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5) Guaranty and Suretyship

[G.R. No. L-9306. May 25, 1956.]


SOUTHERN MOTORS, INC., Plaintiff-Appellee, vs. ELISEO BARBOSA,
Defendant-Appellant.
FACTS:
Southern Motors Inc. brought this action against Barbosa for the foreclosure of a
real estate mortgage which the latter constituted as security for the payment of the
sum of of P2,889.53 due to said Plaintiff from one Alfredo Brillantes, who had failed
to settle his obligation in accordance with the terms and conditions of the
corresponding deed of mortgage.
In his answer, Barbosa admitted that he constituted the deed of mortgage for the
only purpose of guaranteeing as surety and/or guarantor the payment of the
above mentioned debt of Mr. Alfredo Brillantes in favor of the Southern Motors.
However, he claims that the plaintiff has no right of action against him because the
plaintiff has not yet exhausted all recourses to collect from the true debtor Mr.
Alfredo Brillantes. Furthermore, Southern Motors has not yet resorted to all the legal
remedies against the true debtor Mr. Alfredo Brillantes, notwithstanding the fact
that said Mr. Alfredo Brillantes is solvent and has many properties within the
Province of Iloilo.
ISSUE:
Whether the mortgage in question could be foreclosed although Plaintiff had not
exhausted, and did not intend to exhaust, the properties of his principal debtor,
Alfredo Brillantes
RULING:
Defendants affirmative defense is devoid of merit for:
1. The deed of mortgage executed by him specifically provides:
That if said Mr. Alfredo Brillantes or herein mortgagor, his heirs, executors,
administrators and assigns shall well and truly perform the full obligations abovestated according to the terms thereof, then this mortgage shall be null and void,
otherwise it shall remain in full force and effect, in which event herein mortgagor
authorizes and empowers herein mortgagee-company to take any of the following
actions to enforce said payment;.
(a) Foreclose, judicially or extrajudicially, the chattel mortgage above referred to
and/or also this mortgage, applying the proceeds of the purchase price at public
sale of the real property herein mortgaged to any deficiency or difference between
the

purchase price of said chattel at public auction and the amount of P2,889.53,
together with its interest hereby secured; chan roblesvirtualawlibraryor
(b) Simply foreclose this mortgage judicially in accordance with the provisions of
section 2, Rule 70, Rules of Court, or extra- judicially under the provisions of Act No.
3135 and Act No. 4118, to satisfy the full amount of P2,889.53, together with its
interest of 12 per cent per annum.
2. The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to
demand exhaustion of the property of the principal debtor, exists only when a
pledge or a mortgage has not been given as special security for the payment of the
principal obligation. Guarantees, without any such pledge or mortgage, are
governed by Title XV of said Code, whereas pledges and mortgages fall under Title
XVI of the same Code, in which the following provisions, among others, are found:
ART. 2087. It is also of the essence of these contracts 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.
ART. 2126. The mortgage directly and immediately subjects the property upon
which it is imposed, whoever the possessor may be, to the fulfillment of the
obligation for whose security it was constituted.
3. It has been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is
not entitled to the exhaustion of the property of the principal debtor.
4. Although an ordinary personal guarantor not a mortgagor or pledgor may
demand the aforementioned exhaustion, the creditor may, prior thereto, secure a
judgment against said guarantor, who shall be entitled, however, to a deferment of
the execution of said judgment against him until after the properties of the principal
debtor shall have been exhausted to satisfy the obligation involved in the case.
Dino vs Court of Appeals
Facts:
In 1977, UyTiam Enterprises and Freight Services (hereinafter referred to as UTEFS),
thru its representative UyTiam, applied for and obtained credit accommodations
(letter of credit and trust receipt accommodations) from the Metropolitan Bank and
Trust Company (hereinafter referred to as METROBANK) in the sum of P700,000.00.
To secure the aforementioned credit accommodations Norberto Uy and Jacinto
UyDio executed separate Continuing Suretyships, dated 25 February 1977, in favor
of the latter. Under the aforesaid agreements, Norberto Uy agreed to pay
METROBANK any indebtedness of UTEFS up to the aggregate sum of P300,000.00
while Jacinto UyDio agreed to be bound up to the aggregate sum of P800,000.00.

Having paid the obligation under the above letter of credit in 1977, UTEFS, through
UyTiam, obtained another credit accommodation from METROBANK in 1978, which
credit accommodation was fully settled before an irrevocable letter of credit was
applied for and obtained by the abovementioned business entity in 1979.
The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum
of P815, 600.00, covered UTEFS' purchase of "8,000 Bags Planters Urea and 4,000
Bags Planters 21-0-0." It was applied for and obtain by UTEFS without the
participation of Norberto Uy and Jacinto UyDio as they did not sign the document
denominated as "Commercial Letter of Credit and Application." Also, they were not
asked to execute any suretyship to guarantee its payment. Neither did METROBANK
nor UTEFS inform them that the 1979 Letter of Credit has been opened and the
Continuing Suretyships separately executed in February, 1977 shall guarantee its
payment.
The 1979 letter of credit was negotiated. METROBANK paid Planters Products the
amount of P815,600.00 which payment was covered by a Bill of Exchange, dated 4
June 1979, in favor of.
Pursuant to the above commercial transaction, UTEFS executed and delivered to
METROBANK and Trust Receipt, dated 4 June 1979, whereby the former
acknowledged receipt in trust from the latter of the aforementioned goods from
Planters Products which amounted to P815, 600.00. Being the entrusted, the former
agreed to deliver to METROBANK the entrusted goods in the event of non-sale or, if
sold, the proceeds of the sale thereof, on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt.
As a consequence, METROBANK sent letters to the said principal obligor and its
sureties, Norberto Uy and Jacinto UyDio, demanding payment of the amount due.
Informed of
the amount due, UTEFS made partial payments to the Bank which were accepted by
the latter.
Answering one of the demand letters, Dio, thru counsel, denied his liability for the
amount demanded and requested METROBANK to send him copies of documents
showing the source of his liability. In its reply, the bank informed him that the source
of his liability is the Continuing Suretyship which he executed on February 25, 1977.
As a rejoinder, Dio maintained that he cannot be held liable for the 1979 credit
accommodation because it is a new obligation contracted without his participation.
Besides, the 1977 credit accommodation which he guaranteed has been fully paid.
Having sent the last demand letter to UTEFS, Dio and Uy and finding resort to
extrajudicial remedies to be futile, METROBANK filed a complaint for collection of a
sum of money (P613,339.32, as of January 31, 1982, inclusive of interest,

commission penalty and bank charges) with a prayer for the issuance of a writ of
preliminary attachment, against UyTiam, representative of UTEFS and impleaded
Dio and Uy as parties-defendants.
The court issued an order, dated 29 July 1983, granting the attachment writ, which
writ was returned unserved and unsatisfied as defendant UyTiam was nowhere to be
found at his given address and his commercial enterprise was already nonoperational.
On April 11, 1984, Norberto Uy and Jacinto UyDio (sureties-defendant herein) filed
a motion to dismiss the complaint on the ground of lack of cause of action. They
maintained that the obligation which they guaranteed in 1977 has been
extinguished since it has already been paid in the same year. Accordingly, the
Continuing Suretyships executed in 1977 cannot be availed of to secure UyTiam's
Letter of Credit obtained in 1979 because a guaranty cannot exist without a valid
obligation. It was further argued that they can not be held liable for the obligation
contracted in 1979 because they are not privies thereto as it was contracted
without their participation.
On April 24, 1984, METROBANK filed its opposition to the motion to dismiss.
Invoking the terms and conditions embodied in the comprehensive suretyships
separately executed by sureties-defendants, the bank argued that sureties-movants
bound themselves as solidary obligors of defendant UyTiam to both existing
obligations and future ones. It relied on Article 2053 of the new Civil Code which
provides: "A guaranty may also be given as security for future debts, the amount of
which is not yet known; . . . ." It was further asserted that the agreement was in full
force and effect at the time the letter of credit was obtained in 1979 as suretiesdefendants did not exercise their right to revoke it by giving notice to the bank.
Issues:
1. Whether petitioners are liable as sureties for the 1979 obligations of UyTiam to
METROBANK by virtue of the Continuing Suretyship Agreements they separately
signed in 1977; and
2. On the assumption that they are, what is the extent of their liabilities for said
1979 obligations.
Held:
Under the Civil Code, a guaranty may be given to secure even future debts, the
amount of which may not known at the time the guaranty is executed. This is the
basis for contracts denominated as continuing guaranty or suretyship. A continuing
guaranty is one which is not limited to a single transaction, but which contemplates
a future course of dealing, covering a series of transactions, generally for an
indefinite time or until revoked. It is prospective in its operation and is generally

intended to provide security with respect to future transactions within certain limits,
and contemplates a succession of liabilities, for which, as they accrue, the
guarantor becomes liable. Otherwise stated, a continuing guaranty is one which
covers all transactions, including those arising in the future, which are within the
description or contemplation of the contract, of guaranty, until the expiration or
termination thereof. A guaranty shall be construed as continuing when by the terms
thereof it is evident that the object is to give a standing credit to the principal
debtor to be used from time to time either indefinitely or until a certain period,
especially if the right to recall the guaranty is expressly reserved. Hence, where the
contract of guaranty states that the same is to secure advances to be made "from
time to time" the guaranty will be construed to be a continuing one.
In other jurisdictions, it has been held that the use of particular words and
expressions such as payment of "any debt," "any indebtedness," "any deficiency,"
or "any sum," or the guaranty of "any transaction" or money to be furnished the
principal debtor "at any time," or "on such time" that the principal debtor may
require, have been construed to indicate a continuing guaranty.
In the case at bar, the pertinent portion of paragraph I of the suretyship agreement
executed by petitioner Uy provides thus:
I. For and in consideration of any existing indebtedness to the BANK of UY TIAM
(hereinafter called the "Borrower"), for the payment of which the SURETY is now
obligated to the BANK, either as guarantor or otherwise, and/or in order to induce
the BANK, in its discretion, at any time or from time to time hereafter, to make loans
or advances or to extend credit in any other manner to, or at the request, or for the
account of the Borrower, either with or without security, and/or to purchase or
discount, or to make any loans or advances evidence or secured by any notes, bills,
receivables, drafts, acceptances, checks, or other instruments or evidences of
indebtedness (all hereinafter called "instruments") upon which the Borrower is or
may become liable as maker, endorser, acceptor, or otherwise, the SURETY agrees
to guarantee, and does hereby guarantee, the punctual payment at maturity to the
loans, advances credits and/or other obligations hereinbefore referred to, and also
any and all other indebtedness of every kind which is now or may hereafter become
due or owing to the BANK by the Borrower, together with any and all expenses
which may be incurred by the BANK in collecting all or any such instruments or
other indebtedness or obligations herein before referred to, and/or in enforcing any
rights hereunder, and the SURETY also agrees that the BANK may make or cause
any and all such payments to be made strictly in accordance with the terms and
provisions of any agreement(s) express or implied, which has (have) been or may
hereafter be made or entered into by the Borrow in reference thereto, regardless of
any law, regulation or decree, unless the same is mandatory and non-waivable in
character, nor or hereafter in effect, which might in any manner affect any of the
terms or provisions of any such agreement(s) or the Bank's rights with respect

thereto as against the Borrower, or cause or permit to be invoked any alteration in


the time, amount or manner of payment by the Borrower of any such instruments,
obligations or indebtedness; provided, however, that the liability of the SURETY
hereunder shall not exceed at any one time the aggregate principal sum of PESOS:
THREE HUNDRED THOUSAND ONLY (P300,000.00) (irrespective of the currenc(ies) in
which the obligations hereby guaranteed are payable), and such interest as may
accrue thereon either before or after any maturity(ies) thereof and such expenses
as may be incurred by the BANK as referred to above.
Paragraph I of the Continuing Suretyship Agreement executed by petitioner Dio
contains identical provisions except with respect to the guaranteed aggregate
principal amount which is EIGHT THOUSAND PESOS (P800,000.00).
Paragraph IV of both agreements stipulate that:
VI. This is a continuing guaranty and shall remain in full force and effect until written
notice shall have been received by the BANK that it has been revoked by the
SURETY, but any such notice shall not release the SURETY, from any liability as to
any instruments, loans, advances or other obligations hereby guaranteed, which
may be held by the BANK, or in which the BANK may have any interest at the time
of the receipt (sic) of such notice. No act or omission of any kind on the BANK'S part
in the premises shall in any event affect or impair this guaranty, nor shall same (sic)
be affected by any change which may arise by reason of the death of the SURETY,
or of any partner(s) of the SURETY, or of the Borrower, or of the accession to any
such partnership of any one or more new partners.
The foregoing stipulations unequivocally reveal that the suretyship agreement in
the case at bar are continuing in nature. Petitioners do not deny this; in fact, they
candidly
admitted it. Neither have they denied the fact that they had not revoked the
suretyship agreements. Accordingly, as correctly held by the public respondent:
Undoubtedly, the purpose of the execution of the Continuing Suretyships was to
induce appellant to grant any application for credit accommodation (letter of
credit/trust receipt) UTEFS may desire to obtain from appellant bank. By its terms,
each suretyship is a continuing one which shall remain in full force and effect until
the bank is notified of its revocation.
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When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from appellant
bank, for the purpose of obtaining goods (covered by a trust receipt) from Planters
Products, the continuing suretyships were in full force and effect. Hence, even if
sureties-appellees did not sign the "Commercial Letter of Credit and Application,
they are still liable as the credit accommodation (letter of credit/trust receipt) was

covered by the said suretyships. What makes them liable thereunder is the
condition which provides that the Borrower "is or may become liable as maker,
endorser, acceptor or otherwise." And since UTEFS which (sic) was liable as principal
obligor for having failed to fulfill the obligatory stipulations in the trust receipt, they
as insurers of its obligation, are liable thereunder.
Petitioners maintain, however, that their Continuing Suretyship Agreements cannot
be made applicable to the 1979 obligation because the latter was not yet in
existence when the agreements were executed in 1977; under Article 2052 of the
Civil Code, a guaranty "cannot exist without a valid obligation." We cannot agree.
First of all, the succeeding article provides that "[a] guaranty may also be given as
security for future debts, the amount of which is not yet known." Secondly, Article
2052 speaks about a valid obligation, as distinguished from a void obligation, and
not an existing or current obligation. This distinction is made clearer in the second
paragraph of Article 2052 which reads:
Nevertheless, a guaranty may be constituted to guarantee the performance of a
voidable or an unenforceable contract. It may also guarantee a natural obligation.
As to the amount of their liability under the Continuing Suretyship Agreements,
petitioners contend that the public respondent gravely erred in finding them liable
for more than the amount specified in their respective agreements, to wit: (a)
P800,000.00 for petitioner Dio and (b) P300,000.00 for petitioner Uy.
The limit of the petitioners respective liabilities must be determined from the
suretyship agreement each had signed. It is undoubtedly true that the law looks
upon the contract of suretyship with a jealous eye, and the rule is settled that the
obligation of the surety cannot be extended by implication beyond its specified
limits. To the
extent, and in the manner, and under the circumstances pointed out in his
obligation, he is bound, and no farther.
Indeed, the Continuing Suretyship Agreements signed by petitioner Dio and
petitioner Uy fix the aggregate amount of their liability, at any given time, at
P800,000.00 and P300,000.00, respectively. The law is clear that a guarantor may
bond himself for less, but not for more than the principal debtor, both as regards the
amount and the onerous nature of the conditions. 18 In the case at bar, both
agreements provide for liability for interest and expenses, to wit:
. . . and such interest as may accrue thereon either before or after any maturity(ies)
thereof and such expenses as may be incurred by the BANK referred to above.
They further provide that:
In the event of judicial proceedings being instituted by the BANK against the
SURETY to enforce any of the terms and conditions of this undertaking, the SURETY

