TABLE OF CONTENTS already occupied and (2) as to the other floors

People's Bank and Trust Co. v. Odom 1 to be equipped, from the date they are fully
Lopez v CA 2 equipped.
Manila Banking Corp vs. Teodoro 5 o As to the Edward J. Nell Co. Building, the
Integrated Realty v CA 8 parties agreed that Odom would bear all the
Yau Chu v. CA 10 expenses of construction until it is fully
Caltex v. CA 10 completed and in consideration thereof, Gibbs
Allied Bank v. Ordonez 13 assigned to him all the rent which it may
Ng v. People 14 produce for 8 years, 3 months from the date of
Colinares v. CA 18 the termination of its construction; this period
DBP v. Prudential Bank 19 was to be counted from the completion of each
Rosario Textile Mills v Home Bankers 22 floor in the event that the floors comprising the
Vintola vs. IBAA 24 building should not be completed and equipped
People v. Nitafan 26 at the same time.
Traders Royal Bank v. Castanares 27  Due to the contracts entered into with PBTC, Odom
Torres v. Limjap 29 obtained an overdraft from PBTC of P110,000.
Peoples Bank v Dahican 31 o To secure this overdraft, Odom assigned to
Belgian vs Magallanes 32 the PBTC all his rights, title, and interest in
Acme Shoe v CA 34 the contracts of lease with the Sugar News
Ong Liong Tiak v. Luneta Motor Co. 35 Co., Manila Machinery and Supply Co., Inc.,
Prudential v Alviar 36 and T. Yamamoto of the various parts of the
Cuyco v. Cuyco 39 Sugar News Company Building and the
rights, title, and interest which he had
People’s Bank and Trust Co. v. Odom | Gab acquired in the land on which the said
February 25, 1937 building was constructed under the contract
PEOPLE BANK AND TRUST COMPANY, Plaintiff-Appellee, v. he had with A. D. Gibbs.
W. J. ODOM, Defendant-Appellant o Also as security, Odom assigned to the
Imperial, J. PBTC an insurance policy for P100,000
issued by the Manufacturers Life Insurance
NATURE: Appeal Company. (Exhibit C)
SUMMARY: W. J. Odom entered into a contract with A. D. Gibbs  Odom’s overdraft was increased to P150,000.
whereby Gibbs authorized Odom to construct 2 buildings upon o To secure the payment thereof, Odom
Gibbs’ land. Odom then leased out various parts of the 2 assigned to PBTC by guaranty the same
buildings, with one of the lessees being People’s Bank and Trust securities which he had given for the
Co. (PBTC). Due to the contracts entered into with PBTC, Odom overdraft of P110,000. (Exhibit B)
obtained an overdraft from PBTC, the amount of which was  The overdraft was again increased to P165,000.
increased multiple times. Odom also executed various securities o To guarantee the payment thereof, Odom
for the overdraft, with its various amount increases. After drawing assigned to PBTC his rights, title, and
funds upon PBTC through overdrafts, as of January 4, 1934, interest in the contracts of lease with Edward
Odom’s account showed a balance against him of P138,403.68, J. Nell Co., El Progreso, Inc., and France &
including stipulated interest up to said date. PBTC then brought an Goulette of various parts of the Edward J. Nell
action with the Manila CFI to recover from Odom the balance of Company Building, in whatever contracts of
the overdraft and to foreclose the mortgage of properties to lease of any portion of the same building
guarantee his obligation. The CFI later ordered Odom to pay to which he may enter in the future, and the
PBTC P138,403.68, with 9% interest per annum from January 4, rights, title, and interest which he had in the
1934 until fully paid, plus P500 as attorney's fees and the costs. land occupied by the building according to his
After Odom appealed to the SC, the SC affirmed the CFI’s contract with A. D. Gibbs. (Exhibit D)
judgment, except the part ordering the public sale of the o Odom also assigned to PBTC his right to
mortgaged rights, with costs to Odom. collect the rents of the Edward J. Nell
DOCTRINE (related to topic): Company Building. (Exhibit F)
 An assignment to guarantee an obligation is, in effect,  Pursuant to the aforesaid contracts, Odom drew funds
a mortgage, not an absolute conveyance of title, upon PBTC through overdrafts.
which confers ownership on the assignee.  January 4, 1934: Odom’s account showed a balance
FACTS: against him of P138,403.68, including stipulated
 W. J. Odom entered into a contract with A. D. Gibbs interest up to said date.
(Exhibit E) whereby Gibbs authorized Odom to  PBTC then brought an action with the Manila CFI to
construct 2 buildings with 3 floors each upon Gibbs’ recover from Odom the balance of the overdraft and
land. to foreclose the mortgage of properties to guarantee
o The Sugar News Co. Building was completely his obligation.
constructed and its 1st floor was occupied by the
People’s Bank and Trust Co. (PBTC), but the 2
 The CFI ordered Odom to pay to PBTC P138,403.68,
with 9% interest per annum from January 4, 1934 until
upper floors were not fully equipped; the
fully paid, plus P500 as attorney's fees and the costs.
Edward J. Nell Co. Building was then under
construction.
o The judgment also decreed that the principal
and interest should be paid within 3 months,
o Under the contract, Odom bore all the expenses
failing which the mortgaged properties will be
of consideration of the Sugar News Co. Building
sold at public auction, consisting of the rights,
and Gibbs assigned to him all the rents which
title, and interest of Odom in the contracts of
the building may produce for 8 years from: (1)
lease of the 2 buildings and his rights, title, and
November 1, 1926 as to the 1st floor then

BANKING: WEEK 5 | 1
 interest in the land on which the 2 buildings are
constructed, and that the proceeds of the sale
should be applied to the payment of the amount
of the judgment.
 Odom appealed from said CFI’s judgment to the SC.
ISSUE #1:
 W/N Exhibit D took the place of Exhibits B and C (NO)
RATIO #1:
 Exhibit D was executed, according to the contract itself,
as a result of the increase of the overdraft to P165,000
and the additional guaranty given by Odom, consisting of
the assignment of guaranty of his rights in his contracts
of lease of the Edward J. Nell Company Building and of
his rights in the land occupied by the same building.
 Clause 3 of Exhibit D stipulated that Exhibit C was
incorporated therein and also constituted a guaranty of
the payment of the overdraft as increased to P165,000.
 Due to these facts, it is evident that the intention of the
parties was neither to set aside the previous contracts
nor to substitute Exhibit D therefor.
ISSUE #2:
 W/N the CFI should have held that the obligation
contracted by Odom was with a term and the parties
not having fixed the date of payment, PBTC should
have first brought an action to fix said date under
CC, Art. 11281 (NO)
RATIO #2:
 Exhibit D is a complement of Exhibits B and C, hence,
Exhibit D’s language and the intention of the parties must
be interpreted in relation to and jointly with Exhibits B and
C under CC, Art. 1285.
 It was expressly stipulated in Exhibits B and C that the
obligation contracted by Odom shall expire and be due
upon demand of the PBTC and since Exhibit C was
incorporated in Exhibit D and Odom was required by the
PBTC to pay all his indebtedness, the obligation was
without a term and it became due and demandable.
 Thus, CC, Art. 1128 is inapplicable.
ISSUE #3 (MAIN):
 W/N Exhibits B, C, and D are mortgages or
assignment of rights (MORTGAGES)
RATIO #3:
 Exhibits B, C, and D were really mortgages inasmuch
as they were executed to guarantee the principal
obligations of the Odom, consisting of the overdrafts of
the indebtedness resulting therefrom.
 It appears in each of Exhibits B, C, and D that the
Odom assigned to the PBTC all his rights in the
contracts of lease, in the land, and in the insurance
policy to guarantee his indebtedness resulting from
the overdrafts.
 An assignment to guarantee an obligation is, in effect,
a mortgage, not an absolute conveyance of title,
which confers ownership on the assignee. (Title
Guaranty & Surety Co. v. Witmire; Polhemus v. Trainer;
Campbell v. Woodstock Iron Co.; Dunham v. Whitehead;
Woodward v. Crump)
 In Exhibits C and D, it was stipulated that if Odom
should comply with all the conditions of the contracts
and should pay his indebtedness, together with
interest, the assignments would become null and void;
otherwise, they would remain in full force.
o If the parties' intention was that the
1 When it is to be inferred from the nature and circumstances of the obligation that it
was intended to grant the debtor time to pay and the term is not otherwise stated, the
courts should fix the date of the maturity of the obligation.
assignments are absolute and not by guaranty
or mortgage, the stipulation would not have
been made because it would be inconsistent
with the will of the contracting parties.
ISSUE #4:
 W/N Odom’s civil liability has ceased, with him now
not owing PBTC anything (NO)
RATIO #4:
 The assignments Odom made not being absolute and
PBTC having established that Odom has not paid his
total overdraft, he is not yet relieved of his obligation.
ADDITIONAL DISCUSSION:
 Under the contracts, PBTC was authorized to collect the
rents of the 2 buildings during the period which might be
that fixed in the contract between the Odom and Gibbs.
o The SC said “might” because the contracts of
lease have not been put in evidence, hence, it
could point out the duration thereof with
precision.
 However, the PBTC liquidated the account of the Odom
up to January 4, 1934 only and in the appealed
judgment, it was decreed that the mortgaged rights be
sold at public auction should Odom fail to pay his
indebtedness within 3 months.
 If the indebtedness has already been paid with the rents
which the PBTC failed to account for, then there would
be no ground to take the aforementioned step. If the
indebtedness has not yet been fully paid, neither would it
be proper to sell any of the rights in the mortgage
contracts of lease because the latter have already
matured, according to the contract with Gibbs.
o Thus, it is necessary to provide for the one and
the other case.
 As to the insurance policy, nothing can be said about it
as the appealed judgment was silent thereon.
DISPOSITION
 The appealed judgment was affirmed, except the part
ordering the public sale of the mortgaged rights, with
costs to Odom.
Lopez v CA | CM
June 29, 1982
BENITO H. LOPEZ, petitioner,
vs.
THE COURT OF APPEALS and THE PHILIPPINE AMERICAN
GENERAL INSURANCE CO., INC., respondents.
GUERRERO, J.:
Summary: Lopez obtained a loan from prudential bank. He
executed a promissory note, a surety bond with Philamgen as
surety and an indemnity agreement in favour of Philamgen as well
as a deed of assignment of stocks over Philamgen. Lopez
delivered the stock certificate to Philamgen. It was understood that
Abello of Philamgen and Pedrosa of Prudential would buy the
shares and pay to Prudential if Lopez failed to pay on the loan.
Lopez failed to pay. The stocks were transferred to Philamgen.
Philamgen paid the bank. Philamgen is now claiming vs Lopez.
Philamgen claims the stocks were merely pledged. Lopez claims
that there was a dation in payment. SC held that it was merely
pledged and Philamgen must return the stocks to Lopez upon
satisfaction under the Indemnity Agreement.
Doctrine: The character of the transaction between the parties is
to be determined by their intention, regardless of what language
was used or what the form of the transfer was. If it was intended to
secure the payment of money, it must be construed as a pledge
FACTS:
BANKING: WEEK 5 | 2
  On June 2, 1959, petitioner Benito H. Lopez obtained a
loan in the amount of P20,000.00 from the Prudential
Bank and Trust Company.
 He executed a promissory note for the same amount, in
favor of the said Bank, binding himself to repay the said
sum one (1) year after the said date, with interest at the
rate of 10% per annum.
 He executed Surety Bond No. 14164 in which he, as
principal, and Philippine American General Insurance
Co., Inc. (PHILAMGEN) as surety, bound themselves
jointly and severally in favor of Prudential Bank for
the payment of the sum of P20,000.00.
 Lopez also executed in favor of Philamgen an
indemnity agreement whereby he agreed "to indemnify
the Company and keep it indemnified and hold the same
harmless from and against any and all damages, losses,
costs, stamps, taxes, penalties, charges and expenses of
whatever kind and nature which the Company shall or
may at any time sustain or incur in consequence of
having become surety upon the bond."
 Lopez executed a deed of assignment of 4,000 shares
of the Baguio Military Institution entitled "Stock
Assignment Separate from Certificate"2
 With the execution of this deed of assignment, Lopez
endorsed the stock certificate and delivered it to
Philamgen.
 The loan of P20,000.00 was approved conditioned upon
the posting of a surety bond. Thus, Lopez persuaded
Emilio Abello, Assistant Executive Vice-President of
Philamgen and member of the Bond Under writing
Committee to request Atty. Timoteo J. Sumawang,
Assistant Vice- President and Manager of the Bonding
Department, to accommodate him in putting up the
bond against the security of his shares of stock with
the Baguio Military Institute, Inc. It was their
understanding that if he could not pay the loan, Vice-
President Abello and Pio Pedrosa of the Prudential
Bank would buy the shares of stocks and out of the
proceeds thereof, the loan would be paid to the
Prudential Bank.
 On June 2, 1960, Lopez' obligation matured without it
being settled. Prudential Bank sometime in August,
1961 filed a case against Lopez and Philamgen to
enforce payment on the promissory note plus interest.
 Vice-President Abello then instructed Atty. Sumawang to
transfer the shares of stock to Philamgen and made a
commitment that thereafter he (Abello) and Pio Pedrosa
will buy the shares of stock from it so that the proceeds
could be paid to the bank, and in the meantime
Philamgen will not pay the bank because it did not want
payment under the terms of the bank.
 The complaint was thereafter dismissed. But when no
payment was still made by the principal debtor or by the
surety, the Prudential Bank filed on November 8, 1963
another complaint for the recovery of the P20,000.00.
 Lopez’s letter:
22 That for and in consideration of the obligations undertaken by the ASSIGNEE-
SURETY COMPANY under the terms and conditions of SURETY BOND NO. 14164,
issued on behalf of said BENITO H. LOPEZ and in favor of the PRUDENTIAL BANK
& TRUST COMPANY, Manila, Philippines, in the amount of TWENTY THOUSAND
PESOS ONLY (P20,000.00), Philippine Currency, and for value received, the
ASSIGNOR hereby sells, assigns, and transfers unto THE PHILIPPINE
AMERICAN GENERAL INSURANCE CO., INC., Four Thousand (4,000) shares of
the Baguio military Institute, Inc. standing in the name of said Assignor on the books
of said Baguio Military Institute, Inc. represented by Certificate No. 44 herewith and
do hereby irrevocably constitutes and appoints THE PHILIPPINE AMERICAN
GENERAL INSURANCE CO., INC. as attorney to transfer the said stock on the
books of the within named military institute with full power of substitution in the
premises.
Dear Mr. Sumawang: This is with reference to yours of the 13th
instant advising me of a complaint filed against us by Prudential
Bank & Trust Co. regarding my loan of P20,000.00. In this
connection, I would like to know what happened to my shares of
stocks of Baguio Military Academy which were pledged to your
goodselves to secure said obligation. These shares of stock I think
are more than enough to answer for said obligation.
 Philamgen was forced to pay the Prudential Bank the
sum of P27,785.89
 Philamgen brought an action vs. Benito H. Lopez for
reimbursement of the said amount.
 CFI dismissed the complaint holding:
The contention of the plaintiff that the stock of the defendant were
merely pledged to it by the defendant is not borne out by the
evidence. On the contrary, the shares of stock of the defendant
were actually transferred to the plaintiff Philamgen
Now that these shares of stock had already been transferred in
the name of the Philamgen, it would seem that the remedy of the
Philamgen is to go after Messrs. Abello and Pedrosa on their
promise to pay for the said stocks.
 CA promulgated a decision in favor of the Philamgen,
and declared that the stock assignment was a mere
pledge that the transfer of the stocks in the name of
Philamgen was not intended to make it the owner
thereof; that assuming that Philamgen had appropriated
the stocks, this appropriation is null and void as a
stipulation authorizing it is apactum commissorium; and
that pending payment, Philamgen is merely holding the
stock as a security for the payment of Lopez' obligation
ISSUE 1/ HELD: what is the juridical nature of the transaction-a
dation in payment or a pledge? PLEDGE
RATIO:
ON ITS FACE, IT LOOKS LIKE SALE
 Considering the explicit terms of the deed denominated
"Stock Assignment Separate from Certificate",
hereinbefore copied verbatim, Lopez sold, assigned and
transferred unto Philamgen the stocks involved "for and
in consideration of the obligations undertaken" by
Philamgen "under the terms and conditions of the surety
bond executed by it in favor of the Prudential Bank" and
"for value received".
 On its face, it is neither pledge nor dation in
payment. The document speaks of an outright sale as
there is a complete and unconditional divestiture of the
incorporeal property consisting of stocks from Lopez to
Philamgen.
BUT IT IS A PLEDGE
 Notwithstanding the express terms of the "Stock
Assignment Separate from Certificate", however, We
hold and rule that the transaction should not be
regarded as an absolute conveyance in view of the
circumstances obtaining at the time of the execution
thereof.
 Lopez executed a promissory note for P20,000.00, plus
interest at the rate of ten (10%) per cent per annum, in
favor of said Bank. He likewise posted a surety bond to
secure his full and faithful performance of his obligation
under the promissory note with Philamgen as his surety.
In return for the undertaking of Philamgen under the
surety bond, Lopez executed on the same day not only
an indemnity agreement but also a stock assignment.
 The indemnity agreement and the stock assignment
must be considered together as related transactions
because in order to judge the intention of the
contracting parties, their contemporaneous and
subsequent acts shall be principally considered.
(Article 1371, New Civil Code).
 Thus, considering that the indemnity agreement connotes
BANKING: WEEK 5 | 3
 a continuing obligation of Lopez towards Philamgen while
the stock assignment indicates a complete discharge of
the same obligation, the existence of the indemnity
agreement whereby Lopez had to pay a premium of
P1,000.00 for a period of one year and agreed at all
times to indemnify Philamgen of any and all kinds of
losses which the latter might sustain by reason of it
becoming a surety, is inconsistent with the theory of
an absolute sale for and in consideration of the same
undertaking of Philamgen.
 There would have been no necessity for the execution of
the indemnity agreement if the stock assignment was
really intended as an absolute conveyance. Hence, there
are strong and cogent reasons to conclude that the
parties intended said stock assignment to
complement the indemnity agreement and thereby
sufficiently guarantee the indemnification of
Philamgen should it be required to pay Lopez' loan to
Prudential Bank.
o The character of the transaction between the
parties is to be determined by their intention,
regardless of what language was used or
what the form of the transfer was. If it was
intended to secure the payment of money, it
must be construed as a pledge; but if there
was some other intention, it is not a pledge.
However, even though a transfer, if regarded by
itself, appears to have been absolute, its object
and character might still be qualified and
explained by a contemporaneous writing
declaring it to have been a deposit of the
property as collateral security. It has been said
that a transfer of property by the debtor to a
creditor, even if sufficient on its face to make an
absolute conveyance, should be treated as a
pledge if the debt continues in existence and is
not discharged by the transfer, and that
accordingly, the use of the terms ordinarily
importing conveyance, of absolute ownership
will not be given that effect in such a transaction
if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly
indicate a transfer of absolute ownership, in the
absence of clear and unambiguous language or
other circumstances excluding an intent to
pledge.
 We agree with the holding of the respondent Court of
Appeals that the stock assignment, Exhibit C, is in
truth and in fact, a pledge. Indeed, the facts and
circumstances leading to the execution of the stock
assignment, Exhibit C, and the admission of Lopez prove
that it is in fact a pledge.
 The appellate court is correct in ruling that the following
requirements of a contract of pledge have been
satisfied:
(1) that it be constituted to secure the fulfillment of a principal
obligation;
(2) that the pledgor be the absolute owner of the thing pledged;
and
(3) that the person constituting the pledge has the free disposal of
the property, and in the absence thereof, that he be legally
authorized for the purpose. (Article 2085, New Civil Code).
 Article 2087 of the New Civil Code providing that it is
also the essence of these contracts (pledge, mortgage,
and antichresis) that when the principal obligation
becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment
to the creditor, further supports the appellate court's
ruling
o In addition to the requisites prescribed in article
2085, it is necessary, in order to constitute the
contract of pledge, that the thing pledged be
placed in the possession of the creditor, or of
a third person by common agreement. (Art.
2093, N.C.C.) Incorporeal rights, including
shares of stock may also be pledged (Art. 2095,
N.C.C.)
o All these requisites are found in the transaction
between the parties leading to the execution of
the Stock Assignment, Exhibit C. And that it is a
pledge was admitted by the defendant in his
letter of November 18, 1963, Exhibit G, already
quoted above, where he asked what had
happened to his shares of stock "which were
pledged to your goodselves to secure the said
obligation".
 It is not a dation in payment. According to Article 1245 of
the New Civil Code, dation in payment, whereby property
is alienated to the creditor in satisfaction of a debt in
money, shall be governed by the law of sales.
o Dation in payment is the delivery and
transmission of ownership of a thing by the
debtor to the creditor as an accepted
equivalent of the performance of the
obligation. The property given may consist, not
only of a thing, but also of a real right (such as a
usufruct) or of a credit against a third person.
Thus, it has been held that the assignment to
the creditor of the interest of the debtor in an
inheritance in payment of his debt, is valid and
extinguishes the debt.
o The modern concept of dation in payment
considers it as a novation by change of the
object, and this is to our mind the more
juridically correct view.
o Our Civil Code, however, provides in this article
that, where the debt is in money, the law on
sales shall govern; in this case, the act is
deemed to be a sale, with the amount of the
obligation to the extent that it is extinguished
being considered as the price.
o Does this mean that there can be no dation in
payment if the debt is not in money? We do not
think so. It is precisely in obligations which are
not money debts, in which the true juridical
nature of dation in payment becomes manifest.
There is a real novation with immediate
performance of the new obligation. The fact that
there must be a prior agreement of the parties
on the delivery of the thing in lieu of the original
prestation shows that there is a novation which,
extinguishes the original obligation, and the
delivery is a mere performance of the new
obligation.
o The dation in payment extinguishes the
obligation to the extent of the value of the thing
delivered, either as agreed upon by the parties
or as may be proved, unless the parties by
agreement, express or implied, or by their
silence, consider the thing as equivalent to the
obligation, in which case the obligation is totally
extinguished.
 We find that the debt or obligation at bar has not matured
on June 2, 1959 when Lopez "alienated" his 4,000
shares of stock to Philamgen. Such fact being adverse to
the nature and concept of dation in payment, the same
could not have been constituted when the stock
assignment was executed.
BANKING: WEEK 5 | 4
  In case of doubt as to whether a transaction is a
pledge or a dation in payment, the presumption is in
favor of pledge, the latter being the lesser
transmission of rights and interests.
 Petitioner's argument that even assuming, arguendo that
the transaction was at its inception a pledge, it gave way
to a dation in payment when the obligation secured came
into existence and private respondent had the stocks
transferred to it in the corporate books and took a stock
certificate in its name, is without merit. The transfer of
title to incorporeal property is generally an essential part
of the delivery of the same in pledge. It merely
constitutes evidence of the pledgee's right of property in
the thing pledged.
 By the contract of pledge, the pledgor does not part with
his general right of property in the collateral. The general
property therein remains in him, and only a special
property vests in the pledgee. The pledgee does not
acquire an interest in the property, except as a security
for his debt. Thus, the pledgee holds possession of the
security subject to the rights of the pledgor; he cannot
acquire any interest therein that is adverse to the
pledgor's title. Moreover, even where the legal title to
incorporeal property which may be pledged is transferred
to a pledgee as collateral security, he takes only a
special property therein Such transfer merely performs
the office that the delivery of possession does in case of
a pledge of corporeal property.
 The pledgee has been considered as having a lien on the
pledged property. The extent of such lien is measured by
the amount of the debt or the obligation that is secured
by the collateral, and the lien continues to exist as long
as the pledgee retains actual or symbolic possession of
the property, and the debt or obligation remains unpaid.
Payment of the debt extinguishes the lien.
 Though a pledgee of corporation stock does not become
personally liable as a stockholder of the company, he
may have the shares transferred to him on the books of
the corporation if he has been authorized to do so.
ISSUE2/ HELD: WON there was novation (NO)
NO NOVATION
 In his second assignment of error, petitioner contends
that there was a novation of the obligation by substitution
of debtor.
 SC: We do not agree.
 Under Article 1291 of the New Civil Code, obligations
may be modified by: (1) changing their object or principal
condition; (2) substituting the person of the debtor; (3)
subrogating a third person in the rights of the creditor.
And in order that an obligation may be extinguished by
another which substitute the same, it is imperative that it
be so declared in unequivocal terms, or that the old and
the new obligations be on every point incompatible with
each other. (Article 1292, N.C.C.)
 Commenting on the second concept of novation, that is,
substituting the person of the debtor, Manresa opines,
thus:
 In this kind of novation it is not enough
to extend the juridical relation to a third
person; it is necessary that the old
debtor be released from the obligation,
and the third person or new debtor take
his place in the relation. Without such
release, there is no novation
 In the case at bar, the undertaking of Messrs. Emilio
Abello and Pio Pedrosa that they would buy the shares of
stock so that Philamgen could be reimbursed from the
proceeds that it paid to Prudential Bank does not
necessarily imply the extinguishment of the liability of
petitioner Lopez. Since it was not established nor shown
that Lopez would be released from responsibility, the
same does not constitute novation
 In fine, We hold and rule that the transaction entered into
by and between petitioner and respondent under the
Stock Assignment Separate From Certificate in relation to
the Surety Bond No. 14164 and the Indemnity
Agreement, all executed and dated June 2, 1959,
constitutes a pledge of the 40,000 shares of stock by
the petitioner-pledgor in favor of the private respondent-
pledgee, and not a dacion en pago. It is also Our ruling
that upon the facts established, there was no novation of
the obligation by substitution of debtor.
 The promise of Abello and Pedrosa to buy the shares not
having materialized and no action was taken against the
two by Philamgen who chose instead to sue Lopez on
the Indemnity Agreement, it is quite clear that this
respondent Philam has abandoned its right and interest
over the pledged properties and must, therefore, release
or return the same to the petitioner-pledgor Lopez upon
the latter's satisfaction of his obligation under the
Indemnity Agreement.
 It must also be made clear that there is no double
payment nor unjust enrichment in this case because We
have ruled that the shares of stock were merely pledged.
DISPOSITION. AFFIRMED.
The Manila Banking Corporation vs. Teodoro | Karl
January 13, 1989
THE MANILA BANKING CORPORATION, plaintiff-appellee,
vs. ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO,
defendants-appellants.
CHICO-NAZARIO, J.:
NATURE: Appeal from the decision of the CFI of Manila
SUMMARY:
 Teodoros executed a promissory note for P10,420 and
failed to pay the amount. Subsequently, Teodoro
executed in favor of MBC 2 promissory notes for 8k and
1k respectively.
 Also, Teodoro (son) executed in favor of MBC a Deed of
Assignment of Receivables from EEA.
 SC held that the assignment did not have the effect of
payment of all the loans contracted by the Teodoros from
MBC. SC held that the deed of assignment was intended
as collateral security for the bank loans of appellants, as
a continuing guaranty for whatever sums would be owing
by defendants to plaintiff, as stated in stipulation No. 9 of
the deed.
