1
Guillermo Adriano, petitioner, vs. Romulo Pangilinan, respondent.
[G.R. No. 137471] [January 16, 2002]
FACTS:
Guillermo Adriano is the registered owner of a parcel of land. Sometime Nov 1990, he
entrusted the TCT of the land to Angelina Salvador, a distant relative, for the purpose of
securing a mortgage.
W/o the knowledge & consent of Adriano, Salvador mortgaged the property to Romulo
Pangilinan.
Upon verifying the status of his title in the Registry of Deeds, Adriano was surprised to
discover that there is a REM annotated in the TCT, supposedly executed by one Guillermo
Adriano in favor of Pangilinan.
Adriano denied that he executed the deed of mortgage and denounced his signature
thereon as forgery.
Adriano repeatedly demanded from Pangilinan the return or reconveyance of the said land
to him but the demands were ignored or disregarded.
Pangilinan in his defense testified that he was a businessman engaged in the buying and
selling as well as in the mortgage of real estate properties; that Salvador, together with a
person w/ Macanaya and a person who introduced himself as Guillermo Adriano came up
to him to inquire on how they could secure a loan over a parcel of land; that petitioner
voluntarily entrusted his title to the subject property to Salvador for the purpose of
securing a loan, thereby creating a principal-agent relationship between the plaintiff and
Salvador
RTC: Signature was forged. Set aside and nullified the Mortgage
CA: Regardless of the forgery the TCT was entrusted by Adriano to Salvador for the purpose
of using the property as a security or collateral for a real estate mortgage of a loan.
ISSUE: Whether or not the mortgage is valid. NO
HELD: Petitioner contends that because he did not give his consent to the real estate
mortgage (his signature having been forged), then the mortgage is void and produces no
force and effect.
Article 2085 of the Civil Code enumerates the essential requisites of a mortgage, as follows:
Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for that purpose.
Third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property. (1857)
In the case at bar, not only was it proven in the trial court that the signature of the
mortgagor had been forged, but also that somebody else -- an impostor -- had pretended to
be the former when the mortgagee made an ocular inspection of the subject property.
The CA did not dispute the findings of the RTC, but faulted petitioner for entrusting to
Angelina Salvador the TCT covering the property. Without his knowledge or consent,
however, she caused or abetted an impostors execution of the real estate mortgage.
Be that as it may, it is clear that petitioner who is undisputedly the property owner -- did not
mortgage the property himself. Neither did he authorize Salvador or anyone else to do so.
In Parqui v. Philippine National Bank,[14] this Court affirmed the trial courts ruling that a
mortgage was invalid if the mortgagor was not the property owner.
Respondent was not an innocent mortgagee for value, because he failed to observe due
diligence in the grant of the loan and in the execution of the real estate mortgage.
Respondent testified that he was engaged in the real estate business, including the grant of
loans secured by real property mortgages. Thus, he is expected to ascertain the status and
condition of the properties offered to him as collaterals, as well as to verify the identities of
the persons he transacts business with. Specifically, he cannot simply rely on a hasty
examination of the property offered to him as security and the documents backing them up.
He should also verify the identity of the person who claims to be the registered property
owner.
Respondent stated in his testimony that he had been engaged in the real estate business for
almost seven years. But from his testimony, he has failed to verify whether the individual
executing the mortgage was really the owner of the property.
The ocular inspection respondent conducted was primarily intended to appraise the value of
the property in order to determine how much loan he would grant. He did not verify whether
the mortgagor was really the owner of the property sought to be mortgaged. Because of this,
he must bear the consequences of his negligence.
As between petitioner and respondent, we hold that the failure of the latter to verify
essential facts was the immediate cause of his predicament. If he were an ordinary individual
without any expertise or experience in mortgages and real estate dealings, we would
probably understand his failure to verify essential facts. However, he has been in the
mortgage business for seven years. Thus, assuming that both parties were negligent, the
Court opines that respondent should bear the loss. His superior knowledge of the matter
should have made him more cautious before releasing the loan and accepting the identity of
the mortgagor.
Given the particular circumstances of this case, we believe that the negligence of petitioner is
not enough to offset the fault of respondent himself in granting the loan. The former should
not be made to suffer for respondents failure to verify the identity of the mortgagor and the
actual status of the subject property before agreeing to the real estate mortgage. While we
commiserate with respondent -- who in the end appears to have been the victim of
scoundrels -- his own negligence was the primary, immediate and overriding reason that put
him in his present predicament.
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To summarize, we hold that both law and equity favor petitioner. First, the relevant legal
provision, Article 2085 of the Civil Code, requires that the mortgagor be the absolute owner
of the thing x x x mortgaged. Here, the mortgagor was an impostor who executed the
contract without the knowledge and consent of the owner. Second, equity dictates that a
loss brought about by the concurrent negligence of two persons shall be borne by one who
was in the immediate, primary and overriding position to prevent it. Herein respondent who,
we repeat, is engaged in the business of lending money secured by real estate mortgages
could have easily avoided the loss by simply exercising due diligence in ascertaining the
identity of the impostor who claimed to be the owner of the property being mortgaged.
Finally, equity merely supplements, not supplants, the law. The former cannot contravene or
take the place of the latter.

In any event, respondent is not precluded from availing himself of proper remedies against
Angelina Salvador and her cohorts.

WHEREFORE, the Petition is GRANTED and the assailed Decision SET ASIDE. The November
25, 1993 Decision of the RTC of San Mateo, Rizal (Branch 76) is hereby REINSTATED. No costs.

