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A material alteration of the principal contract, effected
by the creditor and principal debtor without the
knowledge and consent of the surety, completely
discharges the surety from all liability on the contract
of suretyship
The appellant obligated himself as surety to answer for
any indebtedness which his principal might incur as
selling agent of the plaintiff in a designated
municipality. Subsequently the contract of agency was
changed, without the knowledge and consent of the, in
such manner as to extent the agency to various other
than that mentioned in the original contract. Held: That
the surety could not be held for the indebtedness
incurred by the agent under the changed contract.
civil action
was instituted
Asiatic Petroleum Company (Philippine Island), Ltd., to
recover of Justico. A. David, as principal, and of
Francisco Hizon y Singian, as surety, the sum of
P51,560.12, an alleged balance due upon liquidation of
accounts between the plaintiff and said David, and for
which Francisco Hizon y Singian is alleged to be
obligated as joint and several surety with the principal
in favor of the plaintiff to recover of Justico A. David, as
principal, the sum of P40,7
David did not appeal, and his obligation, as principal
debtor, to the extent adjudged by the trial court, is not
now in question.
plaintiff contending that the court should have held
Hizon jointly and severally responsible for the entire
sum adjudged against the principal debtor, while Hizon
claims that he should have been wholly absolved
plaintiff is a corporation lawfully engaged in the selling
of petroleum products in the Philippine Islands
plaintiff made a contract (Exhibit B) with Justico A.
David, whereby the later became the selling agent of
the plaintiff at San Fernando in the Province of
Pampanga, with authority extending not only over the
municipality of San Fernando but over the neighboring
places of Guagua, Angeles, San Simon Capas,
Magalang, and Mabalakat, in the same province. In
accordance with this contract and in conformity with
the practices of the contracting parties thereunder
Justico A. David from time to time over a period of
about five years received for sale and distribution at
the places mentioned various consignments of
relation thus established was continued without
interruption until in the year 1921
it was found that David was indebted to the plaintiff
From the time demand was first made upon the present
appellant, Hizon, for the satisfaction of the balance due
to the plaintiff upon liquidation of the account of David,
the appellant has insisted that he had obligated himself
to answer for indebtedness to be incurred by David as
selling agent at and for the town of San Fernando and
that he had been given to understand, at the time he
contracted the obligation, that the indebtedness so
incurred would not be in excess of P5,000.

representation as to the amount into which the

indebtedness would run a representation which
seems to have come exclusively from David we
consider unimportant, since the written contract places
no limit upon the amount of the obligation; but the
defendants contention concerning the place, or places,
over which Davids agency extended is of a more
serious character.
words "Guagua, Angeles, and San Simon." Furthermore
the word "Mabalakat," as written by the typist, overlaps
and obscures the succeeding printed words, "in the,"
standing before "Province of Pampanga." There is of
course nothing particularly suspicious about this, but
the situation thus revealed suggests the possibility that
the words Guagua, Angeles, San Simon, Capas,
Magalang, and Mabalakat may have been inserted after
the contract of suretyship had been signed and
acknowledge by the appellant Hizon. Conclusive proof
on this point comes, however, from another quarter
and from a source not all dependent upon the
credibility of the oral testimony of the appellant Hizon.
Said proof consists in the fact now to be stated.
It appears that at the time the appellant acknowledged
the contract of suretyship
. E. Cuyugan, an attorney, who, at time of the incident
now in question, was engaged in the exercise of the
legal profession, and at the time he was examined as a
witness was filling the office of assistant attorney of the
Bureau of Justice. This witness was introduced by the
plaintiff, and his testimony has every appearance of
being candid and truthful. He states that the two copies
of the principal contract which were produced at the
time the acknowledgement of Hizon to the contract of
suretyship was taken were the same.
appears from the contemporaneous notarial certificate
appended thereto, the notary public delivered to David
one copy of the principal contract, together with one
copy of the contract of suretyship acknowledged by the
appellant; and these two documents went to the hands
of the plaintiff and have appeared in evidence
trial judge reached the conclusion that at the time the
appellants signed and acknowledge the contract of
suretyship the principal contract made no mention of
other places than San Fernando; and that the names of
the other places, after San Fernando, had been
interpolated in the document Exhibit B after the
contract of suretyship had been acknowledge. We
believe that there can be little doubt as to the
correctness of this conclusion, and it completely bears
out the contention of the appellant to the effect that he
really obligated himself only to answer for such
indebtedness as might be incurred by David as agent
at San Fernando. We may add that no witness was
produced by the plaintiff for the purpose of explaining
in any way the discrepancy between the two
documents above referred to.
the appellants contention concerning the extent of the
agency at the time he obligated himself was formulated
at a time when he did not know of the existence of a
copy of the contract of agency in the files of the
division of archives; and the subsequent discovery of
this piece of evidence is strongly suggestive of the
appellants good faith in claiming that he had obligated
himself only for the results of an agency to be
established at San Fernando. Our conclusion upon a
careful consideration of the evidence is that, when the
appellant acknowledge the contract of suretyship, the
principal contract was limited to the agency at the
place and that the document Exhibit B was

subsequently amended by agreement between the

plaintiff and Justino A. David, but without the
knowledge or consent of the appellant, by the insertion
therein of the names of the other places mentioned i
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
It requires no argument to show that the increase of
liability incident to the extension of the agency to other
places than San Fernando was prejudical to the interest
of the appellant, and the change could not be lawfully
made without his consent.
The trial judge was therefore not in error in holding that
the appellant was in effect discharged from liability
under the contract of suretyship
The only obligation which was created on the part of
the defendant was the contract of suretyship (Exhibit B1), and when that obligation was nullified was nullified
by the subsequent alteration of the principal contract,
the appellant was discharged was discharged in toto.
n the light of what has been said it becomes necessary
to reverse the appealed judgment in so far as it awards
the sum P5,000 against the appellant Francisco Hizon y
Singian , and he will be completely absolved from the
Court of First Instance of the City of Manila
in favor of the plaintiff Radio Corporation of the
Philippines and against the defendants Jesus R. Roa, R
Ordering the defendant Jesus R. Roa to pay the plaintiff
the sum of P22,935
failure of the defendant Jesus Roa to pay the said sum
indicated, the chattel described in the second cause of
action shall be sold at public auction to be applied to
the satisfaction of the amount of this judgmen
court below erred in not finding that the balance of the
total indebtedness became immediately due and
demandable upon the failure of the defendant Jesus R.
defendant Jesus R. Roa became indebted to the
Philippine Theatrical Enterprises, Inc., in the sum of
P28,400 payable in seventy-one equal monthly
On that same date the Philippine Theatrical
Enterprises, Inc., assigned all its right and interest in
that contract to the Radio Corporation of the
paragraph of that contract
accelerating clause
the whole amount remaining unpaid under this
mortgage shall immediately become due and payable
and this mortgage on the property herein mentioned as
well as the Luzon Surety Bond
Erlanger & Galinger, Inc., acting in its capacity as
attorney-in-fact of the Radio Corporation of the
Philippines wrote the following letter
principal debtor Jesus R. Roa:
We have no objection to the extension requested by
you to pay the February installment by the first week of
April. We would, however, urge you to make every
efforts to bring the account up-to date as we are given
very little discretion by the RCP in giving extension of
Under the above assignments of error the principal
question to be decided is whether or not the extension

granted in the above copied letter by the plaintiff,

without the consent of the guarantors, the herein
appellants, extinguishes the latter's liability not only as
to the installments due at that time, as held by the trial
court, but also as to the whole amount of their
obligation. Articles 1851 of the Civil Code
ART. 1851.
An extension grated to the debtor by
the creditor, without the consent of the guarantor,
extinguishes the latter's liability
court has held that mere delay in suing for the
collection of the does not release the sureties.
extension of time granted to the debtor by the creditor,
without the consent of the sureties, extinguishes the
latter's liability is common both to Spanish
jurisprudence and the common law; and it is well
settled in English and American jurisprudence that
where a surety is liable for different payments, such as
installments of rent, or upon a series of promissory
notes, an extension of time as to one or more will not
affect the liability of the surety for the others
after default of the payment of one installment the act
of the creditor in extending the time as to such
installment would interfere with the right of the surety
to exercise his legal rights against the debtor, and that
the surety would in such case be discharged by the
extension of time, in conformity with article 1851 and
1852 of the Civil Code. But it will be noted that in the
contract now under consideration the stipulation is not
that the maturity of the latter installments shall be ipso
facto accelerated by default in the payment of a prior
installment, but only that it shall give the creditor a
right treat the subsequent installments as due; and in
this case it does not appear that the creditor has
exercised this election. On the contrary, this action was
not instituted until after all of the installments had
fallen due in conformity with original contract. It results
that the stipulation contained in paragraph (f) does not
effect the application of the doctrine above enunciated
to the case before us.
The stipulation in the contract under consideration,
copied above, is to the effect that upon failure to pay
any installment when due the other installments ipso
facto become due and payable. In view of of the fact
that under the express provision of the contract,
quoted above, the whole unpaid balance automatically
becomes due and payable upon failure to pay one
installment, the act of the plaintiff in extending the
payment of the installment corresponding to February,
1932, to April, 1932, without the consent of the
guarantors, constituted in fact an extension of the
payment of the whole amount of the indebtedness, as
by that extension the plaintiff could not have filed an
action for the collection of the whole amount until after
April, 1932. Therefore appellants' contention that after
default of the payment of one installment the act of the
herein creditor in extending the time of payment
discharges them as guarantors in conformity with
articles 1851 and 1852 of the Civil Code is correct.
unimportant whewther the extension given has actually
proved prejudicial to the surety or not. The rule stated
is quite independent of the event, and the fact that the
principal is insolvent or that the extension granted
promised to be beneficial to the surety would give no
right to the creditor to change the terms of the contract
without the knowledge or consent of the surety. Nor
does it matter for how short a period the time of
payment may be extended. The principle is the same
whether the time is long or short. The creditor must be
in such a situation that when the surety comes to be