further agrees to pay the BANK a reasonable compensation for and as attorney's
fees and costs of collection, which shall not in any event be less than ten per cent
(10%) of the amount due (the same to be due and payable irrespective of whether
the case is settled judicially or extrajudicially).
Thus, by express mandate of the Continuing SuretyshipAgreements which they had
signed, petitioners separately bound themselves to pay interest, expenses,
attorney's fees and costs. The last two items are pegged at not less than ten
percent (10%) of the amount due.
Even without such stipulations, the petitioners would, nevertheless, be liable for the
interest and judicial costs. Article 2055 of the Civil Code provides:
Art. 2055. A guaranty is not presumed; it must be express and cannot extend to
more than what is stipulated therein.
If it be simple or indefinite, it shall comprise not only the principal obligation, but
also all its accessories, including the judicial costs, provided with respect to the
latter, that the guarantor shall only be liable for those costs incurred after he has
been judicially required to pay.
Interest and damages are included in the term accessories. However, such interest
should run only from the date when the complaint was filed in court. Even
attorney's fees may be imposed whenever appropriate, pursuant to Article 2208 of
the Civil Code. Thus, in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang
Machinery Co., Inc., this Court held:
Petitioner objects to the payment of interest and attorney's fees because: (1) they
were not mentioned in the bond; and (2) the surety would become liable for more
than the amount stated in the contract of suretyship.
xxxxxxxxx
The objection has to be overruled, because as far back as the year 1922 this Court
held in Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on a suretyship bond
may recover from the surety as part of their damages, interest at the legal rate
even if the surety would thereby become liable to pay more than the total amount
stipulated in the bond. The theory is that interest is allowed only by way of damages
for delay upon the part of the sureties in making payment after they should have
done so. In some states, the interest has been charged from the date of the interest
has been charged from the date of the judgment of the appellate court. In this
jurisdiction, we rather prefer to follow the general practice, which is to order that
interest begin to run from the date when the complaint was filed in court,
Such theory aligned with sec. 510 of the Code of Civil Procedure which was
subsequently recognized in the Rules of Court (Rule 53, section 6) and with Article
1108 of the Civil Code (now Art. 2209 of the New Civil Code).

In other words the surety is made to pay interest, not by reason of the contract, but
by reason of its failure to pay when demanded and for having compelled the
plaintiff to resort to the courts to obtain payment. It should be observed that
interest does not run from the time the obligation became due, but from the filing of
the complaint.
As to attorney's fees. Before the enactment of the New Civil Code, successful
litigants could not recover attorney's fees as part of the damages they suffered by
reason of the litigation. Even if the party paid thousands of pesos to his lawyers, he
could not charge the amount to his opponent (Tan Ti vs. Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of attorney's fees in eleven cases
enumerated in Article 2208, among them, "where the court deems it just and
equitable that attorney's (sic) fees and expenses of litigation should be recovered"
or "when the defendant acted in gross and evident bad faith in refusing to satisfy
the plaintiff's plainly valid, just and demandable claim." This gives the courts
discretion in apportioning attorney's fees.
The records do not reveal the exact amount of the unpaid portion of the principal
obligation of UyTiam to MERTOBANK under Irrevocable Letter of Credit No. SN-Loc309 dated 30 March 1979. In referring to the last demand letter to Mr. UyTiam and
the complaint filed in Civil Case No. 82-9303, the public respondent mentions the
amount of "P613,339.32, as of January 31, 1982, inclusive of interest commission
penalty and bank charges." 23This is the same amount stated by METROBANK in its
Memorandum. 24 However, in summarizing UyTiam's outstanding obligation as of
17 July 1987, public respondent states:
Hence, they are jointly and severally liable to appellant METROBANK of UTEFS'
outstanding obligation in the sum of P2,397,883.68 (as of July 17, 1987)
P651,092.82 representing the principal amount, P825,133.54, for past due interest
(5-31-82 to 7-17-87) and P921,657.32, for penalty charges at 12%per annum (5-3182 to 7-17-87) as shown in the Statement of Account (Exhibit I). 25
Since the complaint was filed on 18 May 1982, it is obvious that on that date, the
outstanding principal obligation of UyTiam, secured by the petitioners' Continuing
Suretyship Agreements, was less than P613,339.32. Such amount may be fully
covered by the Continuing Suretyship Agreement executed by petitioner Dio which
stipulates an aggregate principal sum of not exceeding P800,000.00, and partly
covered by that of petitioner Uy which pegs his maximum liability at P300,000.00.
Consequently, the judgment of the public respondent shall have to be modified to
conform to the foregoing exposition, to which extent the instant petition is
impressed with partial merit.
SECURITY BANK AND TRUST COMPANY, Inc. vs. RODOLFO M. CUENCA

Facts:
Sta. Ines Melale (Sta. Ines), a corporation engaged in logging operations and a
holder of a Timber License Agreement issued by the Department of Environment
and Natural Resources (DENR) was granted on 10 November 1980, a credit line by
[Petitioner] Security Bank and Trust Co. in the amount of P8,000,000.00 to assist the
latter in meeting the additional capitalization requirements of its logging operations.
The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility
shall be effective until 30 November 1981.
To secure the payment of the amounts drawn by appellant SIMC from the abovementioned credit line, SIMC executed a Chattel Mortgage over some of its
machinery and equipment in favor of [Petitioner] SBTC and as additional security for
the payment of the loan, [Respondent] Rodolfo M. Cuenca executed an Indemnity
Agreement, whereby he solidarily bound himself with SIMC as follows:
xxxxxxxxx
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the
client (SIMC) in favor of the bank for the payment, upon demand and without the
benefit of excussion of whatever amount x x x the client may be indebted to the
bank x x x by virtue of aforesaid credit accommodation(s) including the
substitutions, renewals, extensions, increases, amendments, conversions and
revivals of the aforesaid credit accommodation(s) x x x .
On 26 November 1981, four (4) days prior to the expiration of the period of
effectivity of the P8M-Credit Loan Facility, appellant SIMC made a first drawdown
from its credit line with [Petitioner] SBTC P6,100,000.00. To cover said drawdown,
SIMC duly executed promissory Note for this. Sometime in 1985, [Respondent]
Cuenca resigned as President and Chairman of the Board of Directors of defendantappellant Sta. Ines. Subsequently, appellant SIMC repeatedly availed of its credit
line and obtained six (6) other loan[s] from SBTC in the aggregate amount of
P6,369,019.50. Accordingly, SIMC executed Promissory Notes to cover the amounts.
Appellant SIMC, however, encountered difficulty[6] in making the amortization
payments on its loans and requested [Petitioner] SBTC for a complete restructuring
of its indebtedness. SBTC accommodated appellant SIMCs request and agreed to
restructure the past due obligations of defendant-appellant Sta. Ines. Security Bank
agreed to extend to defendant-appellant Sta. Ines the following loans:
a. Term loan in the amount of P8,800,000.00, to be applied to liquidate the principal
portion of defendant-appellant Sta. Ines total outstanding indebtedness
b. Term loan in the amount of P3,400,000.00, to be applied to liquidate the past due
interest and penalty portion of the indebtedness.

The amount of P6,100,000.00, which was the only loan incurred prior to the
expiration of the P8M-Credit Loan Facility on 30 November 1981 and the only one
covered by the Indemnity Agreement was not segregated from, but was instead
lumped together with, the other loans.
Pursuant to the agreement to restructure its past due obligations, Sta. Ines thus
executed promissory notes in the amount of P 12, 200, 000.00.
Appellant SIMC defaulted in the payment of its restructured loan obligations to SBTC
despite demands made upon appellant SIMC and CUENCA. Thus, SBTC filed a
complaint for collection of sum of money.
RTC in favour of Security Bank.
CA - in favour of Cuenca.
Issues:
1. Whether or not the 1989 Loan Agreement novated the original credit
accommodation and Cuencas liability under the Indemnity Agreement.
2. Whether or not Cuenca waived his right to be notified of and to give consent to
any substitution, renewal, extension, increase, amendment, conversion or revival of
the said credit accommodation.
Held:
The Petition has no merit.
1. Original obligation extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil
Code, which reads as follows:
ART. 1292. 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.
Novation of a contract is never presumed. It has been held that in the absence of an
express agreement, novation takes place only when the old and the new obligations
are incompatible on every point.
The 1989 Loan Agreement extinguished the obligation obtained under the 1980
credit accomodation. This is evident from its explicit provision to liquidate the
principal and the interest of the earlier indebtedness.
The testimony of an officer of the bank that the proceeds of the 1989 Loan
Agreement were used to pay-off the original indebtedness serves to strengthen this
ruling.

Furthermore, several incompatibilities between the 1989 Agreement and the 1980
original obligation demonstrate that the two cannot coexist. While the 1980 credit
accommodation had stipulated that the amount of loan was not to exceed P8
million, the 1989 Agreement provided that the loan was P12.2 million. The periods
for payment were also different.
Since the 1989 Loan Agreement had extinguished the original credit
accommodation, the Indemnity Agreement, an accessory obligation, was
necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which
provides:
ART. 1296. When the principal obligation is extinguished in consequence of a
novation, accessory obligations may subsist only insofar as they may benefit third
persons who did not give their consent.
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of
the P8 million original accommodation; it was not a novation.[25]
This argument must be rejected. To begin with, the 1989 Loan Agreement expressly
stipulated that its purpose was to liquidate, not to renew or extend, the outstanding
indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan
Agreement, which had allegedly extended the original P8 million credit facility.
Hence, his obligation as a surety should be deemed extinguished, pursuant to
Article 2079 of the Civil Code, which specifically states that [a]n extension granted
to
the debtor by the creditor without the consent of the guarantor extinguishes the
guaranty.
x x x. In an earlier case, the Court explained the rationale of this provision in this
wise:
The theory behind Article 2079 is that an extension of time given to the principal
debtor by the creditor without the suretys consent would deprive the surety of his
right to pay the creditor and to be immediately subrogated to the creditors
remedies against the principal debtor upon the maturity date. The surety is said to
be entitled to protect himself against the contingency of the principal debtor or the
indemnitors becoming insolvent during the extended period.
Binding Nature of the Credit Approval Memorandum
Petitioner objects to the appellate courts reliance on that document, contending
that it was not a binding agreement because it was not signed by the parties. It
adds that it was merely for its internal use.

It was petitioner itself which presented the said document to prove the
accommodation. Clearly, it is estopped from denying the terms and conditions of
the P8 million credit accommodation as contained in the very document it
presented to the courts. Indeed, it cannot take advantage of that document by
agreeing to be bound only by those portions that are favorable to it, while denying
those that are disadvantageous.
2. Alleged waiver of Consent
It is fundamental in the law of suretyship that any agreement between the creditor
and the principal debtor which essentially varies the terms of the principal contract,
without the consent of the surety, will release the surety from liability.
In this case, petitioners assertion - that respondent consented to the alterations in
the credit accommodation -- finds no support in the text of the Indemnity
Agreement.
While respondent held himself liable for the credit accommodation or any
modification thereof, such clause should be understood in the context of the P8
million limit and the November 30, 1981 term. It did not give the bank or Sta. Ines
any license to modify the nature and scope of the original credit accommodation,
without informing or getting the consent of respondent who was solidarily liable.
Indeed, it has been held that a contract of surety cannot extend to more than what
is stipulated. It is strictly construed against the creditor, every doubt being resolved
against enlarging the liability of the surety. Likewise, the Court has ruled that it is a
well-settled legal principle that if there is any doubt on the terms and conditions of
the surety agreement, the doubt should be resolved in favor of the surety x x x.
Ambiguous contracts are construed against the party who caused the ambiguity.
[32] In
the absence of an unequivocal provision that respondent waived his right to be
notified of or to give consent to any alteration of the credit accommodation, we
cannot sustain petitioners view that there was such a waiver.
Such untenable theory is contrary to the principle that a surety cannot assume an
obligation more onerous than that of the principal.[35]
In the present case, there is no such express stipulation. At most, the alleged basis
of respondents waiver is vague and uncertain. It confers no clear authorization on
the bank or Sta. Ines to modify or extend the original obligation without the consent
of the surety or notice thereto.
Continuing Surety
The Indemnity Agreement was subject to the two limitations of the credit
accommodation: (1) that the obligation should not exceed P8 million, and (2) that
the accommodation should expire not later than November 30, 1981. Hence, it was

a continuing surety only in regard to loans obtained on or before the


aforementioned expiry date and not exceeding the total of P8 million.
Special Nature of the JSS
It is a common banking practice to require the JSS (joint and solidary signature) of a
major stockholder or corporate officer, as an additional security for loans granted to
corporations. There are at least two reasons for this. First, in case of default, the
creditors recourse, which is normally limited to the corporate properties under the
veil of separate corporate personality, would extend to the personal assets of the
surety. Second, such surety would be compelled to ensure that the loan would be
used for the purpose agreed upon, and that it would be paid by the corporation.
There was no reason or logic, however, for the bank or Sta. Ines to assume that
Cuenca would still agree to act as surety in the 1989 Loan Agreement, because at
that time, he was no longer an officer or a stockholder of the debtor-corporation.
In the same vein, a little prudence should have impelled the bank to insist on the
JSS of one who was in a position to ensure the payment of the loan.
Decision of CA affirmed.
PALMARES VS. COURT OF APPEALS
Facts:
Pursuant to a promissory note, MB Lending Corporation extended a loan to spouses
Azarraga together with EstrellaPalmares (co-maker) in the amount of P30,000.00.
Palmares and the Azarraga spouses were able to pay a total of P16,3000.00 but no
payments were made after the last payment on September 26, 1991. Because of
this, MB Lending Corporation filed a complaint against Palmares to the exclusion of
the principal debtors allegedly by reason of insolvency of the spouses.
Palmarescontends that the provisions of the second and third paragraph of the
promissory note are conflicting that while the second paragraph seems to define her
liability as that of a surety which is joint and solidary with the principal maker, on
the other hand, under the third paragraph her liability is actually that of a mere
guarantor because she bound herself to fulfill the obligation only in case the
principal debtor should fail to do so, which is the essence of a contract of guaranty.
Therefore, to reconcile these provisions, Palmares avers that she is only a guarantor
because the words jointly and severally liable used in the second paragraph are
technical and legal terms, which are not fully appreciated by an ordinary layman
while the words used in the third paragraph are easier to comprehend. Moreover,
petitioner submits that she cannot as yet be compelled to pay the loan because the
principal debtors cannot be considered in default in the absence of a judicial or
extrajudicial demand. Finally, it is argued that the interest charged on the loan in
exorbitant, iniquitous or unconscionable. More importantly, immediately after the