SO ORDERED.
 3
DIZON v. SUNTAY (Peafiel) Dizon cannot rely on the principle of estoppel as is he engaged in a business where
G.R. No. L-30817, Sept. 29, 1972 presumably ordinary prudence would manifest itself to ascertain whether or not an
Petitioner: Dominador Dizon, doing business under the firm name Pawnshop of Dominador individual, who is offering a jewelry by way of a pledge, is entitled to do so. If no such care
Dizon was taken, he should be the last to complain if there right of the true owner should
Respondent: Lourdes Suntay thereafter be recognized. Evidently, no precaution was availed of by Dizon. Hence, estoppel
cannot be invoked.
Doctrines: The business of pawnshops must exercise ordinary prudence in receiving jewelries
or other articles for pledging. Failure to do so does not give them preferential protection Important info from the Separate Opinion of Teehankee, J.
than the owner of the jewels or other articles who was unlawfully deprived thereof. The opinion concurs with the main decision. It reiterated Art. 559 of the Civil Code and the
exception to it: The owner who has been "unlawfully deprived" of personal property may
The thing pledged or mortgaged must belong to the person who pledges or mortgages it. recover it from the possessor without reimbursement, with the sole exception where the
Otherwise, contract is null and void. possessor acquired the article in good faith at a public sale.

The owner who has been "unlawfully deprived" of personal property may recover it from the The term unlawfully deprived extends to all cases where there has been no valid
possessor without reimbursement, with the sole exception where the possessor acquired the transmission of ownership, including the case where the proprietor has entrusted the thing
article in good faith at a public sale. to a borrowed, depositary, or lessee who has sold the same.

Facts: As provided in the case of Arenas v. Raymundo, Art. 1857 of CC prescribes as one of the
Suntay is the owner of a 3-carat diamond ring valued at P5,500.00. She entered into a essential requisite of the contracts of pledge and of mortgage is that the thing pledged or
transaction with Clarita Sison (Sison) wherein the ring was delivered to Sison for sale on mortgaged must belong to the person who pledges or mortgages it. When this requisite is
commission. Sison, upon receiving the ring, executed and delivered to Suntay the absent, such as when the thing was pledged by someone who was not the owner, the
receipt. contract is null and void.
After a lapse of considerable time without Sison having returned the ring, Suntay made
demands on Sison for the return. However, it was without knowledge of Suntay that 3 It cannot confer upon the defendant any rights in the pledged jewelry nor impose any
days after the ring was received by Sison, the said ring was pledged by Melia Sison, the obligation toward him on the part of the owner thereof, since the latter was deprived of her
niece of Sisons husband. They connived and pledged it with Dominador Dizons (Dizon) possession by means of the illegal pledging of the said jewelry, a criminal act.
pawnshop for P2,600.00.
Upon discovery of the pledge, Suntay filed for estafa against Sison. Then, Suntays The business of pawnshops is always exposed to the contingency of receiving in pledge or
lawyer wrote to Dizons pawnshop, asking for the delivery of the ring. The latter security for the loans, jewels and other articles that have been robbed, stolen or embezzled
refused; hence, the present case was filed. from their legitimate owners; and as the owner of the pawnshop accepts the pledging of
Suntay was able to take possession of the ring during the pendency of the action when jewelry from the first bearer who offers the same and asks for money on it, without assuring
the court granted her request for provisional remedy of replevin. himself whether such bearer is or is not the owner thereof, he cannot expect from the law a
preferential protection than the owner of the jewels or other articles, who was deprived
Lower court ruled in favor of Suntay, declaring her to have the right to the possession of
thereof by means of a crime.
the ring. CA: Affirmed. Dizon appealed to the SC, invoking estoppel.
Conclusively, the owner must establish his lawful claim before the courts.
Issue: WON Suntay can recover possession of the ring that was pledged to Dizon -> YES.
WINNER: SUNTAY
Held:
The Court affirmed the assailed rulings. The controlling provision is Art. 559 of the Civil Code,
Gen. Rule: The possession of movable property acquired in good faith is equivalent to a
title. Nevertheless, one who has lost any movable or has been unlawfully deprived thereof
may recover it from the person in possession of the same.
Exception: If the possessor of a lost movable (which was unlawfully deprived from the
owner) has acquired it in good faith at a public sale, the owner cannot obtain its return
without reimbursing the price paid thereof.
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#3 Cavite Dev Bank v Lim ZOSA;
PETITIONERS: Cavite Development Bank, Far East Bank and Trust Co.
RESPONDENTS: Sps. Cyprus Lim & Lolita Chan Lim, CA
TOPIC: Credit Transactions; Pledge, Mortgage and Antichresis
DOCTRINE: The rule that the seller must be the owner of the thing sold also applies in a
foreclosure sale. This is the reason Art. 20851 of the Civil Code, in providing for the essential
requisites of the contract of mortgage and pledge, requires, among other things, that the
mortgagor or pledgor be the absolute owner of the thing pledged or mortgaged, in
anticipation of a possible foreclosure sale should the mortgagor default in the payment of
the loan.
FACTS:
June 15, 1983: Rodolfo Guansing loaned P90, 000 from petitioner CDB secured by a real
estate mortgage in La Loma, QC covered by TCT No. 300809 registered in Rodolfos name.
March 15, 1984: Rodolfo defaulted in the payment of his loan, CDB foreclosed the property.
March 2, 1987: Guansing failed to redeem the property. CDB consolidated the title to the
property and cancelled TCT No. 300809. New TCT No. 355588 was issued in the name of CDB.
June 16, 1988: Respondent Lolita Lim and her broker offered to purchase the property for
P300, 000 from CDB with the following terms and conditions:
(1) 10% Option Money; (2) Balance payable in cash;