substituted in his place by paying the debt, he may

have an immediate right of action against the principal.
The suspension of the right to sue for a month, or even
a day, is as effectual to release the surety as a year or
two years
Plaintiff's contention that the enforcement of the
accelerating clause is potestative on the part of the
obligee, and not self-executing, is clearly untenable
from a simple reading of the clause copied above. What
is potestative on the part of the obligee is the
foreclosure of the mortgage and not the accelerating
Plaintiff-appellee contends that there was no
consideration for the extension granted the principal
debtor. Article 1277 of the Civil Code provides that
"even though the consideration should be expressed in
the contract, it shall be presumed that a consideration
exists and that it is licit, unless the debtor proves the
contrary." It was incumbent upon the plaintiff to prove
that there was no valid consideration for the extension
Appellant Francisco D. Santana was sued by plaintiff,
now appellee, Peoples Bank & Trust Company, along
with the other defendants, Jose Maria Tambunting and
Maria Paz Tambuntin
-in-law and his daughter, for the recovery of the sum of
money due in an overdraft agreement, with the
Tambunting couple as principal debtors and appellant
as surety. The judgment went against him
notwithstanding his plea based on Article 2080 of the
Civil Code, releasing guarantors, even if they be
solidary, if by some act of the creditor subrogation is
thereby precluded
Court of Appeals
found such a defense untenable as in what was
characterized by the lower courts as the "contract of
absolute guaranty", appellant had waived his rights to
the benefit conferred by such a provision. In this
appeal, would vigorously contend that what was thus
agreed to by him was bereft of a binding force. The law
in its wisdom does not lend its approval to such an illdisguised attempt for turn one's back to all obligation
arising from a valid contract. We have to affirm.
Defendant Francisco D. Santana, as guarantor, and the
spouses Tambuntings, conveyed to the bank shares of
capital stock of the International Sports Development
Corporation collateral security for the payment of any
and all indebtedness incurred or arising from the
overdraft, and all extensions, renewals, amendments or
applications thereof. On the same day, defendant
Francisco D. Santana executed a document
denominated as absolute guaranty in which, in
consideration of the 'overdraft agreement and pledge,'
he bound himself to the bank, jointly and severally,
with the Tambunting spouses for the full and prompt
payment of all the indebtedness incurred or to be
incurred by said spouses on account of the overdraft
Before the expiration of the six (6) months period, or on
March 5, 1965, Jose Maria Tambunting asked for
another renewal of the overdraft line for another year,
plaintiff bank approved his request for an extension of
the overdraft line in the amount of P185,000.00 for
another year, or until March 10, 1966,
defendants failed to pay the indebtedness on the date
due and demand for payment was made upon
Francisco Santana and Tambunting

The defendant Santana does not dispute the

indebtedness. However, it is the contention that he had
been released from the guaranty for several reasons.
Defendant Santana contends that he was released from
his obligation on the overdraft line because the plaintiff
had extended the time of payment and released to the
Tambuntings without his consent, the 135 shares of
stocks of the International Sports Development
ledged to the bank to secure the overdraft line. It is
argued that, in accordance with Article 2080 of the New
Civil Code, 'The guarantors, even though they be
solidary, are released from their obligation whenever
by some act of the creditor they cannot be subrogated
to the rights, mortgages, and preferences of the latter
ontention was held devoid of merit
contract of absolute guaranty, ..., expressly authorized
the plaintiff bank to extend the time of payment and to
release or surrender any security or part thereof held
by it without notice to, the consent of, Santana
Santana cannot now complain that the release of the
pledge was without his consent, and that it deprived
him of the right to be subrogated to the rights of the
creditor. The waiver is not contrary to law, nor is it
contrary to public policy. The law does not prohibit the
debtor-guarantor from agreeing in advance and without
notice to the release of any security which had been
given to assure payment of the obligation. The waiver
is not contrary to public policy, because the right is
purely personal, and does not affect public interest nor
does it violate any public policy. Neither does the return
of the shares of stocks novate the original contract for
the obligation remains the same; and if it is a novation,
it is a novation made with the consent of Santana.
Moreover, the pledge is merely an accessory obligation,
and its release does not vary the terms of the principal
It could have been different if there were no
such contract of absolute guaranty to which appellant
was a party under the aforesaid Article 2080. He would
have been freed from the obligation as a result of
plaintiff releasing to the Tambuntings without his
consent the 135 shares of the International Sports
Development Corporation pledged to plaintiff bank to
secure the overdraft line.
It has been traditional in the Philippine for parents to
extend all available aid and assistance to their children.
That is a custom of long standing. Nor is there anything
offensive to morals by an assumption of contingent
liability as thus worded. The law has not been thwarted.
Neither is public order nor public policy disregarded.
The lower court was right thereto in yielding full assent
to the waiver in question. 7 The vigor with which
counsel for appellant impugned the lower decision
cannot therefore be attended with success. It can stand
its ground notwithstanding such a sustained and
spirited attack.
CO. 1965
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.
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
attorney-in-fact to receive and collect from the Bureau
of Public Works

assignment (Exhibit "A") stipulated

power of attorney shall also remain irrevocable until
our total indebtedness to the said Bank have been fully
ATACO delivered to the Bureau of Public Works, and the
latter accepted, asphalt
Bank regularly collected, from April 21, 1948 to
November 18, 1948,
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.
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.
trial court
defendants, Adams & Taguba Corporation and Manila
Surety & Fidelity Co., Inc., to pay plaintiff, Philippines
National Bank
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
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,
Bank's negligence resulted in exoneration of
respondent Manila Surety & Fidelity Company.
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
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
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
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.
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.
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.


EXTEND an omnibus line credit facility worth P10
million in favor of respondent First Business Paper
Corporation (FBPC).
checklist of documents necessary to open the credit
line were stipulated
letter-advise[2] was effective upon compliance with the
documentary requirements.
documents essential for the credit facility and
submitted for this purpose
(a) Board Resolution
(b) agreement to purchase Domestic Bills;
, (c) Continuing Guaranty for any and all amounts
signed by petitioner-spouses Luis Toh and Vicky Tan
Toh, and respondent-spouses Kenneth and Ma. Victoria
Ng Li.[4] The spouses Luis Toh and Vicky Tan Toh were
then Chairman of the Board and Vice-President,
respectively, of FBPC, while respondent-spouses
Kenneth Ng Li and Ma. Victoria Ng Li were President
and General Manager, respectively, of the same
credit facility as well as its terms and conditions was
not cancelled or terminated, and that there was no
prior notice of such fact as required in the letter-advise
letter-advise, petitioner-spouses Luis Toh and Vicky Tan
Toh and respondent-spouses Kenneth Ng Li and Ma.
Victoria Ng Li signed the required Continuing Guaranty,
which was embodied in a public document prepared
solely by respondent Bank.[6] The terms of the
instrument defined the contract arising therefrom as a
surety agreement and provided for the solidary liability
of the signatories thereto for and in consideration of
loans or advances and credit in any other manner to, or
at the request or for the account of FBPC.
Continuing Guaranty set forth no maximum limit on the
indebtedness that respondent FBPC may incur and for
which the sureties may be liable
surety also contained a de facto acceleration clause if
default be made in the payment of any of the
instruments, indebtedness, or other obligation
guaranteed by petitioners and respondent
strengthen this security, the Continuing Guaranty
waived rights of the sureties against delay or absence
of notice or demand on the part of respondent Bank,
and gave future consent to the Banks action to extend
or change the time payment, and/or the manner, place
or terms of payment, including renewal, of the credit
facility or any part thereof in such manner and upon
such terms as the Bank may deem proper without
notice to or further assent from the sureties.
effectivity of the Continuing Guaranty was not
contingent upon any event or cause other than the
written revocation thereof with notice to the Bank that
may be executed by the sureties
respondent FBPC started to avail of the credit facility
FBPC opened thirteen (13) letters of credit and
obtained loans totaling P15,227,510.00
respondent Bank received information that respondentspouses Kenneth Ng Li and Ma. Victoria Ng Li had
fraudulently departed from their conjugal home
Bank served a demand letter upon FBPC and petitioner
Luis Toh invoking the acceleration clause[11] in the
trust receipts of FBPC and claimed payment for
P10,539,758.68 as unpaid overdue
Bank also invoked the Continuing Guaranty executed
by petitioner-spouses Luis Toh and Vicky Tan Toh who
were the only parties known to be within national
jurisdiction to answer as sureties for the credit facility