loan matured, Palmares informed the private respondent of her desire to settle the
obligation.
Regional Trial Court ruled in favor of Palmares while the Court of Appeals reversed
the decision of the RTC.
Issue:
Where the party signs a promissory note as a co-maker and binds herself to be
jointly and severally liable with the principal debtor in case the latter defaults in the
payment of the loan, is such undertaking of the former deemed to be that of a
surety as an insurer of the debt, or a guarantor who warrants the solvency of the
debtor?
Held:
It is a cardinal rule in the interpretation of contracts that if the terms of a contract
are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulation shall control. In the case at bar, petitioner expressly
bound herself to be jointly and severally liable with the principal maker of the note.
The terms of the contract are clear, explicit and unequivocal that petitioners
liability is that of a surety.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency
of the debtor. A suretyship is an undertaking that the debt shall be paid; a guaranty,
an undertaking that the debtor shall pay. Stated differently, a surety promises to
pay the principal's debt if the principal will not pay, while a guarantor agrees that
the creditor, after proceeding against the principal, may proceed against the
guarantor if the principal is unable to pay. A surety binds himself to perform if the
principal does not, without regard to his ability to do so. A guarantor, on the other
hand, does not contract that the principal will pay, but simply that he is able to do
so. In other words, a surety undertakes directly for the payment and is so
responsible at once if the principal debtor makes default, while a guarantor
contracts to pay if, by the use of due diligence, the debt cannot be made out of the
principal debtor.
The undertaking to pay upon default of the principal debtor does not automatically
remove it from the ambit of a contract of suretyship. It has not been shown that
respondent corporation agreed to proceed against Palmaresonly if and when the
defaulting principal has become insolvent. There can be no doubt that the
stipulation contained in the third paragraph of the contract merely elucidated on
and made more specific the obligation of the petitioner as generally defined in the
second paragraph thereof. Also, several attendant factors in that genre lend support
to the finding that petitioner is a surety. For one, when the petitioner was informed
about the failure of the principal debtor to pay the loan, she immediately offered to
settle the account with the respondent corporation. For another, petitioner

presented the receipts of the payments already made which were all issued in her
name and of the Azarraga spouses. This can only be construed to mean that the
payments made by the principal debtors were considered by respondent
corporation as creditable directly upon account and inuring to the benefit of
petitioner.
Petitioners contention that the complaint was prematurely filed because the
principal debtors cannot as yet be considered in default is unmeritorious because of
paragraph G of the promissory note which states: should I fail to pay in accordance
with the
above schedule of payment, I hereby waive my right to notice and demand. Hence,
demand by the creditor is no longer necessary in order that delay may exist and
such waiver equally binds Palmares. Even if it were otherwise, demand on the
sureties is not necessary before bringing suit against them, since the
commencement of the suit is a sufficient demand.
This notwithstanding, however, The Court find that the penalty charge of 3% per
month is highly inequitable and unreasonable, and is therefore eliminated.
Escao and Silos vs. Ortigas
Facts:
This case stemmed from a loan agreement between Private Development
Corporation of the Philippines (PDCP) and Falcon Minerals Inc. (Falcon). Three of
latters stockholders (one of which is herein respondent Ortigas) executed an
Assumption of Solidary Liability whereby they agreed to assume in their individual
capacity for the due and punctual payment of the same loan.
Two years later, an agreement developed to cede control of Falcon to petitioners
Escao, Silos and Matti. A contact (herein referred to as the Undertaking) was
executed between the three stockholders and the petitioners whereby the former
assigned their shares of stocks in Falcon to the latter. Under the contract, petitioners
were being referred to as the SURITIES and the stockholders were referred to as
OBLIGORS. Among the stipulations was a provision stating that in the event that any
of OBLIGORS is for any reason made to pay any amount to PDCP and/or PAIC,
SURETIES shall reimburse OBLIGORS for said amount/s within seven (7) calendar
days from such payment.
Later on, Falcon was not able to satisfy payment to PDCP even after foreclosure of
their chattel mortgage. Thus, PDCP filed a complaint for sum of money with the RTC
against the stockholders and the petitioners.
Because of that case, petitioner Escao entered into a settlement with PDCP wherein
he paid Php 1,000,000. Respondent Ortigas also entered into a compromise

agreement with PDCP without the knowledge and consent of the petitioners for Php
1,300,000. Also, petitioner Silos likewise did the same for Php 500,000.
In the meantime, respondent Ortigasfiled a motion for Summary Judgement against
petitioners on the ground that petitioners need to reimburse him of the Php
1,300,000 (plus attorneys fees) which he paid in his compromise agreement based
on the stipulation under the Undertaking. The trial court then granted his motion
ordering petitioners to pay Ortigas JOINTLY AND SEVERALLY the amount demanded
by respondent Ortigas.
On appeal, the CA affirmed the trial courts decision and thus this petition.
On the petitioners part, they dispute that they are liable to Ortigas on the basis of
the Undertaking, a document which they do not disavow and have in fact annexed
to their petition. Further, if they are indeed liable, they are only JOINTLY liable and
not solidary because the Undertaking did not provide for express solidarity.
Ortigas in turn argues that petitioners, as well as Matti, are JOINTLY AND SEVERALLY
liable for the Undertaking, as the language used in the agreement clearly shows
that it is a surety agreementbetween the obligors (Ortigas group) and the
sureties (Escao group). Ortigas points out that the Undertaking uses the word
SURETIES although the document, in describing the parties. It is further contended
that the principal objective of the parties in executing the Undertaking cannot be
attained unless petitioners are solidarily liable because the total loan obligation
cannot be paid or settled to free or release the OBLIGORS if one or any of the
SURETIES default from their obligation in the Undertaking.
ISSUES:
1. Whether or not petitioners are liable to respondent
2. Whether or not petitioners are JOINTLY liable

HELD:
1. YES, because of the tenor of the Undertaking is clear that the purpose of which
was for petitioners to relieve the burden on Ortigas and his fellow Obligors as soon
as possible, and not only after Ortigas had been subjected to a final and executory
adverse judgement.

There is no argument to support petitioners position on the import of the phrase


made to pay in the Undertaking, other than an unduly literalist reading that is
clearly inconsistent with the thrust of the document. Under the Civil Code, the

various stipulations of a contract shall be interpreted together, attributing to the


doubtful ones that sense which may result from all of them taken jointly. Likewise
applicable is the provision that if some stipulation of any contract should admit of
several meanings, it shall be understood as bearing that import which is most
adequate to render it effectual.As a means to effect the general intent of the
document to relieve Ortigas from liability to PDCP, it is his interpretation, not that of
petitioners, that holds sway with this Court.
2. YES, the petitioners are JOINTLY liable.

a. In the absence of express and indubitable terms characterizing the obligation as


solidary, the presumption is that the obligation is only joint (Art. 1207 of the NCC)

It thus becomes incumbent upon the party alleging that the obligation is indeed
solidary in character to prove such fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the petitioners
agreed to bind themselves jointly and severally in their obligations to the Ortigas
group, or any such terms to that effect. Hence, such obligation established in the
Undertaking is presumed only to be joint.Ortigas, as the party alleging that the
obligation is in fact solidary, bears the burden to overcome the presumption of
jointness of obligations. We rule and so hold that he failed to discharge such burden.

b. Art. 2047. By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter should fail to
do so.

If a person binds himself solidarily with the principal debtor, the Section 4, Chapter
3, Title I of this Book shall be observed. In such case the contract is called a
suretyship.
As provided in Article 2047, in a surety agreement, the surety undertakes to be
bound solidarily with the principal debtor. Thus, a surety agreement is an ancillary
contract as it presupposes the existence of a principal contract. It appears that
Ortigass argument rests solely on the solidary nature of the obligation of the surety
under Article 2047. In tandem with the nomenclature SURETIES accorded to
petitioners and Matti in the Undertaking, however, this argument can only be viable
if the obligations established in the Undertaking do partake of the nature of a
suretyship as defined under Article 2047 in the first place. That clearly is not the

case here, notwithstanding the use of the nomenclature SURETIES in the


Undertaking.
Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom
the surety is solidarily bound by way of an ancillary obligation of segregate identity
from the obligation between the principal debtor and the creditor. The suretyship
does bind the surety to the creditor, inasmuch as the latter is vested with the right
to proceed against the former to collect the credit in lieu of proceeding against the
principal debtor for the same obligation. At the same time, there is also a legal tie
created between the surety and the principal debtor to which the creditor is not
privy or party to. The moment the surety fully answers to the creditor for the
obligation created by the principal debtor, such obligation is extinguished. At the
same time, the surety may seek reimbursement from the principal debtor for the
amount paid, for the surety does in fact become subrogated to all the rights and
remedies of the creditor.
Note that Article 2047 itself specifically calls for the application of the provisions on
joint and solidary obligations to suretyship contracts. Article 1217 of the Civil Code
thus comes into play, recognizing the right of reimbursement from a co-debtor (the
principal debtor, in case of suretyship) in favor of the one who paid (i.e., the surety).
[45] However, a significant distinction still lies between a joint and several debtor,
on one hand, and a surety on the other. Solidarity signifies that the creditor can
compel any one of the joint and several debtors or the surety alone to answer for
the entirety of the principal debt. The difference lies in the respective faculties of
the joint and several debtor and the surety to seek reimbursement for the sums
they paid out to the creditor.
Dr.Tolentino explains the differences between a solidary co-debtor and a surety:
A guarantor who binds himself in solidum with the principal debtor under the
provisions of the second paragraph does not become a solidary co-debtor to all
intents and purposes. There is a difference between a solidary co-debtor and a
fiador in solidum(surety). The latter, outside of the liability he assumes to pay the
debt before the property of the principal debtor has been exhausted, retains all the
other rights, actions and benefits which pertain to him by reason of the fiansa; while
a solidary co-debtor has no other rights than those bestowed upon him in Section 4,
Chapter 3, Title I, Book IV of the Civil Code.
The second paragraph of [Article 2047] is practically equivalent to the contract of
suretyship. The civil law suretyship is, accordingly, nearly synonymous with the
common law guaranty; and the civil law relationship existing between the codebtors liableinsolidum is similar to the common law suretyship.[46]
In the case of joint and several debtors, Article 1217 makes plain that the solidary
debtor who effected the payment to the creditor may claim from his co-debtors only
the share which corresponds to each, with the interest for the payment already

made. Such solidary debtor will not be able to recover from the co-debtors the full
amount already paid to the creditor, because the right to recovery extends only to
the proportional share of the other co-debtors, and not as to the particular
proportional share of the solidary debtor who already paid. In contrast, even as the
surety is solidarily bound with the principal debtor to the creditor, the surety who
does pay the creditor has the right to recover the full amount paid, and not just any
proportional share, from the principal debtor or debtors. Such right to full
reimbursement falls within the other rights, actions and benefits which pertain to
the surety by reason of the subsidiary obligation assumed by the surety.
What is the source of this right to full reimbursement by the surety? We find the
right under Article 2066 of the Civil Code, which assures that [t]he guarantor who
pays for a debtor must be indemnified by the latter, such indemnity comprising of,
among others, the total amount of the debt. Further, Article 2067 of the Civil Code
likewise establishes that [t]he guarantor who pays is subrogated by virtue thereof to
all the rights which the creditor had against the debtor.
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that
the provisions should not extend to sureties, especially in light of the qualifier in
Article 2047 that the provisions on joint and several obligations should apply to
sureties. We reject that argument, and instead adopt Dr.Tolentinos observation that
[t]he reference in the second paragraph of [Article 2047] to the provisions of
Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations, however,
does not mean that suretyship is
withdrawn from the applicable provisions governing guaranty. For if that were not
the implication, there would be no material difference between the surety as
defined under Article 2047 and the joint and several debtors, for both classes of
obligors would be governed by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as established and
granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as
defined under Article 2047. These rights granted to the surety who pays materially
differ from those granted under Article 1217 to the solidary debtor who pays, since
the indemnification that pertains to the latter extends only [to] the share which
corresponds to each [co-debtor]. It is for this reason that the Court cannot accord
the conclusion that because petitioners are identified in the Undertaking as
SURETIES, they are consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the general
presumption favoring joint liability, the Court would have to be satisfied that among
the petitioners and Matti, there is one or some of them who stand as the principal
debtor to Ortigas and another as surety who has the right to full reimbursement
from the principal debtor or debtors. No suggestion is made by the parties that such
is the case, and certainly the Undertaking is not revelatory of such intention. If the

Court were to give full fruition to the use of the term SURETIES as conclusive
indication of the existence of a surety agreement that in turn gives rise to a solidary
obligation to pay Ortigas, the necessary implication would be to lay down a
corresponding set of rights and obligations as between the SURETIES which
petitioners and Matti did not clearly intend.
6) Pledge
DBP vs CA
Facts:
1.
Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083
(new) dated May 13, 1974 from the Government;

2.
Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the
Philippines in the amounts of P109,000.00; P109,000.00; and P98,700.00 under the
terms stated in the Promissory Notes dated September 6, 1974; August 11, 1975;
and April 4, 1977;

3.
As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of
Assignment of her Leasehold Rights;

4.
Plaintiff failed to pay her loan on the scheduled dates thereof in accordance
with the terms of the Promissory Notes;

5.
Without foreclosure proceedings, whether judicial or extra-judicial, defendant
DBP appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in
question;

6.
After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia
Cuba over the fishpond in question, defendant DBP, in turn, executed a Deed of
Conditional Sale of the Leasehold Rights in favor of plaintiff Lydia Cuba over the
same fishpond in question;

7.
In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to
the Manager DBP, Dagupan City dated November 6, 1979 and December 20, 1979.

