SIMPLE LOAN OR MUTUUM P2,377.
23 as of December 31, 1959, plus interest at the rate of
G.R. No. L-20240 December 31, 1965
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
JOSE GRIJALDO, defendant-appellant.
FACTS:
In the year 1943 appellant Jose Grijaldo obtained five loans
from the branch office of the Bank of Taiwan, Ltd. in Bacolod
City, in the total sum of P1,281.97 with interest at the rate of
6% per annum, compounded quarterly. These loans are
evidenced by five promissory notes executed by the appellant
in favor of the Bank of Taiwan, Ltd., as follows: On June 1, 1943,
P600.00; on June 3, 1943, P159.11; on June 18, 1943, P22.86;
on August 9, 1943,P300.00; on August 13, 1943, P200.00, all
notes without due dates, but because the loans were due one
year after they were incurred. To secure the payment of the
loans the appellant executed a chattel mortgage on the
standing crops on his land, Lot No. 1494 known as Hacienda
Campugas in Hinigiran, Negros Occidental.
By virtue of Vesting Order No. P-4, dated January 21, 1946, and
under the authority provided for in the Trading with the Enemy
Act, as amended, the assets in the Philippines of the Bank of
Taiwan, Ltd. were vested in the Government of the United
States. Pursuant to the Philippine Property Act of 1946 of the
United States, these assets, including the loans in question,
were subsequently transferred to the Republic of the
Philippines by the Government of the United States under
Transfer Agreement dated July 20, 1954. These assets were
among the properties that were placed under the
administration of the Board of Liquidators created under
Executive Order No. 372, dated November 24, 1950, and in
accordance with Republic Acts Nos. 8 and 477 and other
pertinent laws.
On September 29, 1954 the appellee, Republic of the
Philippines, represented by the Chairman of the Board of
Liquidators, made a written extrajudicial demand upon the
appellant for the payment of the account in question. The
record shows that the appellant had actually received the
written demand for payment, but he failed to pay.
On January 17, 1961 the appellee filed a complaint in the
Justice of the Peace Court of Hinigaran, Negros Occidental, to
collect from the appellant the unpaid account in question. The
Justice of the Peace Of Hinigaran, after hearing, dismissed the
case on the ground that the action had prescribed. The
appellee appealed to the Court of First Instance of Negros
Occidental and on March 26, 1962 the court a quo rendered a
decision ordering the appellant to pay the appellee the sum of
6% per annum compounded quarterly from the date of the
filing of the complaint until full payment was made. The
appellant was also ordered to pay the sum equivalent to 10%
of the amount due as attorney's fees and costs.
The appellant appealed directly to this Court. During the
pendency of this appeal the appellant Jose Grijaldo died. Upon
motion by the Solicitor General this Court, in a resolution of
May 13, 1963, required Manuel Lagtapon, Jacinto Lagtapon,
Ruben Lagtapon and Anita L. Aguilar, who are the legal heirs of
Jose Grijaldo to appear and be substituted as appellants in
accordance with Section 17 of Rule 3 of the Rules of Court.
ISSUE:
Whether or not the obligation to pay is extinguished.
The appellant likewise maintains, in support of his contention
that the appellee has no cause of action, that because the
loans were secured by a chattel mortgage on the standing
crops on a land owned by him and these crops were lost or
destroyed through enemy action his obligation to pay the
loans was thereby extinguished.
HELD:
This argument is untenable. The terms of the promissory notes
and the chattel mortgage that the appellant executed in favor
of the Bank of Taiwan, Ltd. do not support the claim of
appellant. The obligation of the appellant under the five
promissory notes was not to deliver a determinate thing
namely, the crops to be harvested from his land, or the value
of the crops that would be harvested from his land. Rather, his
obligation was to pay a generic thing the amount of money
representing the total sum of the five loans, with interest. The
transaction between the appellant and the Bank of Taiwan,
Ltd. was a series of five contracts of simple loan of sums of
money. "By a contract of (simple) loan, one of the parties
delivers to another ... money or other consumable thing upon
the condition that the same amount of the same kind and
quality shall be paid." (Article 1933, Civil Code) The obligation
of the appellant under the five promissory notes evidencing
the loans in questions is to pay the value thereof; that is, to
deliver a sum of money a clear case of an obligation to
deliver, a generic thing. Article 1263 of the Civil Code provides:
In an obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not
extinguish the obligation.
The chattel mortgage on the crops growing on appellant's land
simply stood as a security for the fulfillment of appellant's
obligation covered by the five promissory notes, and the loss
of the crops did not extinguish his obligation to pay, because
SECTRANS 2010/ ATTY. AGUINALDO 1
the account could still be paid from other sources aside from
the mortgaged crops.
Frias vs San Diego-Sison
G.R. No. 155223 April 4, 2007
Facts
Petitioner is the owner of a house and lot in Ayala
Alabang.
Petitioner and Dra. Flora San Diego-Sison (Respondent)
entered into a Memorandum of Agreement (MOA) over
the cited property with the following terms:
1. The land is to be sold for P 6.4 million.
2. Petitioner will receive P3 million from
respondent as downpayment.
3. In light of the downpayment, respondent had 6
months (1st) to notify the Petitioner of her
intention to purchase the land. However, the
balance is to be paid within another 6 months.
4. Prior to the first six months, the Petitioner may
still offer the cited land to other persons
provided that the P3 million downpayment shall
be returned to the Respondent including interest
based on prevailing compounded bank interest.
5. Nevertheless, in case there are no other buyers
within the first 6 months, no interest shall be
charged on the P3 million.
6. However, in the event that on the 6th month the
Respondent does not purchase the land, the
Petitioner has a period of another 6 months (2nd)
within which to pay the sum of P3 million with
interest for the last six months only. The
downpayment shall be treated as loan granted by
the Respondent.
Petitioner received from Respondent P2 million in cash
and P1 million in a post-dated check which was
subsequently considered as stale. Therefore, only P2
million was received as downpayment.
Before the check became stale, Petitioner gave
Respondent the TCT and the Deed of Absolute Sale of the
land.
Subsequently, Respondent decided not to purchase the
property and notified Petitioner of this reminding the
latter that the amount of P2 million should be considered
as a loan payable within six months as stipulated in the
MOA with interest computed from such notification.
Petitioner subsequently failed to return the P2 million
pesos.
CA ruled that the P2 million downpayment shall include
interest computed at the time the disputed amount was
considered a loan. Thus, this petition.
Issue:
Whether or not the interest should be limited to the 1st six
months as contained in the MOA?
Ruling:
No. SC ruled in favour of Respondent.
The SC opined that if the terms of an agreement are clear
and leave no doubt as to the intention of the contracting
parties, the literal meaning of its stipulations shall prevail.
It is further required that the various stipulations of a
contract shall be interpreted together.
In this case, the phrase "for the last six months only"
should be taken in the context of the entire agreement.
The MOA speaks of 2 periods of six months each.
o The 1st six-months was given to Respondent to
make up her mind whether or not to purchase
Petitioner's property.
o The 2nd six-months was given to Petitioner to
pay the P2 million loan (downpayment) in the
event that Respondent decided not to buy the
property in which case interest will be charged
"for the last six months only", referring to the 2nd
six-month period.
o This means that no interest will be charged for
the 1st six-months while Respondent
contemplating on whether to buy the property,
but only for the 2nd six-months after Respondent
had decided not to buy the property. This is the
meaning of the phrase "for the last six months
only".
o Certainly, there is nothing in their agreement
that suggests that interest will be charged for 6
months only even if it takes defendant-appellant
an eternity to pay the loan
This does NOT mean that interest will no longer be
charged after the 2nd six-month period since such
stipulation was made on the logical and reasonable
expectation that such amount would be paid within the
date stipulated. Therefore, the monetary interest for the
last 6 months continued to accrue until actual payment of
the loaned amount.
It has been held that for a debtor to continue in possession
of the principal of the loan and to continue to use the
same after maturity of the loan without payment of the
monetary interest, would constitute unjust enrichment on
the part of the debtor at the expense of the creditor.
Art. 1956. No interest shall be due when not expressly
stipulated in writing.
ARWOOD INDUSTRIES, INC. vs. D.M. Consunji, Inc.
FACTS: Petitioner and respondent, as owner and contractor,
respectively entered into an Agreement for the construction of
petitioners condominium. Despite the completion of the
SECTRANS 2010/ ATTY. AGUINALDO 2
project, petitioner was not able to pay respondent the full
amount and left a balance. Repeated demands were left
unheeded prompting respondent to file a civil case against
petitioner, with a prayer among others that the full amount be
paid with interest of 2% per month, from Nov. 1990 up to the
time of payment. RTC ruled in favor of respondent. Petitioner
appealed to the CA, particularly opposing the imposition of the
2% interest. The CA ruled in favor of the 2% interest.
Petitioners contention- The imposition of the interest is
without basis because (1) although it was written in the
Agreement, it was not mentioned by the RTC in the dispositive
portion and (2) the interest does not apply to the respondents
claim but to the monthly progress billing.
ISSUE: WON the RTC and Ca is correct in imposing a 2% per
month interest on the monetary award or the balance of the
contract price.
HELD: Yes. The Agreement between the parties is the formal
expression of the parties rights, duties and obligations. It is the
best evidence of the intention of the parties. Consequently,
upon the fulfillment by respondent of its obligation to
complete the construction project, petitioner had the
correlative duty to pay for respondents services. However,
petitioner refused to pay the balance of the contract price.
From the moment respondent completed the construction of
the condominium project and petitioner refused to pay in full,
there was delay on the part of petitioner.
Delay in the performance of an obligation is looked upon with
disfavor because, when a party to a contract incurs delay, the
other party who performs his part of the contract suffers
damages thereby. Obviously, respondent suffered damages
brought about by the failure of petitioner to comply with its
obligation on time. And, sans elaboration of the matter at
hand, damages take the form of interest. Accordingly, the
appropriate measure of damages in this case is the payment
of interest at the rate agreed upon, which is 2% interest for
every month of delay.
It must be noted that the Agreement provided the contractor,
respondent in this case, two options in case of delay in
monthly payments, to wit: a) suspend work on the project
until payment is remitted by the owner or b) continue the
work but the owner shall be required to pay interest at a rate
of two percent (2%) per month or a fraction
thereof. Evidently, respondent chose the latter option, as the
condominium project was in fact already completed. The
payment of the 2% monthly interest, therefore, cannot be
jettisoned overboard.
Since the Agreement stands as the law between the parties,
this Court cannot ignore the existence of such provision
providing for a penalty for every months delay. Facta legem
facunt inter partes. Neither can petitioner impugn the
Agreement to which it willingly gave its consent. From the
moment petitioner gave its consent, it was bound not only to
fulfill what was expressly stipulated in the Agreement but
also all the consequences which, according to their nature,
may be in keeping with good faith, usage and law.
Petitioners attempt to mitigate its liability to respondent
should thus fail.
As a last-ditch effort to evade liability, petitioner argues that
the amount of P962,434.78 claimed by respondent and later
awarded by the lower courts does not refer to monthly
progress billings, the delayed payment of which would earn
interest at 2% per month.
Petitioner appears confused by a semantics
problem. Monthly progress billings certainly form part of
the contract price. If the amount claimed by respondent is
not the monthly progress billings provided in the contract,
what then does such amount represent? Petitioner has not in
point of fact convincingly supplied an answer to this
query. Neither has petitioner shown any effort to clarify the
meaning of monthly progress billings to support its
position. This leaves us no choice but to agree with
respondent that the phrase monthly progress billings refers
to a portion of the contract price payable by the owner
(petitioner) of the project to the contractor (respondent)
based on the percentage of completion of the project or on
work accomplished at a particular stage. It refers to that
portion of the contract price still to be paid as work
progresses, after the downpayment is made.
This definition is, indeed, not without basis. Articles 6.02 and
6.03 of the Agreement, which respectively provides that the
(b)alance shall be paid in monthly progress payments based
on actual value of the work accomplished and that the
progress payments shall be reduced by a portion of the
downpayment made by the OWNER corresponding to the
value of the work completed give sense to respondents
interpretation of monthly progress billings.
SONCUYA V. AZARRAGA
ROYAL SHIRT FACTORY, INC. v CO
FACTS:
- The parties entered into a contract wherein it is
stipulated that 350 pairs of ballet shoes will be sold
by Co and that Co had 9 days from delivery of the
shoes to make his choice of 2 alternatives: a)
consider the sale for the shoes closed at a flat rate,
or b) return the remaining unsold ones to Royal.
- Co failed to return the unsold pairs after 9 days and
actually began making partial payments on account
of the purchase price agreed upon.
- Co then contended that there was merely a
consignment of the goods and he wanted to return
SECTRANS 2010/ ATTY. AGUINALDO 3
 the unsold shoes. Royal refused contending that it
was an outright sale.
ISSUE: WoN the sale was an outright sale / WoN Co is bound
by the interest stipulated in the invoice.
SC: YES! / NO!
- OUTRIGHT SALE
o Co accepted the invoice of the ballet shoes
and he even noted down in his own
handwriting the partial payments that he
made.
o If the sale has been on consignment, a
stipulation as to the period of time for the
return of the unsold shoes should have
been made, however, this was not done
- NOT BOUND BY THE INTEREST
o He did not sign the invoice slip the
stipulated interest was 20%, hence, not
binding
o However, he is bound by the legal interest
of 6%
- Hence, Co was ordered to pay the balance of the
purchase price for the ballet shoes + legal interest
EMERITO M. RAMOS, et al., petitioners,
vs.
CENTRAL BANK OF THE PHILIPPINES, respondents;
COMMERCIAL BANK OF MANILA, intervenor.
Facts: This involves question as to applicability of Tapia ruling
wherein the Court held that "the obligation to pay interest on
the deposit ceases the moment the operation of the bank is
completely suspended by the duly constituted authority, the
Central Bank," to loans and advances by the Central Bank
Held: Respondents have failed to adduce any cogent
argument to persuade the Court to reconsider its Resolution
at bar that the Tapia ruling is fully applicable to the non-
payment of interest, during the period of the bank's forcible
closure, on loans and advances made by respondent Central
Bank.
Respondent Central Bank itself when it was then managing
the Overseas Bank of Manila (now Commercial Bank of
Manila) under a holding trust agreement, held the same
position in Idelfonso D. Yap vs. OBM wherein it argued that
"(I)n a suit against the receiver of a national bank for money
loaned to the Bank while it was a going concern, it was error
to permit plaintiff to recover interest on the loan after the
bank's suspension"
A significant development of the case, the Government
Service Insurance System (GSIS) has acquired ownership of
99.93% of the outstanding capital stock of COMBANK. The
Court's Resolution manifestly redounds to the benefit of
another government institution, the GSIS, and to the
preservation of the banking system.
LIRAG TEXTILE MILLS, INC. VS. SSS
153 SCRA 338
Facts:
SSS (respondent) and Lirag Textile Mills (Petitioner)
entered into a Purchased Agreement which Respondent
agreed to purchase preferred stocks of Petitioner worth
P1 million subject to conditions:
o For Petitioner to repurchase the shares of
stocks at a regular interval of one year and
to pay dividends.
o Failure to redeem and pay the dividend, the
entire obligation shall become due and
demandable and it shall be liable for an
amount equivalent to 12% of the amount
then outstanding as liquidated damages.
Basilio Lirag (Basilio) as President of Lirag Textile Mills
signed the Agreement as a surety to guarantee the
redemption of the stocks, the payment of dividends and
other obligations.
Pursuant to the Agreement, Respondent paid Petitioner
P500,000 on two occasions and the latter issued 5,000
preferred stocks with a par value of P100 as evidenced by
Stock Certificate Nos. 128 and 139.
After sending Respondent sent demand letters, Petitioner
and Basilio still made no redemption nor made dividend
payments.
Respondent filed an action for specific performance and
damages against Petitioner:
Petitioner contends that there is no obligation on their
part to redeem the stock certificates since Respondent is
still a preferred stock holder of the company and such
redemption is dependent upon the financial ability of the
company.
On the part of Basilio, he contends that his liability only
arises only if the company is liable and does not perform
its obligations under the Agreement.
Issue:
1) Whether or not the Purchase Agreement entered into
by the Parties is a debt instrument?
2) If so, Is Basilio liable as surety?
3) Whether or not Lirag is liable for the interest as
liquidated damages?
Held:
SECTRANS 2010/ ATTY. AGUINALDO 4
1) YES, the Purchase Agreement is a debt instrument. The
terms and conditions of the Agreement show that parties
intended the repurchase of preferred shares on the
respective scheduled dates to be an absolute obligation,
which does not depend on the financial ability of the
corporation.
o This absolute obligation on the part of the Petitioner
corporation is made manifest by the fact that a surety
was required to see to it that the obligation is fulfilled
in the event the principal debtors inability to do so.
o It cannot be said that SSS is a preferred stockholder.
The rights given by the Purchase Agreement to SSS
are not rights enjoyed by ordinary stockholders. Since
there was a condition that failure to repurchase the
stocks on the scheduled dates renders the entire
obligation due and demandable with interest. These
features clearly show that intent of the parties to be
bound therein as debtor and creditor and not as a
corporation and stockholder.
2) YES, Basilio is liable as surety. Thus it follows that he
cannot deny liability for Lirags default. As surety, he is
bound immediately to pay SSS the amount then
outstanding.
3) The award of liquidated damages represented by 12% of
the amount then outstanding is correct, considering that
the petitioners in the stipulation of facts admitted having
failed to fulfill their obligations under the Agreement. The
grant of liquidated damages is expressly provided for the
Purchase Agreement in case of contractual breach.
Since Lirag did not deny its failure to redeem the preferred
shares and the non-payment of dividends which are
overdue, they are bound to earn legal interest from the
time of demand, in this case, judicial i.e. the time of filing
the action.
ANGEL WAREHOUSING vs CHELDA
Facts: Angel Warehousing sued Chelda for the
recovery of unpaid loans amounting to P20,880 because the
post dated checks issued by Chelda were dishonored. Chelda
said that Angel Warehousing charged usurious interests, thus
they have no cause of action against them & cant recover the
remaining balance.
Issue: W/N illegal terms as to payment of interest
likewise renders a nullity the legal terms as to the payment of
the principal debt?
Ruling: No. The contract of loan with usurious interest
consists of principal and accessory stipulations and the two
stipulations are divisible in the sense that the principal debt
can stand without the usurious interest (accessory). These are
divisible contracts. In divisible contracts, if the illegal terms can
be separated from legal ones, the latter may be enforced.
Illegality lies only as to the prestation to pay interest, being
separable, thus should be rendered void. If the principal will be
forfeited this would unjustly enrich the borrower at the
expense of the lender.
CU-UNJIENG V. MABALACAT
Facts: Cu Unjieng e Hijos loaned Mabalacat 163 k, for security,
Mabalacat mortgaged its property.
Mabalacat failed to pay, but Cu Unjieng extended the
payment. Cu Unjieng filed a case against Mabalacat for
foreclosure of property and payment of attorney's fees. It also
claims interest over interest. Mabalacat insisted that
the agreement for the extension of the time of payment had
the effect of abrogating the stipulation of the original contract
with respect to the acceleration of the maturity of the debt by
non-compliance with the terms of the mortgage. The issue
related on this case is the interest over interest.
Issue: WoN Cu-Unjieng is entitled to interest over interest.
Ruling: It is well settled that, under article 1109 of the Civil
Code, as well as under section 5 of the Usury Law (Act No.
2655), the parties may stipulate that interest shall be
compounded; and rests for the computation of compound
interest can certainly be made monthly, as well as quarterly,
semiannually, or annually. But in the absence of express
stipulation for the accumulation of compound interest, no
interest can be collected upon interest until the debt is
judicially claimed, and then the rate at which interest upon
accrued interest must be computed is fixed at 6 per cent per
annum. In this case, there was no compound interest in the
agreement.
DAVID vs. CA
G.R.No. 115821, October 13, 1999
Facts:
A writ of attachment over the real properties owned
by Valentin Afable, Jr.. RTC ordered Afable, Jr. To pay David
P66,500 plus interest from July 24, 1974, until fully paid. RTC
amended its decison and ruled that legal rate of interest
should be computed from January 4, 1966, instead of from July
24, 1974.
Afable appealed to the Court of Appeals and then to
the Supreme Court. In both instances, the decision of the
lower court was affirmed. Entries of judgment were made and
the record of the case was remanded to Branch 27 for the final
execution.
SECTRANS 2010/ ATTY. AGUINALDO 5
 An Alias Writ of Execution was issued by virtue of
which respondent Sheriff Melchor P. Pea conducted a public
auction. Sheriff Pea informed the petitioner that the total
amount of the judgment is P270,940.52. The amount included
a computation of simple interest. Afable, however, claimed
that the judgment award should be P3,027,238.50, because
the amount due ought to be based on compounded interest.
Although the auctioned properties were sold to the
petitioner, Sheriff Pea did not issue the Certificate of Sale
because there was an excess in the bid price in the amount of
P2,941,524.47, which the petitioner failed to pay despite
notice. David filed a Motion praying that respondent Judge
Cruz issue an order directing respondent Sheriff Pea to
prepare and execute a certificate of sale in his favor. His reason
is that compound interest, which is allowed by Article 2212 of
the Civil Code, should apply in this case.
David claim that in computing the interest due of the
P66,500.00, interest should be computed at 6% on the
principal sum of P66,500.00 pursuant to Article 2209 and then
interest on the legal interest should also be computed in
accordance with the language of Article 2212 of the Civil Code.
Issue: Whether or not the amount due should be subject to a
simple interest or compounded interest.
Ruling:
In cases where no interest stipulated, no compounded interest
could be further earned
The Court ruled that Article 2212 contemplates the
presence of stipulated or conventional interest which has
accrued when demand was judicially made. In cases where no
interest had been stipulated by the parties, as in the case of
Philippine American Accident Insurance, no accrued
conventional interest could further earn interest upon judicial
demand.
In this case, no interest was stipulated by the parties.
In the promissory note denominated Compromise
Agreement signed by the Afable, Jr. which was duly accepted
by the David no interest was mentioned. That being the case,
the interest should only be subject to a simple interest.
Topic: Simple Loan or Mutuum; Article 1960
Velez v. Balzarra
FACTS:
Plaintiff Velez filed a complaint for the return of
parcels of land sold by Defendant to Plaintiffs
husband. She further alleged that defendants had
remained in possession of said land under Contract of
Lease but for over 2 years defendants had not paid
the agreed rentals.
Defendant alleged that the real agreement was a loan
secured by a mortgage of those lands.
Trial court found that the payments made by
defendants were not made by way of interest but as
payments for the principal. Defendant overpaid
therefore Plaintiff should return excess.
ISSUE: Whether payments were intended to be applied to the
principal OR were considered as rents, interests?
HELD:
Payments were NOT rents, interests
Neri took possession of land and collected fruits. The
creditor having enjoyed the beneficial use of the lands
delivered as security for the loan, it appears to have
been the intention of the parties that the creditor
should be compensated thereby.
Though receipts, payments are called rents, they
were prepared by Neri (Ps husband) and Plaintiff, and
defendants in their ignorance did not look into the
wording, being merely satisfied that they were proofs
of payment.
The liability of plaintiff to return the excess payments
is in keeping with Article 1895 (Old Civil Code) which
provides that, when something is received which
there is no right to collect, and which by mistake has
been unduly delivered, the obligation to restore it
arises.
The 2 requisites are present: 1) There is no right to
collect these excess sums; and 2) the amounts have
been paid through mistake by defendants. Such
mistake is shown by the fact that their contracts
never intended that either rents or interest should be
paid, and by the further fact that when these
payments were made, they were intended by
defendants to be applied to the principal, but they
overpaid the amounts loaned to them.
USURY LAW
G.R. No. 128990 September 21, 2000
INVESTORS FINANCE CORPORATION, petitioner,
vs.
AUTOWORLD SALES CORPORATION, and PIO BARRETTO
REALTY DEVELOPMENT
CORPORATION,respondents.
FACTS:
Petitioner Investors Finance Corporation, then known also as
FNCB Finance (now doing business under the name of Citytrust
SECTRANS 2010/ ATTY. AGUINALDO 6
Finance Corporation), is a financing company doing business
with private respondent Autoworld Sales Corporation
(AUTOWORLD) since 1975. Anthony Que, president of
AUTOWORLD, also held the same position at its affiliate
corporation, private respondent Pio Barretto Realty
Corporation (BARRETTO).
Sometime in August 1980 Anthony Que, in behalf of
AUTOWORLD, applied for a direct loan with FNCB. However,
since the Usury Law imposed an interest rate ceiling at that
time, FNCB informed Anthony Que that it was not engaged in
direct lending; consequently, AUTOWORLD's request for loan
was denied.
But sometime thereafter, FNCB's Assistant Vice President, Mr.
Leoncio Araullo, informed Anthony Que that although it could
not grant direct loans it could extend funds to AUTOWORLD by
purchasing any of its outstanding receivables at a discount.
After a series of negotiations the parties agreed to execute an
Installment Paper Purchase ("IPP") transaction to enable
AUTOWORLD to acquire the additional capital it needed. The
mechanics of the proposed "IPP" transaction was
(1) First, Pio Barretto (BARRETTO) would execute a
Contract to Sell a parcel of land in favor of
AUTOWORLD for P12,999,999.60 payable in sixty (60)
equal monthly installments of P216,666.66.
Consequently, BARRETTO would acquire
P12,999,999.60 worth of receivables from
AUTOWORLD;
(2) FNCB would then purchase the receivables worth
P12,999,999.60 from BARRETTO at a discounted
value of P6,980,000.00 subject to the condition that
such amount would be "flowed back" to
AUTOWORLD;
(3) BARRETTO, would in turn, execute a Deed of
Assignment (in favor of FNCB) obliging AUTOWORLD
to pay the installments of the P12,999,999.60
purchase price directly to FNCB; and
(4) Lastly, to secure the payment of the receivables
under the Deed of Assignment, BARRETTO would
mortgage the property subject of the sale to FNCB.
On 17 November 1980 FNCB informed AUTOWORLD that its
Executive Committee approved the proposed "IPP"
transaction. The lawyers of FNCB then drafted the contracts
needed and furnished Anthony Que with copies thereof.
On 9 February 1981 the parties signed three (3) contracts to
implement the "IPP" transaction:
(1) Contract to Sell whereby BARRETTO sold a parcel
of land to AUTOWORLD, situated in San Miguel,
Manila, together with the improvements thereon,
covered by TCT No. 129763 for the price of
P12,999,999.60 payable in sixty (60) consecutive and
equal monthly installments of P216,666.66.
(2) Deed of Assignment whereby BARRETTO assigned
and sold in favor of FNCB all its rights, title and
interest to all the money and other receivables due
from AUTOWORLD under the Contract to Sell, subject
to the condition that the assignee (FNCB) has the right
of recourse against the assignor (BARRETTO) in the
event that the payor (AUTOWORLD) defaulted in the
payment of its obligations.
(3) Real Estate Mortgage whereby BARRETTO, as
assignor, mortgaged the property subject of the
Contract to Sell to FNCB as security for payment of its
obligation under the Deed of Assignment.
After the three (3) contracts were concluded AUTOWORLD
started paying the monthly installments to FNCB.
On 18 June 1982 AUTOWORLD transacted with FNCB for the
second time obtaining a loan of P3,000,000.00 with an
effective interest rate of 28% per annum. AUTOWORLD and
BARRETTO, as co-makers, then signed a promissory note in
favor of FNCB worth P5,604,480.00 payable in sixty (60)
consecutive monthly installments of P93,408.00. To secure the
promissory note, AUTOWORLD mortgaged a parcel of land
located in Sampaloc, Manila, to FNCB. Thereafter,
AUTOWORLD began paying the installments.
In December 1982, after paying nineteen (19) monthly
installments of P216,666.66 on the first transaction ("IPP"
worth P6,980,000.00) and three (3) monthly installments of
P93,408.00 on the second transaction (loan worth
P3,000,000.00), AUTOWORLD advised FNCB that it intended to
preterminate the two (2) transactions by paying their
outstanding balances in full. It then requested FNCB to provide
a computation of the remaining balances. FNCB sent
AUTOWORLD its computation requiring it to pay a total
amount of P10,026,736.78, where P6,784,551.24 was the
amount to settle the first transaction while P3,242,165.54 was
the amount to settle the second transaction.
On 20 December 1982 AUTOWORLD wrote FNCB that it
disagreed with the latter's computation of its outstanding
balances. On 27 December 1982 FNCB replied that it would
only be willing to reconcile its accounting records with
AUTOWORLD upon payment of the amounts demanded. Thus,
despite its objections, AUTOWORLD reluctantly paid FNCB
P10,026,736.78 through its UCPB account.
On 5 January 1983 AUTOWORLD asked FNCB for a refund of its
overpayments in the total amount of
P3,082,021.84. According to AUTOWORLD, it overpaid
SECTRANS 2010/ ATTY. AGUINALDO 7
P2,586,035.44 to settle the first transaction and P418,262.00
to settle the second transaction.
The parties attempted to reconcile their accounting figures but
the subsequent negotiations broke down prompting
AUTOWORLD to file an action before the Regional Trial Court
of Makati to annul the Contract to Sell, the Deed of
Assignment and the Real Estate Mortgage all dated 9 February
1981. It likewise prayed for the nullification of thePromissory
Note dated 18 June 1982 and the Real Estate Mortgage dated
24 June 1982.
In its complaint, AUTOWORLD alleged that the
aforementioned contracts were only perfected to facilitate a
usurious loan and therefore should be annulled
FNCB argued that the contracts dated 9 February 1981 were
not executed to hide a usurious loan. Instead, the parties
entered into a legitimate Installment Paper Purchase ("IPP")
transaction, or purchase of receivables at a discount, which
FNCB could legally engage in as a financing company. With
regard to the second transaction, the existence of a usurious
interest rate had no bearing on the P3,000,000.00 loan since
at the time it was perfected on 18 January 1982 Central Bank
Circular No. 871 dated 21 July 1981 had effectively lifted the
ceiling rates for loans having a period of more than three
hundred sixty-five (365) days.
On 11 July 1988 the Regional Trial Court of Makati ruled in
favor of FNCB declaring that the parties voluntarily and
knowingly executed a legitimate "IPP" transaction or the
discounting of receivables. AUTOWORLD was not entitled to
any reimbursement since it was unable to prove the existence
of a usurious loan.
The Court of Appeals modified the decision of the trial court
and concluded that the "IPP" transaction, comprising of the
three (3) contracts perfected on 9 February 1981, was merely
a scheme employed by the parties to disguise a usurious loan.
It ordered the annulment of the contracts and required FNCB
to reimburse AUTOWORLD P2,586,035.44 as excess interest
payments over the 12% ceiling rate. However, with regard to
the second transaction, the appellate court ruled that at the
time it was executed the ceiling rates imposed by the Usury
Law had already been lifted thus allowing the parties to
stipulate any rate of interest.
ISSUE:
We stress at the outset that this petition concerns itself only
with the first transaction involving the alleged' "IPP" worth
P6,980,000.00, which was implemented through the three (3)
contracts of 9 February 1981. As to the second transaction,
which involves the P3,000,000.00 loan, we agree with the
appellate court that it was executed when the ceiling rates of
interest had already been removed, hence the parties were
free to fix any interest rate.
The pivotal issue therefore is whether the three (3) contracts
all dated 9 February 1981 were executed to implement a
legitimate Installment Paper Purchase ("IPP") transaction or
merely to conceal a usurious loan.
HELD:
The three (3) contracts were executed to conceal a usurious
loan.
Generally, the courts only need to rely on the face of written
contracts to determine the intention of the parties. "However,
the law will not permit a usurious loan to hide itself behind a
legal form. Parol evidence is admissible to show that a written
document though legal in form was in fact a device to cover
usury. If from a construction of the whole transaction it
becomes apparent that there exists a corrupt intention to
violate the Usury Law, the courts should and will permit no
scheme, however ingenious, to becloud the crime of
usury." The following circumstances show that such scheme
was indeed employed:
First, petitioner claims that it was never a party to the Contract
to Sell between AUTOWORLD and BARRETTO. As far as it was
concerned, it merely purchased receivables at a discount from
BARRETTO as evidenced by the Deed of Assignment dated 9
February 1981. Whether the Contract to Sell was fictitious or
not would have no effect on its right to claim the receivables
of BARRETTO from AUTOWORLD since the two contracts were
entirely separate and distinct from each other.
Curiously however, petitioner admitted that its lawyers were
the ones who drafted all the three (3) contracts involved which
were executed on the same day. Also, petitioner was the one
who procured the services of the Asian Appraisal Company to
determine the fair market value of the land to be sold way back
in September of 1980 or six (6) months prior to the sale. If it
were true that petitioner was never privy to the Contract to
Sell, then why was it interested in appraising the lot six (6)
months prior to the sale? And why did petitioner's own
lawyers prepare the Contract to Sell? Obviously, petitioner
actively participated in the sale to ensure that the appraised
lot would serve as adequate collateral for the usurious loan it
gave to AUTOWORLD.
Second, petitioner insists that the 9 February 1981 transaction
was a legitimate "IPP" transaction where it only bought the
receivables of BARRETTO from AUTOWORLD amounting to
P12,999,999.60 at a discounted price of P6,980,000.00.
However, per instruction of petitioner in its letter to
BARRETTO dated 17 November 1980 the whole purchase price
of the receivables was to be "flowed back" to
AUTOWORLD. And in its subsequent letter of 24 February 1981
SECTRANS 2010/ ATTY. AGUINALDO 8
petitioner also gave instructions on how BARRETTO should
apply the proceeds worth P6,980,000.00.
It can be seen that out of the nine (9) items of appropriation
stated (in the letter), Item Nos. 2-8 had to be returned to
petitioner. Thus, in compliance with the aforesaid letter,
BARRETTO had to yield P4,058,468.47 of the P6,980,000.00 to
petitioner to settle some of AUTOWORLD's previous debts to
it. Any remaining amount after the application of the proceeds
would then be surrendered to AUTOWORLD in compliance
with the letter of 17 November 1980; none went to BARRETTO.
The foregoing circumstances confirm that the P6,980,000.00
was really an indirect loan extended to AUTOWORLD so that it
could settle its previous debts to petitioner. Had petitioner
entered into a legitimate purchase of receivables, then
BARRETTO, as seller, would have received the whole purchase
price, and free to dispose of such proceeds in any manner it
wanted. It would not have been obliged to follow the
"Application of Proceeds" stated in petitioner's letter.
Third, in its 17 November 1980 letter to BARRETTO, petitioner
itself designated the proceeds of the "IPP" transaction as a
"loan." In that letter, petitioner stated that the "loan
proceeds" amounting to P6,980,000.00 would be released to
BARRETTO only upon submission of the documents it required.
And as previously mentioned, one of the required documents
was a letter agreement between BARRETTO and AUTOWORLD
stipulating that the P6,980,000.00 should be "flowed back" to
AUTOWORLD. If it were a genuine "IPP" transaction then
petitioner would not have designated the money to be
released as "loan proceeds" and BARRETTO would have been
the end recipient of such proceeds with no obligation to turn
them over to AUTOWORLD.
Fourth, after the interest rate ceilings were lifted on 21 July
1981 petitioner extended on 18 June 1982 a direct loan of
P3,000,000.00 to AUTOWORLD. This time however, with no
more ceiling rates to hinder it, petitioner imposed a 28%
effective interest rate on the loan. And no longer having a need
to cloak the exorbitant interest rate, the promissory note
evidencing the second transaction glaringly bore the 28%
interest rate on its face. We are therefore of the impression
that had there been no interest rate ceilings in 1981, petitioner
would not have resorted to the fictitious "IPP" transaction;
instead, it would have directly loaned the money to
AUTOWORLD with an interest rate higher than 12%.
Thus, although the three (3) contracts seemingly show at face
value that petitioner only entered into a legitimate discounting
of receivables, the circumstances cited prove that the
P6,980,000.00 was really a usurious loan extended to
AUTOWORLD.
Petitioner anchors its defense on Sec. 7 of the Usury Law which
states
Provided, finally, That nothing herein contained shall
be construed to prevent the purchase by an innocent
purchaser of a negotiable mercantile paper, usurious
or otherwise, for valuable consideration before
maturity, when there has been no intention on the
part of said purchaser to evade the provisions of the
Act and said purchase was not a part of the original
usurious transaction. In any case however, the maker
of said note shall have the right to recover from said
original holder the whole interest paid by him
thereon and, in any case of litigation, also the costs
and such attorney's fees as may be allowed by the
court.
Indeed, the Usury Law recognizes the legitimate purchase of
negotiable mercantile paper by innocent purchasers. But even
the law has anticipated the potential abuse of such
transactions to conceal usurious loans. Thus, the law itself
made a qualification. It would recognize legitimate purchase of
negotiable mercantile paper, whether usurious or otherwise,
only if the purchaser had no intention of evading the
provisions of the Usury Law and that the purchase was not a
part of the original usurious transaction. Otherwise, the law
would not hesitate to annul such contracts. Thus, Art. 1957 of
the Civil Code provides
Contracts and stipulations, under any cloak or device
whatever, intended to circumvent the laws on usury
shall be void. The borrower may recover in
accordance with the laws on usury.
In the case at bar, the attending factors surrounding the
execution of the three (3) contracts on 9 February 1981 clearly
establish that the parties intended to transact a usurious loan.
These contracts should therefore be declared void. Having
declared the transaction between the parties as void, we are
now tasked to determine how much reimbursement
AUTOWORLD is entitled to. The Court of Appeals, adopting the
computation of AUTOWORLD in its plaintiff-appellant's brief,
ruled
According to plaintiff-appellant, defendant-appellee
was able to collect P3,921,217.78 in interests from
appellant. This is not denied by the appellee.
Computed at 12% the effective interest should have
been P1,545,400.00. Hence, appellant may recover
P2,586,035.44, representing overpayment arising
from usurious interest rate charged by appellee.
While we do not dispute the appellate court's finding that the
first transaction was a usurious loan, we do not agree with the
amount of reimbursement awarded to AUTOWORLD. Indeed,
it erred in awarding only the interest paid in excess of the 12%
ceiling. In usurious loans, the creditor can always recover the
principal debt. However, the stipulation on the interest is
considered void thus allowing the debtor to claim the whole
interest paid. In a loan of P1,000.00 with interest at 20% per
SECTRANS 2010/ ATTY. AGUINALDO 9
annum or P200.00 per year, if the borrower pays P200.00, the
whole P200.00 would be considered usurious interest, not just
the portion thereof in excess of the interest allowed by law.
In the instant case, AUTOWORLD obtained a loan of
P6,980,000.00. Thereafter, it paid nineteen (19) consecutive
installments of P216,666.66 amounting to a total of
P4,116,666.54, and further paid a balance of P6,784,551.24 to
settle it. All in all, it paid the aggregate amount of
P10,901,217.78 for a debt of P6,980,000.00. For the 23-month
period of the existence of the loan covering the period
February 1981 to January 1982, AUTOWORLD paid a total of
P3,921,217.78 in interests. Applying the 12% interest ceiling
rate mandated by the Usury Law, AUTOWORLD should have
only paid a total of P1,605,400.00 in interests. Hence,
AUTOWORLD is entitled to recover the whole usurious interest
amounting to P3,921,217.78.
Solangon vs Salazar
G.R. No. 125944 June 29, 2001
Facts:
Petitioner-spouses executed 3 real estate mortgages on a
parcel of land situated in Bulacan, in favor of the same
Respondent Salazar to secure payment of loans of P60 K,
P136 K and P230 K payable within 4 months, 1 year, and
4 months in that order, with 6% monthly interest on the
first loan, and legal interests on the others.
This action was initiated by the Petitioner-spouses to
prevent the foreclosure of the mortgaged property.
They alleged that they obtained only one loan from the
Respondent which was the P60 K secured by the first
mortgage. Also, Petitioner-spouses opined that the 6%
monthly interest was unconscionable.
The subsequent mortgages were merely continuations of
the first one, which is null and void.
Moreover, the Respondent assured them that he will not
foreclose the mortgage as long as they pay the stipulated
interest upon maturity or within a reasonable time
thereafter. Petitioner-spouses substantially paid the
loans with interest but were unable to pay it in full.
On the other hand, the Respondent claimed that the
mortgages were executed to secure 3 separate loans of
and that the first two loans were paid, but the last one
was not.
He denied having represented that he will not foreclose
the mortgage as long as the Petitioner-spouses pay
interest.
Lower courts ruled in favour of Respondent. Thus, this
petition.
Issue:
Whether or not the 6% monthly interest is unconscionable?
Ruling:
Yes. The SC ruled that this is unconscionable.
While the Usury Law ceiling on interest rates was lifted
by C.B. Circular No. 905, nothing in the said circular
grants lenders carte blanche authority to raise interest
rates to levels which will either enslave their borrowers
or lead to a hemorrhaging of their assets.
In Medel v. Court of Appeals, the Court decreed that the
5.5% interest or 66% per annum was not usurious but
held that the same must be equitably reduced for being
iniquitous, unconscionable and exorbitant , and hence,
contrary to morals (contra bonos mores), if not against
the law.
In the case at bench, Petitioner-spouses stand on a worse
situation. They are required to pay the stipulated interest
rate of 6% per month or 72% per annum which is
definitely outrageous and inordinate.
Hence, the interest rate must be reduced equitably. An
interest of 12% per annum is deemed fair and
reasonable.
SPOUSES PASCUAL VS. RAMOS
FACTS: Petitioners executed a Deed of Absolute Sale with Right
to Repurchase with respondent, in consideration of Php
150,000. The petitioners did not exercise their right to
repurchase the property within the stipulated one-year
period; hence, respondent prayed that the title over the
parcels of land be consolidated in his favor. Petitioners aver
that what was really executed between them and the
respondent is a real estate mortgage and that there was no
agreement limiting the period within which to exercise the
right to repurchase and that they have even overpaid
respondent.
Respondent offered in evidence a document denominated as
Sinumpaang Salaysay which had a provision of an interest of
7% per month on the principal loan of Php 150,000. RTC ruled
that the transaction was actually a loan and the payment was
secured by a mortgage of the property, and that the
petitioners had made payments which resulted in
overpayment as the interest was at 7% per annum.
Respondent filed an MR alleging that the interest stipulated in
the Sinumpaang Salaysay was 7% per month. The RTC ruled in
favor of the respondent acknowledging that the correct
interest rate stipulated was 7% per month. However, the RTC
declared that the 7% per month interest is too burdensome
and onerous and so the court unilaterally reduced the interest
rate from 7% per month to 5% per month. Petitioners filed an
SECTRANS 2010/ ATTY. AGUINALDO 10
MR alleging that either 5% or 7% per month is exorbitant,
unconscionable, unreasonable, usurious and inequitable.
ISSUE: WON the interest of 5% month is exorbitant,
unconscionable, unreasonable, usurious and inequitable.
HELD: NO. It is a basic principle in civil law that parties are
bound by the stipulations in the contracts voluntarily entered
into by them. Parties are free to stipulate terms and
conditions which they deem convenient provided they are not
contrary to law, morals, good customs, public order, or public
policy.
The interest rate of 7% per month was voluntarily agreed upon
by RAMOS and the PASCUALs. There is nothing from the
records and, in fact, there is no allegation showing that
petitioners were victims of fraud when they entered into the
agreement with RAMOS. Neither is there a showing that in
their contractual relations with RAMOS, the PASCUALs were at
a disadvantage on account of their moral dependence,
ignorance, mental weakness, tender age or other handicap,
which would entitle them to the vigilant protection of the
courts as mandated by Article 24 of the Civil Code.
With the suspension of the Usury Law and the removal of
interest ceiling, the parties are free to stipulate the interest to
be imposed on loans. Absent any evidence of fraud, undue
influence, or any vice of consent exercised by RAMOS on the
PASCUALs, the interest agreed upon is binding upon
them. This Court is not in a position to impose upon parties
contractual stipulations different from what they have agreed
upon
REFORMINA V. TOMOL
EASTERN SHIPPING v CA
FACTS:
- 2 Fiber drums of Riboflavin were shipped from Japan
for delivery vessel owned by Eastern Shipping (P)
and that the shipment was insured by Mercantile
Insurance (R)
- Upon arrival in Manila, it was discharged unto the
custody of Metro Port, which it stated in its survey
that 1 drum was in bad order.
- It was then received by Allied Brokerage wherein it
stated in its survey that one drum was opened and
without seal
- Allied then delivered it to the consignees W/H,
which it excepted that 1 drum contained spillages
while the rest was adulterated/fake
- R then filed claims against P for the losses sustained
by the consignee (which R subrogated).
- LC ruled in favor of R and ordered P to pay damages,
however, it failed to state when the interest rate
should commence from date of filing of complaint
at 12% or from date of judgment of TC at 6%
ISSUE: When should the interest rate commence and at what
rate
SC: 6% from the date of decision and 12% from date of finality
of judgment until payment
- This case laid down the rules on the interest rates:
- A) when an obligation regardless of its source, is
breached, the contravenor can be held liable for
damages
- B) with regard particularly to an award of interest in
the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof,
shall be as follows:
- If it consists of payment of money
(loan/forbearance)
o Interest due imposed = as stipulated in
writing and the
o Interest due = earn legal interest from the
time it is judicially demanded
o No stipulation = 12% per annum from date
of default (judicial/extra judicial)
- If it is not loan/forbearance
o Interest on amount of damages = imposed
by discretion of court at 6%
o No interest shall be ordered on
unliquidated claims/damages until demand
can be established with reasonable
certainty
o When demand is established with
reasonable certainty, interest shall begin to
run from the time the claim is made
(judicially/extrajudicially)
o But if it cannot be reasonably established at
the time demand was made = interest to
run from date of judgment of the court
- If judgment becomes Final and Executory
o Rate of legal interest = 12%
o From finality to satisfaction
o Why? It is already considered as
forbearance
EASTERN ASSURANCE AND SURETY CORPORATION (EASCO),
vs. Court of Appeals
Facts:
1) On April 9, 1981, private respondent Vicente Tan
insured his building in Dumaguete City against fire
with petitioner Eastern Assurance and Surety
Corporation (EASCO) for P250,000.00.
SECTRANS 2010/ ATTY. AGUINALDO 11
 2) On June 26, 1981, the building was destroyed by fire.
As his claim for indemnity was refused, private
respondent filed a complaint for breach of contract
with damages against petitioner. The RTC Court,
decided in favour of Vicente Tan. In its ruling, the
RTC court imposed the rate of interest at 12% per
annum, and decided that EASCO to pay immediately
to Vicente Tan the unpaid balance of interest of the
principal amount of P250,000.00 equivalent to 6%
per annum from June 26, 1981 to September
30,1994.
3) Petitioner EASCO appealed to the Court of Appeals,
which, on July 30, 1993, affirmed the decision of the
trial court. The CA, on the authority of prior case,
Eastern Shipping Lines, Inc. v. Court of Appeals, that
the interest rate on the amount due should be 6%
per annum from June 26, 1981 to August 24, 1993,
and 12% per annum beginning August 25, 1993 until
the money judgment is paid.
4) Thereafter, petitioner EASCO tendered payment of
the money judgment in the amount of P250,000.00
plus interest of 6% per annum from June 26, 1981 to
July 30, 1993.
5) However, private respondent refused to accept
payment on the ground that the applicable legal rate
of interest was 12% per annum. Subsequently,
private respondent brought the matter to the
Insurance Commission.
6) Then in, 1995, the parties agreed before the hearing
officer of the commission that the interest should be
computed from June 26, 1981 to September 30,
1994. Petitioner would file with the trial court a
motion to fix the legal rate of interest attaching
thereto a check in the amount of P250,000.00 with
6% interest per annum.
7) In its appeal EASCO to the SC, it contended that the
CA wrongfully applied the aforecited paragraph 3 of
the suggested rules of thumb for future guidance [as
formulated in Eastern Shipping Lines, Inc. v. Court of
Appeals, and unlawfully ignored or disregarded the
agreed cut-off date for the payment of the legal rate.
Issue: When the judgment of the court awarding a
sum of money becomes final and executory what is
the rate to be imposed?
Held: Petitioner's contentions are without merit.
The prior Eastern Shipping Lines, Inc. v. Court of Appeals, was
held:
I. When an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasi-
delicts, is breached, the contravener can be held
liable for damages. The provisions under "Damages"
of the Civil Code govern in determining the measure
of recoverable damages.
II. With regard particularly to an award of interest in
the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is
imposed, as follows:
Par. 3: When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2,
above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.
Unquestionably, this case falls under the rule stated in
paragraph 3. The question is whether this rule can be applied
to this case.
The prior Eastern Shipping Lines, case. did not lay down any
new rules because it was just a a comprehensive summary of
existing rules on the computation of legal interest.
As to the "cut-off date" for the payment of legal interest:
The trial court's finding on this point is binding. Hence, the
payment of 12% legal interest per annum should commence
from August 25, 1993, the date the decision of the trial court
became final, up to September 30, 1994, the agreed "cut-off-
date" for the payment of legal interest. The decision of the CA
is affirmed.
PILIPINAS BANK, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, and LILIA R. ECHAUS,
respondents.
Facts: private respondent filed a complaint against petitioner
and its president, Constantino Bautista, for collection of a
sum of money. The complaint alleged: (1) that petitioner and
Greatland executed a "Dacion en Pago," wherein Greatland
conveyed to petitioner several parcels of land in
consideration of the sum of P7,776,335.69; (2) that Greatland
assigned P2,300,000.00 out of the total consideration in favor
of private respondent; and (3) that notwithstanding her
demand for payment, petitioner refused and failed to pay the
said amount assigned to her.
Petitioner claimed: (1) that its former president had no
authority (2) that it never ratified the same; and (3) that
assuming arguendo that the agreement was binding, the
conditions stipulated therein were never fulfilled.
The trial court ruled in favor of private respondent.
SECTRANS 2010/ ATTY. AGUINALDO 12
Court of Appeals modified the Order dated April 3, 1985, by
limiting the execution pending appeal against petitioner to
P5,517.707.00
Trial court granted the new motion for execution pending
appeal. Petitioner complied with the writ of execution
pending appeal by issuing two manager's checks in the total
amount of P5,517,707.00
The Court of Appeals rendered a decision in CA-G.R. No. CV-
06017, which modified the judgment of the trial court
Petitioner filed a motion in the trial court praying that private
respondent to refund to her the excess payment of
P1,898,623.67 with interests at 6%. It must be recalled that
while private respondent was able to collect P5,517,707.00
from petitioner pursuant to the writ of advance execution,
the final judgment in the main case awarded to private
respondent damages in the total amount of P3,619,083.33
ISSUE: What interest rate applicable?
HELD: Note that Circular No. 416, fixing the rate of interest at
12% per annum, deals with (1) loans; (2) forbearance of any
money, goods or credit; and
(3) judgments.
(1) the amount of P2,300,000.00 adjudged to be paid by
petitioner to private respondent shall earn interest of 6% per
annum - The said obligation arose from a contract of
purchase and sale and not from a contract of loan or
mutuum. Hence, what is applicable is the rate of 6% per
annum as provided in Article 2209 of the Civil Code of the
Philippines and not the rate of 12% per annum as provided in
Circular No. 416.
(2) the amount of P1,898,623.67 to be refunded by private
respondent to petitioner shall earn interest of 12% per
annum. - where money is transferred from one person to
another and the obligation to return the same or a portion
thereof is subsequently adjudged.
PNB v CA
FACTS:
- Province of Isabela issued several checks drawn
against its account with PNB (P) in favor of Ibarrola
(R), as payments for the purchase of medicines.
- The checks were delivered to Rs agents who turned
them over to R, except 23 checks amounting to
P98k.
- Due to failure to receive full amount, R filed case
against P
- LC, CA and SC ordered PNB to pay however, all 3
courts failed to specify the legal rate of interest 6%
or 12%
ISSUE: WoN the rate to be used is 6%
SC: YES!
- This case does not involve a loan, forbearance of
money or judgment involving a loan or forbearance
of money as it arose from a contract of sale whereby
R did not receive full payment for her merchandise.
- When an obligation arises from a contract of
purchase and sale and not from a contract of loan or
mutuum, the applicable rate is 6% per annum as
provided in Art. 2209 of the NCC
- 6% from filing of complaint until full payment before
finality of judgment
- 12% from finality of judgment
PLANTILLA vs. BALIWAG
358 SCRA 396
Facts:
In a civil case, lower court rendered a decision ordering:
o Spouses Orga and Plantilla to reinstate Suiza as
share tenant
o That they pay Suiza unrealized shares from the
harvests of coconut fruits from August until
reinstated the amount of P1,000 with legal
interest until fully paid.
The decision, however, did not state the interest to be
charged.
A writ of execution was issued addressed to Sheriff
Baliwag.
Baliwag demanded payment from the spouses
representing the share of Suiza the amount of 480k,
representing the coconut harvest from Aug 1979 to Jan
1998 at P1,000 with 8 harvests per year with an interest
rate of 12% per annum or a total of 222% plus attorneys
fees.
Col. Plantilla, administrator of the spouses, filed an
administrative complaint against Baliwag charging him of
serious irregularities in implementation of the writ of
execution alleging that dispositive portion of the decision
did not contain 8 harvest per year and Baliwag took it
upon himself to specify the number of harvests.
Issue: Whether or not Sheriff is guilty of irregularities?
Held:
SECTRANS 2010/ ATTY. AGUINALDO 13
Yes, Baliwag is guilty of malfeasance, not irregularities. The
determination of the amount due under the writ properly
pertained to the Judge. Yet, respondent assumed the task. For
doing so instead of pointing out to the court the deficiency of
the writ, he should be sanctioned. He should not have
arrogated unto himself judicial functions that were to be
performed only by the judge.
The computation of the amount due under the writ is not the
duty of the sheriff. Such amount should have already been
specifically stated in the writ if execution issued by the court
under Section 3 Rule 39 of the 1997 Rules of Court. All that the
sheriff should do upon receipt of that writ is the ministerial
duty of enforcing it.
RCBC vs ALFA
Facts: Alfa on separate instances was granted by
RCBC 4 letters of credit to facilitate the purchase of raw
materials for their garments business. Alfa executed 4 trust
receipts and made comprehensive surety agreements wherein
the signatory officers of Alfa agreed in joint/several capacity to
pay RCBC in case the company defaulted. RCBC filed a case
versus Alfa for a sum of money. The CA awarded only P3M
(minimum amount) to RCBC instead of P18M as stipulated in
their contract.
Issue: W/N the CA can deviate from the provisions
of the contract between the parties?
Ruling: No. Contracting parties may establish agreements
terms, deemed advisable provided they are not contrary to
law/public policy. A contract is a law between the parties. In
this case its valid because it was not excessive under the Usury
Law.
*Atty. Aguinaldo assigned this case because he just wanted to
show us how to compute for the interest in long term deals.
He even made a diagram on the board. Di ko na ilalagay un sa
digest because I assume that my industrious & responsible
classmates took down notes... = p
RODZSSEN SUPPLY V. FAR EAST
Facts: On January 15, 1979, defendant Rodzssen Supply, Inc.
opened with plaintiff Far East Bank and Trust Co. a 30-day
domestic letter of credit, in the amount of P190,000.00 in favor
of Ekman and Company, Inc. (Ekman) for the purchase from
the latter of five units of hydraulic loaders, to expire on
February 15, 1979. The three loaders were delivered to
defendant for which plaintiff paid Ekman and which defendant
paid plaintiff before expiry date of LC. The remaining two
loaders were delivered to defendant but the latter refused to
pay. Ekman pressed payment to plaintiff. Plaintiff paid Ekman
for the two loaders and later demanded from defendant such
amount as it paid Ekman. Defendant refused payment
contending that there was a breach of contract by plaintiff who
in bad faith paid Ekman, knowing that the two units of
hydraulic loaders had been delivered to defendant after the
expiry date of subject LC.
Issue: WON petitioner is liable to respondent.
Ruling: The SC agrees with the CA that petitioner should pay
respondent bank the amount the latter expended for the
equipment belatedly delivered by Ekman and voluntarily
received and kept by petitioner. Equitable considerations
behoove us to allow recovery by respondent. True, it erred in
paying Ekman, but petitioner itself was not without fault in the
transaction. It must be noted that the latter had voluntarily
received and kept the loaders since October 1979. When both
parties to a transaction are mutually negligent in the
performance of their obligations, the fault of one cancels the
negligence of the other and, as in this case, their rights and
obligations may be determined equitably under the law
proscribing unjust enrichment.
MENDOZA vs CA
G.R.No. 116710, June 25,2001
Facts:
PNB extended P500,000 credit line and P1 million
letter of credit infavor of Mendoza. As security for the credit
accomodations, he mortgaged real and personal properties to
PNB. The real estate mortgage provided for an escalation
clause.
He also executed 3 promissory notes covering the
P500,000 credit line in 1979. The said notes also provided for
an interest at the rate of 12% per annum until paid , and that
PNB may raise the interest without further notice.
He also executed 11 Application and Agreement for
the commercial letter of credit providing for 9% interest per
annum from the date of drafts until the arrival of payment in
New York and that the bank may increase the interest without
further notice. The bank sent a letter to Mendoza, informing
him that the interest rates increased to 14% per annum.
Mendoza made some proposals for the restructuring
of his past due accounts into 5 year term loan and for an
additional P2 million letter of credit. However, PNB did not
approve his proposal and reduced the letter of credit to P 1
million only.
SECTRANS 2010/ ATTY. AGUINALDO 14
 Mendoza claimed that he was forced to sign 2 blank
promissory notes and claimed that his proposal for 5 year
restructuring of his past due accounts was approved . He also
alleged taht PNB violated their agreement because PNB
inserted 21% instead of 18% in the first promissory note and
18% instead of 12% in the second promissory note. The 2
promissory notes also provided escalation clauses.
The 2 newly executed promissory notes novated the
three 1979 promissory notes and 11 Application and
Agreement for Commercial Letter of Credit executed by
Mendoza earlier.
After sometime, pursuant to the escalation clause,
the interests in the two promissory notes were again
increased. Due to Mendozas failure to pay the 2 promissory
notes, PNB foreclosed the real and personal mortgages.
Mendoza filed for specific performance, nullification of
foreclosure and damages.
Issue: Whether or not the interest rates imposed on the 2
newly executed promissory notes were valid.
Ruling:
The Court upheld the validity of the 2 newly executed
promissory notes on the ground that private transactions are
presumed to be fair and regular.
However, it ruled that interest rates imposed on the
2 newly executed promissory notes are not valid on the ground
that Mendoza was not informed beforehand by PNB of the
change in the stipulated interest rates.
It held that unilateral determination and imposition
of increased interest rates by PNB is violative of the principle
of mutuality of contract. Contract changes must be made with
the consent of the contractiong parties. The minds of all
parties must meet as to the proposed modification, especially
wwhen it affects an important aspect of the agreement. No
one receiving a proposal to change a contract to which the
party is obliged to answer the proposal, and his silence per se
cannot be construed as acceptance.
DEPOSIT
Topic: Deposit; Article 1962
Calibo v. CA
FACTS:
Respondent Abellas son Mike rented for residential
purposes the house of Petitioner Calibo.
Respondent left a tractor in his sons garage for
safekeeping
Petitioner Mike had not paid rentals, electric and
water bills
Mike reassured Calibo that the tractor would stand
as guarantee for its payment
Respondent wanted to take possession of his tractor
but Petitioner said that the Mike had left the tractor
with him as security for the payment of Mikes
obligation to him.
Respondent issued postdated checks but Petitioner
will only accept check if Respondent executes
Promissory Note to cover payment for unpaid electric
and water bills.
Petitioner instituted an action for replevin claiming
ownership of the tractor and seeking to recover
possession thereof from petitioner. Likewise, he
asserts that the tractor was left with him, in the
concept of an innkeeper, on deposit and that he may
validly hold on thereto until Mike Abella pays his
obligations.
TC and CA Mike could not have validly pledged the
tractor because he was not the owner. NO DEPOSIT
ISSUE: WON there was a valid deposit?
HELD: NO
In a contract of deposit, a person receives an object
belonging to another with the obligation of safely
keeping it and of returning the same. Petitioner
himself stated that he received the tractor not to
safely keep it but as a form of security for the
payment of Mike Abellas obligations. There is no
deposit where the principal purpose for receiving the
object is not safekeeping.
Consequently, petitioner had no right to refuse
delivery of the tractor to its lawful owner. On the
other hand, private respondent, as owner, had every
right to seek to repossess the tractor including the
institution of the instant action for replevin.
BISHOP OF JARO V. DELA PENA
CA Agro-Industrial vs CA
G.R. No. 90027 March 3, 1993
Facts
Petitioner (through its President) purchased 2 parcels of
land from spouses Pugao for P350 K with a
downpayment of P75 K.
Per agreement, the land titles will be transferred upon
full payment and will be placed in a safety deposit box
(SBDB) of any bank. Moreover, the same could be
withdrawn only upon the joint signatures of a
representative of the Petitioner and the Pugaos upon full
payment of the purchase price.
SECTRANS 2010/ ATTY. AGUINALDO 15
 Thereafter, Petitioner and spouses placed the titles in
SDB of Respondent Security Bank and signed a lease
contract which substantially states that the Bank will not
assume liability for the contents of the SDB.
Subsequently, 2 renter's keys were given to the renters
one to the Petitioner and the other to the Pugaos. A
guard key remained in the possession of the Respondent
Bank. The SDB can only be opened using these 2 keys
simultaneously.
Afterwards, a certain Mrs. Ramos offered to buy from
the Petitioner the 2 lots that would yield a profit of
P285K.
Mrs. Ramos demanded the execution of a deed of sale
which necessarily entailed the production of the
certificates of title. Thus, Petitioner with the spouses
went to Respondent Bank to retrieve the titles.
However, when opened in the presence of the Bank's
representative, the SDB yielded no such certificates.
Because of the delay in the reconstitution of the title,
Mrs. Ramos withdrew her earlier offer to purchase the
lots; as a consequence, the Petitioner allegedly failed to
realize the expected profit of P285K.
Hence, Petitioner filed a complaint for damages against
Respondent Bank.
Lower courts ruled in favour of Respondent Bank. Thus,
this petition.
Issues:
1. Whether or not the disputed contract is an ordinary
contract of lease?
2. Whether or not the provisions of the cited contract are
valid?
3. Whether or not Respondent Bank is liable for damages?
Ruling:
1. No. SC ruled that it is a special kind of deposit because:
the full and absolute possession and control of the
SDB was not given to the joint renters the
Petitioner and the Pugaos.
The guard key of the box remained with the
Respondent Bank; without this key, neither of the
renters could open the box and vice versa.
In this case, the said key had a duplicate which was
made so that both renters could have access to the
box.
Moreover, the renting out of the SDBs is not
independent from, but related to or in conjunction
with, the principal function of a contract of deposit
the receiving in custody of funds, documents and
other valuable objects for safekeeping.
2. NO. SC opined that it is void.
Generally, the Civil Code provides that the
depositary (Respondent Bank) would be liable if, in
performing its obligation, it is found guilty of fraud,
negligence, delay or contravention of the tenor of
the agreement.
In the absence of any stipulation, the diligence of a
good father of a family is to be observed.
Hence, any stipulation exempting the depositary
from any liability arising from the loss of the thing
deposited on account of fraud, negligence or delay
would be void for being contrary to law and public
policy (which is present in the disputed contract)
Said provisions are inconsistent with the Respondent
Bank's responsibility as a depositary under Section
72(a) of the General Banking Act.
3. NO. SC ruled that:
no competent proof was presented to show that
Respondent Bank was aware of the private
agreement between the Petitioner and the Pugaos
that the Land titles were withdrawable from the
SDB only upon both parties' joint signatures,
and that no evidence was submitted to reveal that
the loss of the certificates of title was due to the
fraud or negligence of the Respondent Bank.
ART. 1977. OBLIGATION NOT TO MAKE USE OF THING
DEPOSITED UNLESS AUTHORIZED.
JAVELLANA VS. LIM
FACTS: Defendants executed a document in favor of plaintiff-
appellee wherein it states that they have received, as a
deposit, without interest, money from plaintiff-appellee and
agreed upon a date when they will return the money. Upon
the stipulated due date, defendants asked for an extension to
pay and binding themselves to pay 15% interest per annum on
the amount of their indebtedness, to which the plaintiff-
appellee acceded. The defendants were not able to pay the full
amount of their indebtedness notwithstanding the request
made by plaintiff-appellee. The lower court ruled in favor of
plaintiff-appellee for the recovery of the amount due.
ISSUE: Whether the agreement entered into by the parties is
one of loan or of deposit?
HELD: The document executed was a contract of loan. Where
money, consisting of coins of legal tender, is deposited with a
person and the latter is authorized by the depositor to use and
dispose of the same, the agreement is not a contract of
deposit, but a loan. A subsequent agreement between the
parties as to interest on the amount said to have been
deposited, because the same could not be returned at the time
fixed therefor, does not constitute a renewal of an agreement
of deposit, but it is the best evidence that the original contract
entered into between therein was for a loan under the guise
of a deposit.
SECTRANS 2010/ ATTY. AGUINALDO 16