respondent Bank filed a complaint for sum of mone

against FBPC, spouses Kenneth Ng Li and Ma. Victoria
Ng Li, and spouses Luis Toh and Vicky Tan Toh,
Toh but not upon Kenneth Ng Li and Ma. Victoria Ng Li
who had apparently absconded
Petitioner-spouses Luis Toh and Vicky Tan Toh filed a
joint answer to the complaint where they admitted
being part of FBPC
Petitioner-spouses however could not be certain
whether to deny or admit the due execution and
authenticity of the Continuing Guaranty.[21] They could
only allege that they were made to sign papers in blank
and the Continuing Guaranty could have been one of
Still, as petitioners asserted, it was impossible and
absurd for them to have freely and consciously
executed the suret
since beginning March of that year they had already
divested their shares in FBPC and assigned them in
favor of respondent Kenneth Ng Li although the deeds
of assignment
petitioner Luis Toh was removed as an authorized
signatory for FBPC and replaced by respondent-spouses
Kenneth Ng Li and Ma. Victoria Ng Li and Redentor
Padilla for all the transactions of FBPC with respondent
even resigned from their respective positions in FBPC
petitioners averred that sometime in June 1993 they
obtained from respondent Kenneth Ng Li their exclusion
from the several surety agreements they had entered
into with different banks
the trial court
finding respondent FBPC liable to pay respondent Solid
Bank Corporation the principal of P10,539,758.68
absolving petitioner-spouses Luis Toh and Vicky Tan Toh
of any liability to respondent Bank
court a quo found that petitioners voluntarily affixed
their signature[s] on the Continuing Guaranty and were
thus at some given point in time willing to be liable
under those forms,[30] although it held that petitioners
were not bound by the surety contract since the letters
of credit it was supposed to secure were opened long
after petitioners had ceased to be part of FBPC
The trial court described the Continuing Guaranty as
effective only while petitioner-spouses were
stockholders and officers of FBPC
The lower court also believed that the Bank knew of
petitioners divestment of their shares in FBPC
appellate court modified the Decision of the trial court
and held that by signing the Continuing Guaranty,
petitioner-spouses became solidarily liable with FBPC to
pay respondent Bank
ratiocinated that the provisions of the surety
agreement did not indicate that Spouses Luis and Vicky
Toh x x x signed the instrument in their capacities as
Chairman of the Board and Vice-President, respectively,
of FBPC only.[38] Hence, the court a quo deduced,
[a]bsent any such indication, it was error for the trial
court to have presumed that the appellees indeed
signed the same not in their personal capacities.[39]
The appellate court also ruled that as petitioners failed
to execute any written revocation of the Continuing
Guaranty with notice to respondent Bank, the
instrument remained in full force and effect when the
letters of credit were availed of by respondent FBPC.
Court of Appeals rejected petitioners argument that
there were material alterations in the provisions of the
letter-advise, i.e., that only domestic letters of credit

were opened when the credit facility was for

importation of papers and other materials
titioner-spouses Luis Toh and Vicky Tan Toh argue
Continuing Guaranty is not legally valid and binding
against them for having been executed long after they
had withdrawn from FBPC. Lastly, they claim that the
surety agreement has been extinguished by the
material alterations
we find no merit in petitioners claim
This Court holds that the Continuing Guaranty is a valid
and binding contract of petitioner-spouses as it is a
public document that enjoys the presumption of
authenticity and due execution
no basis for petitioners to limit their responsibility
thereon so long as they were corporate officers and
stockholders of FBPC. Nothing in the Continuing
Guaranty restricts their contractual undertaking to such
condition or eventuality. In fact the obligations
assumed by them therein subsist upon the
undersigned, the heirs, executors, administrators,
successors and assigns of the undersigned
if petitioners intended not to be charged as sureties
after their withdrawal from FBPC, they could have
simply terminated the agreement by serving the
required notice of revocation upon the Bank as
expressly allowed therein
Regarding the petitioners claim that he is liable only as
a corporate officer of WMC, the surety agreement
shows that he signed the same not in representation of
WMC or as its president but in his personal capacity. He
is therefore personally bound.
. In other words, the authority of the Bank to defer
collection contemplates only authorized extensions,
that is, those that meet the terms of the letter-advise.
Certainly, while the Bank may extend the due date at
its discretion pursuant to the Continuing Guaranty, it
should nonetheless comply with the requirements that
domestic letters of credit b
Thus said, the acts or omissions of the Bank conceded
by petitioners as not affecting nor impairing the surety
contract refer only to those occurring in the premises,
or those that have been the subject of the waiver in the
Continuing Guaranty, and stretch to no other
The foregoing extensions of the letters of credit made
by respondent Bank without observing the rigid
restrictions for exercising the privilege are not covered
by the waiver stipulated in the Continuing Guaranty.
Evidently, they constitute illicit extensions prohibited
under Art. 2079 of the Civil Code, [a]n extension
granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty.
This act of the Bank is not mere failure or delay on its
part to demand payment after the debt has become
due, as was the case in unpaid five (5) letters of credit
which the Bank did not extend, defer or put off,[54] but
comprises conscious, separate and binding agreements
to extend the due date, as was admitted by the Bank
The Bank has in fact no information whether the trust
receipts were indeed used for the purpose for which
they were obtained.[
The consequence of these omissions is to discharge the
surety, petitioners herein, under Art. 2080 of the Civil
Code,[59] or at the very least, mitigate the liability of
the surety up to the value of the property or lien
For the same reason, the grace period granted by
respondent Bank represents unceremonious
abandonment and forfeiture of the fifteen percent

(15%) marginal deposit and the twenty-five percent

(25%) partial payment as fixed in the letter-advise.
These payments are unmistakably additional securities
intended to protect both respondent Bank and the
sureties in the event that the principal debtor FBPC
becomes insolvent during the extension period.
Compliance with these requisites was not waived by
petitioners in the Continuing Guaranty. For this
unwarranted exercise of discretion, respondent Bank
bears the loss; due to its unauthorized extensions to
pay granted to FBPC, petitioner-spouses Luis Toh and
Vicky Tan Toh are discharged as sureties under the
Continuing Guaranty.
petitioner Autocorp Group, represented by its President,
petitioner Peter Y. Rodriguez, secured an ordinary reexport bond
from private respondent Intra Strata Assurance
Corporation (ISAC) in favor of public respondent Bureau
of Customs (BOC
amount of P327,040.00, to guarantee the re-export of
one unit of Hyundai Excel 4-door
petitioners obtained another ordinary re-export bond,
Instrata Bond No. 7154, from ISAC in favor of the BOC
to guarantee the re-export of one unit of Hyundai
Sonata 2.4 GLS and/or to pay the taxes and duties
Petitioners executed and signed two Indemnity
Agreements with identical stipulations in favor of ISAC,
agreeing to act as surety of the subject bonds.
Petitioner Rodriguez signed the Indemnity Agreements
both as President of the Autocorp Group and in his
personal capacity.
The undersigned, by this instrument, grant a special
power of attorney in favor of all or any of the other
undersigned so that any of the undersigned may
represent all the others in all transactions related to
this Bond, its renewals, extensions, or any other
agreements in connection with this Counter-Guaranty,
without the necessity of the knowledge or consent of
the others who hereby promise to accept as valid each
and every act done or executed by any of the
attorneys-in-fact by virtue of the special power of
In sum, ISAC issued the subject bonds to guarantee
compliance by petitioners with their undertaking with
the BOC to re-export the imported vehicles within the
given period and pay the taxes and/or duties due
thereon. In turn, petitioners agreed, as surety, to
indemnify ISAC for the liability the latter may incur on
the said bonds.
Petitioner Autocorp Group failed to re-export the items
guaranteed by the bonds and/or liquidate the entries or
cancel the bonds, and pay the taxes and duties
pertaining to the said items despite repeated demands
made by the BOC, as well as by ISAC. By reason
thereof, the BOC considered the two bonds, with a total
face value of P1,034,649.00, forfeited.
Failing to secure from petitioners the payment of the
face value of the two bonds, despite several demands
sent to each of them as surety under the Indemnity
Agreements, ISAC filed with the RTC
action against petitioners to recover the sum of
ISAC impleaded the BOC as a necessary party plaintiff
in order that the reward of money or judgment shall be
adjudged unto the said necessary plaintiff