 In case of doubt as to whether a transaction is a pledge
or a dation in payment, the presumption is in favor of
pledge, the latter being the lesser transmission of rights
and interests
DOCTRINE (related to topic):
 Assignment of credit is an agreement by virtue of which
the owner of a credit, known as the assignor, by a legal
cause, such as sale, dation in payment, exchange or
donation, and without the need of the consent of the
debtor, transfers his credit and its accessory rights to
another, known as the assignee, who acquires the power
to enforce it to the same extent as the assignor could
have enforced it against the debtor. ...
 It may be in the form of a sale, but at times it may
constitute a dation in payment, such as when a debtor, in
order to obtain a release from his debt, assigns to his
BANKING: WEEK 5 | 5
 creditor a credit he has against a third person, or it may
constitute a donation as when it is by gratuitous title; or it
may even be merely by way of guaranty, as when the
creditor gives as a collateral, to secure his own debt in
favor of the assignee, without transmitting ownership.
 The character that it may assume determines its
requisites and effects. its regulation, and the capacity of
the parties to execute it; and in every case, the
obligations between assignor and assignee will depend
upon the judicial relation which is the basis of the
assignment
FACTS:
 On April 25, 1966, defendants, together with Anastacio
Teodoro, Sr., jointly and severally, executed in favor of
plaintiff MBC a Promissory Note (No. 11487) for the sum
of P10,420.00 payable in 120 days, or on August 25,
1966, at 12% interest per annum.
 Defendants Teodoro failed to pay the said amount inspire
of repeated demands and the obligation as of September
30, 1969 stood at P 15,137.11 including accrued interest
and service charge.
 On May 3, 1966 and June 20, 1966, defendants
Anastacio Teodoro, Sr. (Father) and Anastacio Teodoro,
Jr. (Son) executed in favor of MBC two Promissory Notes
(Nos. 11515 and 11699) for P8,000.00 and P1,000.00
respectively, payable in 120 days at 12% interest per
annum.
o Father and Son made a partial payment on the
May 3, 1966 promissory Note but none on the
June 20, 1966 Promissory Note, leaving still an
unpaid balance of P8,934.74 as of September
30, 1969 including accrued interest and service
charge.
 The three Promissory Notes stipulated that any interest
due if not paid at the end of every month shall be added
to the total amount then due, the whole amount to bear
interest at the rate of 12% per annum until fully paid; and
in case of collection through an attorney-at-law, the
makers shall, jointly and severally, pay 10% of the
amount over-due as attorney's fees, which in no case
shall be leas than P200.00.
 It appears that on January 24, 1964, the Son executed in
favor of MBC a Deed of Assignment of Receivables
from the Emergency Employment Administration in the
sum of P44,635.00.
o The Deed of Assignment provided that it was for
and in consideration of certain credits, loans,
overdrafts and other credit accommodations
extended to defendants as security for the
payment of said sum and the interest thereon,
and that defendants do hereby remise, release
and quitclaim all its rights, title, and interest in
and to the accounts receivables.
o Also contained the following stipulations:
 (1) The title and right of possession to
said accounts receivable is to remain in
the assignee, and it shall have the right
to collect the same from the debtor,
and whatsoever the Assignor does in
connection with the collection of said
accounts, it agrees to do as agent and
representative of the Assignee and in
trust for said Assignee ;
 xxx xxx xxx
 (6) The Assignor guarantees the
existence and legality of said accounts
receivable, and the due and punctual
payment thereof unto the assignee, ...
on demand, ... and further, that
Assignor warrants the solvency and
credit worthiness of each and every
account.
 (7) The Assignor does hereby
guarantee the payment when due on
all sums payable under the contracts
giving rise to the accounts receivable
... including reasonable attorney's fees
in enforcing any rights against the
debtors of the assigned accounts
receivable and will pay upon demand,
the entire unpaid balance of said
contract in the event of non-payment
by the said debtors of any monthly sum
at its due date or of any other default
by said debtors;
 xxx xxx xxx
 (9) ... This Assignment shall also stand
as a continuing guarantee for any and
all whatsoever there is or in the future
there will be justly owing from the
Assignor to the Assignee ...
 In their stipulations of Fact, it is admitted by the parties
that MBC extended loans to Teodorp on the basis and by
reason of certain contracts entered into by the defunct
Emergency Employment Administration (EEA) with
Teodoro for the fabrication of fishing boats, and that the
Philippine Fisheries Commission succeeded the EEA
after its abolition; that non-payment of the notes was due
to the failure of the Commission to pay Teodoro after the
latter had complied with their contractual obligations; and
that the President of MBC took steps to collect from the
Commission, but no collection was effected.
 Trial Court: rendered judgments for Teodoro.
 CA certified case to SC since it involves purely questions
of law.
ISSUE #1:
Whether or not the assignment of receivables has the effect
of payment of all the loans contracted by Teodoro from MBC--
NO
RATIO#1:
 Assignment of credit is an agreement by virtue of which
the owner of a credit, known as the assignor, by a legal
cause, such as sale, dation in payment, exchange or
donation, and without the need of the consent of the
debtor, transfers his credit and its accessory rights to
another, known as the assignee, who acquires the power
to enforce it to the same extent as the assignor could
have enforced it against the debtor. ...
 It may be in the form of a sale, but at times it may
constitute a dation in payment, such as when a debtor, in
order to obtain a release from his debt, assigns to his
creditor a credit he has against a third person, or it may
constitute a donation as when it is by gratuitous title; or it
may even be merely by way of guaranty, as when the
creditor gives as a collateral, to secure his own debt in
favor of the assignee, without transmitting ownership.
 The character that it may assume determines its
requisites and effects. its regulation, and the capacity of
the parties to execute it; and in every case, the
obligations between assignor and assignee will depend
upon the judicial relation which is the basis of the
assignment
 There is no question as to the validity of the
assignment of receivables executed by appellants in
favor of appellee bank.The issue is with regard to its
BANKING: WEEK 5 | 6
 legal effects.
 It is evident that the assignment of receivables executed
by appellants on January 24, 1964 did not transfer the
ownership of the receivables to appellee bank and
release appellants from their loans with the bank incurred
under promissory notes Nos. 11487,11515 and 11699.
 The Deed of Assignment provided that it was for and in
consideration of certain credits, loans, overdrafts, and
their credit accommodations in the sum of P10,000.00
extended to appellants by appellee bank, and as security
for the payment of said sum and the interest thereon; that
appellants as assignors, remise, release, and quitclaim to
assignee bank all their rights, title and interest in and to
the accounts receivable assigned (lst paragraph). It was
further stipulated that the assignment will also stand as a
continuing guaranty for future loans of appellants to
appellee bank and correspondingly the assignment shall
also extend to all the accounts receivable; appellants
shall also obtain in the future, until the consideration on
the loans secured by appellants from appellee bank shall
have been fully paid by them (No. 9).
 The position of appellants, however, is that the deed of
assignment is a quitclaim in consideration of their
indebtedness to appellee bank, not mere guaranty, in
view of the following provisions of the deed of
assignment:
o ... the Assignor do hereby remise, release and
quit-claim unto said assignee all its rights, title
and interest in the accounts receivable
described hereunder.
o ... that the title and right of possession to said
account receivable is to remain in said assignee
and it shall have the right to collect directly from
the debtor, and whatever the Assignor does in
connection with the collection of said accounts,
it agrees to do so as agent and representative of
the Assignee and it trust for said Assignee
 The character of the transactions between the parties
is not, however, determined by the language used in
the document but by their intention.
 Definitely, the assignment of the receivables did not
result from a sale transaction. It cannot be said to have
been constituted by virtue of a dation in payment for
appellants' loans with the bank evidenced by promissory
note Nos. 11487, 11515 and 11699 which are the subject
of the suit for collection in Civil Case No. 78178. At the
time the deed of assignment was executed, said loans
were non-existent yet.
 The deed of assignment was executed on January 24,
1964 (Exh. "G"), while promissory note No. 11487 is
dated April 25, 1966 (Exh. 'A), promissory note 11515,
dated May 3, 1966 (Exh. 'B'), promissory note 11699, on
June 20, 1966 (Exh. "C").
 At most, it was a dation in payment for P10,000.00,
the amount of credit from appellee bank indicated in
the deed of assignment. At the time the assignment
was executed, there was no obligation to be
extinguished except the amount of P10,000.00.
 Moreover, in order that an obligation may be
extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point
incompatible with each other (Article 1292, New Civil
Code).
 Obviously, the deed of assignment was intended as
collateral security for the bank loans of appellants,
as a continuing guaranty for whatever sums would
be owing by defendants to plaintiff, as stated in
stipulation No. 9 of the deed.
 In case of doubt as to whether a transaction is a pledge
or a dation in payment, the presumption is in favor of
pledge, the latter being the lesser transmission of rights
and interests.
ISSUE #2
Whether or not appellee bank must first exhaust all legal
remedies against the Philippine Fisheries Commission before
it can proceed against Teodoro for collections of loan under
the promissory notes which are MBC’s bases in the action for
collection in Civil Case No. 78178.--NO
RATIO #2:
 The obligation of appellants under the promissory notes
not having been released by the assignment of
receivables, appellants remain as the principal debtors of
appellee bank rather than mere guarantors. The deed of
assignment merely guarantees said obligations.
 That the guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of
the debtor, and has resorted to all the legal remedies
against the debtor, under Article 2058 of the New Civil
Code does not therefore apply to them.
 It is of course of the essence of a contract of pledge or
mortgage that when the principal obligation becomes
due, the things in which the pledge or mortgage consists
may be alienated for the payment to the creditor (Article
2087, New Civil Code). In the instant case, appellants are
both the principal debtors and the pledgors or
mortgagors. Resort to one is, therefore, resort to the
other.
 MBCollect on the pledged receivables. As the
Emergency Employment Agency (EEA) which issued the
receivables had been abolished, the collection had to be
coursed through the Office of the President which
disapproved the same
 The receivable became virtually worthless leaving
appellants' loans from MBC unsecured. It is but proper
that after their repeated demands made on appellants for
the settlement of their obligations, MBC should proceed
against Teodoro.
 It would be an exercise in futility to proceed against a
defunct office for the collection of the receivables
pledged.
DISPOSITION: Appeal dismissed.
FELICIANO, J., concurring:
 I would merely wish to add a few lines in respect of the
point made by Bidin, J., that "the character of the
transactions between the parties is not, however,
determined by the language used in the document but by
their intention.' This statement is basically not
exceptionable, so far as it goes.
 It might, however, be borne in mind that the intent of the
parties to the transaction is to be determined in the first
instance, by the very language which they use. The deed
of assignment contains language which suggest that the
parties intended to effect a complete alienation of title to
and rights over the receivables which are the subject of
the assignment. This language is comprised of works like
"remise," "release and quitclaim" and clauses like "the
title and right of possession to said accounts receivable is
to remain in said assignee" who "shall have the right to
collect directly from the debtor." The same intent is also
suggested by the use of the words "agent and
representative of the assignee" in reffering to the
assignor.
BANKING: WEEK 5 | 7
  The point that appears to me to be worth making is OVERSEAS BANK OF MANILA and THE HON. COURT OF
that although in its form, the deed of assignment of APPEALS, respondents.
receivables partakes of the nature of a complete REGALADO, J.
alienation of the receivables assigned, such form
should be taken in conjunction with, and indeed SUMMARY: Raul Santos, President of Integrated Realty (IRC)
must be qualified and controlled by, other language made two time deposits with the Overseas Bank of Manila (OBM)
showing an intent of the parties that title to the in his personal capacity. IRC, through Santos, obtained a loan
receivables shall pass to the assignee for the limited from PNB. By way of security, Santos executed a Deed of
purpose of securing another, principal; obligation Assignment of his two OBM time deposits. OBM failed to pay PNB
owed by the assignor to the assignee. when the time deposits fell due. PNB demanded payment from
 Title moves from assignor to assignee but that title is IRC, but the latter claimed that its obligation was already
defeasible being designed to collateralize the principal extinguished by the Deed of Assignment. PNB sued IRC, Santos
obligation. Operationally, what this means is that the and OBM. IRC and Santos filed a counterclaim against OBM. The
assignee is burdened with an obligation of taking the trial court held IRC and Santos liable to PNB. In turn, OBM was to
proceeds of the receivables assigned and applying such reimburse IRC and Santos for whatever it paid PNB. On appeal,
proceeds to the satisfaction of the principal obligation and the CA absolved OBM from liability. The Supreme Court held that
returning any balance remaining thereafter to the IRC’s loan obligation to PNB was not extinguished by the Deed of
assignor. Assignment as it was merely a pledge.
 The parties gave the deed of assignment the form of DOCTRINE: The character of the transaction between the parties
an absolute conveyance of title over the receivables is to be determined by their intention, regardless of what language
assigned, essentially for the convenience of the was used or what the form of the transfer was. If it was intended to
assignee. Without such formally unlimited secure the payment of money, it must be construed as a pledge;
conveyance of title, the assignee would have to treat but if there was some other intention, it is not a pledge. However,
the deed of assignment as no more than a deed of even though a transfer, if regarded by itself, appears to have been
pledge or of chattel mortgage. absolute, its object and character might still be qualified and
 In other words, in such hypothetical case, should the explained by a contemporaneous writing declaring it to have been
assignee seek to realize upon the security given to him a deposit of the property as collateral security.
through the deed of assignment (which would then have
FACTS:
to comply with the documentation and registration

requirements of a pledge or chattel mortgage), the Under date 11 January 1967 defendant Raul L. Santos
made a time deposit with defendant OBM in the amount
assignee would have to foreclose upon the securities or
of P 500,000.00.
credits assigned and place them on public sale and there
acquire the same.  Under date 6 February 1967 defendant Raul L. Santos
 also made a time deposit with defendant OBM in the
It should be recalled that under the principle which
amount of P 200,000.00.
forbids a pactum commisorium Article 2088, Civil Code),
 Under date 9 February 1967 defendant IRC thru its
a mortgagee or pledgee is prohibited from simply taking
President-defendant Raul L. Santos, applied for a loan
and appropriating the personal property turned over to
and/or credit line in the amount of P 700,000.00 with
him as security for the payment of a principal obligation.
A deed of assignment by way of security avoids the PNB.
necessity of a public sale impose by the rule on pactum o To secure the said loan, defendant Raul L.
commisorium, by in effect placing the sale of the Santos executed on August 11, 1967 a Deed of
collateral up front. (Emphasis supplied) Assignment of the two time deposits in favor of
 The foregoing is applicable where, as in the present PNB.
instance, the deed of assignment of receivables The defendant OBM after the due dates of the time
combines elements of both a complete or absolute deposit certificates, did not pay plaintiff PNB. Plaintiff
demanded payment from defendants IRC and Raul L.
alienation of the credits being assigned and a security
Santos and from defendant OBM.
arrangement to assure payment of a principal obligation.
Where the second element is absent, that is, where thereo Defendants IRC and Raul L. Santos replied that
is nothing to indicate that the parties intended the deed of the obligation (loan) of defendant IRC was
assignment to function as a security device, it would of deemed paid with the irrevocable assignment of
course follow that the simple absolute conveyance the time deposit certificates.
 PNB filed a complaint to collect from IRC and Santos the
embodied in the deed of assignment would be operative;
loan of P700,000.00 with interest as well as attorney's
the assignment would constitute essentially a mode of
payment or dacion en pago. fees. It impleaded OBM as a defendant to compel it to
 redeem and pay to it Santos' time deposit certificates with
Put a little differently, in order that a deed of assignment
interest, plus exemplary and corrective damages,
of receivables which is in form an absolute conveyance
attorney's fees, and costs.
of title to the credits being assigned, may be qualified and

treated as a security arrangement, language to suchOBM replied, acknowledging the certificates of time
deposit that it issued to Santos, and admitting its failure
effect must be found in the document itself and that
language, precisely, is embodied in the deed of to pay the same due to its distressed financial situation.
o It claimed that by reason of its state of
assignment in the instant case. Finally, it might be noted
that that deed simply follows a form in standard use in insolvency its operations have been suspended
commercial banking. by the Central Bank since August 1, 1968; that
the time deposits ceased to earn interest from
that date; that it may not give preference to any
Integrated Realty v. CA / Ish depositor or creditor; and that payment of the
June 28, 1989 plaintiffs claim is prohibited.
INTEGRATED REALTY CORPORATION and RAUL L.  The trial court ruled for PNB. IRC and Santos to pay
SANTOS, petitioners, vs. PHILIPPINE NATIONAL BANK, PNB, OBM to reimburse IRC and Santos.

BANKING: WEEK 5 | 8
  On appeal, the CA promulgated its appealed decision,
with a modification and the deletion of that portion of the
judgment of the trial court ordering OBM to pay IRC and
Santos whatever amounts they will pay to PNB with
interest from the date of payment.
 Hence, this petition for review.
ISSUE #1 (MAIN):
 WoN the liability of IRC and Santos with PNB should
be deemed to have been paid by virtue of the deed of
assignment made by the former in favor of PNB. (NO)
RATIO #1:
 Lopez v. CA: Lopez obtained a loan from Prudential
Bank. He executed a surety bond (with Philamgen as
surety) and an indemnity agreement. He likewise ISSUE #2:
assigned his shares of stock in the Baguio Military
Institute in favor of PBTC. Philamgen, the surety, caused
the transfer of shares to its name in order that it may sell RATIO #2:
the same and apply the proceeds to the loan. HELD:
Lopez still liable to pay PBTC notwithstanding the
assignment, as it was merely meant as a security.
o There would have been no necessity for the
execution of the indemnity agreement if the
stock assignment was really intended as an
absolute conveyance.
 Along the same vein, in the case at bar it would not have
been necessary on the part of IRC and Santos to execute
promissory notes in favor of PNB if the assignment of the
time deposits of Santos was really intended as an RATIO #3:
absolute conveyance.
 Bases as found by the trial court:
o It is clear from the Deed of Assignment that it
was only by way of security;
o The promissory notes were executed on August
16, 1967. If defendants IRC and Raul L. Santos,
upon executing the Deed of Assignment on
August 11, 1967 had already paid their loan of P
700,000.00 or otherwise extinguished the same,
why were the promissory notes made on August
16, 1967 still executed by IRC and signed by ISSUE #4:
Raul L. Santos as President?
o In the application for a credit line, the time
deposits were offered as collateral.
 Court quotes with approval from Lopez:
o The character of the transaction between the
parties is to be determined by their intention,
regardless of what language was used or what
the form of the transfer was. If it was intended to
secure the payment of money, it must be
construed as a pledge; but if there was some
other intention, it is not a pledge. However, even
though a transfer, if regarded by itself, appears
to have been absolute, its object and character
might still be qualified and explained by a
contemporaneous writing declaring it to have
been a deposit of the property as collateral
security.
o It has been said that a transfer of property by
the debtor to a creditor, even if sufficient on its DISPOSITION: Judgment is rendered ordering—
face to make an absolute conveyance, should
be treated as a pledge if the debt continues in
existence and is not discharged by the transfer,
and that accordingly, the use of the terms
ordinarily importing conveyance, of absolute
ownership will not be given that effect in such a
transaction if they are also commonly used in
pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and
unambiguous language or other circumstances
excluding an intent to pledge.
 All requisites of a pledge are present:
o (1) that it be constituted to secure the fulfillment
of a principal obligation;
o (2) that the pledgor be the absolute owner of the
thing pledged;
o (3) that the persons constituting the pledge have
the free disposal of their property, and in the
absence thereof, that they be legally authorized
for the purpose.
 Furthermore, the thing pledged was placed in the
possession of the pledgee through the deed of
assignment.
 WoN the 1 ½% interest charged by PNB is illegal.
(NO)
 It was presumably done in accordance with ordinary
banking procedures.
 Not only did IRC and Santos fail to overcome the
presumption of regularity of business transactions, but
they are likewise estopped from questioning the validity
thereof for the first time in this petition.
ISSUE #3:
 WoN OBM is liable for interests on the time deposits
from the time it ceased operations until it resumed its
business. (NO)
 What enables a bank to pay stipulated interest on money
deposited with it is that thru the other aspects of its
operation it is able to generate funds to cover the
payment of such interest.
 Unless a bank can lend money, engage in international
transactions, acquire foreclosed mortgaged properties or
their proceeds and generally engage in other banking
and financing activities from which it can derive income, it
is inconceivable how it can carry on as a depository
obligated to pay stipulated interest.
 WoN OBM is liable for damages by way of interests
due to failure to pay the time deposits when they fell
due. (YES)
RATIO #4:
 It was only on July 31, 1968 when OBM was excluded
from clearing with the CB under Monetary Board
Resolution No. 1263.
 Subsequently, on August 2, 1968, pursuant to Resolution
No. 1290 of the CB OBM's operations were suspended.
 Thus, when PNB demanded from OBM payment of the
amounts due on the two time deposits which matured on
January 11, 1968 and February 6, 1968, respectively,
there was as yet no obstacle to the faithful compliance by
OBM of its liabilities thereunder.
 Consequently, for having incurred in delay in the
performance of its obligation, OBM should be held liable
for damages.
 IRC and Santos to pay PNB the total loan obligation plus
interests;
 IRC and Santos to pay PNB attorney’s fees;
 OBM to pay IRC and Santos the amount due under the
time deposits with interest;
 OBM to pay IRC and Santos interest in the concept of
damages;
 OBM to pay IRC and Santos attorney’s fees.
BANKING: WEEK 5 | 9
Yau Chu v. CA | Nice  All that had to be done to convert the pledgor's time
September 26, 1989 deposit certificates into cash was to present them to the
VICTORIA YAU CHU, assisted by her husband MICHAEL bank for encashment after due notice to the debtor.
CHU, petitioners, vs. HON. COURT OF APPEALS, FAMILY  The encashment of the deposit certificates was not
SAVINGS BANK and/or CAMS TRADING ENTERPRISES, INC., a pacto commissorio which is prohibited under NCC
respondents. 2088. A pacto commissorio is a provision for
GRINO-AQUINO, J. the automatic appropriation of the pledged or mortgaged
property by the creditor in payment of the loan upon its
NATURE: Rule 45 Petition maturity. The prohibition against a pacto commissorio is
SUMMARY: Yau Chu had several time deposits with Family intended to protect the obligor, pledgor, or mortgagor
Savings Bank, which she used as collateral for payment of her against being overreached by his creditor who holds a
cement withdrawals with Cams Trading. She executed deeds of pledge or mortgage over property whose value is much
assignment over the time deposit certificates. When she did not more than the debt.
pay Cams Trading, the latter requested the Bank encashment of
 Where, as in this case, the security for the debt is
the certificates, to which the Bank agreed. Yau Chu filed a
also money deposited in a bank, the amount of which
complaint for recovery of the deposit, but both the RTC and CA
is even less than the debt, it was not illegal for the
dismissed the case. The SC affirmed, holding that as the pledge
creditor to encash the time deposit certificates to pay
was money, there was no need for an auction sale and that it was
the debtors' overdue obligation, with the latter's
not a pactum commissorium.
consent.
FACTS:
 Since 1980, Victoria Yau Chu had been purchasing
 Whether the debt had already been paid as alleged by
cement on credit from CAMS Trading Enterprises, Inc. Mrs. Chu is a factual question which the CA found
(Cams Trading). To guaranty payment for her cement unproven. Mrs. Chu only presented receipts for payments
made prior to July 18, 1980. Since she signed on July 18,
withdrawals, she executed in favor of Cams Trading
1980 a letter admitting her indebtedness to be in the sum
deeds of assignment of her time deposits totaling P320k
in the Family Savings Bank (Bank). of P404k, and there is no proof of payment made by her
thereafter to reduce or extinguish her debt, the
 Except for serial numbers and dates, the deeds of
application of her time deposits, which she had assigned
assignment, prepared by her own lawyer, uniformly
to the creditor to secure the payment of her debt, was
provided “that the assignment serves as a collateral or
proper.
guarantee for the payment of my obligation with the said
DISPOSITION
CAMS TRADING ENTERPRISES, INC. on account of my
cement withdrawal from said company, per separate  Petition denied. CA affirmed.
contract executed between us.”
 July 24,1980: Cams Trading notified the Bank that Mrs.
Chu had not paid P314k. It asked that it be allowed to Caltex v. CA | Kat
encash the time deposit certificates which had been August 10, 1992
assigned to it by Mrs. Chu. It submitted to the Bank a CALTEX (PHILIPPINES), INC., petitioner, vs.
letter dated July 18, 1980 of Mrs. Chu admitting that her COURT OF APPEALS and SECURITY BANK AND TRUST
outstanding account with Cams Trading was P404k. COMPANY, respondents.
REGALADO, J.
 After verbally advising Mrs. Chu of the assignee's request
to encash her time deposit certificates and obtaining her
SUMMARY: SBTC issued CTDs in favor of Dela Cruz. He
verbal conformity, the Bank agreed to encash the
delivered the CTDs to Caltex in connection with his purchase of
certificates. It gave Cams Trading P283k only, since one
fuel products. Dela Cruz went to SBTC claiming that he lost all the
time deposit certificate lacked the proper signatures.
CTDs. Replacement CTDs were then issued in favor of Dela Cruz.
 Upon being informed of the encashment, Mrs. Chu
He then obtained a loan from SBTC secured by a deed of
demanded from the Bank and Cams Trading that her
assignment of time deposit. Caltex demanded that the time
time deposit be restored. When neither complied, she
deposits be pre-terminated and claimed for payment of the value
filed a complaint with the RTC to recover the P283k from
of the CTDs but this was rejected by SBTC. SBTC then set-off the
them.
time deposits to the payment of the matured load. Caltex filed a
 The trial court dismissed the complaint for lack of merit. complaint to recover the value of the CTDs. RTC, CA and SC
Chu appealed to the CA which affirmed the dismissal of dismissed the complaint. The CTDs were delivered merely as
her complaint. security
 Chu alleges that the CA erred: DOCTRINE:
o in not annulling the encashment of her time Art. 2095. Incorporeal rights, evidenced by negotiable instruments,
deposit certificates as a pactum commissorium; may also be pledged. The instrument proving the right pledged
and shall be delivered to the creditor, and if negotiable, must be
o in not finding that the obligations secured by her indorsed.
time deposits had already been paid. Art. 2096. A pledge shall not take effect against third persons if a
ISSUE #1 (MAIN): description of the thing pledged and the date of the pledge do not
 W/N the encashment was a pactum commissorium appear in a public instrument.
prohibited by NCC 2088 (NO)
RATIO #1: FACTS:
 The CA found that the deeds of assignment were  Various dates: Security Bank and Trust Co., a
contracts of pledge, but, as the collateral was also commercial banking institution, through its Sucat Branch
money or an exchange of "peso for peso," the issued 280 certificates of time deposit (CTDs) in favor
provision in NCC 2112, for the sale at public auction of one Angel dela Cruz who deposited with SBTC the
to convert the thing pledged into money to satisfy aggregate amount of P1,120,000
the pledgor's obligation, did not have to be followed.  Dela Cruz delivered the CTDs to Caltex in connection

BANKING: WEEK 5 | 10
 with his purchase of fuel products from the latter
 March 1982: Dela Cruz informed Mr. Timoteo Tiangco,
the Sucat Branch Manger, that he lost all the CTDs. Mr.