G.R. Nos. L-26948 and L-26949 October 8, 1927
SILVESTRA BARON, plaintiff-appellant,
vs.
PABLO DAVID, defendant-appellant.
And
GUILLERMO BARON, plaintiff-appellant,
vs.
PABLO DAVID, defendant-appellant.
FACTS:
- The defendant owns a rice mill, which was well
patronized by the rice growers of the vicinity.
- On January 17, 1921, a fire occurred that destroyed
the mill and its contents, and it was some time
before the mill could be rebuilt and put in operation
again.
- Silvestra Baron (P1) and Guillermo Baron (P2) each
filed an action for the recovery of the value of palay
from the defendant (D), alleged that:
o The palay have been sold by both plaintiffs
to the D in the year 1920
o Palay was delivered to D at his special
request, with a promise of compensation at
the highest price per cavan
- D claims that the palay was deposited subject to
future withdrawal by the depositors or to some
future sale, which was never effected. D also
contended that in order for the plaintiffs to recover,
it is necessary that they should be able to establish
that the plaintiffs' palay was delivered in the
character of a sale, and that if, on the contrary, the
defendant should prove that the delivery was made
in the character of deposit, the defendant should be
absolved.
ISSUE: WoN there was deposit
SC: NO
- Art. 1978. When the depositary has permission to use
the thing deposited, the contract loses the concept of
a deposit and becomes a loan or commodatum,
except where safekeeping is still the principal
purpose of the contract. The permission shall not be
presumed, and its existence must be proved.
- The case does not depend precisely upon this explicit
alternative; for even supposing that the palay may
have been delivered in the character of deposit,
subject to future sale or withdrawal at plaintiffs'
election, nevertheless if it was understood that the
defendant might mill the palay and he has in fact
appropriated it to his own use, he is of course bound
to account for its value.
- In this connection we wholly reject the defendant's
pretense that the palay delivered by the plaintiffs or
any part of it was actually consumed in the fire of
January, 1921. Nor is the liability of the defendant in
any wise affected by the circumstance that, by a
custom prevailing among rice millers in this country,
persons placing palay with them without special
agreement as to price are at liberty to withdraw it
later, proper allowance being made for storage and
shrinkage, a thing that is sometimes done, though
rarely.
UNITED STATES, vs. IGPUARA
Facts: The defendant Jose igpuara was entrusted with the
amount of P2,498 by Montilla and Veraguth. Without the
consent of Montilla and Veraguth however, Igpuara used the
said amount for his own ends. Thus, igpuara was charged and
convicted with estafa, for having swindled Juana Montilla and
Eugenio Veraguth out of P2,498 which he had taken as
deposit from the former to be at the his disposal. Igpuara was
sentenced to pay Juana Montilla P2,498 . The instrument for
the deposit reads:
We hold at the disposal of Eugenio Veraguth the sum of two
thousand four hundred and ninety-eight pesos (P2,498), the
balance from Juana Montilla's sugar. Iloilo, June 26, 1911,
Jose Igpuara, for Ramirez and Co
Igpuara contended that the amount was not deposit for there
was no certificate of deposit, there was no transfer or
delivery of the P2,498 and what transpired was a loan. If
assuming that it was deposit, this is negotiable.
Issues: Whether or not it is necessary that there be transfer
or delivery in order to constitute a deposit.
Held: No.
A deposit is constituted from the time a person
receives a thing belonging to another with the
obligation of keeping and returning it. (Art. 1758,
Civil Code.)
SECTRANS 2010/ ATTY. AGUINALDO 17
His contention is without merit because firstly, the defendant
drew up a document declaring that they remained in his
possession. With the understanding that he would, for it has
no other purpose.
The certificate of deposit in question is not negotiable
because only instruments payable to order are negotiable.
Hence, this instrument not being to order but to bearer, it is
not negotiable.
As for the argument that the depositary may use or dispose
oft he things deposited, the depositor's consent is required
thus, the rights and obligations of the depositary and of the
depositor shall cease and the rules and provisions applicable
to commercial loans, commission, or contract which took the
place of the deposit shall be observed. Igpuara however has
shown no authorization whatsoever or the consent of the
depositary for using or disposing of the P2,498.
That there was not demand on the same or the next day after
the certificate was signed, does not operate against the
depositor, or signify anything except the intention not to
press it. Failure to claim at once or delay for sometime in
demanding restitution of the things deposited, which was
immediately due, does not imply such permission to use the
thing deposited as would convert the deposit into a loan.
Judgment appealed from is affirmed
ANICETA PALACIO, plaintiff-appellee,
vs.
DIONISIO SUDARIO, defendant-appellant.
FACTS: The plaintiff made an arrangement for the pasturing
of eighty-one head of cattle, in return for which she has to
give one-half of the calves that might be born and was to pay
the defendant one-half peso for each calf branded. On
demand for the whole, forty-eight head of cattle were
afterwards returned to her and this action is brought to
recover the remaining thirty-three.
Defendant in reply to the demand for the cattle, in which he
seeks to excuse himself for the loss of the missing animals.
As a second defense it is claimed that the thirty-three cows
either died of disease or were drowned in a flood. The
defendant's witnesses swore that of the cows that perished,
six died from overfeeding, and they failed to make clear the
happening of any flood sufficient to destroy the others.
HELD: If we consider the contract as one of deposit, then
under article 1183 of the Civil Code, the burden of
explanation of the loss rested upon the depositary and under
article 1769 the fault is presumed to be his. The defendant
has not succeeded in showing that the loss occurred either
without fault on his part or by reason of caso fortuito.
If, however, the contract be not one strictly of deposit but
one according to a local custom for the pasturing of cattle,
the obligations of the parties remain the same.
GULLAS vs. NATIONAL BANK
62 PHIL 519
Facts:
Atty. Gullas has a current account with PNB.
The treasury of the US issued a warrant in the amount of
$361 payable to the order of Bacos. Gullas and Lopez
signed as indorsers of this warrant. Thereupon it was
cashed by PNB.
The warrant was subsequently dishonored by the Insular
treasurer.
At that time, Gullas had a balance of P500 in PNB. From
this balance, he also issued some checks which eventually
could not be paid when it was sequestered by the Bank.
When it learned of the dishonor, PNB sent notice to Gullas
stating that it applied the outstanding balances from his
current account as payment of the dishonored warrant.
Such notice could not be delivered to him since he was out
of town.
Without any action from Gullas, PNB applied the
dishonored warrant against his account.
Because of this, Gullas was unable to pay for the checks
he issued before the application.
Gullas filed a complaint against PNB.
Issue:
Whether or not PNB has a right to apply a deposit to the debt
of a depositor to the bank?
Held:
Yes, PNB has a right to apply the payment against the account
of the depositor.
The relation between a depositor and a bank is that if creditor
and debtor. The general rule is that a bank has a right to set off
of the deposit in its hands for the payment of any indebtedness
to it on the part of the depositor.
However, prior to the mailing of the notice of dishonor and
without waiting for any action by Gullas, the bank made use of
the money standing in his account to make good for the
treasury warrant. At this point recall that Gullas was merely an
indorser. Notice should have been given to him in order that
he might protect his interest. He should be awarded with
SECTRANS 2010/ ATTY. AGUINALDO 18
nominal damages because of the premature action of the
Bank.
SERRANO vs CENTRAL BANK
Facts: Serrano had P350K worth of time deposits in
Overseas Bank of Manila. He made a series of encashment but
was not successful. He filed a case against Overseas Bank & he
also included the Central Bank so that the latter may also be
jointly and severally liable. Serrano argued that the CB failed
to supervise the acts of Overseas Bank and protect the
interests of its depositors by virtue of constructive trust.
Issue: W/N the Central Bank is liable?
Ruling: No. There is no breach of trust from a banks failure
to return the subject matter of the deposit. Bank deposits are
in the nature of irregular deposits. All kinds of bank deposits
are to be treated as loans and are to be covered by the law on
loans Art.1980. In reality the depositor is the creditor while the
bank is the debtor. Failure of the respondent bank to honor
the time deposit is failure to pay its obligation as a debtor.
SESBRENO V. CA
Facts: Sesbreno entered into a money market, giving 300k to
Philfinance. As an exchange, Philfinance gave checks and
confirmation of sale of Delta Motor Corp certificates. Checks
bounced. Sesbreno is running after Philipinas Bank (payee)
(Holder of security of primissory note) and Delta (maker). Delta
contends that it is not liable because there was
"reconstruction" of debt of Delta to Philfinance, the
promissory note is not valid anymore. It also contends that the
document cannot be assigned because its non negotiable. RTC
ruled that Philfinance is liable because Philfinance already
knows that the liability was already waived and it still issued
the certificate. However, since Philfinance was not impleaded,
judgment cannot be made against Philfinance. The issue
related in this case is regarding trasferrability and assignability.
Issue: WoN the non-negotiable instrument is non
transferrable/assignable
Ruling: Assignable is different from tranferrability. Negotiable
instruments can be indorsed. Non negotiable instrumets can
be assigned. Therefore, non negotiable instrument can be
assigned.
DE LOS SANTOS vs TAN KHEY
O.G.No.26695-R, July 30, 1962
Facts:
Tan Khey was the owner of International Hotel
located in Iloilo city. Romeo de los Santos lodged in Tna Kheys
hotel. After arrival, he left the hotel, depositing his revolver
and his bag with the person in charge in the hotel. When he
returned to the hotel, he took his revolver and his bag from the
person in charge in the hotel and proceeded to his room. He
locked the door before sleeping.
When he woke up, he discovered that the door in his
room was opened and his bag and pants, wherein he placed
his revolver , was missing. He reported the matter to the
Assistant Manager of the hotel, who in turn informed Tan
Khey.
A secret service agent was sent to investigate and it
was found that the wall of the room occupied by De los Santos
was only seven feet high with an open space above through
which one could enter from outside. De los Santos told the
detective that he lost his revolver.
Tan Khey disclaimed liability because De los Santos
did not deposit his properties with the manager despite a
notice to that effect was posted in the hotel.
Tan Khey contended that to be liable under Article
1998 of the Civil Code, the following conditions must concur:
1. Deposit of effects by travellers in hotel or inn
2. Notice given to hotel keepers or employees of
the effects brought by guests
3. Guest or travellers take the precautions which
said hotel keepers or their substitutes advised
relative to the care and vigilance of their effects.
Issue: Whether the hotel owner should be held liable for the
loss of the effects of the guest?
Rulng:
The Court ruled that the hotel owner should be liable
for the loss of the revolver, pants and bag of the guest.
Deposit
While the law speaks of deposit of effects by
travellers in hotels or inns, personal receipt by the innkeeper
for safe keeping of effects is not necessaily meant thereby. The
reason therefor is the fact that it is the nature of business of
an innkeeper to provide not only lodging for travellers but also
to security to their persons and effects. The secuity mentioned
is not confined to the effects actually delivered to the
SECTRANS 2010/ ATTY. AGUINALDO 19
innkeeper but also to all effects placed within the premises of
the hotel. This is because innkeepers by the neture of their
business, have supervision and controlof their inns and the
premises threof.
It is not necessary that the effect was actually
delivered but it is enough that they are within the inn. If a
guest and goods are within the inn, that is sufficient to charge
him.
The owner of a hotel may exonerate himself from
liability by showing that the guest has taken exclusive control
of his own goods, but this must be exclusive custody and
control of a guest, and must not be held under the supervision
and care of the innkeeper,ey are kept in a room assigned to a
guest or the other proper depository in the house.
In this case, the guest deposited his effects in the
hotel because they are in his room and within the premises of
the hotel, and therefore, within the supervision and control of
the hotel owner.
Notice
The Court ruled that there was no doubt that the
person in charge had knowledge of his revolver, the bag, and
pants of the guest, De los Santos.
ISSUE: Whether the hotels Undertaking is valid?
The requirement of notice being evidently for the
purpose of closing the door to fraudulent claims for non-
HELD: NO
existent articles, the lack thereof was fatal to De los Santos
claim for reparation for the loss of his eyeglass, ring, and cash.
Precautions
While an innkeeper cannot free himself from
responsibility by posting notices, there can be no doubt of the
innkeepers right to make such regulations in the management
of his inn as will more effectually secure the property of his
guest and operate as protection to himself, and that it is
incumbent upon the guest, if he means to hold the inkeeper
ho his responsibility, to comply with any regulation that is just
and reasonable, when he is requested to do so.
However, in this case, the notice requiring actual
deposit of the effects with the manager was an unreasonable
regulation. It was unreasonable to require the guest to deposit
his bag ,pants and revolver to the manager. De los Santos had
exercised the necessary diligence with respect to the care and
vigilance of his effects.
Topic: Deposit; Article 2003
YHT Realty v. CA
FACTS:
Respondent McLoughlin would stay at Tropicana
Hotel every time he is here in the Philippines and
would rent a safety deposit box.
The safety deposit box could only be opened through
the use of 2 keys, one of which is given to the
registered guest, and the other remaining in the
possession of the management of the hotel.
McLoughlin allegedly placed the following in his
safety deposit box 2 envelopes containing US
Dollars, one envelope containing Australian Dollars,
Letters, credit cards, bankbooks and a checkbook.
When he went abroad, a few dollars were missing and
the jewelry he bought was likewise missing.
Eventually, he confronted Lainez and Paiyam who
admitted that Tan opened the safety deposit box with
the key assigned to him. McLoughlin went up to his
room where Tan was staying and confronted her. Tan
admitted that she had stolen McLouglins key and was
able to open the safety deposit box with the
assistance of Lopez, Paiyam and Lainez. Lopez alsto
told McLoughlin that Tan stole the key assigned to
McLouglin while the latter was asleep.
McLoughlin insisted that it must be the hotel who
must assume responsibility for the loss he suffered.
Lopez refused to accept responsibility relying on the
conditions for renting the safety deposit box entitled
Undertaking For the Use of Safety Deposit Box
Article 2003 was incorporated in the New Civil Code
as an expression of public policy precisely to apply to
situations such as that presented in this case. The
hotel business like the common carriers business is
imbued with public interest. Catering to the public,
hotelkeepers are bound to provide not only lodging
for hotel guests and security to their persons and
belongings. The twin duty constitutes the essence of
the business. The law in turn does not allow such duty
to the public to be negated or diluted by any contrary
stipulation in so-called undertakings that ordinarily
appear in prepared forms imposed by hotel keepers
on guests for their signature.
In an early case (De Los Santos v. Tan Khey), CA ruled
that to hold hotelkeepers or innkeeper liable for the
effects of their guests, it is not necessary that they be
actually delivered to the innkeepers or their
employees. It is enough that such effects are within
the hotel or inn. With greater reason should the
liability of the hotelkeeper be enforced when the
missing items are taken without the guests
knowledge and consent from a safety deposit box
provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the undertaking
manifestly contravene Article 2003, CC for they allow
SECTRANS 2010/ ATTY. AGUINALDO 20
 Tropicana to be released from liability arising from
any loss in the contents and/or use of the safety
deposit box for any cause whatsoever. Evidently, the
undertaking was intended to bar any claim against
Tropicana for any loss of the contents of the safety
deposit box whether or not negligence was incurred
by Tropicana or its employees.
THE WAREHOUSE RECEIPTS LAW
G.R. No. L-16315 May 30, 1964
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
HAWAIIAN-PHILIPPINE COMPANY, respondent.
FACTS:
The petitioner, a corporation duly organized in accordance
with law, is operating a sugar central in the City of Silay,
Occidental Negros. It produces centrifugal sugar from
sugarcane supplied by planters. The processed sugar is divided
between the planters and the petitioner in the proportion
stipulated in the milling contracts, and thereafter is deposited
in the warehouses of the latter. (Pp. 4-5, t.s.n.) For the sugar
deposited by the planters, the petitioner issues the
corresponding warehouse receipts of "quedans". It does not
collect storage charges on the sugar deposited in its
warehouse during the first 90 days period counted from the
time it is extracted from the sugarcane. Upon the lapse of the
first ninety days and up to the beginning of the next milling
season, it collects a fee of P0.30 per picul a month. Henceforth,
if the sugar is not yet withdrawn, a penalty of P0.25 per picul
or fraction thereof a month is imposed. (Exhibits "B-1", "C-1",
"D-1", "B-2", "C-2", p. 10, t.s.n.)
The storage of sugar is carried in the books of the company
under Account No. 5000, denominated "Manufacturing Cost
Ledger Control"; the storage fees under Account No. 521620;
the expense accounts of the factory under Account No. 5200;
and the so-called "Sugar Bodega Operations" under Account
No. 5216, under which is a Sub-Account No. 20, captioned,
"Credits". (Pp. 16-17, t.s.n., Exhibit "F".) The collections from
storage after the lapse of the first 90 days period are entered
in the company's books as debit to CASH, and credit to Expense
Account No. 2516-20 (p. 18, t.s.n.).
The credit for storage charges decreased the deductible
expense resulting in the corresponding increase of the taxable
income of the petitioner. This is reflected by the entries
enclosed in parenthesis in Exhibit "G", under the heading
"Storage Charges". (P. 18, t.s.n.) The alleged reason for this
accounting operation is that, inasmuch as the "Sugar Bodega
Operations" is considered as an expense account, entries
under it are "debits". Similarly, since "Storage Charges"
constitute "credit", the corresponding figures (see Exhibit "C")
are enclosed in parenthesis as they decrease the expenses of
maintaining the sugar warehouses.
Upon investigation conducted by the Bureau, it was found that
during the years 1949 to 1957, the petitioner realized from
collected storage fees a total gross receipts of P212,853.00, on
the basis of which the respondent determined the petitioner's
liability for fixed and percentage taxes, 25% surcharge, and
administrative penalty in the aggregate amount of P8,411.99
(Exhibit "5", p. 11, BIR rec.)
After due hearing the Court of Tax Appeals ordered the CIR to
refund to respondent Hawaiian-Philippine Company the
amount of P8,411.99 representing fixed and percentage taxes
assessed against it and which the latter had deposited with the
City Treasurer of Silay, Occidental Negros
ISSUE:
Whether or notpetitioner is a warehouseman liable for the
payment of the fixed and percentage taxes prescribed in
Sections 182 and 191 of the National Internal Revenue Code
HELD:
YES.
Respondent disclaims liability under the provisions quoted
above, alleging that it is not engaged the business of storing its
planters' sugar for profit; that the maintenance of its
warehouses is merely incidental to its business of
manufacturing sugar and in compliance with its obligation to
its planters. We find this to be without merit.
It is clear from the facts of the case that, after manufacturing
the sugar of its planters, respondent stores it in its warehouses
and issues the corresponding "quedans" to the planters who
own the sugar; that while the sugar is stored free during the
first ninety days from the date the it "quedans" are issued, the
undisputed fact is that, upon the expiration of said period,
respondent charger, and collects storage fees; that for the
period beginning 1949 to 1957, respondent's total gross
receipts from this particular enterprise amounted to
P212,853.00.
A warehouseman has been defined as one who receives and
stores goods of another for compensation (44 Words and
Phrases, p. 635). For one to be considered engaged in the
warehousing business, therefore, it is sufficient that he
receives goods owned by another for storage, and collects fees
in connection with the same. In fact, Section 2 of the General
Bonded Warehouse Act, as amended, defines a
SECTRANS 2010/ ATTY. AGUINALDO 21
warehouseman as "a person engaged in the business of
receiving commodity for storage."
That respondent stores its planters' sugar free of charge for the
first ninety days does not exempt it from liability under the
legal provisions under consideration. Were such fact sufficient
for that purpose, the law imposing the tax would be rendered
ineffectual.
Gonzalez vs Go Tiong
Facts:
Go Tiong (respondent) owned a rice mill and warehouse,
located in Pangasinan. Thereafter, he obtained a license
to engage in the business of a bonded warehouseman.
Subsequently, respondent Tiong executed a Guaranty
Bond with the Luzon Surety Co to secure the
performance of his obligations as such bonded
warehouseman, in the sum of P18,334, in case he was
unable to return the same.
Afterwards, respondent Tiong insured the warehouse
and the palay deposited therein with the Alliance Surety
and Insurance Company.
But prior to the issuance of the license to Respondent, he
had on several occasions received palay for deposit from
Plaintiff Gonzales, totaling 368 sacks, for which he issued
receipts.
After he was licensed as a bonded warehouseman, Go
Tiong again received various deliveries of palay from
Plaintiff, totaling 492 sacks, for which he issued the
corresponding receipts, all the grand total of 860 sacks,
valued at P8,600 at the rate of P10 per sack.
Noteworthy is that the receipts issued by Go Tiong to the
Plaintiff were ordinary receipts, not the "warehouse
receipts" defined by the Warehouse Receipts Act (Act
No. 2137).
On or about March 15, 1953, Plaintiff demanded from Go
Tiong the value of his deposits in the amount of P8,600,
but he was told to return after two days, which he did,
but Go Tiong again told him to come back.
A few days later, the warehouse burned to the ground.
Before the fire, Go Tiong had been accepting deliveries of
palay from other depositors and at the time of the fire,
there were 5,847 sacks of palay in the warehouse, in
excess of the 5,000 sacks authorized under his license.
After the burning of the warehouse, the depositors of
palay, including Plaintiff, filed their claims with the
Bureau of Commerce.
However, according to the decision of the trial court,
nothing came from Plaintiff's efforts to have his claim
paid.
Thereafter, Gonzales filed the present action against Go
Tiong and the Luzon Surety for the sum of P8,600, the
value of his palay, with legal interest, damages in the
sum of P5,000 and P1,500 as attorney's fees.
While the case was pending in court, Gonzales and Go
Tiong entered into a contract of amicable settlement to
the effect that upon the settlement of all accounts due to
him by Go Tiong, he, Gonzales, would have all actions
pending against Go Tiong dismissed.
Inasmuch as Go Tiong failed to settle the accounts,
Gonzales prosecuted his court action
ISSUE:
Whether or not Plaintiffs claim is governed by the Bonded
Warehouse Act due to Go Tiongs act of issuing to the former
ordinary receipts, not warehouse receipts?
RULING:
YES. SC ruled in favor Plaintiff.
Act No. 3893 provides that any deposit made with
Respondent Tiong as a bonded warehouseman must
necessarily be governed by the provisions of Act No.
3893.
The kind or nature of the receipts issued by him for the
deposits is not very material much less decisive since said
provisions are not mandatory and indispensable
Under Section 1 of the Warehouse Receipts Act, the
issuance of a warehouse receipt in the form provided by
it is merely permissive and directory and not obligatory. .
"Receipt", under this section, can be construed as any
receipt issued by a warehouseman for commodity
delivered to him
As the trial court well observed, as far as Go Tiong was
concerned, the fact that the receipts issued by him were
not "quedans" is no valid ground for defense because he
was the principal obligor.
Furthermore, as found by the trial court, Go Tiong had
repeatedly promised Plaintiff to issue to him "quedans"
and had assured him that he should not worry; and that
Go Tiong was in the habit of issuing ordinary receipts
(not "quedans") to his depositors.
Furthermore, Section 7 of said law provides that as long
as the depositor is injured by a breach of any obligation
of the warehouseman, which obligation is secured by a
bond, said depositor may sue on said bond.
In other words, the surety cannot avoid liability from the
mere failure of the warehouseman to issue the
prescribed receipt.
WAREHOUSE RECEIPT: Failure to mark non-negotiable.
ROMAN V. ASIA BANKING CORPORATION
SECTRANS 2010/ ATTY. AGUINALDO 22
FACTS: U. de Poli, for value received, issued a quedan
convering the 576 bultos of tobacco to the Asia Banking
Corporation (claimant & appellant). It was executed as a
security for a loan. The aforesaid 576 butlos are part and parcel
of the 2, 766 bultos purchased by U. de Poli from Felisa Roman
(claimant & appellee).
The quedan was marked as Exhibit D which is a warehouse
receipt issued by the warehouse of U. de Poli for 576 bultos of
tobacco. In the left margin of the face of the receipt, U. de Poli
certifies that he is the sole owner of the merchandise therein
described. The receipt is endorsed in blank; it is not
markednon-negotiable or not negotiable. there by he himself.chanr
Since a sale was consummated between Roman and U. de Poli,
Romans claim is a vendors lien. The lower court ruled in favor
of Roman on the theory that since the transfer to Asia Banking
Corp. (ASIA) was neither a pledge nor a mortgage, but a
security for a loan, the vendors lien of Roman should be
accorded preference over it.
However, if the warehouse receipt issued was non-negotiable,
the vendors lien of Roman cannot prevail against the rights of
ASIA as indorsee of the receipt.
ISSUE: WON the quedan issued by U. de Poli in favor of ASIA.
is negotiable, despite failure to mark it as not negotiable?
HELD: YES. The warehouse receipt in question is negotiable. It
recited that certain merchandise deposited in the ware house
por orden of the depositor instead of a la orden, there was
no other direct statement showing whether the goods
received are to be delivered to the bearer, to a specified
person, or to a specified order or his order. However, the use
of por orden was merely a clerical or grammatical error and
that the receipt was negotiable.
As provided by the Warehouse Receipts Act, in case the
warehouse man fails to mark it as non-negotiable, a holder
of the receipt who purchase if for value supposing it to be
negotiable may, at his option, treat such receipt as imposing
upon the warehouseman the same liabilities he would have
incurred had the receipt been negotiable. This appears to have
given any warehouse receipt not marked non-negotiable
practically the same effect as a receipt which, by its terms, is
negotiable provided the holder of such unmarked receipt
acquired it for value supposing it to be negotiable,
circumstances which admittedly exist in the present case.
Hence, the rights of the indorsee, ASIA, are superior to the
vendors lien.
Bank of P.I. v. Herridge
FACTS:
The insolvent Umberto de Poli was for several years engaged
on an extensive scale in the exportation of Manila hemp,
maguey and other products of the country.
He was also a licensed public warehouseman, though most of
the goods stored in his warehouses appear to have been
merchandise purchased by him for exportation and deposited
In order to finance his commercial operations De Poli
established credits with some of the leading banking
institutions doing business in Manila at that time, among them
the Hongkong & Shanghai Banking Corporation, the Bank of
the Philippine Islands, the Asia Banking Corporation, the
Chartered Bank of India, Australia and China, and the American
Foreign Banking Corporation.
De Poli opened a current account credit with the bank against
which he drew his checks in payment of the products bought
by him for exportation.
Upon the purchase, the products were stored in one of his
warehouses and warehouse receipts issued therefor which
were endorsed by him to the bank as security for the payment
of his credit in the account current.
When the goods stored by the warehouse receipts were sold
and shipped, the warehouse receipt was exchanged for
shipping papers, a draft was drawn in favor of the bank and
against the foreign purchaser, with bill of landing attached,
and the entire proceeds of the export sale were received by
the bank and credited to the current account of De
Poli.chanroble
De Poli was declared insolvent by the Court of First Instance of
Manila with liabilities to the amount of several million pesos
over and above his assets. An assignee was elected by the
creditors and the election was confirmed by the court
Among the property taken over the assignee was the
merchandise stored in the various warehouses of the
insolvent. This merchandise consisted principally of hemp,
maguey and tobacco.
The various banks holding warehouse receipts issued by De
Poli claim ownership of this merchandise under their
respective receipts, whereas the other creditors of the
insolvent maintain that the warehouse receipts are not
negotiable, that their endorsement to the present holders
conveyed no title to the property, that they cannot be
regarded as pledges of the merchandise inasmuch as they are
not public documents and the possession of the merchandise
SECTRANS 2010/ ATTY. AGUINALDO 23
was not delivered to the claimants and that the claims of the
holders of the receipts have no preference over those of the
ordinary unsecured creditors.law lib
ISSSUE:
Whether or not the warehouse receipts issued are negotiable?
HELD:
Yes, a warehouseman who deposited merchandise in his own
warehouse, issued a warehouse receipts therefore and
thereafter negotiated the receipts by endorsement. The
receipt recites that the goods were deposited por orden of
the depositor, the warehouseman, but contained no
statement that the goods were to be delivered to the bearer
of the receipts or to a specified person. It is in the form of a
warehouse receipts and was not mark nonnegotiable.
Therefore the receipts was negotiable warehouse receipts and
the words por orden must be construed to mean to the
order.
PNB v PRODUCERS WAREHOUSE ASSOCIATION
FACTS:
- PNB (P) is a bank in PH, Producers Warehouse
Association (D) is a domestic corporation doing
general warehouse business and Phil. Fiber and
Produce Company (Fiber) is another domestic
corporation.
- D and Fiber entered into a written contract, wherein
Fiber would act as the general manager of the
business of D and that Fiber would exercise a general
and complete supervision over the management of
the business of D.
- Nov and Dec 1918 D issued negotiable quedans to
Fiber for 15k++ piculs of Copra, which the terms
states that
o D agreed to deliver that amount of copra to
Fiber or its order
o D will deliver the packages noted therein
upon the surrender of the warrant to D
o No transfer of interest/ownership will be
recognized unless registered in the books of
D
o The words negotiable warrant were
printed in red ink in the quedan
- Fiber then arranged for overdraft with P for P1M and
to secure it, the subject quedans were endorsed in
blank and delivered by Fiber to P, which became the
owner and holder thereof.
- P later on requested D the delivery of copra
described in the quedans, however, D refused to
comply despite repeated requests of P, stating that it
could not be delivered since the goods mentioned
are not in the warehouse.
- D stated that the quedans were invalid and
wrongfully issued and that the copra was not in its
warehouse
- LC ruled in favor of D
ISSUE: WoN the quedans were validly negotiated to P
SC: YES!
- The quedans have legal force and effect
o They were duly executed by Wicks, as
treasurer and Torres as warehouseman, for
and in behalf of D.
o The said quedans were endorsed in blank
and physical possession was delivered to P
as collateral security for the overdraft of
Fiber Company and
o That the quedans were in negotiable form.
- D cannot now deny the existence of the quedans
CRUZ vs. VALERO
Facts:
Valero is president of the Luzon Sugar Co. while appellant
Cruz had a share amounting to 1,544.38 piculs export
centrifugal sugar, which was exchanged for an equal amount
of domestic centrifugal sugar. Cruz deposited in the Luzon
Sugar Company's warehouse within its compound, with the
obligation on its part to deliver it to the appellant on demand,
that the appellant was entitled to 238.20 piculs of domestic
centrifugal sugar as his share in the 1940-1941 crop. On
different dates, the appellant had withdrawn several piculs of
sugar, reducing reducing the number of gallons of molasses.
Cruz claims that on December 1941, the Luzon Sugar
Company (LSC) did not have in its warehouse the sugar he
had stored in its warehouse for safekeeping and the number
of gallons of molasses he had left in its possession contained
in cylindrical tanks, because the Valero had disposed of the
same without the knowledge and consent of appellant and
that when the appellant wanted to withdraw his sugar from
the warehouse of LSC, the amount of sugar stored in the
warehouse was not manufactured by the Luzon Sugar
Company but by a different company.
This was denied by LSC, contending that it had sufficient
amount of sugar manufactured by it and was in a position to
deliver sugar. Its warehouse was however bombed by
Japanese and the warehouse damaged by shrapnel and some
piculs of centrifugal sugar were looted, some taken by the
Japanese after the occupation and the remaining brought by
SECTRANS 2010/ ATTY. AGUINALDO 24
the Japanese Army to Northern Luzon. Thus it became
impossible the deliver the centrifugal sugar and molasses
belonging of Cruz.
Issue: Whether or not the LSC still has the obligation to
deliver the same amount and kind of sugar stored in its
warehouse.
HELD: Since there was enough sugar to cover and deliver
1,081.79 piculs of domestic, reserve and additional sugar
belonging to the Cruz who, according to the milling contract,
was in duty bound to take delivery thereof at the warehouse,
since it was established that the LSC compound was bombed
on December 1941 by the Japanese who also occupied it
from 1 January to 20 February 1942, the loss was due to the
war or to a fortuitous event and therefore, the obligation of
the depositary to deliver what has been deposited in him has
been extinguished by the happening of a fortuitous event,
which in this case, is the pacific war. The judgment appealed
from is affirmed.
This is an appeal from a decision of the Court of First Instance
of Nueva Ecija which orders the defendant to pay to the
plaintiff the sum of P3,000, with interest thereon at the rate
of 6% per annum from June 26, 1940, and the costs of action.
ESTRADA V. CAR
DMG INC. vs CONSOLIDATED TERMINALS INC.
63 OG 10
Facts:
DMG ordered replacement parts for diesel conversion
engine from Germany.
Upon arrival in Manila, the shipment was placed in the
warehouse of Consolidated Terminals.
When DMG demanded for the delivery of the goods,
Consolidated stated that it was already released and
delivered to DMG through a delivery permit which was
presented by a certain Sandoval authorized by Alteza.
DMG contends that it has no such employees. It
demanded for the payment of such goods.
Issue:
Whether or not Consolidated is liable to DMG?
Held:
Yes, Consolidated is liable to DMG.
Consolidated did not faithfully comply with its duties and
obligations. Section 9 of the Warehouse Receipts Law does not
deem it sufficient as prerequisite for delivery the mere
presentment of the receipt. It further requires that the person
to whom the goods should be delivered is one who is either
himself entitled to the propertyor who has written authority
from the person so entitled. Presentment of the receipt must
be couple with ascertainment that the person so presenting it
is rightfully entitled to take delivery of the goods covered by
the receipt.
Consolidated did not ascertain the identity of Sandoval and
Alteza. They have not called up DMG first and ascertained the
genuineness of the authority in writing before delivering the
articles considering that they did not know either Sandoval or
Alteza.
Consolidated becomes liable under Section 10 of the WRL for
misdelivery. On the contention that DMG was negligent for
allowing such permits to fall into the hands of unauthorized
persons, contributory negligence is not one of the defenses
specified in its answer. In order to for it to be a defense, it must
previously show to have been committed. The burden of proof
is in himself who alleges it as a defense. It cannot be inferred
from the fact that persons other than the consignee or owner
were able to take possession of the shipping documents or the
permit papers which were supposed to be in the latters
custody.
CONSOLIDATED vs ARTEX
Facts: Consolidated Terminals Inc (CTI) operated a
customs warehouse in Manila. It received 193 bales of high
density compressed raw cotton worth P99k. It was understood
that CTI would keep the cotton on behalf of Luzon Brokerage
until the consignee Paramount Textile had opened the
corresponding letter of credit in favor of Adolph Hanslik
Cotton. By virtue of forged permits, Artex was able to obtain
the bales of cotton and paid P15k.
Issue: W/N CTI as warehouseman was entitled to
the possession of the bales of cotton?
Ruling: No. CTI had no cause of action. It was not the owner
of the cotton. It was not a real party of interest in the case. CTI
was not sued for damages by the real party in interest.
LUA KIAN VS. MANILA RAILROAD
Facts: Manila Railroad received into its custody a shipment of
cases of milk, of which 3.171 wwere marked for Cebu and
1,829 for Lua Kia but according to the bills of lading in Manila
Railroad's possession, Lua Kia was entitled to 2000 cases and
Cebu was entitled to 3000 cases. Manila Railroad delivered
1,913 cases to Lua Kia, which is 87 cases short in the bill of
lading.
SECTRANS 2010/ ATTY. AGUINALDO 25