DBP thereafter accepted the offer to repurchase in a letter addressed to plaintiff


dated February 1, 1982;

8.
After the Deed of Conditional Sale was executed in favor of plaintiff Lydia
Cuba, a new Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was
issued by the Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only,
excluding her husband;

9.
Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of
Conditional Sale;

10.
After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of
Conditional Sale, she entered with the DBP a temporary arrangement whereby in
consideration for the deferment of the Notarial Rescission of Deed of Conditional
Sale, plaintiff Lydia Cuba promised to make certain payments as stated in
temporary Arrangement dated February 23, 1982;

11.
Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated
March 13, 1984, and which was received by plaintiff Lydia Cuba;

12.
After the Notice of Rescission, defendant DBP took possession of the
Leasehold Rights of the fishpond in question;

13.
That after defendant DBP took possession of the Leasehold Rights over the
fishpond in question, DBP advertised in the SUNDAY PUNCH the public bidding dated
June 24, 1984, to dispose of the property;

14.
That the DBP thereafter executed a Deed of Conditional Sale in favor of
defendant Agripina Caperal on August 16, 1984;

15.
Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No.
2083-A on December 28, 1984 by the Ministry of Agriculture and Food.

The trial court resolved the issue in favor of CUBA by declaring that DBP's taking
possession and ownership of the property without foreclosure was plainly violative
of Article 2088 of the Civil Code which provides as follows:
Art. 2088.
The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.
CUBA and DBP interposed separate appeals from the decision to the Court of
Appeals. The former sought an increase in the amount of damages, while the latter
questioned the findings of fact and law of the lower court.
In its decision 5 of 25 May 1994, the Court of Appeals ruled that (1) the trial court
erred in declaring that the deed of assignment was null and void and that defendant
Caperal could not validly acquire the leasehold rights from DBP; (2) contrary to the
claim of DBP, the assignment was not a cession under Article 1255 of the Civil Code
because DBP appeared to be the sole creditor to CUBA cession presupposes
plurality of debts and creditors; (3) the deeds of assignment represented the
voluntary act of CUBA in assigning her property rights in payment of her debts,
which amounted to a novation of the promissory notes executed by CUBA in favor of
DBP; (4) CUBA was estopped from questioning the assignment of the leasehold
rights, since she agreed to repurchase the said rights under a deed of conditional
sale; and (5) condition no. 12 of the deed of assignment was an express authority
from CUBA for DBP to sell whatever right she had over the fishpond. It also ruled
that CUBA was not entitled to loss of profits for lack of evidence, but agreed with
the trial court as to the actual damages of P1,067,500. It, however, deleted the
amount of exemplary damages and reduced the award of moral damages from
P100,000 to P50,000 and attorney's fees, from P100,000 to P50,000.
The Court of Appeals thus declared as valid the following: (1) the act of DBP in
appropriating Cuba's leasehold rights and interest under Fishpond Lease Agreement
No. 2083; (2) the deeds of assignment executed by Cuba in favor of DBP; (3) the
deed of conditional sale between CUBA and DBP; and (4) the deed of conditional
sale between DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal,
and the assignment of leasehold rights executed by Caperal in favor of DBP. It then
ordered DBP to turn over possession of the property to Caperal as lawful holder of
the leasehold rights and to pay CUBA the following amounts: (a) P1,067,500 as
actual damages; P50,000 as moral damages; and P50,000 as attorney's fees.
Since their motions for reconsideration were denied, 6 DBP and CUBA filed separate
petitions for review.
Issues:
1) WON the Leasehold the assignment of leasehold rights was a mortgage
contract.

2) WON the condition no. 12 of the deed of assignment constituted pactum


commissorium.
Held:
We agree with CUBA that the assignment of leasehold rights was a mortgage
contract.
It is undisputed that CUBA obtained from DBP three separate loans totalling
P335,000, each of which was covered by a promissory note. In all of these notes,
there was a provision that: "In the event of foreclosure of the mortgage securing
this notes, I/We further bind myself/ourselves, jointly and severally, to pay the
deficiency, if any." 7
Simultaneous with the execution of the notes was the execution of "Assignments of
Leasehold Rights" 8 where CUBA assigned her leasehold rights and interest on a 44hectare fishpond, together with the improvements thereon. As pointed out by CUBA,
the deeds of assignment constantly referred to the assignor (CUBA) as "borrower";
the assigned rights, as mortgaged properties; and the instrument itself, as
mortgage contract. Moreover, under condition no. 22 of the deed, it was provided
that "failure to comply with the terms and condition of any of the loans shall cause
all other loans to become due and demandable and all mortgages shall be
foreclosed." And, condition no. 33 provided that if "foreclosure is actually
accomplished, the usual 10% attorney's fees and 10% liquidated damages of the
total obligation shall be imposed." There is, therefore, no shred of doubt that a
mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment was by
way of security for the payment of the loans; thus:
As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment
of her Leasehold Rights.
In People's Bank & Trust Co. vs. Odom, 9 this Court had the occasion to rule that an
assignment to guarantee an obligation is in effect a mortgage.
We find no merit in DBP's contention that the assignment novated the promissory
notes in that the obligation to pay a sum of money the loans (under the promissory
notes) was substituted by the assignment of the rights over the fishpond (under the
deed of assignment). As correctly pointed out by CUBA, the said assignment merely
complemented or supplemented the notes; both could stand together. The former
was only an accessory to the latter. Contrary to DBP's submission, the obligation to
pay a sum of money remained, and the assignment merely served as security for
the loans covered by the promissory notes. Significantly, both the deeds of
assignment and the promissory notes were executed on the same dates the loans
were granted. Also, the last paragraph of the assignment stated: "The assignor

further reiterates and states all terms, covenants, and conditions stipulated in the
promissory note or notes covering the proceeds of this loan, making said promissory
note or notes, to all intent and purposes, an integral part hereof."
Neither did the assignment amount to payment by cession under Article 1255 of the
Civil Code for the plain and simple reason that there was only one creditor, the DBP.
Article 1255 contemplates the existence of two or more creditors and involves the
assignment of all the debtor's property.
Nor did the assignment constitute dation in payment under Article 1245 of the civil
Code, which reads: "Dation in payment, whereby property is alienated to the
creditor in satisfaction of a debt in money, shall be governed by the law on sales." It
bears stressing that the assignment, being in its essence a mortgage, was but a
security and not a satisfaction of indebtedness. 10
We do not, however, buy CUBA's argument that condition no. 12 of the deed of
assignment constituted pactum commissorium. Said condition reads:
12.
That effective upon the breach of any condition of this assignment, the
Assignor hereby appoints the Assignee his Attorney-in-fact with full power and
authority to take actual possession of the property above-described, together with
all improvements thereon, subject to the approval of the Secretary of Agriculture
and Natural Resources, to lease the same or any portion thereof and collect rentals,
to make repairs or improvements thereon and pay the same, to sell or otherwise
dispose of whatever rights the Assignor has or might have over said property and/or
its improvements and perform any other act which the Assignee may deem
convenient to protect its interest. All expenses advanced by the Assignee in
connection with purpose above indicated which shall bear the same rate of interest
aforementioned are also guaranteed by this Assignment. Any amount received from
rents, administration, sale or disposal of said property may be supplied by the
Assignee to the payment of repairs, improvements, taxes, assessments and other
incidental expenses and obligations and the balance, if any, to the payment of
interest and then on the capital of the indebtedness secured hereby. If after disposal
or sale of said property and upon application of total amounts received there shall
remain a deficiency, said Assignor hereby binds himself to pay the same to the
Assignee upon demand, together with all interest thereon until fully paid. The power
herein granted shall not be revoked as long as the Assignor is indebted to the
Assignee and all acts that may be executed by the Assignee by virtue of said power
are hereby ratified.
The elements of pactum commissorium are as follows: (1) there should be a
property mortgaged by way of security for the payment of the principal obligation,
and (2) there should be a stipulation for automatic appropriation by the creditor of
the thing mortgaged in case of non-payment of the principal obligation within the
stipulated period. 11

Condition no. 12 did not provide that the ownership over the leasehold rights would
automatically pass to DBP upon CUBA's failure to pay the loan on time. It merely
provided for the appointment of DBP as attorney-in-fact with authority, among other
things, to sell or otherwise dispose of the said real rights, in case of default by
CUBA, and to apply the proceeds to the payment of the loan. This provision is a
standard condition in mortgage contracts and is in conformity with Article 2087 of
the Civil Code, which authorizes the mortgagee to foreclose the mortgage and
alienate the mortgaged property for the payment of the principal obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of
assignment. As admitted by it during the pre-trial, it had "[w]ithout foreclosure
proceedings, whether judicial or extrajudicial, . . . appropriated the [l]easehold
[r]ights of plaintiff Lydia Cuba over the fishpond in question." Its contention that it
limited itself to mere administration by posting caretakers is further belied by the
deed of conditional sale it executed in favor of CUBA. The deed stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its favor
by the herein vendees [Cuba spouses] the former acquired all the right and interest
of the latter over the above-described property;
xxx

xxx

xxx

The title to the real estate property [sic] and all improvements thereon shall remain
in the name of the Vendor until after the purchase price, advances and interest shall
have been fully paid. (Emphasis supplied).
It is obvious from the above-quoted paragraphs that DBP had appropriated and
taken ownership of CUBA's leasehold rights merely on the strength of the deed of
assignment.
DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its
act of appropriating the leasehold rights. As stated earlier, condition no. 12 did not
provide that CUBA's default would operate to vest in DBP ownership of the said
rights. Besides, an assignment to guarantee an obligation, as in the present case, is
virtually a mortgage and not an absolute conveyance of title which confers
ownership on the assignee. 12
At any rate, DBP's act of appropriating CUBA's leasehold rights was violative of
Article 2088 of the Civil Code, which forbids a credit or from appropriating, or
disposing of, the thing given as security for the payment of a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP
did not estop her from questioning DBP's act of appropriation. Estoppel is unavailing
in this case. As held by this Court in some cases, 13 estoppel cannot give validity to
an act that is prohibited by law or against public policy. Hence, the appropriation of

the leasehold rights, being contrary to Article 2088 of the Civil Code and to public
policy, cannot be deemed validated by estoppel.
Instead of taking ownership of the questioned real rights upon default by CUBA, DBP
should have foreclosed the mortgage, as has been stipulated in condition no. 22 of
the deed of assignment. But, as admitted by DBP, there was no such foreclosure.
Yet, in its letter dated 26 October 1979, addressed to the Minister of Agriculture and
Natural Resources and coursed through the Director of the Bureau of Fisheries and
Aquatic Resources, DBP declared that it "had foreclosed the mortgage and enforced
the assignment of leasehold rights on March 21, 1979 for failure of said spouses
[Cuba spouces] to pay their loan amortizations." 14 This only goes to show that DBP
was aware of the necessity of foreclosure proceedings.
Ong vs Roban Lending Corporation
Facts:
On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses Wilfredo
N. Ong and Edna Sheila Paguio-Ong obtained several loans from Roban Lending
Corporation (respondent) in the total amount of P4,000,000.00. These loans were
secured by a real estate mortgage on petitioners parcels of land located in
Binauganan, Tarlac City and covered by TCT No. 297840.[1]
On February 12, 2001, petitioners and respondent executed an Amendment to
Amended Real Estate Mortgage[2] consolidating their loans inclusive of charges
thereon which totaled P5,916,117.50. On even date, the parties executed a Dacion
in Payment Agreement[3] wherein petitioners assigned the properties covered by
TCT No. 297840 to respondent in settlement of their total obligation, and a
Memorandum of Agreement[4] reading:
That the FIRST PARTY [Roban Lending Corporation] and the SECOND PARTY [the
petitioners] agreed to consolidate and restructure all aforementioned loans, which
have been all past due and delinquent since April 19, 2000, and outstanding
obligations totaling P5,916,117.50. The SECOND PARTY hereby sign [sic] another
promissory note in the amount of P5,916,117.50 (a copy of which is hereto attached
and forms xxx an integral part of this document), with a promise to pay the FIRST
PARTY in full within one year from the date of the consolidation and restructuring,
otherwise the SECOND PARTY agree to have their DACION IN PAYMENT agreement,
which they have executed and signed today in favor of the FIRST PARTY be
enforced[.][5]
In April 2002 (the day is illegible), petitioners filed a Complaint,[6] docketed as Civil
Case No. 9322, before the Regional Trial Court (RTC) of Tarlac City, for declaration of
mortgage contract as abandoned, annulment of deeds, illegal exaction, unjust
enrichment, accounting, and damages, alleging that the Memorandum of

Agreement and the Dacion in Payment executed are void for being pactum
commissorium.[7]
By Decision of April 21, 2004, Branch 64 of the Tarlac City RTC, finding on the basis
of the pleadings that there was no pactum commissorium, dismissed the complaint.
[20]
The Court of Appeals upheld the RTC decision that there was no pactum
commissorium.[25]
Their Motion for Reconsideration[26] having been denied,[27] petitioners filed the
instant Petition for Review on Certiorari.
Issue:
WON the Memorandum of Agreement and Dacion in Payment constitute pactum
commissorium or dacion en pago.
Held:
Both parties admit the execution and contents of the Memorandum of Agreement
and Dacion in Payment. They differ, however, on whether both contracts constitute
pactum commissorium or dacion en pago.

This Court finds that the Memorandum of Agreement and Dacion in Payment
constitute pactum commissorium, which is prohibited under Article 2088 of the Civil
Code which provides:
The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.
The elements of pactum commissorium, which enables the mortgagee to acquire
ownership of the mortgaged property without the need of any foreclosure
proceedings,[30] are: (1) there should be a property mortgaged by way of security
for the payment of the principal obligation, and (2) there should be a stipulation for
automatic appropriation by the creditor of the thing mortgaged in case of nonpayment of the principal obligation within the stipulated period.[31]
In the case at bar, the Memorandum of Agreement and the Dacion in Payment
contain no provisions for foreclosure proceedings nor redemption. Under the
Memorandum of Agreement, the failure by the petitioners to pay their debt within
the one-year period gives respondent the right to enforce the Dacion in Payment
transferring to it ownership of the properties covered by TCT No. 297840.
Respondent, in effect, automatically acquires ownership of the properties upon
petitioners failure to pay their debt within the stipulated period.

Respondent argues that the law recognizes dacion en pago as a special form of
payment whereby the debtor alienates property to the creditor in satisfaction of a
monetary obligation.[32] This does not persuade. In a true dacion en pago, the
assignment of the property extinguishes the monetary debt.[33] In the case at bar,
the alienation of the properties was by way of security, and not by way of satisfying
the debt.[34] The Dacion in Payment did not extinguish petitioners obligation to
respondent. On the contrary, under the Memorandum of Agreement executed on
the same day as the Dacion in Payment, petitioners had to execute a promissory
note for P5,916,117.50 which they were to pay within one year.[35]
7) Real Estate Mortgage
Sps. Litonjua vs L&R Corp.
Facts:
The controversy stems from loans obtained by the spouses Litonjua from L & R
Corporation in the aggregate sum of P400,000.00; P200,000.00 of which was
obtained on August 6, 1974 and the remaining P200,000.00 obtained on March 27,
1978. The loans were secured by a mortgage[1] constituted by the spouses upon
their two parcels of land and the improvements thereon located in Cubao, Quezon
City covered by Transfer Certificates of Title No. 197232 and 197233, with an area
of 599 and 1,436 square meters, respectively. The mortgage was duly registered
with the Register of Deeds of Quezon City.