(3) Provided that the property shall be cleared of illegal occupants or tenants.
June 17, 1988: Lim paid P30, 000 as Option Money for which she was issued an official
receipt.
After some time following up the sale, Lim discovered that the subject property was
originally registered in the name of Perfecto Guansing, father of mortgagor Rodolfo, under
TCT No. 91148. It appears that Perfecto filed for the cancellation of his sons title; that in
March 23, 1984 QC RTC rendered a decision restoring Perfectos title on the ground that
Rodolfo fraudulently secured TCT No. 300809 in his name. The decision became final and
executory. Sps Lim filed for specific performance and damages based on alleged
misrepresentation against CDB and FEBTC, the mother-company.
RTC rendered a decision in favor of Sps Lim ruling that:
(1) there was a perfected contract of sale between Lim and CDB;
(2) performance by CDB of its obligation had become impossible on account of the
1984 QC RTC decision in favor of Perfecto Guansing;
(3) CDB and FEBTC were not exempt from liability because they could not disclaim
knowledge of the cancellation of Rodolfos title; and
(4) CDB and FEBTC are liable for damages for the prejudice caused against the Lims.
(5) CDB brought the matter to the CA which only affirmed the RTC decision in toto.
Hence, this petition.
ISSUES:
(1) W/N CA erred in holding CDB and FEBTC aware of the QC RTC decision in favor of
Perfecto Guansing. Did not err.
(2) W/N CA erred in ordering CDB and FEBTC to pay the interest of the P30,000 applying Art
2209 of the NCC. Did not err.
(3) W/N the CA erred in ordering CDB to pay moral damages, exemplary damages,
attorneys fees and costs of suit. Did not err but was modified.
DECISION:
1. CDB and FEBTC deny that a contract of sale was perfected because the P30,000 was given
as option money, not as earnest money; that the contract was merely an Option Contract,
not a Contract of Sale. But Court said this has no merit.
The Court ruled Contracts are not defined by the parties but by principles of law; that
Contracts are not bound by the name or title given to it by the contracting parties. The sum
of P30,000, although denominated as Option Money is actually in nature of earnest money
or down payment when considered with the other terms of the offer.
OPTION CONTRACT a contract, separate from and preparatory to a contract of sale which,
if perfected, does not result in the perfection or consummation of the sale. Only when the
option is exercised may a sale be perfected. In this case, after the payment of P30,000, the
Offer to Purchase provides for the payment only of the balance of the purchase price,
implying that the option money forms part of the purchase price. Therefore, it was actually
a Contract of Sale, partially consummated as to the payment of the purchase price. However,
upon the consummation of the sale, CDB cannot give Sps Lim what it does not have because
Rodolfo, the mortgagor in default, was not the owner of the thing sold in the foreclosure
sale. In effect, CDB did not acquire ownership of the property.
Art. 2085 provides for the essential requisites of the Contract of mortgage and pledge,
among other things, that the mortgagor or pledger be the absolute owner of the thing
pledged or mortgaged, in anticipation of a possible foreclosure sale should the mortgagor
default in the payment of the loan.
In the doctrine of the mortgagee in good faith, by reason of public policy, the mortgage is
given effect despite the mortgagor is not the owner of the property. Based on this rule, all
persons dealing with property covered by a Torrens Title, as buyers or mortgagees, are not
required to go beyond what appears on the face of the title. This principle is cited by CDB.
But the Court ruled that while CDB and FEBTC are not expected to conduct an exhaustive
investigation on the mortgagors title, they cannot be excused from the duty of exercising the
due diligence required of banking institutions.
In this case, there is no evidence that CDB observed its duty of diligence. It appears that
Rodolfo obtained his title by executing an extrajudicial settlement with waiver, where he
made it appear that Perfecto had waived all his rights to Rodolfo. This self-executed deed
should have placed CDB on guard against any possible defect in or question as to the
mortgagors title. No ocular inspection report was even offered in evidence. Indeed, CDB and
FEBTC admit that they are aware that the subject land was being occupied by persons other
than Rodolfo and that said persons, who are heirs of Perfecto, contest the title of Rodolfo.
2. On June 16, 1988, when Lim was asked by CDB to pay the 10% option money, CDB already
knew that it was no longer the owner of the said property, its title having been cancelled.
CBD and FEBTC contend that such finding is founded entirely on speculation as neither of the
petitioners was a party in the case where Rodolfos title was cancelled. But the Court is more
convinced of CDB and FEBTCs negligence in approving the mortgage application of Rodolfo.
No circumstance is present showing that CDB and FEBTC are mortgagees in good faith.
 5
3. According to Art 1412(2)2, Sps Lim are entitled to recover the P30,000 option money. The (5) Illegal or arbitrary detention or arrest;
legal rate should be computed from Aug 29, 1989, the date of filing of the civil case, not June (6) Illegal search;
17, 1988, when CDB accepted the payment. In case of a void sale, the seller has no right (7) Libel, slander or any other form of defamation;
whatsoever to keep the money paid by virtue of the sale and should refund it, with interest (8) Malicious prosecution;
at the legal rate, computed from the date of filing of the complaint until fully paid. (9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Considering CDBs negligence, the Court sustains the award of moral damages on the basis of The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of this
Art 213 and 22194 of the Civil Code and the Courts ruling in Tan vs Court of Appeals that article, may also recover moral damages.
damages may be recovered even if a banks negligence is not attended with malice and bad The spouse, descendants, ascendants, and brothers and sisters may bring the action
faith. mentioned in No. 9 of this article, in the order named.