Petitioners thus filed their Answer to the Complaint,

claiming that they sought permission from the BOC for
an extension of time to re-export the items covered by
the bonds; that the BOC has yet to issue an assessment
for petitioners alleged default; and that the claim of
ISAC for payment is premature as the subject bonds are
not yet due and demandable
petitioners admitted the genuineness and due
execution of Instrata Bonds No. 5770 and No. 7154, but
specifically denied those of the corresponding
Indemnity Agreements. The parties agreed to limit the
issue to whether or not these bonds are now due and
RTC rendered its Decision ordering petitioners to pay
ISAC and/or the BOC the face value of the subject
Court of Appeals rendered its Decision affirming the
RTC Decision
present Petition is without merit.
Petitioners contend that their obligation to ISAC is not
yet due and demandable. They cannot be made liable
by ISAC in the absence of an actual forfeiture of the
subject bonds by the BOC and/or an explicit
pronouncement by the same bureau that ISAC is
already liable on the said bonds. In this case, there is
yet no actual forfeiture of the bonds, but merely a
recommendation of forfeiture, for no writ of execution
has been issued against such bond
Court of Appeals, in its assailed Decision, already
directly addressed petitioners arguments by ruling that
an actual forfeiture of the subject bonds is not
necessary for petitioners to be liable thereon to ISAC as
surety under the Indemnity Agreements.
petitioners obligation to indemnify ISAC became due
and demandable the moment the bonds issued by ISAC
became answerable for petitioners non-compliance
with its undertaking with the BOC. Stated differently,
petitioners became liable to indemnify ISAC at the
same time the bonds issued by ISAC were placed at the
risk of forfeiture by the BOC for non-compliance by
petitioners with its undertaking.
subject bonds
became due and demandable upon the failure of
petitioner Autocorp Group to comply with a condition
set forth in its undertaking with the BOC, specifically to
re-export the imported vehicles within the period of six
months from their date of entry. Since it issued the
subject bonds, ISAC then also became liable to the
BOC. At this point, the Indemnity Agreements already
give ISAC the right to proceed against petitioners via
court action or otherwise.
Even when the BOC already admitted that it not only
made a demand upon ISAC for the payment of the
bond but even filed a complaint against ISAC for such
payment,[13] such demand and complaint are not
necessary to hold petitioners liable to ISAC for the
amount of such bonds. Petitioners attempts to prove
that there was no actual forfeiture of the subject bonds
are completely irrelevant to the case at bar.
the Court would be constrained to uphold the validity of
such a stipulation for it is but a slightly expanded
contractual expression of Article 2071 of the Civil Code
which provides, inter alia, that the guarantor may
proceed against the principal debtor the moment the
debt becomes due and demandable. Article 2071 of the
Civil Code provides:
Petitioners also invoke the alleged lack of demand on
the part of ISAC on petitioners as regards Instrata Bond

Even if proven true, such a fact does not carry much

weight considering that demand, whether judicial or
extrajudicial, is not required before an obligation
becomes due and demandable. A demand is only
necessary in order to put an obligor in a due and
demandable obligation in delay,[14] which in turn is for
the purpose of making the obligor liable for interests or
damages for the period of delay.[15] Thus, unless
stipulated otherwise, an extrajudicial demand is not
required before a judicial demand, i.e., filing a civil case
for collection, can be resorted to.
Liability of petitioner Rodriguez
Petitioner Rodriguez posits that he is merely a
guarantor, and that his liability arises only when the
person with whom he guarantees the credit, Autocorp
Group in this case, fails to pay the obligation. Petitioner
Rodriguez invokes Article 2079
of the Civil Code on Extinguishment of Guaranty,
Petitioner Rodriguez argues that there was an
amendment as to the effectivity of the bonds, and this
constitutes a modification of the agreement without his
consent, thereby exonerating him from any liability.
We must take note at this point that petitioners have
not presented any evidence of this alleged amendment
as to the effectivity of the bonds.[21] Be that as it may,
even if there was indeed such an amendment, such
would not cause the exoneration of petitioner
Rodriguez from liability on the bonds.
The Court of Appeals concluded that since petitioner
Rodriguez was a surety, Article 2079 of the Civil Code
does not apply.
surety companys liability under the performance bond
it issues is solidary. The death of the principal obligor
does not, as a rule, extinguish the obligation and the
solidary nature of that liability.
[respondent] Republic-Asahi Glass Corporation
(Republic-Asahi) entered into a contract with x x x Jose
D. Santos, Jr., the proprietor of JDS Construction (JDS),
for the construction of roadways and a drainage system
in Republic-Asahis compound
Pasig City
respondent] was to pay x x x JDS five million three
hundred thousand pesos (P5,300,000.00)
supposed to be completed within a period of two
hundred forty (240) days
to guarantee the faithful and satisfactory performance
of its undertakings x x x JDS, shall post a performance
JDS executed, jointly and severally with [petitioner]
Stronghold Insurance Co., Inc. (SICI) Performance Bond
respondent] paid to x x x JDS
P795,000.00) by way of downpayment.
engineers called the attentio
JDS to the alleged alarmingly slow pace of the
construction, which resulted in the fear that the
construction will not be finished within the stipulated
240-day period. However, said reminders went
unheeded by x x x JDS.
dissatisfied with the progress of the work undertaken
by x x x JDS, [respondent] Republic-Asahi extrajudicially
rescinded the contract
JDS informing the latter of such rescission. Such
rescission, according to Article XV of the contract shall
not be construed as a waiver of [respondents] right to

recover damages from x x x JDS and the latters

Respondent] alleged that, as a result of x x x JDSs
failure to comply with the provisions of the contract,
which resulted in the said contracts rescission, it had to
hire another contractor to finish the project, for which it
incurred an additional expense of
espondent] sent a letter to [petitioner] SICI filing its
claim under the bond for not less than P795,000.00
respondent] again sent another letter reiterating its
demand for payment under the aforementioned bond.
Both letters allegedly went unheeded
Respondent] then filed [a] complaint against x x x JDS
and SICI.
representing the additional expenses incurred by
[respondent] for the completion of the project using
another contractor, and from x x x JDS and SICI, jointly
and severally, payment of P750,000.00 as damages in
accordance with the performance bond; exemplary
damages in the amount of P100,000.00 and attorneys
fees in the amount of at least P100,000.00.
However, x x x Jose D. Santos, Jr. died the previous year
(1990), and x x x JDS Construction was no longer at its
petitioner] SICI filed its answer, alleging that the
[respondents] money claims against [petitioner and
JDS] have been extinguished by the death of Jose D.
Santos, Jr.
Even if this were not the case, [petitioner] SICI had
been released from its liability under the performance
bond because there was no liquidation, with the active
participation and/or involvement, pursuant to
procedural due process, of herein surety and contractor
Jose D. Santos, Jr., hence, there was no ascertainment
of the corresponding liabilities of Santos and SICI under
the performance bond.
[Respondent] can no longer prove its claim for
damages in view of the death of Santos. SICI was not
informed by [respondent] of the death of Santos. SICI
was not informed by [respondent] of the unilateral
rescission of its contract with JDS, thus SICI was
deprived of its right to protect its interests as surety
under the performance bond, and therefore it was
released from all liability
Finally, SICI alleged that [respondent] deviated from
the terms and conditions of the contract without the
written consent of SICI, thus the latter was released
from all liability.
lower court issued an order dismissing the complaint of
[respondent] against x x x JDS and SICI, on the ground
that the claim against JDS did not survive the death of
its sole proprietor, Jose D. Santos, Jr.
The CA ruled that SICIs obligation under the surety
agreement was not extinguished by the death of Jose
D. Santos, J
whether petitioners liability under the performance
bond was automatically extinguished by the death of
Santos, the principal.
no merit.
Petitioner contends that the death of Santos, the bond
principal, extinguished his liability under the surety
bond. Consequently, it says, it is automatically released
from any liability under the bond.
As a general rule, the death of either the creditor or the
debtor does not extinguish the obligation.[8]
Obligations are transmissible to the heirs, except when

the transmission is prevented by the law, the

stipulations of the parties, or the nature of the
obligation.[9] Only obligations that are personal[10] or
are identified with the persons themselves are
extinguished by death
In the present case, whatever monetary liabilities or
obligations Santos had under his contracts with
respondent were not intransmissible by their nature, by
stipulation, or by provision of law. Hence, his death did
not result in the extinguishment of those obligations or
liabilities, which merely passed on to his estate.[15]
Death is not a defense that he or his estate can set up
to wipe out the obligations under the performance
bond. Consequently, petitioner as surety cannot use his
death to escape its monetary obligation under its
performance bond
The liability of petitioner is contractual in nature,
As a surety, petitioner is solidarily liable with Santos in
accordance with the Civil Code, which provides as
Art. 2047. By guaranty a person, called the guarantor,
binds himself to the creditor to fulfill the obligation of
the principal debtor in case the latter should fail to do
The death of the principal debtor will not work to
convert, decrease or nullify the substantive right of the
solidary creditor. Evidently, despite the death of the
principal debtor, respondent may still sue petitioner
alone, in accordance with the solidary nature of the
latters liability under the performance bond.
Petitioners Uy Tong (also known as Henry Uy) and Kho
Po Giok (SPOUSES) used to be the owners of Apartment
with the leasehold right for ninety- nine (99) years over
the land on which the building stands
land is registered in the name of Ligaya Investments
Ligaya Investments, Inc. owned the building
SPOUSES purchased from private respondent
7) units of motor vehicles for a total amount of
P47,700.00 payable in three (3) installments.
evidenced by a written "Agreement"
upon signing of this Agreement, the VENDEE shall pay
unto the VENDOR the amount of Seven Thousand
Seven Hundred (P7,000.00)
and the amount of Fifteen Thousand (P15,000.00
hould 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;
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 Buildin
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
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
judgment was rendered in favor of BAYANIHAN