On July 14, 1979, the spouses Litonjua sold to Philippine White House Auto Supply,
Inc. (PWHAS) the parcels of land they had previously mortgaged to L & R
Corporation for the sum of P430,000.00.[2] The sale was annotated at the back of
the respective certificates of title of the properties.[3]
Meanwhile, with the spouses Litonjua having defaulted in the payment of their
loans, L & R Corporation initiated extrajudicial foreclosure proceedings with the ExOficio Sheriff of Quezon City. On July 23, 1980, the mortgaged properties were sold
at public auction to L & R Corporation as the only bidder for the amount of
P221,624.58.[4] When L & R Corporation presented its corresponding Certificate of
Sale issued by Deputy Sheriff Roberto B. Garcia, to the Quezon City Register of
Deeds for registration on August 15, 1980, it learned for the first time of the prior
sale of the properties made by the spouses Litonjua to PWHAS upon seeing the
inscription at the back of the certificates of title. Thus, on August 20, 1980, it wrote
a letter[5] to the Register of Deeds of Quezon City requesting for the cancellation of
the annotation regarding the sale to PWHAS. L & R Corporation invoked a provision
in its mortgage contract with the spouses Litonjua stating that the mortgagees prior
written consent was necessary in case of subsequent encumbrance or alienation of
the subject properties. Thus, it argued that since the sale to PWHAS was made

without its prior written consent, the same should not have been registered and/or
annotated.

On March 10, 1981, or seven months after the foreclosure sale, PWHAS, for the
account of the spouses Litonjua, tendered payment of the full redemption price to L
& R Corporation in the form of China Bank Managers Check No. HOF-M O12623 in
the amount of P238,468.04.[6] See Exhibits G & 2, Letter of PWHAS to L & R
Corporation, id.6 L & R Corporation, however, refused to accept the payment,
hence, PWHAS was compelled to redeem the mortgaged properties through the ExOficio Sheriff of Quezon City. On March 31, 1981, it tendered payment of the
redemption price to the Deputy Sheriff through China Bank Managers Check No.
HOF-O14750 in the amount of P240,798.94.[7] The check was deposited with the
Branch Clerk of Court who issued Receipt No. 7522484[8] for the full redemption
price of the mortgaged properties. Accordingly, the Deputy Sheriff issued a
Certificate of Redemption in favor of the spouses Litonjua dated March 31, 1981.[9]

In a letter of the same date, the Deputy Sheriff informed L & R Corporation of the
payment by PWHAS of the full redemption price and advised it that it can claim the
payment upon surrender of its owners duplicate certificates of title.[10]

On April 2, 1981, the spouses Litonjua presented for registration the Certificate of
Redemption issued in their favor to the Register of Deeds of Quezon City. The
Certificate also informed L & R Corporation of the fact of redemption and directed
the latter to surrender the owners duplicate certificates of title within five days.[11]

On April 22, 1981, L & R Corporation wrote a letter to the Sheriff, copy furnished to
the Register of Deeds, stating: (1) that the sale of the mortgaged properties to
PWHAS was without its consent, in contravention of paragraphs 8 and 9 of their
Deed of Real Estate Mortgage; and (2) that it was not the spouses Litonjua, but
PWHAS, who was seeking to redeem the foreclosed properties, when under Articles
1236 and 1237 of the New Civil Code, the latter had no legal personality or capacity
to redeem the same.[12]
On the other hand, on May 8 and June 8, 1981, the spouses Litonjua asked the
Register of Deeds to annotate their Certificate of Redemption as an adverse claim
on the titles of the subject properties on account of the refusal of L & R Corporation
to surrender the owners duplicate copies of the titles to the subject properties. With
the refusal of the Register of Deeds to annotate their Certificate of Redemption, the
Litonjua spouses filed a Petition[13] on July 17, 1981 against L & R Corporation for

the surrender of the owners duplicate of Transfer Certificates of Title No. 197232
and 197233 before the then Court of First Instance of Quezon City, Branch IV,
docketed as Civil Case No. 32905.
On August 15, 1981, while the said case was pending, L & R Corporation executed
an Affidavit of Consolidation of Ownership.[14] Thereafter, on August 20, 1981, the
Register of Deeds cancelled Transfer Certificates of Title No. 197232 and 197233
and in lieu thereof, issued Transfer Certificates of Title No. 280054[15] and
28055[16] in favor of L & R Corporation, free of any lien or encumbrance.
With titles issued in its name, L & R Corporation advised the tenants of the
apartments situated in the subject parcels of land that being the new owner, the
rental payments should be made to them, and that new lease contracts will be
executed with interested tenants before the end of August, 1981.[17] Upon learning
of this incident from their tenants, the spouses Litonjua filed an adverse claim[18]
and a notice of lis pendens[19] with the Register of Deeds. In the process, they
learned that the prior sale of the properties in favor of PWHAS was not annotated on
the titles issued to L & R.
A complaint for Quieting of Title, Annulment of Title and Damages with preliminary
injunction was filed by the spouses Litonjua and PWHAS against herein respondents
before the then Court of First Instance of Quezon City, Branch 9, docketed as Civil
Case No. Q-33362.[20] On February 10, 1987, the lower court rendered its
Decision[21] dismissing the Complaint upon its finding that the sale between the
spouses Litonjua and PWHAS was null and void and unenforceable against L & R
Corporation and that the redemption made was also null and void.
On appeal, the decision of the trial court was set aside by the Court of Appeals in its
Decision dated June 22, 1994,[22] on the ground that the sale made to PWHAS as
well as the redemption effected by the spouses Litonjua were valid. However, the
same was subsequently reconsidered and set aside in an Amended Decision dated
September 11, 1997.[23]
Issues:
(1) whether or not paragraphs 8 and 9 of the Real Estate Mortgage are valid and
enforceable;
(2) whether or not the sale of the mortgaged properties by the spouses Litonjua to
PWHAS, without the knowledge and consent of L & R Corporation, is valid and
enforceable;
(3) whether or not PWHAS had the right to redeem the foreclosed properties on the
account of the spouses Litonjua; and
(4) whether or not there was a valid redemption.

Held:
Paragraphs 8 and 9 of the subject Deed of Real Estate Mortgage read as follows
"8. That the MORTGAGORS shall not sell, dispose of, mortgage, nor in any other
manner encumber the real property/properties subject of this mortgage without the
prior written consent of the MORTGAGEE;
9. That should the MORTGAGORS decide to sell the real property/properties subject
of this mortgage, the MORTGAGEE shall be duly notified thereof by the
MORTGAGORS, and should the MORTGAGEE be interested to purchase the same, the
latter shall be given priority over all the other prospective buyers;[24]
There is no question that the spouses Litonjua violated both the aforesaid
provisions, selling the mortgaged properties to PWHAS without the prior written
consent of L & R Corporation and without giving the latter notice of such sale nor
priority over PWHAS.
Re: Validity of prohibition against subsequent sale of mortgaged property
without prior written consent of mortgagee and validity of subsequent
sale to PWHAS
Being contrary to law, paragraph 8 of the subject Deed of Real Estate Mortgage is
not binding upon the parties. Accordingly, the sale made by the spouses Litonjua to
PWHAS, notwithstanding the lack of prior written consent of L & R Corporation, is
valid.
Re: Validity of redemption effected by PWHAS on the account of the
spouses Litonjua
Coming now to the issue of whether the redemption offered by PWHAS on account
of the spouses Litonjua is valid, we rule in the affirmative. The sale by the spouses
Litonjua of the mortgaged properties to PWHAS is valid. Therefore, PWHAS stepped
into the shoes of the spouses Litonjua on account of such sale and was in effect,
their successor-in-interest. As such, it had the right to redeem the property
foreclosed by L & R Corporation. Again, Tambunting, supra, clarifies that
x x x. The acquisition by the Hernandezes of the Escuetas rights over the property
carried with it the assumption of the obligations burdening the property, as
recorded in the Registry of Property, i.e., the mortgage debts in favor of the RFC
(DBP) and the Tambuntings. The Hernandezes, by stepping into the Escuetas shoes
as assignees, had the obligation to pay the mortgage debts, otherwise, these debts
would and could be enforced against the property subject of the assignment. Stated
otherwise, the Hernandezes, by the assignment, obtained the right to remove the
burdens on the property subject thereof by paying the obligations thereby secured;
that is to say, they had the right of redemption as regards the first mortgage, to be
exercised within the time and in the manner prescribed by law and the mortgage

deed; and as regards the second mortgage, sought to be judicially foreclosed but
yet unforeclosed, they had the so-called equity of redemption.
The redemption of PWHAS to redeem the subject properties finds support in Section
6 of Act 3135 itself which gives not only the mortgagor-debtor the right to redeem,
but also his successors-in-interest. As vendee of the subject properties, PWHAS
qualifies as such a successor-in-interest of the spouses Litonjua.
Re: Validity of redemption made
It is clear from the records that PWHAS offered to redeem the subject properties
seven (7) months after the date of registration of the foreclosure sale, well within
the one year period of redemption.
Re: Validity and enforceability of stipulation granting the mortgagee the
right of first refusal
While petitioners question the validity of paragraph 8 of their mortgage contract,
they appear to be silent insofar as paragraph 9 thereof is concerned. Said
paragraph 9 grants upon L & R Corporation the right of first refusal over the
mortgaged property in the event the mortgagor decides to sell the same. We see
nothing wrong in this provision. The right of first refusal has long been recognized
as valid in our jurisdiction. The consideration for the loan-mortgage includes the
consideration for the right of first refusal. L & R Corporation is in effect stating that
it consents to lend out money to the spouses Litonjua provided that in case they
decide to sell the property mortgaged to it, then L & R Corporation shall be given
the right to match the offered purchase price and to buy the property at that price.
Thus, while the spouses Litonjua had every right to sell their mortgaged property to
PWHAS without securing the prior written consent of L & R Corporation, it had the
obligation under paragraph 9, which is a perfectly valid provision, to notify the latter
of their intention to sell the property and give it priority over other buyers. It is only
upon failure of L & R Corporation to exercise its right of first refusal could the
spouses Litonjua validly sell the subject properties to others, under the same terms
and conditions offered to L & R Corporation.
What then is the status of the sale made to PWHAS in violation of L & R
Corporations contractual right of first refusal? On this score, we agree with the
Amended Decision of the Court of Appeals that the sale made to PWHAS is
rescissible. The case of Guzman, Bocaling & Co v. Bonnevie[33] is instructive on this
point
The respondent court correctly held that the Contract of Sale was not voidable but
rescissible. Under Article 1380 to 1381(3) of the Civil Code, a contract otherwise
valid may nonetheless be subsequently rescinded by reason of injury to third
persons, like creditors. The status of creditors could be validly accorded the
Bonnevies for they had substantial interests that were prejudiced by the sale of the

subject property to the petitioner without recognizing their right of first priority
under the Contract of Lease.
[G.R. No. L-23493. August 23, 1978.]
DEVELOPMENT BANK OF THE PHILIPPINES, plaintiff-appellee, vs.
JOVENCIO A. ZARAGOZA and AVELINA E. ZARAGOZA, defendantsappellants.
Jose R. Espique for appellants.
Jesus A. Avencea for appellee.
Facts:
On December 10, 1952, appellee foreclosed extrajudicially the appellant's
mortgaged property and the Sheriff posted the requisite notice of sale at public
auction. The property was sold at public auction on June 10, 1957 after numerous
transfers made of the date of sale upon requests of the appellants themselves.
Because the proceeds of the sale were not sufficient to satisfy the balance of
appellant's indebtedness, appellee sued the appellants for the deficiency. The trial
court found for appellee and ordered the appellants to pay the deficiency, with
interest thereon at the legal rate until fully paid plus the sum equivalent to 10% of
the amount due as attorney's fees and cost of suit.
Issues:
(a) whether or not the mortgage is entitled to claim the deficiency in extrajudicial
foreclosure of mortgage; and
(b) whether or not additional interests are properly chargeable on the balance of the
indebtedness during the period from notice of sale to actual sale.
Held:
(a) that in extrajudicial foreclosure of mortgage, where the proceeds of the sale is
insufficient to cover the debt, the mortgagee is entitled to claim the deficiency from
the debtor; and (b) that since the delay in effecting the auction sale was due to
appellants' numerous requests for transfer of the date of sale, they cannot take
advantage of the delay which was of their own making to the prejudice of the other
party.
Judgment affirmed.
PNB vs Corpuz
This case is about the need for a mortgagee-bank, faced with suspicious layers of
transfers involving a property presented for mortgage, to exercise proper diligence
in ascertaining the bona fide status of those transfers.

Facts:
On October 4, 1974 respondent Mercedes Corpuz delivered her owner's duplicate
copy of Transfer Certificate of Title (TCT) 32815 to Dagupan City Rural Bank as
security against any liability she might incur as its cashier. She later left her job and
went to the United States.
On October 24, 1994 the rural bank where she worked cancelled its lien on Corpuz's
title, she having incurred no liability to her employer. Without Corpuz's knowledge
and consent, however, Natividad Alano, the rural bank's manager, turned over
Corpuz's title to Julita Camacho and Amparo Callejo.
Conniving with someone from the assessor's office, Alano, Camacho, and Callejo
prepared a falsified deed of sale, making it appear that on February 23, 1995
Corpuz sold her land to one "Mary Bondoc" for P50,000.00. They caused
theregistration of the deed of sale, resulting in the cancellation of TCT 32815 and
the issuance of TCT 63262 in Bondoc's name. About a month later or on March 27,
1995 the trio executed another fictitious deed of sale with "Mary Bondoc" selling the
property to the spouses Rufo and Teresa Palaganas for only P15,000.00. This sale
resulted in the issuance of TCT 63466 in favor of the Palaganases.
Nine days later or on April 5, 1995 the Palaganases executed a deed of sale in favor
of spouses Virgilio and Elena Songcuan for P50,000.00, resulting in the issuance of
TCT 63528. Finally, four months later or on August 10, 1995 the
Songcuans took out a loan of P1.1 million from petitioner Philippine National Bank
(PNB) and, to secure payment, they executed a real estate mortgage on their title.
Before granting the loan, the PNB had the title verified and the property inspected.
On November 20, 1995 respondent Corpuz filed, through an attorney-in-fact, a
complaint before the Dagupan Regional Trial Court (RTC) against Mary Bondoc, the
Palaganases, the Songcuans, and petitioner PNB, asking for the annulment of the
layers of deeds of sale covering the land, the cancellation of TCTs 63262, 63466,
and 63528, and the reinstatement of TCT 32815 in her name.
On June 29, 1998 the RTC rendered a decision granting respondent Corpuz's
prayers. This prompted petitioner PNB to appeal to the Court of Appeals (CA). On
July 31, 2007 the CA affirmed the decision of the RTC and denied the motion for its
reconsideration, prompting PNB to take recourse to this Court.
Issue:
WON petitioner PNB is a mortgagee in good faith, entitling it to its lien on the title
to the property in
dispute.