Issue: WoN manila RailRoad is liable to Lua Kia for the
underlivered cases of milk
Ruling. Yes. The legal relationship between an arrastre
operator and the consignee is akin to that of a depositor and
warehouseman. As custodian of the goods discharged from
the vessel, it was A's duty like that of nay other depositary to
take good care of the goods and turn them over to the party
entitled to their possession. Under this particular set of
circumstances, A should have held delivery because of the
discrepancy between the bill of lading and the markings and
conducted its own investigation not unlike that under Sectopm
18 of the Warehouse Receipts law, or called upon the parties
to interplead such ias in case under Section 17 of the same law,
in order to determint the rightful owner of the goods.
AMERICAN FOREIGN BANKING CORPORATION vs HERRIDGE
G.R.No.21005, December 20, 1924
Facts:
U. de Poli was a debtor of American Foreign Banking
Corporation. He issued a warehouse receipt, commonly known
as quedan. The warehouse receipt of the mercahndise covered
thereby was described as Cagayan tabacco en rama. It was
indorsed in blank by U. De Poli to American Foreign Banking
Corporation
As security for an overdraft. U. De Poli became insolvent and
the bank presented its claim for the delivery of the tobacco
covered in the warehouse receipt.
However, it was found that the tobacco had come
from Isabela and not from Cagayan, and the banks claim was
disputed by other creditors of the insolvent on the ground
that, among others, that the tobacco claimed, being Isabela
tobacco, was not correctly described in the warehouse receipt
and that, therefore, the receipt was ineffective as against the
general creditors.
Issue: Whether the use of the word Cagayan instead of
Isabela in describing the tobacco in the quedan renders the
quedan null and void as negotiable warehouse receipt for the
tobacco intended to be covered by it.
Ruling:
The identity of the tobacco was sufficiently
established by the evidence. In the warehouse, there was no
other tobacco stored nut only the Isabela tobacco. The debtor
also said that Isabela tobacco was the tobacco which he
transsfered to American Foreign Banking Corporation. Aside
from that, when the subaccountant of the bank went to the
warehouse to check which tobacco was covered by the
warehouse receipt, the assignee and one of his accountants
pointed to him the Isabela tobacco.
The intention of the parties to the transaction must
prevail against such a technical objection to the sufficiency of
the description of the tobacco. It might be different if there
had been Cagayan tobacco in the warehouse at the time of the
issuance of the quedan, or if there were any doubt as to the
identity of the tobacco intended to be covered by the quedan.
The quedan was a negotiable warehouse receipt
which was duly issued and delivered by the debtor U. de Poli
to American Foreign Banking Corporation and it divested him
of his title to said tobacco and transferred the position and the
title thereof the American Foreign Banking Corporation.
Topic: Warehouse Receipts Law; sec. 38
PNB v. Atendido
FACTS:
Laureano Atendido obtained from PNB a loan of P3k
and pledged 2000 cavans of palay to guarantee
payment which were then deposited in the
warehouse of Cheng Siong Lam & Co and to that
effect the borrower endorsed in favour of the bank
the corresponding warehouse receipt.
Before the maturity of the loan, the 2000 cavans of
palay disappeared for unknown reasons in the
warehouse. When the loan matured, the borrower
failed to pay obligation
Defendant claimed that the warehouse receipt
covering the palay which was given as security having
been endorsed in blank in favour of the bank and the
palay having been lost or disappeared, he thereby
became relieved of liability.
ISSUE: Whether the surrender of the warehouse receipt
covering 2000 cavans of palay given as security, endorsed in
blank, to PNB, has the effect of transferring their title or
ownership OR it should be considered merely as a guarantee
to secure the payment of the obligation of Defendant?
HELD:
Nature of contract is Pledge supported by the
stipulations embodied in the contract signed by
Defendant when he secured the loan from PNB.
The 2000 cavans of palay covered by the warehouse
receipt were given to PNB only as a guarantee to
secure the fulfilment by Defendant in his obligation.
This clearly appears in the contract wherein it is
expressly stated that said 2000 cavanes of palay were
given as collateral security.
It follows that by the very nature of the transaction its
ownership remains with the pledgor subject only to
foreclosure in case of non-fulfillment of the
obligation.
SECTRANS 2010/ ATTY. AGUINALDO 26
 By this we mean that if the obligation is not paid upon
maturity the most that the pledge can do is to sell the
property and apply the proceeds to the payment of
the obligation and to return the balance, if any, to the
pledgor. This is the essence of the contract, for,
according to law, a pledge cannot become the owner
of, nor appropriate to himself the thing given in
pledge.
If by the contract of pledge, the pledgor continues to
be the owner of the thing pledged during the
pendency of the obligation, it stands to reason that in
case of loss of the property, the loss should be borne
by the pledgor.
The fact that the warehouse receipt covering the
palay was delivered, endorsed in blank, to the bank
does not alter the situation, the purpose of such
endorsement being merely to transfer the juridical
possession of the property to the pledge and to
forestall any possible disposition thereof on the part
of the pledgor.
Where a warehouse receipt or quedan is transferred
or endorsed to a creditor only to secure the payment
of a loan or debt, the transferee or endorsee does not
automatically become the owner of the goods
covered by the warehouse receipt or quedan but he
merely retains the right to keep and with the consent
of the owner to sell them so as to satisfy the
obligation from the proceeds of the sale. This is for
the simple reason that the transaction involved is not
a sale but only a mortgage or pledge, and that if the
property covered by the quedans or warehouse
receipts is lost without fault or negligence of the
mortgagee or pledge or the transferee or endorsee of
the warehouse receipt or quedan, then said goods are
to be regarded as lost on account of the real owner,
mortgagor or pledgor.
MARTINEZ V. PNB
Siy Cong Bien vs HSBC
FACTS
Plaintiff is a corporation engaged in business generally,
and that the Defendant HSBC is a foreign bank
authorized to engage in the banking business in the
Philippines.
On June 25, 1926, Otto Ranft called the office of the
Plaintiff to purchase hemp (abaca), and he was offered
the bales of hemp as described in the contested
negotiable quedans.
The parties agreed to the aforesaid price, and on the
same date the quedans, together with the covering
invoice, were sent to Ranft by the Plaintiff, without
having been paid for the hemp, but the Plaintiff's
understanding was
o that the payment would be made against the
same quedans,
o and it appear that in previous transaction of the
same kind between the bank and the Plaintiff,
quedans were paid one or two days after their
delivery to them.
Immediately these Quedans were pledged by Otto Ranft
to the Defendant HSBC to secure the payment of his
preexisting debts to the latter.
The baled hemp covered by these warehouse receipts
was worth P31,635; 6 receipts were endorsed in blank by
the Plaintiff and Otto Ranft, and 2 were endorsed in
blank, by Otto Ranft alone
On the evening of the said delivery date, Otto Ranft died
suddenly at his house in the City of Manila.
When the Plaintiff found out, it immediately demanded
the return of the quedans, or the payment of the value,
but was told that the quedans had been sent to the
herein Defendant as soon as they were received by
Ranft.
Shortly thereafter the Plaintiff filed a claim for the
aforesaid sum of P31,645 in the intestate proceedings of
the estate of the deceased Otto Ranft, which on an
appeal from the decision of the committee on claims,
was allowed by the CFI Manila.
In the meantime, demand had been made by the Plaintiff
on the Defendant bank for the return of the quedans, or
their value, which demand was refused by the bank on
the ground that it was a holder of the quedans in due
course.
ISSUE
Whether or not the Quedans endorsed in blank gave the
HSBC rightful and valid title to the goods?
HELD
YES. SC ruled in favour of Defendant HSBC.
It may be noted,
o first, that the quedans in question were
negotiable in form;
o second, that they were pledged by Otto Ranft to
the Defendant bank to secure the payment of
his preexisting debts to said bank;
o third, that such of the quedans as were issued in
the name of the Plaintiff were duly endorsed in
blank by the Plaintiff and by Otto Ranft;
o and fourth, that the two remaining quedans
which were duly endorsed in blank by him.
The bank had a perfect right to act as it did, and its action
is in accordance with sections 47, 38, and 40 of the
Warehouse Receipts Act
SECTRANS 2010/ ATTY. AGUINALDO 27
 However, the pertinent provision regarding the rights
the Defendant bank acquired over the aforesaid quedans
after indorsement and delivery to it by Ranft, is found in
section 41 of the Warehouse Receipts Act (Act No. 2137):
o SEC. 41. Rights of person to whom a receipt has
been negotiated. A person to whom a
negotiable receipt has been duly negotiated
acquires thereby:
(a) Such title to the goods as the person
negotiating the receipt to him had or had
ability to convey to a purchaser in good
faith for value, and also such title to the
goods as the depositor of person to whose
order the goods were to be delivered by the
terms of the receipt had or had ability to
convey to a purchaser in good faith for
value, and. . . .
Therefore, the bank is not responsible for the loss; the
negotiable quedans were duly negotiated to the bank
and as far as the record shows, there has been no fraud
on the part of the Defendant.
Moreover, Plaintiff is estopped to deny that the bank had
a valid title to the quedans for the reason that the
Plaintiff had voluntarily clothed Ranft with all the
attributes of ownership and upon which the Defendant
bank relied. Subsequently, Plaintiff in this case has
suffered the loss of the quedans, but as far as the court
sees it, there is now no remedy available to the Plaintiff
equitable estoppel place the loss upon him whose
misplaced confidence has made the wrong possible as
ruled in National Safe Deposit vs. Hibbs (a US case)
WAREHOUSE RECEIPT: Who may negotiate a receipt?
PNB v. NOAHS ARK SUGAR REFINERY
FACTS: Defendant issued on several dates warehouse receipts,
which were substantial in form and contained the terms
prescribed by law, to Rosa Sy and Teresita Ng. Subsequently,
some of the warehouse receipts were negotiated and indorsed
to Luis Ramos and Cresencia Zoleta. Ramos and Zoleta then
used the quedans as security for loans obtained by them from
PNB. Upon maturity, both failed to pay, prompting PNB to
demand the delivery of the sugar covered by the quedans
indorsed to it by Ramos and Zoleta. Noahs refused to comply
with the demand, PNB filed a case for Specific Performance.
The main contention of Noahs was that it was still the owner
of the subject quedans and the quantity of sugar represented
thereon because the corresponding payment of Sy and Ng
through checks were dishonoured and so they did not acquire
ownership. The it follows that the subsequent indorsers and
plaintiff itself did not acquire a better right of ownership than
the original vendees or first indorsers.
In the answer of Sy and Ng, they alleged that the transaction
between them and Noahs, concerning the quedans, was
bogus and simulated. It was part of a complex banking scheme
and financial maneuvers to avoid VAT payment and other BIR
assessments.
ISSUES:
1. WON the non-payment of the purchase price for the sugar
stock evidenced by the quedans, rendered invalid the
negotiation of said quedans by Sy and Ng to indorsers Ramos
and Zoleta and the subsequent negotiation of Ramos and
Zoleat to PNB?
2. WON PNB as indorsee of quedans was entitled to delivery of
sugar stocks from the warehouseman, Noahs Ark?
HELD: The validity of the negotiation by RNS Merchandising
and St. Therese Merchandising to Ramos and Zoleta, and by
the latter to PNB to secure a loan cannot be impaired by the
fact that the negotiation between Noah's Ark and RNS
Merchandising and St. Therese Merchandising was in breach
of faith on the part of the merchandising firms or by the fact
that the owner (Noah's Ark) was deprived of the possession of
the same by fraud, mistake or conversion of the person to
whom the warehouse receipt/quedan was subsequently
negotiated if (PNB) paid value therefor in good faith without
notice of such breach of duty, fraud, mistake or conversion.
(See Article 1518, New Civil Code). And the creditor (PNB)
whose debtor was the owner of the negotiable document of
title (warehouse receipt) shall be entitled to such aid from the
court of appropriate jurisdiction attaching such document or
in satisfying the claim by means as is allowed by law or in
equity in regard to property which cannot be readily attached
or levied upon by ordinary process. (See Art. 1520, New Civil
Code). If the quedans were negotiable in form and duly
indorsed to PNB (the creditor), the delivery of the quedans to
PNB makes the PNB the owner of the property covered by said
quedans and on deposit with Noah's Ark, the warehouseman.
(See Sy Cong Bieng & Co. vs. Hongkong & Shanghai Bank Corp.,
56 Phil. 598).
In the case at bar, PNB's right to enforce the obligation of
Noah's Ark as a warehouseman, to deliver the sugar stock to
PNB as holder of the quedans, does not depend on the
outcome of the third-party complaint because the validity of
the negotiation transferring title to the goods to PNB as holder
of the quedans is not affected by an act of RNS Merchandising
and St. Therese Merchandising, in breach of trust, fraud or
conversion against Noah's Ark.
PNB v SAYO, JR.
FACTS
- Noahs Ark Sugar Refinery (Noahs) issued several
warehouse receipts (quedans), which were
negotiated to Rosa, RNS and St. Therese (vendees),
SECTRANS 2010/ ATTY. AGUINALDO 28
 which were again negotiated to Luis and Cresencia,
which they (Luis and Cresencia) endorsed to PNB as
security for 2 loan agreements.
o Transfer of quedans Noahs Rosa, RNS
and St. Therese Luis and Cresencia
PNB
- Luis and Cresencia failed to pay their loans hence
PNB demanded delivery of sugar stocks, however,
Noahs Ark refused, alleging ownership thereof.
- Noahs Ark contended that the agreement made by
them with the vendees was stopped since the bank
dishonored the payments made by the vendees to
Noahs Ark. As such, the vendees and the endorsers
of the quedans never acquired ownership thereof.
- Noahs Ark claimed for warehousemans lien for the
storage of the goods.
- LC granted lien
- PNB appealed

ISSUE: WoN PNB is entitled to the stocks of sugar as the

endorsee of the quedans, without paying the lien

SC: YES

- While PNB is entitled to the stocks of sugar as the

endorsee of the quedans, delivery to it shall be
effected only upon payment of the storage fees.
- The warehouseman is entitled to the
warehousemans lien that attaches to the goods GUARANTY AND SURETYSHIP
invokable against anyone who claims a right of
possession thereon.
- However, in this case, the lien was lost when R MACHETTI v HOSPICIO DE SAN JOSE
refused to deliver the goods, which were not
anchored to a valid excuse (i.e. non satisfaction of FACTS:
W/Hman Lien) but on an adverse claim of
ownership.
1) In 1916, Romulo Machetti, agreed to construct a building
- The loss of W/H Mans lien does not necessarily
in Manila for the Hospicio de San Jose, for P64,000. One of
mean the extinguishment of the obligation to pay
the conditions of the agreement was that the contractor
the W/H fees and charges which continues to be a
should obtain the "guarantee" of the Fidelity and Surety
personal liability of the owners, PNB in this case.
Company of the Philippine Islands to the amount of P128,800.
However, such fees and charges have ceased to
Said contract read:
accrue from the date of the rejection by Noahs Ark
to heed the lawful demand for the release of the
goods. For value received we hereby guarantee compliance
with the terms and conditions as outlined in the
above contract.

2) Thereafter Machetti constructed the building and, as the

work progressed, payments were made to him from time to
time, until the entire contract price, except the sum of
P4,978.08, was paid.

3) Later on it was found that the work had not been carried
out in accordance with the specifications which formed part
of the contract and that the workmanship was not of the
standard required, and thus the Hospicio presented a
counterclaim for damages for the partial noncompliance with