DAMAGES TRIAL COURTS AWARD SCS MODIFICATION

Moral Damages P250,000 P50,000
Exemplary Damages P50,000 P30,000
Attorneys Fees P30,000 P20,000

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the MODIFICATION as to
the award of damages as above stated. SO ORDERED.

1Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

(3) That the persons constituting the pledge or mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may secure the latter by
pledging or mortgaging their own property. (1857)
2Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a

criminal offense, the following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover what he
has given by virtue of the contract, or demand the performance of the other's
undertaking;(2) When only one of the contracting parties is at fault, he cannot recover what
he has given by reason of the contract, or ask for the fulfillment of what has been promised
him. The other, who is not at fault, may demand the return of what he has given without any
obligation to comply his promise. (1306)

3Art.
21. Any person who wilfully causes loss or injury to another in a manner that is contrary
to morals, good customs or public policy shall compensate the latter for the damage.

4Art. 2219. Moral damages may be recovered in the following and analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
 6
DBP v. CA (1998)
!st case
Petitioner: Development Bank of the Philippines
Respondents: Court of Appeals; Lydia Cuba
2nd case
*reverse of 1st case with additional defendant, Agripina Caperal
Concept: Pactum Commissorium
Brief facts: Cubas loan from DBP was secured by two deeds of assignment over her fishpond
leasehold rights granted by the government. When she defaulted on her payments, DBP
appropriated said rights without foreclosure proceedings and sold it in a public bidding. Cuba
contends that the provision (Condition #12) in the assignment agreement violates the
prohibition on pactum commissorium provided in Art. 2088. SC ruled that the provision itself
is not pactum commissorium BUT DPB, in appropriating without going through foreclosure
proceedings, was in violation of Art. 2088.
Doctrine: For a mortgage to be considered as pactum commissorium, thus void, the two
requisites must be present:
(1) that there should be a property mortgaged by way of security for the payment of
the principal obligation; and
(2) that there should be a stipulation for automatic appropriation by the creditor of
the thing mortgaged.
Condition #12 DID NOT PROVIDE that ownership over the leasehold RIGHTS WOULD
AUTOMATICALLY pass to DPB upon Cubas failure to pay. It merely provided for an
appointment of DBP as attorney-in-fact with authority, among others, to sell or dispose of
the rights.
FACTS:
1. Case is a consolidation of both DPB and Cubas appeal from the judgement rendered by
the CA regarding the latters leasehold rights.
2. Lydia Cuba is a grantee of a Fishpond Lease Agreement from the government.
3. She obtained loans from DBP totaling P335,000 covered by 3 promissory notes. Aside
from the notes, she also executed two Deeds of Assignment of her leasehold rights in #1
as security.
4. When Cuba defaulted, DBP appropriated her Leasehold Rights without judicial or extra-
judicial foreclosure proceedings. It was eventually resold to Cuba under a Deed of
Conditional Sale.
5. When Cuba again defaulted under the conditional sale, DBP sent a Notice of Rescission to
Cuba, after which it took possession of the leasehold rights.
6. Said rights were eventually sold to Agripina Caperal in a public bidding. Consequently,
DBP and Caperal executed a Deed of Conditional Sale over the leasehold rights.
7. Cuba filed complaint to declare the appropriation null and void and to annul the
subsequent sale to Caperal. She cited Condition #12 of the assignment agreement saying
that it amounted to pactum commissorium and thus void.
RTC: Ruled in favor of Cuba. DBPs taking of possession and ownership of property
without foreclosure violated Art. 2088, NCC.
RTC ruled that it was a case of pactum commissorium. DBP never acquired lawful
ownership of the leasehold rights, and as such, all acts of ownership (including all other
Deeds executed thereafter) and possession by the bank were void.
RTC also awarded a shit load of damages to Cuba
Court found DPB guilty of gross bad faith in falsely representing to Bureau of Fisheries
that it had foreclosed the mortgage.
CA: Reversed. The deeds of assignment represented the voluntary act of Cuba in
assigning her property rights in payment of her debts, which amounted to a novation of the
promissory notes. Cuba was estopped from questioning the deed of assignment because she
agreed to the repurchase under the deed of conditional sale.
CA also ruled that Condition #12 was just a mere authority from Cuba for DPB to sell
whatever rights she had over the fishpond.
CA reduced award for damages
Hence the appeal
ISSUES:
1. Can the assignment of leasehold rights be considered a mortgage contract (YES)
2. WON there was a novation from being a loan to an assignment for consideration when
the Assignment of Leasehold Rights was executed (NO)
3. WON this was a case of pactum commisorium (NO)
RATIO:
1. YES. As held in Peoples Bank & Trust Co. vs. Odom, an assignment to guarantee an
obligation is in effect a mortgage.
- The language of the whole note showed the intent of both parties to have executed
a mortgage agreement. Promissory notes executed by Cuba expressly provide a
clause that: In the event of foreclosure of the mortgage securing this note...
- Simultaneous with the execution of the notes was the execution of Assignments of
Leasehold Rights, which constantly referred to the assignor as borrower, the
assigned rights, as mortgaged properties, and the instrument itself, as mortgage
contract.
- Also, under the deed, it was provided that failure to comply with the terms and
condition of any of the loans shall cause all other loans to become due and
demandable and all mortgages shall be foreclosed.
- Another condition also provides that if foreclosure is actually accomplished,
attorneys fees and liquidated damages shall be imposed.
- It was also admitted by the parties in the pre-trial that the assignment was by way of
security for the payment of the loans.
2. NO. There is no absolute incompatibility between the Promissory Notes and the
Assignment of Rights. [not all are relevant, but I included because this establishes that the
agreement falls under the first element of pactum commissirium]
- Assignment merely complemented or supplemented the notes, and the both could
stand together. The former is merely an accessory to the latter.
- The obligation to pay a sum of money, under the PN, remains, and the assignment
merely served as security. In fact, the last paragraph of the assignment provides
 7
that the promissory notes earlier executed shall be an integral part of said
assignment.
- Neither was there cession under Art 1255 as it requires the existence of two or more
creditors and involves the assignment of all of the debtors property.
- Neither was it dacion en pago, as the assignment was but a security for the loan and
not a satisfaction of indebtedness.

3. NO. The 2nd element of pactum commissorium is missing.

- Elements of pactum commissorium
(1) There should be a property mortgaged by way of security for the payment of
the principal obligation
(2) There should be a stipulation for automatic appropriation by the creditor of the
thing mortgaged in case of non-payment of the principal obligation within the
stipulated period.
- Condition No. 12 did not provide that the ownership over rights would automatically
pass to DBP upon default; it merely provided for the appointment of DBP as
attorney-in-fact with authority, among other things, to sell or otherwise dispose of
the said rights, in case of default, and to apply the proceeds to the payment of the
loan.
12. That effective upon the breach of any condition of this assignment the Assignor
hereby appoints the Assignee his Attorney-in-fact with full power and authority to take
actual possession of the property above-described to lease the same or any portion
thereof and to collect rentals to sell or otherwise dispose of whatever rights the Assignor
has or might have over the said property
- The provision is actually a standard condition in mortgage contracts and is in
conformity with Art. 2087.
- BUT, DBP exceeded the authority vested under the condition when it appropriated
the rights without foreclosure proceedings. Condition No. 12 does not provide that
default would operate to vest DBP ownership of the leasehold rights of Cuba.
- DBPs act of appropriating was violative of Art. 2088, which forbids a creditor from
appropriating, or disposing of, the thing given as security for the payment of a debt.
- Estoppel could also not be used as defense by DBP as estoppel cannot give validity
to an at that is prohibited by law or against public policy.
- Instead of taking ownership upon default, DBP should have foreclosed the
mortgage.