. 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
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
action was however dismissed on the ground that
BAYANIHAN was not the real party in interest, not being
the owner of the building.
demands to vacate the subject apartment made by
BAYANIHAN's counsel was again ignored by the
SPOUSES, an action for recovery of possession with
filed with the Court of First Instance of Manila
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
SPOUSES appealed to the Court of Appeal
Court of Appeals affirmed in toto the decision
stipulations is provided for by Article 2088 of the Civil
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.
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.
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

no reason to impugn the validity of the said deed of

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.
Facts: A. Francisco Realty granted a loan of P7.5 M to
spouses Javillonar, in consideration of which, the latter
executed a promissory note, a real estate mortgage
over a certain property, and a deed of sale of said
mortgaged property in favor of A. Francisco.
Upon maturity, Javillonar spouses failed to pay, and as
a consequence, A. Francisco registered the sale of the
mortgaged property, for which a new TCT was issued.
A. Francisco demanded possession of the mortgaged
realty. Spouses refused to vacate. Hence, A. Francisco
filed a case for possession before the RTC.
The spouses admitted that they owed money in favor
of A. Francisco but they also alleged that it was not
their intention to sell the realty as the deed of sale
executed by them was merely an additional security for
the payment of their loan. RTC adjudged in favor of A.
Francisco. On appeal, CA reversed RTC decision and
dismissed the complaint against the spouses holding
that the deed of sale was void, being in the nature of a
pactum commissorium prohibited by law. Hence, this
petition with the SC.
Issue: Whether or not the deed of sale executed by
the spouses was void, being in the nature of pactum
Held: Yes. Art. 2088 of the Civil Code provides that the
creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them. Any
stipulation to the contrary is void. What is envisioned
by this article is a provision in the deed of mortgage
providing for the automatic conveyance of the
mortgaged property in case of the failure of the debtor
to pay the loan. A pactum commissorium is a forfeiture
clause in a deed of mortgage. The proscribed
stipulation of automatic conveyance must be found in
the mortgage deed itself.
this Court categorically ruled that a mortgagees mere
act of registering the mortgaged property in his own
name upon the mortgagors failure to redeem the
property amounted to the exercise of the privilege of a
mortgagee in a pactum commissorium.
Obviously, from the nature of the transaction,
applicants predecessor-in-interest is a mere mortgagee,
and ownership of the thing mortgaged is retained by
Basilia Beltran, the mortgagor. The mortgagee,
however, may recover the loan, although the mortgage
document evidencing the loan was nonregistrable
being a purely private instrument. Failure of mortgagor
to redeem the property does not automatically vest
ownership of the property to the mortgagee, which
would grant the latter the right to appropriate the thing
mortgaged or dispose of it.
In the case at bar, the stipulations in the promissory
note provide that, upon failure of spouses to pay
interest, ownership of the property would be
automatically transferred to A. Francisco and the deed
of sale in its favor would be registered. These
stipulations are in substance a pactum commissorium.
They embody the two elements of pactum
commissorium, to wit:

(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;
(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.
The subject transaction being void, the registration of
the deed of sale, by virtue of which petitioner
Vicente Reyes filed an application for registration of his
title to a parcel of land situated in Antipolo
declared that he acquired the land by inheritance from
his father who died sometime in 1944. Applicant is one
of the heirs of the deceased Vicente Reyes Sr. but the
other heirs executed a deed of quit claim in favor of the
An opposition was filed by the Director of Lands,
Francisco Sierra and Emilio Sierra
trial the court rendered a decision,
Vicente Reyes the true and rightful owne
Since the execution of this document, Vicente Reyes,
Sr. began paying the realty taxes up to the time of his
death in 1944, after which, his children continued
paying the taxes. Basilia Beltran died in 1938 before
Reyes could recover from the loan.
Applicant, in seeking the registration of the land, relied
on his belief that the property belongs to his father who
bought the same from Basilia Beltran, as borne out by
his testimony during the trial on direct examination.
he Court is of the opinion
mortgage contract. The intention of the parties at the
time of the execution of the contract must prevail, that
is, the borrowing and lending of money with security.
The use of the word Debt (utang) in an agreement
helps to point out that the transaction was intended to
be a loan with mortgage, because the term "utang"
implies the existence of a creditor-debtor relationship.
The ' Court has invariably upheld the validity of an
agreement or understanding whereby the lender of
money has taken a deed to the land as security for
repayment of the loan. Thus
The fact that the real transaction between the parties
was a borrowing and lending, will, whenever, or
however, it may appear, show that a deed, absolute on
its face was intended as a security for money; and
whenever it can be ascertained to be a security for
money, it is only a mortgage, however artfully it may
be disguised
whether the written instrument in controversy was a
mortgage or a conditional sale. ... The real intention of
the parties at the time the written instrument was
made must concern in the interpretation given to it by
the courts. ... The correct test, where it can be applied,
is the continued existence of a debt or liability between
the parties. If such exists, the conveyance may be held
to be merely a security for the debt or an indemnity
against the liability
when the character of a mortgage has attached at the
commencement of the transaction, so that the
instrument, whatever be its form, is regarded in equity
as a mortgage, that character of mortgage must and
will always continue. If the instrument is in its essence
a mortgage, the parties cannot by any stipulations,
however express and positive, render it anything but a
mortgage or deprive it of the essential attributes
belonging to a mortgage in equity.
In declaring applicant as the "true and rightful owner of
the land in question," the trial court held that applicant

and his predecessor-in- interest acquired ownership

over the property by means of prescription having been
in constructive possession of the land applied for since
1926, applying Arts, 1134 and 1137 of the New Civil
Art. 1134. Ownership and other real rights over
immovable property are acquired by ordinary
prescription through possession of ten years.
Art. 1137. Ownership and other real rights over
immovables also prescribe through uninterrupted
adverse possession thereof for thirty years, without
need of title or good faith.
Applicant in his testimony on cross-examination,
admitted that he and his father did not take possession
of the property but only made use of the same for the
purpose of spending vacation there, which practice
they discontinued for the last 23 years. Possession of
the property must. be in the concept of an owner. This
is a fundamental principle of the law of prescription in
this jurisdiction. In the case at bar, the possession of
applicant was not adverse, nor continuous.
). Mortgage does not constitute just title on the part of
the mortgagee. since ownership is retained by the
mortgagor. When possession is asserted to convert
itself into ownership, a new right is sought to be
created, and the law becomes more exacting and
requires positive proof of title. Applicant failed to
present sufficient evidence to prove that he is entitled
to register the property. The trial court's finding that
since applicant and his father had been continuously
paying the realty taxes, that fact "constitutes strong
corroborating evidence of applicant's adverse
possession," does not carry much weight.
The belief of applicant that he owns the property in
question which he inherited from his father cannot
overthrow the fact that the transaction is a mortgage.
The doctrine "once a mortgage always a mortgage" has
been firmly established whatever be its form.
Applicant having failed to show by sufficient evidence a
registrable title to the land in question, the application
for registration should be dismissed.
WHEREFORE, the decision appealed from is hereby set
OLEA V. CA 1995
Facts: On 27 January 1947 spouses Filoteo Pacardo and
Severa de Pacardo executed a deed of Sale Con Pacto
de Retro over Lot No. 767 of the Passi Cadastre covered
by Transfer Certificate of Title No. 26424 in their name
for a consideration of P950.00 in favor of Maura
Palabrica, predecessor in interest of petitioner, subject
to the condition that . . . if we, the said spouses,
Filoteo Pacardo and Severa de Pacardo, our heirs,
assigns, successors-in-interest, executors and
administrators shall and will truly repurchase the
above-described parcel of land from the said Maura
Palabrica, her heirs, assigns, successors-in-interest
after THREE YEARS counting from the date of the
execution of this instrument, to wit, on January 27,
1950 in cash payment in the sum of Five Hundred
Pesos, Philippine currency, plus Four Hundred and Fifty
Pesos (P450), also lawful currency, in cash or eighteen
(18) cavans of palay (Provincial Measurement) at our
option, then this sale shall become null and void and of
no force and effect whatsoever. On the contrary, the
same will become irrevocable, definite and final. The
contract of sale with right to repurchase was
acknowledged by the vendors before Notary Public