Tiangco advised him to execute and submit a notarized
Affidavit of Loss, as required by SBTC's procedure, if he
desired replacement of said lost CTDs
 March 18, 1982: Dela Cruz executed and delivered to
SBTC the required Affidavit of Loss. On the basis of said
affidavit of loss, 280 replacement CTDs were issued in
favor of said depositor.
 March 25, 1982: Dela Cruz negotiated and obtained a
loan from SBTC of P875,000.
 Same date: Dela Cruz executed a notarized Deed of
Assignment of Time Deposit which stated, among
others, that he (de la Cruz) surrenders to SBTC "full
control of the indicated time deposits from and after date"
of the assignment and further authorizes said bank to
pre-terminate, set-off and "apply the said time deposits to
the payment of whatever amount or amounts may be
due" on the loan upon its maturity.
 November, 1982: Mr. Aranas, Credit Manager of Caltex
(Phils.) Inc., went to SBTC’s Sucat branch and presented
for verification the CTDs declared lost by dela Cruz
alleging that the same were delivered to Caltex "as
security for purchases made with Caltex Philippines, Inc."
by said depositor
 November 26, 1982: SBTC received a letter from Caltex
formally informing it of its possession of the CTDs and of
its decision to pre-terminate the same.
 December 8, 1982: Caltex was requested by SBTC to
furnish the former "a copy of the document evidencing
the guarantee agreement with Mr. Angel dela Cruz" as
well as "the details of Mr. Angel dela Cruz" obligation
against which Caltex proposed to apply the CTDs
 No copy of the requested documents was furnished
SBTC.
 SBTC rejected the Caltex’ demand and claim for
payment of the value of the CTDs in a letter dated
February 7, 1983
 April 1983: the loan of Angel dela Cruz with the SBTC
matured and fell due
 August 5, 1983: SBTC set-off and applied the time
deposits to the payment of the matured loan
 Caltex filed a complaint, praying that SBTC be ordered
to pay it the aggregate value of the CTDs of
P1,120,000.00 plus accrued interest and compounded
interest therein at 16% per annum, moral and exemplary
damages as well as attorney's fees.
 RTC: dismissed complaint
 CA: affirmed RTC
 Hence, petition for review on certiorari
Sample text of the CTDs
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this
Bank the sum of PESOS: FOUR THOUSAND ONLY,
SECURITY BANK SUCAT OFFICE P4,000 & 00
CTS Pesos, Philippine Currency, repayable to said
depositor 731 days. after date, upon presentation and
surrender of this certificate, with interest at the rate
of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
——————— ————————
AUTHORIZED SIGNATURES
ISSUE #1: W/N the CTDs are non-negotiable instruments? NO
(Not important)
RATIO #1:
CTDs are Negotiable instruments
 CA: CTDs are non-negotiable instruments, While the
word "bearer" appears rather boldly in the CTDs issued,
after the word "BEARER" stamped on the space provided
supposedly for the name of the depositor, the words "has
deposited" a certain amount follows. The document
further provides that the amount deposited shall be
"repayable to said depositor" on the period indicated. The
text manifest that they are payable, not to whoever
purports to be the "bearer" but only to the specified
person indicated therein, the depositor. In effect, SBTC
acknowledges its depositor Angel dela Cruz as the
person who made the deposit and further engages itself
to pay said depositor the amount indicated thereon at the
stipulated date.
 SC: The CTDs in question are negotiable instruments.
 The CTDs undoubtedly meet the requirements of the law
for negotiability3.
 The bone of contention is with regard to requisite (d)
 Mr. Timoteo P. Tiangco, SBTC's Branch Manager way
back in 1982, testified in open court that the depositor
reffered to in the CTDs is no other than Mr. Angel de la
Cruz.
 The negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the
instrument itself. In the construction of a bill or note, the
intention of the parties is to control, if it can be legally
ascertained. While the writing may be read in the light of
surrounding circumstances in order to more perfectly
understand the intent and meaning of the parties, yet as
they have constituted the writing to be the only outward
and visible expression of their meaning, no other words
are to be added to it or substituted in its stead. The duty
of the court in such case is to ascertain, not what the
parties may have secretly intended as
contradistinguished from what their words express, but
what is the meaning of the words they have used. What
the parties meant must be determined by what they said.
 Case at bar: The documents provide that the amounts
deposited shall be repayable to the depositor. According
to the document, the depositor is the bearer? It is the
"bearer." The documents do not say that the depositor is
Angel de la Cruz and that the amounts deposited are
repayable specifically to him. Rather, the amounts are to
be repayable to the bearer of the documents or, for that
matter, whosoever may be the bearer at the time of
presentment.
 If it was really the intention of SBTC to pay the amount to
Angel de la Cruz only, it could have with facility so
expressed that fact in clear and categorical terms in the
documents, instead of having the word "BEARER"
stamped on the space provided for the name of the
depositor in each CTD.
 The witness merely declared that Angel de la Cruz is the
3 Section 1 Act No. 2031, Negotiable Instruments Law, enumerates the requisites for
an instrument to become negotiable:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
BANKING: WEEK 5 | 11
 depositor "insofar as the bank is concerned," but
obviously other parties not privy to the transaction
between them would not be in a position to know that the
depositor is not the bearer stated in the CTDs. Hence,
the situation would require any party dealing with the
CTDs to go behind the plain import of what is written
thereon to unravel the agreement of the parties thereto
through facts aliunde. This need for resort to extrinsic
evidence is what is sought to be avoided by the
Negotiable Instruments Law and calls for the application
of the elementary rule that the interpretation of obscure
words or stipulations in a contract shall not favor the
party who caused the obscurity.
ISSUE #2: W/N Caltex can recover on the CTDs? NO [IMPT]
RATIO #2:
 The records reveal that Angel de la Cruz, whom Caltex
chose not to implead in this suit for reasons of its own,
delivered the CTDs amounting to P1,120,000.00 to
Caltex without informing SBTC thereof at any time.
 Unfortunately for Caltex, although the CTDs are bearer
instruments, a valid negotiation thereof for the true
purpose and agreement between it and De la Cruz, as
ultimately ascertained, requires both delivery and
indorsement.
 Any doubt as to whether the CTDs were delivered as
payment for the fuel products or as a security has been
dissipated and resolved in favor of the latter by Caltex’
own authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to
Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager,
wrote: "These certificates of deposit were negotiated to
us by Mr. Angel dela Cruz to guarantee his purchases of
fuel products" This admission is conclusive upon Caltex,
its protestations notwithstanding.
 Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against
the person relying thereon. A party may not go back on
his own acts and representations to the prejudice of the
other party who relied upon them. In the law of evidence,
whenever a party has, by his own declaration, act, or
omission, intentionally and deliberately led another to
believe a particular thing true, and to act upon such
belief, he cannot, in any litigation arising out of such
declaration, act, or omission, be permitted to falsify it.
 If it were true that the CTDs were delivered as payment
and not as security, Caltex’ credit manager could have
easily said so, instead of using the words "to guarantee"
in the letter aforequoted.
 Besides, when SBTC moved for a bill of particularity
praying that Caltex be required to aver with sufficient
definiteness or particularity (a) the due date or dates of
payment of the alleged indebtedness of Angel de la Cruz
to Caltex and (b) whether or not it issued a receipt
showing that the CTDs were delivered to it by De la Cruz
as payment of the latter's alleged indebtedness to it,
Caltex opposed the motion. Had it produced the receipt
prayed for, it could have proved, if such truly was the
fact, that the CTDs were delivered as payment and not
as security. Having opposed the motion, Caltex now
labors under the presumption that evidence willfully
suppressed would be adverse if produced.
 Intergrated Realty Corporation, et al. vs. Philippine
National Bank, et al citing Lopez: The character of the
transaction between the parties is to be determined
by their intention, regardless of what language was
used or what the form of the transfer was. If it was
intended to secure the payment of money, it must be
construed as a pledge; but if there was some other
intention, it is not a pledge. However, even though a
transfer, if regarded by itself, appears to have been
absolute, its object and character might still be qualified
and explained by contemporaneous writing declaring it to
have been a deposit of the property as collateral security.
A transfer of property by the debtor to a creditor,
even if sufficient on its face to make an absolute
conveyance, should be treated as a pledge if the debt
continues in inexistence and is not discharged by the
transfer, and that accordingly the use of the terms
ordinarily importing conveyance of absolute
ownership will not be given that effect in such a
transaction if they are also commonly used in
pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and unambiguous
language or other circumstances excluding an intent
to pledge.
 Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to
another in such a manner as to constitute the transferee
the holder thereof, and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the
bearer thereof.
 In the present case, there was no negotiation in the
sense of a transfer of the legal title to the CTDs in favor
of Caltex in which situation, for obvious reasons, mere
delivery of the bearer CTDs would have sufficed. Here,
the delivery thereof only as security for the purchases of
De la Cruz (and we even disregard the fact that the
amount involved was not disclosed) could at the most
constitute Caltex only as a holder for value by reason of
his lien. Accordingly, a negotiation for such purpose
cannot be effected by mere delivery of the instrument
since, necessarily, the terms thereof and the subsequent
disposition of such security, in the event of non-payment
of the principal obligation, must be contractually provided
for.
 Where the holder has a lien on the instrument arising
from contract, he is deemed a holder for value to the
extent of his lien. As such holder of collateral security, he
would be a pledgee but the requirements therefor and the
effects thereof, not being provided for by the Negotiable
Instruments Law, shall be governed by the Civil Code
provisions on pledge of incorporeal rights
 Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, may also be pledged. The instrument
proving the right pledged shall be delivered to the
creditor, and if negotiable, must be indorsed.
 Art. 2096. A pledge shall not take effect against third
persons if a description of the thing pledged and the
date of the pledge do not appear in a public
instrument.
 Aside from the fact that the CTDs were only delivered but
not indorsed, the factual findings of the CA show that
Caltex failed to produce any document evidencing any
contract of pledge or guarantee agreement between it
and Angel de la Cruz. The mere delivery of the CTDs did
not legally vest in Caltex any right effective against and
binding upon SBTC.
 The requirement under Article 2096 is not a mere rule of
adjective law prescribing the mode whereby proof may
be made of the date of a pledge contract, but a rule of
substantive law prescribing a condition without which the
execution of a pledge contract cannot affect third persons
adversely.
 The assignment of the CTDs made by Angel de la Cruz
in favor of SBTC was embodied in a public instrument.
BANKING: WEEK 5 | 12
  Civil Code, Art. 1625. An assignment of credit, right or
action shall produce no effect as against third persons,
unless it appears in a public instrument, or the instrument
is recorded in the Registry of Property in case the
assignment involves real property.
 SBTC duly complied with this statutory requirement.
Contrarily, Caltex, whether as purchaser, assignee or
lien holder of the CTDs, neither proved the amount of its
credit or the extent of its lien nor the execution of any
public instrument which could affect or bind private
respondent. Necessarily, therefore, as between Caltex
and SBTC, the latter has definitely the better right over
the CTDs in question.
ISSUE #3: W/N SBTC observed the requirements of the law in the
case of lost negotiable instruments and the issuance of
replacement certificates? Not raised in issued submitted (not impt)
RATIO #3:
 The aspect of alleged negligence of SBTC was not
included in the stipulation of the parties and in the
statement of issues submitted by them to the trial court.
 An issue raised for the first time on appeal and not raised
timely in the proceedings in the lower court is barred by
estoppel. Questions raised on appeal must be within the
issues framed by the parties and, consequently, issues
not raised in the trial court cannot be raised for the first
time on appeal.
 Pre-trial is primarily intended to make certain that all
issues necessary to the disposition of a case are properly
raised.
 To accept Caltex' suggestion that respondent bank's
supposed negligence may be considered encompassed
by the issues on its right to preterminate and receive the
proceeds of the CTDs would be tantamount to saying
that Caltex could raise on appeal any issue.
 Even assuming arguendo that said issue of negligence
was raised in the court below, Caltex still cannot have the
odds in its favor.
 A close scrutiny of the provisions of the Code of
Commerce laying down the rules to be followed in case
of lost instruments payable to bearer, which it invokes,
will reveal that said provisions, even assuming their
applicability to the CTDs in the case at bar, are merely
permissive and not mandatory.
 Art 548. The dispossessed owner, no matter for what
cause it may be, may apply to the judge or court of
competent jurisdiction, asking that the principal, interest
or dividends due or about to become due, be not paid a
third person, as well as in order to prevent the ownership
of the instrument that a duplicate be issued him.
 The use of the word "may" in said provision shows that it
is not mandatory but discretionary on the part of the
"dispossessed owner" to apply to the judge or court of
competent jurisdiction for the issuance of a duplicate of
the lost instrument. The word "may" is usually permissive,
not mandatory. It is an auxiliary verb indicating liberty,
opportunity, permission and possibility.
 Articles 548 to 558 of the Code of Commerce merely
established, on the one hand, a right of recourse in favor
of a dispossessed owner or holder of a bearer instrument
so that he may obtain a duplicate of the same, and, on
the other, an option in favor of the party liable thereon
who, for some valid ground, may elect to refuse to issue
a replacement of the instrument. Significantly, none of
the provisions cited by Caltex categorically restricts or
prohibits the issuance a duplicate or replacement
instrument sans compliance with the procedure outlined
therein, and none establishes a mandatory precedent
requirement therefor.
Petition DENIED. CA AFFIRMED.
Allied Bank v. Ordonez | Apa
(1990)
Padilla, J.
Summary:
PBM, which entered into a T/R agreement, claims that they are
not criminally liable under PD115 because the goods covered by
the T/R were not ultimately for sale, but for their own use. While
SoJ Gonzales denied their claim, the new SoJ, Ordonez, granted
the MR. SC reversed the latter’s decision finding that PD115
covers all goods, whether or not they were meant to be ultimately
sold.
Nature: Special civil action for Certiorari regarding the
interpretation by the DOJ of the penal provision of PD 115, the
Trust Receipts Law.
Facts:
The Philippine Blooming Mills (PBM), through its authorized
officer, respondent Ching, applied for the issuance of commercial
letters of credit (L/C) with petitioner's Makati branch to finance the
purchase of 500 M/T Magtar Branch Dolomites and one (1) Lot
High Fired Refractory Sliding Nozzle Bricks.
 Petitioner issued irrevocable letter of credit in favor of
Nikko Industry Co., Ltd., in light of which the latter drew
four drafts which were accepted by PBM and paid by the
bank.
 To secure payment, and in consideration of the transfer
of the goods by petitioner to PBM, the latter (as
entrustee) through Ching executed four Trust Receipt
Agreements (T/R).
o Such acknowledged petitioner’s ownership of
the goods, and PBM’s obligation to turn over the
proceeds of the sale of the goods, if sold, or to
return the same, if unsold within the stated
period.
PBM incurred a liability of of P1,475,274.09 for its failure and
refusal turn over the proceeds of the sale of the goods or to return
the same.
 Hence, a criminal complaint for estafa under PD115 was
filed.
 Respondent refused to participate in the preliminary
investigation, thereby the Fiscal found a prima facie case
for violation of PD 115.
o They filed their first MR on the following
grounds:
 Lack of proper preliminary
investigation;
 Lack of Jurisdiction;
 That a novation had been made
substitututing Ching with Rehabilitation
Receivers.
 The Secretary of Justice (Gonzales) denied the MR in
light of a valid and binding T/R.
o On second MR, resondets forwarded the
additional ground:
 PBM was under rehabilitation, hence
no criminal liability could be impured
against it (and Ching).
 SoJ Gonzales once again denied the MR finding that:
o The offense was consummated long before the
appointment of rehabilitation receivers. The
BANKING: WEEK 5 | 13
 crime of estafa for violation of the Trust Receipts
Law is a special offense or mala prohibita.
 It is a fundamental rule in criminal law
that when the crime is punished by a
special law, the act alone, irrespective
of its motives, constitutes the offense.
o Neither should the rehabilitation proceedings
stay the attempt to enforce criminal liability
against respondents.
 Though Sec. 4 of PD1785 provides
that “upon appointment of a as property of the entruster;
management committee,
rehabilitationn all actions for claims
… shall be suspended”, such refers
only to money claims and not criminal
liability.
 A third MR was once again filed with the additional
grounds:
o That there was no evidence on record to show
that respondent was in particeps criminis in the
act complained of;
o There could be no violation of the T/R
agreements because the articles imported by
the corporation were fungible or consummable
goods and do not form part of the steel product
itself. These goods were not procured to be
sold in whatever state or condition they were in
or were supposed to be after the manufacturing
process.
 The new SoJ Ordonez GRANTED the MR finding:
o What the law contemplates or covers are goods
which have, for their ultimate destination,
the sale thereof or if unsold, their surrender to
the entruster, this whether the goods are in their
original form or in their manufactured/processed
state.
o Since the goods covered by the T/R here in
were to be utilized in the operation of the
equipment and machineries of the corporation,
they could not have been contemplated as
being covered by PD 115.
o Not all transactions are covered by T/Rs are the
transactions that fall within the scope of PD 115.
o In this case, the T/R were executed as security
for the payment of the drafts. As such, the main
transaction was that of a loan. Hence, the case
should be civil in light of the creditor-debtor
relationship.
Petitioner filed for MR of the Ordonez Resolution, which was
denied by the DOJ.
WoN Sec. 13. PD115 applies when the goods covered by a T/R 4
do not form part of the finished products which are ultimately sold
but are instead, utilized/used up in the operation of the equipment
and machineries of the entrustee-manufacturer (Yes)
4 Sec. 4. What constitutes a trust receipt transaction. — A trust receipt transaction,
within the meaning of this Decree, is any transaction by and between a person
referred to in this Decree as the entrustee, and another person referred to in this
Decree as the entrustee, whereby the entruster, who owns or holds absolute title or
security interests over certain specified goods, documents or instruments, releases
the same to the possession of the entrustee upon the latter's execution and delivery
to the entruster of a signed document called a 'trust receipt' wherein the entrustee
binds himself to hold the designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents or instruments
with the obligation to turn over to the entruster the proceeds thereof to the extent of
the amount owing to the entruster or as appears in the trust receipt or the goods,
documents or instruments themselves, if they are unsold or not otherwise disposed
of, in accordance with the terms and conditions specified in the trust receipt
Respondent Ching contends that PBM is not in the business of
selling, but a manufacturer of steel products. But PBM, as
entrustee under the trust receipts has, under Sec. 9 of PD 115, the
following obligations:
(a) receive the proceeds of sale, in trust for the entruster and
turn over the same to the entruster to the extent of the
amount owing to him or as appears on the trust receipt;
(b) keep said goods or proceeds thereof whether in money
or whatever form, separate and capable of identification
(c) return the goods, documents or instruments in the event
of non-sale, or upon demand of the entruster; and
(d) observe all other terms and conditions of the trust receipt
not contrary to the provisions of said Decree.
Through a T/R, an entrustee binds himself to sell or otherwise
dispose of the entrusted goods with the obligation to turn over to
the entruster the proceeds if sold, or return the goods if unsold or
not otherwise disposed of.
 A violation of this undertaking constitutes estafa under
Sec. 13 of PD115 and Art. 315 of the RPC.
o The act is malum prohibitum.
 Ordonez’s resolution, treating T/Rs as mere security
documents for loan transactions, thereby obliterating
criminal liability is a misjudgment.
Furthermore, respondent’s claim that Sec. 13 of PD115 covers
only goods destined for sale, and that no such representation was
made in attaining the T/R was made, is of no merit.
 The non-payment of the amount covered by a T/R is an
act violative of the entrustee's obligation to pay. There is
no reason why the law should not apply to all
transactions covered by trust receipts, except those
expressly excluded.
o In the construction of statutes, the courts start
with the assumption that the legislature intended
an effective law. Hence, it is a general principle,
embodied in the maxim, 'ut res magis valeat
quam pereat, that the courts should, if
reasonably possible, interpret the statute to give
it efficient operation and effect as a whole.
 Hence, PD115 encompasses any act violative of an
obligation covered by the trust receipt; it is not limited to
transactions in goods which are to be sold (retailed),
reshipped, stored or processed as a component of a
product ultimately sold.
PETITION GRANTED. DOJ REVERSED
Ng vs. People | Erika
April 23, 2010
ANTHONY L. NG, Petitioner,
vs.
PEOPLE OF THE PHILIPPINES, Respondent.
VELASCO, JR.
SUMMARY: Ng applied for a P3M-credit line with Asiatrust. Upon
approval of his loan, he was required to sign, among others, Trust
Receipt Agreements. Having had difficulty in collecting his
receivables from one of his clients, Ng was unable to fully pay his
loan with Asiatrust. Thus, upon Asiatrust’s complaint, an
Information for Estafa under Art 315, par 1(b) of the RPC in rel. to
the Trust Receipts Law was filed against Ng. RTC and CA
convicted him while SC acquitted him, ruling that the Trust Receipt
Law applies only to sales transactions. This case does not involve
a sales transaction as the goods in this case were never intended
for sale but for use in the fabrication of steel communication
BANKING: WEEK 5 | 14
towers. The agreement itself provides that Ng will turn over the
proceeds “as soon as received” and not before.
DOCTRINE: The true nature of a trust receipt transaction can be
found in the "whereas" clause of PD 115 which states that a trust
receipt is to be utilized "as a convenient business device to assist
importers and merchants solve their financing problems."
Obviously, the State, in enacting the law, sought to find a way to
assist importers and merchants in their financing in order to
encourage commerce in the Philippines. Regardless of whether
the transaction is foreign or domestic, it is important to note that
the transactions discussed in relation to trust receipts mainly
involved sales.
NATURE: Petition for Review on Certiorari under Rule 45
FACTS:
 Early part of 1997: petitioner Anthony Ng, then engaged
in the business of building and fabricating
telecommunication towers under the trade name "Capitol
Blacksmith and Builders," applied for a credit line of P3M
with Asiatrust Dev’t Bank, Inc.
 In support of Asiatrust’s credit investigation, Ng
voluntarily submitted the ff. documents:
o (1) the contracts he had with Islacom, Smart,
and Infocom; (2) the list of projects wherein he
was commissioned by the said
telecommunication companies to build several
steel towers; and (3) the collectible amounts he
has with the said companies.
 May 30, 1997: Asiatrust approved Ng’s loan application.
Ng was then required to sign several documents:
o Credit Line Agreement, Application and
Agreement for Irrevocable L/C, Trust Receipt
Agreements, and PNs
 Though the PNs matured on Sept 18, 1997, the 2
aforementioned Trust Receipt Agreements did not
bear any maturity dates as they were left unfilled or in
blank by Asiatrust.
 After Ng received the goods, consisting of chemicals and
metal plates from his suppliers, he utilized them to
fabricate the communication towers ordered from him by
his clients which were installed in 3 project sites: Isabel,
Leyte; Panabo, Davao; and Tongonan.
 As Ng realized difficulty in collecting from his client
Islacom, he failed to pay his loan to Asiatrust. Asiatrust
then conducted a surprise ocular inspection of Ng’s
business through Villarva S. Linga, Asiatrust’s
representative appraiser.
o Linga reported to Asiatrust that he found that
approximately 97% of the subject goods of
the Trust Receipts were "sold-out and that
only 3% of the goods pertaining to PN No.
1963 remained."
 Asiatrust then endorsed Ng’s account to its Account
Management Division for the possible restructuring of his
loan. The parties held a series of conferences. However,
efforts towards a settlement failed to be reached.
 Mar 16, 1999: Remedial Account Officer Ma. Girlie C.
Bernardez filed a Complaint-Affidavit before the Office of
the City Prosecutor of QC.
 Sept 12, 1999: an Information5 for Estafa, as defined
and penalized under Art. 315, par. 1(b) of the RPC in
5 On or about the 30th day of May 1997, in QC; xxx willfully, unlawfully, and
feloniously defraud Ma. Girlie C. Bernardez by entering into a Trust Receipt
Agreement with said complainant whereby said Ng as entrustee received in trust from
the said complainant various chemicals in the total sum of P4.5 million with the
obligation to hold the said chemicals in trust as property of the entruster with the right
to sell the same for cash and to remit the proceeds thereof to the entruster, or to
return the said chemicals if unsold; but said Ng xxx with intent to defraud did then and
there misappropriated, misapplied and converted the said amount to his own
personal use and benefit and despite repeated demands made upon him, said Ng
relation to Sec. 3, PD 115 or the Trust Receipts Law, was
filed with the RTC. Ng pleaded not guilty.
 During the pendency of the case, conferences between
Ng and Asiatrust’s Remedial Account Officer, Daniel Yap,
were held.
 Afterward, a Compromise Agreement was drafted by
Asiatrust.
o One of the requirements of the Compromise
Agreement was for Ng to issue 6 postdated
checks.
o Ng, in good faith, tried to comply by issuing 2 or
3 checks, which were deposited and made
good. The remaining checks, however, were not
deposited as the Compromise Agreement did
not push through.
 RTC (May 29, 2001): guilty; from 6 years, 8 months and
21 days of prision mayor minimum TO 20 years reclusion
temporal maximum
o Ordered to return P2,971,650.00 with legal rate
of interest from the filing of Info until fully paid
o Re contracts of adhesion argument: Ng is
presumed to have read and understood and is,
therefore, bound by the provisions of the Letters
of Credit and Trust Receipts.
o It was clear that Asiatrust had furnished Ng with
a Statement of Account enumerating therein the
precise figures of the outstanding balance along
with the computation of other fees and charges;
thus, Asiatrust did not violate Truth in Lending
Act.
o Ng, being the entrustee stated in the Trust
Receipts issued by Asiatrust, is thus obliged to
hold the goods in trust for the entruster and shall
dispose of them strictly in accordance with the
terms and conditions of the trust receipts;
otherwise, he is obliged to return the goods in
the event of non-sale or upon demand of the
entruster, failing thus, he evidently violated the
Trust Receipts Law.
 CA (Aug 29, 2003): affirmed RTC; subsequent MR
denied
o Re Ng’s argument on the change in the name of
complainant: During the course of the trial, Ng
knew that the complainant Bernardez and the
other co-witnesses are all employees of
Asiatrust and that she is suing in behalf of the
bank.
o The fact that Ng acted without malice or fraud in
entering into the transactions has no bearing,
since the offense is punished as malum
prohibitum regardless of the existence of intent
or malice; the mere failure to deliver the
proceeds of the sale or the goods if not sold
constitutes the criminal offense.
o Re receivables and demand: mere query as to
the whereabouts of the goods and/or money is
tantamount to a demand.
o Re alleged bias, hostility, and prejudice of the
RTC against Ng: Ng failed to present any
substantial proof
ISSUE: W/N Ng is liable for Estafa under Art. 315, par. 1(b) of the
RPC in relation to PD 115 (NO)
RATIO: The Trust Receipts Law does not apply as there is no
sales transaction involved.
refused and failed and still refuses and fails to make good of his obligation, to the
damage and prejudice of the said Ma. Girlie C. Bernardez in the amount of
P2,971,650.00
BANKING: WEEK 5 | 15
 Especially in criminal cases where the accused stands to
lose his liberty by virtue of his conviction, the Court must
be satisfied that the factual findings and conclusions of
the lower courts leading to his conviction must satisfy the
standard of proof beyond reasonable doubt.