DISPOSITIVE: CA reversed. Remanded to Trial Court.

*As to damages awarded by lower courts (More than 1m) they were not awarded by SC for
lack of evidence to prove their existence
 8
NATALIA P. BUSTAMANTE V. SPS. RODITO AND NORMA ROSEL
G.R. NO. 126800, 29 NOVEMBER 1999
PARDO, J.
DIGESTED BY: ELINZANO
DOCTRINE: A STIPULATION WHICH ALLOWS THE CREDITOR TO ACQUIRE/APPROPRIATE THE COLLATERAL OF A LOAN,
IN THE EVENT THE DEBTOR FAILS TO PAY THE SAID LOAN, IS VOID.
FACTS:
1. Respondent Norma Rosel entered into a loan agreement with petitioner Bustamante,
where the former intends to borrow P100,000 for 2 years with 18% interest per annum
from the latter, with a 70 sq. m. parcel of land as a guaranty/collateral (inclusive of the
apartment therein). In the event the borrower fails to pay, the lender has the option to
buy or purchase the collateral land for P200,000 inclusive of the borrowed amount.
(TAKE NOTE OF THIS ANIMAL)
2. When the loan was ABOUT to mature, the respondent spouses offered to buy at
P200,000 the 70 sqm of land.
3. Petitioner Bustamante refused to sell thereof and requested for an extension of time to
pay the loan. Petitioner, instead, offered to sell ANOTHER residential lot with the
principal loan plus interest (P100,000 plus 18%) to be used as downpayment.
4. Respondents then refused to extend the payment of the loan and to accept the OTHER
residential lot offered.1
5. Thereafter, the petitioner tendered payment of the loan to respondents, which the
latter refused and insisted the signing of the prepared deed of sale of the collateral.
6. RTC ORDERED the payment of the P100,000 loan with 18% interest.
7. CA reversed and insisted the execution of the deed of sale over the collateral.
should be a stipulation for automatic appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal obligation within the stipulated
period.
- In Nakpil vs. Intermediate Appellate Court, the Supreme Court said:
The arrangement entered into between the parties, whereby Pulong
Maulap was to be considered sold to him (respondent) xxx in case
petitioner fails to reimburse Valdes, must then be construed as tantamount
to pactum commissorium which is expressly prohibited by Art. 2088 of the
Civil Code. For, there was to be automatic appropriation of the property by
Valdes in the event of failure of petitioner to pay the value of the
advances. Thus, contrary to respondents manifestation, all the elements of
a pactum commissorium were present: there was a creditor-debtor
relationship between the parties; the property was used as security for the
loan; and there was automatic appropriation by respondent of Pulong
Maulap in case of default of petitioner.
- In this case, the intent to appropariate the property given as collateral in favor of the
creditor appears to be evident, for the debtor is obliged to dispose of the collateral at
the pre-agreed consideration amounting to practically the same amount as the loan. In
effect, the creditor acquires the collateral in the event of non-payment of the loan. This
is within the concept of pactum commissorium. Such stipulation is void.
DISPOSITION: CA DECISION IS REVERSED.

ISSUE: IS THE STIPULATION IN THE CONTRACT, WITH REGARD TO THE SALE OF COLLATERAL, IS VALID AND
ENFORCEABLE?

HELD:
SC: The sale of the collateral is an obligation with a suspensive condition. It is dependent
upon the happening of an event, without which the obligation to sell does not arise. Since
the event did not occur, the spouses Rosel had no right to demand the sale.
- Furthermore, while the Court acknowledges the principle of freedom to contract,
contractual provisions must not be contrary to law, morals, good customs, public order,
or public policy.
- A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to
acquire the property given as security for the loan. This is embraced in the concept
of pactum commissorium, which is proscribed by law. (YES, MY FRIEND, THE ANIMAL
EMPHASIZED IN THE FIRST PARAGRAPH OF THE FACTS IS NOT ALLOWED BY LAW)
- The elements of pactum commissorium are as follows: 1) there should be a property
mortgaged by way of security for the payment of the principal obligation, and 2) there

1 They said that the OTHER residential lot was occupied by squatters and that the petitioner
is not actually the owner thereof but is merely a developer.
 9
ONG v ROBAN LENDING CORP.
DOCTRINE: Pactum Commissorium is the
automatic appropriation by the creditor of the thing pledged or mortgaged upon the
failure of the debtor to pay the principal obligation. Article 2088 prohibits this The creditor
cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.
FACTS:
Spouses Ong obtained several loans from respondent Roban Lending Corp that was
secured by real estate mortgage on petitioner parcels of land located in Tarlac City.
On Feb 2001, Spouses on executed an Amendment to Amend Real Estate
Mortgage consolidating their loans inclusive of charges which totals to 5. 9 mil. To
extinguish this, the parties executed a Dacion in Payment Agreement where
petitioner assigned properties covered by the mortgage property to respondent in
settlement of their total obligation, and a Memorandum of Agreement which
provides that Spouses Ong promise to pay the amount due within one year or else
the Dacion will be enforced.
In April 2002, Spouses Ong filed a complaint before the RTC of Tarlac to declare the
mortgage contract as abandoned, annul the deeds, illegal exaction, unjust
enrichment, accounting and damages, alleging that the Memorandum of
Agreement and Dacion in Payment executed are void for being PACTUM
COMMISSORIUM.
o Petitioner allege that the loans were added interest denominated as
EVAT/AR. Petitioner decried these additional charges as illegal,
iniquitous, unconscionable, and revolting to the conscience as they hardly
allow any borrower any chance of survival in case of default.
Respondent Roban maintained the legality of the transacrtion.
RTC found no pactum commisorium and dismissed the complaint
CA upheld the RTC decision
In the case at bar, the Memorandum and Dacion contains no provision for
foreclosure nor redemption.
Respondent argues that dacion is a special form of payment.
Under the Memorandum of Agreement, the failure by the Ong spouses to pay their
debt within the one-year period gives respondent the right to enforce the Dacion in
Payment transferring to it ownership of the properties covered by TCT No. 297840.
Respondent, in effect, automatically acquires ownership of the properties upon
Spouses Ongs failure to pay their debt within the stipulated period.
In a true dacion en pago, the assignment of the property extinguishes the
monetary debt.
Here, the alienation of the properties was by way of security, and not by way of
satisfying the debt. The Dacion in Payment did not extinguish Spouses Ongs
obligation to Roban. On the contrary, under the Memorandum of Agreement
executed on the same day as the Dacion in Payment, petitioners had to execute a
promissory note for P5, 916, 117.50 which they were to pay within one year
With regard to the interest imposed, the contract provides that the petitioner must
pay. 3.5% per month (42% per annum) and 5% per month penalty (60% pa)
unconscionable. The court reduced it to 12%.
Spouses Ong wins
DISPOSITIVE:
decision of CA is REVERESED;
-MOA and Dacion in Payment are declared NULL and VOID for being pactum
commissorium
-the interest rates are MODIFIED for being unconscionable

