PNB v.

Pineda
May 13, 1991
PHILIPPINE NATIONAL BANK, petitioner, vs. HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of the Court of
First Instance of Rizal, Branch XXI and TAYABAS CEMENT COMPANY, INC., respondents.
FERNAN, C.J.
NATURE: Petition for certiorari
SUMMARY:The Arroyos obtained several loans from PNB. To secure these loans, they executed real estate mortgages over several of
their properties. Thereafter, Tayabas Cement or TCC, a company majority-owned by the Arroyos, applied with PNB for a letter of credit
in favor of a Japanese company for the import of cement machinery, which was granted. To secure the L/C, a trust receipt agreement
was executed by TCC and PNB over the cement machinery, and a surety agreement was executed by the Arroyos. Upon failure of TCC
to pay for the advances drawn by the Japanese company which were covered by the L/C, PNB repossessed the cement machinery
pursuant to the trust receipt agreement. PNB also filed petitions for extrajudicial foreclosure over the properties of the Arroyos. During
the foreclosure sale, PNB was the highest bidder, but the Arroyos contested the award since they contended that the foreclosure should
only cover the personal obligation of the Arroyos. Hence, PNB filed a petition for mandamus with the CFI for the sheriff to proceed with
the foreclosure sale to satisfy not only the personal obligation of the Arroyos, but also their obligation as surety of TCC. This petition
was granted, but before it attained finality, TCC filed a petition for the issuance of a writ of injunction in another CFI branch (presided by
Judge Pineda), arguing that the repossession of the cement machinery by PNB effectively extinguished the obligation under the trust
receipt agreement. Judge Pineda granted the writ. The SC set aside the writs, ruling that the repossession of the machinery did not
extinguish the loan obligation. Moreover, since the Arroyos were sureties of TCC, PNB had the right to foreclose their properties to
satisfy the obligation of TCC, since they were primarily liable pursuant to the surety agreement.
DOCTRINE:The transaction (in question) involves a loan feature represented by the letter of credit, and a security feature which is in
the covering trust receipt. Contrary to the allegations, [the lender] 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 [entrustee]. The goods the [entrustee] had purchased through [the lenders]
financing remain their own property and they hold it at their own risk. The trust receipt arrangement did not convert [the lender] into an
investor; the latter remained a lender and creditor.The fact that they were unable to sell the [goods] does not affect [the lenders] right to
recover the advances it had made under the L/C.PNB's possession of the machinery and equipment being a form of security for the
advances under the L/C, said possession by itself cannot be considered payment of the loan. Payment would legally result only after
PNB had foreclosed on the securities, sold them, and applied the proceeds to TCC's loan. Mere possession does not amount to
foreclosure, for foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property
and includes the sale itself.
FACTS:

1963: Ignacio and Lourdes Arroyo (the Arroyos), obtained a loan of P580k from PNB to purchase 60% of the subscribed
capital stock (thus, controlling interest) of Tayabas Cement Company, Inc. (TCC). As security for said loan, the Arroyos
executed a real estate mortgage over a parcel of land known as the La Vista property.

TCC filed with PNB an application and agreement for the establishment of an 8 year deferred letter of credit (L/C) for USD
7m in favor of Toyo Menka Kaisha, Ltd. (TMKL) of Tokyo to cover the importation of cement plant machinery and
equipment.

Upon approval and opening of the L/C by PNB, the Arroyos executed the following documents to secure this loan
accommodation:
o Surety Agreement dated August 5, 1964; and
o Covenant dated August 6, 1964.

The machinery and equipment arrived from Japan and were released to TCC under a trust receipt agreement. Subsequently,
TMKL drew against the L/C as scheduled. TCC, however, failed to pay the amount covered by the drawings.

May 19, 1968: pursuant to the trust receipt agreement, PNB notified TCC of its intention to repossess, as it later did, the
imported machinery and equipment for failure of TCC to settle its obligations under the L/C.

In the meantime, the personal accounts of the Arroyos, which included another loan of P160k secured by REM over lands
known as Hacienda Bacon, had likewise become due. The Arroyos failed to satisfy their obligations with PNB, so PNB decided
to foreclose the real estate mortgages.

July 18, 1975: PNB filed with the City Sheriff of Quezon City a petition for extra-judicial foreclosure of the REM over the La
Vista property. PNB likewise filed a similar petition with the City Sheriff of Bacolod, Negros Occidental with respect to the
mortgage over Hacienda Bacon.

At the auction sale of the La Vista property, PNB was the highest bidder with a bid price of P1,000,001. However, before the
award of the property to PNB, the Arroyos objected and demanded from PNB the difference between the bid price and the
debt of P499,060.25 of the Arroyos on their personal account.
o TheArroyos contended that the foreclosure proceedings referred only to the personal account of the
spouses without reference to the account of TCC.

August 13, 1975: To remedy the situation, PNB filed a supplemental petition requesting the Sheriff's Office to proceed with the
sale of the properties to satisfy not only the debt owed by the Arroyos on their personal account, but also the amount of P35m
exclusive of interest, commission charges and other expenses owed by said spouses as sureties of TCC. Said petition was
opposed by the Arroyos and the other bidder, Jose L. Araneta.

September 12, 1975: Acting Clerk of Court and Ex-Officio Sheriff Dungca issued a resolution ruling that her office cannot
properly proceed with the foreclosure sale unless and until there be a court ruling on the questions raised by the parties, which
required the reception and evaluation of evidence.