 RPC ART. 315. Swindling (estafa).—Any person who
shall defraud another by any of the means mentioned
hereinbelow x x x
o 1. With unfaithfulness or abuse of confidence,
namely:
a. x x x
b. By misappropriating or converting, to the
prejudice of another, money, goods, or any
other personal property received by the offender
in trust or on commission, or for administration,
or under any other obligation involving the duty
to make delivery of or to return the same, even
though such obligation be totally or partially
guaranteed by a bond; or by denying having
received such money, goods, or other property x
x x.
 Essential Elements of Estafa:
o (1) that money, goods or other personal
property is received by the offender in trust or
on commission, or for administration, or under
any obligation involving the duty to make
delivery of or to return it;
o (2) that there be misappropriation or conversion
of such money or property by the offender, or
denial on his part of such receipt;
o (3) that such misappropriation or conversion or
denial is to the prejudice of another; and
o (4) there is demand by the offended party to the
offender.
 Estafa can also be committed in what is called a
"trust receipt transaction" under PD 115
 PD 115 Section 4. What constitutes a trust receipts
transaction.—A trust receipt transaction, within the
meaning of this Decree, is any transaction by and
between a person referred to in this Decree as the
entruster, and another person referred to in this Decree
as entrustee, whereby the entruster, who owns or holds
absolute title or security interests over certain specified
goods, documents or instruments, releases the same to PD 115 Does Not Apply
the possession of the entrustee upon the latter’s
execution and delivery to the entruster of a signed
document called a "trust receipt" wherein the entrustee
binds himself to hold the designated goods, documents
or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the trust
receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed
of, in accordance with the terms and conditions specified
in the trust receipt, or for other purposes substantially
equivalent to any of the following:
1. In the case of goods or documents: (a) to sell
the goods or procure their sale; or (b) to
manufacture or process the goods with the
purpose of ultimate sale: Provided, That, in the
case of goods delivered under trust receipt for
the purpose of manufacturing or processing
before its ultimate sale, the entruster shall retain
its title over the goods whether in its original or
processed form until the entrustee has complied
full with his obligation under the trust receipt; or
(c) to load, unload, ship or transship or
otherwise deal with them in a manner
preliminary or necessary to their sale; or
2. In the case of instruments: (a) to sell or
procure their sale or exchange; or (b) to deliver
them to a principal; or (c) to effect the
consummation of some transactions involving
delivery to a depository or register; or (d) to
effect their presentation, collection or renewal.
The sale of good, documents or instruments by a person
in the business of selling goods, documents or
instruments for profit who, at the outset of transaction,
has, as against the buyer, general property rights in such
goods, documents or instruments, or who sells the same
to the buyer on credit, retaining title or other interest as
security for the payment of the purchase price, does not
constitute a trust receipt transaction and is outside the
purview and coverage of this Decree.
 TRUST RECEIPT TRANSACTION: is one where the
entrustee has the obligation to deliver to the entruster the
price of the sale, or if the merchandise is not sold, to
return the merchandise to the entruster.
 2 OBLIGATIONS IN A TRT:
o 1) refers to money received under the obligation
involving the duty to turn it over (entregarla) to
the owner of the merchandise sold
o 2) refers to the merchandise received under the
obligation to "return" it (devolvera) to the owner
 A violation of any of these undertakings constitutes
Estafa defined under Art. 315, par. 1(b) of the RPC, as
provided in Sec. 13 of PD 115:
o Section 13. Penalty Clause.—The failure of an
entrustee to turn over the proceeds of the sale
of the goods, documents or instruments covered
by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust
receipt or to return said goods, documents or
instruments if they were not sold or disposed of
in accordance with the terms of the trust receipt
shall constitute the crime of estafa
 CASE AT BAR: the transaction between Ng and
Asiatrust is not a trust receipt transaction but one of
simple loan.
 Ng was transparent to Asiatrust from the very beginning
that the subject goods were not being held for sale but
were to be used for the fabrication of steel
communication towers in accordance with his contracts
with Islacom, Smart, and Infocom.
 The true nature of a trust receipt transaction can be
found in the "whereas" clause of PD 115 which states
that a trust receipt is to be utilized "as a convenient
business device to assist importers and merchants solve
their financing problems." Obviously, the State, in
enacting the law, sought to find a way to assist importers
and merchants in their financing in order to encourage
commerce in the Philippines.
 Regardless of whether the transaction is foreign or
domestic, it is important to note that the transactions
discussed in relation to trust receipts mainly involved
sales.
 The entruster, who owns or holds absolute title or
security interests over specified goods, documents or
instruments, releases the subject goods to the
possession of the entrustee. The release of such goods
to the entrustee is conditioned upon his execution and
delivery to the entruster of a trust receipt wherein the
former binds himself to hold the specific goods,
documents or instruments in trust for the entruster and to
BANKING: WEEK 5 | 16
 sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the
entruster the proceeds to the extent of the amount owing
to the entruster or the goods, documents or instruments
themselves if they are unsold.
 CASE AT BAR: the goods in this case were never
intended for sale but for use in the fabrication of
steel communication towers, RTC erred in ruling that
the agreement is a trust receipt transaction.
 RTC relied on the Memorandum of Asiatrust’s appraiser,
Linga, who stated that the goods have been sold by Ng
and that only 3% of the goods remained
 But RTC did not give weight to the testimony of Linga
when he testified6 that he merely presumed that the
goods were sold
o Linga showed that he had no real personal
knowledge or proof of the fact that the goods
were indeed sold. He did not notify Ng about the
inspection nor did he talk to or inquire with Ng
regarding the whereabouts of the subject goods.
Neither did he confirm with Ng if the subject
goods were in fact sold. The Memo which was
based only on his presumption and not any
actual personal knowledge, should not have
been used by the RTC to prove that the goods
have in fact been sold. At the very least, it could
only show that the goods were not in the
warehouse.
Ng’s liability is only limited to the satisfaction of his
obligation from the loan
 The real intent of the parties was simply to enter into a
simple loan agreement.
 To emphasize, the Trust Receipts Law was created to "to
aid in financing importers and retail dealers who do not
have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may
not be able to acquire credit except through utilization, as
collateral, of the merchandise imported or purchased."
 Since Asiatrust knew that Ng was neither an importer
nor retail dealer, it should have known that the said
agreement could not possibly apply to Ng.
Ng is not liable for Estafa both under the RPC and PD 115.
(1) Goods Were Not Received in Trust
 The first element of Estafa under RPC requires that the
money, goods or other personal property must be
received by the offender in trust or on commission, or for
administration, or under any other obligation involving the
duty to make delivery of, or to return it. But as we already
discussed, the goods received by Ng were not held in
trust. They were also not intended for sale and neither
did Ng have the duty to return them. They were only
intended for use in the fabrication of steel communication
towers.
(2) No Misappropriation of Goods or Proceeds
 The second element of Estafa requires that there be
misappropriation or conversion of such money or
property by the offender, or denial on his part of such
receipt.
 This is the very essence of Estafa under Art. 315, par.
1(b). The words "convert" and "misappropriated" connote
an act of using or disposing of another’s property as if it
6 Q So, in other words, when the goods were not there anymore. You presumed that,
that is already sold?
A Yes, your Honor.
were one’s own, or of devoting it to a purpose or use
different from that agreed upon.
 Ng: there was no misappropriation or conversion,
because his liability arises and becomes due only upon
receipt of the proceeds of the sale and not prior to the
receipt of the full price of the goods.
 SC: correct.
 Thus, assuming arguendo that the provisions of PD 115
apply, Ng is not liable for Estafa because Sec. 13 of PD
115 provides that an entrustee is only liable for Estafa
when he fails "to turn over the proceeds of the sale of the
goods x x x covered by a trust receipt to the extent of the
amount owing to the entruster or as appears in the trust
receipt x x x in accordance with the terms of the trust
receipt."
 The trust receipt entered into between Asiatrust and Ng
states: In case of sale I/we agree to hand the
proceeds as soon as received to the BANK to apply
against the relative acceptance (as described above) and
for the payment of any other indebtedness of mine/ours
to ASIATRUST DEVELOPMENT BANK.
 Ng experienced difficulties in collecting payments from
his clients for the communication towers. Absent proof
that the proceeds have been actually and fully received
by Ng, his obligation to turn over the same to Asiatrust
never arose.
 What is more, under the Trust Receipt Agreement itself,
no date of maturity was stipulated. The provision left
blank by Asiatrust: x x x agree to hold said goods in Trust
for the said Bank and as its property with liberty to sell
the same for its account within ________ days from the
date of execution of the Trust Receipt x x x
 In fact, Asiatrust purposely left the space designated for
the date blank, an action which in ordinary banking
transactions would be noted as highly irregular. Hence,
the only way for the obligation to mature was for Asiatrust
to demand from Ng to pay the obligation, which it never
did.
 There was no abuse of confidence to speak of nor was
there any intention to convert the subject goods for
another purpose, since Ng did not withhold the fact that
they were to be used to fabricate steel communication
towers to Asiatrust. Hence, no malice or abuse of
confidence and misappropriation occurred in this
instance due to Asiatrust’s knowledge of the facts.
Ng has fully paid
 This Court also takes judicial notice of the fact that Ng
has fully paid his obligation to Asiatrust, making the claim
for damage and prejudice of Asiatrust baseless and
unfounded. (Asiatrust executed an Affidavit of
Desistance)
Reasonable Doubt Exists
 Colinares v. CA: The practice of banks of making
borrowers sign trust receipts to facilitate collection of
loans and place them under the threats of criminal
prosecution should they be unable to pay it may be
unjust and inequitable, if not reprehensible. Such
agreements are contracts of adhesion which borrowers
have no option but to sign lest their loan be disapproved.
The resort to this scheme leaves poor and hapless
borrowers at the mercy of banks, and is prone to
misinterpretation x x x.
 Such is the situation in this case.
DISPOSITION: ACQUITTED.
BANKING: WEEK 5 | 17
Colinares v CA || Celine
MELVIN COLINARES and LORDINO VELOSO, petitioners, vs.
HONORABLE COURT OF APPEALS, and THE PEOPLE OF
THE PHILIPPINES, respondents.
September 5, 2000
NATURE: Review on certiorari of the decision of the CA.
SUMMARY: Petitioners Colinares and Veloso were charged with
violating the Trust Receipts Law based on a Trust Receipt issued
by PBC to them, in order for them to buy building materials for
their construction project. But the SC here ruled that the 
transaction was a simple by virtue of the fact that the loan was
applied for AFTER Colinares already bought the goods and the
goods were in their position. Normally, in a trust receipt
transaction, the buyer goes to the bank first and the bank
becomes the owner of the goods. In this case, goods were never
owned by the bank, and the “trust receipt” transaction was only
entered into after the goods were in the possession of petitioners.
 In 1979, Melvin Colinares and Lordino Veloso (petitioners)
were contracted by the Carmelite Sisters of CDO to renovate
their convent.
o Consideration: Php 40,000
 Petitioners obtained materials for the construction from CM
Builders Centre.
 They applied for the commercial letter of credit with the
Philippine Banking Corporation in favor of CM Builders
o PBC approved, issued a letter of credit for Php 22,
289 to cover value of the goods.
o Petitioners signed a trust receipt as security, due on
29 Jan 1980.
 PBC debited Php 6,720 from Petitioners marginal deposit as
partial payment of the loan.
 On May 1980, PBC wrote to the petitioners demanding that
the amount be paid within 7 days.
o Veloso confessed that they lost Php 19,195.83 in the
Carmelite Monastery Project, and requested a grace
period of until June 15, 1980 to settle the account.
 On October 1980, PBC again sent a demand letter to
Petitioners asking them to pay the 20, 824 (exclusive of
attorney’s fees) but petitioners still did not.
o They later tried to modify the terms of loan, and paid
Php 1k to PBC.
 Petitioners were charged with the violation of PD 115 (Trust
Receipts Law) in relation to Art. 315 of the RPC.
o Information was filed with Branch 18, RTC of CDO.
o “…the said accused after receipt of the goods, with
intent to defraud and cause damage to the entruster,
conspiring, confederating together and mutually
helping one another, did then and there wilfully,
unlawfully and feloniously fail and refuse to remit the
proceeds of the sale of the goods to the entruster
despite repeated demands but instead converted,
misappropriated and misapplied the proceeds to
their own personal use, benefit and gain, to the
damage and prejudice of the Philippine Banking
Corporation, in the aforesaid sum of P22,389.80,
Philippine Currency.”
 Their defense was that they thought the transaction was a
“clean loan” as per verbal guarantee of PBC’s former
manager. That they signed the loan without reading the fine
print, and that they learned that it was a trust receipt much
later.
o They were assured that the trust receipt was a mere
formality.
 RTC: Convicted petitioners of Estafa. Convinced that the
transaction between the two of them was a trust receipt
transaction.
 CA: Modified the judgment of the trial court by increasing the
penalty. It held that the documentary evidence of the
prosecution prevails over Velosos testimony, discredited
Petitioners claim that the documents they signed were in
blank, and disbelieved that they were coerced into signing
them.
 Petitioners filed a Motion for New Trial/Reconsideration.
o Alleged that the Disclosure Statement on
Loan/Credit Transaction signed by them and the
Manager was suppressed by PBC during the trial.
o Denied by the CA.
Hence, this petition, putting in issue:
o WON the denial of the CA of the Motion for New
Trial, namely, disclosure on loan/credit transaction,
which if introduced would allegedly change the
judgment, does not constitute a denial of due
process.
o Assuming there was a valid Trust Receipt, WON the
accused were properly charged, tried and convicted
for violation of Sec. 13, PD 115 notwithstanding the
“novation of the so-called Trust Receipt”
 Thereafter, Petitioners filed an MTD on the ground that they
already fully paid PBC the balance of Php 70,000 for the
balance of the loan.
o But the SolGen opined that payment of the loan was
akin to a voluntary surrender or plea of guilty which
merely serves to mitigate Petitioners culpability, but
does not in any way extinguish their criminal liability.
 Petition was given due course.
Issue #1: WON the denial of the CA of the Motion for New
Trial, namely, disclosure on loan/credit transaction, which if
introduced would allegedly change the judgment, does not
constitute a denial of due process -- NO
 Preliminaries:
o The grant or denial of a motion for new trial rests
upon the discretion of the judge
o New trial may be granted if: (1) errors of law or
irregularities have been committed during the trial
prejudicial to the substantial rights of the accused; or
(2) new and material evidence has been discovered
which the accused could not with reasonable
diligence have discovered and produced at the trial,
and which, if introduced and admitted, would
probably change the judgment
o For newly discovered evidence to be a ground for
new trial, such evidence must be (1) discovered after
trial; (2) could not have been discovered and
produced at the trial even with the exercise of
reasonable diligence; and (3) material, not merely
cumulative, corroborative, or impeaching, and of
such weight that, if admitted, would probably change
the judgment
 SC Ruling: We find no indication in the pleadings that the
Disclosure Statement is a newly discovered evidence.
o SC finds that the petitioners could not have been
unaware that the 2 page document exists.
o The Disclosure Statement itself states, NOTICE TO
BORROWER: YOU ARE ENTITLED TO A COPY
OF THIS PAPER WHICH YOU SHALL SIGN
 Assuming Petitioners copy was then
unavailable, they could have compelled its
production in court, which they never
did. Petitioners have miserably failed to
establish the second requisite of the rule on
newly discovered evidence.
o The alleged newly discovered evidence is mere
forgotten evidence that jurisprudence excludes as a
BANKING: WEEK 5 | 18
 ground for new trial
Issue #2: Assuming there was a valid Trust Receipt, WON the
accused were properly charged, tried and convicted for
violation of Sec. 13, PD 115 notwithstanding the “novation of
the so-called Trust Receipt” -- NO
 Definition of a Trust Receipt in Sec. 4, PD 115: Any
transaction by and between a person referred to as the
entruster, and another person referred to as the entrustee,
whereby the entruster who owns or holds absolute title or
security interest over certain specified goods, documents or
instruments, releases the same to the possession of the
entrustee upon the latters execution and delivery to the
entruster of a signed document called a trust receipt wherein
the entrustee binds himself to hold the designated goods,
documents or instruments with the obligation to turn over to
the entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the
goods, documents or instruments themselves if they are
unsold or not otherwise disposed of, in accordance with the
terms and conditions specified in the trust receipt.
o Two situations in a trust receipt transaction:
 The first is covered by the provision which
refers to money received under the
obligation involving the duty to deliver it
(entregarla) to the owner of the
merchandise sold.
 The second is covered by the provision
which refers to merchandise received under
the obligation to return it (devolvera) to the
owner
 A thorough examination of the facts obtaining in the case at
bar reveals that the transaction intended by the parties was a
simple loan, not a trust receipt agreement.
o Petitioners received the merchandise from CM
Builders Centre on 30 October 1979. On that day,
ownership over the merchandise was already
transferred to Petitioners who were to use the
materials for their construction project. It was only a
day later, 31 October 1979, that they went to the
bank to apply for a loan to pay for the merchandise.
o This situation belies what normally obtains in a pure
trust receipt transaction where goods are owned by
the bank and only released to the importer in trust
subsequent to the grant of the loan. The bank
acquires a security interest in the goods as holder of
a security title for the advances it had made to the
entrustee.
o The ownership of the merchandise continues to be
vested in the person who had advanced payment
until he has been paid in full, or if the merchandise
has already been sold, the proceeds of the sale
should be turned over to him by the importer or by
his representative or successor in interest
o To secure that the bank shall be paid, it normally
takes full title to the goods at the very beginning
and continues to hold that title as his
indispensable security until the goods are sold
and the vendee is called upon to pay for them;
hence, the importer has never owned the goods and
is not able to deliver possession.
 In a certain manner, trust receipts partake
of the nature of a conditional sale where the
importer becomes absolute owner of the
imported merchandise as soon as he has
paid its price
 BC attempted to cover up the true delivery date of the
merchandise, yet the trial court took notice even though it
failed to attach any significance to such fact in the judgment.
o PBC could have presented its former bank manager,
Cayo Garcia Tuiza, who contracted with Petitioners,
to refute Velosos testimony, yet it only presented
credit investigator Grego Mutia. Nowhere from
Mutias testimony can it be gleaned that PBC
represented to Petitioners that the transaction they
were entering into was not a pure loan but had trust
receipt implications.
 The Trust Receipts Law does not seek to enforce payment of
the loan, rather it punishes the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice
of another regardless of whether the latter is the owner. Here,
it is crystal clear that on the part of Petitioners there was
neither dishonesty nor abuse of confidence in the handling of
money to the prejudice of PBC.
o Petitioners continually endeavored to meet their
obligations, as shown by several receipts issued by
PBC acknowledging payment of the loan.
o The Information charges Petitioners with intent to
defraud and misappropriating the money for their
personal use. The mala prohibita nature of the
alleged offense notwithstanding, intent as a state of
mind was not proved to be present in Petitioners
situation. Petitioners employed no artifice in dealing
with PBC and never did they evade payment of their
obligation nor attempt to abscond. Instead,
Petitioners sought favorable terms precisely to meet
their obligation
 Noteworthy is the fact that Petitioners are not importers
acquiring the goods for re-sale, contrary to the express
provision embodied in the trust receipt. They are contractors
who obtained the fungible goods for their construction
project. At no time did title over the construction materials
pass to the bank, but directly to the Petitioners from CM
Builders Centre. This impresses upon the trust receipt in
question vagueness and ambiguity, which should not be the
basis for criminal prosecution in the event of violation of its
provisions.
WHEREFORE, the challenged Decision of 6 March 1989 and the
Resolution of 16 October 1989 of the Court of Appeals in CA-GR.
No. 05408 are REVERSED and SET ASIDE. Petitioners are
hereby ACQUITTED of the crime charged, i.e., for violation of P.D.
No. 115 in relation to Article 315 of the Revised Penal Code.
DBP v. Prudential Bank | Gab
November 22, 2005
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, v.
PRUDENTIAL BANK, Respondent
Corona, J.
NATURE: Petition for review on certiorari under ROC, Rule 45
SUMMARY: Lirag Textile Mills, Inc. (Litex) opened an irrevocable
commercial letter of credit with Prudential Bank in connection with
its importation of 5,000 spindles for spinning machinery with
drawing frame, simplex fly frame, ring spinning frame and various
accessories, spare parts, and tool gauges. These were then
released to Litex under covering "trust receipts" it executed in
favor of Prudential Bank. The items were installed and used by
Litex in its textile mill in Montalban, Rizal. Later on, to secure a
loan from DBP to Litex, Litex executed real estate and chattel
mortgages on its plant site in Montalban, Rizal, including the
buildings and other improvements, machineries, and equipment
there (which included the articles covered by the "trust receipts").
Prudential Bank later notified DBP of its claim over the various
items covered by the "trust receipts," which had been installed and
BANKING: WEEK 5 | 19
used by Litex in the textile mill. However, due to Litex’s failure to
pay its loan, DBP extrajudicially foreclosed on the real estate and
chattel mortgages, including the articles claimed by Prudential
Bank, acquiring the foreclosed properties. Even after further
correspondence between Prudential Bank and DBP, DBP, without
Prudential Bank’s knowledge, sold the Litex textile mill, as well as
the machineries and equipment therein, to Lyon Textile Mills, Inc.
Prudential Bank then filed a complaint for a sum of money with
damages against DBP with the Makati RTC. Both the RTC and the
CA ruled for Prudential Bank. Upon reaching the SC, the SC
affirmed the CA’s decision.
DOCTRINES (related to topic):
 In a trust receipt transaction, the goods are released
by the entruster (who owns or holds absolute title or
security interests over the said goods) to the
entrustee on the entrustee’s execution and delivery
to the entruster of a trust receipt.
o The trust receipt evidences the absolute title
or security interest of the entruster over the
goods.
 As a consequence of the release of the goods and the
execution of the trust receipt, a 2-fold obligation is
imposed on the entrustee: (1) To hold the designated
goods, documents, or instruments in trust for selling
or otherwise disposing of them and (2) to turn over to
the entruster either the proceeds thereof to the extent
of the amount owing to the entruster or as appears in
the trust receipt or the goods, documents, or
instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms
and conditions specified in the trust receipt.
o In the case of goods, they may also be
released for other purposes substantially
equivalent to: (a) their sale or the
procurement of their sale; or (b) their
manufacture or processing with the purpose
of ultimate sale, in which case the entruster
retains his title over the said goods whether
in their original or processed form until the
entrustee has complied fully with his
obligation under the trust receipt; or (c) the
loading, unloading, shipment or
transshipment, or otherwise dealing with
them in a manner preliminary or necessary
to their sale.
 In a trust receipt transaction, the release of the goods
to the entrustee, on his execution of a trust receipt, is
essentially for their sale or is necessarily connected
with their ultimate or subsequent sale.
FACTS:
 Lirag Textile Mills, Inc. (Litex) opened an irrevocable
commercial letter of credit with Prudential Bank for
US$498,000 in connection with its importation of
5,000 spindles for spinning machinery with drawing
frame, simplex fly frame, ring spinning frame and
various accessories, spare parts, and tool gauges.
o These were released to Litex under covering
"trust receipts" it executed in favor of
Prudential Bank.
 Litex installed and used the items in its textile mill in
Montalban, Rizal.
 DBP later granted a foreign currency loan of
US$4,807,551 to Litex.
o To secure the loan, Litex executed real estate
and chattel mortgages on its plant site in
ISSUE #1 (MAIN):
Montalban, Rizal, including the buildings and
other improvements, machineries, and
equipment there.
o Among the machineries and equipment
mortgaged to DBP were the articles covered
by the "trust receipts."
 Prudential Bank then learned about DBP’s plan for the
overall rehabilitation of Litex.
 In a July 14, 1982 letter, Prudential Bank notified DBP
of its claim over the various items covered by the
"trust receipts," which had been installed and used by
Litex in the textile mill.
o Prudential Bank informed DBP that it was the
absolute and juridical owner of the said items
and they were thus not part of the mortgaged
assets that could be legally ceded to DBP.
 Due to Litex’s failure to pay its obligation, DBP
extrajudicially foreclosed on the real estate and
chattel mortgages, including the articles claimed by
Prudential Bank.
o During the foreclosure sale, DBP acquired
the foreclosed properties as the highest
bidder.
 DBP later caused to be published in the September 2,
1984 issue of the Times Journal an invitation to bid in
the public sale to be held on September 10, 1984.
o It called on interested parties to submit bids
for the sale of the textile mill formerly owned
by Litex, the land on which it was built, as well
as the machineries and equipment therein.
 Learning of the intended public auction, Prudential Bank
wrote a letter to DBP (dated September 6, 1984)
reasserting its claim over the items covered by "trust
receipts" in its name and advising DBP not to include
them in the auction.
o Prudential Bank also demanded the turnover of
the articles or, alternatively, the payment of their
value.
 In reply to Prudential Bank’s September 6, 1984 letter,
DBP requested documents to enable it to evaluate
Prudential Bank’s claim.
 Prudential Bank later gave DBP the requested
documents.
 Around November 1984, Prudential Bank followed up the
status of its claim.
 In a letter dated December 3, 1984, DBP informed
Prudential Bank that its claim had been referred to
DBP’s legal department and instructed Prudential Bank
to get in touch with its chief legal counsel.
 There being no concrete action on DBP’s part,
Prudential Bank, in a letter dated July 30, 1985, made a
final demand on DBP for the turnover of the contested
articles or the payment of their value.
 June 8, 1987: Without Prudential Bank’s knowledge,
DBP sold the Litex textile mill, as well as the
machineries and equipment therein, to Lyon Textile
Mills, Inc. (Lyon).
 Prudential Bank filed a complaint for a sum of money
with damages against DBP with the Makati RTC.
 The RTC, applying PD 115 (Trust Receipts Law), ruled
for Prudential Bank.
 DBP appealed to the CA, which dismissed the appeal
and affirmed the RTC’s decision in toto.
 DBP filed an MR, which was also dismissed by the CA.
 DBP then filed the present petition or review on certiorari
under ROC, Rule 45 with the SC.