ISSUE: Whether or not Pactum Commisorium exists

HELD: Yes, Pactum Commissorium exists.
Pactum Commissorium is prohibited under Art 2088 of the CC which provides: the
creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them, Any stipulation is null and void.
The elements of pactum commissorium, which enables the mortgagee to acquire
ownership of the mortgaged property without the need of any foreclosure
proceedings, are:
o There should be a property mortgaged by way of security for the
payment of the principal obligation
o There should be a stipulation for automatic appropriation by the creditor
of the thing mortgaged in case of non-payments of the principal
obligation within the stipulated period.
 10
Uy Tong v CA & Bayanihan Automotive
SPOUSES UY TONG & KHO PO GIOK, petitioners,
vs.
HONORABLE COURT OF APPEALS, HONORABLE BIENVENIDO C. EJERCITO, Judge of the Court of
First Instance of Manila, Branch XXXVII and BAYANIHAN AUTOMOTIVE CORPORATION,
respondents.
Doctrine: For pactum commissorium to exist: (1) that there should be a pledge or mortgage
wherein a property is pledged or mortgaged by way of security for the payment of the principal
obligation; and (2) that there should be a stipulation for an automatic appropriation by the
creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation
within the stipulated period.
Facts:
(1) Uy Tong (also known as Henry Uy) and Kho Po Giok (SPOUSES) used to be the owners of
Apartment No. 307 of the Ligaya Building, together with the leasehold right for ninety- nine
(99) years over the land on which the building stands. The land is registered in the name of
Ligaya Investments, Inc.
(2) It appears that Ligaya Investments, Inc. owned the building which houses the apartment units
but sold Apartment No. 307 and leased a portion of the land in which the building stands to
the SPOUSES.
(3) SPOUSES purchased from private respondent Bayanihan Automotive, Inc. (BAYANIHAN)
seven (7) units of motor vehicles for a total amount of P47,700.00 payable in three (3)
installments. The transaction was evidenced by a written Agreement" stating that:
That if for any reason the VENDEE should fail to pay her aforementioned
obligation to the VENDOR, the latter shall become automatically the owner of the
former's apartment which is located at No. 307, Ligaya Building, Alvarado St.,
Binondo, Manila, with the only obligation on its part to pay unto the VENDEE the
amount of P3,535.00 and in such event the VENDEE shall execute the
corresponding Deed of absolute Sale in favor of the VENDOR and or the
Assignment of Leasehold Rights.
(4) After making a downpayment of P7,700.00, the SPOUSES failed to pay the balance of
P40,000.00. Due to these unpaid balances, BAYANIHAN filed an action for specific
performance against the SPOUSES
(5) CFI ruled in favor of Bayanihan. Ordered spouses to pay and in the event that they fail to do
so, they shall execute the deed of sale.
(6) Pursuant to said judgment, an order for execution pending appeal was issued by the trial
court and a deed of assignment dated May 27, 1972, was executed by the SPOUSES over
Apartment No. 307 of the Ligaya Building together with the leasehold right over the land on
which the building stands.
(7) Notwithstanding the execution of the deed of assignment the SPOUSES remained in
possession of the premises. Subsequently, they were allowed to remain in the premises as
lessees for a stipulated monthly rental until November 30,1972.
(8) Despite the expiration of the said period, the SPOUSES failed to surrender possession of the
premises in favor of BAYANIHAN.
(9) On February 7, 1979, after demands to vacate the subject apartment made by BAYANIHAN's
counsel was again ignored by the SPOUSES, an action for recovery of possession with
damages was filed with the Court of First Instance of Manila against the SPOUSES and
impleading Ligaya Investments, Inc. as party defendant.
(10) CFI Manila ruled in favor of Bayanihan. CA affirmed
(11) Petitioners-SPOUSES in seeking a reversal of the decision of the Court of Appeals rely on the
following reasons:
(12) The deed of assignment is null and void because it is in the nature of a pactum commissorium
and/or was borne out of the same.
(13) In support of the first argument, petitioners bring to the fore the contract entered into by the
parties whereby petitioner Kho Po Giok agreed that the apartment in question will
automatically become the property of private respondent BAYANIHAN upon her mere failure
to pay her obligation. This agreement, according to the petitioners is in the nature of a
pactum commissorium which is null and void, hence, the deed of assignment which was
borne out of the same agreement suffers the same fate.
ISSUE: Whether the Deed of Assignment is in the nature of a pactum commissorium?
HELD: NO.
- Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of the same. Any stipulation to the contrary is null and void.
- The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1)
that there should be a pledge or mortgage wherein a property is pledged or mortgaged by
way of security for the payment of the principal obligation; and (2) that there should be a
stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged
in the event of non-payment of the principal obligation within the stipulated period.
- A perusal of the terms of the questioned agreement evinces no basis for the application of
the pactum commissorium provision. First, there is no indication of 'any contract of mortgage
entered into by the parties. It is a fact that the parties agreed on the sale and purchase of
trucks.
- There is no case of automatic appropriation of the property by BAYANIHAN. When the
SPOUSES defaulted in their payments of the second and third installments of the trucks they
purchased, BAYANIHAN filed an action in court for specific performance. The trial court
rendered favorable judgment for BAYANIHAN and ordered the SPOUSES to pay the balance of
their obligation and in case of failure to do so, to execute a deed of assignment over the
property involved in this case. The SPOUSES elected to execute the deed of assignment.
- Clearly, there was no automatic vesting of title on BAYANIHAN because it took the
intervention of the trial court to exact fulfillment of the obligation, which, by its very nature is
". . anathema to the concept of pacto commissorio
- And even granting that the original agreement between the parties had the badges of
pactum commissorium, the deed of assignment does not suffer the same fate as this was