May 1976: PNB filed with the CFI of Quezon City a petition for mandamus against the City Sheriff to compel her to proceed
with the foreclosure sale of the properties in order to satisfy both the personal obligation of the Arroyos and their
liabilities as sureties of TCC.

September 6, 1976: petition granted; Dungca directed to proceed with the foreclosure sale.
Before the decision could attain finality, TCC filed before the CFI of Pasig a complaint against PNB, Dungca, and the
Provincial Sheriff of Negros Occidental and Ex-Officio Sheriff of Bacolod City seeking a writ of preliminary injunction to restrain
the foreclosure of the mortgages, and a declaration that its obligation with PNB had been fully paid by reason of the latter's
repossession of the imported machinery and equipment.

October 5, 1976: the CFI, thru respondent Judge Gregorio Pineda, issued a restraining order and granted a writ of preliminary
injunction. PNB's MR was denied, hence this petition.

PNB argues that:

o the writ contravenes P.D. No. 385 which prohibits the issuance of a restraining order against a government financial
institution in any action taken by such institution in compliance with the mandatory foreclosure provided in Section 1
thereof;
o the writ countermands a final decision of a co-equal and coordinate court;
o the writ seeks to prohibit the performance of acts beyond the court's territorial jurisdiction; and,
o TCC has not shown any clear legal right or necessity to the relief of preliminary injunction.

TCC avers that P.D. No. 385 does not apply to the case at bar, firstly because no foreclosure proceedings have been instituted
against it by PNB and secondly, because its account under the L/C has been fully satisfied with the repossession of the
imported machinery and equipment by PNB.
ISSUE #1 (MAIN):

W/N TCC's liability has been extinguished by the repossession of PNB of the imported cement plant machinery and
equipment(NO)
RATIO #1:

PNB took possession of the imported cement plant machinery and equipment pursuant to the trust receipt agreement, which
gave it the unqualified right to the possession and disposal of all property shipped under the Letter of Credit until such time as
all the liabilities and obligations under said letter had been discharged.

In the case of Vintola vs. Insular Bank of Asia and America wherein the same argument was advanced, it was held that:
o The submission (that the obligation is extinguished by repossession) overlooks the nature and mercantile usage of a
letter of credit-trust receipt transaction. Under this 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.
o A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the
goods.Asdefined in our laws:

(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.
o Contrary to the allegations, [the lender] 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 [entrustee]. The goods the [entrustee] had purchased
through [the lenders] financing remain their own property and they hold it at their own risk. The trust receipt
arrangement did not convert [the lender] into an investor; the latter remained a lender and creditor.
o Since the [lender] is not the factual owner of the goods, the [entrustees] cannot justifiably claim that because they
have surrendered the goods 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 [goods] does not affect [the lenders] right to recover the advances it had made under the
L/C.

PNB's possession of the machinery and equipment being a form of security for the advances under the L/C, said
possession by itself cannot be considered payment of the loan. Payment would legally result only after PNB had
foreclosed on the securities, sold them, and applied the proceeds to TCC's loan. Mere possession does not amount
to foreclosure, for foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the
mortgagor on the property and includes the sale itself.

Neither can said repossession amount to dacionenpago. As aforesaid, the repossession of the machinery and equipment in
question was merely to secure the payment of TCC's loan obligation and not for the purpose of transferring ownership to PNB
in satisfaction of said loan.
ISSUE #2:

W/N PNB may foreclose the mortgages to satisfy both the personal obligation and the obligation as surety of the
Arroyos(YES)
RATIO #2:

From the above discussion, PNB has the right to foreclose the mortgages executed by the Arroyos as sureties of TCC. A
surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of
the latter, and their liabilities are interwoven as to be inseparable. As sureties, the Arroyos are primarily liable and are bound
immediately to pay the creditor the amount outstanding.

Under PD385, government financial institutions like PNB are required to foreclose on the collaterals and/or securities for any
loan, credit or accommodation whenever the arrearages on such account amount to at least 20% of the total outstanding
obligations, including interests and charges, as appearing in the books of account. Moreover, "no restraining order, temporary
or permanent injunction shall be issued by the court against any government financial institution in any action taken by such
institution in compliance with the mandatory foreclosure provided in Section 1 hereof, whether such restraining order,
temporary or permanent injunction is sought by the borrower(s) or any third party or parties."

It is not disputed that the foreclosures instituted by PNB were in compliance with the mandate of PD385. Hence, Judge Pineda
acted in excess of his jurisdiction in issuing the injunction.

Moreover, the writ interfered with the order of a co-equal and coordinate court. Since the CFI of Rizal had already acquired
jurisdiction over the question of foreclosure and rendered judgment in relation thereto, then it retained jurisdiction to the
exclusion of all other coordinate courts. The foreclosure sale having been ordered by the CFI of Rizal, TCC should not have
filed injunction proceedings with another branch of the same CFI, but instead should have first sought relief by proper motion
and application from the former court which had exclusive jurisdiction over the foreclosure proceeding.This doctrine of noninterference is premised on the principle that a judgment of a court of competent jurisdiction may not be opened, modified or
vacated by any court of concurrent jurisdiction.

Furthermore, we find the issuance of the preliminary injunction directed against the Provincial Sheriff of Negros Occidental and
ex-officio Sheriff of Bacolod City a jurisdictional faux pas as the CFI can only enforce their writs of injunction within their
respective designated territories.
DISPOSITION
Petition granted. Writs set aside.