision,
Manila and covered by Transfer Certificate of Title No. 1442, in their names, including a house to be
constructed thereon, to guarantee a P15,000.00 loan granted them by the Bank, payable within ten (10)
years, at a given monthly amortization. In view of plaintiffs' failure to comply with the terms and conditions
of their contract, the Bank asked the sheriff of Manila to take possession of the property and sell it at public
auction. After several postponements made upon plaintiffs' request, the sale was set for March 29, 1955.
Upon the behest of Juan Sumerariz made the day before, the Bank agreed, however, to postpone the sale if
there was a token payment of at least P100.00, before 9:00 a.m., the next day. No such payment having
been made, the Bank bought the property, on March 29, for P8,000.00, as the highest bidder.
Subsequently, the Bank repeatedly notified the plaintiffs that they could redeem the property within one (1)
year, or not later than March 29, 1956, upon a down payment of P2,806.64, the balance payable in ten (10)
years, at the rate of P166.50 per month. Instead of exercising the right of redemption, on March 26, 1956,
plaintiffs instituted Civil Case No. 29306, of the Court of First Instance of Manila, against the Bank and the
sheriff of Manila, to set aside the aforementioned foreclosure sale, upon the ground that the Bank had failed
to comply with its agreement to postpone the auction sale scheduled to be held on March 29, 1956.
On July 19, 1956, while the case was pending in the trial Court, the Bank sold the property to the Philippine
Surety and Insurance Co., Inc., hereinafter referred to as the Surety Co. Subsequently, or on January 13,
1958, laid Court rendered a decision dismissing the complaint in case No. 29306, for the reason that
plaintiffs had not redeemed the property within the period prescribed by law therefor and that the Bank had
thereby become its absolute owner. Said decision was, on November 5, 1959, affirmed by the Court of
Appeals, in CA-G.R. No. 25077-R. Plaintiffs petitioned the Supreme Court to review by certiorari the decision
of the Court of Appeals; but denied the petition,on February 5, 1960.
ISSUE: WON the period to redeem was suspended by the institution of a separate civil case for annulment of
mortgage, foreclosure.
HELD:
YES. Although not a party in the first case, the inclusion of the Surety Co. as defendant in the case at bar
does not detract from the legal identity of both cases, because, by buying the property from the Bank, the
Surety Co. became merely the Bank's success. Neither does the absence, as party herein, of the sheriff, who
was one of the defendants in the first case, negate said identity, inasmuch as the sheriff was but a formal
party in said previous case, and is virtually a party in the present proceedings, although not explicitly
mentioned as such therein.
The subject-matter of both cases is, obviously, the same the property in question. There is, likewise,
identity of the cause of action. In the first case, the issue was the validity of the auction sale in favor of the
Bank, which sale, plaintiffs contended, had been made in violation of their agreement with the Bank. In the
case at bar, plaintiffs maintain that the conveyance by the Bank to the Surety Co. is invalid, and this pretense
is anchored upon the predicate that, when it took place, the property did not belong to the Bank, the sale in
its favor by the sheriff having been made in violation of the alleged agreement aforementioned, which
predicate had been rejected Court in the previous case. Similarly, the cause of in the first case was based
upon the alleged right of the plaintiffs to the property in question, upon the ground that its sale to the Bank
was illegal. This premise is, also, the cornerstone of plaintiffs' cause of action in the case at bar.
Plaintiffs maintain that the period of one (1) year to redeem the property in question was suspended by the
institution of Case No. 29306, on March 26, 1956, or three (3) days before the expiration of said period. We
have not found, however, any statute or decision in support of this pretense. Moreover, up to now plaintiffs
have not exercised the right of redemption. Indeed, although they have intimated their wish to redeem the
property in question, they have not deposited the amount necessary therefor. It may not be amiss to note

that, unlike Section 30 of Rule 39 of the Rules of Court, which permits the extension of the period of
redemption of mortgaged properties, Section 3 of Commonwealth Act No. 459, in relation to Section 9 of
Republic Act No. 85, which governs the redemption of property mortgaged to the Bank, does not contain a
similar provision. Again this question has been definitely settled by the decision in the previous case
declaring that plaintiffs' right of redemption has already been extinguished in view of their failure to exercise
it within the statutory period.
20. Cavite Development Bank v. Lim
Doctrine:
Definition of option contract: It 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.
Exception to rule that sale of mortgaged property is void when mortgagor is not the owner thereof:
mortgagee in good faith (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)
Facts:
June 15, 1983 Rodolfo Guansing obtained a loan from CDB, to secure which he mortgaged a parcel of land
situated at La Loma and covered by TCT registered in his name. As Guansing defaulted in the payment of his
loan, CDB foreclosed the mortgage. The mortgaged property was sold to CDB as the highest bidder at the
foreclosure sale. Guansing failed to redeem, and CDB consolidated title to the property in its name. June 16,
1988 private respondent Lolita Chan Lim, assisted by a broker named Remedios Gatpandan, offered to
purchase the property from CDB.
Written Offer to Purchase:
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.
Lim paid CDB P30,000 as Option Money. 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.
Rodolfo succeeded in having the property registered in his name under TCT No. 300809, the same title he
mortgaged to CDB. It appears, however, that the father, Perfecto, instituted a civil case for the cancellation of
his sons title. The trial court rendered a decision restoring Perfectos previous title and cancelling TCT No.
300809 on the ground that the latter was fraudulently secured by Rodolfo. This decision has since become
final and executory.
Lim and her husband filed an action for specific performance and damages against CDB and its mothercompany, Far East Bank and Trust Co.
RTC in favor of Lim spouses: there was a perfected contract of sale; CDB and FEBTC liable for damages. CA
affirmed.
Issue: W/N there was a VALID contract of sale between the parties.
Held:
NO. There is a perfected contracted of sale
Contracts are not defined by the parties thereto but by principles of law. In determining the nature of a
contract, the courts are not bound by the name or title given to it by the contracting parties. In the case at
bar, the sum of P30,000, 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.
Definition of option contract: It 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.
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 (i.e.
earnest money).
CDB has accepted Lims offer to purchase and considered it as good and no longer subject to a final approval.
However, it is impossible for CDB to perform its obligation as seller to deliver and transfer ownership of the
property. Nemo dat quod non habet (One cannot give what one does not have). Ownership of the thing sold
is required not during the perfection of the contract, but during consummation.

. But it is void.
The sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo Guansing must 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.
Exception to rule that sale of mortgaged property is void when mortgagor is not the owner thereof:
mortgagee in good faith (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)
Private respondents are entitled to recover the P30,000 option money paid by them plus legal interest. Also,
considering CDBs negligence, the award of moral damages on the basis of Arts. 21 and 2219 of the Civil
Code is proper.