SECTRANS 2010/ ATTY. AGUINALDO 29

the terms of the agreement abovementioned, in the total
sum of P71,350.
4) During the duration of the trial however, Machetti,
declared insolvent and an order was entered suspending the
proceeding in the present case. Thus, the Hospicio filed a
motion asking that the Fidelity and Surety Company be made
cross-defendant to the exclusion of Machetti and that the
proceedings be continued as to said company, which motion
was granted and subsequently, the Hospicio filed a complaint
against the Fidelity and Surety Company for a judgement
against the company upon its guaranty. The CFI rendered
judgment against Fidelity.
ISSUE: Whether or not Fidelity is answerable to the Hospicio
as guaranty of Machetti.
HELD:
A) Guarantor implies an undertaking of guaranty, as
distinguished from suretyship and in this case, it appears that
the contract is the guarantor's separate undertaking in which
the principal does not join, that its rests on a separate
consideration moving from the principal and that although it
is written in continuation of the contract for the construction
of the building, it is a collateral undertaking separate and
distinct from the latter. All of these circumstances are
distinguishing features of contracts of guaranty.
B) On the other hand, a surety undertakes to pay if the
principal does not pay, the guarantor only binds himself to
pay if the principal cannot pay. The one is the insurer of the
debt, the other an insurer of the solvency of the debtor. This
latter liability is what the Fidelity Company assumed in this
case. Thus, Fidelity having bound itself to pay only the event
its principal, cannot pay it follows that it cannot be compelled
to pay until it is shown that Machetti is unable to pay. The
judgment appealed from is therefore reversed.
PHIL EXPORT v VP EUSEBIO
FACTS: Respondent entered into contract with SOB for
construction of Therapy Bldg. SOB demanded bonds to secure
performance. Project was delayed
DOCTRINE: 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 so; if the
person binds himself solidarily with the principal debtor, the
contract is called suretyship.
That the guarantee issued by the petitioner is
unconditional and irrevocable does not make the petitioner a
surety. As a guaranty, it is still characterized by its subsidiary
and conditional quality because it does not take effect until the
fulfillment of the condition. Unconditional guarantee is still
subject to the condition that the principal debtor should
default in his obligation first before resort to the guarantor
could be had.
MANILA RAILROAD v ALVENDIA
Facts:
CFI sentenced Manila Railroad Co. (MRC) and Manila Port
Service (MPS) to pay Bataan Refining Corp.
MPS filed a notice of appeal accompanied by an appeal
bond.
Noticing that the appeal bond was only executed by MPS
signed by the manager and Standard Insurance (as surety)
signed by the vice-president, the trial court rejected the
record on appeal.
It is contended by MRC that the MPS, being a mere
subsidiary or department of MRC, without legal
personality of its own, the bond filed by the former should
be a bond for the MRC and that the appeal of the latter
should have been given due course.
Issue: Whether or not the notice of appeal should be
accepted?
Held:
No, the notice of appeal should be rejected.
Where there is no principal debtor in the appeal bond, it is
void and unenforceable. The mere recital in the body of the
instrument, We, MRC et. al, as principal and the Standard
Insurance Co. Inc xxx as surety does not suffice to make
contract binding on the MRC unless it is shown that the same
was authorized by it. Neither the signature nor the
acknowledgment indicates that the act of that of the MRC or
that the latter had empowered MPS to execute the bond in its
behalf. The result would be that the appeal bond is void and
unenforceable for lack of principal debtor or obligation.
While the surety bound itself to pay jointly and severally, such
an undertaking presupposes that the obligation is to be
enforceable against someone else besides the surety and the
latter could always claim that it was never its intention to be
the sole person obliged thereby.
IFC v IMPERIAL TEXTILE
Facts: IFC extended to PPIC a loan of
US$7,000,000.00, payable in sixteen (16) semi-annual
installments of US$437,500.00 each, beginning June
1, 1977 to December 1, 1984. On December 17, 1974,
a Guarantee Agreement was executed with
Imperial Textile Mills, Inc. (ITM). ITM agreed to
guarantee PPIC's obligations under the loan
SECTRANS 2010/ ATTY. AGUINALDO 30
agreement. PPIC paid the installments due on June 1,
1977, December 1, 1977 and June 1, 1978. Despite
the rescheduling of the installment payments,
however, PPIC defaulted. IFC demanded ITM and
Grandtex, as guarantors of PPIC, to pay the
outstanding balance. However, the outstanding
balance remained unpaid.
Issue: The issue is whether ITM is a surety, and thus solidarily
liable with PPIC for the payment of the loan.
Ruling: Yes. The Agreement uses guarantee and guarantors,
prompting ITM to base its argument on those words. This
Court is not convinced that the use of the two words limits the
Contract to a mere guaranty. The specific stipulations in the
Contract show otherwise.
While referring to ITM as a guarantor, the Agreement
specifically stated that the corporation was 'jointly and
severally liable. To put emphasis on the nature of that liability,
the Contract further stated that ITM was a primary obligor, not
a mere surety. Those stipulations meant only one thing: that at
bottom, and to all legal intents and purposes, it was a surety.
Indubitably therefore, ITM bound itself to be solidarily.
SEVERINO v SEVERINO
F: upon the death of x, who left considerable property, a
litigation ensued between c, xs widow, and other heirs of x. a
compromise was effected by which d, a son of x, took over the
property pertaining to the estate of x at the same time
agreeing to pay P100k to c, payable, first in P40k cash upon the
execution of the document of compromise and the balance, in
three equal installments. G. affixed his name as guarantor
Upon ds failure to pay the balance, c instituted an action
against d and g, the latter contending that he received nothing
for affixing his signature as guarantor to the contract and that
in effect the contract was lacking in consideration as to him.
Issue: is there a consideration for the guaranty?
Ruling: a guarantor or surety is bound by the same
consideration that makes the contract effective between the
principal parties thereto. The compromise and dismissal of
lawsuit is recognized in law as a valuable consideration; and
the dismissal of the action which c instituted against d was an
adequate consideration to support the promise on the part of
d to pay the sums stipulated in the contract subject of the
action
It is neither necessary that the guarantor or surety should
receive any part of the benefit, if such there be accruing to his
principal. The true consideration of this contract was the
detriment suffered by c in the former action in dismissing the
proceeding and it is immaterial that no benefit may have
accrued either to the principal or his guarantor
LEE v CA
FACTS: PBCOM was furnished by a board resolution stating
that they authorize President, Mr. Charles Lee, and the Vice-
President and General Manager, Mr. Mariano A. Sio to apply
for, negotiate and secure the approval of commercial loans
and other banking facilities and accommodations, from the
Philippine Bank of Communications, in such sums as they shall
deem advantageous, the principal of all of which shall not
exceed the total amount of TEN MILLION PESOS
(P10,000,000.00), Philippine Currency, plus any interests.
Mico availed of the loans and as security for the loans, MICO
through its Vice-President and General Manager, Mariano Sio,
executed on May 16, 1979 a Deed of Real Estate Mortgage
over its properties situated in Pasig, Metro Manila.
On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio,
Alfonso Yap and Richard Velasco, in their personal capacities
executed a Surety Agreement in favor of PBCom whereby the
petitioners jointly and severally, guaranteed the prompt
payment on due dates of overdrafts, promissory notes,
discounts, drafts, letters of credit, bills of exchange, trust
receipts, and other obligations of every kind and nature, for
which MICO may be held accountable by PBCom. It was
provided, however, that the liability of the sureties shall not at
any one time exceed the principal amount of Three Million
Pesos plus interest, costs, losses, charges and expenses
including attorneys .
On July 14, 1980, petitioner Charles Lee, in his capacity as
president of MICO, wrote PBCom and applied for an additional
loan in the sum of Four Million Pesos). The loan was intended
for the expansion and modernization of the companys
machineries. Upon approval of the said application for loan,
MICO availed of the additional loan of Four Million Pesos (as
evidenced by Promissory Note TA No. 094.
As per agreement, the proceeds of all the loan availments were
credited to MICOs current checking account with PBCom. To
induce the PBCom to increase the credit line of MICO, Charles
Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco
and Alfonso Co (hereinafter referred to as petitioners-
sureties), executed another surety agreement in favor of
PBCom on July 28, 1980, whereby they jointly and severally
guaranteed the prompt payment on due of overdrafts,
promissory notes, discounts, drafts, letters of credit, bills of
exchange, trust receipts and all other obligations of any kind
and nature for which MICO may be held accountable by
PBCom. It was provided, however, that their liability shall not
at any one time exceed the sum of Seven Million Five Hundred
SECTRANS 2010/ ATTY. AGUINALDO 31
Thousand Pesos including interest, costs, charges, expenses
and attorneys fees incurred by MICO in connection therewith.
Upon maturity of all credit availments obtained by MICO from
PBCom, the latter made a demand for payment. For failure of
petitioner MICO to pay the obligations incurred despite
repeated demands, private respondent PBCom extrajudicially
foreclosed MICOs real estate mortgage and sold the said
mortgaged properties in a public auction sale held on
November 23, 1982 and PBCom won and applied the proceeds
of the purchase price at public auction of Three Million Pesos
to the expenses of the foreclosure, interest and charges and
part of the principal of the loans, leaving an unpaid balance of
Five Million Four Hundred Forty-One Thousand Six Hundred
Sixty-Three Pesos and Ninety Centavos exclusive of penalty
and interest charges.
Aside from the unpaid balance, MICO likewise had another
standing obligation and PBCom then demanded the
settlement of the aforesaid obligations from herein
petitioners-sureties who, however, refused to acknowledge
their obligations to PBCom under the surety agreements.
Hence, PBCom filed a complaint with prayer for writ of
preliminary attachment, alleging that MICO was no longer in
operation and had no properties to answer for its obligations.
PBCom further alleged that petitioner Charles Lee has
disposed or concealed his properties with intent to defraud his
creditors. Except for MICO and Charles Lee, the sheriff of the
RTC failed to serve the summons on herein petitioners-sureties
since they were all reportedly abroad at the time. An alias
summons was later issued but the sheriff was not able to serve
the same to petitioners Alfonso Co and Chua Siok Suy who was
already sickly at the time and reportedly in Taiwan where he
later died.
Petitioners contend that there was no proof that the proceeds
of the loans or the goods under the trust receipts were ever
delivered to and received by MICO. But the record shows
otherwise. Petitioners-sureties further contend that assuming
that there was delivery by PBCom of the proceeds of the loans
and the goods, the contracts were executed by an
unauthorized person, more specifically Chua Siok Suy who
acted fraudulently and in collusion with PBCom to defraud
MICO.
ISSUE: Whether or not the individual petitioners, as sureties,
may be held liable under the two (2) Surety Agreements
executed on March 26, 1979 and July 28, 1980.
RULING: Yes.
The court ruled that it is proven that MICO received the
proceeds of the loan and that PBCom has the right to to believe
that Chua Siok Suy based on the Certificate issued by the
Sectretary of MICO.
The court ruled that as regards petitioners-sureties contention
that they obtained no consideration whatsoever on the surety
agreements, the court pointed that the consideration for the
sureties is the very consideration for the principal obligor,
MICO, in the contracts of loan.
In the case of Willex Plastic Industries Corporation vs. Court of
Appeals, we ruled that the consideration necessary to support
a surety obligation need not pass directly to the surety, a
consideration moving to the principal alone being sufficient.
For a guarantor or surety is bound by the same consideration
that makes the contract effective between the parties
thereto.
It is not necessary that a guarantor or surety should receive
any part or benefit, if such there be, accruing to his principal.
DE GUZMAN v SANTOS
FACTS:
Jerry O. Toole, Antonio Abad and Anastacio Santos
formed a general mercantile partnership Philippine
American Construction Company with a capital of
P14k.
P10k of which were taken by way of loan from Paulino
Candelaria. The partnership and the co-partners
undertook and bound themselves to pay jointly and
severally the indebtedness.
Upon default, Paulino filed civil case against Phil-Am
Construction Company and co-partners for the
recovery of loan
TC ordered all Defendants to pay jointly and
severally; CA affirmed
Upon filing of complaint, Paulino obtained a writ of
attachment against Defendants. The Sheriff attached
properties of 3 partners. Partnership offered to post
a bond of P10k.
Phil-Am Construction Company as principal then
represented by the partner Antonio Abad, Santiago
Lucero and Meliton Carlos as guarantors executed a
bond of P10k in favour of Paulino for the lifting of the
attachment.
After issuance of writ of execution, Sheriff found no
property of the judgment debtors. Paulino moved for
the issuance of writ of execution against the
guarantors of Defendants.
Guarantor-Plaintiff and co-guarantor Meliton Carlos
later paid the creditor and were able to recover from
Antonio Abad a sum of P3800, which they divided
equally.
It appeared that the payment made by the plaintiff to
Paulino was reduced to the sum of P3665. Plaintiff
now demands from Anastacio Santos the return of
the aforesaid sum but Anastacio refused.
ISSUE: Whether or not Defendant is bound to pay Plaintiff
what he had advanced to Paulino?
SECTRANS 2010/ ATTY. AGUINALDO 32
HELD: YES
Article 1838 provides that any guarantor who pays for
the debtor shall be indemnified by the latter even
should the guaranty have been undertaken without
the knowledge of the debtor.
IN THIS CASE: The guarantor was the deceased
Santiago Lucero, now represented by the plaintiff in
her capacity as judicial administratrix, and the debtor
is the defendant-appellant. Applying the provision
cited, it is obvious that the Defendant is legally bound
to pay what the Plaintiff had advanced to the creditor
upon the judgment, notwithstanding the fact that the
bond had been given without his knowledge.
Any person who makes a payment for the account of
another may recover from the debtor the amount of
the payment, unless it was made against the express
will of the latter. In the latter case, he can only
recover from the debtor in so far as the payment has
been beneficial to the latter.
It is evident that Defendant is bound to pay to the
plaintiff what the latter had advanced to the creditor
upon the judgment, and this is more so because it
appears that although Lucero executed the bond
without his knowledge, nevertheless he did not
object thereto or repudiate the same at any time.
MUNICIPALITY OF GASAN v MARASIGAN
FACTS:
The plaintiff-appellee municipality, on December 9, 1930, put
up at auction the privilege of gathering whitefish spawn in its
jurisdictional waters for the period of one year from January 1,
1931. Two bidders, Graciano Napa and Miguel Marasigan,
appeared at the auction. Graciano Napa proposed to accept
the privilege by paying P5,000 therefor, Miguel Marasigan
proposed to do likewise, but by paying only P4,200.
The council of the plaintiff-appellee municipality, in its
resolution No. 161 (Exhibit 1) of December 11, 1930 rejected
Graciano Napa's bid and accepted that of the appellant Miguel
Marasigan.
To secure his compliance with the terms of the contract which
was immediately formalized by him and the plaintiff, and
pursuant to the provisions of section 8 of resolution No. 128,
series of 1925, of the council of said plaintiff, Miguel Marasigan
filed the bond, Exhibit B, subscribed on December 15, 1930, by
the defendants-appellants Angel R. Sevilla and Gonzalo L.
Luna, who bound themselves in said document to pay to the
plaintiff the sum of P8,400, if Miguel Marasigan failed to
deposit one-fourth of P4,200 quarterly in advance in the
municipal treasury of Gasan.
Graciano Napa forwarded a protest (Exhibit 4) to the provincial
board, which protest was later indorsed by said provincial
board to the Chief of the Executive Bureau, alleging that the
plaintiff municipality violated the provisions of section 2323 of
the Administrative Code in rejecting his bid.
The provincial board, passing upon Graciano Napa's protest
and acting under the authority which, in its opinion, was
granted to it by section 2233 of the Administrative Code, held
that resolution No. 161, series of 1930, by virtue of which the
municipal council of Gasan rejected Graciano Napa's bid and
accepted that of Miguel Marasigan, notwithstanding the fact
that the latter offered to pay less, was invalid, and suggested
that the privilege should be, awarded to Graciano Napa who,
in its opinion, appeared to be the highest bidder in accordance
with the provisions of sections 2323 and 2319 of the
Administrative Code (Exhibit 9). The Executive Bureau,
concurring with the provincial board's points of view, declared,
in turn, that the concession made to Marasigan was illegal in
view of the fact that Graciano Napa was the highest bidder
(Exhibit 13).
The plaintiff municipality decided to award the privilege of
gathering whitefish spawn within its waters to Graciano Napa,
giving him a period of seven days, from January 8, 1931 (Exhibit
19-A), to deposit the sum of P500.
Graciano Napa not only failed to make the deposit required by
the plaintiff but he formally declared, through his duly
authorized representative, that he yielded the privilege
granted him to Miguel Marasigan or to any other person
selected by the municipal authorities.
One day later plaintiff-appellee municipality sent the letter
Exhibit 21 to Miguel Marasigan informing him that the contract
between them becomes effective on January 14, 1931.
Prior to this, plaintiff informed Marasigan that the contract
granting Marasigan the privilege is suspended & considered
ineffective while the protest is pending.
Plaintiff filed an action to recover from Marasigan, Sevilla and
Luana the sum of P 3,780 as part of license fees which they
failed to pay.
ISSUE: w/n respondents are liable
HELD:
No. The contract was not only considered not consummated
but cancelled.
It ceased to be valid when it was cancelled
Neither the appellant nor his sureties were bound to comply
with the terms of their respective contracts of fishing privilege
and suretyship.
SECTRANS 2010/ ATTY. AGUINALDO 33
This is so particularly with respect to the sureties, because
suretyship cannot exist without a valid obligation.
Guaranty is not presumed.
The elimination of the obligation for which said sureties
desired to answer with their bond also rendered the bond also
eliminated.
SMITH BELL v PNB
FACTS
On April 1918, Fred M. Harden applied to Smith, to buy 8
Anderson expellers end drive, latest model, for the price
of P80,000, to be paid on delivery. This would be used for
the extraction of coconut oil.
It was understood that these expellers would be
manufactured in the US and delivery would be in the
month of February or March of the ensuing year.
In order to assure the prompt payment of the price upon
delivery, an arrangement was made between Harden and
the Philippine National Bank (PNB) whereby the latter
bound itself to Smith, Bell & Co. for the payment of the
contract price, but provided that the expellers would
delivered to them and must be new and in first class
working order.
Shortly after the contract was made, Harden appeared in
the office of Smith, Bell & Co. and requested them to
change the order for the expellers from "end-drive" to
"side-drive;" and in obedience to this instruction, the
house cabled to its agent in New York to change the
order accordingly, which was done.
On July 1919, Smith, Bell & Co. informed both Harden
and PNB that the expellers had arrived.
Shortly thereafter Harden, having examined the
machinery in the Plaintiff's bodega, advised the Bank that
the expellers were not as ordered.
Consequently, the Bank naturally refused to accept and
pay for the machinery, and the Plaintiff disposed of them
to the best advantage in the Manila market at a price
which was below the price at which Harden had agreed
to take them.
The ground upon which the defense is chiefly rested is
that the expellers tendered by the Plaintiff were "side-
drive" instead of "end-drive" expellers, and in support of
this contention Harden was produced by the Defendant
as a witness, and he denied that the order for expellers
had been changed upon his instructions.
Issue:
Whether or not PNB is subsidiary liable?
Rulings:
NO. The SC ruled that PNBs liability is primary in nature.
The contract by which the Bank obligated itself is both in
form and effect an independent undertaking on the part
of the Bank directly to the Plaintiff; and inasmuch as the
Plaintiff had compiled, or offered to comply, with the
terms of said contract, the Bank is bound by its promise
to pay the purchase price.
Its obligation to the Plaintiff is direct and independent.
The debt must be considered a liquidated debt, in the
sense intended in article 1825 of the Civil Code; and the
action is now maintainable by the Plaintiff directly
against the Bank without regard to the position of
Harden.
The Bank is to be considered strictly in the light of an
independent promisor, a consequence would be that
Harden had no authority to change the order from end-
drive to side-drive expellers; in other words, that the
Bank should be held to be obligated according to the
terms of the order as it stood when the Bank entered
into the undertaking which is the subject of the suit.
WISE & CO. v KELLY
FACTS: Kelly bought goods and merchandise on credit from
Wise and Co., with the agreement that Kelly will apply the
proceeds of its sale to the discharge of his indebtedness. Lim,
as surety for Kelly, guaranteed unto Wise & Co. the payment
of a sum of money which Kelly owes to Wise for goods and
merchandise received and purchased by Kelly, to be sold in his
establishment, upon the condition that Kelly will pay over to
Wise at the end of each month all sums which he may receive
from the sale of said goods and merchandise, and that in the
contrary event, the surety undertakes to pay Wise such sums
as Kelly may fail to turn in.
As alleged by Wise, Kelly has not paid any money and thus filed
a collection case against Kelly and Lim. Lim interposed the
defense that the obligation was conditional as to him, and that
the fact constituting the condition had not occurred. Lower
court dismissed the case against Lim on the ground that wise
has not proven that Kelly had failed to turn over any money
and established the conclusion that Lim had incurred no
liability.
ISSUE: WON Lim should be held liable.
HELD: NO. Lim is not liable for the difference between the
amount realized from the sale of the merchandise and the
purchase price of the same. Lim as surety did not undertake to
pay the principal amount due. His agreement was limited to
respond for the performance by Kelly of one of the accessory
pacts, namely, the undertaking to deliver to Wise the total
proceeds of the sales of the merchandise for the invoice value
of which the promissory note was given. Wise has not proved
that it has NOT in fact received all the money derived from the
sale of the merchandise mentioned in the note, it follows that
SECTRANS 2010/ ATTY. AGUINALDO 34
there is no evidence of the existence of the condition to which
the obligation assumed by Lim was subordinated. In
obligations subject to a suspensive condition the acquisitions
of the right on the part of the creditor depends upon the
occurrence of the event constituting the conditions.
RCBC v ARRO
FACTS:
Residoro Chua and Enrique Go, Sr. executed a
comprehensive surety agreements to guaranty
among others, any existing indebtedness of Davao
Agricultural Industries Corporation provided that the
liability shall not exceed at any one time the
aggregate principal sum of P100,000.00.
A promissory note in the amount of P100,000.00
was issued in favor of petitioner. Said note was
signed by Enrique Go, Sr. in his personal capacity and
in behalf of Daicor. The promissory note was not
fully paid despite repeated demands; hence
petitioner filed a complaint for a sum of money
against Daicor, Enrique Go, Sr. and Residoro Chua
Petitioner alleged that by virtue of the execution of
the comprehensive surety agreement, private
respondent is liable because said agreement covers
not merely the promissory note subject of the
complaint, but is continuing; and it encompasses
every other indebtedness the Borrower may, from
time to time incur with petitioner bank.
The sole issue resolved by respondent court was the
interpretation of the comprehensive surety
agreement, particularly in reference to the
indebtedness evidenced by the promissory note
involved in the instant case, said comprehensive
surety agreement having been signed by Enrique Go,
Sr. and private respondent, binding themselves as
solidary debtors of said corporation not only to
existing obligations but to future ones.
Respondent court said that corollary to that
agreement must be another instrument evidencing
the obligation in a form of a promissory note or any
other evidence of indebtedness without which the
said agreement serves no purpose; that since the
promissory notes, which is primarily the basis of the
cause of action of petitioner, is not signed by private
respondent, the latter can not be liable thereon.
ISSUE: whether private respondent is liable to pay the
obligation evidence by the promissory note?
HELD:
YES, The comprehensive surety agreement was
jointly executed by Residoro Chua and Enrique Go,
Sr., President and General Manager, respectively of
Daicor, 1976 to cover existing as well as future
obligations which Daicor may incur with the
petitioner bank, subject only to the proviso that their
liability shall not exceed at any one time the
aggregate principal sum of P100,000.00
The agreement was executed obviously to induce
petitioner to grant any application for a loan Daicor
may desire to obtain from petitioner bank. The
guaranty is a continuing one which shall remain in
full force and effect until the bank is notified of its
termination.
The surety agreement which was earlier signed by
Enrique Go, Sr. and private respondent, is an
accessory obligation, it being dependent upon a
principal one which, in this case is the loan obtained
by Daicor as evidenced by a promissory note.
What obviously induced petitioner bank to grant the
loan was the surety agreement whereby Go and
Chua bound themselves solidarily to guaranty the
punctual payment of the loan at maturity. By terms
that are unequivocal, it can be clearly seen that the
surety agreement was executed to guarantee future
debts which Daicor may incur with petitioner, as is
legally allowable under the Civil Code
WILLEX PLASTICS v CA
FACTS:
- Inter Resin opened a Letter of Credit with Manila
Banking Corp. with security of Continuing Surety
Agreement signed by Inter Resin and Investment and
Underwriting Corp (IUCP) wherein they bound
themselves solidarily for the.
- Later Inter Resin together with Willex (P) executed a
continuing guaranty in favor of IUCP, stating that Inter
Resin and P are solidarily liable. Due to this, IUCP paid
Manila Bank P4M (Letter of Credit)
- IUCP then demanded payment of the amount,
however, Inter Resin and P failed to do so. Hence, this
case
- P contends that it should not be liable since P is
merely a guarantor
ISSUE: WoN P ma be held jointly and severally liable with Inter
Resin for the amount paid by Interbank to Manila Bank
SC: YES
- The amount had been paid by InterBank to Manila
bank
- The intention of the parties is to secure the payment
of the obligation.
o CA held-to secure the guarantee undertaken
by Interbank of the credit accommodation
SECTRANS 2010/ ATTY. AGUINALDO 35
 granted to Inter Resin by Manila Bank,
Interbank required P to sign a Continuing
Guaranty
DOCTRINE: Although a contract of suretyship is ordinarily not
be construed retrospective, in the end the intention of the
parties as revealed by the evidence is controlling
TRADERS INSURANCE v DY
FACTS:
1) For several years Destilleria Lim Tuaco & Co., Inc. had one
Dy Eng Giok as its provincial sales agent who has the duty of
turning over the proceeds of his sales to the distillery
company. In 1951, Dys outstanding running account was in
the sum of P12,898.61. Thereafter, a surety bond was
executed by Dy as principal and Traders Insurance as solidary
guarantor, whereby they bound themselves, jointly and
severally,
WHEREAS, the contract requires the above bounden
principal to give a good and sufficient bond in the
above stated sum to secure the full and faithful
fulfillment on its part of said contract; namely, to
guarantee the full payment of the Principal's
obligation not to exceed the above stated sum.
2) On the same date, by Eng Giok, as principal, with Pedro
Lopez Dee and Pedro Dy-Liacco, as counterboundsmen,
subscribed an indemnity agreement in favor of appellant
Surety Company, where, in consideration of its surety bond,
the three agreed to be obligated to the surety company.
Thereafter, Dy contracted obligations in favor of the
Destilleria in the amount of P41,449.93; and Dy made
remittances of the same amount
3) The distillary, however, applied said remittances first to Dy
Eng Giok's outstanding balance prior to August 4, 1951,
before the suretyship agreement was executed, in the sum
of P12,898.61; and the balance of P28,965.88 to Dy's
obligations between August 4, 1951 and August 3, 1952.
4) Then demanded payment of the remainder from Dy, and
later, from the appellant Surety Company. The latter paid
P10,000.00 (the maximum of its bond) on July 17, 1953,
apparently, without questioning the demand; and then
sought reimbursement from Dy Eng Giok and his counter
guarantors, who however failed to pay. Because of this the
company brought an action to enforce collection.
5) The CFI absolved the counter-guarantors on the theory
that in so far as they are concerned, the payments made by
Dy from August 4, 1951 to August 3, 1952, should have been
applied to his obligations during that period, which were the
ones covered by the surety bond and the counter-guaranty;
and since these obligations only amounted to P41,449.93, the
payments exceeding the obligations, the CFI concluded that
the Surety Company incurred no liability and the
counterbondsmen in turn had nothing to answer for.
HELD:
A) The CFI is correct. There are two reasons why the
remittances by Dy Eng Giok in the sum of P41,864.49 should
be applied to the obligation of P41,449.93 contracted by him
during the period covered by the suretyship agreement:
a.. In the absence of express stipulation, a guaranty
or suretyship operates prospectively and not
retroactively; that is to say, it secures only the debts
contracted after the guaranty takes effect because a
guaranty is not presumed, but must be express, and
can not extend to more than what is stipulated.
b.. Since the obligations of Dy between August 4,
1951 to August 4, 1952, were guaranteed, while his
indebtedness prior to that period was not secured,
then in the absence of express application by the
debtor, any partial payments made by him should be
imputed or applied to the debts that were
guaranteed, since they are regarded as the more
onerous debts from the standpoint of the debtor.
B) In essence therefore debts covered by a guaranty are
deemed more onerous to the debtor than the simple
obligations because, in their case, the debtor may be
subjected to action not only by the creditor, but also by the
guarantor, and this even before the guaranteed debt is paid
by the guarantor; hence, the payment of the guaranteed debt
liberates the debtor from liability to the creditor as well as to
the guarantor, while payment of the unsecured obligation
only discharges him from possible action by only one party,
the unsecured creditor.
C) Thus, payment voluntarily made by appellant was
improper since it was not liable under its bond; consequently,
it can not demand reimbursement from the
counterbondsmen but only from Dy.
D) Ultimately, the application by a creditor depends upon the
debtor acquiescence thereto. In the present case, as already
noted, there is no evidence that the receipts for payment
expressed any imputation, or that the debtor agreed to the
same. Judgment is affirmed.
SOCONY v CHO SIONG
FACTS: Cho Siong entered into contract of agency for
distribution of petroleum products, assumed liability of former
SECTRANS 2010/ ATTY. AGUINALDO 36
agent Tong Kuan. His agency bond was secured by Ong Guan
Can. Defaulted in the amount of P64.00
DOCTRINE: Under the terms of the bond signed by the
surety, he did not answer for the principal obligor save for the
Latters acts by virtue of the contract of agency. He cannot be
held liable for the debt of a former agent, which the principal
obligor assumed by virtue of another contract, of which said
surety was not even aware. A contract of suretyship is to be
strictly interpreted and is not to be extended beyond its terms.
GARON v PROJECT MOVERS
Facts:
Project Movers Realty and Devt Corp (PMRDC) obtained a
loan from Garon. The loan was covered by a Promissory
note to mature on December 19. The stipulated interest
rate was 36% per annum.
To secure the payment of the loan, PMRDC undertook to
assign to Garon its leasehold rights over a space at the
Monumento Plaza Commercial Complex.
The parties stipulated that failure to pay the note or any
portion thereof, or any interest thereon, shall constitute
as default and the entire obligation shall become due and
demandable without need of demand.
PMRDC obtained another loan from Garon at 17% per
annum to mature on December 31. It is covered by
another promissory note and secure a leasehold rights
over another space in Monumento Plaza.
To secure its obligations to assign the leasehold rights to
Garon, PMRDC procured a surety bond from Stronghold
Insurance, which the liability of the surety will not exceed
the sum of P12M and will expire on Nov 7.
When PMRDC defaulted in the payment of its obligations,
Garon sent a demand letter dated Nov 3 requiring PMRDC
to execute and deliver a unilateral Deed of Assignment of
its leasehold rights over the commercial spaces.
Garon also sent a demand letter to the surety on Nov 6.
For failure to comply with the demand, Garon filed a
complaint for collection of the principal obligation against
PMRDC and the surety.
The surety contends that the complaint stated no cause of
action and was prematurely filed. At the time Garon sent
the demand letter, the obligation guaranteed by the bond
had not yet matured.
On the part of PMRDC, it denied that it executed the
promissory noted and alleged instead that they were
mere roll-overs. It also alleged that it already complied
with its undertaking under the promissory notes when it
put up a surety bond. And that when Garon chose to
demand from the surety, she effectively waived the right
to claim for it.
Issue: Whether or not the surety is liable to Garon under its
surety bond.
Held:
Yes, the surety is liable in general. The principal obligation
guaranteed by the surety bond is the assignment of leasehold
rights of PMRDC to Garon over the subject spaces. Garon made
a formal demand but PMRDC defaulted. As such, PMRDCs
liability arose. Consequently, the suretys liability likewise
arose.
Suretyship arises upon the solidary binding of a person with
the principal debtor, for the purpose of fulfilling an obligation.
A surety is considered in law as being the same party as the
debtor in relation to whatever is adjudged as touching the
obligation of the latter and their liabilities are interwoven as to
be inseparable. Although a surety contract is secondary to the
principal obligation, the liability of the surety is direct,
primary and absolute or equivalent to that of a regular party
to the undertaking.
Note:
Surety in this case was not held liable since its undertaking
under the surety bond was merely to guarantee the
assignment of PMRDCs leasehold rights and not the payment
of the entire obligation and Garon is seeking to enforce her
right to collect the principal debt rather than enforce the
security.
REPUBLIC v PAL-FOX LUMBER
Facts: Pal-Fox Lumber Co., Inc. was indebted to the Bureau
of Internal Revenue for forest charges and surcharges
amounting to P11,851.56, and that the Far Eastern Surety &
Insurance Co., Inc. was jointly and severally liable with the
lumber company for the payment of said forest charges up to
P5,000.00. Republic moved for reconsideration, pointing out
that the surety company's correct liability under the appealed
decision was P5,000.00 plus legal interest from the filing of the
complaint. In other words, the Republic would want the surety
company to pay the legal interest adjudged by the trial court
before the case may finally be considered dismissed. Far
Eastern's denial of liability for such interest is based on the
stipulation in the bond that it was bound to the plaintiff "in the
sum of P5,000.00."
Issue: W/N Far Eastern should also pay interest?
Ruling: Yes. Article 2055, paragraph 2, of the Civil Code of the
Philippines is clearly applicable.
If it (the guaranty) be simple or indefinite, it shall comprise not
only the principal obligation but also all its accessories,
including judicial costs.
COMMONWEALTH v CA
SECTRANS 2010/ ATTY. AGUINALDO 37
This case is about SIGS and ELBA borrowing money from RCBC
worth P4m. Commonwealth being the surety. SIGS and ELBA
defaulted so RCBC went after Commonwealth.
Commonwealth insists on not paying. Lower Court ruled in
favor of RCBC and ordered Commonwealth to pay the principal
debt plus interest. Commonwealth refused. Commonwealth
appealed to CA and questions the ruling of the lower court
awarding interest. (focus on interest)
Issue: WoN Commonwealth whould pay principal and interest
Ruling: Obviously, Commonwealth is obliged to pay the
principal being the surety. Regarding the interest, generally no.
However because Commonwealth refused to pay the principal
when the lower court ordered it to do so, it is now bound to
pay the interest.
NAMARCO v MARQUEZ
FACTS: Properties, rights, obligations, and contracts of the
Philippine Relief and Trade Rehabilitation Administration
(PRATRA) had been transferred to the Price Stabilization
Corporation (PRISCO) and subsequently all rights and contracts
of the PRISCO involving real estate, fixed assets and stock in
trade had been assumed by herein plaintiff, the NAMARCO.
Marquez secured from the PRATRA one tractor and one rice
thresher, with a total value of P20,000.00 for which the said
defendant paid thereon the sum of P8,000.00 as down
payment, thereby leaving a balance of P12,000.00. Marquez
executed a promissory note in the amount of P12,000.00
payable in installments commencing from June 24, 1951 to
June 25, 1952, with interest thereon at the rate of 7% per
annum from June 24, 1950 until finally paid.
To guarantee full compliance with the aforementioned
obligation, defendant Marquez, as principal, and defendant
Plaridel Surety & Insurance Company, as surety, executed
Guaranty Bond P. S. & I. No. 4220 in favor of the PRATRA,
wherein they bound themselves, jointly and severally, to pay
the said amount of P12,000.00 (Exhibit C).
In this guaranty bond, the surety expressly waives its right to
demand payment and notice of non-payment and agrees that
the liabilities of this guaranty shall be direct and immediate
and not contingent upon the exhaustion by the PRATRA of
whatever remedies it may have against the principal, and that
the same shall be valid and continuous until the obligation so
guaranteed is paid in full.
After making partial payment, Marquez defaulted in the
payment of the other installments. Plaintiff demanded from
defendants Marquez and Plaridel Surety & Insurance
Company, payment of their outstanding obligation. The claim,
therefore, of defendant Plaridel Surety & Insurance Company
that they never received a demand for payment from plaintiff
must necessarily fail, considering that it is clearly shown in
registry return receipts that the same had been received by the
addressee.
ISSUES: Whether the surety's liability can exceed the sum of
P12,000.00.
RULING: Yes
While the guarantee was for the original amount of the debt
of Gabino Marquez, the amount of the judgment by the trial
court in no way violates the rights of the surety. The judgment
on the principal was only for P10,000.00, while the remaining
P9,990.91 represent the moratory interest due on account of
the failure to pay the principal obligation from and after the
same had fallen due, and default had taken place. Appellant
surety was fully aware that the obligation earned interest,
since the note was annexed to its contract, Exhibit "C".
The contract of guaranty executed by the appellant Company
nowhere excludes this interest, and Article 2055, paragraph 2,
of the Civil Code of the Philippines is clearly applicable.
If it (the guaranty) be simple or indefinite, it
shall comprise not only the principal obligation but
also all its accessories, including judicial costs,
provided with respect to the latter, that the
guarantor shall only be liable for those costs
incurred after he has been judicially required to pay.
Compensated sureties are not entitled to have their contracts
interrupted strictissimi juris in their favor
VIZCONDE v IAC
FACTS:
Perlas called Vizconde and asked her to sell an 8 carat
diamond ring on a commission for P85k
Vizconde later returned the ring. Afterwards,
Vizconde called on Perlas and claimed that there was
a sure buyer for the ring, Pilar Pagulayan
Pagulayan gave a post-dated check; Perlas and
Vizconde signed a receipt (Exh. A)
The check was dishonoured. After 9 days, Pagulayan
paid Perlas P5k against the value of the ring and gave
3 Certificates of Title to guarantee delivery of the
balance of such value (Exh D)
Perlas filed a complaint against Pagulayan and
Vizconde for estafa.
TC and CA Vizconde and Pagulayan had assumed a
joint agency in favour of Perlas for the sale of the
latters ring, which rendered them criminally liable,
upon failure to return the ring or deliver its agreed
value, under Art 315, par 1(b) of the Revised Penal
Code
SOL GEN disagreed; Vizconde cant be convicted of
estafa based on the Exhibits presented
SECTRANS 2010/ ATTY. AGUINALDO 38