Victorio Tagamolila on the same day the contract was

executed in the Municipality of Passi, Province of Iloilo.
After the execution of the sale, the Pacardo spouses as
vendors remained in possession of the land and
continued the cultivation thereof. Since the sale on 27
January 1947 up to August 1987, or for a period of
about 40 years, the spouses delivered annually onethird (1/3) of the produce of the land to Maura Palabrica
and kept for themselves the remaining two-thirds (2/3).
Despite the lapse of 3 years, the Sps. Pacardo failed to
repurchase the property but still gave the 1/3 share of
the produce to Maura Palabrica. Filoteo Sr. died and
Filoteo Jr. continued to give the 1/3 share to Maura and
eventually to Thelma Olea, daughter of Maura, to
whom she eventually sold the land. Maura caused the
registration of the sale con pacto de retro on 22 Sept
1969. Filoteo Jr. died and Sps. Jesus and Elizabeth
Palencia took over but they gave the 1/3 share not to
Thelma but to Elena Pacardo, wife of Filoteo Jr. Thelma
filed a case against sps. Palencia and Elena for
recovery of possession with damages. Private
respondents Elena Vda. de Pacardo and Jesus and
Elizabeth Palencia filed their answer alleging that their
parents intended the disputed transaction to be an
equitable mortgage and not a sale with right to
repurchase. Respondent Monserrat Paciente, another
daughter of the vendor-spouses Filoteo and Severa
Pacardo, filed an answer in intervention raising likewise
as defense that the Sale Con Pacto de Retro was indeed
an equitable mortgage.
Issue: W/N the sale was a Sale Con Pacto de Retro?
Held: No, Sale was an Equitable Mortgage. We cannot
sustain petitioner. Art. 1602 of the New Civil Code
provides that the contract of sale with right to
repurchase shall be presumed to be an equitable
mortgage in any of the following cases: (a) when the
price of the sale is unusually inadequate; (b) when the
vendor remains in possession as lessee or otherwise;
(c) when upon or after the expiration of the right to
repurchase another instrument extending the period of
redemption or granting a new period is executed; (d)
when the purchaser retains for himself a part of the
purchase price; (e) when the vendor binds himself to
pay the taxes on the thing sold; and, (f) in any other
case where it may be fairly inferred that the real
intention of the parties is that the transaction shall
secure the payment of a debt or the performance of
any other obligation. Being remedial in nature, Art.
1602 may be applied retroactively to cases prior to the
effectivity of the New Civil Code 3 Hence it may apply
to the instant case where the deed of sale with right to
repurchase was executed on 27 January 1947. It has
been held that a contract should be construed as a
mortgage or a loan instead of a pacto de retro sale
when its terms are ambiguous or the circumstances
surrounding its execution or its performance are
incompatible or inconsistent with the theory that it is a
sale Even when a document appears on its face to be a
sale with pacto de retro the owner of the property may
prove that the contract is really a loan with mortgage
by raising as an issue the fact that the document does
not express the true intent and agreement of the
parties. In this case, parol evidence then becomes
competent and admissible to prove that the instrument
was in truth and in fact given merely as a security for
the repayment of a loan. In pacto de retro sale the
payment of the repurchase price does not merely
render the document null and void but there is the

obligation on the part of the vendee to sell back the

property. This is so because pacto de retro sales with
the stringent and onerous effects that accompany them
are not favored. In case of doubt, a contract purporting
to be a sale with right to repurchase shall be construed
as an equitable mortgage
. Such stipulation that the ownership of the property
would automatically pass to the vendee in case no
redemption was effected within the stipulated period is
void for being a pactum commissorium which enables
the mortgagee to acquire ownership of the mortgaged
property without need of foreclosure. Its insertion in the
contract is an avowal of the intention to mortgage
rather than to sell the property. Consequently, there
was no valid sale to Maura Palabrica. Ownership over
the property was not transferred to her for she was
merely a mortgagee. There being no title to the land
that Palabrica acquired from the spouses Filoteo and
Severa Pacardo, it follows that Palabrica had no title to
the same land which could be conveyed to petitioner.
15 Hence there is no legal basis for petitioner to
recover possession of the property. Sps. Pacardo still
gave the 1/3 of the produce until 1987 which is equal to
the interest on the rent. Case for recovery was filed 39
years after, hence barred by estoppel by laches.
(1970, Ruiz Castro, J.)
PETITIONER: Vincent P. Dayrit
RESPONDENTS: Court of Appeals, Hon. Francisco Arca,
judge of CFI of Manila, Mobil Oil Philippines, Inc., and
Eladio Ylagan, special sheriff

On July 21, 1965, defendants Vincent Dayrit,

Leonila T. Sumbillo and Reynaldo Angeles entered into
a contract with Mobil Oil Philippines, Inc., entitled

For and in consideration of Sales Agreement

dated July 21,1965, among the parties herein, Mobil
grants a loan of P150,000 to borrowers.

Defendants-Borrowers shall repay Mobil the

whole amount of P150,000 plus 10% interest per
annum on the diminishing balance for 48 months.

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.

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.

Mobil, in case of default and foreclosure shall

be entitled to attorney's fees and cost of collection
equivalent to not less than 25%of total indebtedness
remaining unpaid.

All expenses in connection with the

preparation and registration of this mortgage as well as
cancellation of same shall the for the account of

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.

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. The plaintiff made due demand, which
Dayrit answered, acknowledging his liability in his

TC: in favor of the plaintiff

No appeal having been interposed by the

defendants, the above decision became final and

An undated Mobil's motion for execution of the

decision and for the appointment of Eladio Ylagan as
special sheriff was received by the 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 onethird share with a reasonable discount, if possible, in so
far as the interests and the award for attorney's fees
were concerned, with the corresponding release of the
mortgage on all his properties, and praying, inview
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 orderof February 24, 1968.

On March 25, 1968, petitioner filed another

motion for 20 days' extension within which to pay his
one-third share of the judgment obligation and to
submit the corresponding compromise agreement for
the satisfaction of the judgment. The said motion was

Thereafter, the respondent Mobil filed all

"Urgent Reply to Opposition and Motion to Stay
Execution dated February 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 a 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 petitioner's
properties or lands be ordered released or cancelled.

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 petitioner's motion dated April3, 1968,
playing 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 Mobil's 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."

CA: dismissed the petition for certiorari, there

being no abuse of discretion in ordering the execution
of a final judgment. Details of execution for satisfaction
of Vincent Dayrit's liability will be worked out in
connection with the safe of the collateral for mortgaged
debt, and the judgment in Civil Case No. 64138 of the
CFI-Manila a will control the disposition and application
of the collateral.
ISSUE: W/N the CFI and the CA 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.
1. PROCEDURAL ISSUE: 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 has admittedly
become final and executory. The controverted
judgment ordered the defendants (Dayrit, Sumbillo and
Angeles) "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 113 of the total

The prayer of the complaint filed with the CFI

recites as follows:

WHEREFORE, it is respectfully prayed that

judgment be rendered
(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 defendants under
this complaint.

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.

Petitioner: the judgment by the lower court is

a simple money judgment and not a foreclosure
judgment, and that because 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 mortgage foreclosure 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 68of the Rules of Court, that the order of payment
be made into the court "within a period not less than
ninety (90) days, x x x 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.

The decision which the petitioner describes as

a simple money judgment orders the defendants
Vincent Dayrit, Leonila T. Sumbilloand Reynaldo
Angeles to pay the plaintiff the sum of P147,434, and in
default of such payment, the properties put up in
collateralshall 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, die entire loan of P150,000 that
the respondent Mobil extended to die 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 havingbeen 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.

Petitioner: 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
Dayrit's liability which as above determined, is 1/3 of
the obligation," thereby entitling him to pay or deposit
in court his correspondent 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.

A mortgage directly and immediately subjects

the property upon which it is imposed, the same being
indivisible even though the debt may be divided, and
such indivisibility likewise being unaffected by the fact
that 'the debtors are not solidarity liable. As Tolentino,
in his Commentaries and Jurisprudence on the Civil
Code of the Philippines, puts it:

"When several things are pledged or

mortgaged, each thing for a determinate portion of the
debt, the pledges or mortgage, are considered
separate from each other. But when the several things
are given to secure the same debt in its entirety, all of
themare liable for the debt, and the creditor does not
have to divide his action by distributing the debt
among the various things pledgedor 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 cannot be
claimed that the lot and the house should be sold
separately and not together."

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 foreclosuresale 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 themortgaged 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 liemight voluntarily pay
the debt before the sale of the collateral at public
auction was ordered, we agree that the trial court failed
toprovide such period. However, this failure can be
regarded as having resulted in mere dammum absque
injuria.From November 17, 1967 when the decision was
rendered to May 23, 1968 when the final order to sell
the mortgaged properties wasissued, a period of more
than six months had passed, which is considerably
much more than the 90-day period of grace allowed
thepetitioner to validly tender the proper payment.
DISPOSITIVE: Petition is denied, at petitioner's cost.
BELO V. PNB 2001

Eduarda Belo owned an agricultural land which

she leased a portion to Sps Eslabon in connection with
the said spouses sugar plantation business.

To finance their business venture, respondents

spouses Eslabon obtained a loan from PNB secured by
a real estate mortgage on their own four (4) residential
houses located in Roxas City, as well as on the land
owned by Eduarda Belo. SPA was issued by Eduarda
Belo as to the mortgage of her property

Sps Eslabon failed to pay mortgages and

thereafter extrajudicial foreclosure proceedings against
the mortgaged properties were instituted by PNB. PNB
was the highest bidder at the auction sale

PNB appraised Eduarda Belo of the sale at

public auction of her agricultural land. She had oneyear period to redeem the land.

Eduarda Belo sold her right of redemption to

petitioner Sps Belo under a deed of absolute sale of
proprietary and redemption rights.

Sps Belo tendered payment for the

redemption of the agricultural land for (P484,482.96),
which includes the bid price of respondent PNB, plus
interest and expenses as provided under Act No. 3135.