Held:
Petitioner PNB points out that, since it did a credit investigation, inspected the
property, and verified the clean status of the title before giving out the loan to the
Songcuans, it should be regarded as a mortgagee in good faith. PNB claims that the
precautions it took constitute sufficient compliance with the due diligence required
of banks when dealing with registered lands.
As a rule, the Court would not expect a mortgagee to conduct an exhaustive
investigation of the history of the mortgagor's title before he extends a loan. 1
But petitioner PNB is not an ordinary mortgagee; it is a bank. 2 Banks are expected
to be more cautious than ordinary individuals in dealing with lands, even registered
ones, since the business of banks is imbued with public interest.3 It is of judicial
notice that the standard practice for banks before approving aloan is to send a staff
to the property offered as collateral and verify the genuineness of the title to
determine the real owner or owners. 4
One of the CA's findings in this case is that in the course of its verification,petitioner
PNB was informed of the previous TCTs covering the subject property. 5And the PNB
has not categorically contested this finding. It is evident from the faces of those
titles that the ownership of the land changed from Corpuz to Bondoc, from Bondoc
to the Palaganases, and from the Palaganases to the Songcuans in less than three
months and mortgaged to PNB within four months of the last transfer.
The above information in turn should have driven the PNB to look at the deeds of
sale involved. It would have then discovered that the property was sold for
ridiculously low prices: Corpuz supposedly sold it to Bondoc for just P50,000.00;
Bondoc to the Palaganases for just P15,000.00; and the Palaganases to the
Songcuans also for just P50,000.00. Yet the PNB gave the property an appraised
value of P781,760.00. Anyone who deliberately ignores a significant fact that would
create suspicion in an otherwise reasonable person cannot be considered as an
innocent mortgagee for value.
The Court finds no reason to reverse the CA decision.
WHEREFORE, the Court DENIES the petition and AFFIRMS the decision of the
Court of Appeals dated July 31, 2007 and its resolution dated December 17, 2007.
SO ORDERED.
Cando vs Sps. Olazo
Facts:

On 27 April 1987, Aurora and Claudio Olazo (respondents) mortgaged to Herminia


Cando (petitioner) a parcel of land with improvements thereon to secure the
payment of their P240,000.00 loan. The real estate mortgage was embodied in a
written instrument titled "Mortgage of Realty." In the said instrument, the parties
agreed that should the mortgagors fail to pay the loan within one (1) year from the
date of the execution of the document, the mortgage shall be foreclosed.
Alleging that respondents failed to pay their obligation within the prescribed period
despite demands, petitioner filed a complaint for judicial foreclosure of mortgage
before the Regional Trial Court of Olongapo City on 16 February 1998. 2
Respondents moved for the dismissal of the complaint, arguing that the action for
foreclosure of the mortgage has already prescribed; that petitioner is barred from
filing the complaint under the principle of laches; and that respondents have
already paid the mortgage obligation.
On 25 May 1998, the trial court issued an Order which reads:
Acting on the Motion to Dismiss on the ground that the Action to Foreclose Mortgage
of Realty dated April 27, 1987 has prescribed in accordance with Article 1142 of the
Civil Code "that the action for foreclosure of mortgage prescribes after ten (10)
years" and it appearing that this Complaint was filed on February16, 1998 after the
expiration of the said period, this case is hereby DISMISSED.
SO ORDERED. 3
Petitioner sought reconsideration of the Order but her motion was denied by the
trial court, 4 prompting her to appeal the case before the Court of Appeals.
In her brief as appellant, 5 petitioner interposed a lone assignment of error, to wit:
THE LOWER COURT HAD CLEARLY ERRED IN DISMISSING THE PLAINTIFF'S
COMPLAINT IN THE INSTANT CASE ON THE GROUND OF PRESCRIPTION OFACTION. 6
The appellate court dismissed the appeal on the ground of lack of jurisdiction. It
found
that the issue raised in the appeal is a pure question of law, that is, what is the
proper computation of the ten (10) year prescriptive period for filing an action for
foreclosure of mortgage. According to the Court of Appeals, the dismissal was based
on Sec. 2, Rule 50 of the Rules of Civil Procedure which provides that an appeal
under Rule 41 taken from the Regional Trial Court to the Court of Appeals raising
only questions of law shall be dismissed.
Issue:
When is the 10 year period of prescription runs?
Held:

It is indelibly clear that the trial court committed an appalling blunder when it ruled
that an action for foreclosure of mortgage prescribes after ten (10) years from the
date of the mortgage contract. Under Article 1142 of the Civil Code, a mortgage
action prescribes after ten (10) years. Jurisprudence, however, hasclarified this rule
by holding that a mortgage action prescribes after ten (10) years from the time the
right of action accrued, 14 which is obviously not the same as the date of the
mortgage contract. Stated differently, an action to enforce a right arising from a
mortgage should be enforced within ten (10) years from the time the right of action
accrues; otherwise, it will be barred by prescription and the mortgage creditor will
lose his rights under the mortgage. 15 The right of action accrues when the
mortgagor defaults in the payment of his obligation to the mortgagee. 16
The foregoing basic principles must have been unknown to the trial court when it
reached its erroneous conclusion that the action to foreclose the mortgage covered
by the "Mortgage of Realty dated April 27, 1987 has prescribed in accordance with
Article 1142 of the Civil Code which provides that 'the action for foreclosure of
mortgage prescribes after ten (10) years' and it appearing that this Complaint was
filed on February 16, 1998 after the expiration of the said period.
Sps. Yap vs First e- Bank Corporation
Facts:
On August 30, 1990, Sammy Yap obtained a P2 million loan from PDCP Development
Bank, Inc. 1 (PDCP). As security, Sammy's parents, petitioners Simon Yap and
Milagros Guevarra, executed a third-party mortgage on their land 2 and warehouse
standing on it. The mortgage agreement provided that PDCP may extrajudicially
foreclose the property in case Sammy failed to pay the loan.
On November 7, 1990, Sammy issued a promissory note and six postdated checks 3
in favor of PDCP as additional securities for the loan.
When Sammy defaulted on the payment of his loan, PDCP presented the six checks
to the drawee bank but the said checks were dishonored. 4 This prompted
PDCP to file a complaint against Sammy for six counts of violation of BP 22
(Bouncing Checks Law) on February 8, 1993.
On May 3, 1993, PDCP filed an application for extrajudicial foreclosure of mortgage
on the property of petitioners which served as principal security for Sammy's loan.
On December 16, 1993, on motion of Sammy and without objection from the public
prosecutor and PDCP, the BP 22 cases were provisionally dismissed.
On October 26, 1994, pursuant to the petition of PDCP for extrajudicial foreclosure,
the extrajudicial sale was set on December 28, 1994. Copies of the notice of
extrajudicial sale were sent by registered mail to Sammy, petitioners, the Registrar

of Deeds of San Carlos City, Pangasinan, the Sangguniang Panglungsod of San


Carlos City and the office of the barangay secretary of Taloy District, San Carlos
City, Pangasinan.
The notice was also published in the Sunday Punch, a newspaper of general
circulation in Pangasinan on November 27, December 4 and 11, 1994.
On December 20, 1994, petitioners filed in the Regional Trial Court (RTC) of San
Carlos City, Pangasinan a complaint for injunction (with prayer for the issuance of a
temporary restraining order/preliminary injunction), damages and accounting of
payments against PDCP. The complaint sought to stop the foreclosure sale on the
ground that PDCP waived its right to foreclose the mortgage on their property when
it filed the BP 22 cases against Sammy.
On April 2, 1997, the RTC 5 ruled in favor of petitioners. It held that PDCP had three
options when Sammy defaulted in the payment of his loan: enforcement of the
promissory note in a collection case, enforcement of the checks under the
Negotiable Instruments Law and/or BP 22, or foreclosure of mortgage. The remedies
were alternative and the choice of one excluded the others. Thus, PDCP was
deemed to have waived its right to foreclose on the property of petitioners when it
elected to sue Sammy for violation of BP 22. 6
PDCP appealed to the Court of Appeals (CA). On February 8, 2005, the CA 7
reversed the RTC. It opined that PDCP was not barred from exercising its right to
foreclose on the property of petitioners despite suing Sammy for violation of BP 22.
The purpose of BP 22 was to punish the act of issuing a worthless check, not to
force a debtor to pay his debt. 8 cSIACD
Hence, this as appeal 9 where petitioners argue that, when Sammy was sued for six
counts of violation of BP 22, PDCP should have been deemed to have
simultaneously filed for collection of the amount represented by the checks. The
civil aspect of the case was naturally an action for collection of Sammy's obligation
to PDCP. PDCP clearly elected a remedy. PDCP should not be allowed to pursue
another, like foreclosure of mortgage.
Issue:
WON the three remedies of the creditor are commulative or alternative.
Held:
Prior to the effectivity of Circular 57-97, the alternative remedies of foreclosure of
mortgage and collection suit were not barred even if a suit for BP 22 had been filed
earlier, unless a judgment of conviction had already been rendered in the BP 22
case finding the accused debtor criminally liable and ordering him to pay the
amount of the check(s). 13

In this case, no judgment of conviction (which could have declared the criminal and
civil liability of Sammy) was rendered because Sammy moved for the provisional
dismissal of the case. Hence, PDCP could have still foreclosed on the mortgage or
filed a collection suit.
Nonetheless, records show that, during the pendency of the BP 22 case, Sammy had
already paid PDCP the total amount of P1,783,582. 14 Thus, to prevent unjust
enrichment on the part of the creditor, any foreclosure by PDCP should only be for
the unpaid balance.
It is undisputed that the BP 22 cases were provisionally dismissed at Sammy's
instance. In other words, PDCP was prevented from recovering the whole amount by
Sammy himself. To bar PDCP from foreclosing on petitioners' property for the
balance of the indebtedness would be to penalize PDCP for the act of Sammy. That
would not only be illogical and absurd but would also violate elementary rules of
justice and fair play. In sum, PDCP has not yet effectively availed of and fully
exhausted its remedy.
While it can be argued that PDCP may revive the BP 22 cases anytime as their
dismissal was only provisional, suffice it to state that the law gives the right of
choice to PDCP, not to Sammy or to petitioners.
Petitioners should be mindful that, by being third party mortgagors, they agreed
that their property would stand as collateral to the loan of Sammy until the last
centavo is paid to PDCP. That is a risk they willingly assumed. To release the
mortgage just because they find it inconvenient would be the height of injustice
against PDCP.
All told, PDCP should not be left without recourse for the unsettled loan of Sammy.
Otherwise, an iniquitous situation will arise where Sammy and petitioners are
unjustly enriched at the expense of PDCP. That we cannot sanction.
So as not to create any misunderstanding, however, the point should be
underscored that the creditor's obvious purpose when it forecloses on mortgaged
property is to obtain payment for a loan which the debtor is unable or unjustifiably
refuses to pay. The rationale is the same if the creditor opts to sue the debtor for
collection. Thus, it is but logical that a creditor who obtains a personal judgment
against the debtor on a loan waives his right to foreclose on the mortgage securing
the loan. Otherwise, the creditor becomes guilty of splitting a single cause of action
15 for the debtor's inability (or unjustified refusal) to pay his debt. 16 Nemo debet
bis vexare pro una et eadem causa. No man shall be twice vexed for one and the
same cause.
In the light of Circular 57-97 and Section 1 (b), Rule 111 of the Rules of Court, the
same rule applies when the creditor sues the debtor for BP 22 and thereafter
forecloses on the mortgaged property. It is true that BP 22 is a criminal remedy

while foreclosure of mortgage is a civil remedy. It is also true that BP 22 was not
enacted to force, much more penalize a person for his inability (or refusal to pay)
his debt. 17 What BP 22 prohibits and penalizes is the issuance of bum checks
because of its pernicious effects on public interest. Congress, in the exercise of
police power, enacted BP 22 in order to maintain public confidence in commercial
transactions. 18
At the other end of the spectrum, however, is the fact that a creditor's principal
purpose in suing the debtor for BP 22 is to be able to collect his debt. (Circular 5797 and Section 1 (b), Rule 111 of the Rules of Court have been drawn up to address
this reality.) It is not so much that the debtor should be imprisoned for issuing a bad
check; this is so specially because a conviction for BP 22 does not necessarily result
in imprisonment. 19
Thus, we state the rule at present. If the debtor fails (or unjustly refuses) to pay his
debt when it falls due and the debt is secured by a mortgage and by a check, the
creditor has three options against the debtor and the exercise of one will bar the
exercise of the others. He may pursue either of the three but not all or a
combination of them.
First, the creditor may file a collection suit against the debtor. This will open up all
the properties of the debtor to attachment and execution, even the mortgaged
property itself. Second, the creditor may opt to foreclose on the mortgaged property.
In case the debt is not fully satisfied, he may sue the debtor for deficiency judgment
(not a collection case for the whole indebtedness), in which case, all the properties
of the debtor, other than the mortgaged property, are again opened up for the
satisfaction of the deficiency. 20 Lastly, the creditor may opt to sue the debtor for
violation of BP 22 if the checks securing the obligation bounce. Circular 57-97 and
Section 1 (b), Rule 111 of the Rules of Court both provide that the criminal action for
violation of BP 22 shall be deemed to necessarily include the corresponding civil
action, i.e., a collection suit. No reservation to file such civil action separately shall
be allowed or recognized.
Petitioners would have been correct had it not been for the reasons stated earlier.
WHEREFORE, the petition is hereby DENIED.
Costs against petitioners.
SO ORDERED.
Sps Yap vs Sps. Dy
Facts:
The spouses Tomas Tirambulo and Salvacion Estorco (Tirambulos) are the registered
owners of several parcels of land located in Ayungon, Negros Oriental, registered