ISSUE: Whether Vizconde was considered as agent of Perlas or
mere guarantor of obligation of Pagulayan?
HELD: Mere guarantor
Nothing in the language of the receipt, Exh A, or in the
proven circumstances attending its execution can
logically be considered as evidencing the creation of
an agency between Perlas, as principal, and Vizconde
as agent, for the sale of the formers ring.
If any agency was established, it was one between
Perlas and Pagulayan only, this being the logical
conclusion from the use of the singular I in said
clause, in conjunction with the fact that the part of
the receipt in which the clause appears bears only the
signature of Pagulayan.
To warrant anything more than a mere conjecture
that the receipt also constituted Vizconde the agent
of Perlas for the same purpose of selling the ring, the
cited clause should at least have used the plural we,
or the text of the receipt containing that clause
should also have carried Vizcondes signature.
The joint and several undertaking assumed by
Vizconde in a separate writing below the main body
of the receipt, Exhibit A, merely guaranteed the civil
obligation Pagulayan to pay Perlas the value of the
ring in the event of her (Pagulayans) failure to return
said article.
What is clear from Exh A is that the ring was entrusted
to Pagulayan to be sold on commission; there is no
mention therein that it was simultaneously delivered
to and received by Vizconde for the same purpose or,
therefore, that Vizconde was constituted, or agreed
to act as, agent jointly with Pagulayan for the sale of
the ring.
What Vizconde solely undertook was to guarantee
the obligation of Pagulayan to return the ring or
deliver its value; and that guarantee created only a
civil obligation, without more, upon default of the
principal.
Upon the evidence, Vizconde was a mere guarantor,
a solidary one to be sure, of the obligation assumed
by Pagulayan to complainant Perlas for the return of
the latters ring or the delivery of its value. Whatever
liability was incurred by Pagulayan for defaulting on
such obligation and this is not inquired into that
of Vizconde consequent upon such default was
merely civil, not criminal.
ESTATE OF HEMADY v LUZON SURETY
FACTS:
The Luzon Surety Co. had filed a claim against the Estate based
on twenty different indemnity agreements, or counter bonds,
each subscribed by a distinct principal and by the deceased K.
H. Hemady, a surety solidary guarantor) in all of them, in
consideration of the Luzon Surety Co.s of having guaranteed,
the various principals in favor of different creditors.
The Luzon Surety Co., prayed for allowance, as a contingent
claim, of the value of the twenty bonds it had executed in
consideration of the counterbonds, and further asked for
judgment for the unpaid premiums and documentary stamps
affixed to the bonds, with 12 per cent interest thereon.
The lower court, by order of September 23, 1953, dismissed
the claims of Luzon Surety Co., on the ground that whatever
losses may occur after Hemadys death, are not chargeable to
his estate, because upon his death he ceased to be guarantor.
The reasoning of the court below ran as follows:
The administratrix further contends that upon the death of
Hemady, his liability as a guarantor terminated, and therefore,
in the absence of a showing that a loss or damage was
suffered, the claim cannot be considered contingent. This
Court believes that there is merit in this contention and finds
support in Article 2046 of the new Civil Code. It should be
noted that a new requirement has been added for a person to
qualify as a guarantor, that is: integrity. As correctly pointed
out by the Administratrix, integrity is something purely
personal and is not transmissible. Upon the death of Hemady,
his integrity was not transmitted to his estate or successors.
Whatever loss therefore, may occur after Hemadys death, are
not chargeable to his estate because upon his death he ceased
to be a guarantor.
Another clear and strong indication that the surety company
has exclusively relied on the personality, character, honesty
and integrity of the now deceased K. H. Hemady, was the fact
that in the printed form of the indemnity agreement there is a
paragraph entitled Security by way of first mortgage, which
was expressly waived and renounced by the security company.
The security company has not demanded from K. H. Hemady
to comply with this requirement of giving security by way of
first mortgage. In the supporting papers of the claim presented
by Luzon Surety Company, no real property was mentioned in
the list of properties mortgaged which appears at the back of
the indemnity agreement. (Rec. App., pp. 407-408).
ISSUE: W/N the liability of the guarantor was terminated upon
his death
HELD: NO.
Under the present Civil Code (Article 1311), as well as under
the Civil Code of 1889 (Article 1257), the rule is that
Contracts take effect only as between the parties, their
assigns and heirs, except in the case where the rights and
obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law.
Under our law, therefore, the general rule is that a partys
contractual rights and obligations are transmissible to the
successors.
Of the three exceptions fixed by Article 1311, the nature of the
obligation of the surety or guarantor does not warrant the
SECTRANS 2010/ ATTY. AGUINALDO 39
conclusion that his peculiar individual qualities are
contemplated as a principal inducement for the contract.
What did the creditor Luzon Surety Co. expect of K. H. Hemady
when it accepted the latter as surety in the counterbonds?
Nothing but the reimbursement of the moneys that the Luzon
Surety Co. might have to disburse on account of the obligations
of the principal debtors. This reimbursement is a payment of a
sum of money, resulting from an obligation to give; and to the
Luzon Surety Co., it was indifferent that the reimbursement
should be made by Hemady himself or by some one else in his
behalf, so long as the money was paid to it.
The second exception of Article 1311, p. 1, is intransmissibility
by stipulation of the parties. Being exceptional and contrary to
the general rule, this intransmissibility should not be easily
implied, but must be expressly established, or at the very least,
clearly inferable from the provisions of the contract itself, and
the text of the agreements sued upon nowhere indicate that
they are non-transferable.
Because under the law (Article 1311), a person who enters into
a contract is deemed to have contracted for himself and his
heirs and assigns, it is unnecessary for him to expressly
stipulate to that effect; hence, his failure to do so is no sign
that he intended his bargain to terminate upon his death.
Similarly, that the Luzon Surety Co., did not require bondsman
Hemady to execute a mortgage indicates nothing more than
the companys faith and confidence in the financial stability of
the surety, but not that his obligation was strictly personal.
The third exception to the transmissibility of obligations under
Article 1311 exists when they are not transmissible by
operation of law. The provision makes reference to those
cases where the law expresses that the rights or obligations
are extinguished by death, as is the case in legal support
(Article 300), parental authority (Article 327), usufruct (Article
603), contracts for a piece of work (Article 1726), partnership
(Article 1830 and agency (Article 1919). By contract, the
articles of the Civil Code that regulate guaranty or suretyship
(Articles 2047 to 2084) contain no provision that the guaranty
is extinguished upon the death of the guarantor or the surety.
WISE & CO. v TANGLAO
FACTS
In the CFI of Manila, Wise & Co filed a civil case against
Cornelio C. David for the recovery of a certain sum of
money.
David was an agent of Wise & Co. and the amount
claimed from him was the result of a liquidation of
accounts showing that he was indebted in said amount.
In said case Wise & Co. asked and obtained a preliminary
attachment of David's property.
To avoid the execution of said attachment, David
succeeded in having the defendant Attorney Tanglao sign
a power of attorney in his favor, with a clause
(considered a special POA to David) To sign as
guarantor for himself in his indebtedness to Wise &
Company of Manila, and to mortgage the Attorneys lot
Subsequently, David made a compromise with the
petitioner by paying P340 leaving an unpaid balance of
P296 and pledged the lot owned by the Atty as a
guaranty for the balance.
Wise & Co. now institutes this case against Tanglao for
the recovery of said unpaid amount.
There is no doubt that under POA, Tanglao empowered
David, in his name, to enter into a contract of suretyship
and a contract of mortgage of the property described in
the document, with Wise & Co.
However, David used said power of attorney only to
mortgage the property and did not enter into contract of
suretyship.
ISSUE
Whether or not Atty. Tanglao is liable?
RULING
NO.
The SC ruled that there is nothing stated in the
Compromise Agreement to the effect that Tanglao
became David's surety for the payment of the sum in
question. Neither is this inferable from any of the clauses
thereof, and even if this inference might be made, it
would be insufficient to create an obligation of
suretyship which, under the law, must be express and
cannot be presumed.
The only obligation which the Compromise Agreement,
in connection with POA, has created on the part of
Tanglao, is that resulting from the mortgage of a
property belonging to him to secure the payment of said
P640. However, a foreclosure suit is not instituted in this
case against Tanglao, but a purely personal action for the
recovery of the amount still owed by David.
At any rate, even granting that Defendant Tanglao may
be considered as a surety under the cited Compromise
the action does not yet lie against him on the ground
that all the legal remedies against the debtor have not
previously been exhausted (art. 1830 of the Civil Code,
and decision of the Supreme Court of Spain of March 2,
1891).
The Plaintiff has in its favor a judgment against debtor
David for the payment of debt. It does not appear that
the execution of this judgment has been asked for and
the Compromise, on the other hand, shows that David
has two pieces of property the value of which is in excess
of the balance of the debt the payment of which is
sought of Tanglao in his alleged capacity as surety.
SOUTHERN MOTORS v BARBOSA
SECTRANS 2010/ ATTY. AGUINALDO 40
FACTS: Defendant Barbosa executed a real estate mortgage for
the only purpose of guaranteeing as surety and/or guarantor
the payment of the debt of one Alfredo Brillantes in favor of
Southern Motors, Inc. due to the failure of Brillantes to settle
his obligation; plaintiff filed an action against defendant to
foreclose the real estate mortgage. Defendant filed an answer
alleging that the plaintiff has no right of action against him
because the plaintiff did not intent to exhaust all recourses to
collect from the true debtor (Brillantes), notwithstanding the
fact that the latter is solvent and has many properties within
the Province of Iloilo.
ISSUE: WHETHER THE MORTGAGE IN QUESTION COULD BE
FORECLOSED ALTHOUGH PLAINTIFF HAD NOT EXHAUSTED,
AND DID NOT INTEND TO EXHAUST, THE PROPERTIES OF HIS
PRINCIPAL DEBTOR.
HELD: NO. The right of guarantors, under Art. 2058 of the Civil
Code, to demand exhaustion of the property of the principal
debtor, exists only when a pledge or a mortgage has not been
given as special security for the payment of the principal
obligation.
Although an ordinary personal guarantor not a mortgagor or
pledgor may demand exhaustion of the properties of the
principal debtor, the creditor may, prior thereto, secure
judgment against said guarantor, who shall be entitled,
however, to a deferment of the execution of said judgment
against him until after the properties of the principal debtor
shall have been exhausted to satisfy the obligation involved
in the case.
SAAVEDRA v PRICE
FACTS:
This is a proceeding instituted by the petitioner to
annul the order of May 8, 1939, entered by the
Court of First Instance of Leyte, which provided for
the sale at public auction of the real property
described in Transfer Certificate of Title No. 395
issued in favor of the petitioner, so that the
proceeds thereof may be applied to the payment of
the credit of the respondent W.S. Price in the sum of
P15,000
In civil case No. 3707 of the Court of First Instance of
Leyte, W.S. Price, plaintiff vs. Ceferino Ibaez et al.,
defendants, said court rendered judgment ordering
the defendants to pay the plaintiff within ninety days
the sum of P15,000, with the legal interest thereon
from January 16, 1934, and in case of default on
their part, that the real property subject matter of
the mortgage be sold at public auction so that the
proceeds thereof may be applied to the payment of
the sum in question and the interest thereon.
After the period of ninety days has elapsed and
Rafael Martinez and Ceferino Ibaez failed to pay
the sum in question with the interest thereon, the
respondent Price filed a motion praying that the real
property mortgaged be sold at public auction for the
payment of his mortgage credit and its interest.
This was denied.
The petitioner now claims that the respondent Judge
acted with abuse of his discretion in not transferring
the hearing of the motion for the sale of the
mortgaged realty and that he exceeded his
jurisdiction in ordering the sale of said property.
ISSUE: Whether or not the order of sale of such property was
proper?
HELD:
It is contended that since the petitioner is not the
debtor and as she, on the other hand is the owner of
the mortgaged realty, she merely acted as surety to
Rafael Martinez, the principal debtor, and as such
she entitled to the benefit of the exhaustion of the
property of the principal debtor, in accordance with
the provision of article 1830 of the Civil Code.
We are of the opinion that this last contention is
likewise unfounded and untenable.
o In the first place, this alleged defense should
have been interposed before the judgment was
rendered in this case and it is too late to raise it
for the first time as a ground for opposing the
motion to sell the real property in question.
o In the second place, the contention that the
mortgaged real property belonging to the
petitioner cannot be sold to pay the debt for the
reason that she is a mere surety of Rafael
Martinez, finds no support in the law.
It is true that the petitioner is a surety with regard to
Rafael Martinez and as such surety she is entitled to
resort to the actions and remedies against him which
the law affords her, but we should not lose sight of
the fact that she was sued not as a surety but as a
mortgage debtor for being the owner of the
mortgaged property
ARROYO v JUNGSAY
FACTS:
SECTRANS 2010/ ATTY. AGUINALDO 41
 - Arroyo (P) is an appointed guardian of an imbecile,
while Jungsay et al (D) are the previous guardian and
bondsmen who absconded.
- D, the former guardian of the ward, absconded with
the funds of his ward.
- LC ordered D to pay P, which the bondsmen appealed.
D also pointed out properties of the previous
guardian which are now being adversely claimed by
3rd parties
ISSUE: WoN the bondsmen are liable
SC: YES
- For the surety to be not liable, he must be able to
point out property of the principal debtor which are
realizable and is situated within the Philippines to
insure the fulfillment of the obligation and furnish the
creditor with the means of obtaining its fulfillment
without delay
- The property pointed out by the sureties is not
sufficient to pay the indebtedness; it is not salable; it
is encumbered to 3rd parties
BITANGA v PYRAMID
FACTS:
1) On March 26 1997, Pyramid entered into an agreement
with Macrogen Realty, of which Bitanga is the President, to
construct for the latter a building, located in Sucat,
Paraaque. Pyramid then commenced civil, structural, and
architectural works on the construction project. However,
Macrogen Realty failed to settle respondents progress
billings. Bitanga, assured Pyramid that the outstanding
account of Macrogen Realty would be paid.Thus, Pyramid
continued the construction project.
2) In August 1998, Pyramid suspended work on the
construction project since the conditions that it imposed for
the continuation thereof, including payment of unsettled
accounts, had not been complied with by Macrogen Realty
and eventually, on 1 September 1999, respondent instituted
with the Construction Industry Arbitration Commission (CIAC)
a case for arbitration against Macrogen Realty seeking
payment by the latter of its unpaid billings and project costs.
Macrogen, chose to amicably settle the arbitration case and
both parties entered into a Compromise Agreement, with
Bitanga acting as signatory for and in behalf of Macrogen
Realty.
3) Under the Agreement, Macrogen Realty agreed to pay
Pyramid the total amount in six equal monthly installments,
that if it would default in the payment of two successive
monthly installments, immediate execution could issue
against it for the unpaid balance, without need of judgment
from any court or tribunal. Bitanga guaranteed the
obligations of Macrogen Realty under the Compromise
Agreement by executing a Contract of Guaranty in favor of
respondent, by virtue of which he irrevocably and
unconditionally guaranteed the full and complete payment of
the principal amount of liability of Macrogen Realty.
4) However, despite this, Macrogen Realty failed and refused
to pay all the monthly installments agreed upon in the
Compromise Agreement. Thus, on 7 September 2000,
respondent moved for the issuance of a writ of execution
against Macrogen Realty, which was granted.
5) The sheriff however filed a return stating that he was
unable to locate any property of Macrogen Realty, except its
bank deposit of P20,242.33, with the Planters Bank, Buendia
Branch. Respondent then made, on January 3, 2001, a written
demand on petitioner, as guarantor of Macrogen Realty, to
pay the P6,000,000.00, or to have properties of the Macrogen
Realty sufficient to cover the obligation guaranteed. Said
demands met no reply.
6) As to Marilyns (bitangas wife) liability, Pyramid
contended that Macrogen Realty was owned and controlled
by bitanga and Marilyn and/or by corporations owned and
controlled by them. On the theory that since the completion
of the construction project would have redounded to the
benefit of both petitioner and Marilyn and/or their
corporations; and considering, Marilyns interest in a
corporation which controls Macrogen Realty, Marilyn cannot
be unaware of the obligations incurred by Macrogen Realty
and/or petitioner in the course of the business operations of
the said corporation.
7) Pyramid filed suit that a judgment be rendered ordering
petitioner and Marilyn to comply with their obligation under
the Contract of Guaranty by paying respondent the amount
of P6,000,000.000.
8) Marilyn contended that, since she did not co-sign the
Contract of Guaranty with her husband; nor was she a party
to the Compromise Agreement between respondent and
Macrogen Realty. She had no part at all in the execution of
the said contracts. This was denied
ISSUES:
(1) whether the defendants were liable under the contract of
guarantee dated April 17, 2000 entered into between
Benjamin Bitanga and the plaintiff;
(2) whether defendant wife Marilyn Bitanga is liable in this
action;
HELD:
A) Under a contract of guarantee, the guarantor binds himself
to the creditor to fulfill the obligation of the principal debtor
SECTRANS 2010/ ATTY. AGUINALDO 42
in case the latter should fail to do so. The guarantor who pays
for a debtor, in turn, must be indemnified by the latter.
However, the guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of
the debtor and resorted to all the legal remedies against the
debtor. This is what is otherwise known as the benefit of
excussion.
Article 2060 of the Civil Code reads:
In order that the guarantor may make use of the
benefit of excussion, he must set it up against the
creditor upon the latters demand for payment from
him, and point out to the creditor available property
of the debtor within Philippine territory, sufficient to
cover the amount of the debt.
B) Said provision imposes a condition for the invocation of
the defense of excussion. Article 2060 of the Civil Code clearly
requires that in order for the guarantor to make use of the
benefit of excussion, he must set it up against the creditor
upon the latters demand for payment and point out to the
creditor available property of the debtor within the
Philippines sufficient to cover the amount of the debt.
C) In this case, despite having been served a demand letter at
his office, petitioner still failed to point out to the respondent
properties of Macrogen Realty sufficient to cover its debt.
Such failure on petitioners part forecloses his right to set up
the defense of excussion.
D) Article 2059(5) of the Civil Code thus finds application and
precludes petitioner from interposing the defense of
excussion. We quote:
(5) If it may be presumed that an execution on the
property of the principal debtor would not result in
the satisfaction of the obligation.
E) Petition is DENIED.
ONG v PCIB
FACTS: Cho Siong entered into contract of agency for
distribution of petroleum products, assumed liability of former
agent Tong Kuan. His agency bond was secured by Ong Guan
Can. Defaulted in the amount of P64.00
DOCTRINE: Under the terms of the bond signed by the
surety, he did not answer for the principal obligor save for the
Latters acts by virtue of the contract of agency. He cannot be
held liable for the debt of a former agent, which the principal
obligor assumed by virtue of another contract, of which said
surety was not even aware. A contract of suretyship is to be
strictly interpreted and is not to be extended beyond its terms.
MIRA HERMANOS v MANILA TOBACCONISTS
Facts:
By virtue of a written contract, Mira Hermanos (MH)
agreed to deliver to Manila Tobacconists (MT)
merchandise for sale on consignment under certain
specified terms and MT agreed to pay MH on or before the
20th day of each month the invoice value of all the
merchandise sold during the preceding month.
MH required MT a bond of 3,000 which was executed by
Provident Insurance (PI).
The volume of the business of MT increased so that the
merchandise received by way of consignment from MH
exceeded 3,000 in value.
MH required MT to post an additional bond of 2,000 which
MT complied, executing a bond with same conditions with
the Manila Compania de Seguros (MCS) for the excess of
3,000 up to 5,000.
After liquidation of the transaction, a balance was due
from MT to MH for the amount of 2,200 which MT is
unable to pay.
PI, as surety, only paid 1,300, alleging that the remaining
40% should be paid by the other surety, MCS.
Issue: Whether or not MCS should be held liable for the
remaining 40% of the balance due?
Held:
No, the bond of 3,000 filed by PI responded for the obligation
of MT up to the some of 3,000, inasmuch as the bond of 2,000
filed by MCS responded for the obligation of MT only insofar
as it might exceed 3,000 and up to 5,000.
The provision in the NCC with regard to several sureties of only
one debtor for the same debt does not apply in this case.
Although the two bonds on their face appear to guarantee the
same debt coextensively up to 2,000 that of PI alone
extending beyond that sum up to 3,000 it was pleaded and
conclusively proven that in reality said bonds, or the two
sureties, do not guarantee the same debt because PI
guarantees only the first 3,000 while MCS only the excess up
to 5,000.
CACHO v VALLES
Facts: On October 29, 1920, the National Sporting Club, of
Manila, obligated itself by a promissory note payable at four
months to pay to Jose Ma. Cacho. Below the signature of said
National Sporting Club, as signed by the proper officers of the
Club, the following personal guaranty was written: "We
guarantee this obligation." (Sgd.) J. A. Valles, J. L. Mateu, G. J.
Heffting, Ed. Chesley, Baldomero Roxas. This note was not paid
at maturity. An action was instituted thereon against the
National Sporting Club and the guarantors. Baldomero Roxas
SECTRANS 2010/ ATTY. AGUINALDO 43
interposed a defence claiming the right of division as among
the co-sureties, and asking that in case he should be found
liable that he should be held responsible only for his aliquot
part of the debt.
Issue: W/N in case of the insolvency of one or more of several
simple sureties, those who remain solvent can be made to pay
the entire debt?
Ruling: None of the sureties, so far as this record shows, has
been declared bankrupt. The benefit of division therefore has
not been lost, and the rule declaring each surety liable only for
his aliquot part of the guaranteed debt, must hold. The
obligation of the surety cannot be extended beyond its
specified limits. A co-surety is entitled to the benefit of division
from the very moment that he contracts the obligation, except
where there is stipulation to the contrary.
TUASON v MACHUCA
F: Universal Trading Company was going to withdraw goods
from the Bureau of Customs to be delivered to BPI. To
withdraw, they gave a bond executed by Manila Compania de
Seguros. That bond was secured solidarily by Tuason Co. and
Machuca of Universal Trading. It was to be paid whether or not
Manila Compania already paid CIR. Manila Compania
demanded payment from Tuason. Manila Compania filed a
case against tuason. Tuason later payed but incurred litigation
expenses. Tuason now demands payment from Machuca.
Tuason filed a case for collection of money from Machuca. The
lower court ruled that Machuca should pay the debt and the
expenses incurred by Tuason in the case for collection of
money.
Issue: Won Machuca should pay the expenses incurred by
Tuason in its case vs. Manila Compania
Ruling: NO! it was not Machucas fault why tuason incurred
expenses in the litigation of Manila Compania and Tuason. If
tuason paid Manila compania, no litigation expenses will be
paid.
AUTOCORP v INTRA STRATA
FACTS: Autocorp Group, represented by its President,
petitioner Peter Y. Rodriguez, secured two ordinary re-export
bond from private respondent Intra Strata Assurance
Corporation (ISAC) in favor of public respondent Bureau of
Customs (BOC) to guarantee the re-export of one unit of
Hyundai Excel 4-door 1.5 LS and Hyundai Sonata 2.4 GLS,
and/or to pay the taxes and duties thereon.
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.
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 on 24 October 1995 an action against petitioners.
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.
ISSUES: Whether actual forfeiture of the subject bonds is
necessary for the petitioners to be liable to ISAC under the
Indemnity Agreements?
RULING: The liability of the guarantor already triggers the
liability of the debtor.
Autocrops liability
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.
It is worthy to note that petitioners did not impugn the validity
of the stipulation in the Indemnity Agreements allowing ISAC
to proceed against petitioners the moment the subject bonds
become due and demandable, even prior to actual forfeiture
or payment thereof. Even if they did so, 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
SECTRANS 2010/ ATTY. AGUINALDO 44
may proceed against the principal debtor the moment the
debt becomes due and demandable.
Art. 2071. The guarantor, even before having paid, may
proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from
the guaranty within a specified period, and this period has
expired;
(4) When the debt has become demandable, by reason of
the expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation
has no fixed period for its maturity, unless it be of such
nature that it cannot be extinguished except within a period
longer than ten years;
(6) If there are reasonable grounds to fear that the principal
debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming
insolvent.
In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that shall
protect him from any proceedings by the creditor and from
the danger of insolvency of the debtor.
Rodriguezs liability
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, which states:
Art. 2079. An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the
guaranty. The mere failure on the part of the creditor to
demand payment after the debt has become due does not of
itself constitute any extension of time referred to herein.
The use of the term guarantee in a contract does not ipso facto
mean that the contract is one of guaranty. It thus ruled that
both petitioners assumed liability as a regular party and
obligated themselves as original promissors, i.e., sureties.
The provisions of the Civil Code on Guarantee, other than the
benefit of excussion, are applicable and available to the
surety.[22] The Court finds no reason why the provisions of
Article 2079 would not apply to a surety.
This, however, would not cause a reversal of the Decision of
the Court of Appeals. The Court of Appeals was correct that
even granting arguendo that there was a modification as to the
effectivity of the bonds, petitioners would still not be absolved
from liability since they had authorized ISAC to consent to the
granting of any extension, modification, alteration and/or
renewal of the subject bonds
SAENZ v YAP CHUAN
FACTS:
Engracio Palanca a judicial administrator gave bond
to guarantee his administration of the estate of
Margarita Jose
The bond was executed by Engracio, Plaintiff Saenz
and two others in favour of the government for the
sum of P60k
On the same date, Engracio and 5 others executed a
bond in favour of Saenz; Yap Chuan P20k and the
other 4 P5k each
TC ordered Saenz, as surety in solidum of the ex-
administrator Engracio to pay the estate the sum of
P41k
Saenz paid to the administrator of the estate P8k; He
filed sut against 5 sureties who executed the bond
TC acquitted Defendant from the P20k claim and
ordered the other 4 to pay P2k each.
Both parties appealed. Defendants were claiming that
they are only liable for P1k each only according to the
terms of the contract. Plaintiff was claiming that he is
entitled to maximum sum of P5k for which each one
had bound himself in the contract.
ISSUE: Whether or not Vizmanos is entitled to P20k, a
reimbursement of P5k each from the Defendants?
HELD: NO
The bond of a debtor to protect his surety is not a sub
bond nor a second bond with respect to the original
creditor. It is nothing but a substitution of the
obligation of the debtor with respect to his surety,
and is necessarily governed by the legal provisions
which regulate the right of action of the surety against
the party for whom he gave the bond, that is, an
action of subrogation which lies with the surety to
compel the debtor to comply with the obligation to
reimburse.
This action arising out of subrogation is the remedy
for securing reimbursement of the amount that
another has paid, and cannot exceed, except there is
an express agreement to the contrary, the amount
actually paid by the surety in place of the debtor.
IN THIS CASE: The following terms of an obligation
cannot be considered as an express agreement to the
contrary: x x x bind themselves as such conjointly to
reimburse or pay whatever amounts the latter (the
surety) may have to pay or shall have paid by reason
of the judicial bond, inasmuch as this manner of
expressing the intention of the obligated parties does
SECTRANS 2010/ ATTY. AGUINALDO 45
 not constitute a true disjunctive proposition, but is
merely explanatory of the obligation as if contracted
by the debtor himself, the only natural and logical
interpretation.
To ask an indemnity of P20k, when the loss to be
indemnified is only P8k is contrary to law.
Vizmanos only entitled to an action against 4
Defendants for recovery of maximum P5k. He cannot
collect more than the sum which he himself was
actually compelled to pay.
MANILA SURETY v BATU CONSTRUCTION
FACTS:
On July 8, 1950, the defendant Batu Construction & Company,
as principal, and the plaintiff Manila Surety & Fidelity Co. Inc.,
as surety, executed a surety bond for the sum of P8,812.00 to
insure faithful performance of the former's obligation as
contractor for the construction of the Bacarra Bridge, Project
PR-72 (No. 3) Ilocos Norte Province. On the same date, July
8,1950, the Batu Construction & Company and the defendants
Carlos N. Baquiran and Gonzales P. Amboy executed an
indemnity agreement to protect the Manila Surety & Fidelity
Co. Inc.., against damage, loss or expenses which it may sustain
as a consequence of the surety bond executed by it jointly with
Batu Construction & Company.
On or about May 30, 1951, the plaintiff received a notice from
the Director of Public Works (Exhibit B) annulling its contract
with the Government for the construction of the Bacarra
Bridge because of its failure to make satisfactory progress in
the execution of the works, with the warning that ,any amount
spent by the Government in the continuation of the work, in
excess of the contract price, will be charged against the surety
bond furnished by the plaintiff. It also appears that a complaint
by the laborers in said project of the Batu Construction &
Company was filed against it and the Manila Surety and Fidelity
Co., Inc., for unpaid wages amounting to P5,960.10.
Trial Court dismissed the case holding that provisions of article
2071 of the new Civil Code may be availed of by a guarantor
only and not by a surety the complaint, with costs against the
plaintiff.
ISSUE: The main question to determine is whether the last
paragraph of article 2071 of the new Civil Code taken from
article 1843 of the old Civil Code may be availed of by a surety.
HELD:
A guarantor is the insurer of the solvency of the debtor; a
surety is an insurer of the debt. A guarantor binds himself to
pay if the principal is unable to pay; a surety undertakes to pay
if the principal does not pay.1 The reason which could be
invoked for the non-availability to a surety of the provisions of
the last paragraph of article 2071 of the new Civil Code would
be the fact that guaranty like commodatum 2 is gratuitous. But
guaranty could also be for a price or consideration as provided
for in article 2048. So, even if there should be a consideration
or price paid to a guarantor for him to insure the performance
of an obligation by the principal debtor, the provisions of
article 2071 would still be available to the guarantor. In
suretyship the surety becomes liable to the creditor without
the benefit of the principal debtor's exclusion of his properties,
for he (the surety) maybe sued independently. So, he is an
insurer of the debt and as such he has assumed or undertaken
a responsibility or obligation greater or more onerous than
that of guarantor. Such being the case, the provisions of article
2071, under guaranty, are applicable and available to a surety.
The reference in article 2047 to, the provisions of Section 4,
Chapter 3, Title 1, Book IV of the new Civil Code, on solidary or
several obligations, does not mean that suretyship which is a
solidary obligation is withdrawn from the applicable provisions
governing guaranty.
The plaintiff's cause of action does not fall under paragraph 2
of article 2071 of the new Civil Code, because there is no proof
of the defendants' insolvency. The fact that the contract was
annulled because of lack of progress in the construction of the
bridge is no proof of such insolvency. It does not fall under
paragraph 3, because the defendants have not bound
themselves to relieve the plaintiff from the guaranty within a
specified period which already has expired, because the surety
bond does not fix any period of time and the indemnity
agreement stipulates one year extendible or renewable until
the bond be completely cancelled by the person or entity in
whose behalf the bond was executed or by a Court of
competent jurisdiction. It does not come under paragraph 4,
because the debt has not become demandable by reason of
the expiration of the period for payment. It does not come
under paragraph 5 because of the lapse of 10 years, when the
principal obligation has no period for its maturity, etc., for 10
years have not yet elapsed. It does not fall under paragraph 6,
because there is no proof that "there are reasonable grounds
to fear that the principal debtor intends to abscond." It does
not come under paragraph 7, because the defendants, as
principal debtors, are not in imminent danger of becoming
insolvent, there being no proof to that effect.
But the plaintiff's cause of action comes under paragraph 1 of
article 2071 of the new Civil Code, because the action brought
by Ricardo Fernandez and 105 persons in the Justice of the
Peace Court of Laoag, province of Ilocos Norte, for the
collection of unpaid wages amounting to P5,960.10, is in
connection with the construction of the Bacarra Bridge,
Project PR-72 (3), undertaken by the Batu Construction &
Company, and one of the defendants therein is the herein
plaintiff, the Manila Surety and Fidelity Co., Inc., and paragraph
1 of article 2071 of the new Civil Code provides that the
guarantor, even before having paid, may proceed against the
principal debtor "to obtain release from the guaranty, or to
SECTRANS 2010/ ATTY. AGUINALDO 46
demand a security that shall protect him from any proceedings
by the creditor or from the danger of insolvency of the debtor,
when he (the guarantor) is sued for payment. It does not
provide that the guarantor be sued by the creditor for the
payment of the debt. It simply provides that the guarantor of
surety be sued for the payment of an amount for which the
surety bond was put up to secure the fulfillment of the
obligation undertaken by the principal debtor. So, the suit filed
by Ricardo Fernandez and 105 persons in the Justice of the
Peace Court of Laoag, province of Ilocos Norte, for the
collection of unpaid wages earned in connection with the work
done by them in the construction of the Bacarra Bridge, Project
PR-72(3), is a suit for the payment of an amount for which the
surety bond was put up or posted to secure the faithful
performance of the obligation undertaken by the principal
debtors (the defendants) in favor of the creditor, the
Government of the Philippines.
The order appealed from dismissing the complaint is reversed
and set aside.
GEN. INDEMNITY v ALVAREZ
FACTS:
On February 1954, Appellee General Indemnity Co., Inc.,
filed a complaint in the CFI Manila against Appellant
Estanislao Alvarez for the recovery of the sum of P2,000
representing the amount of a loan allegedly taken by the
Appellant from the PNB, which the Appellee guaranteed
with an indemnity bond, and for which Appellant, as
counter-guaranty, executed in Plaintiff's favor a
mortgage on his share of land in a parcel of land .
The complaint further alleged that the Appellant failed to
pay said loan, together with interest, to PNB as a result
of which the bank deducted the amount thereof
Plaintiff's deposit.
Thereafter, Appellant averred that the loan in question
was secured by him only in accommodation of one Hao
Lam, and that Plaintiff agreed not to take any steps
against Appellant and the mortgage executed by him in
Plaintiff's favor until the latter had failed to obtain
payment from said Hao Lam.
Eight months later, Plaintiff filed a motion for summary
judgment saying that Appellang presented no real and
meritorious defense and that it was entitled to a
summary judgment in its favor, based on the affidavit of
its comptroller Pedro R. Mendiola essentially saying that:
o That he has personal knowledge of the indebtedness
of the Defendant.
o Notwithstanding said several demands by Plaintiff,
Defendant has failed and refused and still fails and
refuses to pay the same.
The lower courts ruled in favour of Plaintiff. Thus this
petition.
Issue:
Whether or not Defendant Alvarez is liable?
Ruling:
NO. The SC ruled that there exists a controversy in the
complaint and answer as to whether or not Appellee had
actually paid Appellant's obligation to the Philippine
National Bank, a matter which should be decided in the
affirmative before Appellant, as surety, can claim
reimbursement from Appellant, the principal debtor.
However, Appellee is correct in saying that said defense
is immaterial to its right to recovery, since the mortgage
deed executed by Appellant in its favor (the genuineness
and due execution of which Appellant admitted in his
answer) shows Appellant to be the actual and only
debtor, and Appellant is precluded from varying this
representation by parol evidence.
In ruling for the Appellant, the SC opined that the last
paragraph of Art. 2071 of the New Civil Code, provides
that the only action the guarantor can file against the
debtor "to obtain release from the guaranty, or to
demand a security that shall protect him from any
proceeding by the creditor and from the danger of
insolvency of the debtor."
An action by the guarantor against the principal debtor
for payment, before the former has paid the creditor, is
premature.
INTRA STRATA v REPUBLIC
FACTS: Grand Textile imported materials from other countries
which, upon arrival, were transferred to Customs Bonded
Warehouse. Grand Textile was obliged to pay customs charges.
To secure payment of these obligations, petitioners issued
general warehousing bonds in favor of the Bureau of Customs
(BOC). Without payment of any of the obligations due, Grand
Textile withdrew the imported goods from storage. BOC
demanded payment from Grand Textile as importer and from
the petitioners as sureties. All three failed to pay. The
government filed a collection suit against the parties.
Lower Court ruled against petitioners, CA affirmed. Petitioners
allege that: (1) they were released from their obligations under
their bonds when Grand Textile withdrew the imported goods
without payment of taxes, duties, and other charges; and (2)
that their non-involvement in the active handling of the
warehoused items from the time they were stored up to their
withdrawals substantially increased the risks they assumed
under the bonds they issued, thereby releasing them from
liabilities under these bonds.
ISSUE: Whether the withdrawal of the stored goods, wares,
and merchandise without notice to them as sureties
released them from any liability for the duties, taxes, and
charges they committed to pay under the bonds they issued?
SECTRANS 2010/ ATTY. AGUINALDO 47
HELD: NO. By its very nature under the terms of the laws
regulating suretyship, the liability of the surety is joint and
several but limited to the amount of the bond, and its terms
are determined strictly by the terms of the contract of
suretyship in relation to the principal contract between the
obligor and the obligee. The definition and characteristics of a
suretyship bring into focus the fact that a surety agreement is
an accessory contract that introduces a third party element in
the fulfillment of the principal obligation that an obligor owes
an obligee. In short, there are effectively two (2) contracts
involved when a surety agreement comes into play a
principal contract and an accessory contract of
suretyship. Under the accessory contract, the surety becomes
directly, primarily, and equally bound with the principal as the
original promissor although he possesses no direct or personal
interest over the latters obligations and does not receive any
benefit therefrom.
Considered in relation with the underlying laws that are
deemed read into these bonds, it is at once clear that the
bonds shall subsist that is, shall remain in full force and
effect unless the imported articles are regularly and
lawfully withdrawn. . .on payment of the legal customs duties,
internal revenue taxes, and other charges to which they shall
be subject. Fully fleshed out, the obligation to pay the
duties, taxes, and other charges primarily rested on the
principal Grand Textile; it was allowed to warehouse the
imported articles without need for prior payment of the
amounts due, conditioned on the filing of a bond that shall
remain in full force and effect until the payment of the duties,
taxes, and charges due. Under these terms, the fact that a
withdrawal has been made and its circumstances are not
material to the sureties liability, except to signal both the
principals default and the elevation to a due and demandable
status of the sureties solidary obligation to pay. Under the
bonds plain terms, this solidary obligation subsists for as long
as the amounts due on the importations have not been
paid. Thus, it is completely erroneous for the petitioners to say
that they were released from their obligations under their
bond when Grand Textile withdrew the imported goods
without payment of taxes, duties, and charges. From a
commonsensical perspective, it may well be asked: why else
would the law require a surety when such surety would be
bound only if the withdrawal would be regular due to the
payment of the required duties, taxes, and other charges?
We note in this regard the rule that a surety is released from
its obligation when there is a material alteration of the
contract in connection with which the bond is given, such as a
change which imposes a new obligation on the promising
party, or which takes away some obligation already imposed,
or one which changes the legal effect of the original contract
and not merely its form. A surety, however, is not released by
a change in the contract which does not have the effect of
making its obligation more onerous.
We find under the facts of this case no significant or material
alteration in the principal contract between the government
and the importer, nor in the obligation that the petitioners
assumed as sureties. Specifically, the petitioners never
assumed, nor were any additional obligation imposed, due to
any modification of the terms of importation and the
obligations thereunder. The obligation, and one that never
varied, is on the part of the importer, to pay the customs
duties, taxes, and charges due on the importation, and on the
part of the sureties, to be solidarily bound to the payment of
the amounts due on the imported goods upon their
withdrawal or upon expiration of the given terms. The
petitioners lack of consent to the withdrawal of the goods, if
this is their complaint, is a matter between them and the
principal Grand Textile; it is a matter outside the concern of
government whose interest as creditor-obligee in the
importation transaction is the payment by the importer-
obligor of the duties, taxes, and charges due before the
importation process is concluded. With respect to the sureties
who are there as third parties to ensure that the amounts due
are paid, the creditor-obligee's active concern is to enforce the
sureties solidary obligation that has become due and
demandable.
With regard to the issue on the notice, the surety does not, by
reason of the surety agreement, earn the right to intervene in
the principal creditor-debtor relationship; its role becomes
alive only upon the debtors default, at which time it can be
directly held liable by the creditor for payment as a solidary
obligor. A surety contract is made principally for the benefit of
the creditor-obligee and this is ensured by the solidary nature
of the sureties undertaking. Under these terms, the surety is
not entitled as a rule to a separate notice of default, nor to the
benefit of excussion, and may be sued separately or together
with the principal debtor. Significantly, nowhere in the
petitioners bonds does it state that prior notice is required to
fix the sureties
liabilities. Without such express requirement, the creditors
right to enforce payment cannot be denied as the petitioners
became bound as soon as Grand Textile, the principal
debtor, defaulted. Thus, the filing of the collection suit was
sufficient notice to the sureties of their principals default.
RADIO CORP. OF THE PHILS. v ROA
FACTS:
The defendant Jesus R. Roa became indebted to the
Philippine Theatrical Enterprises, Inc., in the sum of
P28,400 payable in seventy-one equal monthly
installments at the rate of P400 a month
commencing thirty days after December 11, 1931,
with five days grace monthly until complete
payment of said sum. On that same date the
Philippine Theatrical Enterprises, Inc., assigned all its
right and interest in that contract to the Radio
Corporation of the Philippines.
SECTRANS 2010/ ATTY. AGUINALDO 48
 In the said contract there was an accelerating clause
that in case the vendee-mortgagor fails to make any
of the payments as hereinbefore provided, 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 may be
foreclosed by the vendor-mortgagee
Roa failed to pay the monthly installment and the
whole amount fell due.
The defendant asked for an extension which was
granted.
After the extension given, the surety now argued
that they already release from their obligation.
ISSUE:
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?
HELD:
NO, The rule that an 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
VILLA v GARCIA BOSQUE
FACTS:
A sale of property was made by the attorney in fact for a stated
consideration, part of which was paid in cash and the balance
made payable in deferred instalments. The attorney in fact
then executed a substituted power of attorney in favor of a
third person to enable the latter to collect the deferred
instalments.
SC:
- Extension of time by Creditor to Principal Debtor;
Effect on liability of sureties
- Where the purchase price of property is payable in
various installments, an extension of time granted by
the creditor to the debtor with respect to one
instalment will discharge the sureties, whether simple
or solidary, from ALL liability as to such instalment bit
it DOES NOT AFFECT their liability for other
instalments unconnected with the extension of time.
HOSPICIO DE SAN JOSE v FIDELITY
SECURITY BANK v CUENCA
DOCTRINE: An extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes the
guaranty. The 1989 Loan Agreement expressly stipulated that
its purpose was to liquidate, not to renew or extend, the
outstanding indebtedness. Moreover, respondent did not sign
or consent to the 1989 Loan Agreeement, which had
alledgedly extended the original P8 million credit facility.
Hence, his obligation as a surety should be deemed
extinguished, pursuant to Article 2079 of the Civil Code, which
specifically states that [a]n extension granted to the debtor
by the creditor without the consent of the guarantor
extinguishes the guaranty.
An essential alteration in the terms of a Loan
Agreement without the consent of the surety extinguishes the
latters obligation. The submission that only the borrower, not
the surety, is entitled to be notified of any modification in the
original loan accommodation is untenable-such theory is
contrary to the to the principle that a surety cannot assume an
obligation more onerous than that of the principal. That the
Indemnity Agreement is a continuing surety does not
authorize the lender to extend the scope of the principal
obligation inordinately; A continuing guaranty is one which
covers all transaction, including those arising in the future,
which are within the description or contemplation of the
contract of guaranty, until the expiration or termination
thereof.
PNB v MANILA SURETY
Facts:
PNB had opened a letter of credit and advanced thereon
$120K to Edgingtom Oil Refinery for 8,000 tons of hot
asphalt. Of this amount, 2,000 tons were released and
delivered to Adams & Taguba Corp (ATACO) under a trust
receipt guaranteed by Manila Surety & Fidelity Co. (MSFC)
up to the amount of 75K.
To pay for the asphalt, ATACo constituted PNB its assignee
and atty-in-fact to receive and collect from the Bureau of
Public Works (BPW) the amount aforesaid out of funds
payable to the assignor under a purchase order.
ATACO delivered to BPW and the latter accepted the
asphalt to the total value of 400K.
After this, PNB regularly collected for 8 months.
Thereafter, it ceased to collect until after 4 years, its
investigators found that more money were payable to
ATACO from BPW, because the latter allowed other
creditors to collect funds due to ATACO under the same
purchase order.
SECTRANS 2010/ ATTY. AGUINALDO 49
 PNB demanded from ATACO and MSFC for payment but
both refused.
PNB filed a complaint against ATACO and MSFC to recover
the balance with interests and costs.
PNB contends that the power of attorney obtained from
ATACO was merely an additional security in its favor and
that it was the duty of the surety not that of the creditor
to see to it that the obligor fulfills his obligations and that
the creditor owed the surety no duty of active diligence to
collect any sum from the principal debtor.
Issue: Whether or not MFSC should be held liable for the
unpaid balance?
Held: No, MFSC is not liable.
PNB is not negligent in failing to collect from the principal
debtor but is negligent for its failure 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 care of a good father of the family and becomes
liable for damages which the principal may suffer through non-
performance.
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, PNB deprived the former of any possibility
of recoursing against that security. Article 2080 of the Civil
Code provides that guarantors even though they are solidary,
are released from their obligation whenever some act of the
creditor they cannot be subrogated to the rights, mortgages
and preferences of the latter.
PROVISIONS COMMON TO PLEDGE AND MORTGAGE
ARENAS v RAYMUNDO
Facts: Estanislaua Arenas and Julian La O, brought suit against
Fausto O. Raymundo (pawnshop owner). The plaintiffs alleged
that the said jewelry, during the last part of April or the
beginning of May, 1908, was delivered to Elena de Vega to sell
on commission, and that the latter, in turn, delivered it to
Conception Perello, likewise to sell on commission, but that
Perello, instead of fulfilling her trust, pledged the jewelry in the
defendant's pawnshop. The said jewelry was then under the
control and in the possession of the defendant, as a result of
the pledge by Perello, and that the former refused to deliver it
to the plaintiffs.
Issue: W/N the pawnshop should return the jewelry to the
plaintiffs?
Ruling: Yes. In the present suit, it was not proven that
Estanislaua Arenas authorized Perello to pawn the jewelry
given to her by Arenas to sell on commission. Conception
Perello was not the legitimate owner of the jewelry which she
pledged to the defendant Raymundo, for a certain sum that
she received from the latter as a loan, the contract of pledge
entered the jewelry so pawned cannot serve as security for the
payment of the sum loaned, nor can the latter be collected out
of the value of the said jewelry. The Civil Code prescribes as
one of the essential requisites of the contracts of pledge and
of mortgage, that the thing pledged or mortgaged must belong
to the person who pledges or mortgages it. This essential
requisite for the contract of pledge between Perello and the
defendant being absent as the former was not the owner of
the jewelry given in pledge.
UNION MOTOR CORP. v CA
This case is about the spouses respondents who bought a
jeepney worth 30k. to finance the purchase, the spouses
entered into a chattel mortgage with Union Motors wherein
the security will be the jeepney. Union motors then
transferred the mortgage to a financing company. Receipts
and other documents of ownership were issued however, the
jeep is still not in the possession of the spouses. The spouses
tried to have possession of the jeep but failed. Frustrated, they
did not continue the payment. LC ruled in favor of the spouses
saying that they are not liable because there is still no delivery.
Finance Co. claimed there was constructive delivery because
how can the spouses mortgage the property if they do not own
the it.
Issue: WoN there was delivery
Ruling: Non! Chattel mortgage do not prove delivery.
DBP v PRUDENTIAL
CAVITE DEVELOPMENT v SPOUSES LIM
FACTS:
Rodolfo Guansing obtained a loan in the amount of
P90k from Cavite Devt Bank (CDB) and mortgaged a
parcel of land covered by TCT in his name to secure
the loan.
When Guansing defaulted in the payment of his loan,
CDB foreclosed the mortgage and consolidated the
title to the property in its name
R Lim offered to purchase the property from CDB and
paid P30k as option money. She later on discovered
that the subject property was originally registered in
the name of Perfecto Guansing, father of Rodolfo
Guansing.
R filed an action for specific performance and
damages against CDB for serious misrepresentation
CDB denied that a contract of sale was ever perfected
between them and R. Rs letter offer clearly states
SECTRANS 2010/ ATTY. AGUINALDO 50
 that the sum of P30k was given as option money NOT
earnest money; therefore only an option contract
ISSUE: WON there was a valid foreclosure of the mortgage and
subsequently a contract of sale?
HELD: NO
NEMO DAT QUOD NON HABET
The sale by CDB to Lim of the property mortgaged by
Rodolfo Guansing is deemed a nullity for CDB did not
have a valid title to the said property.
CDB never acquired a valid title to the property
because the foreclosure sale, by virtue of which, the
property had been awarded to CDB as highest bidder,
is likewise void since the mortgagor was not the
owner of the property foreclosed.
DE LEON v CALALO
FACTS:
This case was brought below by respondent Eduardo Calalo for
the annulment of the mortgage executed by his brother,
Augorio Calalo, in favor of petitioner Roberto de Leon covering
a piece of land and the improvements thereon, consisting of a
residential house and a commercial building located at 45/4th
Street, East Tapinac, Olongapo City. Respondent Eduardo
alleged that he was the owner of the property mortgaged,
having bought it for P306,000.00 from the spouses Federico
and Marietta Malit on September 13, 1984. He claimed that,
as he was then a member of the merchant marines and stayed
abroad, the Deed of Absolute Sale covering the land was made
in favor of his brother, Augorio Calalo; that on April 8, 1985,
Augorio executed a Deed of Donation in favor of the minor
Julsunthie Calalo, herein respondents son, who, from the time
the property was purchased until the filing of the complaint,
had been receiving the fruits of the property; that on
September 14, 1988, Augorio mortgaged the said property to
petitioner Roberto de Leon without his [respondents]
knowledge and consent; that the mortgage was amended on
September 30, 1988; that Augorio did not have any right to
mortgage the property because he was not the owner thereof;
and that he (respondent Eduardo) learned only in June 1992
that the property was the subject of an extrajudicial
foreclosure. Named defendants in the action were petitioner
Roberto de Leon, Augorio Calalo and Benjamin Gonzales, the
sheriff conducting the foreclosure proceeding.
In due time, petitioner De Leon filed an answer in which he
claimed to be a mortgagee in good faith, having previously
ascertained the ownership of Augorio who occupied and
possessed the land in question and in whose name the land
was registered in the Register of Deeds and in various other
documents. He pointed out that even the deed of sale
attached to respondents complaint showed that the land was
in Augorios name, clearly proving that the latter owned the
property. Petitioner De Leon averred that the mortgage in his
favor was registered with the Register of Deeds and that it had
been amended four times.
ISSUE: W/N the mortgage executed by Augorio Calalo in favor
of petitioner De Leon is valid.
HELD:
There is no dispute that the land subject of the mortgage is
titled in the name of Augorio Calalo. Nor is there any question
that petitioner De Leon did not know of the claim of ownership
of respondent Eduardo Calalo until after the present action
was instituted. As the trial court found, petitioner De Leon
examined the relevant documents pertaining to the land,
consisting of the transfer certificate of title, the tax
declarations in the City Assessors Office and information on
the records in the barangay, and found that the land was
registered in the name of Augorio Calalo. Upon due inspection
of the property, he also found it to be occupied by Augorio
Calalo. Petitioner had no reason to believe that the land did
not belong to Augorio. Persons dealing with property covered
by a torrens certificate of title, as buyers or mortgagees, are
not required to go beyond what appears on the face of the
title. The public interest in upholding the indefeasibility of
torrens titles, as evidence of the lawful ownership of the land
or of any encumbrance thereon, protects buyers or
mortgagees who, in good faith, rely upon what appears on the
face of the certificate of title.4 Petitioner De Leon is a
mortgagee in good faith.
Whether the money used in acquiring the property from the
original owners came from respondent Eduardo Calalo and the
title to the property was placed in the name of his brother
Augurio Calalo only because respondent thought he was not
qualified to acquire lands in the Philippines because he had
become an American citizen, and that the land was
subsequently donated to respondent Eduardos son,
Julsunthie, are matters not known to petitioner. Hence,
whether Augorio Calalo committed a breach of trust and
whether the property was validly donated to petitioners son
Julsunthie are questions which must be resolved in a separate
proceeding.
CEBU INTERNATIONAL v CA
ERENA v QUERRA-KAUFFMAN
FACTS: Respondent is the owner of a lot with house, with the
TCT kept in a safety deposit box. She left the key of the box to
her husband as she was leaving for the US. Later on, the
daughter of respondent as well as her husband left for the US,
and the key was entrusted to the sister of her husband, Mira
Bernal. After a few months, respondent asked her sister to get
the TCT in the safety deposit box to be able to sell the property.
When the safe was broken, the items inside were missing,
including the title to the lot and tax declarations, as well as
jewelry.
SECTRANS 2010/ ATTY. AGUINALDO 51
Respondent discovered from Bernal that she and Jennifer
Ramirez, Victors daughter took the title and mortgaged it to
petitioner. There was a woman who pretended to be the
owner of the lot, showing the TCT in her name as Vida Dana
Querrer and identification card. Petitioner verified with the
Office of the Register of Deeds that the property was in the
name of Vida Dana Querrer and that it was free of any lien or
encumbrance. Subsequently, petitioner was convinced to
enter into a Real Estate Mortgage Contract which was later on
notarized and filed with the Office of the Register of Deeds and
annotated on the TCT.
Respondent filed a complaint against petitioner, Bernal and
Ramirez for Nullification of Deed of Real Estate Mortgage.
The RTC ruled in favor of petitioner and declared the Deed of
Real Estate Mortgage valid. The CA rendered judgment in favor
of defendant on the ground that in a Real Estate Mortgage
contract, it is essential that the mortgagor be the absolute
owner of the property to be mortgaged; otherwise the
mortgage is void.
ISSUE: WON THE REAL ESTATE MORTGAGE CONTRACT IS
VALID?
HELD: NO. One of the essential requisites of a mortgage
contract is that the mortgagor must be the absolute owner of
the thing mortgaged. A mortgage is, thus, invalid if the
mortgagor is not the property owner. In this case, the trial
court and the CA are one in finding that based on the evidence
on record the owner of the property is respondent who was
not the one who mortgaged the same to the petitioner.
Petitioner cannot be considered an innocent purchaser for
value, relying on the Torrents title. While a Torrens title serves
as evidence of an indefeasible title to the property in favor of
the person whose name appears therein, when the instrument
presented for registration is forged, even if accompanied by
the owners duplicate certificate of title, the registered owner
does not thereby lose his title, and neither does the assignee
of the mortgagee, for that matter, acquire any right or title to
the property. In such a case, the transferee or the mortgagee,
based on a forged instrument, is not even a purchaser or a
mortgagee for value protected by law.
Petitioner cannot also invoke the doctrine of a mortgagee on
good faith. Said doctrine speaks of a situation where, despite
the fact that the mortgagor is not the owner of the mortgaged
property, his title being fraudulent, the mortgage contract or
any foreclosure sale arising therefrom are given effect by
reason of public policy. The doctrine of mortgagee in good
faith presupposes that the mortgagor, who is not the rightful
owner of the property, has already succeeded in obtaining a
Torrens title over the property in his name and that, after
obtaining the said title, he succeeds in mortgaging the
property to another who relies on what appears on the said
title- it does not apply to a situation where the title is still in
the name of the rightful owner and the mortgagor is a different
person pretending to be the owner.
PNB v AGUDELO
Vda. DE JAYME v CA
FACTS:
- Spouses Jayme (P) are the registered owners of a
parcel of land. They entered into a contract of lease
with Asian Cars (R) covering half of the lot for 20 years
- The contract allows R to mortgage the property as
long as the proceeds will be for the construction of a
building on the land.
- R mortgaged the property for P6M to MetroBank,
covering the whole lot, and in which P signed the
documents. R also executed an undertaking wherein
the officers of R are liable personally to the mortgage
- R defaulted and MetroBank foreclosed the property.
- P filed for annulment of mortgage as it was acquired
through fraud
- RTC and CA declared the mortgage and undertaking
valid
ISSUE: WON Mortgage allowing R to mortgage the property
was valid
SC: YES
- It has long been settled that it is valid so long as valid
consent was given. In consenting thereto even
granting that petitioner may not be assuming
personal liability for the debt, her property shall
nevertheless secure and respond for the performance
of the principal obligation
- The law recognizes instances when persons not
directly parties to a loan agreement may give as
security their own properties for the principal
transaction.
- In this case, the spouses should not be allowed to
disclaim the validity of a transaction they voluntarily
and knowingly entered into for the simple reason that
such transaction turned out prejudicial to them later
on.
SECTRANS 2010/ ATTY. AGUINALDO 52
 - Records show that P voluntarily agreed to use their
property as collateral for Rs loan, hence, no fraud
- The undertaking made by R and its officers are valid,
hence they are liable to reimburse P for the damages
they suffered by reason of the mortgage
SPOUSES BELO v PNB
FACTS:
1) Eduarda Belo owned an agricultural land with an area of
661,288 square meters in Panitan, Capiz, which she leased a
portion to respondents spouses Eslabon, for a period of 7 years
at the rate of P7,000.00 per year.
2) Respondents spouses Eslabon obtained a loan from PNB
secured by a real estate mortgage on their own 4 residential
houses located in Roxas City, as well as on the agricultural land
owned by Eduarda Belo. The assent of Eduarda Belo to the
mortgage was acquired through a special power of attorney
which was executed in favor of respondent Marcos Eslabon on
June 15, 1982.
3) The spouses Eslabon failed to pay their loan obligation, and
so extrajudicial foreclosure proceedings against the
mortgaged properties were instituted by PNB and was the
highest bidder of the foreclosed properties at P447,632.00.
4) Meanwhile, Eduarda Belo sold her right of redemption to
petitioners spouses Enrique and Florencia Belo under a deed
of absolute sale of proprietary and redemption rights. Before
the expiration of the redemption period, petitioners spouses
Belo tendered payment for the redemption of the agricultural
land which includes the bid price of respondent PNB, plus
interest and expenses.
5) However, PNB rejected the tender of payment of petitioners
spouses Belo contending that the 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
amounting to P2,779,978.72 to which the spouses disagreed
and refused to pay the said total claim of respondent PNB.
Thereafter the\ spouses Belo filed in the RTC an action for
declaration of nullity of mortgage, with an alternative cause of
action, in the event that the accommodation mortgage be held
to be valid, to compel respondent PNB to accept the
redemption price tendered by petitioners spouses Belo which
is based on the winning bid price of respondent PNB in the
extrajudicial foreclosure. The RTC ruled in favour of the
spouses belo.
6) On appeal, the CA ruled that the petitioners spouses Belo
should pay the entire amount due to PNB under the mortgage
deed at the time of the foreclosure sale plus interest, costs and
expenses.
ISSUE: whether or not the SPA the real estate mortgage
contract, the foreclosure proceedings and the subsequent
auction sale involving Eduarda Belo's property are valid. And
assuming they are valid, whether or not the petitioners are
required to pay, as redemption price, the entire claim of
respondent PNB in the amount of P2,779,978.72 as of the date
of the public auction sale on June 10, 1991.
HELD:
A) The validity of the SPA and the mortgage contract cannot
anymore be assailed due to petitioners Belo failure to appeal
the same after the trial court rendered its decision affirming
their validity.
B) Also, the SPA executed by Eduarda Belo in favor of the
respondents spouses Eslabon and the Real Estate Mortgage
executed by the respondents spouses in favor of respondent
PNB are valid. It is stipulated in paragraph three (3) of the SPA
that Eduarda Belo appointed the Eslabon spouses "to make,
sign, execute and deliver any contract of mortgage or any other
documents of whatever nature or kind . . . which may be
necessary or proper in connection with the loan herein
mentioned, or with any loan which my attorney-in-fact may
contract personally in his own name
C) ThisSPA was not meant to make her a co-obligor to the
principal contract of loan between respondent PNB, as lender,
and the spouses Eslabon, as borrowers. Eduarda Belo
consented to be an accommodation mortgagor in the sense
that she signed the SPA to authorize respondents spouses
Eslabons to execute a mortgage on her land.
D) An accommodation mortgage isnt 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."
E) An accommodation mortgagor, ordinarily, is not himself a
recipient of the loan.
F) There is no doubt that Eduarda Belo, assignor of the
petitioners, is an accommodation mortgagor. Section 25 of
P.D. No. 694 provides that "the mortgagor shall have the right
to redeem the property by paying all claims of the Bank against
him". From said provision can be deduced that the mortgagor
referred to by that law is one from whom the bank has a claim
in the form of outstanding or unpaid loan; he is also called a
borrower or debtor-mortgagor.
G) PNB has no claim against accommodation mortgagor
Eduarda Belo inasmuch as she only mortgaged her property to
accommodate the Eslabon spouses who are the loan
SECTRANS 2010/ ATTY. AGUINALDO 53
borrowers of the PNB. The principal contract is the contract of
loan between the Eslabon spouses, as borrowers/debtors, and
the PNB as lender. The accommodation real estate mortgage
which secures the loan is only an accessory contract. Thus, the
term "mortgagor" in Section 25 of P.D. No. 694 pertains only
to a debtor-mortgagor and not to an accommodation
mortgagor.
H) Moreover, the mortgage contract provides that ". . . the
mortgagee may immediately foreclose this mortgage judicially
in accordance with the Rules of Court or extrajudicially in
accordance with Act No. 3135, as amended and Presidential
Decree No. 385 Thus, since the mortgage contract in this case
is in the nature of a contract of adhesion as it was prepared
solely by respondent, it has to be interpreted in favor of
petitioners.
J) While the petitioners, as assignees of Eduarda Belo, are not
required to pay the entire claim of respondent PNB against the
principal debtors, 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 4 residential lots of the spouses Eslabon. Thus,
petitioners are allowed to redeem only the property registered
in the name of Eduarda Belo, by paying only the bid price less
the corresponding loan value of the foreclosed (4) residential
lots of the respondents spouses Eslabon.
BUSTAMANTE v ROSEL
ALCANTARA v ALINEA
Facts:
Alinea and Belarmino loaned P480 from Alcantara.
According to the loan agreement, if the period has expired
without payment of the loan, the house and lot of Alinea
and Belarmino will be considered sold to Alcantara.
Alinea and Belarmino failed to pay.
They refused to deliver the property to Alcantara.
Alcantara filed an action against them.
The defendants contend that the amount claimed by
Alcantara included the interest and that the principal
borrowed was only 200 and that the interest was 280.
They also alleged as their special defense that they offered
to pay Alcantara the sum of 480 but the latter had refused
to accept the same.
Issue:
1) WON there was a valid mortgage?
2) WON the defendants should deliver the property to
Alcantara?
Held:
1) No. The property, the sale of which was agreed to by the
debtors does not appear mortgaged in favor of the
creditor because in order to constitute a valid mortgage it
is indispensable that the instrument be registered in the
Register of Property and the document contract does not
constitute a mortgage nor it could possibly be a mortgage,
for the reason that the said document is not vested with
the character and conditions of a public instrument.
The contract is not a pledge since the said property is not
personal property and the debtor continued in possession
thereof and was never been occupied by the creditor.
It is also not an antichresis by reason that as the creditor
has never been in possession of the property nor has
enjoyed the said property nor for one moment received
its rents.
2) Yes. The will of the parties are controlling, In this case, a
contract of loan and a promise of sale of a house and lot,
the price of which should be the amount loaned, if within
a fixed period of time such amount should not be paid by
the debtor-vendor of the property to the creditor-vendee
of same. The fact that the parties have agreed at the same
time, in such a manner that the fulfillment of the promise
of sale would depend upon the nonpayment or return of
the amount loaned, has not produced any change in the
nature and legal conditions of either contract, or any
essential defect which would tend to nullify the same.
MAHONEY v TUASON
Facts: P. Blanc, the owner of the jewels, entered into a contract
of pledge, delivering to the creditor Mariano Tuason several
jewels and other merchandise for the purpose of securing the
fulfillment of the obligation which he (Blanc) had contracted in
favor of the latter who had guaranteed the payment of a
considerable amount of money which Blanc owed to the
Chartered Bank. Creditor Tuason paid to the Chartered Bank
the sum of sixteen thousand pesos (P16,000) which the debtor
Blanc owed and failed to pay, and that the latter did not
reimburse Tuason the amount paid to the bank together with
interests thereon.
Issue: W/N Tuason can appropriate the things given by way of
pledge?
Ruling: No. Tuason is entitled to retain and appropriate to
himself the merchandise received in pledge is null and
indefensible, because he can only recover his credit, according
to law, from the proceeds of the sale of the same. Art. 2088.
LANUZA v DE LEON
SECTRANS 2010/ ATTY. AGUINALDO 54
Spouses lanuza executed a deed of sale with a right to
repurchase to Reyes. Upon expiration of term to repurchase,
the time was extended without the wife of lanuza signing the
document. A stipulation to the effect that the ownership will
only be passed to the vendee if the vendor fails to repurchase
the property was included. The spouses then mortgage the
property to respondent to secure a debt. The debt was unpaid
and respondent filed a case to foreclose the mortgage which
was granted. Reyes filed a case for consolidation, claiming she
has the right to the property. Reyes claims the ownership in
the property automatically passes immediately to him after
the sale and not after the end of the period to repurchase.
Issue: won reyes contention valid
Ruling: yes. a stipulation in a purported pacto de retro sale that
the ownership over the property sold would automatically
pass to the vendee in case no redemption was effected within
the stipulated period is contrary to the nature of a true pacto
de retro sale, under which the vendee acquires ownership of
the thing sold immediately upon the execution of the sale,
subject only to the vendors rights of redemption. The said
stipulation is a pactum commissorium which enables the
mortgagee to acquire ownership of the mortgaged property
without need of forclosure. It is void. Its insertion in the
contract is an avowal of the intention to mortgage rather than
to sell the property.
DAYRIT v CA
FACTS: Dayrit, Sumbillo and Angeles entered into a contract
with Mobil Oil Phil, entitled LOAN & MORTGAGE AGREEMENT.
Defendants violated the LOAN & MORTGAGE AGREEMENT
because they only paid one installment. They also failed to buy
the quantities required in the Sales Agreement.
The plaintiff made a demand, Dayrit answered acknowledging
his liability. Trial Court ruled in favor of plaintiff and also ruled
that each of the three defendants shall pay 1/3 of the cost. No
appeal had been taken so the decision became final and
executor.
Mobil filed for the execution of the judgment. Dayrit opposed
alleging that they had an agreement with Mobil, that he would
not appeal anymore but Mobil would release the mortgage
upon payment of his 1/3 share.
Mobil claimed that the agreement was that it would only
release the mortgage if the whole principal mortgaged debt
plus the whole accrued interest were fully paid.
ISSUE: Whether or not the CFI erred in ordering the sale at
public auction of the mortgaged properties to answer for the
entire principal obligation of Dayrit, Sumbillo and Angeles.
RULING:
While it is true that the obligation is merely joint and each of
the defendant is obliged to pay his 1/3 share of the joint
obligation, the undisputed fact remains that the intent and
purpose of the LOAN & MORTGAGE AGREEMENT was to
secure the entire loan.
The court ruled that 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 unaffected by the fact that the
debtors are not solidarily liable.
YU v PCIB
FACTS:
P mortgaged their title, interest, and participation
over several parcels of land located in Dagupan City
and Quezon City in favour of PCIB (R) as security for
the payment of a loan in the amount of P9mill
P failed to pay the loan; R filed a Petition for
Extrajudicial Foreclosure of Real Estate Mortgage on
the Dagupan City properties. A Certificate of Sale was
issued in favour of R. Subsequently, R filed an Ex-
Parte Petition for Writ of Possession before RTC
Dagupan
P filed a Motion to Dismiss. They argued that the
Certificate of Sale is void because the real estate
mortgage is indivisible, the mortgaged properties in
Dagupan City and Quezon City cannot be separately
foreclosed.
R the filing of two separate foreclosure proceedings
did not violate Article 2089 of the Civil Code on the
indivisibility of a real estate mortgage since Section 2
of Act No. 3135 expressly provides that extra-judicial
foreclosure may only be made in the province or
municipality where the property is situated. R further
submits that the filing of separate applications for
extra-judicial foreclosure of mortgage involving
several properties in different locations is allowed by
A.M. No. 99-10-05-0, the Procedure on Extra-Judicial
Foreclosure of Mortgage, as further amended on
August 7, 2001.
TC denied Motion
ISSUE: WON a real estate mortgage over several properties
located in different localities can be separately foreclosed in
different places?
HELD: YES
What the law proscribes is the foreclosure of only a
portion of the property or a number of the several
properties mortgaged corresponding to the unpaid
portion of the debt where, before foreclosure
proceedings, partial payment was made by the
debtor on his total outstanding loan or obligation.
This also means that the debtor cannot ask for the
release of any portion of the mortgaged property or
of one or some of the several lots mortgaged unless
SECTRANS 2010/ ATTY. AGUINALDO 55
 and until the loan thus secured has been fully paid,
notwithstanding the fact that there has been partial
fulfillment of the obligation. Hence, it is provided that
the debtor who has paid a part of the debt cannot ask
for the proportionate extinguishment of the
mortgage as long as the debt is not completely
satisfied. In essence, indivisibility means that the
mortgage obligation cannot be divided among the
different lots, that is, each and every parcel under
mortgage answers for the totality of the debt
A.M. No. 99-10-05-0,the Procedure on Extra-Judicial
Foreclosure of Mortgage, lays down the guidelines for
extra-judicial foreclosure proceedings on mortgaged
properties located in different provinces. It provides
that the venue of the extra-judicial foreclosure
proceedings is the place where each of the
mortgaged property is located. Relevant portion
provides:
Where the application concerns the extrajudicial
foreclosure of mortgages of real estates and/or
chattels in different locations covering one
indebtedness, only one filing fee corresponding
to such indebtedness shall be collected. The
collecting Clerk of Court shall, apart from the
official receipt of the fees, issue a certificate of
payment indicating the amount of indebtedness,
the filing fees collected, the mortgages sought to
be foreclosed, the real estates and/or chattels
mortgaged and their respective locations, which
certificate shall serve the purpose of having the
application docketed with the Clerks of Court of
the places where the other properties are
located and of allowing the extrajudicial
foreclosures to proceed thereat. (Emphasis
supplied)
The indivisibility of the real estate mortgage is not
violated by conducting two separate foreclosure
proceedings on mortgaged properties located in
different provinces as long as each parcel of land is
answerable for the entire debt
METROBANK v SLGT
FACTS:
On October 25, 1995, Dylanco and SLGT each entered into a
contract to sell with ASB for the purchase of a unit (Unit 1106
for Dylanco and Unit 1211 for SLGT) at BSA Towers then being
developed by the latter. As stipulated, ASB will deliver the
units thus sold upon completion of the construction or before
December 1999. Relying on this and other undertakings,
Dylanco and SLGT each paid in full the contract price of their
respective units. The promised completion date came and
went, but ASB failed to deliver, as the Project remained
unfinished at that time. To make matters worse, they learned
that the lots on which the BSA Towers were to be erected had
been mortgaged6 to Metrobank, as the lead bank, and
UCPB7 without the prior written approval of the Housing and
Land Use Regulatory Board (HLURB).
Alarmed by this foregoing turn of events, Dylanco, on August
10, 2004, filed with the HLURB a complaint for delivery of
property and title and for the declaration of nullity of
mortgage. A similar complaint filed by SLGT followed three (3)
days later. At this time, it appears that the ASB Group of
Companies, which included ASB, had already filed with the
Securities and Exchange Commission a petition for
rehabilitation and a rehabilitation receiver had in fact been
appointed.
What happened next are laid out in the OP decision adverted
to above, thus:
In response to the above complaints, ASB alleged
that it encountered liquidity problems sometime in
2000 after its creditors [UCPB and Metrobank]
simultaneously demanded payments of their loans;
that on May 4, 2000, the Commission (SEC) granted
its petition for rehabilitation; that it negotiated with
UCPB and Metrobank but nothing came out
positive from their negotiation .
On the other hand, Metrobank claims that
complainants [Dylanco and SLGT] have no personality
to ask for the nullification of the mortgage because
they are not parties to the mortgage transaction ;
that the complaints must be dismissed because of the
ongoing rehabilitation of ASB; xxx that its claim
against ASB, including the mortgage to the [Project]
have already been transferred to Asia Recovery
Corporation; xxx.
UCPB, for its part, denies its liability to SLGT [for lack
of privity of contract] [and] questioned the
personality of SLGT to challenge the validity of the
mortgage reasoning that the latter is not party to the
mortgage contract [and] maintains that the
mortgage transaction was done in good faith.
Finally, it prays for the suspension of the proceedings
because of the on-going rehabilitation of ASB.
In resolving the complaint in favor of Dylanco and
SLGT, the Housing Arbiter ruled that the mortgage
constituted over the lots is invalid for lack of
mortgage clearance from the HLURB.
ISSUE: W/N The declaration of nullity of the entire mortgage
constituted on the project land site and the improvements was
valid. and
SECTRANS 2010/ ATTY. AGUINALDO 56
HELD:
Both petitioners do not dispute executing the mortgage in
question without the HLURBs prior written approval and
notice to both individual respondents. Section 18 of
Presidential Decree No. (PD) 957 The Subdivision and
Condominium Buyers Protective Decree provides:
SEC. 18. Mortgages. - No mortgage of any unit or lot
shall be made by the owner or developer without
prior written approval of the [HLURB]. Such approval
shall not be granted unless it is shown that the
proceeds of the mortgage loan shall be used for the
development of the condominium or subdivision
project . The loan value of each lot or unit covered
by the mortgage shall be determined and the buyer
thereof, if any, shall be notified before the release of
the loan. The buyer may, at his option, pay his
installment for the lot or unit directly to the
mortgagee who shall apply the payments to the
corresponding mortgage indebtedness secured by
the particular lot or unit being paid for . (Emphasis
and word in bracket added)
There can thus be no quibbling that the project lot/s and the
improvements introduced or be introduced thereon were
mortgaged in clear violation of the aforequoted provision of
PD 957. And to be sure, Dylanco and SLGT, as Project unit
buyers, were not notified of the mortgage before the release
of the loan proceeds by petitioner banks.
As it were, PD 957 aims to protect innocent subdivision lot and
condominium unit buyers against fraudulent real estate
practices. Its preambulatory clauses say so and the Court need
not belabor the matter presently. Section 18, supra, of the
decree directly addresses the problem of fraud and other
manipulative practices perpetrated against buyers when the
lot or unit they have contracted to acquire, and which they
religiously paid for, is mortgaged without their knowledge, let
alone their consent. The avowed purpose of PD 957 compels,
as the OP correctly stated, the reading of Section 18 as
prohibitory and acts committed contrary to it are void. Any less
stringent construal would only accord unscrupulous
developers and their financiers unbridled discretion to follow
or not to follow PD 957 and thus defeat the very lofty purpose
of that decree. It thus stands to reason that a mortgage
contract executed in breach of Section 18 of the decree is null
and void.
The next question to be addressed turns on whether or not the
nullity extends to the entire mortgage contract.
The poser should be resolved, as the CA and OP did resolve it,
in the affirmative. This disposition stems from the basic
postulate that a mortgage contract is, by nature, indivisible.
Consequent to this feature, a debtor cannot ask for the release
of any portion of the mortgaged property or of one or some of
the several properties mortgaged unless and until the loan
thus secured has been fully paid, notwithstanding the fact that
there has been partial fulfillment of the obligation. Hence, it is
provided that the debtor who has paid a part of the debt
cannot ask for the proportionate extinguishments of the
mortgage as long as the debt is not completely satisfied.
The situation obtaining in the case at bench is within the
purview of the aforesaid rule on the indivisibility of mortgage.
It may be that Section 18 of PD 957 allows partial redemption
of the mortgage in the sense that the buyer is entitled to pay
his installment for the lot or unit directly to the mortgagee so
as to enable him - the said buyer - to obtain title over the lot
or unit after full payment thereof. Such accommodation
statutorily given to a unit/lot buyer does not, however, render
the mortgage contract also divisible. Generally, the divisibility
of the principal obligation is not affected by the indivisibility of
the mortgage. The real estate mortgage voluntarily
constituted by the debtor (ASB) on the lots or units is one and
indivisible. In this case, the mortgage contract executed
between ASB and the petitioner banks is considered
indivisible, that is, it cannot be divided among the different
buildings or units of the Project. Necessarily, partial
extinguishment of the mortgage cannot be allowed. In the
same token, the annulment of the mortgage is an all or nothing
proposition. It cannot be divided into valid or invalid parts. The
mortgage is either valid in its entirety or not valid at all. In the
present case, there is doubtless only one mortgage to speak
of. Ergo, a declaration of nullity for violation of Section 18 of
PD 957 should result to the mortgage being nullified wholly.
It will not avail the petitioners any to feign ignorance of PD 957
requiring prior written approval of the HLURB, they being
charged with knowledge of such requirement since granting
loans secured by a real estate mortgage is an ordinary part of
their business.
CENTRAL BANK v CA
PLEDGE
YULIONGSIU v PNB
FACTS: Yulongsiu owned 2 vessels and equity in FS-203, which
were purchased by him from the Philippine Shipping
Commission, by installment. Plaintiff obtained a loan from
defendant and to guarantee payment, plaintiff pledged the 2
vessels and the equity on FS-203, as evidenced by a pledge
contract. Plaintiff made a partial payment and the remaining
balance was renewed by the execution of 2 promissory notes
in the banks favor. These two notes were never paid at all by
plaintiff on their respective due dates.
Defendant bank filed a criminal case against plaintiff charging
the latter with estafa through falsification of commercial
SECTRANS 2010/ ATTY. AGUINALDO 57
documents, and the trial court convicted the plaintiff and was
sentenced to indemnify the defendant. The corresponding writ
of execution issued to implement the order for
indemnification was returned unsatisfied as plaintiff was
totally insolvent.
Meanwhile, together with the institution of the criminal
action, defendant took physical possession of the 2 vessels and
transferred the equity on FS-203 to the defendant. Later on,
the 2 vessels were sold by defendant to third parties.
Plaintiff commenced an action for recovery on the pledged
items, and alleges, among others, that the contract executed
was a chattel mortgage so the creditor defendant could not
take possession of the chattel object thereof until after there
has been default.
ISSUE: Whether the contract entered into between plaintiff
and defendant is a chattel mortgage or a valid contract of
pledge?
HELD: Its a contract of pledge. The contract itself provides that
it is a contract of pledge and the judicial admission that it is a
pledge contract cannot be offset without showing of palpable
mistake.
The pledgee defendant was therefore entitled to the actual
possession of the vessels. The plaintiffs continued operation
of the vessels after the pledge contract was entered into places
his possession subject to the order of the pledge. The pledge
can temporarily entrust the physical possession of the chattels
pledged to the pledgor without invalidating the pledge. In this
case, the pledgor is regarded as holding the pledge merely as
a trustee for the pledge.
As to the validity of the pledge contract with regard to delivery,
plaintiff alleges that constructive delivery is insufficient to
make pledge effective. The Court ruled that type of delivery
will depend on the nature and peculiar circumstances of each
case. Since the defendant bank was, pursuant to the pledge
contract, in full control of the vessels through plaintiff, the
former could take actual possession at any time during the life
of the pledge to make more effective its security.
FBDC v YLLAS LENDING
FACTS:
FBDC executed a lease contract in favor of Tirreno,
Inc. (Tirreno) over a unit at the Entertainment Center
- Phase 1 of the Bonifacio Global City in Taguig,
Metro Manila
Two provisions in the lease contract are pertinent to
the present case: Section 20, which is about the
consequences in case of default of the lessee, and
Section 22, which is about the lien on the properties
of the lease.
Tirreno began to default in its lease payments in
1999. By July 2000, Tirreno was already in arrears by
P5,027,337.91. FBDC and Tirreno entered into a
settlement agreement on 8 August 2000. Despite the
execution of the settlement agreement, FBDC found
need to send Tirreno a written notice of termination
dated 19 September 2000 due to Tirreno's alleged
failure to settle its outstanding obligations
FBDC entered and occupied the leased premises.
FBDC also appropriated the equipment and
properties left by Tirreno pursuant to Section 22 of
their Contract of Lease as partial payment for
Tirreno's outstanding obligations.
Yllas Lending Corporation and Jose S. Lauraya, in his
official capacity as President, (respondents) caused
the sheriff of Branch 59 of the trial court to serve an
alias writ of seizure against FBDC. On the same day,
FBDC served on the sheriff an affidavit of title and
third party claim
Despite FBDC's service upon him of an affidavit of
title and third party claim, the sheriff proceeded
with the seizure of certain items from FBDC's
premises
The sheriff delivered the seized properties to
respondents. FBDC questioned the propriety of the
seizure and delivery of the properties to respondents
without an indemnity bond before the trial court.
FBDC argued that when respondents and Tirreno
entered into the chattel mortgage agreement on 9
November 2000, Tirreno no longer owned the
mortgaged properties as FBDC already enforced its
lien on 29 September 2000.
ISSUE: Whether or not the dismissal of FBDC's third party
claim upon the trial court's erroneous interpretation that
FBDC has no right of ownership over the subject properties
because Section 22 of the contract of lease is void for being a
pledge and a pactum commissorium?
HELD:
SECTRANS 2010/ ATTY. AGUINALDO 58
 No, This stipulation is in the nature of a resolutory
condition, for upon the exercise by the [lessor] of his
right to take possession of the leased property, the
contract is deemed terminated. This kind of
contractual stipulation is not illegal, there being
nothing in the law proscribing such kind of
agreement.
Judicial permission to cancel the agreement was not,
therefore necessary because of the express
stipulation in the contract of [lease] that the [lessor],
in case of failure of the [lessee] to comply with the
terms and conditions thereof, can take-over the
possession of the leased premises, thereby
cancelling the contract of sub-lease. Resort to
judicial action is necessary only in the absence of a
special provision granting the power of cancellation.
We allow FBDC's forfeiture of Tirreno's properties in
the leased premises. By agreement between FBDC
and Tirreno, the properties are answerable for any
unpaid rent or charges at any termination of the
lease. Such agreement is not contrary to law, morals,
good customs, or public policy. Forfeiture of the
properties is the only security that FBDC may apply
in case of Tirreno's default in its obligations
PNB v ATENDIDO
(Re Incorporeal Rights)
FACTS:
Laureano Atendido (LA) obtained from PNB (P) a loan payable
in 120 days with interest. To guarantee its payment LA pledge
to the bank 2,000 cavans of palay which were deposited in a
warehouse and to that effect endorsed in favor of the bank the
corresponding WH receipt. Before the maturity of the loan, the
cavans of rice dissappeared from the WH. LA failed to pay the
loan upon matrity and so the present action was instituted. LA
set up the defense that the quedan covering the palay which
was given as security having been endorsed in blank in favor of
the bank and the palay having been lost or disappeared, he
thereby became relieved of liability.
ISSUE: WoN LA is relieved from liability
SC: NO!
The surrender of the warehouse receipt fiven as security,
endorsed in blank was NOT that of a final transfer or that WH
receipt but merely as a guaranty to the fulfillment of the
obligation of P3k. This being so, the ownership remains with
the pledgor subject only to foreclosure in case of
nonfulfillment of obligation. The pledgor, continuing to be the
owner of the goods pledged during the pendency of the
obligation in case of the loss of the property, the loss is borne
by him.
OCEJO PEREZ v INTERNATIONAL BANK
FACTS:
1) On March 7, 1914, Chua Teng Chong, executed to the
International Banking Corporation a promissory note, payable
one month after date, for the sum of P20,000 which note was
also attached to another private document, signed by Chua,
which stated that he had deposited with the bank, as security
for the said note, 5,000 piculs of sugar, which were said
stored in a warehouse in Binondo, Manila.
2) The bank made no effort to exercise any active ownership
over said merchandise until the April 16, when it discovered
that the amount of sugar stored in the said warehouse was
much less than what was mentioned in the contract. The
agreement between the bank and Chua Teng Chong with
respect to the alleged pledge of the sugar was never recorded
in a public instrument.
3) On March 24, 1914, the plaintiff partnership Ocejo, Perez
and Co., entered into contract with Chua for the sale to him
of sugar where the delivery should be made in April. The
delivery was completed April 16, 1914, and the sugar was
stored in the buyer's warehouse situated at Muelle de la
Industria. On this same date, the bank sent an employee to
inspect the sugar described in the pledge agreement, which
should have been stored in the Calle Toneleros warehouse. It
was discovered that the amount of sugar in that warehouse
did not exceed 1,800 piculs, it was supposed to have 5,000
piculs of sugar. Eventually, the employee was informed that
the rest of the sugar covered by the pledge agreement was
stored in the warehouse at No. 119, Muelle de la Industria.
The bank's representative immediately went to this
warehouse, found 3,200 piculs of sugar, of which he took
immediate possession, closing the warehouse with the bank's
padlocks.
4) On April 17, 1914, partnership Ocejo presented, for
collection, its account for the purchase price of the sugar, but
chua refused to make payment, and up to the present time
the sellers have been unable to collect the purchase price of
the merchandise in question.
5) The partnership Ocejo made a demand on the bank for the
delivery of the sugar, to which demand the bank refused to
accede. A suit was filed by Ocejo alleging that said defendant
was unlawfully holding the seized sugar, the property of the
plaintiff firm Ocejo, which the bank had received from Chua
Teng Chong, and prayed for the judgment for the possession
of said sugar.
6) Subsequently, by agreement of the parties, the sugar was
sold and the proceeds of the deposited in the bank.
Afterwards, a complaint in intervention was filed by Chua
Seco, the assignee of the insolvency of Chua Teng Chong,
asserting a preferential right to the sugar, or to the proceeds
of its sale contending that the sugar is the property of the
insolvent estate represented by him. The lower court
rendered judgment in favor of the Oceja
SECTRANS 2010/ ATTY. AGUINALDO 59
ISSUES: bank took possession of that sugar under the erroneous
belief, based upon the false statement of Chua Teng Chong,
(a) Did title to the sugar pass to the buyer upon its delivery to that it was a part of the lot mentioned in the private
him (chua seco)? document. Even assuming that an attempt was made to
pledge the sugar and that delivery was made in accordance
(b) Assuming to pay that the title passed to the buyer, did his with the agreement, the pledge so established would be void
failure to pay the purchase price authorize the seller to as against third persons since it is provided Article 1865 of the
rescind the sale? Civil Code that a pledge is without effect as against third
persons "if the certainty of the date does not appear by public
instrument."
(c) Can the pledge of the sugar to the bank be sustained
upon the evidence as to the circumstances under which it
obtained physical possession thereof? E) As to assignee Chua Seco: He filed a complaint in
intervention in this suit, in which he contends that by reason
of its sale and delivery by plaintiff to the insolvent, title to the
HELD:
sugar passed to the latter and that the pledge set up by the
bank is void as to third persons. The title to the sugar having
A) The SC agreed with Chuas contention that he was entitled
been commenced against him before the declaration of
to demand payment of the sugar at any time after the
insolvency, the assignee, Chua Seco, has a better right to its
delivery. No term having been stipulated within which the
possession or to the product of its sale during the pendency
payment should be made, payment was demandable at the
of this action. The decision of the court below is therefore
time and place of the delivery of the thing sold. The seller did
reversed, and it is decided that the assignee of the
not avail himself of his right to demand payment as soon as
bankruptcy of Chua Teng Chong is entitled to the product of
the right to such payment arose, but as no term for payment
the sale of the sugar here in question, to wit, P10,826.76,
was stipulated, he was entitled, to require payment to be
together with the interest accruing thereon, reserving
made at any time after delivery, and it was the duty of the
proceedings. So ordered.
buyer to pay the price immediately upon demand. In essence,
the delivery had the effect of transmitting the title of the
CRUZ v LEE
sugar to the buyer.
SARMIENTO v JAVELLANA
B) Failure on the part of the buyer to pay the price on
Facts:
demand: Article 1506 of the Civil Code provides that the
contract of sale may be rescinded for the same causes as all
Spouses Villasenor obtained a loan from Javellana to be
other obligations, in addition to the special causes
paid within one year with an interest of 25% p.a.
enumerated in the preceding articles. It is also observed that
evidenced by to documents.
the article does not distinguish the consummated sale from
They pledged 4,000 worth of jewels.
the merely perfected sale. In the contract of the sale the
Upon maturity, the Spouses requested for an extension.
obligation to pay the price is correlative to the obligation to
After 7 years, Villasenor offered to pay the loan and
deliver the thing sold. Nonperformance by one of the parties
redeem the jewels.
authorizes the other to exercise the right, conferred upon
him by the law, to elect to demand the performance of the Javellana refused on the ground that redemption period
obligation or its rescission. has already expired and he has already bought the jewels
from the wife of Villasenor.
Villasenor brought an action against Javellana to compel
C) The sugar here in question could not be possibly have been
the return of the jewels pledged.
the subject matter of the contract of pledge which the parties
undertook to create by the private document, inasmuch as it
Issues:
was not at the time the property of the bank, and this
constitutes an indispensable requisite for the creation of a
1) WON Villasenor can still redeem the jewels?
pledge.
2) WON the right to redeem has already expired?