PNB rejected payment contending that

redemption price should be the total claim of the bank
on the date of the auction sale and custody of property
plus charges accrued and interests (P2,779,978.72).

Sps Belo filed action to annul the mortgage,

with an alternative cause of action to compel PNB to
accept offer of spouses Belo which is based on the
winning bid price of PNB (P447,632.00) plus interest
and expenses.

RTC: Granted alternative cause of action of

Sps Belo P447,632.00, plus interest and other charges

CA: Modified TC ruling that the petitioners

should pay the entire amount due to PNB under the
mortgage deed at the time of the foreclosure sale plus
interest, costs and expenses. As assignees of Eduarda
Belos right of redemption, the appellees succeed to
the precise right of Eduarda including all conditions
attendant to such right. Moreover, the indivisible
character of a contract of mortgage (Article 2089, Civil
Code) will extend to apply in the redemption stage of
the mortgage.
1. WON SPA, real estate mortgage contract, the
foreclosure proceedings and the subsequent auction
sale involving Eduarda Belos property are valid. YES
2. WON the petitioners are required to pay, as
redemption price, the entire claim of respondent PNB
(P2,779,978.72) NO
1. YES.The subject SPA, the real estate mortgage
contract, the foreclosure proceedings and the
subsequent auction sale of Eduarda Belos property
are valid and legal.

The findings of trial courts which are factual in

nature must not be disturbed.

It is stipulated in paragraph three (3) of the

SPA that Eduarda Belo appointed the Eslabon spouses
as her agents. The accommodation real estate
mortgage over her property is merely an accessory

An accommodation mortgage is not

necessarily void simply because the accommodation
mortgagor did not benefit from the same. The validity

of an accommodation mortgage is allowed under

Article 2085 of the New Civil Code which provides that
(t)hird persons who are not parties to the principal
obligation may secure the latter by pledging or
mortgaging their own property.

The letter of Eduarda Belo addressed to

respondent PNB manifesting her intent to redeem the
property is a waiver of her right to question the validity
of the SPA, etc.
2. NO. This Court finds the petitioners position on that
issue to be meritorious.

There is no doubt that Eduarda Belo, assignor

of the petitioners, is an accommodation mortgagor.
Mortgagor in Section 25 of P.D. No. 694 pertains only
to a debtor-mortgagor and not to an accommodation
Respondent PNB maintains that Section 25 of
Presidential Decree No. 694 (right to redeem the
property by paying all claims of the Bank against him
on the date of the sale)
Petitioners assert to follow Section 6 of Act No. 3135 &
Section 28 of Rule 39 of the Rules of Court (by paying
the purchaser the amount of his purchase plus interest
& other expenses)

The interpretation accorded by respondent

PNB to Section 25 of P.D. No. 694 is unfair and unjust to
accommodation mortgagors and their assignees.
Forcing an accommodation mortgagor like Eduarda
Belo to pay for what the principal debtors (Eslabon
spouses) owe to respondent bank is to punish her for
the accommodation and generosity she accorded to the
Eslabon spouses. Also, PNBs application for
extrajudicial foreclosure and public auction sale of
Eduarda Belos mortgaged property[30] was filed under
Act No. 3135 and none of the proceedings thereafter
mentioned P. D. No. 694 as the basis for redemption.
Similar rulings:
Sy v. Court of Appeals and other case
The General Banking Act and P.D. No. 694 shall prevail
over Act No. 3135 with respect to the redemption price.
accommodation mortgagors as such are not in anyway
liable for the payment of the loan or principal obligation
of the debtor/borrower. The liability of the
accommodation mortgagors extends only up to the
loan value of their mortgaged property and not to the
entire loan itself.
While the petitioners, as assignees of Eduarda Belo, are
not required to pay the entire claim of respondent PNB
against the principal debtors, spouses Eslabon, they
can only exercise their right of redemption with respect
to the parcel of land belonging to Eduarda Belo, the
accommodation mortgagor. Thus, they have to pay the
bid price less the corresponding loan value of the
foreclosed four (4) residential lots of the spouses

PNB contends to allow petitioners to redeem

only the property belonging to their assignor, Eduarda
Belo, would violate the principle of indivisibility of
mortgage contracts (Art 2089). The indivisibility
concept does not apply to the right of redemption of an
accommodation mortgagor and her assignees.

Indivisibility arises only when there is a debt,

that is, there is a debtor-creditor relationship. But, this
relationship is wanting in the case at bar in the sense
that petitioners are assignees of an accommodation
mortgagor and not of a debtor-mortgagor. Hence, it is

fair and logical to allow the petitioners to redeem only

the property belonging to their assignor, Eduarda Belo.

Redemption only extends to the subject

property of Eduarda Belo for the reason that the notice
of the sale limited the redemption to said property.
Petition is partially granted: Petitioner Sps Belo are
allowed to redeem only the property of Eduarda Belo,
by paying only the bid price less the corresponding loan
value of the foreclosed four (4) residential lots of the
respondents Sps Eslabon, consistent with the RTC
Facts: Yuliongsiu 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.
Yuliongsiu obtained a loan of P50,000 from PNB. To
guarantee its payment, plaintiff pledged the M/S
Surigao, M/S Don Dino and its equity in the FS-203, as
evidenced by the pledge contract , duly registered with
the office of the Collector of Customs for the Port of
Cebu. Yuliongsiu effected partial payment of the loan in
the sum of P20,000. The remaining balance was
renewed by the execution of 2 promissory notes in the
bank's favor. These two notes were never paid at all by
Yuliongsiu on their respective due dates.
PNB filed criminal charges against Yuliongsiu and two
other accused for estafa thru falsification of commercial
documents, and they were convicted by the trial court
and sentenced to indemnify PNB
in the sum of P184,000. CA affirmed conviction. The
corresponding writ of execution issued to implement
the order for indemnification was returned unsatisfied
as Yuliongsiu was totally insolvent .Meanwhile,
together with the institution of the criminal action, PNB
took physical possession of three pledged vessels while
they were at the Port of Cebu, and after the first note
fell due and was not paid, the Manager of PNB, acting
as attorney-in-fact of Yuliongsiu pursuant to the terms
of the pledge contract, executed a document of sale,
transferring the two pledged vessels and Yuliongsiu's
equity in FS-203, to PNB for P30,042.72.The FS-203 was
subsequently surrendered by PNB to the Philippine
Shipping which rescinded the sale to Yuliongsiu, for
failure to pay the remaining installments on the
purchase price.
The other two boats were sold byPNB to third
parties.Yuliongsiu commenced action in the CFI to
recover the three vessels or their value and damages
from PNB.The lower court rendered its decision ruling:
(a) that the bank's taking of physical possession of the
vessels was justified by the pledge contract and the
law; (b) that the private sale of the pledged vessels by
PNB to itself withoutnotice to the plaintiff-pledgor as
stipulated in the pledge contract was likewise valid;
and (c) that the PNB should paythe sums of P1,153.99
and P8,000, as his remaining account balance, or setoff these sums against the indemnitywhich Yuliongsiu
was ordered to pay to it in the criminal cases.

: W/N the contract was a chattel mortgage so that PNB
cannot take possession of the chattels until after there
has been default.
No. Pledge.
The parties stipulated as a fact that Exhibit "A" & "1Bank" is a pledge contract. Necessarily, this judicial
admission binds Yuliongsiu. Without any showing that
this was made thru palpable mistake, no amount of
rationalization can offset it.
PNB as pledgee was therefore entitled to the actual
possession of the vessels. While it is true that
Yuliongsiu continued operating the vessels after the
pledge contract was entered into, his possession was
expressly made subject to the order of the pledgee."
The provision of Art. 2110 of the present Civil Code
being 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.
Yuliongsiu also urge Us to rule that constructive
delivery is insufficient to make pledge effective. 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., a
vessel used in maritime business, such delivery is
sufficient. Since PNB was, pursuant to the terms of
pledge contract, in full control of the vessels thru
Yuliongsiu, 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
was not unlawful. Nor was it unjustified considering
that Yuliongsiu had just defrauded the PNB in the huge
sum of P184,000
On various dates, defendant, a commercial banking
institution, through its Sucat Branch issued 280
certificates of time deposit (CTDs) in favor of one Angel
dela Cruz.
One time Mr. dela Cruz delivered the CTDs to Caltex
Philippines in connection with his purchase of fuel
products from the latter. However, Sometime in March
1982, he informed the Sucat Branch Manger that he
lost all the certificates of time deposit in dispute. New
CTDs were issued after the execution of affidavit of
Subsequently, Angel dela Cruz negotiated and obtained
a loan from defendant bank and executed a notarized
Deed of Assignment of Time Deposit, which stated,
among others, that he surrenders to defendant bank
"full control of the indicated time deposits from and
after date" of the assignment and further authorizes
said bank to pre-terminate, set-off and "apply the said
time deposits to the payment of whatever amount or
amounts may be due" on the loan upon its maturity.
In 1982, Mr. Aranas, Credit Manager of plaintiff Caltex
(Phils.) Inc., went to the defendant bank's Sucat branch