under Transfer Certicate of Title (TCT) Nos. T-14794, T-14777, T-14780, T-14781, T14783 and T-20301 of the Registry of Deeds of Negros Oriental, and more
particularly designated asfollows:
(1) TCT No. T-14777 Lot 1 of Plan Pcs-11728 61,371 sq.m.
(2) TCT No. T-20301 Lot 3 of Plan Psu-124376 17,373 sq.m.
(3) TCT No. T-14780 Lot 4 of Plan Pcs-11728 27,875 sq.m.
(4) TCT No. T-14794 Lot 5 of Plan Psu-124376 2,900 sq.m.
(5) TCT No. T-14781 Lot 6 of Plan Pcs-11728 16,087 sq.m.
(6) TCT No. T-14783 Lot 8 of Plan Pcs-11728 39,888 sq.m.
The Tirambulos likewise own a parcel of land denominated as Lot 846, covered by
Tax Declaration No. 08109.
On December 3, 1976, the Tirambulos executed a Real Estate Mortgage 3 over Lots
1, 4, 5, 6 and 8 in favor of the Rural Bank of Dumaguete, Inc., predecessor of
Dumaguete Rural Bank, Inc. (DRBI), to secure a P105,000 loan extended by the
latter to them. Later, the Tirambulos obtained a second loan for P28,000 and also
executed a Real Estate Mortgage 4 over Lots 3 and 846 in favor of the same bank
on August 3, 1978.
Subsequently, on October 27, 1979, the Tirambulos sold all seven mortgaged lots to
the spouses Zosimo Dy, Sr. and Natividad Chiu (the Dys) and the spouses Marcelino
C. Maxino and Remedios Lasola (the Maxinos) without the consent and knowledge
of DRBI. This sale,which was embodied in a Deed of Absolute Sale, 5 was followed
by a default on the part of the Tirambulos to pay their loans to DRBI. Thus, DRBI
extrajudicially foreclosed the December 3, 1976 mortgage and had Lots 1, 4, 5, 6
and 8 sold at public auction on March 31, 1982.
At the auction sale, DRBI was proclaimed the highest bidder and bought said lots for
P216,040.93. The Sheriff's Certicate of Sale 6 stated that the "sale is subject to the
rights of redemption of the mortgagor(s) or any other persons authorized by law so
to do, within a period of one (1) year from registration hereof." 7 The certicate of
sale, however, was not registered until almost a year later, or on June 24, 1983.
On July 6, 1983, or twelve (12) days after the sale was registered, DRBI sold Lots 1,
3 and 6 to the spouses Francisco D. Yap and Whelma D. Yap (the Yaps) under a Deed
of Sale with Agreement to Mortgage. 8 It is important to note, however, that Lot 3
was not among the five properties foreclosed and bought by DRBI at public auction.
On August 8, 1983, or well within the redemption period, the Yaps led a Motion for
Writ of Possession 9 alleging that they have acquired all the rights and interests of
DRBI over the foreclosed properties and are entitled to immediate possession of the

same because the one-year redemption period has lapsed without any redemption
being made. Said motion, however, was ordered withdrawn on August 22, 1983 10
upon motion of the Yaps, who gave no reason therefor. 11 Three days later, or on
August 25, 1983, the Yaps again filed a Motion for Writ of Possession. 12 This time
the motion was granted, and a Writ of Possession 13 over Lots 1, 3 and 6 was issued
in favor of the Yaps on September 5, 1983.
They were placed in possession of Lots 1, 3 and 6 seven days later. On May 22,
1984, roughly a month before the one-year redemption period was set to expire, the
Dys and the Maxinos attempted to redeem Lots 1, 3 and 6. They tendered the
amount of P40,000.00 to DRBI and the Yaps, 14 but both refused, contending that
the redemption should be for the full amount of the winning bid of P216,040.93 plus
interest for all the foreclosed properties.
Thus, on May 28, 1984, the Dys and the Maxinos went to the Ofce of the Sheriff of
Negros Oriental and paid P50,625.29 (P40,000.00 for the principal plus P10,625.29
for interests and Sheriff's Commission) to effect the redemption. 15 Noticing that
Lot 3 was not included in the foreclosure proceedings, Benjamin V. Diputado, Clerk
of Court and Provincial Sheriff, issued a Certicate of Redemption 16 in favor of the
Dys and the Maxinos only for Lots 1 and 6, and stated in said certicate that Lot 3 is
not included in the foreclosure proceedings. By letter 17 of even date, Atty.
Diputado also duly notified the Yaps of the redemption of Lots 1 and 6 by the Dys
and the Maxinos, as well as the non-inclusion of Lot 3 among the foreclosed
properties. He advised the Yaps to personally claim the redemption money or send a
representative to do so.
In a letter to the Provincial Sheriff on May 31, 1984, the Yaps refused to take
delivery of the redemption price arguing that one of the characteristics of a
mortgage is its indivisibility and that one cannot redeem only some of the lots
foreclosed because all the parcels were sold for a single price at the auction sale. 18
On June 1, 1984, the Provincial Sheriff wrote the Dys and the Maxinos informing
them of the Yaps' refusal to take delivery of the redemption money and that in view
of said development, the tender of the redemption money was being considered as
a consignation. 19
On June 15, 1984, the Dys and the Maxinos filed Civil Case No. 8426 with the
Regional Trial Court of Negros Oriental for accounting, injunction, declaration of
nullity (with regard to Lot 3) of the Deed of Sale with Agreement to Mortgage, and
damages against the Yaps and DRBI. In their complaint.
Thereafter, on June 19, 1984, the Dys and the Maxinos consigned to the trial court
an additional sum of P83,850.50 plus sheriff's commission fee of P419.25
representing the remaining balance of the purchase price that the Yaps still owed
DRBI by virtue of the sale to them by the DRBI of Lots 1, 3 and 6. 22

Meanwhile, by letter 23 dated June 27, 1984, the Yaps told DRBI that no redemption
has been made by the Tirambulos or their successors-in-interest and requested
DRBI to consolidate its title over the foreclosed properties by requesting the
Provincial Sheriff to execute the nal deed of sale in favor of the bank so that the
latter can transfer the titles of the two foreclosed properties to them.
On the same date, the Yaps also wrote the Maxinos informing the latter that during
the last harvest of the lots bought from DRBI, they excluded from the harvest Lot 3
to show their good faith. Also, they told the Maxinos that they were formally turning
over the possession of Lot 3 to the Maxinos, without prejudice to the nal
determination of the legal implications concerning Lot 3. As to Lots 1 and 6,
however, the Yaps stated that they intended to consolidate ownership over them
since there has been no redemption as contemplated by law. Included in the letter
was a liquidation of the copra proceeds harvested from September 7, 1983 to April
30, 1984 for Lots 1, 3 and 6. 24
Later, on July 5, 1984, the Yaps filed Civil Case No. 8439 for consolidation of
ownership, annulment of certificate of redemption, and damages against the Dys,
the Maxinos, the Provincial Sheriff of Negros Oriental and DRBI.
Civil Case Nos. 8426 and 8439 were tried jointly.
On October 24, 1985, the Yaps, by counsel, led a motion to withdraw from the
provincial sheriff the redemption money amounting to P50,373.42. 27 Said motion
was granted on October 28, 1985 after a Special Power of Attorney executed by
Francisco Yap in favor of his brother Valiente Yap authorizing the latter to receive the
P50,373.42 redemption money was presented in court. 28
On February 12, 1997, the trial court rendered decision 29 in favor of the Yaps.
On May 17, 2005, the CA rendered a decision reversing the March 7, 1997 amended
decision of the trial court.
The CA held that the trial court erred in ruling that it could not consider the
evidence for the Dys and the Maxinos allegedly because they failed to formally offer
the same. The CA noted that although the testimonies of Attys. Marcelino C. Maxino
and Benjamin V. Diputado were not formally offered, the procedural lapse was cured
when the opposing counsel cross-examined said witnesses. Also, while the original
TSNs of the witnesses for the plaintiffs in Civil Case No. 8426 were burned, the
latter's counsel who had copies thereof, furnished the Yaps copies for their scrutiny
and comment. The CA further noted that the trial court also admitted all the
documentary exhibits of the Dys and the Maxinos on March 3, 1995. Unfortunately,
however, the trial court simply failed to locate the pertinent documents in the
voluminous records of the cases.

On the merits, the CA ruled that the Dys and the Maxinos had proven their cause of
action sufficiently. The CA noted that their claim that Lot 3 was not among the
properties foreclosed was duly corroborated by Atty. Diputado, the Provincial Sheriff
who conducted the foreclosure sale. The Yaps also failed to rebut their contention
regarding the former's acceptance of the redemption money and their delivery of
the possession of the three parcels of land to the Dys and the Maxinos. The CA also
noted that not only did the Yaps deliver possession of Lot 3 to the Dys and the
Maxinos, they also filed a Motion to Withdraw the Redemption Money from the
Provincial Sheriff and withdrew the redemption money.
As to the question whether the redemption was valid or not, the CA found no need
to discuss the issue. It found that the bank was in bad faith and therefore cannot
insist on the protection of the law regarding the need for compliance with all the
requirements for a valid redemption while estoppel and unjust enrichment operate
against the Yaps who had already withdrawn the redemption money.
Hence, the consolidated petitions assailing the appellate court's decision.
Issues:
(1) Is Lot 3 among the foreclosed properties?
(2) To whom should the payment of redemption money
be made?
(3) Did the Dys and Maxinos validly redeem Lots 1 and 6? and (4) Is DRBI liable for
damages?
Held:
As to the first issue, we fnd that the CA correctly ruled that the Dys and Maxinos
were able to prove their claim that Lot 3 was not among the properties foreclosed
and that it was merely inserted by the bank in the Sheriff's Certicate of Sale. As
Atty. Diputado, the Provincial Sheriff, testied, the application for foreclosure was
only for ve parcels of land, namely, Lots 1, 4, 5, 6 and 8. Accordingly, only said ve
parcels of land were included in the publication and sold at the foreclosure sale.
When he was shown a copy of the Sheriff'sCertificate of Sale consisting of three
pages, he testied that it was altered because Lot 3 and Lot 846 were included
beyond the "xxx" that marked the end of the enumeration of the lots foreclosed. 35
Also, a perusal of DRBI's application for foreclosure of real estate mortgage 36
shows that it explicitly refers to only one deed of mortgage to settle the Tirambulos'
indebtedness amounting to P216,040.93. This is consistent with the Notice of
Extrajudicial Sale of Mortgaged Property, published in the Dumaguete Star Informer
on February 18, 25 and March 4, 1982, 37 announcing the sale of Lots 1, 4, 5, 6 and
8 for the satisfaction of the indebtedness amounting to P216,040.93. It is also
consistent with the fact that Lots 1, 4, 5, 6 and 8 are covered by only one real estate

mortgage, the Real Estate Mortgage 38 dated December 3, 1976. Indeed, that the
foreclosure sale refers only to Lots 1, 4, 5, 6 and 8 is clear from the fact that Lots 1,
4, 5, 6 and 8 and Lot 3 are covered by two separate real estate mortgages. DRBI
failed to refute these pieces of evidence against it.
As to the second issue regarding the question as to whom payment of the
redemption money should be made, Section 31, 39 Rule 39 of the Rules of Court
then applicable provides:
SEC. 31.Effect of redemption by judgment debtor, and a certicate to be delivered
and recorded thereupon. To whom payments on redemption made. If the
judgment debtor redeem, he must make the same payments as are required to
effect a redemption by a redemptioner, whereupon the effect of the sale is
terminated and he is restored to his estate, and the person to whom the payment is
made must execute and deliver to him a certicate of redemption acknowledged or
approved before a notary public or other ofcer authorized to take
acknowledgments of conveyances of real property. Such certificate must be filed
and recorded in the ofce of the registrar of deeds of the province in which the
property is situated, and the registrar of deeds must note the record thereof on the
margin of the record of the certicate of sale. The payments mentioned in this and
the last preceding sections may be made to the purchaser or redemptioner, or for
him to the ofcer who made the sale. (Emphasis supplied.)
Here, the Dys and the Maxinos complied with the above-quoted provision. Well
within the redemption period, they initially attempted to pay the redemption money
not only to the purchaser, DRBI, but also to the Yaps. Both DRBI and the Yaps
however refused, insisting that the Dys and Maxinos should pay the whole purchase
price at which all the foreclosed properties were sold during the foreclosure sale.
Because of said refusal, the Dys and Maxinos correctly availed of the alternative
remedy by going to the sheriff who made the sale. As held in Natino v. Intermediate
Appellate Court, 40 the tender of the redemption money may be made to the
purchaser of the land or to the sheriff. If made to the sheriff, it is his duty to accept
the tender and execute the certificate of redemption. But were the Dys and Maxinos
entitled to redeem Lots 1 and 6 in the first place? We rule in the affirmative.
The Dys and the Maxinos have legal personality to redeem the subject properties.
Contrary to petitioners' contention, the Dys and Maxinos have legal personality to
redeem the subject properties despite the fact that the sale to the Dys and Maxinos
was without DRBI's consent. In Litonjua v. L & R Corporation , 41 this Court declared
valid the sale by the mortgagor of mortgaged property to a third person
notwithstanding the lack of written consent by the mortgagee, and likewise
recognized the third person's right to redeem the foreclosed property, to wit:
Coming now to the issue of whether the redemption offered by PWHAS on account
of the spouses Litonjua is valid, we rule in the afrmative. The sale by the spouses

Litonjua of the mortgaged properties to PWHAS is valid. Therefore, PWHAS stepped


into the shoes of the spouses Litonjua on account of such sale and was in effect,
their successor-in-interest. As such, it had the right to redeem the property
foreclosed by L & R Corporation. Again, Tambunting, supra, clarifies that
". . . . The acquisition by the Hernandezes of the Escuetas' rights over the property
carried with it the assumption of the obligations burdening the property, as
recorded in the Registry of Property, i.e., the mortgage debts in favor of the RFC
(DBP) and the Tambuntings. The Hernandezes, by stepping into the Escuetas' shoes
as assignees, had the obligation to pay the mortgage debts, otherwise, these debts
would and could be enforced against the property subject of the assignment. Stated
otherwise, the Hernandezes, by the assignment, obtained the right to remove the
burdens on the property subject thereof by paying the obligations thereby secured;
that is to say, they had the right of redemption as regards the first mortgage, to be
exercised within the time and in the manner prescribed by law and the mortgage
deed; and as regards the second mortgage, sought to be judicially foreclosed but
yet unforeclosed, they had the so-called equity of redemption."
The right of PWHAS to redeem the subject properties nds support in Section 6 of
Act 3135 itself which gives not only the mortgagor-debtor the right to redeem, but
also his successors-in-interest. As vendee of the subject properties, PWHAS qualifies
as such a successor-in-interest of the spouses Litonjua. 42 Likewise, we rule that the
Dys and the Maxinos validly redeemed Lots 1 and 6.
The requisites of a valid redemption are present.
The requisites for a valid redemption are: (1) the redemption must be made within
twelve (12) months from the time of the registration of the sale in the Ofce of the
Register of Deeds; (2) payment of the purchase price of the property involved, plus
1% interest per month thereon in addition, up to the time of redemption, together
with the amount of any assessments or taxes which the purchaser may have paid
thereon after the purchase, also with 1% interest on such last named amount; and
(3) written notice of the redemption must be served on the ofcer who made the
sale and a duplicate led with the Register of Deeds of the province. 43
There is no issue as to the first and third requisites. It is undisputed that the Dys
and the Maxinos made the redemption within the 12-month period from the
registration of the sale. The Dys and Maxinos effected the redemption on May 24,
1984, when they deposited P50,373.42 with the Provincial Sheriff, and on June 19,
1984, when they deposited an additional P83,850.50. Both dates were well within
the one-year redemption period reckoned from the June 24, 1983 date of
registration of the foreclosure sale. Likewise, the Provincial Sheriff who made the
sale was properly notied of the redemption since the Dys and Maxinos deposited
with him the redemption money after both DRBI and the Yaps refused to accept it.