D) It is not shown that an effort was made to pledge the

sugar, the subject matter of this case. Though it happened
that the day the sugar was delivered, the Chua gave the
bank's representative the keys of the warehouse on the
Muelle de la Industria in which the sugar was stored, it was
not because of an agreement concerning the pledge of the
sugar. From the facts, no attempt was made to enter into any
agreement for the pledge of the sugar here in question. The
Held:
1) Yes. As the jewels in question were in the possession of
the defendant to secure the payment of a loan of 1,500
with interest thereon and for having subsequently
extended the term of the loan indefinitely, and so long as
the value of the jewels pledged was sufficient to secure
SECTRANS 2010/ ATTY. AGUINALDO 60
 the payment of the capital and the accrued interest, the
defendant is bound to return the jewels or their value to
the plaintiffs, and the plaintiffs have the right to demand
the same upon the payment by them of the sum of 1,500
plus interest.
2) An action for recovery of the goods which were pledged
to secure the payment of a loan evidenced by a document
is an action on a written contract which has a prescriptive
period of 10 years from the date on which the debtor may
have paid the debt and demanded the return of the goods
pledged.
In this case, the expiration of the contract was in 1912 and
the action to recover was filed in 1920, therefore, the
action has not yet prescribed.
PARAY v RODRIGUEZ
Facts: Respondents were the owners, in their respective
personal capacities, of shares of stock in a corporation known
as the Quirino-Leonor-Rodriguez Realty Inc.1 Sometime during
the years 1979 to 1980, 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
obligations. When the Parays attempted to foreclose the
pledges on account of respondents failure to pay their loans,
respondents filed complaints with the Regional Trial Court
(RTC) of Cebu City and , sought the declaration of nullity of the
pledge agreements. However the RTC, in its decision 3 dated 14
October 1988, dismissed the complaint and gave "due course
to the foreclosure and sale at public auction of the various
pledges. Respondents then received Notices of Sale which
indicated that the pledged shares were to be sold at public
auction. However, before the scheduled date of auction, all of
respondents caused the consignation with the RTC Clerk of
Court of various amounts. It was claimed that respondents had
attempted to tender these payments to the Parays, but had
been rebuffed. Notwithstanding the consignations, the public
auction took place as scheduled, with petitioner Vidal Espeleta
successfully bidding. Respondents instead filed on 13
November 1991 a complaint seeking the declaration of nullity
of the concluded public auction. Petitioners now argue that
the essential procedural requisites for the auction sale had
been satisfied.
Issue: W/N the the essential procedural requisites for the
auction sale had been satisfied?
Ruling: Yes. 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.
MANILA SURETY v VELAYO
F: Manila Surety & Fidelity Co., upon request of Rodolfo
Velayo, executed a bond for P2,800.00 for the dissolution of a
writ of attachment obtained by one Jovita Granados in a suit
against Rodolfo Velayo in the Court of First Instance of Manila.
Velayo undertook to pay the surety company an annual
premium of P112.00 and provided collateral jewelry with the
authority to sell in case Manila Surety will be obliged to pay.
Judgment having been rendered in favor of Jovita Granados
and against Rodolfo Velayo, and execution having been
returned unsatisfied, the surety company was forced to pay
P2,800.00 that it later sought to recoup from Velayo; and upon
the latter's failure to do so, the surety caused the pledged
jewelry to be sold, realizing therefrom a net product of
P235.00 only The surety files a claim against Velayo because
the security Is insufficient. Velayo claims the sale of the jewelry
even if insufficient extinguishes the principal obligation.
Issue: Won Velayos contention is correct
Ruling: Yes! The sale of the thing pledged shall extinguish the
principal obligation, whther or not the proceeds of the sale are
equal to the amount of the principal obligation, interest and
expenses in a proper case.
REAL MORTGAGE
VIOLA v EPCIB
FACTS: Via a contract denominated as CREDIT LINE AND REAL
ESTATE MORTGAGE AGREEMENT FOR PROPERTY LINE (Credit
Line Agreement) executed on March 31, 1997, Leo-Mers
Commercial, Inc., as the Client, and its officers spouses
Leopoldo and Mercedita Viola (petitioners) obtained a loan
through a credit line facility in the maximum amount of
P4,700,000.00 from the Philippine Commercial International
Bank (PCI Bank), which was later merged with Equitable Bank
and became known as Equitable PCI Bank, Inc.
To secure the payment of the loan, petitioners executed also
on March 31, 1997 a Real Estate Mortgage in favor of
PCIBank over their two parcels of land.
Petitioners availed of the full amount of the loan.
Subsequently, they made partial payments and made no
further payments and despite demand, they failed to pay their
outstanding obligation.
Respondent thus extrajudicially foreclosed the mortgage
before the Office of the Clerk of Court & Ex-Officio Provincial
Sheriff of the Regional Trial Court (RTC) of Marikina City. The
mortgaged properties were sold on April 10, 2003 for
P4,284,000.00 at public auction to respondent, after which a
Certificate of Sale dated April 21, 2003 was issued.
SECTRANS 2010/ ATTY. AGUINALDO 61
More than five months later or on October 8, 2003, petitioners
filed a complaint for annulment of foreclosure sale. They claim
that:
a) they had made substantial payments
b) the foreclosure proceedings and auction sale were
not only irregularly and prematurely held but were
null and void because the mortgage debt is only
P2,224,073.31 on the principal obligation and
P1,455,137.36 on the interest, or a total of only
P3,679,210.67 as of April 15, 2003, but the mortgaged
properties were sold to satisfy an inflated and
erroneous principal obligation of P4,783,254.69, plus
3% penalty fee per month or 33% per year and 15%
interest per year, which amounted to P14,024,623.22
as of September 30, 2002;
c) that the parties never agreed and stipulated in the
real estate mortgage contract that the 15% interest
per annum on the principal loan and the 3% penalty
fee per month on the outstanding amount would be
covered or secured by the mortgage;
ISSUE: whether the mortgage contract also secured the
penalty fee per month on the outstanding amount as
stipulated in the Credit Line Agreement.
RULING: A mortgage must sufficiently describe the debt
sought to be secured, which description must not be such as
to mislead or deceive, and an obligation is not secured by a
mortgage unless it comes fairly within the terms of the
mortgage.
In the case at bar, the parties executed two separate
documents on March 31, 1997 the Credit Line Agreement
granting the Client a loan through a credit facility in the
maximum amount of P4,700,000.00, and the Real Estate
Mortgage contract securing the payment thereof.
Undisputedly, both contracts were prepared by respondent
and written in fine print, single space.
The provision of the mortgage contract does not specifically
mention that, aside from the principal loan obligation, it also
secures the payment of a penalty fee of three percent (3%)
per month of the outstanding amount to be computed from
the day deficiency is incurred up to the date of full payment
thereon, which penalty was expressly stipulates in the Credit
Line Agreement.
Since an action to foreclose must be limited to the amount
mentioned in the mortgage and the penalty fee of 3% per
month of the outstanding obligation is not mentioned in the
mortgage, it must be excluded from the computation of the
amount secured by the mortgage.
Penalty fee is entirely different from bank charges. The
phrase bank charges is normally understood to refer to
compensation for services. A penalty fee is likened to a
compensation for damages in case of breach of the
obligation. Being penal in nature, such fee must be specific
and fixed by the contracting parties, unlike in the present case
which slaps a 3% penalty fee per month of the outstanding
amount of the obligation.
DILAG v HEIRS OF RESSURECCION
FACTS:
BEFORE 1936: Laureano Marquez (LM) was indebted
to Fortunato Resurreccion (FR) in the sum of P5k as
the balance of purchase price of a parcel of land
which LM bought and received from FR.
FR was in turn indebted to Luzon Surety Company in
the same amt, secured by a mortgage on 3 parcels of
land one of which was bought by LM from him
AS EARLY AS 193: LM had agreed to pay FRs
indebtedness to Luzon Surety Company by way of
satisfaction of his own indebtedness to FR in the same
amt
LM failed to pay indebtedness of FR to the Luzon
Surety Company, and the latter foreclosed judicially
the mortgage executed in its favour by FR
Since LM did not fulfil his promise, FR commenced an
action against LM to recover the value of lost
properties
LM sale at public auction of 5 parcels of land
mentioned in FRs complaint is invalid because they
are not specifically described in the mortgage deed.
LM acquired those parcels of land subsequent to the
execution of mortgage deed.
In the fifth clause of said document Laureano
Marquez stipulated that inasmuch as the five parcels
of land described in the fourth clause were not
sufficient to cover all his obligations in favor of
Fortunato Resurreccion, he also constituted a
mortgage in favor of the latter and his assignees on
any other property he then might have and on those
he might acquire in the future.
ISSUE: WON such a stipulation constitute a valid mortgage on
the 5 other parcels of land which LM subsequently acquired?
HELD: NO
LM could not legally mortgage any property he did
not yet own. In order that a mortgage may be validly
constituted the instrument by which it is created
must be recorded in the Registry of Deeds and so far
as the additional parcels of land are concerned, the
registration of Deed of Mortgage did not affect and
could not have affected them because they were not
specifically described therein.
PBCOM v MACADAEG
FACTS:
SECTRANS 2010/ ATTY. AGUINALDO 62
On September 30, 1950, respondents Pedro B. Bautista,
Dativa Corrales Bautista, Inocencio C. Campos, and the Flash
Taxi Company jointly and severally applied for and obtained a
credit accommodation from the petitioner bank in the sum of
P100,000.00, and as a security therefor executed in favor of
the bank, in one single document, a real estate mortgage
over four parcels of land, and a chattel mortgage on some
movie equipment and thirty taxicabs. Respondents having
failed to pay the total amount of P128,902.42 due on the
credit accommodation referred to, the petitioner bank
procured the extrajudicial foreclosure of the real estate
mortgage in accordance with Act No. 3135, as amended, and
at the foreclosure sale on January 9, 1956, the bank acquired
the properties mortgaged as the highest bidder for the sum
of P68,365.60.
Claiming a balance of P62, 749.72 still due, the petitioner
bank, instead of foreclosing respondents' chattel mortgage,
filed against them on may 22, 1956, Civil Case No. 29752 for
the collection of said balance. The lower court, on June 30,
1956, rendered judgment ordering defendants to pay the
plaintiff bank, jointly and severally, the sum of P62, 749.72,
with interest thereon at the rate of 7% per annum from May
22, 1956 until the said amount is fully paid.
On September 18,1956, the court issued an order to execute
said judgment; it does not appear, though, that plaintiff
sought the enforcement of the writ of execution.
On April 24, 1957, the court issued another order for the
execution of the judgement, pursuant to which the sheriff of
Manila published a "Notice of Sale," setting for sale at public
auction on May 13, 1957 the rights, interest or participation
of respondents on the certificate of public convenience
registered in the name of the Flash Taxi Co. in cases Nos.
32578 of the Public Service Commission.
On May 13, 1957, the sheriff sold the rights, interests, or
participation of respondents in the certificate of public
convenience in question to the plaintiff bank as the highest
bidder for the amount of P60,371.25, and two days later, on
May 15, the sheriff issued to plaintiff the corresponding
certificate of sale.
Respondents Pedro B. Bautista, et al., filed in the court below
a "Petition To Set Aside Order dated June 8, 1957, Confirming
Sheriffs Sale of may 15, 1957 and to Declare its Nullity,"
claiming, as grounds for the petitions, that they had other
properties which they had pointed out to the plaintiff bank
with which the judgement could be satisfied that the law
grants to the judgement debtor the right to direct which of
his properties should be sold in execution of a judgement;
that the sale of the certificate of public convenience in
question would mean irreparable damage to them and would
prove of work about forth drivers employed in their taxicab
business; and that defendants had no objection to bearing
the expenses of the sale sought to be revoked and of any
subsequent execution sales in satisfaction of the judgement.
Plaintiff bank opposed the petition, contending that there
was no showing that the sheriff's sale in question was
irregular or not in accordance with law; that the subject of
the execution sale being personal property, and a certificate
of sale having already been delivered to it by the sheriff, the
court could no longer set aside said sale
ISSUE: W/N the sheriffs sale was irregular and therefore null
and void.
HELD:
The alleged nullity is claimed to arise from the fact that the
real estate and chattel mortgage executed by respondents to
secure their credit accommodation with the petitioner bank
was indivisible, and that consequently, the bank had no legal
right to extra judicially foreclose only the real estate
mortgage and leave out the chattel mortgage, and then sue
respondents for a supposed deficiency judgement; and for
this reason, respondents assert that the judgement in the
bank's favor for such deficiency in Civil Case No. 29752 is a
nullity.
The argument is fallacious because the mere embodiment of
the real estate mortgage and the chattel mortgage in one
document does not fuse both securities into an indivisible
whole. Both remain distinct agreements, differing not only in
the subject-matter of the contract but in the but in the
governing legal provisions. Petitioner bank, therefore, had
every right to foreclose the real estate mortgage and waive
the chattel mortgage, and maintain instead a personal action
for the recovery of the unpaid balance of its credit (De la
Rama vs. Sajo, 45 Phil., 703; Salomon vs. Dantees, 63 Phil.,
522; Brancharch Motor Co. vs. Rangal, et al., 68 Phil., 287,
290). This petitioner did by filing civil Case No. 29752 for the
collection of the unpaid balance of respondents'
indebtedness; and the validity and correctness of the action
was admitted by respondents themselves when they
confessed judgement thereto. The court in fact decision
pursuant to such confession of judgement, and the decision
has long since been final and executory.
PRUDENTIAL BANK v PANIS
HOME BANKERS v CA
Facts:
Private respondents entered into a Contract to Sell
Agreement with TransAmerican through Engr. Garcia
over portions of land with one unit three-storey
townhouse to be built on each portion.
Engr. Garcia obtained a loan from petitioner and as
security executed a mortgage over the property
SECTRANS 2010/ ATTY. AGUINALDO 63
 subject to the Contract to Sell with the private
respondents. Petitioner registered its mortgage on
these titles without any other encumbrance or lien
annotated therein.
When the loan was due, Engr. Garcia failed to pay
hence petitioner instituted an extrajudicial
foreclosure on the subject lots.
Private respondents prayed for the annulment of the
mortgage in favor of petitioner.
Petitioner filed its Answer contending that private
respondents have no cause of action against it; that
at the time of the loan application and execution of
the promissory note and real estate mortgage by
Garcia, there were no known individual buyers of the
subject land nor annotation of any contracts, liens or
encumbrances of third persons on the titles of the
subject lots; that the loan was granted and released
without notifying HLURB as it was not necessary.
CA ruled in favor of private respondents saying that
despite the contracts to sell, Garcia/TransAmerican
did not apprise petitioner of the existence of these
contracts nor did petitioner exhaust any effort to
inquire into their existence since petitioner merely
relied on the purported clean reconstituted titles in
the name of Garcia; that the mortgage of the subject
lots without the consent of the buyers and the
authorization of the HLURB is a clear violation of P.D.
No. 957; that the mortgage contract is void and
unenforceable against private respondents.
ISSUES:
1. WON HLURB has jurisdiction over the case?
2. WON the mortgage is valid?
3. WON petitioner is a mortgagee in good faith and since
the titles on their face were free from any claims, liens
and encumbrances at the time of the mortgage, it is
not obliged under the law to go beyond the
certificates of title registered under the Torrens
system and had every reason to rely on the
correctness and validity of those titles.?
HELD:
1. HLURB has jurisdiction. The Court ruled in a prior case
that the jurisdiction of the HLURB to regulate the
real estate trade is broad enough to include
jurisdiction over complaints for specific performance
of the sale, or annulment of the mortgage, of a
condominium unit, with damages.
2. THE MORTGAGE IS VOID. Under Section 18 of P.D. No.
957, it is provided that no mortgage on any unit or lot
shall be made by the owner or developer without
prior written approval of the HLURB Such approval
shall not be granted unless it is shown that the
proceeds of the mortgage loan shall be used for the
development of the condominium or subdivision
project and effective measures have been provided to
ensure such utilization. Without the prior written
approval of the HLURB, the latter has the jurisdiction
to annul the mortgage for being void.
3. Petitioner is NOT A MORTGAGEE IN GOOD FAITH.
Petitioner knew that the loan it was extending to
Garcia/TransAmerican was for the purpose of the
development of the eight-unit
townhouses. Petitioners insistence that prior to the
approval of the loan, it undertook a thorough check
on the property and found the titles free from liens
and encumbrances would not suffice. It was
incumbent upon petitioner to inquire into the status
of the lots which includes verification on whether
Garcia had secured the authority from the HLURB to
mortgage the subject lots. Petitioner failed to do
so. We likewise find petitioner negligent in failing to
even ascertain from Garcia if there are buyers of the
lots who turned out to be private
respondents. Petitioners want of knowledge due to
its negligence takes the place of registration - thus it
is presumed to know the rights of respondents over
the lot - and the conversion of its status as mortgagee
to buyer-owner will not lessen the importance of such
knowledge.
SAMANILLA v CAJUCOM
MOBIL PHILIPPINES v DIOCARES
FACTS:
The parties Mobil and Diocares entered an agreement wherein
on cash basis, Mobil will deliver minimum of 50k liters of
petroleum a month. To secure this, diocares executed a Real
Mortgage. Diocares failed to pay the balance of their
indebtedness and Mobil filed an action for the collection of the
balance of the purchase amount or that the Real Property
mortgaged by Diocares be sold to a public auction and the
proceeds be applied to the payment of the obligation. LC did
not grant foreclosure on the ground that the mortgage was not
validly executed (not registered).
ISSUE: WON failure to register the Real Mortgage would
render it invalid
SC: NO!
- If the instrument is not recorded, the mortgage is
nevertheless binding between the parties. Its
conclusion, however, is that what was thus created
was merely a personal obligation but did not
establish a real estate mortgage.
- The mere fact that there is as yet no compliance
with the requirement that it be recorded cannot be a
bar to foreclosure
MCCULLOUGH v VELOSO
FACTS:
SECTRANS 2010/ ATTY. AGUINALDO 64
1) On March 23, 1920, the plaintiff McCullough & Co., sold to
Mariano Veloso the "McCullough Building," and the land
thereon, for the price of P700,000. Veloso paid P50,000 cash
on account at the execution of the contract, leaving a balance
of P650,000 to be paid.
2) Veloso assumed also the obligation to insure the property
for not less than P500,000, as well as to pay all legal taxes
that might be imposed upon the property, and in the event of
his failure to do so, the plaintiff should pay said taxes at the
expense of Veloso, with the right to recover of him the
amounts thus paid, with interest at 7 per cent per year. To
secure the payment of these amounts, Veloso mortgaged the
property purchased
3) It was, also, stipulated that in case of failure on the part of
Veloso to comply with any of the stipulations contained in the
mortgage deed, all the installments with the interest thereon
shall become due, and the creditor shall then have the right
to bring the proper action for the collection of the unpaid
part of the debt.
4) On August 21, 1920, Mariano Veloso, in turn, sold the
property, with the improvements thereon for P100,00 to
Joaquin Serna, who agreed to respect the mortgage of the
property in favor of the plaintiff and to assume Mariano
Veloso's obligation to pay the plaintiff the balance due of the
price of the estate on the respective dates when payments
should be made according to the contract between Mariano
Veloso and the plaintiff.
5) Veloso paid P50,000 on account of the P650,000, and
Serna made several payments up to the total sum of
P250,000. Subsequently, however, neither Veloso, nor Serna,
made any payment upon the last installments, by virtue of
which delay, the whole obligation became due, and Veloso
lost the right to the installments stipulated in his contract
with the plaintiff.
6) Upon a liquidation of the debt of Mariano Veloso in favor
of the plaintiff, including the interest due, with the result that
Veloso owed exactly P510,047.34. Thus, the plaintiff brings
this action to recover of the defendant the sum due of
P510,047.34. The defendant contends however that having
sold the property to Serna, and the latter having assumed the
obligation to pay the plaintiff the unpaid balance of the price
secured by the mortgage upon the property, he no more
obligation and it is upon Serna to pay the plaintiff.
HELD:
A) The mortgage is merely an encumbrance upon the
property and does not extinguish the title of the debtor, who
does not, therefore, lose his principal attribute as owner, that
is, the right to dispose. the fact that the plaintiff recognized
the efficaciousness of that sale cannot prejudice him, which
sale the defendant had the right to make and the plaintiff
cannot oppose and which, at all events, could not affect the
mortgage, since it follows the property whoever the
possessor may be.
B) The Mortgage Law in force at the promulgation of the Civil
Code and referred to in the latter, provided, among other
things, that the debtor should not pay the debt upon its
maturity after a judicial or notarial demand for payment has
been made by the creditor upon him. Accordingly, the
obligation of the new possessor to pay the debt originated
only from the right of the creditor to demand payment of
him, it being necessary that a demand for payment should
have previously been made upon the debtor and the latter
should have failed to pay.
C) The Civil Code imposes the obligation of the debtor to pay
the debt stand although the property mortgaged to secure
the payment of said debt may have been transferred to a
third person.
SANTIAGO v DIONISIO
DOCTRINE: All persons having or claiming an interest in
the mortgaged premises subordinate in right to that of the
holder of the mortgage should be made defendants in the
action for the foreclosure of the mortgage. Intervening as a
subordinate lienholder in a foreclosure case merely to oppose
the confirmation of the sale upon learning that such a sale had
been made, is no the same as being a party to the suit to the
extent of being bound by the judgement in the foreclosure
suit.
The effect of the failure to implead a subordinate
lienholder or subsequent purchaser or both is to render the
foreclosure ineffective as against them, with the result that
there remains in their favor the unforeclosed equity of
redemption.
PADERES v CA
Facts:
Manila International Construction Corporation (MICC)
mortgaged 21 properties in favor of Banco Filipino (BF) for
a loan of P1.8M. The mortgaged was registered with the
Registry of Deeds.
2 of the lots were later sold to Spouses Paderes and
Spouses Bergardo.
MICC failed to pay the loan.
Without any redemption having been made within the
reglementary period, Banco Filipino foreclosed the
properties extra judicially.
BF won as the highest bidder in the auction sale.
SECTRANS 2010/ ATTY. AGUINALDO 65
 Paderes and Bergardo filed a petition stating that their
right is superior than BF since they are buyers in good faith
and are still entitled to redeem.
Issue: WON Paderes and Bergardo has still rights over the
properties?
Held:
No. Sale or transfer cannot affect or release the mortgage. A
purchaser is necessarily bound to acknowledge and respect
the encumbrance to which is subjected the purchased thing
and which is at the disposal of the creditor in order that he,
under the terms of the contract, may recover the amount of
his credit therefrom.
For a recorded real estate mortgage is a right in rem, a lien on
the property whoever its owner may be because the
personality of the owner is disregarded. The mortgage subsists
notwithstanding changes of ownership. The last transferee is
just as much of a debtor as the first one. A mortgage lien is
inseparable from the property mortgaged. All subsequent
purchasers thereof must respect the mortgage, whether the
transfer to them be with or without the consent of the
mortgagee. For the mortgage until discharged, follows the
property.
With regard to the redemption period, it is settled that the
buyer in a foreclosure sale becomes the absolute owner of the
property purchased if it is not redeemed during the period of
one year after the registration of the sale. As such, he is
entitled to the possession of the said property and can demand
it any time following the consolidation of ownership in his
name and the issuance to him of a new TCT. If the buyer
demands the possession of the property before the expiration
period, he has to post a bond. No bond is required after the
redemption period if the property is not redeemed.
VELASCO v CA
Facts: November 10, 1965, Alta Farms secured from
the GSIS a Three Million Two Hundred Fifty Five
Thousand Pesos (P3,255,000.00) loan and an
additional loan of Five Million Sixty-Two Thousand
Pesos (P5,062,000.00) on October 5, 1967, to
finance a piggery project. Alta Farms defaulted in the
payment because of this that Alta Farms executed a
Deed of Sale With Assumption of Mortgage with
Asian Engineering Corporation on July 10, 1969 but
without the previous consent or approval of the GSIS
and in direct violation of the provisions of the
mortgage contracts. Even without the approval of the
Deed of Sale With Assumption of Mortgage by the
GSIS, Asian Engineering Corporation executed an
Exclusive Sales Agency, Management and
Administration Contract in favor of Laigo Realty
Corporation, with the intention of converting the
piggery farm into a subdivision. After developing the
area, on December 4, 1969, Laigo entered into a
contract with Amable Lumanlan, one of the
petitioners, to construct for the home buyers, 20
houses on the subdivision. Petitioner Lumanlan
allegedly constructed 20 houses for the home buyers
and for which he claims a balance of P309,187.76
from the home buyers and Laigo. Out of his claim,
petitioner Lumanlan admits that Mrs. Rhody Laigo
paid him in several checks totalling P124,855.00 but
which checks were all dishonoured. On December
29, 1969, Laigo entered into a contract with
petitioner Pepito Velasco to construct houses for the
home buyers who agreed with Velasco on the prices
and the downpayment. Petitioner Velasco
constructed houses for various home buyers, who
individually agreed with Velasco, as to the prices and
the downpayment to be paid by the individual home
buyers.When neither Laigo nor the individual home
buyers paid for the home constructed, Velasco wrote
the GSIS to intercede for the unpaid accounts of the
home buyers.
Issue: W/N GSIS is liable to the petitioners for the
cost of the materials and labor furnished by them in
construction of the 63 houses now owned by the
GSIS?
Ruling: Yes. GSIS should pay the petitioners. GSIS
assumed ownership of the houses built by petitioners
and was benefited by the same. Art. 2127, the
mortgage extends to the natural accessions, to the
improvements, growing fruits, rents.
AFABLE v BELANDO
Afable brought a suit against Belando for an unpaid promissory
note. Judgment was rendered in favor of him and because
Belando has no money, the rents in her property was given to
Afable. It turns out, before Afable filed a case for the collection
of money, another creditor of Belando, La Urbana, already had
a lien on the property because Belando borrowed money from
La Urbana and as a security, Belando mortgaged the property
being rented to La Urbana. La Urbana filed a petition to
intervene in the case of Afable v Belando and claims that since
the property was mortgaged to them, they also own the rents
and the rents cannot be given to Afable.
Issue: Won the contention of La Urbana is valid
SECTRANS 2010/ ATTY. AGUINALDO 66
Ruling: Yes. The mortgage extends to the rents not yet
received when the obligation becomes due. In this case,
because the property was mortgaged to La Urbana, they also
own the rents of the mortgaged property.
Bank of America v American Realty
F: Petitioner Bank of America NT & SA (BANTSA) is an
international banking and financing institution Bank of
America International Limited (BAIL), on the other hand, is a
limited liability company organized and existing under the
laws of England.
BANTSA and BAIL on several occasions granted three major
multi-million United States (US) Dollar loans to the following
corporate borrowers and which are foreign affiliates of
private respondent. 3
Due to the default in the payment of the loan amortizations,
BANTSA and the corporate borrowers signed and entered
into restructuring agreements. As additional security for the
restructured loans, private respondent ARC (American Realty)
as third party mortgagor executed two real estate
mortgages, over its parcels of land including improvements
thereon, located at Bulacan.
Eventually, the corporate borrowers defaulted in the
payment of the restructured loans prompting petitioner
BANTSA to file civil actions before foreign courts for the
collection. This includes the property of American Realty.
Petitioners already filed collection cases in foreign courts. It
also filed an extrajudicial foreclosure on the property in
Bulacan in which American Realty question because the
petitioners cannot file a case for collection and a case for
extrajudicial foreclosure at the same time.
Issue: Won the contention of respondents are valid
Ruling: yes! The mortgagee cannot have both remedies. He has
only one cause of action, i.e., non-payment of the mortgage
debt; hence, he cannot split up his cause of action by filing a
compliant for payment of the and another complaint for
foreclosure.
PEOPLES BANK v DAHICAN LUMBER
FACTS: On September 8, 1948, Atlantic Gulf & Pacific Company
of Manila, a West Virginia corporation licensed to do business
in the Philippines hereinafter referred to as ATLANTIC
sold and assigned all its rights in the Dahican Lumber
concession to Dahican Lumber Company hereinafter
referred to as DALCO. Thereafter, to develop the concession,
DALCO obtained various loans from the People's Bank & Trust
Company.
As security for the payment of the abovementioned loans,
DALCO executed in favor of the BANK the latter acting for
itself and as trustee for the Export-Import Bank of Washington
D.C. a deed of mortgage covering five parcels of land
together with all the buildings and other improvements
existing thereon and all the personal properties of the
mortgagor located in its place of business.
On the same date, DALCO executed a second mortgage on the
same properties in favor of ATLANTIC to secure payment of the
unpaid balance of the sale price of the lumber concession.
Both deeds contained the following provision extending the
mortgage lien to properties to be subsequently acquired
referred to hereafter as "after acquired properties" by the
mortgagor:
All property of every nature and description taken in
exchange or replacement, and all buildings,
machinery, fixtures, tools equipment and other
property which the Mortgagor may hereafter acquire,
construct, install, attach, or use in, to, upon, or in
connection with the premises, shall immediately be
and become subject to the lien of this mortgage in the
same manner and to the same extent as if now
included therein, and the Mortgagor shall from time
to time during the existence of this mortgage furnish
the Mortgagee with an accurate inventory of such
substituted and subsequently acquired property.
Both mortgages were registered in the Office of the Register
of Deeds. In addition thereto DALCO and DAMCO pledged to
the BANK 7,296 shares of stock of DALCO and 9,286 shares of
DAMCO to secure the same obligations.
Upon DALCO's and DAMCO's failure to pay the fifth promissory
note upon its maturity, the BANK paid the same to the Export-
Import Bank of Washington D.C., and the latter assigned to the
former its credit and the first mortgage securing it.
Subsequently, the BANK gave DALCO and DAMCO up to April
1, 1953 to pay the overdue promissory note.
After July 13, 1950 the date of execution of the mortgages
mentioned above DALCO purchased various machineries,
equipment, spare parts and supplies in addition to, or in
replacement of some of those already owned and used by it
on the date aforesaid. Pursuant to the provision of the
mortgage deeds quoted theretofore regarding "after acquired
properties," the BANK requested DALCO to submit complete
lists of said properties but the latter failed to do so.
The alleged sales of equipment, spare parts and supplies by
CONNELL and DAMCO to It, was subsequently rescinded by the
parties.
The BANK, in its own behalf and that of ATLANTIC, demanded
that said agreements be cancelled but CONNELL and DAMCO
SECTRANS 2010/ ATTY. AGUINALDO 67
refused to do so. As a result, ATLANTIC and the BANK
commenced foreclosure proceedings.
Main contentions of plaintiffs as appellants are the following:
that the "after acquired properties" were subject to the deeds
of mortgage mentioned heretofore; that said properties were
acquired from suppliers other than DAMCO and CONNELL; that
even granting that DAMCO and CONNELL were the real
suppliers, the rescission of the sales to DALCO could not
prejudice the mortgage lien in favor of plaintiffs.
The defendants-appellants contend that the mortgages
aforesaid were null and void as regards the "after acquired
properties" of DALCO because they were not registered in
accordance with the Chattel Mortgage Law.
ISSUES:
1. are the so-called "after acquired properties" covered
by and subject to the deeds of mortgage subject of
foreclosure?
2. assuming that they are subject thereto, are the
mortgages valid and binding on the properties
aforesaid inspite of the fact that they were not
registered in accordance with the provisions of the
Chattel Mortgage Law?
RULING:
1. it is crystal clear that all property of every nature and
description taken in exchange or replacement, as well
as all buildings, machineries, fixtures, tools,
equipments, and other property that the mortgagor
may acquire, construct, install, attach; or use in, to
upon, or in connection with the premises that is,
its lumber concession "shall immediately be and
become subject to the lien" of both mortgages in the
same manner and to the same extent as if already
included therein at the time of their execution.
Such stipulation is neither unlawful nor immoral, its
obvious purpose being to maintain, to the extent
allowed by circumstances, the original value of the
properties given as security. Indeed, if such
properties were of the nature already referred to, it
would be poor judgment on the part of the creditor
who does not see to it that a similar provision is
included in the contract.
2. the chattels were placed in the real properties
mortgaged to plaintiffs, they came within the
operation of Art. 415, paragraph 5 and Art. 2127 of
the New Civil Code. It is not disputed in the case at
bar that the "after acquired properties" were
purchased by DALCO in connection with, and for use
in the development of its lumber concession and that
they were purchased in addition to, or in replacement
of those already existing in the premises on July 13,
1950. In Law, therefore, they must be deemed to
have been immobilized, with the result that the real
estate mortgages involved herein which were
registered as such did not have to be registered a
second time as chattel mortgages in order to bind the
"after acquired properties" .
PHIL SUGAR ESTATE v CAMPS
FACTS:
Defendant executed and delivered to Plaintiff a
mortgage on certain real estate, which is particularly
described therein, including the building erected
thereon, in order to guarantee the payment of
certain sum of money; Another mortgage upon the
same property to secure the payment of an additional
sum of money
Plaintiff commenced an action to recover said sums
and to foreclose said mortgages when neither of said
sums of money secured by said mortgages was fully
paid and satisfied
Def denied; alleged that the sum of P3k included in
said mortgages for the payment of expenses was
excessive
TC Judge Ostrand ordered foreclosure of said
mortgages
While Sheriff tried to sell the property included in said
mortgages, Def interposed an objection that a certain
cinematograph which had been constructed upon the
property mortgaged was not included therein and
that it should not, therefore, be sold under said
execution.
Despite objection, Sheriff sold the property
mortgaged together with the buildings erected
thereon
Def objected to the confirmation of said sale; said
cinematograph in question was created by simply
reforming a building located on the land at the time
said mortgage was executed and delivered; that it
was not a new structure on said land; that it was the
result of changing and altering a building already
upon the land, for the purpose of making it into a
cinematograph
TC Judge Harvey confirmed said sale
ISSUE: WON the sale under execution by the sheriff of certain
real property including the buildings thereon should be
confirmed?
HELD: YES
Questions presented by Camps have been discussed
by this court and decided against his contention in the
SECTRANS 2010/ ATTY. AGUINALDO 68
 case of Bischoff v. Pomar and Compania General de
Tabacos.
In that case, this court discussed the very articles of
the Mortgage Law upon which Camps now seeks
relief. In that case the Court said:
So that even though no mention had been
made of said machinery and tramway in the
mortgage instrument, the mortgage of the
property whereon they are located in
understood by law to extend to them and
they must be considered as included therein,
as well as all other improvements, unless
there was an express stipulation between
the parties that they should be excluded.
IN THIS CASE: the buildings erected thereon" were
expressly included in the mortgage. Nothing in the
form of buildings was exclude. The buildings,
therefore, were manifestly included in the mortgage.
TADY-Y v PNB
PRUDENTIAL BANK v ALVIAR
LOPEZ v ALVAREZ
FACTS: Appellee Evaristo holds a lien over the estate of one
Vicente Lopez as the latter executed a mortgage deed in favor
of Evaristo. On April 5, 1904, Evaristo assigned his lien on the
estate to appellant Manuel Lopez through a public instrument
but the same was not registered in the Registry of Deeds.
Appellee Grindrod is a creditor of Evaristo, to whom the latter
promised to pay his obligation through the sugar yielded by
the hacienda, said agreement was entered into July 7, 1900.
But the hacienda was not able to increase the sugar it yielded
and defendant On August 5, 1904, Grindrod who feared of not
getting paid obtained a preliminary attachment over all the
property of Evaristo including the lien that was assigned to
appellant. The same was registered on August 12, 1904. A
dispute arised over the rightful owner of the lien, defendants
main contention is that since the assignment made to Lopez
was not registered it is not binding and has no effect.
ISSUE: WON THE ASSIGNMENT OF A MORTGAGE CREDIT NEED
TO BE REGISTERED FOR IT TO BE VALID AND EFFECTIVE?
HELD: NO. Although the Civil Code provides that A mortgage
credit may be alienated or assigned to a third person, wholly
or partially, with the formalities required by law, the fact
that such assignment was not registered in the property
register is no obstacle to the transfer of the dominion or
ownership of said credit in the sum therein stated in favor of
Lopez. In as much as the assignment or alienation of a credit,
made by the owner thereof in favor of another, is prior to the
act of its registration, and entirely independent of such
formality to such an extent that, if any question should arise
over the contract between the assignor and the assignee, it
would have to be decided according to common law without
need of previous registration of the title, which shows that a
credit secured by a mortgage may be assigned or alienated,
and is a perfectly valid contract even if it were not registered.
Also, the registration of the assignment or alienation of a credit
secured by mortgage, required, among others, of the
Mortgage Law, is only necessary in order that it may be
effectual as against third parties.
BPI v CONCEPCION
LITONJUA v L&R CORPORATION
FACTS:
- Spouses Litonjua (P) obtained a loan from L & R
Corporation (R) Aug 6, 1974 (P200k) and Mar 27,
1978 (P200k) which are secured by a mortgage on
2 parcels of land owned by P
- However, P sold to Phil White House Auto Supply
(PWHAS) the subject parcels of land, without prior
written consent of R, pursuant to the Mortgage
agreement that they have.
- Upon default of P, R initiated an extrajudicial sale
and won the bidding.
- P later on filed for redemption of the property but R
refused to do accept the payment contending that P
violated the contract
- R informed the Sheriff and Register of Deeds,
stating: (1) that the sale of the mortgaged properties
to PWHAS was without its consent, in contravention
of their Deed of Real Estate Mortgage; and (2) that it
was not the spouses Litonjua, but PWHAS, who was
seeking to redeem the foreclosed properties,
- Register of Deeds issued TCT in favor of R
- A complaint for Quieting of Title, Annulment of Title
and Damages with preliminary injunction was filed
by the spouses Litonjua and PWHAS against R
- LC ruled in favor of R and affirmed by CA
ISSUE: WON paragraphs 8 and 9 of the Real Estate Mortgage
are valid and enforceable;
SC: NO!
- Art. 2130 stipulation forbidding alienation of
mortgaged property is VOID
- A real mortgage is merely an encumbrance; it does
not extinguish the title of the debtor, whose right to
dispose a principal attribute of ownership is
not thereby lost. Thus, a mortgagor had every right
to sell his mortgaged property, which right the
mortgagee cannot oppose.
- Although the provision does not absolutely prohibit
the mortgagor from selling his mortgaged property;
but what it does not outrightly prohibit, it
nevertheless achieves.
SECTRANS 2010/ ATTY. AGUINALDO 69
 - For all intents and purposes, the stipulation
practically gives the mortgagee the sole prerogative
to prevent any sale of the mortgaged property to a
third party.
- The mortgagee can simply withhold its consent and
thereby, prevent the mortgagor from selling the
property. This creates an unconscionable advantage
for the mortgagee and amounts to a virtual
prohibition on the owner to sell his mortgaged
property. In other words, stipulations like those
covered by paragraph 8 (requiring P to acquire prior
consent of R before alienating the property) of the
subject Deed of Real Estate Mortgage circumvent
the law, specifically, Article 2130 of the New Civil
Code.
- Being contrary to law, paragraph 8 of the subject
Deed of Real Estate Mortgage is not binding upon
the parties.
UNION BANK v CA
FACTS:
1) A real estate mortgage was executed on December 1991
by spouses Dario (hereafter mortgagors) in favor of
UNIONBANK to secure a P3 million loan which covered a
Quezon City property in Leopoldo Dario's name and was
annotated on the title. For non-payment of the principal
obligation, UNIONBANK extrajudicially foreclosed the
property mortgaged on August 1993 and sold the same at
public auction, with itself posting the highest bid.
2) One week before the one-year redemption period expired,
private respondents filed a complaint with the RTC against
the mortgagors, UNIONBANK and the Register of Deeds
annulment of sale and real estate mortgage reconveyance
and prayer for restraining notice of lis pendens was
annotated on the title.
3) On October 1994, the RTC issued a TRO enjoining the
redemption of property within the statutory period and its
consolidation under UNIONBANK's name.
4) Without notifying private respondents, UNIONBANK
consolidated its title over the foreclosed property on October
1994, UNIONBANK's name was issued in the new TCT.
5) Private respondents filed an amended complaint, alleging
that they, not the mortgagors, are the true owners of the
property mortgaged and insisting on the invalidity of both the
mortgage and its subsequent extrajudicial foreclosure. They
claimed that the original title, was entrusted to a certain Atty.
Reynaldo Singson preparatory to its administrative
reconstitution after a fire gutted the Quezon City Hall
building. Mortgagor Leopoldo, private respondent Fermina's
son, obtained the property from Atty. Singson, had the title
reconstituted under his name without private respondents'
knowledge, executed an ante-dated deed of sale in his favor
and mortgaged the property to UNIONBANK.
6) On December 1994, the RTC admitted the aforementioned
amended complaint. UNIONBANK filed its answer ad
cautelam asserting its status as an innocent mortgagee for
value whose right or lien upon the property mortgaged must
be respected even if, the mortgagor obtained his title through
fraud. It also averred that the action had become "moot and
academic by the consolidation of the foreclosed property on
24 October 1994" in its name.
7) On appeal, the CA nullified the consolidation of ownership,
which was the prior judgment in the RTC, ordered the
Register of Deeds to cancel the certificate of title in
UNIONBANK's name and to reinstate TCT of respondents.
ISSUE: Whether UNIONBANK is a mortgagee in good faith and
for value with a right to consolidate ownership over the
foreclosed property with the redemption period having
expired and there having been no redemptioners.
HELD:
A) The SC disagrees with the CAs judgment that
consolidation deprived private respondents of their property
without due process. Because the buyer in a foreclosure sale
becomes the absolute owner of the property purchased if it is
not redeemed during the period of one year after the
registration of the sale. In effect, consolidation took place as
a matter of right since there was no redemption of the
foreclosed property and the TRO expired upon dismissal of
the complaint.
C) UNIONBANK need not have informed private respondent
that it was consolidaint its title over the property, upon the
expiration of the redemption period, without the judgment
debtor having made use of his right of redemption, the
ownership of the property sold becomes consolidated in the
purchaser. Upon failure to redeem foreclosed realty,
consolidation of title becomes a matter of right on the part of
the auction buyer, and the issuance of a certificate of title in
favor of the purchaser becomes ministerial upon the Register
of Deeds.
C) At any rate, the consolidation of ownership over the
mortgaged property in favor of UNIONBANK and the issuance
of a new title in its name during the pendency of an action for
annulment and reconveyance will not cause injury to private
respondents because as purchaser at a public auction,
UNIONBANK is only substituted to and acquires the right,
title, interest and claim of the judgment debtors or
mortgagors to the property at the time of levy. With the main
action for reconveyance pending before the RTC, the notice
SECTRANS 2010/ ATTY. AGUINALDO 70
of lis pendens, sufficiently protects private respondents
interest over the property. Thus the Decision of the Court of
Appeals is REVERSED and SET ASIDE. The order of the trial
court dated 7 August 1999, declaring UNIONBANK's prayer
for writ of preliminary injunction moot and academic, is
hereby REINSTATED. Let this case be remanded to the
Regional Trial Court for trial on the merits.
DBP v LICUANAN
DOCTRINE: All persons having or claiming an interest in
the mortgaged premises subordinate in right to that of the
holder of the mortgage should be made defendants in the
action for the foreclosure of the mortgage. Intervening as a
subordinate lienholder in a foreclosure case merely to oppose
the confirmation of the sale upon learning that such a sale had
been made, is no the same as being a party to the suit to the
extent of being bound by the judgement in the foreclosure
suit.
The effect of the failure to implead a subordinate
lienholder or subsequent purchaser or both is to render the
foreclosure ineffective as against them, with the result that
there remains in their favor the unforeclosed equity of
redemption.
DBP v GO
Facts:
In 1982, Go obtained a loan from DBP evidenced by two
promissory notes, one for 194K payable quarterly for 5
years and the other 300K payable quarterly for 7 years.
He mortgaged his real and personal property.
A contract provision states that DBP can unilaterally
increase the interest rate and requires Go to insure the
mortgaged properties.
DBP increased its interest rate to 35% then lowered it to
29%.
Go failed to pay the loan.
In 1986, DBP extrajudicially foreclosed the property and
was declared the winner as the highest bidder in the
auction sale.
Go filed an action to annul the auction sale.
Both RTC and CA declared that the extrajudicial
foreclosure was void because loan has not yet mature at
the time of the foreclosure sale (the foreclosure was done
less than 5 years from the execution of the contract).
Issue: WON the extrajudicial foreclosure should be declared
null and void?
Held:
Yes. The mortgage contract states that petitioner may resort
to either judicial or extrajudicial foreclosure in case of default.
Petitioner opted for extrajudicial foreclosure. However, both
the trial court and the CA declared that the extrajudicial
foreclosure void for being premature. For all intents and
purposes, there has been no foreclosure. Therefore, this Court
or any court cannot issue a writ of execution to judicially
foreclose the property.
FIESTAN v CA
Facts: Dionisio Fiestan and Juanita Arconada owners
of a parcel of land (Lot No. 2B) situated in Ilocos Sur
covered by TCT T-13218 which they mortgaged to
the Development Bank of the Philippines (DBP) as
security for their P22,400.00 loan. Lot No. 2-B was
acquired by the DBP as the highest bidder at a public
auction sale on August 6, 1979 after it was
extrajudicially foreclosed by the DBP in accordance
with Act No. 3135, as amended by Act No. 4118, for
failure of petitioners to pay their mortgage
indebtedness. On April 13,1982, the DBP sold the lot
to Francisco Peria in a Deed of Absolute Sale.
Francisco Peria mortgaged said lot to the PNB Vigan
Branch as security for his loan of P115,000.00 as
required by the bank to increase his original loan
from P49,000.00 to P66,000.00 until it finally
reached the approved amount of P115,000.00. Since
petitioners were still in possession of Lot No. 2-B,
the Provincial Sheriff ordered them to vacate the
premises.
Issue: W/N there was a valid extrajudicial
foreclosure sale?
Ruling: Yes. The formalities of a levy, as an
essential requisite of a valid execution sale under
Section 15 of Rule 39 and a valid attachment lien
under Rule 57 of the Rules of Court, are not basic
requirements before an extrajudicially foreclosed
property can be sold at public auction. The case at
bar, as the facts disclose, involves an extrajudicial
foreclosure sale. Act No. 3135, as amended by Act
No. 4118 otherwise known as "An Act to Regulate
the Sale of Property under Special Powers Inserted
in or Annexed to Real Estate Mortgages" applies in
cases of extrajudicial foreclosure sale.
BANK OF AMERICA v AMERICAN REALTY
CHIENG v SPOUSE SANTOS
SECTRANS 2010/ ATTY. AGUINALDO 71