and presented for verification the CTDs declared lost by

Angel dela Cruz alleging that the same were delivered
to herein plaintiff "as security for purchases made with
Caltex Philippines, Inc." by said depositor.
The bank received a letter from the plaintiff formally
informing of its possession of the CTDs in question and
of its decision to pre-terminate the same. Accordingly,
defendant bank rejected the plaintiff's demand and
claim for payment of the value of the CTDs in a letter
dated February 7, 1983.
The loan of Angel dela Cruz with the defendant bank
matured and fell due and on August 5, 1983, the latter
set-off and applied the time deposits in question to the
payment of the matured loan. However, the plaintiff
filed the instant complaint, praying that defendant
bank be ordered to pay it the aggregate value of the
certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein at
16% per annum, moral and exemplary damages as well
as attorney's fees.
Whether or not the transaction between Caltex and de
la cruz is valid pledge. Whether or not Caltex can
recover the CTDs
1. The transaction entered into is a pledge. Petitioner's
insistence that the CTDs were negotiated to it begs the
question. Under the Negotiable Instruments Law, an
instrument is negotiated when it is transferred from
one person to another in such a manner as to
constitute the transferee the holder thereof, and a
holder may be the payee or indorsee of a bill or note,
who is in possession of it, or the bearer thereof. In the
present case, however, there was no negotiation in the
sense of a transfer of the legal title to the CTDs in favor
of petitioner in which situation, for obvious reasons,
mere delivery of the bearer CTDs would have sufficed.
Here, the delivery thereof only as security for the
purchases of Angel de la Cruz (and we even disregard
the fact that the amount involved was not disclosed)
could at the most constitute petitioner only as a holder
for value by reason of his lien. Accordingly, a
negotiation for such purpose cannot be effected by
mere delivery of the instrument since, necessarily, the
terms thereof and the subsequent disposition of such
security, in the event of non-payment of the principal
obligation, must be contractually provided for. In the
case at bar, evidence suggests that the instrument was
delivered to Caltex by Dela Cruz as security to the fuel
purchases of the latter and not as payment for such
2. No. The pertinent law on this point is that where the
holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent
of his lien. As such holder of collateral security, he
would be a pledgee but the requirements therefor and
the effects thereof, not being provided for by the
Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights,
which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, . . . may also be pledged.
The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable,
must be indorsed.
Art. 2096. A pledge shall not take effect against third
persons if a description of the thing
pledged and the date of the pledge do not appear in a
public instrument.

Aside from the fact that the CTDs were only delivered
but not indorsed, the factual findings of respondent
court quoted at the start of this opinion show that
petitioner failed to produce any document evidencing
any contract of pledge or guarantee agreement
between it and Angel de la Cruz. Consequently, the
mere delivery of the CTDs did not legally vest in
petitioner any right effective against and binding upon
respondent bank. The requirement under Article 2096
aforementioned is not a mere rule of adjective law
prescribing the mode whereby proof may be made of
the date of a pledge contract, but a rule of substantive
law prescribing a condition without which the execution
of a pledge contract cannot affect third persons
On the other hand, the assignment of the CTDs made
by Angel de la Cruz in favor of respondent bank was
embodied in a public instrument.
Respondent bank duly complied with this statutory
requirement. Contrarily, petitioner, whether as
purchaser, assignee or lien holder of the CTDs, neither
proved the amount of its credit or the extent of its lien
nor the execution of any public instrument which could
affect or bind private respondent. Necessarily,
therefore, as between petitioner and respondent bank,
the latter has definitely the better right over the CTDs
in question.
e 1980, the petitioner, Victoria Yau Chu, had been
purchasing cement on credit from CAMS Trading
Enterprises, Inc. (hereafter "CAMS Trading"
To guaranty payment for her cement withdrawals, she
executed in favor of Cams Trading deeds of assignment
of her time deposits in the total sum of P320,000
Except for the serial numbers and the dates of the time
deposit certificates, the deeds of assignment, which
were prepared by her own lawyer
Cams Trading notified the Bank that Mrs. Chu had an
unpaid account with it in the sum of P314,639.75. It
asked that it be allowed to encash the time deposit
certificates which had been assigned to it by Mrs. Chu
It submitted to the Bank a letter dated July 18, 1980 of
Mrs. Chu admitting that her outstanding account with
Cams Trading was P404,500. After verbally advising
Mrs. Chu of the assignee's request to encash her time
deposit certificates and obtaining her verbal conformity
thereto, the Bank agreed to encash the certificates.It
delivered to Cams Trading the sum of P283,737.75
only, as one time deposit certificate (No. 0048120954)
lacked the proper signatures. Upon being informed of
the encashment, Mrs. Chu demanded from the Bank
and Cams Trading that her time deposit be restored.
When neither complied, she filed a complaint to
recover the sum of P283,737.75 from them
trial court dismissed the complaint for lack of merit.
Chu appealed to the Court of Appeals (CA-G.R. CV
which affirmed the dismissal of her complaint.
she alleges that the Court of Appeals erred:
In not annulling the encashment of her time deposit
certificates as a pactum commissorium; and
In not finding that the obligations secured by
her time deposits had already been paid.
We find no merit in the petition for review.
The Court of Appeals found that the deeds of
assignment were contracts of pledge, but, as the
collateral was also money or an exchange of "peso for
peso," the provision in Article 2112 of the Civil Code for

the sale of the thing pledged at public auction to

convert it into money to satisfy the pledgor's
obligation, did not have to be followed. All that had to
be done to convert the pledgor's time deposit
certificates into cash was to present them to the bank
for encashment after due notice to the debtor
The encashment of the deposit certificates was not a
pacto commissorio which is prohibited under Art. 2088
of the Civil Code. A pacto commissorio is a provision for
the automatic appropriation of the pledged or
mortgaged property by the creditor in payment of the
loan upon its maturity. The prohibition against a pacto
commissorio is intended to protect the obligor, pledgor,
or mortgagor against being overreached by his creditor
who holds a pledge or mortgage over property whose
value is much more than the debt. Where, as in this
case, the security for the debt is also money deposited
in a bank, the amount of which is even less than the
debt, it was not illegal for the creditor to encash the
time deposit certificates to pay the debtors' overdue
obligation, with the latter's consent.
hether the debt had already been paid as now alleged
by the debtor, is a factual question which the Court of
Appeals found not to have been proven for the
evidence which the debtor sought to present on appeal,
were receipts for payments made prior to July 18, 1980.
Since the petitioner signed on July 18, 1980 a letter
admitting her indebtedness to be in the sum of
P404,500, and there is no proof of payment made by
her thereafter to reduce or extinguish her debt, the
application of her time deposits, which she had
assigned to the creditor to secure the payment of her
debt, was proper. The Court of Appeals did not commit
a reversible error in holding that it was so.
Respondents were the owners, in their respective
personal capacities, of shares of stock in a corporation
known as the Quirino-Leonor-Rodriguez Realty
Inc.Respondents secured by way of pledge of some of
their shares of stock to petitioners Bonifacio and
Faustina Paray (Parays) the payment of certain loan
When the Parays attempted to foreclose the
pledges on account of respondents failure to pay their
loans, respondents filed complaints which sought the
declaration of nullity of the pledge agreements.
Respondents consign to RTC which they
interpreted as redemption.
Notwithstanding the consignations, the public
auction took place as scheduled, with petitioner Vidal
Espeleta successfully bidding the amount of
P6,200,000.00 for all of the pledged shares.
WON Petitioners were authorized to refuse as
they did the tender of payment since they were
undertaking the auction sale pursuant to the final and
executory decision in Civil Cases.
Yes. it must be clarified that the subject sale of pledged
shares was an extrajudicial sale, specifically a notarial
sale, as distinguished from a judicial sale as typified by
an execution sale. Under the Civil Code, the foreclosure
of a pledge occurs extrajudicially, without intervention

by the courts. All the creditor needs to do, if the credit

has not been satisfied in due time, is to proceed before
a Notary Public to the sale of the thing pledged.[9]
In this case, petitioners attempted as early as
1980 to proceed extrajudicially with the sale of the
pledged shares by public auction. However,
extrajudicial sale was stayed with the filing of Civil
Cases No. R-20120 and 20131, which sought to annul
the pledge contracts. The final and executory judgment
in those cases affirmed the pledge contracts and
Since the pledged shares in this case are not subject to
redemption, the Court of Appeals had no business
invoking and applying the inexistent right of
redemption. We cannot thus agree that the consigned

payments should be treated with liberality, or somehow

construed as having been made in the exercise of the
right of redemption. We also must reject the appellate
courts declaration that the buyer of at the public
auction is not ipso facto rendered the owner of the
auctioned shares, since the debtor enjoys the one-year
redemptive period to redeem the property. Obviously,
since there is no right to redeem personal property, the
rights of ownership vested unto the purchaser at the
foreclosure sale are not entangled in any suspensive
condition that is implicit in a redemptive period.
WHEREFORE, the petition is GRANTED. The assailed
decision of the Court of Appeals is SET ASIDE and the
decision of the Cebu City RTC, Branch 16, dated 18
November 1992 is REINSTATED. Costs against