executed pursuant to a valid judgment in Civil Case No. 80420
- This being the case, there is no reason to impugn the validity of the said deed of assignment.
WHEREFORE, the petition is hereby DENIED for lack of merit and the decision of the Court of
Appeals is AFFIRMED in toto.
 11
Guanzon vs. Argel
Plaintiffs: MARIA T, GUANZON, assisted by her husband Genaro Guanzon
Defendant HON, MANUEL ARGEL, Presiding Judge of the Court of First Instance of Antique, JUAN,
ERNESTO, ESTRELLA, BARTOLOME, HONORATO, all surnamed DUMARAOG,
DOCTRINE: The only right of a mortgagee in case of non-payment of a debt secured by mortgage
would be to foreclose the mortgage and have the encumbered property sold to satisfy the
outstanding indebtedness. The mortgagor's default does not operate to vest in the mortgagee the
ownership of the encumbered property, for any such effect is against public policy as enunciated
by Article 2088 of the Civil Code.
FACTS:
1. The respondents Dumaraogs filed an action against petitioner Guanzon for the redemption
of a parcel of rice land in Antique, which their mother, Ines Flores, had mortgaged to
defendant, and to recover damages, before CFI-Antique.
Prayed that the purported pacto de retro sale be declared a mortgage and that
Guanzon be ordered to execute an instrument of reconveyance after payment by
Dumaraog of the loan of P1,500.00.
2. Guanzon denied the allegations and alleged that the document executed by Flores was in fact
a pacto de retro sale and that her title as vendee had been consolidated.
3. Lower court declared that the document was an equitable mortgage and ordered Guanzon to
execute an instrument of reconveyance.
Also declared that whatever additional amounts were loaned to the vendor-a-retro,
Flores, by Guanzon were offset by the value of the 30 cavans of palay a year she
received from 1949 to 1962.
4. Guanzon instead of paying filed a motion for execution wherein she prayed that the
Provincial Sheriff be ordered to execute the necessary conveyance of the property in
question in her favor and that she be placed in the possession thereof.
5. the trial court ordered the Dumaraogs to deposit the P1,500.00 redemption price with the
clerk of court, which Guanzon shall receive, and that Guanzon shall within 10 days from
receipt of the order execute the deed of reconveyance in favor of Dumaraog,
6. Meanwhile, in pursuance of the decision, Dumaraog filed a notice of deposit of the
redemption price of P1,500.00.
7. From the orders of the respondent judge:
(1) directing Dumaraog to deposit the P1,500.00 redemption price and for her to receive
the said amount and to execute a deed of reconveyance in favor of Dumaraog, and
(2) approving the Dumaraog's bill of costs,
Guanzon filed a MR, alleging that the lower court has no jurisdiction to issue the said
order.
8. MR was denied it was not contemplated in the decision that Guanzon is entitled to a deed of
conveyance, and that at most, she could withhold execution of the deed of reconveyance
until Dumaraog pays P1,500.00, otherwise the Provincial Sheriff shall execute the necessary
conveyance in her favor.
9. Guanzon claimed that the respondent judge acted in GADALEJ, arguing that:
the judge altered his original decision, because although she was directed to execute a
reconveyance within 20 days in the original decision declaring the questioned document
as an equitable mortgage, she was given another additional 10 days to do so;
the judge allowed Dumaraog to deposit the redemption price of P1,500.00 even after
the lapse of 20 days after the finality of the judgment.
ISSUE (S): WoN Judge Argel committed GADALEJ in promulgating said decision --- NO.
RATIO: The writs prayed for .are denied, Costs against the petitioner.
The final decision of the respondent court, in its operative clause, provided the following:
"WHEREFORE, the Court hereby readers judgment:
1. 1.Declaring the document executed on 26 April 1949 by Ines Flores in favor of Maria
T. Guanzon, Exhibit A (same as Exhibit 2) an equitable mortgage instead of a pacto de retro
sale;
1. 2.Ordering the defendant Maria T. Guanzon to execute a reconveyance in favor of
the plaintiffs herein upon payment by the said plaintiffs of the amount of P1,500.00 within
twenty (20) days from the finality of this decision otherwise execution may issue and that
Provincial Sheriff may execute the necessary conveyance, with costs against the defendants.
2. 3.Counterclaim is dismissed for lack of proof.
While paragraph 2 is not as clear as it could have been, nevertheless its purport is plain that
respondents Dumaraog fail to pay the P1,500.00 within the specified 20 days, petitioner
Guanzon would be entitled to have execution issue to collect the said amount from the
properties of the respondents Dumaraog whereupon the deed of reconveyance would be
executed by Guanzon.
Should respondents Dumaraog deposit the money, but Guanzon refused to reconvey, the
reconveyance could then be made by the Provincial Sheriff. This is in accord with the section
10, Rule 39, of the ROC2
In no way can the judgment at bar be construed to mean that should the Dumaraogs fail to
pay the money within the specified period then the property would be conveyed by the
Sheriff to Guanzon.
o Any interpretation in that sense would contradict the declaration made in the same
judgment that the contract between the parties was in fact a mortgage and not a
pacto de retro sale.
o The only right of a mortgagee in case of non-payment of a debt secured by mortgage
would be to foreclose the mortgage and have the encumbered property sold to satisfy
the outstanding indebtedness.
o The mortgagor's default does not operate to vest in the mortgagee the ownership of
the encumbered property, for any such effect is against public policy, as enunciated by
the Civil Code.
o The court can not be presumed to have ad judged what would be contrary to law; unless
it be plain and inescapable from its final judgment.
o Hence, the orders of the court below refusing to command the sheriff to convey the
property to petitioner Guanzon, as she demanded, and instead ordering her to
reconvey the property to respondents Dumaraog and receive the P1,500.00 deposited
by the latter, were in conformity with the original decision that had become final and
executory.
2
"SEC. 10. Judgment for specific acts; vesting title.lf a judgment directs a party to execute a conveyance of land, or to