 W/N the contested articles were excluded from goods
that could be covered by a trust receipt (NO)
BANKING: WEEK 5 | 20
RATIO #1:
 Trust receipt transactions are governed by PD 115
(Trust Receipts Law), which defines a trust receipt as:
“Section 4. What constitutes a trust receipt transaction. – A
trust receipt transaction, within the meaning of this Decree, is any
transaction by and between a person referred to in this Decree as
the entruster, and another person referred to in this Decree as
entrustee, whereby the entruster, who owns or holds absolute title
or security interests over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee
upon the latter’s execution and delivery to the entruster of a
signed document called a "trust receipt" wherein the entrustee
binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise
dispose of the goods, documents or instruments with the
obligation to turn over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster or as appears in the
trust receipt or the goods, documents or instruments themselves if
they are unsold or not otherwise disposed of, in accordance with
the terms and conditions specified in the trust receipt, or for other
purposes substantially equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods or
procure their sale; or (b) to manufacture or process the goods with
the purpose of ultimate sale: Provided, That, in the case of goods
delivered under trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall retain its
title over the goods whether in its original or processed form until
the entrustee has complied fully with his obligation under the trust
receipt; or (c) to load, unload, ship or tranship or otherwise deal
with them in a manner preliminary or necessary to their sale; or
2. In the case of instruments, (a) to sell or procure their sale or
exchange; or (b) to deliver them to a principal; or (c) to effect the
consummation of some transactions involving delivery to a
depository or register; or (d) to effect their presentation, collection
or renewal.
x x x x x x x x x”
 In a trust receipt transaction, the goods are released
by the entruster (who owns or holds absolute title or
security interests over the said goods) to the
entrustee on the entrustee’s execution and delivery
to the entruster of a trust receipt.
o The trust receipt evidences the absolute title
or security interest of the entruster over the
goods. Amount of Bill
 As a consequence of the release of the goods and the
execution of the trust receipt, a 2-fold obligation is
imposed on the entrustee: (1) To hold the designated
goods, documents, or instruments in trust for selling
or otherwise disposing of them and (2) to turn over to
the entruster either the proceeds thereof to the extent
of the amount owing to the entruster or as appears in
the trust receipt or the goods, documents, or
instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms
and conditions specified in the trust receipt.
o In the case of goods, they may also be
released for other purposes substantially
equivalent to: (a) their sale or the
procurement of their sale; or (b) their
manufacture or processing with the purpose
of ultimate sale, in which case the entruster
retains his title over the said goods whether
in their original or processed form until the
entrustee has complied fully with his
obligation under the trust receipt; or (c) the
loading, unloading, shipment or
transshipment, or otherwise dealing with
them in a manner preliminary or necessary
to their sale.7
 Thus, in a trust receipt transaction, the release of the
goods to the entrustee, on his execution of a trust
receipt, is essentially for their sale or is necessarily
connected with their ultimate or subsequent sale.
 Litex was not engaged in the business of selling spinning
machinery, its accessories, and spare parts, but in
manufacturing and producing textile and various kinds of
fabric.
 The articles were not released to Litex to be sold nor
was the transfer of possession intended to be a
preliminary step for the said goods to be ultimately or
subsequently sold.
 Instead, the contemporaneous and subsequent acts
of both Litex and Prudential Bank showed that the
imported articles were released to Litex to be
installed in its textile mill and used in its business.
o DBP itself was aware of this.
 DBP: The chattels in controversy were procured by Litex
for the exclusive use of its textile mills. They were not
procured: (a) to sell or otherwise procure their sale or (b)
to manufacture or process the goods with the purpose of
ultimate sale.
o Hence, the transactions between Litex and
Prudential Bank were not trust receipt
transactions within the meaning of PD 115.
o It follows that, contrary to the decisions of the
lower courts, the transactions were not
governed by PD 115.
 The SC disagreed with DBP’s contention.
 The various agreements between Prudential Bank and
Litex commonly denominated as "trust receipts" were
valid.
o Their provisions did not contravene the law,
morals, good customs, public order, or public
policy.
 The agreements uniformly provided:
Received, upon the Trust hereinafter mentioned from the
PRUDENTIAL BANK (hereinafter referred to as BANK) the
following goods and merchandise, the property of said
BANK specified in the bill of lading as follows:
Description of Security Marks & Nos. Vessel
and in consideration thereof, I/We hereby agree to hold said
goods in trust for the BANK and as its property with liberty to
sell the same for its account but without authority to make any
other disposition whatsoever of the said goods or any part thereof
(or the proceeds thereof) either by way of conditional sale, pledge,
or otherwise.
x x x x x x x x x”
 The articles were owned by Prudential Bank and they
were only held by Litex in trust.
o While it was allowed to sell the items, Litex had
no authority to dispose of them or any part
thereof or their proceeds through conditional
sale, pledge, or any other means.
 NCC, Art. 2085 (2) requires that, in a contract of pledge
or mortgage, it is essential that the pledgor or should be
7 See PD 115, Sec. 4 (1)
BANKING: WEEK 5 | 21
 the absolute owner of the thing pledged or mortgaged.
 NCC, Art. 2085 (3) further mandates that the person
constituting the pledge or mortgage must have the free
disposal of his property, and in the absence thereof, that
he be legally authorized for the purpose.
 Litex had neither absolute ownership, free disposal, nor
the authority to freely dispose of the articles.
 Litex could not have subjected the articles to a
chattel mortgage.
o Their inclusion in the mortgage was void and
had no legal effect.
 There being no valid mortgage, there could also be no
valid foreclosure or valid auction sale.
 Thus, DBP could not be considered either as a
mortgagee or as a purchaser in good faith.
 No one can transfer a right to another greater than what
he himself has. Nemo dat quod non habet. Hence, Litex
could not transfer a right that it did not have over the
disputed items.
 Corollarily, DBP could not acquire a right greater than
what its predecessor-in-interest had.
o The spring cannot rise higher than its source.
 DBP merely stepped into the shoes of Litex as trustee
of the imported articles with an obligation to pay their
value or to return them on Prudential Bank’s
demand.
 By its failure to pay or return them, despite
Prudential Bank’s repeated demands, and by selling
them to Lyon without Prudential Bank’s knowledge
and conformity, DBP became a trustee ex maleficio.
ISSUE #2:
 W/N the SC may review the evidence presented
during the trial and reverse the factual findings of the
RTC concerning the award of actual damages (NO)
RATIO #2:
 The SC is not a trier of facts and it is not its function to
analyze or weigh evidence anew.
 The rule is that factual findings of the trial court, when
adopted and confirmed by the CA, are binding and
conclusive on SC and, generally, will not be reviewed on
appeal.
o While there are recognized exceptions to this
rule, none of the established exceptions applies
at bar.
ISSUE #3:
 W/N the awards of exemplary and compensatory
damages and attorney’s fees were proper (YES)
RATIO #3:
 The CA agreed with the RTC that the requirements for
the award of exemplary damages had been sufficiently
established.
 Prudential Bank’s entitlement to compensatory damages
was also amply proven.
 It was shown that DBP was aware of Prudential Bank’s
claim as early as July 1982.
o However, DBP ignored Prudential Bank’s
demand, included the disputed articles in the
mortgage foreclosure, and caused their sale in a
public auction, where it was declared as the
highest bidder.
 Thereafter, in the series of communications between
them, DBP gave Prudential Bank the false impression
that its claim was still being evaluated.
 Without acting on Prudential Bank’s plea, DBP included
the contested articles among the properties it sold to
Lyon.
 The RTC found that this chain of events showed DBP’s
fraudulent attempt to prevent Prudential Bank from
asserting its rights.
o It smacked of bad faith, if not deceit.
 Thus, the award of exemplary damages was in order.
 Due to the award of exemplary damages, the grant of
attorney’s fees was proper.8
ISSUE #4:
 W/N Prudential Bank’s right to enforce its action had
prescribed when it filed its complaint (NO)
RATIO #4:
 DBP: Under NCC, Art. 1146 (1), Prudential Bank’s cause
of action had prescribed as it should be reckoned from
October 10, 1980, the day the mortgage was registered
SC: Not correct
 The written extrajudicial demand by the creditor
interrupted the prescription of action.9
 Hence, the 4-year prescriptive period was interrupted
when Prudential Bank wrote the extrajudicial demands
for the turnover of the articles or their value.
o In particular, the last demand letter sent by
Prudential Bank was dated July 30, 1988, which
was received by DBP the next day.
 Thus, Prudential Bank’s right to enforce its action had not
yet prescribed when it filed the complaint on May 24,
1988.
DISPOSITION
 The petition is denied.
Rosario Textile Mills v Home Bankers| CM
June 29, 2005
ROSARIO TEXTILE MILLS CORPORATION and EDILBERTO
YUJUICO, petitioners, vs. HOME BANKERS SAVINGS AND
TRUST COMPANY,respondent.
SANDOVAL-GUTIERREZ, J.:
Summary: RTMC was granted a credit line by Home Bankers.
Yujuico bound himself jointly and severally as surety. RTCM made
drawdowns and issued PNs and trust receipts. RTMC failed to pay
its loan. Home Bankers sued. RTMC alleges that the agreement
was that the bank was the owner of the goods RTMC imported by
virtue of the trust receipts and that RTMC did not accept the goods
imported. SC disagreed. The principal contact was that of a loan
and RTMC delivered the raw materials to the bank as collateral.
Trust receipts were executed by the parties to evidence this
security arrangement. The trust receipts were mere securities.
Doctrine: a trust receipt, therefore, is a security agreement,
pursuant to which a bank acquires a security interest in the goods.
It secures an indebtedness and there can be no such thing as
security interest that secures no obligation
FACTS:
 1989, Rosario Textile Mills Corporation (RTMC) applied
from Home Bankers Savings & Trust Co. for an Omnibus
Credit Line for P10 million.
 The bank approved RTMCs credit line but for only P8
million. The bank notified RTMC of the grant of the said
loan thru a letter dated March 2, 1989 which contains
terms and conditions conformed by RTMC thru Edilberto
V. Yujuico.
 Yujuico signed a Surety Agreement in favor of the
bank, in which he bound himself jointly and severally
with RTMC for the payment of all RTMCs
indebtedness to the bank from 1989 to 1990.
8 Cf. NCC, Art. 2208 (1)
9 Cf. NCC, Art. 1155
BANKING: WEEK 5 | 22
  RTMC availed of the credit line by making numerous
drawdowns, each drawdown being covered by a
separate promissory note and trust receipt. RTMC,
represented by Yujuico, executed in favor of the bank a
total of eleven (11) promissory notes.
 RTMC failed to pay its loans. Hence, the bank filed a
complaint for sum of money against RTMC and Yujuico
 RTMC and Yujuico contend that they should be absolved
from liability. They claimed that although the grant of the  In Samo vs. People, we described a trust receipt as a
credit line and the execution of the suretyship agreement
are admitted, the bank gave assurance that the
suretyship agreement was merely a formality under
which Yujuico will not be personally liable. They
argue that the importation of raw materials under the
credit line was with a grant of option to them to turn-over
to the bank the imported raw materials should these fail
to meet their manufacturing requirements. RTMC offered
to make such turn-over since the imported materials did
not conform to the required specifications. However, the
bank refused to accept the same, until the materials were
destroyed by a fire
 RTC ruled in favor of the bank
 RTMC and Yujuico appealed contending that under the
trust receipt contracts between the parties, they merely
held the goods described therein in trust for
respondent Home Bankers Savings and Trust
Company (the bank) which owns the same. Since the
ownership of the goods remains with the bank, then it
should bear the loss. With the destruction of the goods by
fire, petitioners should have been relieved of any
obligation to pay.
 CA affirmed the RTC, holding that the bank is merely the
holder of the security for its advance payments to
petitioners; and that the goods they purchased, through
the credit line extended by the bank, belong to them and
hold said goods at their own risk.
ISSUE 1/ HELD: WON RTMC and Yujuico are relieved of their
obligation to pay their loan after they tried to tender the goods to
the bank which refused to accept the same (NO)
RATIO:
 RTC and Yujuico theorize that when RTMC imported the
raw materials needed for its manufacture, using the credit
line, it was merely acting on behalf of the bank, the true
owner of the goods by virtue of the trust receipts.
Hence, under the doctrine of res perit domino, the bank ISSUE 2/ HELD: WON RTMC and Yujuico are solidarily liable for
took the risk of the loss of said raw materials. RTMCs the payment of their obligations to the bank (YES)
role in the transaction was that of end user of the raw RATIO:
materials and when it did not accept those materials as
they did not meet the manufacturing requirements
 SC: this however, conveniently ignores the true nature of
its transaction with the bank. We recall that RTMC filed
with the bank an application for a credit line in the
amount ofP10 million, but only P8 million was approved.
RTMC then made withdrawals from this credit line and
issued several promissory notes in favor of the bank.
 In banking and commerce, a credit line is that amount of
money or merchandise which a banker, merchant, or
supplier agrees to supply to a person on credit and
generally agreed to in advance. It is the fixed limit of
credit granted by a bank, retailer, or credit card issuer to
a customer, to the full extent of which the latter may avail
himself of his dealings with the former but which he must
not exceed and is usually intended to cover a series of
transactions in which case, when the customers line of
credit is nearly exhausted, he is expected to reduce his
indebtedness by payments before making any further
drawings.
 CAB: The principal transaction between petitioner RTMC
and the bank is a contract of loan. RTMC used the
proceeds of this loan to purchase raw materials from a
supplier abroad. In order to secure the payment of the
loan, RTMC delivered the raw materials to the bank as
collateral. Trust receipts were executed by the parties to
evidence this security arrangement. Simply stated, the
trust receipts were mere securities.
security transaction intended to aid in financing importers
and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit
except through utilization, as collateral, of the
merchandise imported or purchased.
 In Vintola vs. Insular Bank of Asia and America, we
elucidated further that a trust receipt, therefore, is a
security agreement, pursuant to which a bank
acquires a security interest in the goods. It secures
an indebtedness and there can be no such thing as
security interest that secures no obligation.
 Section 3 (h) of the Trust Receipts Law (P.D. No. 115)
defines a security interest as follows: (h) Security Interest
means a property interest in goods, documents, or
instruments to secure performance of some obligation of
the entrustee or of some third persons to the entruster
and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or
retained for security only.
 Petitioners insistence that the ownership of the raw
materials remained with the bank is untenable. In Sia vs.
People, Abad vs. Court of Appeals, and PNB vs.
Pineda, we held that:
 If under the trust receipt, the bank is made to appear as
the owner, it was but an artificial expedient, more of legal
fiction than fact, for if it were really so, it could dispose of
the goods in any manner it wants, which it cannot do, just
to give consistency with purpose of the trust receipt of
giving a stronger security for the loan obtained by the
importer. To consider the bank as the true owner from
the inception of the transaction would be to
disregard the loan feature thereof...
 Thus, petitioners cannot be relieved of their obligation to
pay their loan in favor of the bank.
 Yujuico contends that the suretyship agreement he
signed does not bind him, the same being a mere
formality.
 SC: NO. First, there is no record to support his allegation
that the surety agreement is a mere formality; and the
Suretyship Agreement signed by petitioner Yujuico binds
him. The terms clearly show that he agreed to pay the
bank jointly and severally with RTMC.
 The parole evidence rule under Section 9, Rule 130 of
the Revised Rules of Court is in point, thus:
 SEC. 9. Evidence of written agreements. When the terms
of an agreement have been reduced in writing, it is
considered as containing all the terms agreed upon and
there can be, between the parties and their successors in
interest, no evidence of such terms other than the
contents of the written agreement.
 However, a party may present evidence to modify,
explain, or add to the terms of the written agreement if he
puts in issue in his pleading:
(a) An intrinsic ambiguity, mistake, or imperfection in
the written agreement;
BANKING: WEEK 5 | 23
 (b) The failure of the written agreement to express the
true intent and agreement of the parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the
parties or their successors in interest after the
execution of the written agreement.
 Under this Rule, the terms of a contract are rendered
conclusive upon the parties and evidence aliunde is not
admissible to vary or contradict a complete and
enforceable agreement embodied in a document.
 There is no ambiguity in the Suretyship Agreement
signed by Yujuico.
ISSUE 3/ HELD: WON the CA violated the Trust Receipts Law
(NO)
 The contract between the parties is a loan. What
respondent bank sought to collect as creditor was the
loan it granted to petitioners. Petitioners recourse is to
sue their supplier, if indeed the materials were defective.
DISPOSITION. AFFIRMED
Vintola vs Insular Bank of Asia and America| Karl
May 29, 1987
SPOUSES TIRSO I. VINTOLA and LORETO DY VINTOLA,
defendants-appellants, vs. INSULAR BANK OF ASIA AND
AMERICA, plaintiff-appellee.
MELENCIO-HERRERA, J.:
NATURE: Appeal to SC
SUMMARY:
 The Vintolas were granted a letter of credit by IBAA. The
Vintolas executed a Trust Receipt Agreement with IBAA
involving the seashells. The Vintolas defaulted.
Thereafter, IBAA filed a case for estafa but the Vintolas
were acquitted. Subsequently, IBAA filed a civil case to
collect from the Vintolas. The SC held that the acquittal in
the criminal case did not bar the civil action and that the
Vintolas were still liable to IBAA despite the return of the
seashells which were subject of the Trust Receipt
Agreement.
DOCTRINE (related to topic):
 A letter of credit-trust receipt arrangement is endowed
with its own distinctive features and characteristics.
Under that set-up, a bank extends a loan covered by the
Letter of Credit, with the trust receipt as a security for the
loan. In other words, the transaction involves a loan
feature represented by the letter of credit, and a security
feature which is in the covering trust receipt
 A trust receipt, therefore, is a security agreement,
pursuant to which a bank acquires a "security interest" in
the goods. "It secures an indebtedness and there can be
no such thing as security interest that secures no
obligation."
FACTS:
 On August 20, 1975 the spouses Tirso and Loreta Vintola
(the VINTOLAS, for short), doing business under the
name and style "Dax Kin International," engaged in the
manufacture of raw sea shells into finished products,
applied for and were granted a domestic letter of credit
by the Insular Bank of Asia and America (IBAA), Cebu
City in the amount of P40,000.00.
 The Letter of Credit authorized the bank to negotiate for
their account drafts drawn by their supplier, one Stalin
Tan, on Dax Kin International for the purchase of puka
and olive seashells.
 In consideration thereof, the VINTOLAS, jointly and
severally, agreed to pay the bank "at maturity, in
Philippine currency, the equivalent, of the
aforementioned amount or such portion thereof as may
be drawn or paid, upon the faith of the said credit
together with the usual charges."
 On the same day, August 20, 1975, having received from
Stalin Tan the puka and olive shells worth P40,000.00,
the VINTOLAS executed a Trust Receipt agreement with
IBAA, Cebu City.
 Under that Agreement, the VINTOLAS agreed to hold the
goods in trust for IBAA as the "latter's property with
liberty to sell the same for its account, " and "in case of
sale" to turn over the proceeds as soon as received to
(IBAA) the due date indicated in the document was
October 19, 1975.
 Having defaulted on their obligation, IBAA demanded
payment from the VINTOLAS in a letter dated January 1,
1976. The VINTOLAS, who were unable to dispose of the
shells, responded by offering to return the goods.
 IBAA refused to accept the merchandise, and due to the
continued refusal of the VINTOLAS to make good their
undertaking, IBAA charged them with Estafa for having
misappropriated, misapplied and converted for their own
personal use and benefit the aforesaid goods.
 During the trial of the criminal case the VINTOLAS turned
over the seashells to the custody of the Trial Court.
 CFI: acquitted Vintolas after finding that the element of
misappropriation or conversion was inexistent.
 Shortly thereafter, IBAA commenced the present civil
action to recover the value of the goods before the
Regional Trial Court of Cebu, Branch XVI.
 Holding that the complaint was barred by the judgment of
acquittal in the criminal case, said Court dismissed the
complaint. However, on IBAA's motion, the Court granted
reconsideration.
 Vintolas’ Contentions:
o The VINTOLAS rest their present appeal on the
principal allegation that their acquittal in the
Estafa case bars IBAA's filing of the civil action
because IBAA had not reserved in the criminal
case its right to enforce separately their civil
liability. They maintain that by intervening
actively in the prosecution of the criminal case
through a private prosecutor, IBAA had chosen
to file the civil action impliedly with the criminal
action, pursuant to Section 1, Rule 111 of the
1985 Rules on Criminal Procedure, reading:
 Section 1. Institution of criminal and
civil action. — When a criminal action
is instituted, the civil action for the
recovery of civil liability arising from the
offense charged is impliedly instituted
with the criminal action, unless the
offended party expressly waives the
civil action or reserves his right to
institute it separately. ...
o and that since the judgment in the criminal case
had made a declaration that the facts from
which the civil action might arise did not exist,
the filing of the civil action arising from the
offense is now barred, as provided by Section 3-
b of Rule 111 of the same Rules providing:
 (b) Extinction of the penal action does
not carry with it extinction of the civil,
unless the extinction proceeds from a
declaration in a final judgment that the
fact from which the civil might arise did
not exist. In other cases, the person
entitled to the civil action may institute
it in the jurisdiction in the manner
BANKING: WEEK 5 | 24
 provided by law against the person
who may be liable for restitution of the
thing and reparation or indemnity for
the damage suffered.
o Further, the VINTOLAS take the position that
their obligation to IBAA has been extinguished
inasmuch as, through no fault of their own, they
were unable to dispose of the seashells, and
that they have relinguished possession thereof
to the IBAA, as owner of the goods, by
depositing them with the Court.
Preliminaries:
 A letter of credit-trust receipt arrangement is endowed
with its own distinctive features and characteristics.
Under that set-up, a bank extends a loan covered by the
Letter of Credit, with the trust receipt as a security for the
loan. In other words, the transaction involves a loan
feature represented by the letter of credit, and a security
feature which is in the covering trust receipt.
 Thus, Section 4 of P.D. No. 115 defines a trust receipt
transaction as:
... any transaction by and between a person referred to in this
Decree as the entruster, and another person referred to in this
Decree as the entrustee, whereby the entruster, who owns or
holds absolute title or security interests over certain specified
goods, documents or instruments, releases the same to the
possession of the entrustee upon the latter's execution and
delivery to the entruster of a signed document called a "trust
receipt" wherein the entrustee binds himself to hold the designated
goods, documents or instruments in trust for the entruster and to
sell or otherwise dispose of the goods, documents or instrument
thereof to the extent of the amount owing to the entruster or as
appears in the trust receipt or the goods, documents or
instruments themselves if they are unsold or not otherwise
disposed of, in accordance with the terms and conditions specified
in the trust receipt, or for other purposes substantially equivalent
to any one of the following:
1. In the case of goods or documents, (a) to sell the goods or
procure their sale
 A trust receipt, therefore, is a security agreement,
pursuant to which a bank acquires a "security interest" in
the goods. "It secures an indebtedness and there can be
no such thing as security interest that secures no
obligation."
(h) "Security Interest"means a property interest in goods,
documents or instruments to secure performance of some
obligations of the entrustee or of some third persons to the
entruster and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or retained for
security only.
ISSUE #1:
Whether or not the Vintolas’ obligation to IBAA has been
extinguished inasmuch as, through no fault of their own, they were
unable to dispose of the seashells, and that they have
relinguished possession thereof to the IBAA, as owner of the
goods, by depositing them with the Court.--NO
RATIO#1:
 As elucidated in Samo vs. People "a trust receipt is
considered as a security transaction intended to aid in
financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral of
the merchandise imported or purchased."
 Contrary to the allegation of the VINTOLAS, IBAA did not
become the real owner of the goods. It was merely the
holder of a security title for the advances it had made to
the VINTOLAS The goods the VINTOLAS had purchased
through IBAA financing remain their own property and
they hold it at their own risk. The trust receipt
arrangement did not convert the IBAA into an investor;
the latter remained a lender and creditor.
 Since the IBAA is not the factual owner of the goods, the
VINTOLAS cannot justifiably claim that because they
have surrendered the goods to IBAA and subsequently
deposited them in the custody of the court, they are
absolutely relieved of their obligation to pay their loan
because of their inability to dispose of the goods. The
fact that they were unable to sell the seashells in
question does not affect IBAA's right to recover the
advances it had made under the Letter of Credit. In so
arguing, the VINTOLAS conveniently close their eyes to
their application for a Letter of Credit wherein they
expressly obligated themselves in these terms:
o IN CONSIDERATION THEREOF, I/we promise
and agree to pay you at maturity in Philippine
Currency the equivalent of the above amount or
such portion thereof as may be drawn or paid
upon the faith of said credit together with the
usual charges. ...
 They further agreed that their marginal deposit of
P8,000.00, later increased to P11,000.00 be applied,
without further proceedings or formalities to pay or
reduce our obligation under this letter of credit or its
corresponding Trust Receipt
ISSUE #2
Whether or not the Vintolas’ acquittal in the Estafa case bars
IBAA's filing of the civil action because IBAA had not reserved in
the criminal case its right to enforce separately their civil liability.--
NO
RATIO #2:
 The foregoing premises considered, it follows that the
acquittal of the VINTOLAS in the Estafa case is no bar to
the institution of a civil action for collection.
 It is inaccurate for the VINTOLAS to claim that the
judgment in the estafa case had declared that the facts
from which the civil action might arise, did not exist, for, it
will be recalled that the decision of acquittal expressly
declared that "the remedy of the Bank is civil and not
criminal in nature."
 This amounts to a reservation of the civil action in IBAA's
favor, for the Court would not have dwelt on a civil liability
that it had intended to extinguish by the same decision.
The VINTOLAS are liable ex contractu for breach of the
Letter of Credit — Trust Receipt, whether they did or they
did not "misappropriate, misapply or convert" the
merchandise as charged in the criminal case.
 Their civil liability does not arise ex delicto, the action for
the recovery of which would have been deemed instituted
with the criminal-action (unless waived or reserved) and
where acquittal based on a judicial declaration that the
criminal acts charged do not exist would have
extinguished the civil action.
 Rather, the civil suit instituted by IBAA is based ex
contractu and as such is distinct and independent from
any criminal proceedings and may proceed regardless of
the result of the latter. Under the situational
circumstances of the parties, they are governed by Article
31 of the Civil Code, explicitly providing:
Art. 31. When the civil action is based on an obligation not arising
BANKING: WEEK 5 | 25
from the act or omission complained of as a felony, such civil
action may proceed independently of the criminal proceedings and
regardless of the result of the latter.
DISPOSITION: Affirmed.
People v. Nitafan / Ish
April 6, 1992
PEOPLE OF THE PHILIPPINES and ALLIED BANKING
CORPORATION, petitioners, vs. HON. JUDGE DAVID G.
NITAFAN and BETTY SIA ANG, respondents.
GUTIERREZ, JR., J.
SUMMARY: Betty Sia Ang was charged with estafa under Art.
315, par. 1 (b) of the RPC in relation to PD 115 (The Trus
Receipts Law). She filed a motion to quash on the ground that the
facts charged do not constitute an offense. Judge Nitafan granted
the motion to quash. SC reversed.
DOCTRINE: An entrustee in a trust receipt agreement who fails to
deliver the proceeds of the sale or to return the goods if not sold to
the entruster-bank is liable for the crime of estafa. Trust receipts
are indispensable contracts in international and domestic business
transactions. The prevalent use of trust receipts, the danger of
their misuse and/or misappropriation of the goods or proceeds
realized from the sale of goods, documents or instruments
held in trust for entruster-banks, and the need for regulation of
trust receipt transactions to safeguard the rights and enforce the
obligations of the parties involved are the main thrusts of P.D.