FIRST MARBELLA v GATMAYTAN
FACTS:
R is the registered owner of Fontavilla No. 501 (condo
unit), Marbella I Condominium, Roxas Blvd under CCT
No. 1972
P filed a Petition for Extradudicial foreclosure of the
condominium unit of R and alleged that P is a duly
organized association of the tenants and
homeowners of Marbella I Condominium; that R is a
member thereof but has unpaid association dues
amounting to P3.2mill; that R refused to to pay his
dues despite demand
P - that it is expressly provided under Section 20 of
Republic Act (R.A.) No. 4726 that it has the right to
cause the extrajudicial foreclosure of its annotated
lien on the condominium unit. Its petition then is
cognizable by the RTC under Administrative Matter
No. 99-10-05
R objected to P's right to file the petition for extra-
judicial foreclosure, pointing out that the latter does
not hold a real estate mortgage on the condominium
unit or a special power of attorney to cause the extra-
judicial foreclosure sale of said unit.
- there is even a pending litigation regarding the
validity of petitioner's constitution as a
homeowners association and its authority to
assess association dues, annotate unpaid
assessments on condominium titles and enforce
the same through extrajudicial foreclosure sale
Clerk of Court, as Ex-Officio Sheriff, recommended to
RTC Exec. Judge :
Under the facts given, no mortgage exists between
the petitioner and respondent. Evidently, it is not one
of those contemplated under Act 3135 as amended
by Act 4118. The allegation simply does not show a
mortgagor-mortgagee relationship since respondent
liability arises from his failure to pay dues,
assessments and charges due to the petitioner.
As clearly stated, the authority of the Executive Judge
under Administrative Matter No. 99-10-05-0, as
amended dated March 1, 2001, covers extra-judicial
foreclosure of real estate mortgages under R.A. No.
3135 and chattel mortgages under P.D. No. 1508.
There is nothing in the above mentioned Circular
which authorizes the Executive Judge and/or the Ex-
Officio Sheriff to extra judicially foreclose properties
covered by obligations other than the said mortgages.
Hence, the subject petition is not proper for extra-
judicial foreclosure under the supervision of the
Executive Judge. Dismissal of the subject petition is
recommended
TC denied request for extrajudicial foreclosure of
the subject condo unit and dismissed the petition; It
not within the authority of Exec. Judge to supervise
and approve the extrajudicial foreclosures of
mortgage
ISSUE: WON P has a right to file a petition for extrajudicial
foreclosure?
HELD: NO
In order to avail itself of a writ of mandamus,
petitioner must establish that it has a clear right to
the extrajudicial foreclosure sale of the condominium
unit of respondent. Under Circular No. 7-
2002, implementing Supreme Court Administrative
Matter No. 99-10-05-0, it is mandatory that a petition
for extrajudicial foreclosure be supported by
evidence that petitioner holds a special power or
authority to foreclose
Without proof of petitioner's special authority to
foreclose, the Clerk of Court as Ex-Oficio Sheriff is
precluded from acting on the application for
extrajudicial foreclosure
IN THIS CASE: the only basis of petitioner for causing
the extrajudicial foreclosure of the condominium unit
of respondent is a notice of assessment annotated on
CCT No. 1972 in accordance with Section 20 of R.A.
No. 4726. However, neither annotation nor law vests
it with sufficient authority to foreclose on the
property
The notice of assessment contains no provision for
the extrajudicial foreclosure of the condominium
unit. All that it states is that the assessment of
petitioner against respondent for unpaid association
dues constitutes a "first lien against [the]
condominium unit
Section 20 of RA 4726 does not grant P special
authority to foreclose. It merely prescribes the
procedure by which petitioner's claim may be treated
as a superior lien - i.e., through the annotation
thereof on the title of the condominium unit.
While the law also grants petitioner the option to
enforce said lien through either the judicial or
extrajudicial foreclosure sale of the condominium
unit, Section 20 does not by itself, ipso facto,
authorize judicial as extra-judicial foreclosure of the
condominium unit. Petitioner may avail itself of either
option only in the manner provided for by the
governing law and rules. As already pointed out, A.M.
No. No. 99-10-05-0, as implemented under Circular
No. 7-2002, requires that petitioner furnish evidence
of its special authority to cause the extrajudicial
foreclosure of the condominium unit.
LANGKAAN REALTY v UCPB
BOHANAN v CA
METROBANK v WONG
SECTRANS 2010/ ATTY. AGUINALDO 72
FACTS: Mindanao Grains, Inc. applied for a credit
accommodation with petitioner. As security for such credit
accommodation, respondent Wong executed a real estate
mortgage in favor of petitioner. Due to MGIs failure to pay the
obligation, petitioner filed an application for extrajudicial
foreclosure which was published in Pagadian Times once, for
three consecutive weeks setting the date for the auction sale.
No notice was posted in the municipality or city where the
mortgaged property was situated. The auction sale proceeded
and petitioner was adjudged as the sole and highest bidder.
After the expiration of the one year redemption period,
ownership was consolidated and TCT correspondingly issued
in the name of petitioner.
Respondent unaware of the foregoing developments, applied
for a credit accommodation with another bank, only to find out
that his property was already foreclosed by petitioner.
Respondent filed a case assailing the validity of the
extrajudicial foreclosure on the ground that petitioner did not
comply with the procedural requirements of law.
Petitioner on the other hand justifies his claim by citing Olizon
v. CA, (1) that its failure to comply with the posting
requirement did not necessarily result in the nullification of
the foreclosure sale since it complied with the publication
requirement; and (2) that personal notice of the foreclosure
proceedings to respondent is not a condition sine qua non for
its validity.
ISSUE: 1. WON PERSONAL NOTICE TO RESPONDENT IS A
CONDITION SINE QUA NON TO THE VALIDITY OF THE
FORECLOSURE PROCEEDINGS?
2. WON PETITIONERS NON-COMPLIANCE WITH THE
POSTING REQUIREMENT IS FATAL TO THE VALIDITY OF THE
FORECLOSURE PROCEEDINGS?
HELD:
1. Section 3 of Act no. 3135 only requires: (1) the posting
of notices of sale in three public places, and (2) the
publication of the same in a newspaper of general
circulation. Personal notice to the mortgagor is not
necessary. Nevertheless, the parties are not
precluded from exacting additional requirements. In
the case at bar, it was stipulated that notice should be
served to the mortgagor. When petitioner failed to
send the notice of foreclosure sale to respondent, he
committed a contractual breach sufficient to render
the foreclosure sale null and void.
2. The general rule is that non-compliance with the
posting requirement is fatal to the validity of the
foreclosure proceedings. The Olizon case was an
exception due to the unusual nature of the attendant
facts and peculiarity of the confluent circumstances
which are not present in the instant case. While the
law recognizes the right of the bank to foreclose a
mortgage upon the mortgagors failure to pay his
obligation, it is important that such right be exercised
according to its clear mandate. Each and every
requirement of the law must be complied with
PNB v CA
PNB v NEPOMUCENO PRODUCTIONS, INC.
FACTS:
PNB granted respondents (R) a credit line to finance the filming
of the movie Pacific Connection. The loan was secured by
mortgages on Rs real and personal properties (Malugay
property, Forbes Park Property and motion picture
equipments). However, R defaulted in their obligation. PNB
sought foreclosure of the mortgaged properties where pNB
was the highest bidder. R filed for annulment of foreclosure
sale since it is null and void for lack of publication of the notice
of sale. LC annulled foreclosure.
ISSUE: WoN the foreclosure sale was valid despite lack of
publication
SC: NO!
- Act 3135, governing EJF of mortgages on real
property is specific with regard to the posting and
publication requirements of the notice of sale, which
requires:
o Posting of notices of sale in 3 public places
o Publication of the same in a newspaper of
general circulation.
o FAILURE TO PUBLISH the notice of sale
constitutes a jurisdictional defect, which
INVALIDATES the sale.
- RE: WAIVER OF PUBLICATION REQUIREMENTS
o PNB and R have absolutely NO RIGHT to
waive the posting and publication
requirements of the law.
o The principal object of a notice of sale in a
foreclosure of mortgage is not so much to
notify the mortgagor as to inform the public
generally of the nature and condition of the
property to be sold, and of the time, place
and terms of the sale
- Notice is given to secure bidders and prevent a
sacrifice of the property
- Statutory requirement of Publication is mandatory
not for the mortgagors benefit, but for the public or
3rd persons.
SECTRANS 2010/ ATTY. AGUINALDO 73
 PNB v SPOUSES CABATINGAN
FACTS:
1) Respondent spouses Cabatingan obtained two loans,
secured by a real estate mortgage, in the total amount of
P421,200 from petitioner PNB. They were unable to fully pay
their obligation despite having been granted more than
enough time to do so.
2) Thus, PNB extrajudicially foreclosed on the mortgage.
Thereafter, a notice of extrajudicial sale was issued. Pursuant
to this, the properties were sold at public auction on
November 5, 1991. PNB was the highest bidder.
3) On March 16, 1993, respondent spouses filed in
the RTC a complaint for annulment of extrajudicial
foreclosure of real estate mortgage and the
November 5, 1991 auction sale.
4) Petitioners claimed that the provisions of ACT no. 3135 must
be observed strictly. Thus, because the public auction of the
foreclosed properties was held for only 20 minutes (instead of
seven hours as required by law), the consequent sale was void.
Thus, the RTC issued an order annulling the sale at public
auction.
ISSUE: Whether a sale at public auction, to be valid, must be
conducted the whole day from 9:00 a.m. until 4:00 p.m. of the
scheduled auction day.
HELD:
A) Section 4 of Act 3135 provides that the sale must
take place between the hours of nine in the morning
and four in the afternoon.
B) A creditor may foreclose on a real estate mortgage only if
the debtor fails to pay the principal obligation when it falls due.
But the foreclosure of a mortgage does not extinguish a
debtors obligation to his creditor. The proceeds of a sale at
public auction may not be sufficient to extinguish the liability
of the former to the latter. For this reason, Section 4 of Act
3135 should be construed in such a way that affords the
creditor greater opportunity to satisfy his claim without unduly
rewarding the debtor for not paying his just debt.
C) The word between ordinarily means in the time interval
that separates. Thus, between the hours of nine in the
morning and four in the afternoon merely provides a time
frame within which an auction sale may be conducted.
Therefore, a sale at public auction held within the intervening
period provided by law is valid, without regard to the duration
or length of time it took the auctioneer to conduct the
proceedings. Since it was conducted within the time frame
provided by law, the sale was valid.
MONZON v RELOVA
DOCTRINE: Any person having a lien on the property
subsequent to the mortgage or deed of trust under which the
property is sold, may redeem the same at any time within the
term of one year from and after the date of sale.
Even if, for the sake of argument, Rule 68 is to be
applied to extrajudicial foreclosure of mortgages, such right
can only be given to second mortgagees who are made parties
to the (judicial) foreclosure. While a second mortgagee is a
proper and in a sense even a necessary party to a proceeding
to foreclose a first mortgage on real property, he is not an
indispensable party, because a valid decree may be made, as
between the mortgagor and the first mortgagee, without
regard to the second mortgagee; but the consequence of a
failure to make the second mortgagee a party to the
proceeding is that the lien of the second mortgagee on the
equity of redemption is not affected by the decree of
foreclosure.
SAGUAN v PBCOM
Facts:
Saguan obtained a loan of 3M from PBC and mortgaged
his 5 lands.
Saguan defaulted.
PBC extrajudicially foreclosed the property and won as the
highest bidder in the auction sale.
Because Saguan failed to redeem, the properties were
consolidated in the name of PBC which later on filed a writ
of possession.
Saguan filed an opposition since PBC failed to return the
excess amount of the extrajudicial foreclosure sale.
PBC points to Saguans remaining unsecured obligations
with the former to which the excess or surplus proceeds
were applied.
Issue:
1) WON the writ of possession should be issued?
2) WON PBC may unilaterally apply the excess proceeds to
petitioners remaining unsecured obligations?
Held:
1) Yes. A writ of possession is an order enforcing a judgment
to allow a persons recovery of possession of real or
personal property. This writ may be issued either 1) within
the one-year redemption period, upon filing of the bond,
2) after the lapse of the redemption period, without the
need of a bond.
SECTRANS 2010/ ATTY. AGUINALDO 74
 In this case, the issuance of RTC of a writ of possession in
favor of PBC is proper since the redemption period has
already expired. The duty of the trial court to grant a writ
of possession in such instances is ministerial, and the court
may not exercise discretion or judgment. Even if the
excess proceeds were not returned to the petitioner, the
writ is still valid.
A party may file a petition to set aside the foreclosure sale
to cancel the writ of possession in the same proceeding
where the writ was requested. However, in this case,
petitioners do not challenge the validity of the foreclosure
only the contention that the excess proceeds were not
returned to them.
2) No. The foreclosure of petitioners properties was meant
to answer only the obligation secured by the mortgage.
Even if the petitioners have remaining obligations with the
respondent, these obligations were not collateralized by
the foreclosed mortgage.
The petitioners remedy lies in a separate civil action for
collection of a sum of money and not an action to set aside
the foreclosure sale.
SUICO v CA
QUIRINO GONZALES v CA
Facts: Petitioners applied for credit accommodations with
respondent bank, which the bank approved granting a credit
line of Php900,000.00. Petitioners obligations were secured
by a real estate mortgage on four parcels of land. Also,
petitioners had made certain advances in separate
transactions from the bank in connection with QGLCs
exportation of logs and executed a promissory note in 1964.
Due to petitioners long default in the payment of their
obligations under the credit line, the bank foreclosed the
mortgage and sold the properties covered to the highest
bidder in the auction. Respondent bank, alleging non-
payment of the balance of QGLCs obligation after the
proceedings of the foreclosure sale were applied and non-
payment of promissory notes despite repeated demands,
filed a complaint for sum of money against petitioners.
Petitioners, on the other hand, asserted that the complaint
states no cause of action and assuming that it does, the same
is barred by prescription or void for want of consideration.
Issue: Whether or not the cause of action is barred by
prescription.
Held: An action upon a written contract, an obligation
created by law, and a judgment must be brought within 10
years from the time the right of action accrues.
The finding of the trial court that more than ten years had
elapsed since the right to bring an action on the Banks first
to sixth causes had arisen is not disputed. The Bank contends,
however, that the notices of foreclosure sale in the
foreclosure proceedings of 1965 are tantamount to formal
demands upon petitioners for the payment of their past due
loan obligations with the Bank; hence, said notices of
foreclosure sale interrupted the running of the prescriptive
period.
The Banks contention has no merit. Prescription of actions is
interrupted when they are filed before the court, when there
is a written extrajudicial demand by the creditors, and when
there is any written acknowledgment of the debt by the
debtor.
The law specifically requires a written extrajudicial demand
by the creditor which is absent in the case at bar. The
contention that the notices of foreclosure are tantamount to
a written extrajudicial demand cannot be appreciated, the
contents of said notices not having been brought to light.
But even assuming that the notices interrupted the running
of the prescriptive period, the argument would still not lie for
the following reasons:
The Bank seeks the recovery of the deficient amount of the
obligation after the foreclosure of the mortgage. Such suit is
in the nature of a mortgage action because its purpose is to
enforce the mortgage contract. A mortgage action prescribes
after ten years from the time the right of action accrued.
The law gives the mortgagee the right to claim for the
deficiency resulting from the price obtained in the sale of the
property at public auction and the outstanding obligation
proceedings. In the present case, the Bank, as mortgagee,
had the right to claim payment of the deficiency after it had
foreclosed the mortgage in 1965. as it filed the complaint
only on January 27, 1977, more than ten years had already
elapsed, hence, the action had then prescribed.
PIANO v CAYANONG
FACTS: On March 17, 1952, the plaintiffs commenced an action
to foreclose a mortgage executed by the defendant in favor of
the plaintiffs upon a parcel of land. The parties-litigant
submitted a compromise agreement.
The defendant failed to pay the obligation within the period
set by the Court; so the property in question was sold at public
auction on Jan. 30, 1952(should be 1953) per order of the
court, by the deputy sheriff of Maasin, Leyte, to the plaintiffs,
they being the only bidders for P2,475.
The certificate of sheriff's sale contained the provision that the
said property is subject "to redemption within one year from
the date hereof in the manner provided by the law applicable
to the case." On March 11, 1953, the plaintiffs filed a motion
for the confirmation of the sale executed by the sheriff, which
was unopposed by the defendant. The sale was confirmed by
the Court on March 21, 1953.
SECTRANS 2010/ ATTY. AGUINALDO 75
Thereafter, the plaintiffs filed a petition for writ of possession;
by virtue of such petition the court adjudicated possession to
the plaintiffs on Aug. 15, 1953. On Aug. 20, 1953, the deputy
clerk issued the writ of possesion prayed for by the plaintiffs.
On Jan. 26, 1954, the defendant deposited with the court the
sum of P2,783.93, P2,772 of which was in the concept of
redemption deposit to be delivered to Generosa Cayanong and
her husband.
The oppositor Francisco Pilapil, on Feb. 11, 1954, filed an
opposition to the defendants' motion of Jan. 26, 1954, claiming
that the property, subject of foreclosure, having been sold at a
judicial foreclosure sale, was not subject to redemption after
the judicial sale was confirmed, title thereto having been fully
vested and consolidated in favor of Cayanong and Bellones,
their assignees and successors-in-interest.
ISSUE: Whether the property subject of foreclosure, having
been sold at a judicial foreclosure sale is subject to redemption
after the judicial sale was confirmed.
RULING:
In a foreclosure of mortgage under Rule 70 of the Rules of
Court, there is no right of redemption after the sale is
confirmed, although there is an equity of redemption in favor
of the mortgagor or junior encumbrancer, consisting in the
right to redeem the mortgaged property within the 90-day
period, or even thereafter, but before the confirmation of the
sale.
It is only in cases of foreclosures of mortgages in favor of
banking and credit institutions (Sec. 76, General Banking Act
[Rep. Act 337]), to the Philippine National Bank (Acts Nos.
2747, and 2938), and in extrajudicial foreclosures (Act 3135 as
amended by Act 4118), where, by express provision, the law
allows redemption. In all other foreclosure cases, there is no
legal redemption.
The sheriff, therefore, has no authority to grant or insert a
period of redemption in the certificate of sale, when the same
is conducted pursuant to Rule 70 and, wanting in said
authority, any insertion therein has no validity and effect. Once
the judicial sale is confirmed by the court, the rights are vested
in the purchaser (Sec. 3, Rule 70).
LANDRITO v CA
FACTS:
P obtained a loan of P350k from R and secured
payment by executing a deed of real estate mortgage
of their parcel of land at Muntinlupa; obtained again
another loan P 1mill and was granted by R with an
amendment of real estate mortgage
P defaulted and refused to comply with their
obligation despite repeated demands
R filed a petition for the extrajudicial foreclosure of
the mortgage. Mortgaged property was sold in a
public auction with R as highest bidder. R registered
sheriffs certificate of sale.
P filed a complaint for annulment of the extrajudicial
foreclosure and auction sale and alleged that said
foreclosure and auction sale were null and void for
failure to comply with requirements of notice and
publication; the mortgaged property was illegally
foreclosed; application for consolidation of title was
premature because the Rs Husband granted them an
extension of the period of redemption
TC granted Rs Motion to Dismiss; action already
barred by laches. CA affirmed
ISSUE: WON the extrajudicial foreclosure and public auction
sale of the subject parcel of land are valid and lawful?
HELD: YES
Records indubitably show that at the time of the
foreclosure sale on 11 August 1993, petitioners were
already in default in their loan obligation to
respondent Carmencita San Diego.
A final notice of demand for payment had been sent
to them, despite which they still failed to pay. Hence,
respondent Carmencita San Diegos resort to
extrajudicial foreclosure, provided no less in the
parties Amendment of Real Estate Mortgage.
The rule has been, and still is, that in real estate
mortgage, when the principal obligation is not paid
when due, the mortgagee has the right to foreclose
on the mortgage and to have the mortgaged property
seized and sold with the view of applying the
proceeds thereof to the payment of the obligation
IN THIS CASE: The validity of the extrajudicial
foreclosure on 11 August 1993 was virtually
confirmed by the trial court when it dismissed
petitioners complaint, and rightly so, what with the
fact that petitioners failed to exercise their right of
redemption within the 1-year period therefor
counted from the registration of the sheriffs
certificate of sale.
It appears from the evidence on record that despite
due notice and publication of the same in a
newspaper of general, P did not bother to attend the
foreclosure sale nor raise any question regarding the
propriety of the sale.
It was only on November 9, 1994, or more than one
year from the registration of the Sheriffs Certificate
of Sale, that P filed the instant complaint. Clearly, P
had slept on their rights and are therefore guilty of
laches, which is defined as the failure or neglect for
an unreasonable or explained length of time to do
that which, by exercising due diligence, could or
should have been done earlier, failure of which gives
rise to the presumption that the person possessed of
SECTRANS 2010/ ATTY. AGUINALDO 76
 the right or privilege has abandoned or has declined
to assert the same.
In Lazo v. Republic Surety & Insurance Co., Inc., this
Court has made it clear that it is only where, by
voluntary agreement of the parties, consisting of
extensions of the redemption period, followed by
commitment by the debtor to pay the redemption
price at a fixed date, will the concept of legal
redemption be converted into one of conventional
redemption.
IN THIS CASE: There is no showing whatsoever that
petitioners agreed to pay the redemption price on or
before 11 November 1994, as allegedly set by Mrs.
San Diegos husband. On the contrary, their act of
filing their complaint on 09 November 1994 to
declare the nullity of the foreclosure sale is indicative
of their refusal to pay the redemption price on the
alleged deadline set by the husband. At the very
least, if they so believed that their loan obligation was
only for P1,000,000.00, petitioners should have made
an offer to redeem within one (1) year from the
registration of the sheriffs certificate of sale,
together with a tender of the same amount. This,
they never did.
METROBANK v TAN
IBAAN RURAL BANK v CA
RAMIREZ v CA
FACTS: One Ronnie Garcia executed a first mortgage over a
parcel of land in favor of PNB as a security for a loan granted
by PNB. The deed was registered with the Register of Deeds
and annotated in the title of the mortgaged property. During
the subsistence of the first mortgage, Ronnie executed a
second mortgage over the same property in favor of private
respondent Marmeto which was also recorded on the title. For
failure to pay his loan, PNB extra-judicially foreclosed the
mortgage and a Certificate of Sale was issued in its favor on
Nov. 8, 1977. The second mortgage was also extra-judicially
foreclosed and a Certificate of Sale was issued in favor of
Marmeto on June 27, 1978.
On February 1980, Ronnie executed a Waiver and
Renunciation of Rights with respect to his right of redemption
with respect to the first mortgage in favor of his father. The
latter assigned his right to petitioner Nimfa Ramirez, who in
turn paid the total redemption price to PNB which accepted it.
Meanwhile, Ronnie having not exercised his right of
redemption over the second mortgage, Marmeto filed in court
for the Consolidation of Ownership over the mortgaged
property to which petitioner Ramirez filed an adverse claim.
ISSUE:
1. Whether Ramirez had acquired any right by virtue of
her having redeemed the property in question
beyond the one-year redemption period?
2. What will be the effect of the redemption by Ramirez
on private respondent Marmeto?
HELD:
1. Yes, by accepting the redemption price after the
statutory period for redemption had expired, PNB is
considered to have waived the one (1) year period
within which Ramirez could redeem the property.
There is nothing in the law which prevents such a
waiver. Allowing a redemption after the lapse of the
statutory period, when the buyer at the foreclosure
does not object but even consents to the redemption,
will uphold the policy of the law. Thus, there is no
doubt that the redemption made by petitioner
Ramirez is valid.
2. The rule is well settled that a second mortgagee
merely takes what is called an equity of redemption
and thus a second mortgagee has to wait until after
the debtor's obligation to the first mortgagee has
been fully settled. The rights of a second mortgagee
are strictly subordinate to the superior lien of the first
mortgagee. In the case at bar, the proper foreclosure
of the first mortgage gave, not only the first
mortgagor, but also subsequent lien holders like
Marmeto, the right to redeem the property within the
statutory period. Marmeto failed to make the
redemption but instead it was the petitioner who
made such redemption.
TOLENTINO v CA
SPOUSES OLIVEROS v PRESIDING JUDGE
FACTS:
The mortgagors (P) obtained 2 loans for the construction of the
Cabuyao Commercial Complex for P58M as evidenced by
promissory notes from Metrobank (R). To secure the loans,
Spouses Oliveros and Nevalga executed a Deed of Real Estate
Mortgage in favor of Metrobank over the 3 parcels of land
together with all the buildings and improvements existing
thereon. Due to the failure of mortgagors to pay their loan,
Metrobank instituted an EJF over the Real Estate Mortgage.
Metrobank won the bid. Mortgagors failed to redeem the
property hence, Metrobank consolidated its title to the subject
property. Metrobank demanded P to turn over the actual
possession of the property but the mortgagors failed and
refused to do so. Metrobank filed a writ of possession which
the Petitioner Spouses opposed claiming thata pending case
was in another court for nullification of foreclosure
proceedings.
ISSUE: WoN a writ of possession is proper when there is a
pending case to nullify the foreclosure sale
SECTRANS 2010/ ATTY. AGUINALDO 77