deliver deeds or other documents, or to perform any other specif ic act, and the party fails to comply within the time
specified, the court may direct the act to be done at the costs of the disobedient party by some other person appointed by
the court and the act when so done shall have like effect as if done by the party. If real or personal property is within the
Philippines, the court in lieu of directing a conveyance thereaf may enter judgment divesting the title of any party and
vesting it in others and such judgment shall have the force and effect of a conveyance executed in due form of law."
 12
CENTRAL BANK OF THE PHILIPPINES V. CA
DOCTRINE: The rule of indivisibility of a real mortgage provided for by Article 2089 of the
Civil Code is inapplicable to the facts of the case as the said rule presupposes several heirs of
the debtor or creditor which does not obtain in this case.
FACTS:
(1) Island Savings Bank (BANK) approved the loan application for P80,000 of Sulpicio Tolentino
(TOLENTINO), who, as a security of the loan, executed a REM over his 100-hectare land. The
approved loan application called for a lump sum of P80,000 loan, repayable in semi-annual
installments for a period of 3 years, with 12% annual interest. The purpose of the loan was to
serve as an additional capital to develop his property into a subdivision.
(2) However, out of the P80,000 loan to be released, only P17,000 was made by the BANK, and
TOLENTINO signed a PN for P17,000 at 12% annual interest, payable within 3 years from the
date of the execution of the contract. Moreover, the BANK demanded an advanced interest
for the P80,000. But this pre-deducted interest was refunded to TOLENTINO after being
informed that there was no fund yet available for the release of the P63,000 balance. The
BANK repeatedly promised to release the remaining balance.
(3) The Monetary Board of the Central Bank, after finding Island Savings Bank was suffering from
liquidity problems, issued a Resolution which prohibited the bank from making NEW LOANS
and investments and later on, through another resolution, prohibited the BANK from doing
business in the Philippines.
(4) In view of TOLENTINOs non-payment of the P17,000 covered by the PN, the BANK filed an
application for the extra-judicial foreclosure of the REM and scheduled an auction.
TOLENTINO, on the other hand, filed a petition for injunction, specific performance or
rescission alleging that since the BANK failed to deliver the remaining balance of P63,000, he
is entitled to specific performance by ordering the BANK to deliver the same with interest,
and if the said balance cannot be delivered, to rescind the REM.
(5) TC: ruled in favor of the BANK. Ordered TOLENTINO to pay the BANK P17,000 due to the non-
payment of the PN.
(6) CA: ruled in favor of TOLENTINO. BANK can neither foreclose the REM nor collect P17,000
ISSUES:
(1) Can the action of TOLENTINO for specific performance prosper? (NO)
(2) Is TOLENTINO liable to pay the P17,000 covered by the PN? (YES)
(3) If the liability to pay P17,000 subsists, can TOLENTINOs entire REM be foreclosed
to satisfy said amount? (NO)
HELD (1 & 2):
- The loan agreement entered into between the BANK and TOLENTINO is a reciprocal
obligation where the promise of each party is the consideration of the other. The rule is
that default commences only when one of the party has performed his obligation or
shows his willingness to perform the said obligation. The other party who is not ready
nor is willing to perform shall be in delay.
- When TOLENTINO executed the REM, he signified his willingness to pay P80,000. From
such date, the BANKs obligation to furnish P80,000 accrued. Thus, the BANKs delay
strated when the the Monetary Bank of the Central Bank issued the Resolution
prohibiting the BANK from doing further business. Such prohibition made it legally
impossible for the BANK to furnish P63,000.
- The Resolution issued by the Monetary Board cannot interrupt the BANK s failure of
releasing the remaining balance of P63,000 because the said resolution merely
prohibited the BANK from making NEW LOANS AND INVESTMENTS, and nowhere did it
prohibit the bank from releasing the balance of loan agreements PREVIOUSLY
CONTRACTED.
- The mere insolvency of a debtor is never an excuse for the non-fulfillment of an
obligation but instead is taken as a breach of the contract by him. Since the BANK was in
default in fulfilling its reciprocal obligation under the loan agreement, TOLENTINO, may
choose between specific performance or rescission with damages to both cases. But
since the BANK is now prohibited from doing further business as mentioned by the
Resolution, specific performance cannot be granted.
- Rescission, on the other hand, cannot also be granted for TOLENTINO was also at fault
for his non-payment of the P17,000 loan he received after signing the PN. His failure to
pay the overdue amortizations under the PN made him a party in default. If TOLENTINO
had not signed the PN, he would be entitled to ask for rescission of the entire loan
because he cannot possibly be in default as there was no date for him to perform his
reciprocal obligation to pay.
- Since both parties were in default, both shall be liable for damages.
HELD (3):
- The consideration of the accessory contract of real estate mortgage is the same as that
of the principal contract. For the debtor, the consideration is his obligation to pay is the
existence of a debt. Thus, in the accessory contract of real estate mortgage, the
consideration of the debtor in furnishing the mortgage is the existence of a valid,
voidable, or unenforceable debt.
- And where there is partial failure of consideration, the mortgage becomes
unenforceable to the extent of such failure. Where the indebtedness actually owing to
the holder of the mortgage is less than the sum named in the mortgage, the mortgage
cannot be enforced for more than the actual sum due.
- Since the BANK failed to furnish the P63, 000 balance of the P80,000 loan, the REM of
TOLENTINO became UNENFORCEABLE to such extent. P63,000 is 78.75% of P80,000,
hence, the REM covering 100-hectares is unenforceable to the extent of 78.75 hectares.
The mortgage covering the remainder of 21.25 hectares subsists as a security for the
P17,000 debt.
- The rule on indivisibility of a real estate mortgage provided for by Article 2089 is
inapplicable for the provision presupposes several heirs of the debtor or creditor which
does not obtain in this case. Hence, the indivisibility of a mortgage cannot apply.