115.
FACTS:
 Betty Sia Ang was the proprietress of Eckart Enterprises.
 She executed a trust receipt in favor of petitioner Allied
Banking Corporation and received in trust from the bank
Gordon Plastics, plastic sheeting and Hook Chromed, in
the total amount of P398,000.00.
o The trust receipt contained an express
obligation on the part of Ang to sell the same
and account for the proceeds of the sale
thereof, if sold, or to return said merchandise, if
not sold, on or before October 16, 1980, or upon
demand.
 Despite demands from Allied Bank, Ang paid only the
amount of P283,115.78, thereby leaving unaccounted for
the amount of P114,884.22.
 The accused filed a motion to quash the information on
the ground that the facts charged do not constitute an
offense.
 Respondent Judge Nitafan granted the motion to quash.
o A trust receipt transaction is an evidence of a
loan being secured so that there is, as between
the parties to it, a creditor-debtor relationship.
o The penal clause of Presidential Decree No.
115 on the Trust Receipts Law is inoperative
because it does not actually punish an offense
mala prohibita. It merely refers to the provision
on estafa in the RPC.
o People v. Cuevo: for lack of the required
number of votes, the SC upheld the dismissal of
a charge for estafa for a violation of a trust
receipt agreement.
o Sia v. People (1983): violation of PD 115 merely
gives rise to a civil obligation.
 At the time the order to quash was issued or on January
7, 1988, these two decisions were the only most recent
ones.
 Hence, this petition.
ISSUE #1 (MAIN):
 WoN failure of an entrustee to turn over the proceeds
of the sale or to return the goods subject of the trust
receipt can be held liable for estafa. (YES)
RATIO #1:
 Allied Banking Corp. v. Hon. Ordoñez (1990): SC
reversed the pronouncement of the Secretary of Justice
limiting the application of the penal provision of P.D. 115
only to goods intended to be sold to the exclusion of
those still to be manufactured.
 Lee v. Rodil (1989) and Sia v. CA (1988): Acts involving
the violation of trust receipt agreements occuring after 29
January 1973 (date of enactment of P.D. 115) would
make the accused criminally liable for estafa under
paragraph 1 (b), Article 315 of the Revised Penal Code
(RPC) pursuant to the explicit provision in Section 13 of
P.D. 115.
 PD 115 provides:
Sec. 13. Penalty clause. - The failure of an entrustee to
turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to
the extent of the amount owing to the entruster or as
appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three Hundred and
Fifteen, paragraph one (b) of Act Numbered Three
Thousand Eight Hundred and Fifteen, as amended,
otherwise known as the Revised Penal Code. If the
violation or offense is committed by a corporation,
partnership, association or other juridical entities, the
penalty provided for in this Decree shall be imposed upon
the directors, officers, employees or other officials or
persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal
offense.
 Par. 1 (b), Art. 315, RPC states:
Swindling (estafa). - Any person who shall
defraud another by any of the means mentioned herein
below x x x:
xxx xxx xxx
b. By misappropriating or converting, to the prejudice of
another, money, goods, or any other personal property
received by the offender in trust or on commission, or for
administration, or under any other obligation involving the
duty to make delivery of or to return the same, even
though such obligation be totally or partially guaranteed
by a bond; or by denying having received such money,
goods, or other property.
 The factual circumstances in the present case show that
the alleged violation was committed sometime in 1980 or
during the effectivity of P.D. 115. The failure, therefore,
to account for the P114,884.22 balance is what makes
the accused-respondent criminally liable for estafa.
 The Court reiterates its definitive ruling that, in
the Cuevo and Sia (1983) cases relied upon by
the accused, P.D. 115 was not applied because the
questioned acts were committed before its effectivity.
 Contrary to the reasoning of the respondent court and the
accused, a trust receipt arrangement does not involve a
simple loan transaction between a creditor and a debtor-
BANKING: WEEK 5 | 26
 importer.
o Apart from a loan feature, the trust receipt
arrangement has a security feature that is
covered by the trust receipt itself.
o That second feature is what provides the much
needed financial assistance to our traders in the
importation or purchase of goods or
merchandise through the use of those goods or
merchandise as collateral for the advancements
made by a bank.
o The title of the bank to the security is the one
sought to be protected and not the loan which is
a separate and distinct agreement.
ISSUE #2:
 WoN PD 115 violates the constitutional prohibition
against imprisonment for debt. (NO)
RATIO #2:
 The Trust Receipts Law punishes the dishonesty and
abuse of confidence in the handling of money or goods to
the prejudice of another regardless of whether the latter
is the owner or not.
 The law does not seek to enforce payment of the loan.
 Thus, there can be no violation of a right against
imprisonment for non-payment of a debt.
 Moreover, PD 115 is a valid exercise of police power.
(Lee v. Rodil)
ISSUE #3:
 WoN PD 115 punishes a malum prohibitum. (YES)
RATIO #3:
 It is in the context of upholding public interest that the law
now specifically designates a breach of a trust receipt
agreement to be an act that “shall” make one liable for
estafa.
 The offense is punished as
a malum prohibitum regardless of the existence of intent
or malice.
 A mere failure to deliver the proceeds of the sale or the
goods if not sold, constitutes a criminal offense that
causes prejudice not only to another, but more to the
public interest.
DISPOSITION: Petition granted. Order granting motion to quash
set aside.
Traders v. Castañares | Nice
December 6, 2010
TRADERS ROYAL BANK, Petitioner, vs. NORBERTO
CASTAÑARES and MILAGROS CASTAÑARES, Respondents.
VILLARAMA, J.
NATURE: Rule 45 Petition
SUMMARY: The Spouses Castañares obtained from Traders
various loans and accommodations under several promissory
notes, to secure which they executed REMs over their properties.
The loans began to mature. Meanwhile, Traders applied to the
payment of the loans a telegraphic transfer of $4,220 sent to the
account of the Spouses, which they contested. Upon the Spouses’
failure to pay, Traders extrajudicially foreclosed on the REMs, and
then filed a complaint to recover the deficiency judgment. The
Spouses, on the other hand, sued Traders for the recovery of the
$4,220. The SC held that Traders could validly apply the amount
as payment for the indebtedness, since the parties had stipulated
it in the promissory notes.
DOCTRINE: Agreements for compensation of debts or any
obligations when the parties are mutually creditors and debtors
are allowed under NCC 1282 even though not all the legal
requisites for legal compensation are present. Voluntary or
conventional compensation is not limited to obligations which are
not yet due.
FACTS:
 1977-1978: Norberto and Milagros Castañares (Spouses
Castañares) obtained from Traders Royal Bank (Traders)
various loans and credit accommodations for their export
business. They executed two real estate mortgages
(REMs) dated April 18, 1977 and January 25, 1978
covering their properties. As evidenced by a Promissory
Note dated May 10, 1977, Traders released only P35k
although the mortgage deeds indicated the principal
amounts as P86k and P60k.
 The Spouses were further granted additional funds on
various dates (6 dates) under separate promissory
notes they executed in favor of Traders, totaling P100.4k.
 By the 2nd quarter of 1978, the loans began to mature
and the letters of credit against which the packing
advances were granted started to expire. Meanwhile, on
December 7, 1979, Traders, without notifying the
Spouses, applied to the payment of their outstanding
obligations the sum of $4,220 or P30,930 which was
remitted to the Spouses thru telegraphic transfer from
AMROBANK, Amsterdam by one Richard Wagner.
 For failure to pay, Traders proceeded with the
extrajudicial foreclosure of the REMs. Thereafter, a
Certificate of Sale covering all the mortgaged properties
was issued by the sheriff to Traders as the lone bidder for
P117k during the auction sale. Said certificate of sale
was registered with the Register of Deeds on February 4,
1982.
 November 24, 1982: Traders filed a complaint for
deficiency judgment, claiming that after applying the
proceeds of the foreclosure sale to the total unpaid
obligations (P200k), the Spouses were still indebted by
P83k.
 February 10, 1983: the Spouses filed a case for recovery
of the sums of P2,584.27 debited from their savings
account passbook and the equivalent amount of $4,220
telegraphic transfer. In addition, they sought $55,258.85
representing the damage they suffered from letters of
credit left un-negotiated because of Traders’ refusal to
pay the $4,220 demanded by the Spouses.
 The cases were consolidated before the RTC of Cebu,
which ruled in favor of Traders and ordered the Spouses
to pay the deficiency judgment. The trial court found that
despite the Spouses’ insistence that the REM covered
only a separate loan for P86k, the evidence clearly
showed that said REM was constituted as security for all
the promissory notes.
o No separate demand was made for the amount
of P86k stated in the REM, as the demand was
limited to the amounts of the promissory notes.
The trial court further noted that respondents
never questioned the judgment for extrajudicial
foreclosure, the certificate of sale and the
deficiency in that case.
 Upon appeal, the CA reversed the RTC and ruled for the
Spouses. It held that:
o the RTC overlooked the fact that there were no
adequate evidence presented to prove that
Traders released in full to the Spouses the
proceeds of the REM loan;
o where there was failure of the mortgagee bank
to deliver the consideration for which the
mortgage was executed, the contract of loan
was invalid and consequently the accessory
contract of mortgage is likewise null and void,
citing the cases of Filipinas Marble v. IAC and
BANKING: WEEK 5 | 27
 Naguiat v. CA;
o in this case, only P35k out of the P86k stated in
the REMs was released to the Spouses, and
hence the REMs was valid only to that extent.
o the rule is that a pledge, real estate mortgage or
antichresis may exceptionally secure after-
incurred obligations only as long as these debts
are accurately described therein, citing Acme
Shoe v. CA.
o in this case, neither of the two REMs accurately
described or even mentioned the securing of
future debts or obligations.
 As to the $4,220 telegraphic transfer, the CA ruled that
sincethe transfer transaction was separate and distinct
from the contract of loan between the parties, Traders
had no authority to convert it into cash since the
participation of the Spouses was necessary to sign and
indorse the disbursement voucher and check.
o Moreover, Traders did not inform the Spouses
of its intention to apply the proceeds of the
telegraphic transfer to their loan account and
worse, it did not even present an official receipt
to prove payment. Section 5 of the Foreign
Currency Deposit Act provides that there shall
be no restriction on the withdrawability by the
depositor of his deposit or the transferability of
the same abroad except those arising from
contract between the depositor and the bank.
 Hence, this Petition, where Traders argues that:
o there is a specific stipulation in the REMs that
the mortgage extends not only to the amounts
specified therein but also to loans or credits
subsequently granted.
o the amounts indicated on the REMs are only the
maximum sum or "ceiling" which the REM
secures.
o the cases cited by the CA do not support its
conclusion that the promissory notes were
totally unrelated to the REMs:
 In the Acme case, the pronouncement
was that the after-incurred obligations
must, at the time they are contracted,
only be accurately described in a
proper instrument as in the case of a
promissory note. (no “therein”)
 In the Filipinas Marble case, there was
misappropriation by some individuals
of the loan proceeds, so there was
failure to deliver all the loan proceeds.
 In the Naguiat case, there was
evidence that an agent of the creditor
withheld from the debtor the checks
representing the proceeds of the loan
pending delivery of additional
collateral.
o it had the right by way of set-off the telegraphic
transfer of $4,220 against the unpaid loan
account of the Spouses. Citing BPI v. CA, both
parties are bound principally as both creditors
and debtors of each other, the debts consisting ISSUE #2 (MAIN): W/N Traders could apply the $4,220
of a sum of money, both due, liquidated and
demandable, and are not claimed by a third
person.
ISSUE #1:
 W/N the REMs secured after-incurred obligations as payment
well (YES)
RATIO #1:
 The subject REMs contained a stipulation10 which is
known as a "dragnet clause" or "blanket mortgage
clause" in American jurisprudence that would subsume
all debts of past and future origins.
 It has been held as a valid and legal undertaking, the
amounts specified as consideration in the contracts do
not limit the amount for which the pledge or mortgage
stands as security, if from the four corners of the
instrument, the intent to secure future and other
indebtedness can be gathered.
 A pledge or mortgage given to secure future
advancements is a continuing security and is not
discharged by the repayment of the amount named in the
mortgage until the full amount of all advancements shall
have been paid.
 A "dragnet clause" operates as a convenience and
accommodation to the borrowers as it makes available
additional funds without their having to execute additional
security documents, thereby saving time, travel, loan
closing costs, costs of extra legal services, recording
fees, et cetera. While a real estate mortgage may
exceptionally secure future loans or advancements,
these future debts must be sufficiently described in the
mortgage contract. An obligation is not secured by a
mortgage unless it comes fairly within the terms of the
mortgage contract.
 A reading of the said stipulation of the REMs shows that
its terms are broad enough to cover packing credits and
export advances granted by Traders to the Spouses.
That the Spouses subsequently availed of letters of credit
and export advances in various amounts as reflected in
the promissory notes, buttressed the claim of Traders
that the amounts of P86k and P60k stated in the REMs
merely represent the maximum total loans which will be
secured by the mortgage. The Spouses even confirmed
that the mortgage was constituted for the purpose of
obtaining additional capital as dictated by the needs of
their export business.
 Significantly, no complaint was made by the Spouses as
to the non-release of P86k and P60k and no demand for
the said specific amounts was ever made by Traders.
Considering that they deemed it a serious "banking
malpractice" for Traders not to release in full the loan
amount stated in the REMs, it can only be inferred that
they themselves understood that the amounts were
intended merely to fix a ceiling.
 The cases relied upon by the CA are all inapplicable to
the present controversy. The Spouses never denied
receiving the amounts under the promissory notes which
were all covered by the REMs and the very obligations
subject of the extrajudicial foreclosure. Having expressly
agreed to the terms of the REMs which are phrased to
secure all such loans and advancements to be obtained
from Traders, although the principal amount stated
therein were not released at one time and under several,
not just one, subsequently issued promissory notes, the
Spouses may not be allowed to complain later that the
amounts they received were unrelated to the REMs.
10 That, for and in consideration of certain loans, overdrafts and other credit
accommodations obtained, from the Mortgagee by the Mortgagor and/or SPS.
NORBERTO V. CASTAÑARES & MILAGROS M. CASTAÑARES and to secure the
of the same, the principal of all of which is hereby fixed at EIGHTY-SIX
THOUSAND PESOS ONLY – (P86,000.00) Pesos, Philippine Currency, as well as
those that the Mortgagee may hereafter extend to the Mortgagor x x x, including
interest and expenses or any other obligation owing to the Mortgagee, whether direct
or indirect, principal or secondary, as appears in the accounts, books and records of
the Mortgagee x x x.
BANKING: WEEK 5 | 28
telegraphic transfer to the Spouses’ loan obligation (YES) DOCTRINE: A stipulation in the mortgage, extending its scope
RATIO #2: and effect to after-acquired property, is valid and binding
 The CA erred in holding that Traders had no authority to
do so by way of compensation or set off. FACTS:
 The parties themselves stipulated on the manner of
11  April 16, 1930: 2 actions were commenced in CFI Manila
such set off in case of non-payment of the amount due for the purpose of securing from Limjap the
under each promissory note. possession of two drug stores located in the City of
 Agreements for compensation of debts or any Manila, covered by two chattel mortgages executed by
obligations when the parties are mutually creditors the deceased Jose B. Henson in favor of the plaintiffs
and debtors are allowed under NCC 1282 even Torres, et. al.
though not all the legal requisites for legal  1st case: Plaintiffs Torres, et. al. alleged that Jose B.
compensation are present. Voluntary or conventional Henson, in his lifetime, executed in their favor a chattel
compensation is not limited to obligations which are mortgage on his drug store at Nos. 101-103 Calle
not yet due. Rosario, known as Farmacia Henson, to secure a loan of
P7,000, although it was made to appear in the
 The only requirements for conventional compensation instrument that the loan was for P20,000.
are
 2nd case: Plaintiffs Vergara et. al. alleged that they were
o (1) that each of the parties can fully dispose of
the heirs of the late Don Florentino Torres
the credit he seeks to compensate, and
o Jose B. Henson, in his lifetime, executed in
o (2) that they agree to the extinguishment of their
favor of Don Florentino Torres a chattel
mutual credits.
mortgage (same CM) on his three drug stores
 Consequently, Traders validly applied, by way of known as Henson's Pharmacy, Farmacia
compensation, the $4,220 telegraphic transfer remitted Henson and Botica Hensonina, to secure a
by the Spouses’ foreign client through Traders. loan of P50,000, which was later reduced to
DISPOSITION P26,000, and for which, Henson's Pharmacy at
 Petition GRANTED. CA reversed. RTC decision Nos. 71-73 Escolta, remained as the only
reinstated. security by agreement of the parties.
 Both cases: Plaintiffs Torres et.al. alleged that Limjap
violated the terms of the mortgage and that, in
Torres v. Limjap | Kat consequence thereof they became entitled to the
September 21, 1931 possession of the chattels and to foreclose their
G.R. No. 34385 mortgages thereon.
ALEJANDRA TORRES, ET AL., plaintiff-appellees, vs.  Upon the petition of the plaintiffs Torres et. al. and after
FRANCISCO LIMJAP, Special Administrator of the estate of the the filing of the necessary bonds, the court issued in each
deceased Jose B. Henson, defendant-appellant. case an order directing the sheriff of the City of Manila to
G.R. No. 34386 take immediate possession of said drug stores.
SABINA VERGARA VDA. DE TORRES, ET AL., plaintiffs-  Limjap denied generally and specifically the plaintiffs'
appellees, vs. allegations, and set up the following special defenses:
FRANCISCO LIMJAP, Special Administration of the estate of the o (1) That the chattel mortgages are null and
deceased Jose B. Henson, defendant-appellant. void for lack of sufficient particularity in the
JOHNSON, J. description of the property mortgaged; and
o (2) That the chattels which the plaintiffs
SUMMARY: Henson executed in favor of Toreres a chattel sought to recover were not the same
mortgage on his drug stores to secure a loan. Since he allegedly property described in the mortgage.
violated the terms of such loans, the plaintiffs as heirs of Torres o He also filed a counterclaim for damages of
instituted actions to secure possession of the drug stores from P20,000 in the first case and P100,000 in the
Limjap, the special administrator of the estate of deceased second case.
Henson. Torres claims that the CMs are null and void for lack of
 CFI (July 17, 1930): in favor of the plaintiffs and against
sufficient particularity in the description of the property mortgaged
Limjap, confirming the attachment of said drug stores by
and that the chattels sought to be recovered are not the same as
the sheriff of the City of Manila and the delivery thereof to
those described in the CM. The CFI and SC ruled in favor of the
the plaintiffs.
plaintiffs. (1) The provision of the last paragraph of section 7 of Act
o (a) Limjap defaulted in the payment of interest
No. 1508 is not applicable to drug stores, bazaars and all other
on the loans secured by the mortgages, in
stores in the nature of a revolving and floating business. (2) The
violation of the terms thereof;
stipulation in the chattel mortgages in question, extending their
o (b) By reason of said failure said mortgages
effect to after-acquired property, is valid and binding. The lower
became due, and
court committed no error in not permitting the Limjap to introduce
o (c) Pplaintiffs, as mortgagees, were entitled to
evidence tending to show that the goods seized by the sheriff
the possession of the drug stores Farmacia
were in the nature of after-acquired property.
Henson at Nos. 101-103 Calle Rosario and
Henson's Pharmacy at Nos. 71-73 Escolta.
11 In case of non-payment of this note or any installments thereof at maturity, I/We
jointly and severally, agree to pay an additional amount equivalent to two per cent
(2%) per annum of the amount due and demandable as penalty and collection ISSUE 1: W/N the lower court erred in refusing to allow the
charges, in the form of liquidated damages, until fully paid; and the further sum of ten defendant to introduce evidence tending to show that the stock of
per cent (10%) thereof in full, without any deduction, as and for attorney’s fees merchandise found in the two drug stores was not in existence or
whether actually incurred or not, exclusive of costs and judicial/extrajudicial
expenses; moreover, I/We, jointly and severally, further empower and authorize the owned by the mortgagor at the time of the execution of the
TRADERS ROYAL BANK, at its option, and without notice, to set-off or to apply to the mortgages in question.
payment of this note any and all funds, which may be in its hands on deposit or RATIO 1:
otherwise belonging to anyone or all of us, and to hold as security therefor any real or
personal property, which may be in its possession or control by virtue of any other
 Limjap attacks the validity of the stipulation in said
contract. mortgages authorizing the mortgagor to sell the goods

BANKING: WEEK 5 | 29
 covered thereby and to replace them with other goods
thereafter acquired. He insists that a stipulation
authorizing the disposal and substitution of the chattels
mortgaged does not operate to extend the mortgage to
after-acquired property, and that such stipulation is in
contravention of the express provision of the last
paragraph of section 7 Act No. 1508, which reads as
follows:
o A chattel mortgage shall be deemed to cover
only the property described therein and not like
or substituted property thereafter acquired by
the mortgagor and placed in the same
depository as the property originally mortgaged,
anything in the mortgage to the contrary
notwithstanding.
 In order to give a correct construction to the above-
quoted provision of our Chattel Mortgage Law (Act No.
1508), the spirit and intent of the law must first be
ascertained.
 When said Act was placed on our statute books by the
United States Philippine Commission on July 2, 1906, the
primary aim of that law-making body was undoubtedly to
promote business and trade in these Islands and to give
impetus to the economic development of the country.
 Bearing this in mind, it could not have been the intention
of the Philippine Commission to apply the provision of
section 7 above quoted to stores open to the public for
retail business, where the goods are constantly sold and
substituted with new stock, such as drug stores, grocery
stores, dry-goods stores, etc.
 If said provision were intended to apply to this class of
business, it would be practically impossible to constitute
a mortgage on such stores without closing them, contrary
to the very spirit about a handicap to trade and business,
would restrain the circulation of capital, and would defeat
the purpose for which the law was enacted, to wit, the
promotion of business and the economic development of
the country.
 In the interpretation and construction of a statute the
intent of the law-maker should always be ascertained
and given effect, and courts will not follow the letter
of a statute when it leads away from the true intent
and purpose of the Legislature and to conclusions
inconsistent with the spirit of the Act.
 Vol. II Sutherland, Statutory Construction, pp. 693-695
o The Intent of Statute is the Law. — If a statute
is valid it is to have effect according to the
purpose and intent of the lawmaker. The
intent is the vital part, the essence of the
law, and the primary rule of construction is
to ascertain and give effect to that intent.
The intention of the legislature in enacting a law
is the law itself, and must be enforced when
ascertained, although it may not be consistent
with the strict letter of the statute. Courts will not
follow the letter of a statute when it leads away
from the true intent and purpose of the
legislature and to conclusions inconsistent with
the general purpose of the act. Intent is the spirit
which gives life to a legislative enactment. In
construing statutes the proper course is to start
out and follow the true intent of the legislature
and to adopt that sense which harmonizes best
with the content and promotes in the fullest
manner the apparent policy and objects of the
legislature.
 A stipulation in the mortgage, extending its scope
and effect to after-acquired property, is valid and
binding —
o . . . where the after-acquired property is in
renewal of, or in substitution for, goods on hand
when the mortgage was executed, or is
purchased with the proceeds of the sale of such
goods, etc. (11 C.J., p. 436.)
 Cobbey, a well-known authority on Chattel Mortgages,
recognizes the validity of stipulations relating to after-
acquired and substituted chattels. He says:
o "A mortgage may, by express stipulations,
be drawn to cover goods put in stock in
place of others sold out from time to time. A
mortgage may be made to include future
acquisitions of goods to be added to the
original stock mortgaged, but the mortgage
must expressly provide that such future
acquisitions shall be held as included in the
mortgage. ... Where a mortgage covering the
stock in trade, furniture, and fixtures in the
mortgagor's store provides that "all goods, stock
in trade, furniture, and fixtures hereafter
purchased by the mortgagor shall be included in
and covered by the mortgage," the mortgage
covers all after-acquired property of the classes
mentioned, and, upon foreclosure, such
property may be taken and sold by the
mortgagee the same as the property in
possession of the mortgagor at the time the
mortgage was executed." (Vol. I, Cobbey on
Chattel Mortgages, sec. 361, pp. 474, 475.)
 In harmony with the foregoing, we are of the opinion
o (a) that the provision of the last paragraph of
section 7 of Act No. 1508 is not applicable to
drug stores, bazaars and all other stores in the
nature of a revolving and floating business;
o (b) that the stipulation in the chattel mortgages
in question, extending their effect to after-
acquired property, is valid and binding; and
o (c) that the lower court committed no error in not
permitting the Limjap to introduce evidence
tending to show that the goods seized by the
sheriff were in the nature of after-acquired
property.
ISSUE 2: W/N the lower court erred in failing to make a finding on
the question of the sufficiency of the description of the chattels
mortgaged and in failing to hold that the chattel mortgages were
null and void for lack of particularity in the description of the
chattels mortgaged? NO
RATIO 2:
 We deem it unnecessary to discuss the question therein
raised, Limjap is estopped from questioning the validity of
these chattel mortgages.
ISSUE 3: W/N the lower court erred in holding that the
administrator of the deceased is now estopped from contesting the
validity of the mortgages in question? NO
RATIO 3:
 Limjap is estopped from contenting the validity of the
mortgages in question. This feature of the case has been
very ably and fully discussed by the lower court in its
decision, and said discussion is made, by reference, a
part of this opinion.
DISPOSITION: For all of the foregoing, we are of the opinion and
so hold that the judgment appealed from is in accordance with the
facts and the law, and the same should be and is hereby affirmed,
with costs. So ordered.
BANKING: WEEK 5 | 30
People’s Bank & Trust Company & Atlantic Gulf and Pacific
Co. of Manila v. Dahican Lumber Company, et al., (1967)
Summary:
DALCO obtained various loans from the Export-Import Bank and
Atlantic Bank, respectively, both secured under a deed of
mortgage. Both deeds contained a clause committing after
acquired properties. Upon DALCO’s failure to pay, the banks
sought to collect, and subsequently foreclosed on the properties in
light of the former’s failure to pay. Before the SC, DALCO argues
that the after acquired properties should not be considered as the
properties mortgaged because the corporation had decided to
rescind the purchases. The SC rejects said claim and rules that
the after acquired properties of DALCO were meant to be included
in the first and second mortgages under foreclosure.
FACTS:
Atlantic Gulf & Pacific Co. (hereinafter, Atlantic) sold and assigned
all its rights in the Dahican Lumber concession to the Dahican
Lumber Co. (DALCO) for the total amount of $500,000. Only
$50,000 was paid.
 To develop the concession, DALCO obtained various
loans from petitioner PBTC in the total amount of
$200,000.
 It also obtained a loan of $250,000 from the Export-
Import Bank.
o Covered by five promissory notes of $50,000
each.
o Signatories: DALCO and Dahican American
Lumber Corp. (DAMCO, a stockholder of
DALCO).