SC: YES!
- Metrobank purchased the properties at a public
auction following the EJF of the subject properties.
Certificate of sale over the properties were issued in
favor of Metrobank and registered with RD. P as
mortgagors failed to redeem the properties within
the 1 year period of redemption hence Metrobank
consolidated its ownership over the subject
properties.
- Metrobank having consolidated its title to the
mortgaged properties is even more entitled now to
possession thereof and makes more unmistakable its
right to file an ex parte motion for the issuance of a
writ of possession.
- The issuance of the writ of possession becomes a
mere ministerial duty on the part of the judge,
regardless of WoN there is a pending action for
nullification of the sale at public auction or
foreclosure itself
CHINA BANK v ORDINARIO
FACTS:
1) Petitioner ChinaBank granted 3 loans to TransAmerican
owned by spouses Garcia, secured by real estate mortgages
constituted by Jesus Garcia 45 parcels of land The contracts
of mortgage were all registered in the same Registry.
Subsequently for failure of TransAmerican to pay its loans,
Chinabank foreclosed extrajudicially the three real estate
mortgages which were then sold at public auction for
P38,004,205.01 to the same bank. The Certificate of Sale was
then registered in the Registry of Deeds of Quezon City.
2) Thereafter Chinabank filed with the RTC a petition for
issuance of a writ of possession, which was granted, thus
placing Chinabank in possession of the 45 parcels of land.
Then, spouses Ordinario, filed a motion for reconsideration
praying that the parcel of land be excluded from the above
order alleging, that they purchased the land covered on
which was constructed their townhouse and that the
mortgage foreclosure cannot prevail over their superior right
as legitimate buyers of the area.
3) To this, Chinabank filed its opposition to respondents
motion for reconsideration. The trial court denied Sps
Ordinarios motion for reconsideration. On appeal, this was
overturned by the CA.
HELD:
A) Under Section 7 of Act No. 3135, the purchaser in a
foreclosure sale is entitled to possession of the property.
Thus the writ prayed for by petitioner granting it possession
has to be issued as a matter of course, being a ministerial
duty of the trial court to grant such writ of possession. No
discretion is left for the trial court.
B) Under the Rules of Court a third-party claimant or a
stranger to the foreclosure suit, like respondents herein, can
opt to file a remedy known as terceria against the sheriff or
officer effecting the writ by serving on him an affidavit of his
title and a copy thereof upon the judgment creditor. By the
terceria, the officer shall not be bound to keep the property
and could be answerable for damages. A third-party claimant
may also resort to an independent "separate action," the
object of which is the recovery of ownership or possession of
the property seized by the sheriff, as well as damages arising
from wrongful seizure and detention of the property despite
the third-party claim. If a "separate action" is the recourse,
the third-party claimant must institute in a forum of
competent jurisdiction an action, distinct and separate from
the action in which the judgment is being enforced, even
before or without need of filing a claim in the court that
issued the writ. Both remedies are cumulative and may be
availed of independently of or separately from the other.
Availment of the terceria is not a condition sine qua non to
the institution of a "separate action."
C) In essence, the Court of Appeals committed palpable error
when it granted Spouses Ordinarios motion for
reconsideration and set aside the orders dated April 10, 1991
and September 21, 1992 of the RTC. Thus, the appealed
Decision and Resolution of the Court of Appeals are
REVERSED and SET ASIDE. The orders of the RTC, Branch 90,
Quezon City, directing the issuance of a writ of possession in
favor of petitioner bank are AFFIRMED.
ANTICHRESIS
DELA VEGA v BALLILOS
BARRETTO v BARRETTO
Facts:
After the death of Juan Antonio Barretto, Sr., his son Juan
Antonio Grandpre, in his own behalf and as the executor
of his father, mortgaged, the cultivated half of said
hacienda in favor of Antonio Vicente Barretto as security
for the amount of P11,000 which the latter loaned to him.
By verbal agreement, Antonio will collect his credit from
the products of the property.
His three children and heirs Antonio Ma Barretto, Ricardo
Esteban Barretto, and Guadalupe Barretto came to
succeed after the death of Antonio.
Guadalupe made a donation inter vivos in favor of the
plaintiff Alberto Barretto of the undivided one-third part
of the hypothecary credit and of the rights belonging to
her deceased father Antonio Vicente Barretto, assigning
SECTRANS 2010/ ATTY. AGUINALDO 78
 to the donee all the rights and actions which she might
have in the foreclosure proceedings exhibited at the trial
of the present action, on the condition that as soon as the
donee Alberto Barretto could collect the said one-third
part of the credit or should obtain the assignment of the
property of the debtor, he would divide what was
donated, into nine equal parts among the donee himself
and six living brothers and the heirs of their two brothers
now dead, each receiving one-ninth part.
Alberto Barretto, complying with the condition imposed in
said document of the donation paid to each of his brothers
and nephews, and in exchange for the sums received as
such price his co-donees assigned and conveyed to him
one-eight part of the third of the said hacienda and
whatever rights and interests the grantors might have by
virtue of the said donation in favor of the plaintiff
Barretto.
It is to be noted that the plaintiff bought one-eight
undivided part of the third of the whole hacienda of
Balintagac and paid to every claimant the price of the
eight part sold to him. The third part of the ownership of
the hacienda was transferred to the plaintiff by the donor
Guadalupe Barretto.
Antonio and Ricardo, as grantors, sold and conveyed all
their rights and actions included and derived from the said
hypothecary credit for the price of P14,000 which would
be paid by the grantee and vendee by installments and in
the manner prescribed in the said deed, assigning to him,
besides, all the rights which the said brothers had over the
two-third parts of the said hacienda.
Issue: WON there was a transfer of ownership to Alberto?
Held:
No. the plaintiff did not obtain by assignment, sale, or transfer,
as expressed in said deeds, the ownership of the said hacienda
of Balintagac, but only the hypothecary credit which the heirs
of the deceased creditor Antonio Vicente Barretto had
inherited from the latter, after the plaintiff had obtained from
his other brothers the conveyance of their respective rights to
the donation.
The rights acquired by the creditor were transmitted by
hereditary title through operation of law to the heirs of the
same Antonio M.a, Ricardo Esteban, and Guadalupe, Barretto
y Rocha and these in turn assigned, sold and transferred the
credit with all their rights as hypothecary creditors, as well as
the right to the usufruct of all the hacienda of Balintagac to the
plaintiff Alberto Barretto.
When in the record of an action it is fully established that the
parties indebted in a certain amount, which is secured with a
mortgage over of their hacienda, having delivered to the
creditor not only the mortgaged half but the whole hacienda,
not in the nature of an assignment of property in payment of
a debt, still unpaid, but with the object that the creditor may
collect by means of usufruct his credit and the interest agreed
upon, the verbal contract which is inferred from such facts and
presumed to have been entered into between the parties,
although not set in any document, deserves in law the name
of antichresis as defined in Article 1881 of the Civil Code.
By the antichresis a creditor acquires a right to
receive the fruits of real property of his debtor, with
the obligation to apply them to the payment of the
interest, if due, and afterwards to the principal of
his credit.
The creditor in antichresis cannot by mere possession of the
real property which he received by virtue of an antichresis
acquire ownership over the same for failure of the debtor to
pay the debt within the stipulated time, any agreement to the
contrary being void; and the debtor on his part cannot recover
the enjoyment and use of the real property given in antichresis
to the creditor, without having previously paid the latter all his
debt and interests thereon, the creditor being entitled to ask
the courts that the said real property be sold to satisfy his
credit.
With regard to prescription, the creditor in antichresis can
never by prescription acquire the ownership of the real
property received in antichresis, as he entered into the
possession of the same not as an owner but as a creditor with
right only to collect his credit from the fruits of said real
property.
The extinguishment of the right as creditor and the
termination of his use and possession of the real property
given in antichresis depend upon the full payment of the debt
and its interests, after the liquidation of the amounts entered
on the account of the debtors and received by the creditor.
LEGAZPI & SALCEDO v CELESTIAL
ANGELES v SEC. OF JUSTICE
PANDO v GIMENEZ
SECTRANS 2010/ ATTY. AGUINALDO 79
FACTS: This action was instituted for the purpose of
foreclosing a mortgage executed by defendant Antonio
Gimenez. Massy Teague was also impleaded for having
purchased at public auction one of the mortgaged properties.
In order to secure the payment of P8,000 which the defendant
Gimenez owed the plaintiff, he mortgaged the house at No.
655 Santa Mesa, Manila, and the leasehold right on the lot
upon which it stands (Exhibit A). This was payable on October
27, 1925, but, in spite of nonpayment, the creditor, who is the
plaintiff herein, did not foreclose the mortgage.
The defendant was leaving the City of Manila in order to attend
to his business in the Province of Cagayan, and at the special
instance and request of the herein plaintiff, said defendant
gave to the plaintiff the full control, and complete and absolute
administration of the building and the parcel of land on which
said building was erected, situated in Santa Mesa, District of
Santa Mesa, mortgaged to the plaintiffIt and it was agreed
between them that the plaintiff would collect the rents of said
house, in order to apply them to the payment of interest on
the amount of the indebtedness.
For default in the payment of taxes for the years 1925 and
1926, the house was on November 23, 1926 sold at public
auction, and, for failure to exercise the right of legal
redemption, the City of Manila, the attachment creditor and
vendor of the property, executed a final deed of sale in favor
of the purchaser, the other defendant Massy Teague.
Furthermore, for default in the payment of the rents due on
the lot of said house for the years 1925 to 1928, the Santa
Mesa estate, the lessor of said land, cancelled the lease on July
13, 1928, pursuant to the terms of the contract.
The appellant Gimenez contends that the plaintiff was
responsible for the delinquency in the payment of both the tax
on the house and the rent of the lot, which caused him the loss
of the said house and the leasehold right on the lot, because
the plaintiff was at that time in charge of the administration of
the premises with the obligation to attend to the payment of
the tax and the rents.
The plaintiff denied that he had such obligation, alleging that
his duties were confined to the collection of the rents of the
house in order to apply them to the payment of the interest on
the mortgage.
Such was in fact the original agreement; but the appellant
asserts that it was modified by the letter.
ISSUE: Whether or not the the administration of the property
in question assumed by the plaintiff toward the end of
October, 1925 is antichretic in character.
RULING:
Taking into account the language of the letter Exhibit 1 and the
appellant's unimpeached testimony, we are constrained to
hold that it has been proved by a preponderance of evidence,
that even though at first the plaintiff had only undertaken to
collect the rents of the house, later on, towards the end of
October, 1925, he assumed the obligation to pay both the tax
on the house, and the rent of the lot.
As to the consideration contained in the judgment appealed
from to the effect that, in view of the reduction of the rent of
the house in May, 1926, the plaintiff would not have accepted
the administration under the conditions alleged by the
defendant-appellant, it must be remembered that the plaintiff
took over such complete administration months before such
reduction of rents, and it does not appear that the reduction
was foreseen.
From all these circumstances it follows that the administration
of the property in question assumed by the plaintiff toward the
end of October, 1925 is antichretic in character, and therefore
justice and equity demand that application be here made of
the Civil Code provisions touching the obligations of the
antichretic creditor, to wit:
The creditor is obliged to pay the taxes and charges
which burden the estate, in the absence of an
agreement to the contrary.
He shall also be obliged to pay any expenses
necessary for its preservation and repair.
Any sums he may expend for such purposes shall be
chargeable against the fruits. (Art. 1882, Civil Code.)
These obligations arise from the very nature of the covenant,
and are correlated with the plaintiff's acquired right to take
charge of the property and collect the fruits for himself.
PERALTA v QUIMPO
51 OG No. 3 p. 1383, Sept 1954
NO COPY AVAILABLE
VILLANUEVA v IPONDO
CHATTEL MORTGAGE
ALEMAN v CATERA
ALLIED BANK v SALAS
SECTRANS 2010/ ATTY. AGUINALDO 80
FACTS: Petitioner-bank (through petitioners predecessor)
granted Gencor Marketing, Inc. a time loan and was secured
by a Deed of Chattel Mortgage over certain printing
machineries and equipments; said deed was recorded in the
Chattel Mortgage Registry in Feb. 7, 1974. Gencor failed to pay
prompting petitioner to extra judicially foreclose the mortgage
and requested the Sheriff of Quezon City to effect the said
foreclosure. Upon issuance of the Notice of Sheriffs sale,
private respondent filed a motion in court to enjoin the public
auction alleging that the properties have been previously
levied and attached by the Sheriff of Rizal.
Metrobank is a creditor of Gencors president and claims the
properties as the exclusive property of the president doing
business under the firm name of Gencor Printing and as such
may not be foreclosed and sold at auction. During the trial it
was admitted by petitioner that the properties belonged to the
president and not to Gencor.
ISSUE: WHO between the two claimants has a better right over
the property.
HELD: Petitioner has the better right. Even though petitioner
admitted that it was the president and not gencor who owned
the properties, the Court nevertheless finds that the chattel
mortgage over the printing machineries and equipment was
ratified and approved by Clarencio Yujuico. As earlier stated
and as pointed out by petitioner, it was Clarencio Yujuico as
president of Gencor Marketing, Inc., who signed the
promissory note evidencing the time loan granted by
petitioner's predecessor General Bank and Trust Company in
favor of Gencor Marketing, Inc.
Finding the chattel mortgage to be valid, the Court takes
special note of the fact that said chattel mortgage was
registered and duly recorded in the Chattel Mortgage Registry
of Quezon City on February 7, 1974, prior to April 22, 1977, the
date the writ of attachment of the properties in question was
issued. This is a significant factor in determining who of two
contending claimants should be given preference over the
same properties in question.
The registration of the chattel mortgage more than three years
prior to the writ of attachment issued by respondent judge is
an effective and binding notice to other creditors of its
existence and creates a real right or a lien, which being
recorded, follows the chattel wherever it goes. 7 The chattel
mortgage lien attaches to the property wherever it may be.
Thus, private respondent as attaching creditor acquired the
properties in question subject to petitioner's mortgage lien as
it existed thereon at the time of the attachment.
In this regard, it must be stressed that the right of those who
so acquire said properties should not and cannot be superior
to that of the creditor who has in his favor an instrument of
mortgage executed with the formalities of law, in good faith,
and without the least indication of fraud. 8
Applying the foregoing principle to the case at bar, the Court
finds the lien of petitioner's chattel mortgage over the
mortgaged properties in question superior to the levy on
attachment made on the same by private respondent as
creditor of chattel mortgagor Clarencio Yujuico. What may be
attached by private respondent as creditor of said chattel
mortgagor is only the equity or right of redemption of the
mortgagor.
MAKATI LEASING v WEAREVER TEXTILES
TSAI v CA
FACTS:
- Ever Textile (R) obtained a P3M loan from PBCOM (P),
with Real Property and Chattel Mortgage over the lot,
where its factory stands and the chattels located
therein as enumerated in its attached schedule
- A 2nd loan was obtained secured by a Chattel
Mortgage over personal properties listed in its
attached list, which is similar to the attached list to
the 1st mortgage.
- On the same date of the 2nd loan, R purchased various
machines and equipments
- Later, R filed insolvency proceedings
- P commenced an extrajudicial foreclosure (EJF),
wherein P won the bid and the properties were leased
and later sold to Tsai. P sold the factory, properties
and the contested machineries of R.
- R filed for annulment of sale contending that the
machineries bought by R which are not included in
the list should be excluded from the sale to TSAI
- P contended that the machineries, which are
connected to the land, are part of the real estate
stated in the Mortgage.
- RTC and CA ruled in favor of R.
ISSUE: WoN the contested machineries (property bought by R
on the same day that the 2nd loan was executed) should be
inlcluded in the auction sale and sale to TSAI
SC: NO!
- Based on the pieces of evidence, the true intention of
P and R is to treat machinery and equipment as
chattels.
- The controverted machineries are not covered by or
included in either of the 2 mortgages
- The machineries were not included in the Notice of
Sale
- An immovable may be considered a personal
property if there is a stipulation as when it is used as
security in the payment of an obligation where a
chattel mortgage is executed over it, as in the case at
bar.
DOCTRINE: a chattel mortgage shall be deemed to cover only
the property described therein and not like or substituted
SECTRANS 2010/ ATTY. AGUINALDO 81
property thereafter acquired by the mortgagor and placed in
the same depository as the property originally mortgaged.
ACME SHOE v CA
FACTS:
1) Petitioner Chua Pac, the president and general manager of
co-petitioner Acme Shoe, executed on June 1978, for and in
behalf of the company, a chattel mortgage in favor of private
respondent Producers Bank of the Philippines as security for
petitioner's corporate loan of P3,000,000.00. It was stated
that:
In case the MORTGAGOR executes subsequent promissory
note or notes either as a renewal of the former note, as an
extension thereof, or as a new loan, or is given any other kind
of accommodations such as overdrafts, letters of credit,
acceptances and bills of exchange, releases of import
shipments on Trust Receipts, etc., this mortgage shall also
stand as security for the payment of the said promissory note
or notes and/or accommodations without the necessity of
executing a new contract and this mortgage shall have the
same force and effect as if the said promissory note or notes
and/or accommodations were existing on the date thereof.
This mortgage shall also stand as security for said obligations
and any and all other obligations of the MORTGAGOR to the
MORTGAGEE of whatever kind and nature, whether such
obligations have been contracted before, during or after the
constitution of this mortgage
2) On 10 and 11 January 1984, the bank yet again extended to
petitioner corporation a loan of P1,000,000.00 covered by
four promissory notes for P250,000.00 each. Due to financial
constraints, the loan was not settled at maturity. The bank
then applied for an extra judicial foreclosure of the chattel
mortgage, with the Sheriff of prompting Acme to file an
injunction, which was dismissed. The court also ordered the
foreclosure of the chattel mortgage. It held petitioner
corporation bound by the stipulations.
ISSUE: Whether it is valid and effective to have a clause in a
chattel mortgage that purports to likewise extend its
coverage to obligations yet to be contracted or incurred.
HELD:
A) Contracts of security are either personal or real. In
contracts of personal security, such as a guaranty or a
suretyship, the faithful performance of the obligation by the
principal debt or is secured by the personal commitment of
another.
B) In contracts of real security, such as a pledge, a mortgage
or an antichresis, that fulfillment is secured by an
encumbrance of property in pledge, the placing of movable
property in the possession of the creditor; in chattel
mortgage, by the execution of the corresponding deed
substantially in the form prescribed by law; in real estate
mortgage, by the execution of a public instrument
encumbering the real property covered thereby; and in
antichresis, by a written instrument granting to the creditor
the right to receive the fruits of an immovable property with
the obligation to apply such fruits to the payment of interest,
if owing, and thereafter to the principal of his credit upon
the essential condition that if the obligation becomes due
and the debtor defaults, then the property encumbered can
be alienated for the payment of the obligation, but that
should the obligation be duly paid, then the contract is
automatically extinguished proceeding from the accessory
character 8 of the agreement.
C) While a pledge, real estate mortgage, or antichresis may
secure after-incurred obligations so long as these future
debts are accurately described, a chattel mortgage, can only
cover obligations existing at the time the mortgage is
constituted.
D) Although a promise expressed in a chattel mortgage to
include debts that are yet to be contracted can be a binding
commitment that can be compelled upon, the security itself,
however, does not come into existence or arise until after a
chattel mortgage agreement covering the newly contracted
debt is executed either by concluding a fresh chattel
mortgage or by amending the old contract. Refusal on the
part of the borrower to execute the agreement so as to cover
the after-incurred obligation can constitute an act of default
on the part of the borrower of the financing agreement
whereon the promise is written but the remedy of
foreclosure can only cover the debts extant at the time of
constitution and during the life of the chattel mortgage
sought to be foreclosed.
E) A chattel mortgage, as hereinbefore so intimated, must
comply substantially with the form prescribed by the Chattel
Mortgage Law itself. One of the requisites, under Section 5
thereof, is an affidavit of good faith. The fact, .that the
statute has provided that the parties to the contract must
execute an oath that the mortgage is made for the purpose
of securing the obligation specified in the conditions thereof,
and for no other purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose of fraud
means that the debt referred to in the law is a current, not an
obligation that is yet merely contemplated.
F) In the chattel mortgage here involved, the only obligation
specified in the chattel mortgage contract was the
P3,000,000.00 loan which petitioner corporation later fully
paid. By virtue of Section 3 of the Chattel Mortgage Law, the
payment of the obligation automatically rendered the chattel
SECTRANS 2010/ ATTY. AGUINALDO 82
mortgage void or terminated. In other words, A mortgage
that contains a stipulation in regard to future advances in the
credit will take effect only from the date the same are made
and not from the date of the mortgage.
CERNA v CA
MAGNA FINANCIAL v COLARINA
Facts:
Elias Colarina bought on installment from Magna Financial
Services (MFS) one Suzuki Multicab.
After making a down payment, Colarina executed a
promissory note for the balance of P229,284.00 payable
in 36 equal monthly installments. To secure payment,
Colarina executed an integrated promissory note and
deed of chattel mortgage over the motor vehicle.
Colarina failed to pay the monthly amortization
accumulating an unpaid balance of P131,607.00.
Despite repeated demands, he failed to make the
necessary payment.
MFS filed a Complaint for Foreclosure of Chattel Mortgage
with Replevin.
Upon the filing of a Replevin Bond, a Writ of Replevin was
issued. Summons, together with a copy of the Writ of
Replevin, was served on Colarina who voluntarily
surrendered physical possession of the vehicle to the
Sheriff.
The motor vehicle was turned over by the sheriff to Magna
Financial Services Group, Inc.
The trial court rendered judgment in favor of MFS and
asked Coralina to pay the unpaid balance and foreclose
the chattel mortgage.
Colarina appealed to the Regional Trial Court which
affirmed in toto the decision of the MTCC.
CA reversed the decision of MTCC and RTC stating that
MTC and the RTC erred in ordering the defendant to pay
the unpaid balance of the purchase price of the subject
vehicle irrespective of the fact that the instant complaint
was for the foreclosure of its chattel mortgage.
Issue:
1) WON MFS can avail of the two remedies, payment of
unpaid balance and foreclosure of chattel mortgage?
2) WON there was actual foreclosure?
Held:
1) No. Article 1484, paragraph 3, provides that if the vendor
has availed himself of the right to foreclose the chattel
mortgage, he shall have no further action against the
purchaser to recover any unpaid balance of the purchase
price. Any agreement to the contrary shall be void. In
other words, in all proceedings for the foreclosure of
chattel mortgages executed on chattels which have been
sold on the installment plan, the mortgagee is limited to
the property included in the mortgage.
Petitioner resolutely declared that it has opted for the
remedy provided under Article 1484(3) of the Civil Code,
that is, to foreclose the chattel mortgage. The petitioners
prayer contains two remedies, payment of unpaid balance
and foreclosure of chattel mortgage. Such a scheme is not
only irregular but is a flagrant circumvention of the
prohibition of the law. By praying for the foreclosure of
the chattel, Magna Financial Services Group, Inc.
renounced whatever claim it may have under the
promissory note.
2) No. In the case at bar, there is no dispute that the subject
vehicle is already in the possession of the petitioner,
Magna Financial Services Group, Inc. However, actual
foreclosure has not been pursued, commenced or
concluded by it. Where the mortgagee elects a remedy of
foreclosure, the law requires the actual foreclosure of the
mortgaged chattel. It is the actual sale of the mortgaged
chattel that would bar the creditor (who chooses to
foreclose) from recovering any unpaid balance. And it is
deemed that there has been foreclosure of the mortgage
when all the proceedings of the foreclosure, including the
sale of the property at public auction, have been
accomplished.
Be that as it may, although no actual foreclosure as
contemplated under the law has taken place in this case,
since the vehicle is already in the possession of Magna
Financial Services Group, Inc. and it has persistently and
consistently avowed that it elects the remedy of
foreclosure, the Court of Appeals, thus, ruled correctly in
directing the foreclosure of the said vehicle without more.
BA FINANCE v CA
BICOL SAVINGS v GUINHAWA
F: Victorio Depositario together with private respondent
Jaime Guinhawa, acting as solidary co-maker, took a loan
from petitioner Bicol Savings and Loan Association (BISLA)
payable every 19th day of each month. To secure the
payment of the foregoing loan obligation, the principal
borrower Victorio Depositario put up as security a chattel
mortgage which was a Yamaha Motorcycle. Said motorcycle
was eventually foreclosed by reason of the failure of
Depositario and private respondent Guinhawa to pay the
loan. There was a deficiency in the amount of P5,158.06
where BISLA made a demand to pay the same. Petitioner
BISLA (plaintiff therein) filed a complaint for the recovery of a
sum of money constituting the deficiency after foreclosure of
SECTRANS 2010/ ATTY. AGUINALDO 83
the chattel mortgage put up by the principal borrower
Depositario against the latter and his solidary co-maker
Guinhawa (herein private respondent) as defendants.
Eventually, a stipulation of facts was entered into between
BISLA and Guinhawa. They agreed to drop Depositario, as "his
whereabouts being unknown now and he could not be served
with summons". The creditor claims that he can maintain an
action for deficiency and claim P5k balance.
Issue: WoN creditor can claim remaining balance
Ruling: Yes! The creditor may maintain an action for deficiency
although the chattel mortgage law Is silent on this point. The
reason is tat a chattel mortgage is only given as a security and
not as payment for the debt in case of failure of payment
PAMECA WOOD v CA
FACTS: On April 17, 1980, petitioner PAMECA Wood Treatment
Plant, Inc. (PAMECA) obtained a loan of US$267,881.67, or the
equivalent of P2,000,000.00 from respondent Bank. By virtue
of this loan, petitioner PAMECA, through its President,
petitioner Herminio C. Teves, executed a promissory note for
the said amount, promising to pay the loan by installment.
As security for the said loan, a chattel mortgage was also
executed over PAMECA's properties in Dumaguete City,
consisting of inventories, furniture and equipment, to cover
the whole value of the loan.
On January 18, 1984, and upon petitioner PAMECA's failure to
pay, respondent bank extrajudicially foreclosed the chattel
mortgage, and, as sole bidder in the public auction, purchased
the foreclosed properties for a sum of P322, 350.00.
On June 29, 1984, respondent bank filed a complaint for the
collection of the balance.
Petitioners submit that Articles 1484 and 2115 of the Civil Code
be applied in analogy to the instant case to preclude the
recovery of a deficiency claim.
ISSUES: Whether the foreclosure of the chattel mortgage valid
RULING:
The court did not find anything irregular or fraudulent in the
circumstance that respondent bank was the sole bidder in the
sale, as all the legal procedures for the conduct of a foreclosure
sale have been complied with, thus giving rise to the
presumption of regularity in the performance of public duties.
The effects of foreclosure under the Chattel Mortgage Law run
inconsistent with those of pledge under Article 2115. Whereas,
in pledge, the sale of the thing pledged extinguishes the entire
principal obligation, such that the pledgor may no longer
recover proceeds of the sale in excess of the amount of the
principal obligation, Section 14 of the Chattel Mortgage Law
expressly entitles the mortgagor to the balance of the
proceeds, upon satisfaction of the principal obligation and
costs.
Since the Chattel Mortgage Law bars the creditor-mortgagee
from retaining the excess of the sale proceeds there is a
corollary obligation on the part of the debtor-mortgagee to
pay the deficiency in case of a reduction in the price at public
auction.
As correctly pointed out by the trial court, the said article
applies clearly and solely to the sale of personal property the
price of which is payable in installments. Although Article
1484, paragraph (3) expressly bars any further action against
the purchaser to recover an unpaid balance of the price, where
the vendor opts to foreclose the chattel mortgage on the thing
sold, should the vendee's failure to pay cover two or more
installments, this provision is specifically applicable to a sale on
installments.
SUPERLINES v ICC
FACTS:
Superlines decided to acquire five (5) new buses from
the Diamond Motors Corporation for the price of
P10k. However, Superlines lacked financial resources
for the purpose so by virtue of a board resolution, it
authorized its President and Gen Mgr Lavides to look
for a loan for the purchase of said buses.
Lavides negotiated with ICC Leasing. ICC agreed to
finance the purchase of the new buses via a loan and
proposed a 3-yr term for the payment. The new buses
to be purchased were to be used by Superlines as
security for the loan.
Diamond Motors sold to Superlines 5 new buses and
was registered under the name of Superlines.
Superlines executed 2 docus Deed of Chattel
Mortgage over said buses a security for the purchase
price of buses in P13mill loaned by ICC to Superlines;
a Continuing Guaranty to pay jointly and severally in
favour of ICC the amount of P13mill
After paying only 7 monthly amortizations, Superlines
defaulted in the payment of its obligation to ICC.
ICC filed a complaint for collection of sum of money
with a prayer for a writ of replevin
TC dismissed; ICC and Superlines forged a consumer
loan agreement and not an amortized commercial
loan.
CA reversed;
- ICC and Superlines entered into an amortized
commercial loan agreement with ICC as creditor-
mortgagee and Superlines as debtor-mortgagor,
and ordered Superlines and Lavides to pay jointly
and severally the sum of P5mill as deficiency
- It was Diamond Motors Corporation and not ICC
which sold the subject buses to Superlines. It held
that no evidence had been presented by
Superlines to show that ICC bought the said
SECTRANS 2010/ ATTY. AGUINALDO 84
 buses from Diamond Motors Corporation under
a special arrangement and that ICC sold the
buses to Superlines. The appellate court also
ruled that Article 1484(3) is applicable only
where there is vendor-vendee relationship
between the parties and since ICC did not sell the
buses to Superlines, the latter cannot invoke said
law.
ISSUE: WON there was an amortized commercial loan
agreement?
HELD: YES
DIAMOND is the seller of the five units of buses and
not the plaintiff
No convincing evidence, except the self-serving
testimony of defendant Manolet Lavides, was
presented to prove that there was an internal
arrangement between the plaintiff, as financing
agent, and Diamond, as seller of the buses. In fact,
defendant Lavides admitted under oath that
DIAMOND and plaintiff did not enter into transaction
over the sale of the buses
The evidence shows that the transaction between the
parties was an "amortized commercial loan" to be
paid in installments
P failed to adduce a preponderance of evidence to
prove that R and Diamond Motors Corporation
entered into a special arrangement relative to the
issuance of certificates of registration over the buses
under the name of petitioner Superlines.
P were also unable to prove that respondent
purchased from Diamond Motors Corporation the
new buses. In contrast, the vehicle invoices of
Diamond Motors Corporation irrefragably show that
it sold the said buses to petitioner Superlines. The net
proceeds of the loan were remitted by respondent to
petitioner Superlines and the latter remitted the
same to Diamond Motors Corporation in payment of
the purchase price of the buses. In fine, respondent
and Diamond Motors Corporation had no direct
business transactions relative to the purchase of the
buses and the payment of the purchase price thereof.
The evidence on record shows that under the
Promissory Note, Chattel Mortgage and Continuing
Guaranty, respondent was the creditor-mortgagee of
petitioner Superlines and not the vendor of the new
buses. Hence, petitioners cannot find refuge in Article
1484(3) of the New Civil Code.
What should apply was the Chattel Mortgage
executed by petitioner Superlines and R in relation to
the Chattel Mortgage Law.
This Court had consistently ruled that if in an extra-
judicial foreclosure of a chattel mortgage a deficiency
exists, an independent civil action may be instituted
for the recovery of said deficiency. To deny the
mortgagee the right to maintain an action to recover
the deficiency after foreclosure of the chattel
mortgage would be to overlook the fact that the
chattel mortgage is only given as security and not as
payment for the debt in case of failure of payment.
Both the Chattel Mortgage Law and Act 3135
governing extra-judicial foreclosure of real estate
mortgage, do not contain any provision, expressly or
impliedly, precluding the mortgagee from recovering
deficiency of the principal obligation.
ESGUERRA v CA
BPI CREDIT v CA
SERVICEWIDE v CA
FACTS:
Respondents executed a promissory note and a
chattel mortgage over a vehicle they bought from the
mortgagee itself, C. R. Tecson Enterprises, for the
payment in installments of the vehicle. C. R. Tecson
Enterprises, on the same date, assigned in favor of
Filinvest Credit Corporation. The respondents were
aware that the new mortagee is Filinvest.
Respondent spouses by way of Deed of Sale with
Assumption of Mortgage transferred and delivered
the vehicle to Conrado Tecson.
Subsequently, Filinvest assigned all its rights as
mortgagee to petitioner.
Respondents failed to pay the installments and
despite demands from petitioner-mortgagee to pay
or to return the vehicle.
Petitioner filed a complaint for Replevin but the
respondents alleged in their Answer that they can no
longer be held liable as they had already conveyed the
car to Conrado Tecson.
ISSUE:
1. WON the assignment of credit by the creditor-
mortgagee quires the notice and consent of the
debtor- mortgagor?
2. WON the assignment of credit by the debtor-
mortgagor requires the notice and consent of the
creditor-mortgagee?
HELD:
1. Only notice to the debtor-mortgagor of the
assignment of credit is required. His consent is not
required.
2. In contrast, consent of the creditor-mortgagee to the
alienation of the mortgaged property is necessary in
order to bind said creditor. Since the assignee of the
SECTRANS 2010/ ATTY. AGUINALDO 85
 credit steps into the shoes of the creditor-mortgagee
to whom the chattel was mortgaged, it follows that
the assignee's consent is necessary in order to bind
him of the alienation of the mortgaged thing by the
debtor-mortgagor. This is tantamount to a novation.
As the new assignee, petitioner's consent is necessary
before respondent spouses' alienation of the vehicle
can be considered as binding against third persons.
Petitioner is considered a third person with respect to
the sale with mortgage between respondent spouses
and third party defendant Conrado Tecson.
CONCURRENCE AND PREFERENCE OF CREDITS
DE BARRETTO v VILLANUEVA
SAMPAGUITA PICTURES v JALWINDOR
FACTS:
- Sampaguita (P) is the owner of a building which its
roofdeck was leased to Capitol 300 (Capitol), wherein
it was agreed that whatever improvements
introduced therein by Capitol will later be owned by
P.
- Capitol purchased on credit from Jalwindor (R) glass
and wooden jalousies which were DELIVERED and
INSTALLED in the leased premises by R, replacing the
existing windows of P.
- Capitol failed to pay and R filed an action for
collection of sum of money against Capitol.
- R made a levy on the glass and wooden jalousies in
question, which P intervened in the case alleging that
it cannot be levied upon since it is already the owner
of the subject jalousies.
ISSUE: WoN R may levy the jalousies
SC: NO!
- When the glass and wooden jalousies were delivered
and installed in the leased premises, P became the
owner thereof, due to the contract between P and
Capitol in which it stated that all permanent
improvements made by lessee shall belong to the
lessor and that said improvements hav been
considered as part of the monthly rentals.
- The fact that Capitol failed to pay R the purchase price
of the items levied upon did not prevent the transfer
of ownership to Capitol and then to P.
UY v ZAMORA
FACTS:
1) At the instance of plaintiff Uy, the MTC ordered the
attachment of a vehicle belonging to Zamora. The writ was
levied on the vehicle on August 11, 1960. Subsequently, the
Municipal Court rendered judgment for the plaintiff Uy and
ordered defendant Zamora to pay the sum of P1,740. Zamora
appealed to the CFI.
2) While the case was pending appeal, the Allied Finance, Inc.
intervene. According to it, the vehicle, which was attached by
the Sheriff, had previously been mortgaged to it by Zamora to
secure the payment of a loan and that at the time of the filing
of the complaint in intervention, a balance of P2,451.93
remained in its favor. Allied, prayed that Zamora be ordered
to pay P2,451.93 as principal.
3) On January 12, 1961, Uy and Zamora, submitted to the
court a compromise agreement wherein Zamora admitted
being indebted to Uy. Since the motor vehicle had already
been sold on order of the Court for P2,500 to prevent
depreciation, defendant Zamora agreed to have plaintiff Uy's
credit paid out of the proceeds of the sale.
4) The court found defendant Zamora to be liable to plaintiff
Uy in the amount of P2,500, and to the intervenor in the
amount of P2,451.93, plus interest. Uy claims preference on
the basis of a lien arising from the attachment of the vehicle
on August 11, 1960. On the other hand, allied bases its claim
to preference on a Deed of Chattel Mortgage covering the
same motor vehicle.
ISSUE: Which of the two credits is preferred?
HELD:
A) Considering the fact that Allied Finance, Inc. registered its
mortgage only on August 24, 1960, or subsequent to the date
of the writ of attachment obtained by plaintiff Uy on August
11, 1960, the credit of the intervenor cannot prevail over that
of the plaintiff.
B) The SC disagreed with the lower courts decision upheld
Allieds credit on the ground that, being embodied in a public
instrument of an earlier date (June 20, 1960), it should take
precedence over plaintiff's lien by attachment (August 11,
1960), pursuant to Article 2244 of the Civil Code, for the
reason that, as already stated, the credit of the Allied cannot
be considered as preferred until the same has been recorded
in the Motor Vehicles Office.
C) A mortgage of motor vehicles, in order to affect third
persons, should not only be registered in the Chattel
Mortgage Registry, but the same should also be recorded in
the Motor Vehicles Office The decision of the lower court is
reversed, without pronouncement as to costs.
CORDOVA v REYES
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CENTRAL BANK v MORFE
Facts:
The Monetary Board found the Fidelity Savings Bank to be
insolvent. The Board directed the Superintendent of
Banks to take charge of its assets, forbade it to do business
and instructed the Central Bank Legal Counsel to take legal
actions.
Prior to the institution of the liquidation proceeding but
after the declaration of insolvency, the spouses Elizes filed
a complaint in the CFI against the Fidelity Savings Bank for
the recovery of the balance of their time deposits.
In the judgment rendered in that case, the Fidelity Savings
Bank was ordered to pay the Elizes spouses the sum plus
accumulated interest.
In another case, the spouses Padilla secured a judgment
against the Fidelity Savings Bank for the sums as the
balance of their time deposits, plus interests, moral and
exemplary damages and attorney's fees.
The lower court (having cognizance of the liquidation
proceeding), upon motions of the Elizes and Padilla
spouses and over the opposition of the Central Bank,
directed the latter as liquidator, to pay their time deposits
as preferred judgments, evidenced by final judgments,
within the meaning of article 2244(14)(b) of the Civil Code.
Central Bank contends that the final judgments secured by
the Elizes and Padilla spouses do not enjoy any preference
because (a) they were rendered after the Fidelity Savings
Bank was declared insolvent and (b) under the charter of
the Central Bank and the General Banking Law, no final
judgment can be validly obtained against an insolvent
bank.
Issue: Whether a final judgment for the payment of a time
deposit in a savings bank which judgment was obtained after
the bank was declared insolvent, is a preferred claim against
the bank?
Held:
No. It should be noted that fixed, savings, and current deposits
of money in banks and similar institutions are not true
deposits. They are considered simple loans and, as such, are
not preferred credits.
The aforequoted section 29 of the Central Bank's charter
explicitly provides that when a bank is found to be insolvent,
the Monetary Board shall forbid it to do business and shall take
charge of its assets. Evidently, one purpose in prohibiting the
insolvent bank from doing business is to prevent some
depositors from having an undue or fraudulent preference
over other creditors and depositors.
We are of the opinion that such judgments cannot be
considered preferred and that article 2244(14)(b) does not
apply to judgments for the payment of the deposits in an
insolvent savings bank which were obtained after the
declaration of insolvency.
In the Rohr case, the general principle of equity that the assets
of an insolvent are to be distributed ratably among general
creditors applies with full force to the distribution of the assets
of a bank. A general depositor of a bank is merely a general
creditor, and, as such, is not entitled to any preference or
priority over other general creditors.
The assets of a bank in process of liquidation are held in trust
for the equal benefit of all creditors, and one cannot be
permitted to obtain an advantage or preference over another
by an attachment, execution or otherwise.
Considering that the deposits in question, in their inception,
were not preferred credits, it does not seem logical and just
that they should be raised to the category of preferred credits
simply because the depositors, taking advantage of the long
interval between the declaration of insolvency and the filing of
the petition for judicial assistance and supervision, were able
to secure judgments for the payment of their time deposits.
MANABAT v LAGUNA FED
PHIL SAVINGS BANK v LANTIN
F: c built a duplex apartment house on a registered lot of
spouses x and y, using his own money, P25k to finish the
construction. Meanwhile, x and y obtained from psb a loan
secured by a mortgage to complete construction. At the time
of the registration of the mortgage, the transfer certificate of
title over the property was free from all liens and
encumbrances. PSB foreclosed the mortgage, and being the
highest bidder a new certificate of title was subsequently
issued in its favor
C filed an action against the spouses to collect the unpaid cost
of construction. As x and y did not have any properties to
satisfy the judgment rendered in his favor, c demanded from
psb a pro rata share in the value of the duplex apartment in
accordance with article 2242.
Issue: is c entitled to claim pro rata share in the value of the
property in question.
Ruling: no. the action filed by c to collect the unpaid cost of the
construction of the duplex apartment is far from being a
general liquidation of the estate of x and y.
Although the lower court found that there were no known
creditors other than c and psb, this cannot be conclusive. It will
not bar other creditors in the event they show up and present
their claims against psb, claiming they have also preferred
SECTRANS 2010/ ATTY. AGUINALDO 87
claims against the property. Consequently, the transfer
certificate of title issued to psb which is supposed to be
indefeasible would remain constantly unstable and
questionable. Such could not have been the intention of article
2243 of the civil code although it considers claims and credits
under article 2242 as statutory liens. Neither does the de
barreto caes sanction such instability.

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