 By way of security, DALCO, for itself and as trustee of
the Export-Import Bank, executed a deed of mortgage Are the after acquired properties covered by and subject to the
covering five parcels of land in Camarines Norte together deeds of mortgage subject to foreclosure? YES.
with the improvements thereon and all personal
properties of the mortgagor located in its place of
business.
 A second mortgage was executed by DALCO in favor of
Atlantic to secure the payment of the balance of the
purchase price of the lumber concession ($450,000).
o Both deeds contained the following clause on
after acquired properties:
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.
the fact that they were not registered in accordance with the
 As to the $200,000 loan from the Bank, payment was Chattel Mortgage Law? YES.
secured by pledge involving 7,296 shares of DALCO and
9,286 shares of DAMCO.
 DALCO and DAMCO failed to pay the fifth promissory
note due to the Export-Import Bank. PBTC paid the same
and the Export-Import Bank assigned its credit to PBTC.
 After the execution of the deeds of mortgage, DALCO
purchased various machineries, equipment, spare parts,
and supplies in addition to, or in replacement of some
already owned and used by it.
o PBTC asked for the list of the new equipment,
but DALCO refused.
o The purchase of the machinery caused DALCO
to be indebted to the Connell Bros. Company
(Connell) in the amount of P452,860, and to
DAMCO, P2.15 million.
 Later, the Board of Directors of DALCO agreed to the
rescission of the sales of the equipment. Thus, there
would be no more after acquired properties.
 PBTC, on its own behalf and that of Atlantic, demanded
the cancellation of the agreements. DAMCO and Connell
refused.
 Thus, both PBTC and Atlantic commenced foreclosure
proceedings against DALCO and DAMCO. They prayed
for the issuance of a writ of preliminary injunction to
restrain DALCO from removing its properties.
 The court appointed a receiver, Evans. He was
subsequently discharged. Connell sought to intervene
alleging ownership of the properties covered by the lien.
His motion was granted. Evans was reinstated as
receiver.
 The court ordered the sale of all the machineries at public
auction. The same were sold for a total consideration of
P175,000.
o Half – represented undebated properties (those
not claimed by DAMCO and Connell);
o Other half – represented after acquired
properties.
 Trial court’s order: declared DALCO indebted to PBTC
and Atlantic, on one hand, and Connell and DAMCO on
the other.
o P87,500 to plaintiffs;
o P87,500 to DAMCO and Connell.
 Supplementary decision: If the balance of the claims are
not paid, the court will cause the sale of the lands subject
of the mortgage to satisfy the mortgages.
 The mortgage contract clearly states 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.
 The language used by the parties is clear and leaves no
room for interpretation.
 The stipulation is logical in cases where the property
mortgaged is perishable or subject to inevitable wear and
tear.
 PURPOSE: to maintain the original value of the
properties given as security.
Are the mortgages valid and binding on the properties in spite of
 DAMCO and Connell: Mortgage not registered in
accordance with Act No. 1508. Properties not particularly
described. Stipulations in the contract merely partake of
an “agreement to give a lien” over the after acquired
property.
 Court: the stipulations of the contract are clear. The after
acquired properties “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.”
 Act No. 1508 does not apply. The mortgages were
executed when the Old Civil Code was still in force.
Besides, the equipment in this case is considered real
property under Art. 334, now 415 of the Civil Code.
BANKING: WEEK 5 | 31
 o They are machinery, receptacles, instruments or
replacements intended by the owner of the
tenement for an industry or works which may be
carried on in a building or on a piece of land,
and shall tend directly to meet the needs of the
said industry or works.
 Since the after acquired properties in this case were
immobilized, they became real property, with the
inevitable result that the real estate mortgage did not
have to be registered a second time in order to bind such
property.
 DAMCO and Connell, citing Davao Sawmill, make much
of the fact that the land wherein the properties are
located did not exclusively belong to DALCO.
o Facts are different. In Davao Sawmill, the
parties repeatedly treated the property involved
as personal property, even subjecting the same
to a chattel mortgage.
o Here, the parties characterized the machinery
as real property by agreeing that they shall be
subjected to the lien of the real estate
mortgages.
What is the effect of the rescission of the sales to DALCO by DOCTRINE: Where the statute provides that the parties to a
DAMCO and Connell? Nothing.
 DAMCO and Connell: As unpaid sellers, their lien is honestly due and owing from the mortgagor to the mortgagee, it is
superior to that of the mortgage.
 Court: The auditor’s report shows that all the items be thereafter contacted.
subject of the mortgage were not supplied by the FACTS:
defendants.
 DAMCO was a mere stockholder of DALCO. On the
other hand, Connell was its general agent, charging 5%
service charge on top of the purchase price.
o At most, the defendants can be considered
financiers, who do not hold liens superior to that
constituted by virtue of the deeds of mortgage.
 Both defendants had known and admitted from the
beginning that the after acquired properties of DALCO
were meant to be included in the first and second
mortgages under foreclosure.
 That Belden, of Atlantic, consented to the rescission is of
no moment. He, as board member of DALCO, objected
to the resolution passed by the Board.
Was the action to foreclose the mortgages premature? NO.
 Promissory note was due on April 1, but foreclosure filed
on Feb. 12.
 DALCO was insolvent.
o Chairman of the Board: DALCO was “without
funds, nether does it expect to have any funds
in the foreseeable future.”
 Under Art. 1198, the debtor shall lose every right to make
use of the period when after the obligation has been
contracted, he becomes insolvent, unless he gives a
guaranty or security for the debt.
 The guaranty was plainly inadequate because the debt
already reached P1.2 million, exclusive of interests, while
the chattels only sold for P175,000. Connell, however,
was claiming that the aggregate price of the after
acquired properties was P1.6 million.
How should the proceeds of the foreclosure sale be divided? All
to plaintiffs.
 As already stated, defendants do not even have liens in
their favor over the properties.
 As to damages, claim should be remanded to the court a
quo.
DISPOSITION: Judgment modified.
Belgian vs. Magallanes | Erika
November 24, 1926
THE BELGIAN CATHOLIC MISSIONARIES, INC., plaintiff-
appellee,
vs.
MAGALLANES PRESS, INC., ET AL., defendants.
JOSE MARIA MEMIJE, appellant.
VILLA-REAL, J.
NATURE: Appeal from CFI of Manila
SUMMARY: Defendant Memije was the transferee of J.P.
Heilbronn’s mortgage credit against Magallanes Press, Inc.
Another creditor of Magallanes Press, plaintiff Belgian Catholic
Missionaries, Inc, filed a complaint to prevent Memije from
foreclosing his chattel mortgage on Magallanes Press’ properties
when the loan became due and unpaid. Previously, a fire
destroyed the mortgaged properties. CFI granted the complaint of
Belgian Missionaries, ruling among others that the Belgian
Missionaries has the right to the insurance proceeds. SC modified,
ruling that Memije has a right to the said proceeds up to the
amount of his credit, P8,280.90. However, as to the increase of
the amount and the extension of the mortgage Memije granted to
Magallanes Press, Memije only has the rights of a regular creditor,
the same being prejudicial to Belgian Missionaries’ rights.
chattel mortgage must make oath that the debt is a just debt,
obvious that a valid mortgage cannot be made to secure a debt to
 Dec 1, 1921: Magallanes Press, through its general
manager H. Camena, executed a promissory note in
favor of J. P. Heilbronn & Co., Inc., for P3,472.92
o with interest at 10% per annum, payable at
P250 a month, plus the interest earned on the
unpaid balance, until the whole amount is paid,
the first payment to be made on Jan 1, 1922,
with the condition that upon the failure to pay
any monthly installment or the interest, the
whole amount of the indebtedness shall become
due, and the maker shall pay an additional sum
of 15% of the total balance, for attorney's fee
and expenses of collection, forfeiting all right of
exemption.
 Same date: Magallanes Press executed another PN in
favor of J. P. Heilbronn (same terms except this is for
P10,715.77, with 12% interest, payable at P500 a month)
 To secure the payment of said promissory notes,
Camena (as GM of Magallanes Press) executed a
chattel mortgage on all its printing machinery and its
accessories in favor of J. P. Heilbronn
 June 19, 1922: Magallanes Press Co., Inc., successor of
Magallanes Press, thru its duly authorized president, E.
F. Clemente, executed a chattel mortgage on the same
printing machinery and its accessories in favor of the
Belgian Catholic Missionaries Co., Inc. to secure the
payment of a loan it obtained from Belgian
Missionaries of P30,500, with 12% p.a. interest, the
duration of the mortgage loan being 1 year from the
execution of the mortgage deed
 Dec 1922: defendant Jose Ma. Memije made a loan of
P2K to Clemente (Pres. of Magallanes Press, Inc) which
was paid on account of the indebtedness of Magallanes
Press to J. P. Heilbronn & Co., Inc., together with P1,641
which A. F. Mendoza owed said Clemente.
 Feb 21, 1923: a writ of attachment was issued in a civil
case in CFI Manila (Jose Ma. Cavanna vs. Magallanes
Press Co., Inc.). Defendant Memije filed an intervention.
BANKING: WEEK 5 | 32
  All the PNs executed by Magallanes Press in favor of J.
P. Heilbronn became overdue for non-payment of the
installments as well as the respective chattel mortgage
 J. P. Heilbronn then transferred all its mortgage
credit against Magallanes Press to Memije in
consideration of P8,280.90, the balance of said mortgage
credit.
 Mar 14, 1923: Clemente, as manager of the Magallanes
Press Co., Inc., executed a deed in favor of Memije
where the chattel mortgage which was given by
Magallanes Press in favor of J. P. Heilbronn (and later
transferred to Memije), was made to cover an additional
loan of P5,895.79, which included the sum of P2K which
Memije had advanced Clemente in Dec 1922.
 Apr 21, 1923: a fire occurred in the building where the
printing machinery, accessories and other personal
property of Magallanes Press Co., Inc., were located and
which were covered by said chattel mortgages.
 The property was insured. The insurance companies
were disposed to pay but due to the issuance of the
above-mentioned WPI, payment could not be made.
 May 9, 1923: Memije having attempted to foreclose the
mortgage, Belgian Catholic Missionaries Co., Inc., filed a
complaint, with a petition for a writ of preliminary
injunction against the sheriff, in whose hands the
foreclosure of the mortgage was placed.
 May 10, 1923: WPI was issued upon the filing of a P15K
bond, there being no person more interested in the
conservation and custody of the property covered by the
mortgage than Belgian Missionaries
 Thus, Memije was unable to collect the amount of the
insurance policies, and when he was summoned under
the complaint on May 14, 1923, he made demand on
Magallanes Press Co., Inc., for the payment of his
mortgage credit
 Clemente of Magallaness Press, Inc permitted the
secretary to place the property in the hands of Memije in
order that the same might be sold, but the sale could not
be consummated due to the issuance of the WPI
 CFI of Manila: Exhibits C and D (the mortgage deeds in
question), in so far as they prejudice the rights of Belgian
Missionaries, Inc, are null and void
o The WPI issued against Memije is final and
absolute
o Belgian Missionaries, Inc to recover the amount
of the fire insurance policies; Magallanes Press
Inc is ordered to endorse said insurance policies
to Belgian Missionaries, Inc
ISSUE #1: W/N CFI erred in overruling the demurrer filed by
Memije (NO)
RATIO #1:
No fraud as to transfer
 Memije: one of the grounds of said demurrer was that
the complaint did not allege facts sufficient to constitute a
cause of action against Memije
o notwithstanding the fact that the complaint was
instituted to annul the document of transfer of
the mortgage credit Exhibit C, it was not alleged
that Memije had any intention to defraud the
interests of Belgian Missionaries, Inc, which was
absolutely impossible due to the nature of the
transaction and the preferential character of the
mortgage credit of J. P. Heilbronn
 SC: Belgian Missionaries, Inc having known of the
existence of a chattel mortgage in favor of J. P.
Heilbronn, the latter, either as the 1st or as the 2nd
mortgage, had a perfect right to transfer its mortgage
credit, without the knowledge or consent of any other
mortgagee, inasmuch as whoever acquired it, would
have exactly the same status as the transferor with
the same rights and obligations.
 The fact, therefore, that Magallanes Press Co., Inc., had
consented to the transfer of the mortgage credit of J. P.
Heilbronn does not constitute a fraud that can vitiate the
said transfer, inasmuch as the order of preference of the
mortgages has not been altered, and its allegations does
not constitute a cause of action to annul the said transfer.
Yes fraud as to increase and extension
 The increase made by Memije in the mortgage credit
acquired by him from J.P. Heilbronn, and the extension
made by Magallanes Press, Inc., of the mortgage to said
additional credit without the knowledge or consent of
Belgian Missionaries, Inc, as second mortgagee,
prejudices the credit of the latter, inasmuch as the
security for the payment of said credit was reduced
as to it, and, therefore, constitute a fraud that vitiates
the contract of extension of the mortgage evidence by
the deed Exhibit D, rendering it void.
 Thus, the facts alleged in par. 9 of the complaint are
sufficient to constitute a cause of action of nullity
ISSUE #2: W/N CFI erred in giving the Belgian Missionaries
possession of the property mortgaged to Memije (NO)
RATIO #2:
 Contrary to the contention of Memije, this case is not one
of replevin but simply a proceeding instituted by Belgian
Missionaries, Inc for the deposit of the property in
litigation, upon the filing of a bond
 Belgian Missionaries, acting as a receiver by authority of
the court, being the person most interested in the
conservation and care of the same
ISSUE #3 (ON TOPIC): Who has preference over the insurance
proceeds between Belgian Missionaries and Memije? (Memije,
only up to P8,280.90)
RATIO #3:
 J. P. Heilbronn & Co., Inc., at the time of the transfer of
this mortgage rights to Memije, had a preferential right
over that of the Belgian Missionaries for the remainder of
the amount of the mortgage credit, that is, P8,280.90.
 Belgian Missionaries had a preferential right to the rest
of the value of the mortgaged property after deducting
the remaining mortgage credit of J. P. Heilbronn
 The increase of P5,895.59 made by Memije in favor of
Magallanes Press Co., Inc., and the extension of the
mortgage thereto, are not only subordinate to the
mortgage credit of Belgian Missionaries, Inc, being
subsequent in time and in registration, but said increase
in the security is also void.
 The increase of the mortgage security becomes a new
mortgage in itself, inasmuch as the original mortgage did
not contain any stipulation in regard to the increase of the
mortgage credit, and even if it did, said increase would
take effect only from the date of the increase.
 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
 In accordance with Sec 5 of Act No. 1508 or the
Chattel Mortgage Law: [the parties to the original deeds
swore that the same was mortgaged] "to secure the
obligations specified therein and for no other purpose."
BANKING: WEEK 5 | 33
  Neither the increase in question, nor the extension of
the mortgage to secure the payment of the same is
specified in the deed, consequently said extension is
void. "Where the statute provides that the parties to a
chattel mortgage must make oath that the debt is a just
debt, honestly due and owing from the mortgagor to the
mortgagee, it is obvious that a valid mortgage cannot be
made to secure a debt to be thereafter contacted."
 THUS:
o (a) Memije has a preferential right to the value
of the chattels mortgage and the amount of the
insurance policies up to the sum of P8,280.90;
o (b) Belgian Missionaries, Inc has a right to the
remainder of the value of said chattels and the
insurance policies up to the amount of P30,500,
after deducting the preferential credit of Memije;
o (c) That as to the increase of P5,895.59, the
right of defendant Memije is that of an ordinary
creditor.
Re: Memije’s claim for damages
 Memije has a right to interest at 12% on the P8,280.90
the amount of the mortgage credit acquired by him from
J. P. Heilbronn from Feb 26, 1923, the date of the
acquisition until fully paid.
DISPOSITION: Judgment revoked and another entered declaring
all the mortgages overdue. The mortgage credit of Memije
preferential over Belgian Missionaries’ up to P8,280.90, 12% p.a.
interest from Feb 26, 1923, until fully paid; the mortgage credit of 
Belgian Missionaries for P30,500 with 12% p.a. interest from June
19, 1922, until fully paid, plusP3K for attorney's fees, over the
additional credit of Memije for P5,895.59; and ordering the
foreclosure of the said mortgages, to the proceeds of which shall
be added the amount of the insurance policies and the above-
mentioned credits in the order of preference above established,
without special pronouncement as to costs.
 Acme appealed to the CA which affirmed, in all respects, the
ACME Shoe, Rubber and Plastic vs. CA || Celine
ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA
PAC, petitioners, vs. HON. COURT OF APPEALS,
PRODUCERS BANK OF THE PHILIPPINES and REGIONAL
SHERIFF OF CALOOCAN CITY, respondents.
August 22, 1996
NATURE: Petition for review on certiorari.
SUMMARY: ACME applied for a 3M loan with Producers Bank of
the Philippines, secured by a Chattel Mortgage. Such loan was
fully paid, but ACME applied for 2 more loans subsequently. It
failed to pay on its latest loan, and Producers Bank tried to
foreclose on the chattel mortgage to satisfy ACME’s default on its
latest loan. SC said that Chattel Mortgages cannot extend to loan
subsequently entered into by the same parties, as the Chattel
Mortgage Law expressly requires that the Chattel Mortgage to be
executed contain an affidavit of good faith which says 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 valid and just obligation, and one not entered
into the for the purpose of fraud.
 Chua Pac is the president and general manager of Acme
Shoe, Rubber and Plastic Company.
o He executed on June 27, 1978 a chattel mortgage in
favor of Producers Bank of the Philippines.
o Secured a corporate loan of 3M Php.
 The Chattel Mortgage had the following provision:
o "(c) If the MORTGAGOR, his heirs, executors or
administrators shall well and truly perform the full
obligation or obligations above-stated according to
the terms thereof, then this mortgage shall be null
and void. x x x.
o "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."
 The loan was paid by Acme.
o It then secured more accomodations from the bank,
totaling Php 2.7M, also paid on their due dates.
o It then secured another loan, Php 1M, covered by
four promissory notes for Php 250K each.
The latest loan was not settled at maturity, prompting
Producers Bank to extrajudicially forclosure of the chattel
mortgage above-cited.
o Acme filed an action for injunction with damages and
prayer for a writ of preliminary injunction with the
RTC.
o RTC dimissed the complaint and ordered the
extrajudicial foreclosure of the chattel mortgage.
RTC decision.
 Hence, this instant petition.
Issue #1: Would it be 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? -
NO
 Preliminaries:
o 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 debtor is secured by the
personal commitment of another (the guarantor or
surety). In contracts of real security, such as a
pledge, a mortgage or an antichresis, that fulfillment
is secured by an encumbrance of property.
 In chattel mortgage, by the execution of the
corresponding deed substantially in the
form prescribed by law
o This is upon the essential condition that if the
principal 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 of the agreement.
 As the law so puts it, once the obligation is
complied with, then the contract of security
becomes, ipso facto, null and void.
BANKING: WEEK 5 | 34
 o While a pledge, real estate mortgage, or
antichresis may exceptionally secure after-
incurred obligations so long as these future
debts are accurately described,[10] a chattel
mortgage, however, can only cover obligations
existing at the time the mortgage is constituted.
 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 conformably with
the form prescribed by the Chattel
Mortgage Law.
 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, of course, 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.
o One of the requisites under Section 5 of the
Mortgage Law is an affidavit of good faith, which
says 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 valid and just obligation, and one not entered
into the for the purpose of fraud.”
 It makes it obvious that the debt referred to
in the law is a current one, and not one
merely contemplated.
 In the chattel mortgage involved in this case, he 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
mortgage void or terminated.
o Since the 1978 chattel mortgage had ceased to exist
coincidentally with the full payment of the
P3,000,000.00 loan, there no longer was any chattel
mortgage that could cover the new loans that were
concluded thereafter.
Issue #2: Should the case be remanded to the RTC for a
specific finding on the amount of damages ACME has
allegedly sustained? – NO.
 Such a prayer was not reflected on its complaint, where is
merely asked for the amount of Php 3M by way of moral
damages.
 But the SC says that mental suffering can be experienced
only by one having a nervous system and it flows from real
ills, sorrows, and griefs of life - all of which cannot be suffered
by respondent bank as an artificial person
o While Chua Pac is included in the case, the
complaint, however, clearly states that he has
merely been so named as a party
in representation of petitioner corporation.
WHEREFORE, the questioned decisions of the appellate court
and the lower court are set aside without prejudice to the
appropriate legal recourse by private respondent as may still be
warranted as an unsecured creditor. No costs.
Ong Liong Tiak v. Luneta Motor Co. | Gab
November 7, 1938
ONG LIONG TIAK, Plaintiff-Appellant, v. LUNETA MOTOR
COMPANY and the SHERIFF OF MANILA, Defendant-
Appellees
Diaz, J.
NATURE: Appeal
SUMMARY: S. Arellano Choa Siong purchased a Chrysler Sedan
from the Luneta Motor Co. He executed 18 promissory notes in
favor of Luneta Motor. To secure the payment of said 18
promissory notes, the payment of articles he might take from
Luneta Motor, and to also secure the payment of any other
obligation that he might contract with it, he constituted a chattel
mortgage on the Chrysler Sedan. Choa Siong then acted as a
surety up to P300 on Jeronimo Angeles’ indebtedness to
Macondray & Co. Macondray later assigned to Luneta Motor
Macondray’s credit against Choa Siong. After the payments Choa
Siong had made on Angeles’ account, the balance against Choa
Siong was P100. Choa Siong then made the last payment of the
18 promissory notes which he had executed in favor of Luneta
Motor. However, as there was still a balance against Choa Siong
on Angeles’ indebtedness, the chattel mortgage on the Chrysler
Sedan was not cancelled. Luneta Motor then foreclosed the
chattel mortgage, causing the Sheriff of Manila to attach the
Chrysler Sedan. Choa Siong transferred the ownership of the
Chrysler Sedan to Ong Liong Tiak. Ong Liong Tiak later filed a
complaint with the CFI to set aside the attachment on the Chrysler
Sedan, which the CFI dismissed. After appealing to the SC, the
SC held that the Chrysler Sedan was still encumbered when it was
sold by Choa Siong to Ong Liong Tiak, affirming the CFI’s
decision.
DOCTRINE (related to topic):
 Instruments of mortgage are binding, while they
subsist, not only upon the parties executing them, but
also upon those who later, by purchase or otherwise,
acquire the properties referred to in the mortgage.
o The right of those who 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 the law, in good faith,
and without the least indication of fraud.
FACTS:
 August 21, 1933: Choa Siong, the registered owner of
the Chrysler Sedan, transferred the ownership thereof
to Ong Liong Tiak, to which effect Choa Siong
endorsed his certificate of registration in favor of
Ong Liong Tiak.
Before the transfer of ownership
 June 11, 1931: S. Arellano Choa Siong purchased a
Chrysler Sedan from the Luneta Motor Co.
 However, instead of paying the price of the car (P1,800),
Choa Siong executed 18 promissory notes for P100
each in favor of Luneta Motor.
o To secure the payment of said 18 promissory
notes, the payment of articles he might take
from Luneta Motor, and to also secure the
payment of any other obligation that he
might contract with it, he constituted a
chattel mortgage on the Chrysler Sedan:
“…it being expressly agreed…that this mortgage shall also as
BANKING: WEEK 5 | 35
security for the payment to the said mortgagee in addition to the
aforesaid notes of the purchase price or cost of any and all
gasoline, tires, automobile accessories or parts, and repairs
furnished or made by the said mortgagee at any time up to the
date this mortgage is completely satisfied as and when the same
becomes due, and of any other indebtedness of the mortgagor in
favor of the mortgagee incurred in any other manner whatever.”
 Jeronimo Angeles obtained from Macondray & Co.,
Inc. (Macondray) paints and other merchandise
totaling P407.
o For the payment of this amount, Choa Siong
acted as surety up to P300.
 Choa Siong later paid P160 on account for Angeles’
indebtedness, leaving a balance against him of P140.
 Macondray then assigned to Luneta Motor
Macondray’s credit against Choa Siong, who offered
no objection thereto.
 Choa Siong later paid P40 on account for Angeles’
indebtedness, leaving a balance of P100.
 About April 4, 1933: Choa Siong then made the last
payment of the 18 promissory notes which he had
executed in favor of Luneta Motor.
o However, as there still existed in Luneta
Motor’s favor a credit of P100 for Angeles’
indebtedness, which was under the personal
guaranty of Choa Siong, Luneta Motor
refused to cancel the chattel mortgage.
 Luneta Motor foreclosed the chattel mortgage,
causing the Sheriff of Manila to attach the Chrysler
Sedan. (Gab: I’m not sure if this was really before or after
the transfer of the car’s ownership from Choa Siong to
Ong Liong Tiak.)
Back to the present
 Ong Liong Tiak filed a complaint with the Manila CFI
to set aside the attachment on the Chrysler Sedan.
o Ong Liong Tiak sought an injunction against
Luneta Motor and a judgment in his favor for
damages of P500, plus the costs.
 The CFI overruled and dismissed Ong Liong Tiak’s
complaint.
 Ong Liong Tiak then filed the present appeal with the SC.
ISSUE #1:
 W/N the indebtedness of Angeles to Macondray was
also guaranteed by the chattel mortgage executed by
Choa Siong in favor of Luneta Motor (YES)
RATIO #1:
 (No discussion by the SC)
ISSUE #2 (MAIN):
 W/N the Chrysler Sedan was still encumbered at the
time it was sold by Choa Siong to Ong Liong Tiak
(YES)
RATIO #2:
 The CFI was right in holding that, by interpreting the
terms of the chattel mortgage, the Chrysler Sedan still
remained subject to the lien stated in the chattel
mortgage inasmuch as the account, which Choa
Siong accepted and bound himself to pay for
Angeles, had not been completely settled.
 Instruments of mortgage are binding, while they
subsist, not only upon the parties executing them, but
also upon those who later, by purchase or otherwise,
acquire the properties referred to in the mortgage.
o The right of those who 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 the law, in good faith,
and without the least indication of fraud.
 The aforementioned principle is all the more true in at
bar because, when Ong Liong Tiak purchased the
Chrysler Sedan, he knew or, at least, it is presumed
that he knew, by the mere fact that the instrument of
mortgage was registered in the Office of the Register
of Deeds of Manila that the car was subject to a
mortgage lien.
o In purchasing it, with full knowledge that
such circumstances existed, it should be
presumed that he did so, very much willing to
respect the lien existing thereon since he
should not have expected that with the
purchase, he would acquire a better right than
that which the vendor then had.
ISSUE #3:
 W/N the chattel mortgage over the Chrysler Sedan
was extinguished upon payment of the last
promissory note (NO)
RATIO #3:
 (No discussion by the SC)
ISSUE #4:
 W/N the Chrysler Sedan was, at the time of the levy
on execution by the Sheriff of Manila, the exclusive
property of Ong Liong Tiak (NO)
RATIO #4:
 (No discussion by the SC)
DISPOSITION
 The CFI’s decision was affirmed, with costs to Ong Liong
Tiak.
Prudential v Alviar| CM
July 28, 2005
PRUDENTIAL BANK, Petitioner,
v. AUSTRIA-MARTINEZ,DON A. ALVIAR and GEORGIA B.
ALVIAR,Respondents.
TINGA, J.:
Summary: Sps Alviar obtained a loan with Prudential Bank for
250k secured by a REM with a dragnet clause. Another PN was
issued secured by a hold-out on the FCSA, and another PN for
545k secured by a Clean-Phase out TOD. Sps paid 2M to be
applied to the loan of G.B. Alviar and released the REM.
Prudential scheduled the foreclosure of the property of the Sps.
Sps averred that there had been a 2M payment on the loan
covered by the REM and that the other unpaid loans are not
secured by the REM. The bank says the REM applies to the other
loans by virtue of the dragnet clause. SC held that the REM does
not cover the other loans as these were secured by other
securities.
Doctrine:
 A mortgage with such a clause will not secure a note that
expresses on its face that it is otherwise secured as to its
entirety, at least to anything other than a deficiency after
exhausting the security specified therein, such deficiency
being an indebtedness within the meaning of the
mortgage, in the absence of a special contract excluding
it from the arrangement.
 The parties having conformed to the blanket mortgage
clause or dragnet clause, it is reasonable to conclude
that they also agreed to an implied understanding that
subsequent loans need not be secured by other
securities, as the subsequent loans will be secured by
the first mortgage. In other words, the sufficiency of the
first security is a corollary component of the dragnet
clause. But of course, there is no prohibition, as in the
BANKING: WEEK 5 | 36
 mortgage contract in issue, against contractually
requiring other securities for the subsequent loans. Thus,
when the mortgagor takes another loan for which another
security was given it could not be inferred that such loan
was made in reliance solely on the original security with
the dragnet clause, but rather, on the new security given.
This is the reliance on the security test.
 A mortgage containing a dragnet clause will not be
extended to cover future advances unless the document
evidencing the subsequent advance refers to the
mortgage as providing security therefor.
FACTS:
 Respondents, spouses Don A. Alviar and Georgia B.
Alviar, are the registered owners of a parcel of land in
San Juan, Metro Manila, covered by TCT No. 438157.
 On 10 July 1975, they executed a deed of real estate
mortgage in favor of petitioner Prudential Bank to secure
the payment of a loan worth P250,000.00. and
annotated at the back of the TCT.
 On 4 August 1975, respondents executed the
corresponding promissory note, PN BD#75/C-252 and
that the note is secured by a real estate mortgage
 22 October 1976, Don Alviar executed another PN
BD#76/C-345 for P2,640,000.00, secured by D/A
SFDX #129, signifying that the loan was secured by a
hold-out on the mortgagors foreign currency savings
account
 On 27 December 1976, respondent spouses executed for
Donalco Trading, Inc., of which the husband and wife
were President and Chairman of the Board and Vice
President, respectively, PN BD#76/C-430
covering P545,000.000. As provided in the note, the
loan is secured by Clean-Phase out TOD CA 3923,
which means that the temporary overdraft incurred by
Donalco Trading, Inc. with petitioner is to be converted
into an ordinary loan in compliance with a Central Bank
circular directing the discontinuance of overdrafts.
o On 16 March 1977, Prudential Bank wrote
Donalco Trading, Inc., informing the latter of its
approval of a straight loan of P545,000.00,
the proceeds of which shall be used to liquidate
the outstanding loan of P545,000.00 TOD. The
letter likewise mentioned that the securities for
the loan were the deed of assignment on two
promissory notes executed by Bancom
Realty Corporation with Deed of Guarantee
in favor of A.U. Valencia and Co. and the
chattel mortgage on various heavy and
transportation equipment.
 On 06 March 1979, Sps paid Prudential P2,M, to be
applied to the obligations of G.B. Alviar Realty and
Development, Inc. and for the release of the real estate
mortgage for the P450,000.00 loan covering the two (2)
lots in Greenhills. The payment was acknowledged and
the mortgage released.
 On 15 January 1980, Prudential moved for the
extrajudicial foreclosure of the mortgage on the
property covered by TCT No. 438157. Per petitioners
computation, respondents had the total obligation
of P1,608,256.68, covering the three (3) promissory
notes: PN BD#75/C-252 for P250,000.00, PN BD#76/C-
345 for P382,680.83, and PN BD#76/C-340 for
P545,000.00, plus assessed past due interests and
penalty charges.
 The Sps. filed a complaint for damages with a prayer for
the issuance of a WPI, claiming that they have paid their
principal loan secured by the mortgaged property, and
thus the mortgage should not be foreclosed.
 Prudential averred that the payment of P2,000,000.00
made on 6 March 1979 was not a payment made by
respondents, but by G.B. Alviar Realty and Development
Inc., on separate loan and mortgage.
 TC dismissed the complaint and ordered the Sheriff to
proceed with the extra-judicial foreclosure.
 TC reversed on MR. It found that only the P250,000.00
loan is secured by the mortgage on the land covered by
TCT No. 438157. On the other hand, the P382,680.83
loan is secured by the foreign currency deposit account
of Don A. Alviar, while the P545,000.00 obligation was an
unsecured loan, being a mere conversion of the
temporary overdraft of Donalco Trading, Inc. in
compliance with a Central Bank circular.
o The blanket mortgage clause relied upon by
petitioner applies only to future loans obtained
by the mortgagors, and not by parties other than
the said mortgagors, such as Donalco Trading,
Inc., for which respondents merely signed as
officers thereof.
 CA affirmed.
 The Court of Appeals, however, found that the Sps have
not yet paid the P250,000.00 covered by PN BD#75/C-
252 since the payment of P2,000,000.00 adverted to by
the Sps was issued for the obligations of G.B. Alviar
Realty and Development, Inc.
ISSUE/ HELD: WON the blanket mortgage clause applies even to
subsequent advancements (NO, if there are new securities)
RATIO:
 Prudential maintains that the blanket mortgage clause or
the dragnet clause in the real estate mortgage expressly
covers not only theP250,000.00 under PN BD#75/C-252,
but also the two other promissory notes included in the
application for extrajudicial foreclosure of real estate
mortgage.
o Although PN BD#76/C-345 was specifically
secured by a foreign currency deposit account,
petitioner states that there is no law or rule
which prohibits an obligation from being covered
by more than one security.
o As for PN BD#76/C-345, which the CA found to
be exclusively secured by the Clean-Phase
outTOD 3923, petitioner posits that such
security is not exclusive, as the dragnet clause
of the real estate mortgage covers all the
obligations of the respondents.
o The Sps attempt to evade foreclosure by the
expediency of stating that the promissory notes
were executed by them not in their personal
capacity but as corporate officers.
 SPS: the dragnet clause cannot be applied to the
subsequent loans extended to Don Alviar and Donalco
Trading, Inc. since these loans are covered by separate
promissory notes that expressly provide for a different
form of security.
NO NEED TO PIERCE VEIL OF CORPORATE FICTION
 At this point, it is important to note that one of the loans
sought to be included in the blanket mortgage clause was
obtained by respondents for Donalco Trading, Inc.
Indeed, PN BD#76/C-430 was executed by respondents
on behalf of Donalco Trading, Inc. and not in their
personal capacity. Petitioner asks the Court to pierce the
veil of corporate fiction
 The mortgage contract states that the mortgage covers
as well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and
expenses or any other obligation owing to the Mortgagee,
whether direct or indirect, principal or secondary.
BANKING: WEEK 5 | 37
  Well-settled is the rule that a corporation has a
personality separate and distinct from that of its officers
and stockholders. However, the legal fiction that a
corporation has a personality separate and distinct from
stockholders and members may be disregarded if it is
used as a means to perpetuate fraud or an illegal act or
as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues.
 CAB: PN BD#76/C-430, being an obligation of Donalco
Trading, Inc., and not of the respondents, is not within the
contemplation of the blanket mortgage clause. Moreover,
Prudential is unable to show that the Sps are hiding
behind the corporate structure to evade payment of their
obligations. Save for the notation in the promissory note
that the loan was for house construction and personal
consumption, there is no proof showing that the loan was
indeed for respondents personal consumption.
DRAGNET CLAUSE
 A blanket mortgage clause, also known as a dragnet
clause in American jurisprudence, is one which is
specifically phrased to subsume all debts of past or future
origins. Such clauses are carefully scrutinized and strictly
construed.
 Mortgages of this character enable the parties to provide
continuous dealings, the nature or extent of which may
not be known or anticipated at the time, and they avoid
the expense and inconvenience of executing a new
security on each new transaction. A dragnet clause
operates as a convenience and accommodation to
the borrowers as it makes available additional funds
without their having to execute additional security
documents, thereby saving time, travel, loan closing
costs, costs of extra legal services, recording fees, et
cetera. Indeed, it has been settled in a long line of
decisions that mortgages given to secure future
advancements are valid and legal contracts, and the
amounts named as consideration in said contracts do not
limit the amount for which the mortgage may stand as
security if from the four corners of the instrument the
intent to secure future and other indebtedness can be
gathered.
 The blanket mortgage clause in the instant case states:
That for and in consideration of
certain loans, overdraft and other credit
accommodations obtained from the
Mortgagee by the Mortgagor and/or
________________ hereinafter referred to,
irrespective of number, as DEBTOR, and to
secure the payment of the same
and those that may hereafter be
obtained, the principal or all of which is
hereby fixed at Two Hundred Fifty
Thousand (P250,000.00) Pesos, Philippine
Currency, as well as those that the
Mortgagee may extend to the Mortgagor
and/or DEBTOR, including interest and
expenses or any other obligation owing
to the Mortgagee, whether direct or
indirect, principal or secondary as
appears in the accounts, books and records
of the Mortgagee, the Mortgagor does
hereby transfer and convey by way of
mortgage unto the Mortgagee, its
successors or assigns, the parcels of land
which are described in the list inserted on
the back of this document, and/or appended
hereto, together with all the buildings and
improvements now existing or which may
hereafter be erected or constructed thereon,
of which the Mortgagor declares that he/it is
the absolute owner free from all liens and
incumbrances. . .
 Thus, contrary to the finding of the Court of Appeals,
petitioner and respondents intended the real estate
mortgage to secure not only theP250,000.00 loan from
the petitioner, but also future credit facilities and
advancements that may be obtained by the respondents.
The terms of the above provision being clear and
unambiguous, there is neither need nor excuse to
construe it otherwise.
 In the case at bar, the subsequent loans obtained by
respondents were secured by other securities, thus: PN
BD#76/C-345, executed by Don Alviar was secured by a
hold-out on his foreign currency savings account, while
PN BD#76/C-430, executed by respondents for Donalco
Trading, Inc., was secured by Clean-Phase out TOD CA
3923 and eventually by a deed of assignment on two
promissory notes executed by Bancom Realty
Corporation with Deed of Guarantee in favor of A.U.
Valencia and Co., and by a chattel mortgage on various
heavy and transportation equipment.
 Under American jurisprudence, two schools of thought
have emerged on this question.
o One school advocates that a dragnet clause so
worded as to be broad enough to cover all other
debts in addition to the one specifically secured
will be construed to cover a different debt,
although such other debt is secured by another
mortgage.
o The contrary thinking maintains that a mortgage
with such a clause will not secure a note that
expresses on its face that it is otherwise
secured as to its entirety, at least to anything
other than a deficiency after exhausting the
security specified therein, such deficiency being
an indebtedness within the meaning of the
mortgage, in the absence of a special contract
excluding it from the arrangement.
 SC: The latter school represents the better position.
The parties having conformed to the blanket mortgage
clause or dragnet clause, it is reasonable to conclude
that they also agreed to an implied understanding that
subsequent loans need not be secured by other
securities, as the subsequent loans will be secured by
the first mortgage. In other words, the sufficiency of the
first security is a corollary component of the dragnet
clause. But of course, there is no prohibition, as in the
mortgage contract in issue, against contractually
requiring other securities for the subsequent loans. Thus,
when the mortgagor takes another loan for which another
security was given it could not be inferred that such loan
was made in reliance solely on the original security with
the dragnet clause, but rather, on the new security given.
This is the reliance on the security test.
 Hence, based on the reliance on the security test, the
California court in the cited case made an inquiry whether
the second loan was made in reliance on the original
security containing a dragnet clause. Accordingly, finding
a different security was taken for the second loan no
intent that the parties relied on the security of the first
loan could be inferred, so it was held. The rationale
involved, the court said, was that the dragnet clause in
the first security instrument constituted a continuing offer
by the borrower to secure further loans under the security
of the first security instrument, and that when the lender
accepted a different security he did not accept the offer.
 Indeed, in some instances, it has been held that in the
absence of clear, supportive evidence of a contrary
intention, a mortgage containing a dragnet clause will
not be extended to cover future advances unless the
BANKING: WEEK 5 | 38
 document evidencing the subsequent advance refers
to the mortgage as providing security therefor.
 It was therefore improper for Prudential to seek
foreclosure of the mortgaged property because of non-
payment of all the three promissory notes.
 There is a need to respect the existence of the other
security given for PN BD#76/C-345. The foreclosure of
the mortgaged property should only be for
the P250,000.00 loan covered by PN BD#75/C-252, and
for any amount not covered by the security for the
second promissory note.
 The security specifically executed for subsequent loans
must first be exhausted before the mortgaged property FACTS(note: didn’t change the designations of petitioners
can be resorted to.
 The mortgage contract, as well as the promissory notes nakakalito):
subject of this case, is a contract of adhesion, to which
respondents only participation was the affixing of their
signatures or adhesion thereto. A contract of adhesion is
one in which a party imposes a ready-made form of
contract which the other party may accept or reject, but
which the latter cannot modify. It must be strictly
construed against the party responsible for its
preparation- Prudential
 Petitioner, however, is not without recourse. Both the
Court of Appeals and the trial court found that
respondents have not yet paid theP250,000.00, and gave
no credence to their claim that they paid the said amount
when they paid petitioner P2,000,000.00. Thus, the
mortgaged property could still be properly subjected to
foreclosure proceedings for the unpaid P250,000.00 loan,
and as mentioned earlier, for any deficiency after
D/A SFDX#129, security for PN BD#76/C-345, has been
exhausted, subject of course to defenses which are
available to respondents.
DISPOSITION: AFFIRMED
Cuyco vs. Cuyco | Karl
April 19, 2006
SPOUSES ADELINA S. CUYCO and FELICIANO U. CUYCO,
Petitioners, - versus - SPOUSES RENATO CUYCO and FILIPINA
CUYCO, Respondents.
YNARES-SANTIAGO, J.:
NATURE: This petition for review on certiorari assails the Decision
of the Court of Appeals (CA).
SUMMARY:
 The petitioners obtained a loan from respondents which
was secured by a REM. The petitioners obtained
subsequent loans. The petitioners defaulted. The
respondents wanted to foreclose on the mortgage. The
SC held that the REM only covers the original loan and
not the subsequent ones for failure of the contract to
include a dragnet clause. Also, the SC clarified the rules
on the payment of interest.
DOCTRINE (related to topic):
 As a general rule, a mortgage liability is usually limited to
the amount mentioned in the contract.
 However, the amounts named as consideration in a
contract of mortgage do not limit the amount for which
the mortgage may stand as security if from the four
corners of the instrument the intent to secure future and
other indebtedness can be gathered.
 This stipulation is valid and binding between the parties
and is known in American Jurisprudence as the blanket
mortgage clause, also known as a dragnet clause.
 A dragnet clause operates as a convenience and
accommodation to the borrowers as it makes available
additional funds without their having to execute additional
security documents, thereby saving time, travel, loan
closing costs, costs of extra legal services, recording
fees, et cetera.
 While a real estate mortgage may exceptionally secure
future loans or advancements, these future debts must
be sufficiently described in the mortgage contract. An
obligation is not secured by a mortgage unless it comes
fairly within the terms of the mortgage contract.
and respondents because they’re both Cuyco. Mas
 Petitioners, spouses Adelina and Feliciano Cuyco,
obtained a loan in the amount of P1,500,000.00 from
respondents, spouses Renato and Filipina Cuyco,
payable within one year at 18% interest per annum, and
secured by a Real Estate Mortgage over a parcel of land
with improvements thereon situated in Cubao, Quezon
City covered by TCT No. RT-43723 (188321).
 Subsequently, petitioners obtained additional loans from
the respondents in the aggregate amount of
P1,250,000.00, broken down as follows: (1) P150,000.00
on May 30, 1992; (2) P150,000.00 on July 1, 1992; (3)
P500,000.00 on September 5, 1992; (4) P200,000.00 on
October 29, 1992; and (5) P250,000.00 on January 13,
1993.
 Petitioners made payments amounting to P291,700.00,
but failed to settle their outstanding loan obligations.
 Thus, on September 10, 1997, respondents filed a
complaint for foreclosure of mortgage with the RTC of
Quezon City, which was docketed as Civil Case No. Q-
97-32130.
o They alleged that petitioners loans were
secured by the real estate mortgage; that as of
August 31, 1997, their indebtedness amounted
to P6,967,241.14, inclusive of the 18% interest
compounded monthly; and that petitioners
refusal to settle the same entitles the
respondents to foreclose the real estate
mortgage.
 Petitioners filed a motion to dismiss on the ground that
the complaint states no cause of action which was denied
by the RTC for lack of merit.
 In their answer, petitioners admitted their loan obligations
but argued that only the original loan of P1,500,000.00
was secured by the real estate mortgage at 18% per
annum and that there was no agreement that the same
will be compounded monthly.
 RTC: rendered judgment in favor of the respondents
 CA: partially granted the petition and modified the RTC
decision insofar as the amount of the loan obligations
secured by the real estate mortgage.
o It held that by express intention of the parties,
the real estate mortgage secured the original
P1,500,000.00 loan and the subsequent loans
of P150,000.00 and P500,000.00 obtained on
July 1, 1992 and September 5, 1992,
respectively.
o As regards the loans obtained on May 31, 1992,
October 29, 1992 and January 13, 1993 in the
amounts of P150,000.00, P200,000.00 and
P250,000.00, respectively, the appellate tribunal
held that the parties never intended the same to
be secured by the real estate mortgage.
o The Court of Appeals also found that the trial
BANKING: WEEK 5 | 39
 court properly imposed 12% legal interest on the
stipulated interest from the date of filing of the
complaint
ISSUE #1:
Whether or not the imposition of the 12% legal interest per annum
on the stipulated interest of 18% per annum computed from the
filing of the complaint until fully paid was not provided in the real
estate mortgage contract, thus, the same has no legal basis.--NO
RATIO#1:
 While a contract is the law between the parties, it is also
settled that an existing law enters into and forms part of a
valid contract without the need for the parties expressly
making reference to it.
 Thus, the lower courts correctly applied Article 2212 of
the Civil Code as the basis for the imposition of the legal
interest on the stipulated interest due. It reads:
o Art. 2212. Interest due shall earn legal interest
from the time it is judicially demanded, although
the obligation may be silent upon this point.
 The foregoing provision has been incorporated in the
comprehensive summary of existing rules on the
computation of legal interest enunciated by the Court in
Eastern Shipping Lines, Inc. v. Court of Appeals:
o When an obligation is breached, and it consists
in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should
be that which may have been stipulated in
writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
o When an obligation, not constituting a loan or
forbearance of money, is breached, an interest
on the amount of damages awarded may be
imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages
except when or until the demand can be
established with reasonable certainty.
Accordingly, where the demand is established
with reasonable certainty, the interest shall
begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so
reasonably established at the time the demand
is made, the interest shall begin to run only from
the date the judgment of the court is made (at
which time the quantification of damages may
be deemed to have been reasonably
ascertained). The actual base for the
computation of legal interest shall, in any case,
be on the amount finally adjudged.
o 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.
 In the case at bar, the evidence shows that petitioners
obtained several loans from the respondent, some of
which as held by the CA were secured by real estate
mortgage and earned an interest of 18% per annum.
Upon default thereof, respondents demanded payment
from the petitioners by filing an action for foreclosure of
the real estate mortgage. Clearly, the case falls under the
rule stated in paragraph 1.
 Applying the rules in the computation of interest, the
principal amount of loans subject of the real estate
mortgage must earn the stipulated interest of 18% per
annum, which interest, as long as unpaid, also earns
legal interest of 12% per annum, computed from the date
of the filing of the complaint on September 10, 1997 until
finality of the Courts Decision. Such interest is not due to
stipulation but due to the mandate of the law[21] as
embodied in Article 2212 of the Civil Code. From such
date of finality, the total amount due shall earn interest of
12% per annum until satisfied.[22]
 Certainly, the computed interest from the filing of the
complaint on September 10, 1997 would no longer be
true upon the finality of this Courts decision. In
accordance with the rules laid down in Eastern Shipping
Lines, Inc. v. Court of Appeals, we derive the following
formula for the RTCs guidance:
TOTAL AMOUNT DUE = [principal + interest + interest on interest]
- partial payments made
Interest = principal x 18 % per annum x no. of years from due date
until finality of judgment
Interest on interest = Interest computed as of the filing of the
complaint (September 10, 1997) x 12% x no. of years until finality
of judgment
Total amount due as of the date of finality of judgment will earn an
interest of 12% per annum until fully paid.
ISSUE #2
Which loans were secured by the REM?—only the original loan
RATIO #2:
 As a general rule, a mortgage liability is usually limited to
the amount mentioned in the contract.
 However, the amounts named as consideration in a
contract of mortgage do not limit the amount for which
the mortgage may stand as security if from the four
corners of the instrument the intent to secure future and
other indebtedness can be gathered.
 This stipulation is valid and binding between the
parties and is known in American Jurisprudence as
the blanket mortgage clause, also known as a
dragnet clause.
 A dragnet clause operates as a convenience and
accommodation to the borrowers as it makes available
additional funds without their having to execute additional
security documents, thereby saving time, travel, loan
closing costs, costs of extra legal services, recording
fees, et cetera.
 While a real estate mortgage may exceptionally secure
future loans or advancements, these future debts must
be sufficiently described in the mortgage contract. An
obligation is not secured by a mortgage unless it comes
fairly within the terms of the mortgage contract.
 The pertinent provisions of the November 26, 1991 real
estate mortgage reads:
That the MORTGAGOR is indebted unto the MORTGAGEE in the
sum of ONE MILLION FIVE THOUSAND PESOS (sic)
(1,500,000.00) Philippine Currency, receipt whereof is hereby
acknowledged and confessed, payable within a period of one
year, with interest at the rate of eighteen percent (18%) per
BANKING: WEEK 5 | 40
annum;
RATIO #3:
That for and in consideration of said indebtedness, the  Section 2, Rule 68 of the Rules of Court provides:
MORTGAGOR does hereby convey and deliver by way of o SEC. 2. Judgment on foreclosure for payment or
MORTGAGE unto said MORTGAGEE, the latters heirs and sale. If upon the trial in such action the court
assigns, the following realty together with all the improvements shall find the facts set forth in the complaint to
thereon and situated at Cubao, Quezon City, and described as be true, it shall ascertain the amount due to the
follows: plaintiff upon the mortgage debt or obligation,
including interest and other charges as
xxxx approved by the court, and costs, and shall
render judgment for the sum so found due and
PROVIDED HOWEVER, that should the MORTGAGOR duly pay order that the same be paid to the court or to the
or cause to be paid unto the MORTGAGEE or his heirs and judgment obligee within a period of not less than
assigns, the said indebtedness of ONE MILLION FIVE HUNDRED ninety (90) days nor more than one hundred
THOUSAND PESOS (1,500,000.00), Philippine Currency, twenty (120) days from the entry of judgment,
together with the agreed interest thereon, within the agreed term and that in default of such payment the property
of one year on a monthly basis then this MORTGAGE shall be shall be sold at public auction to satisfy the
discharged, and rendered of no force and effect, otherwise it shall judgment. (Emphasis added)
subsist and be subject to foreclosure in the manner and form  Indeed, the above provision of the Rules of Court
provided by law. provides that the mortgaged property may be charged
not only for the mortgage debt or obligation but also for
 It is clear from a perusal of the aforequoted real the interest, other charges and costs approved by the
estate mortgage that there is no stipulation that the court. Thus, to discharge the real estate mortgage,
mortgaged realty shall also secure future loans and petitioners must pay the respondents (1) the total amount
advancements. Thus, what applies is the general rule due, as computed in accordance with the formula
above stated. indicated above, that is, the principal loan of
 Even if the parties intended the additional loans of P1,500,000.00, the stipulated interest of 18%, the interest
P150,000.00 obtained on May 30, 1992, P150,000.00 on the stipulated interest due of 12% computed from the
obtained on July 1, 1992, and P500,00.00 obtained on filing of the complaint until finality of the decision less
September 5, 1992 to be secured by the same real partial payments made, (2) the 12% legal interest on the
estate mortgage, as shown in the acknowledgement total amount due from finality until fully satisfied, (3) the
receipts, it is not sufficient in law to bind the realty for it reasonable attorneys fees of P25,000.00 and (4) the
was not made substantially in the form prescribed by law. costs of suit, within the period specified by the Rules.
 In order to constitute a legal mortgage, it must be Should the petitioners default in the payment thereof, the
executed in a public document, besides being recorded. property shall be sold at public auction to satisfy the
A provision in a private document, although denominating judgment.
the agreement as one of mortgage, cannot be considered
as it is not susceptible of inscription in the property DISPOSITION: AFFIRMED with the MODIFICATIONS that
registry. petitioners are ordered to pay the respondents (1) the total amount
 A mortgage in legal form is not constituted by a private due, as computed by the RTC in accordance with the formula
document, even if such mortgage be accompanied with specified above, (2) the legal interest of 12% per annum on the
delivery of possession of the mortgage property. total amount due from such finality until fully paid, (3) the
 Besides, by express provisions of Section 127 of Act No. reasonable amount of P25,000.00 as attorneys fees, and (4) the
496, a mortgage affecting land, whether registered under costs of suit, within a period of not less than 90 days nor more
said Act or not registered at all, is not deemed to be than 120 days from the entry of judgment, and in case of default of
sufficient in law nor may it be effective to encumber or such payment the property shall be sold at public auction to satisfy
bind the land unless made substantially in the form the judgment.
therein prescribed.
 It is required, among other things, that the document be
signed by the mortgagor executing the same, in the
presence of two witnesses, and acknowledged as his
free act and deed before a notary public. A mortgage
constituted by means of a private document obviously
does not comply with such legal requirements
 What the parties could have done in order to bind the
realty for the additional loans was to execute a new real
estate mortgage or to amend the old mortgage
conformably with the form prescribed by the law. Failing
to do so, the realty cannot be bound by such additional
loans, which may be recovered by the respondents in an
ordinary action for collection of sums of money.

ISSUE #3
Whether or not to discharge the real estate mortgage, payment
only of the principal and the stipulated interest of 18% per annum
is sufficient as the mortgage document does not contain a
stipulation that the legal interest on the stipulated interest due,
attorneys fees, and costs of suit must be paid first before the same
may be discharged.--NO

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