The second requisite, the proper redemption price, is the main subject of contention
of the opposing parties. The Yaps argue that P40,000.00 cannot be a valid tender of
redemption since the amount of the auction sale was P216,040.93. They further
contend that the mortgage is indivisible so in order for the tender to be valid and
effectual, it must be for the entire auction price
plus legal interest.
We cannot subscribe to the Yaps' argument on the indivisibility of the mortgage. As
held in the case of Philippine National Bank v. De los Reyes , 44 the doctrine of
indivisibility of mortgage does not apply once the mortgage is extinguished by a
complete foreclosure thereof as in the instant case. The Court held:
The parties were accordingly embroiled in a hermeneutic disparity on theiraforesaid
contending positions. Yet, the rule on the indivisibility of mortgage finds no
application to the case at bar. The particular provision of the Civil Code referred to
provides:
Art. 2089.A pledge or mortgage is indivisible, even though the debt may be divided
among the successors in interest of the debtor or of the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.
Neither can the creditor's heir who received his share of the debt return the pledge
or cancel the mortgage, to the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which, there being several things
given in mortgage or pledge, each one of these guarantees only a determinate
portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or
mortgage as the portion of the debt for which each thing is specially answerable is
satisfied.
From the foregoing, it is apparent that what the law proscribes is the foreclosure of
only a portion of the property or a number of the several properties mortgaged
corresponding to the unpaid portion of the debt where before foreclosure
proceedings partial payment was made by the debtor on his total outstanding loan
or obligation. This also means that the debtor cannot ask for the release of any
portion of the mortgaged property or of one or some of the several lots mortgaged
unless and until the loan thus, secured has been fully paid, notwithstanding the fact
that there has been a partial fulllment of the obligation.

Hence, it is provided that the debtor who has paid a part of the debt cannot ask for
the proportionate extinguishment of the mortgage as long as the debt is not
completely satisfied.
That the situation obtaining in the case at bar is not within the purview of the
aforesaid rule on indivisibility is obvious since the aggregate number of the lots
which comprise the collaterals for the mortgage had already been foreclosed and
sold at public auction. There is no partial payment nor partial extinguishment of the
obligation to speak of. The aforesaid doctrine, which is actually intended for the
protection of the mortgagee, specifically refers to the release of the mortgage which
secures the satisfaction of the indebtedness and naturally presupposes that the
mortgage is existing. Once the mortgage is extinguished by a complete foreclosure
thereof, said doctrine of indivisibility ceases to apply since, with the full payment of
the debt, there is nothing more to secure. 45 (Emphasis supplied.)
Nothing in the law prohibits the piecemeal redemption of properties sold at one
foreclosure proceeding. In fact, in several early cases decided by this Court, the
right of the mortgagor or redemptioner to redeem one or some of the foreclosed
properties was recognized.
In the 1962 case of Castillo v. Nagtalon , 46 ten parcels of land were sold at public
auction. Nagtalon, who owned three of the ten parcels of land sold, wanted to
redeem her properties. Though the amount she tendered was found as insufficient
to effectively release her properties, the Court held that the tender of payment was
made timely and in good faith and thus, in the interest of justice, Nagtalon was
given the opportunity to complete the redemption purchase of three of the ten
parcels of land foreclosed.
Also, in the later case of Dulay v. Carriaga , 47 wherein Dulay redeemed eight of the
seventeen parcels of land sold at public auction, the trial court declared the
piecemeal redemption of Dulay as void. Said order, however, was annulled and set
aside by the Court on certiorari and the Court upheld the redemption of the eight
parcels of land sold at public auction.
Clearly, the Dys and Maxinos can effect the redemption of even only two of the five
properties foreclosed. And since they can effect a partial redemption, they are not
required to pay the P216,040.93 considering that it is the purchase price for all the
five properties foreclosed.
So what amount should the Dys and Maxinos pay in order for their redemption of
the two properties be deemed valid considering that when the five properties were
auctioned, they were not separately valued?
Contrary to the Yaps' contention, the amount paid by the Dys and Maxinos within
the redemption period for the redemption of just two parcels of land was not only
P40,000.00 but totaled to P134,223.92 (P50,373.42 paid on May 28, 1984 plus

P83,850.50 paid on June 19, 1984). That is more than 60% of the purchase price for
the five foreclosed properties, to think the Dys and Maxinos were only redeeming
two properties.
The two subject properties to be redeemed, Lots 1 and 6, have a total area of
77,458 square meters or roughly 52% of the total area of the foreclosed properties.
Even with this rough approximation, we rule that there is no reason to invalidate the
redemption of the Dys and Maxinos since they tendered 60% of the total purchase
price for properties constituting only 52% of the total area. However, there is a need
to remand the case for computation of the pro-rata value of Lots 1 and 6 based on
their true values at that time of redemption for the purposes of determining if there
is any deciency or overpayment on the part of the Dys and Maxinos.
Medida vs CA
Facts:
"On October 10, 1974 plaintiff spouses, alarmed of losing their right of redemption
over lot 4731 of the Cebu City Cadastre and embraced under TCT No. 14272 from
Mr. Juan Gandioncho, purchaser of the aforesaid lot at the foreclosure sale of the
previous mortgage in favor of Cebu City Development Bank, went to Teotimo
Abellana, president of defendant Association, to obtain a loan of P30,000.00. Prior
thereto or on October 3, 1974, their son Teofredo Dolino filed a similar loan
application for Twenty-Five Thousand (P25,000.00) Pesos with lot No. 4731 offered
as security for the Thirty Thousand (P30,000.00) Pesos loan from defendant
association. Subsequently, they executed a promissory note in favor of defendant
association. Both documents indicated that the principal obligation is for Thirty
Thousand (P30,000.00) Pesos payable in one year with interest at twelve (12%)
percent per annum.
"When the loan became due and demandable without plaintiff paying the same,
defendant association caused the extrajudicial foreclosure of the mortgage on
March 16, 1976. After the posting and publication requirements were complied with,
the land was sold at public auction on April 19, 1976 to defendant association being
the highest bidder. The certificate of sale was issued on April 20, 1976 and
registered on May 10, 1976 with the Register of Deeds of Cebu.
"On May 24, 1971 (sic, 1977), no redemption having been effected by plaintiff, TCT
No. 14272 was cancelled and in lieu thereof TCT No. 68041 was issued in the name
of defendant association." 3
xxx xxx xxx
On October 18, 1979, private respondents filed the aforestated Civil Case No. R18616 in the court a quo for the annulment of the sale at public auction conducted

on April 19, 1976, as well as the corresponding certificate of sale issued pursuant
thereto.
In their complaint, private respondents, as plaintiffs therein, assailed the validity of
the extrajudicial foreclosure sale of their property, claiming that the same was held
in violation of Act No. 3135, as amended, and prayed, inter alia, for the cancellation
of Transfer Certificate of Title No. 68041 issued in favor of therein defendant City
Savings and Loan Association, Inc., now known as City Savings Bank and one of the
petitioners herein.
In its answer, the defendant association therein denied the material allegations of
the complaint and averred, among others, that the present private respondent
spouses may still avail of their right of redemption over the land in question.
On January 12, 1983, after trial on the merits, the court below rendered judgment
upholding the validity of the loan and the real estate mortgage, but annulling the
extrajudicial foreclosure sale inasmuch as the same failed to comply with the notice
requirements in Act No. 3135, as amended, under the following dispositive part:
Not satisfied therewith, herein private respondents interposed a partial appeal to
respondent court with respect to the second and third paragraphs of the
aforequoted decretal portion, contending that the lower court erred in (1) declaring
that the mortgage executed by the therein plaintiff spouses Dolino is valid; (2)
permitting therein Cebu City Savings and Loan Association, Inc. to collect interest
after the same foreclosure proceedings and auction sale which are null and void
from the beginning; (3) not ordering the forfeiture of the capital or balance of the
loan with usurious interest; and (4) not sentencing therein defendant to pay
damages and attorney's fees to plaintiffs. 5
On September 28, 1990, respondent Court of Appeals promulgated its decision
modifying the decision of the lower court.
Herein petitioners then filed a motion for reconsideration which was denied by
respondent court in its resolution dated March 5, 1991, hence the present petition
which, in synthesis, postulates that respondent court erred in declaring the real
estate mortgage void, and also impugns the judgment of the trial court declaring
ineffective the extrajudicial foreclosure of said mortgage and ordering the
cancellation of Transfer Certificate of Title No. 68041 issued in favor of the
predecessor of petitioner bank. 7
The trial court held that the true agreement between the parties therein was that
Gaborro would assume and pay the indebtedness of Dizon to the banks and, in
consideration thereof, Gaborro was given the possession and enjoyment of the
properties in question until Dizon shall have reimbursed him for the amount paid to
the creditor banks.

Accordingly, the trial court ordered the reformation of the documents to the extent
indicated and such particular relief was affirmed by the Court of Appeals. This Court
held that the agreement between the parties is one of those innominate contracts
under Article 1307 of the Civil Code whereby the parties agreed "to give and to do"
certain rights and obligations, but partaking of the nature of antichresis.
Hence, on appeal to this Court, the judgment of the Court of Appeals in that case
was affirmed.
Issue:
Whether or not a mortgagor, whose property has been extrajudicially foreclosed and
sold at the corresponding foreclosure sale, may validly execute a mortgage contract
over the same property in favor of a third party during the period of redemption.

Held:
Yes.
it is undisputed that the real estate mortgage in favor of petitioner bank was
executed by respondent spouses during the period of redemption. We reiterate that
during said period it cannot be said that the mortgagor is no longer the owner of the
foreclosed property since the rule up to now is that the right of a purchaser at a
foreclosure sale is merely inchoate until after the period of redemption has expired
without the right being exercised. 12 The title to land sold under mortgage
foreclosure remains in the mortgagor or his grantee until the expiration of the
redemption period and conveyance by the master's deed. 13 To repeat, the rule has
always been that it is only upon the expiration of the redemption period, without the
judgment debtor having made use of his right of redemption, that the ownership of
the land sold becomes consolidated in the purchaser. 14
Parenthetically, therefore, what actually is effected where redemption is seasonably
exercised by the judgment or mortgage debtor is not the recovery of ownership of
his land, which ownership he never lost, but the elimination from his title thereto of
the lien created by the levy on attachment or judgment or the registration of a
mortgage thereon. The American rule is similarly to the effect that the redemption
of property sold under a foreclosure sale defeats the inchoate right of the purchaser
and restores the property to the same condition as if no sale had been attempted.
Further, it does not give to the mortgagor a new title, but merely restores to him the
title freed of the encumbrance of the lien foreclosed. 15
Garcia vs Villar
Facts:

On July 6, 1993, Galas, with her daughter, Ophelia G. Pingol (Pingol), as co-maker,
mortgaged the subject property to Yolanda Valdez Villar (Villar) as security for a loan
in the amount of Two Million Two Hundred Thousand Pesos (P2,200,000.00). 6
On October 10, 1994, Galas, again with Pingol as her co-maker, mortgaged the
same subject property to Pablo P. Garcia (Garcia) to secure her loan of One Million
Eight Hundred Thousand Pesos (P1,800,000.00). 7
Both mortgages were annotated at the back of TCT No. RT-67970 (253279), to wit:
REAL ESTATE MORTGAGE
Entry No. 6537/T-RT-67970 (253279) MORTGAGE In favor of Yolanda Valdez Villar
m/to Jaime Villar to guarantee a principal obligation in the sum of P2,200,000
mortgagee's consent necessary in case of subsequent encumbrance or alienation of
the property; Other conditions set forth in Doc. No.97, Book No. VI, Page No. 20 of
the Not. Pub. of Diana P. Magpantay.
Date of Instrument: 7-6-93
Date of Inscription: 7-7-93
SECOND REAL ESTATE MORTGAGE
Entry No. 821/T-RT-67970(253279) MORTGAGE In favor of Pablo Garcia m/to
Isabela Garcia to guarantee a principal obligation in the sum of P1,800,000.00
mortgagee's consent necessary in case of subsequent encumbrance or alienation of
the property; Other conditions set forth in Doc. No. 08, Book No. VII, Page No. 03 of
the Not. Pub. of Azucena Espejo Lozada
Date of Instrument: 10/10/94
Date of Inscription: 10/11/94
On November 21, 1996, Galas sold the subject property to Villar for One Million Five
Hundred Thousand Pesos (P1,500,000.00), and declared in the Deed of Sale 9 that
such property was "free and clear of all liens and encumbrances of any kind
whatsoever." 10
On December 3, 1996, the Deed of Sale was registered and, consequently, TCT No.
RT- 67970 (253279) was cancelled and TCT No. N-168361 11 was issued in the
name of Villar.
Both Villar's and Garcia's mortgages were carried over and annotated at the back of
Villar's new TCT. 12
On October 27, 1999, Garcia filed a Petition for Mandamus with Damages 13 against
Villar before the RTC, Branch 92 of Quezon City. Garcia subsequently amended his

petition to a Complaint for Foreclosure of Real Estate Mortgage with Damages. 14


Garcia alleged that when Villar purchased the subject property, she acted in bad
faith and with malice as she knowingly and willfully disregarded the provisions on
laws on judicial and extrajudicial foreclosure of mortgaged property. Garcia further
claimed that when Villar purchased the subject property, Galas was relieved of her
contractual obligation and the characters of creditor and debtor were merged in the
person of Villar. Therefore, Garcia argued, he, as the second mortgagee, was
subrogated to Villar's original status as first mortgagee, which is the creditor with
the right to foreclose. Garcia further asserted that he had demanded payment from
Villar, 15 whose refusal compelled him to incur expenses in filing an action in court.
16
On May 27, 2002, the RTC rendered in favor of the plaintiff Pablo P.
The RTC declared that the direct sale of the subject property to Villar, the first
mortgagee, could not operate to deprive Garcia of his right as a second mortgagee.
The RTC said that upon Galas's failure to pay her obligation, Villar should have
foreclosed the subject property pursuant to Act No. 3135 as amended, to provide
junior mortgagees like Garcia, the opportunity to satisfy their claims from the
residue, if any, of the foreclosure sale proceeds. This, the RTC added, would have
resulted in the extinguishment of the mortgages.
The RTC held that the second mortgage constituted in Garcia's favor had not been
discharged, and that Villar, as the new registered owner of the subject property with
a subsisting mortgage, was liable for it. 28 Villar appealed 29 this Decision to the
Court of Appeals based on the arguments that
Garcia had no valid cause of action against her; that he was in bad faith when he
entered into a contract of mortgage with Galas, in light of the restriction imposed by
the first mortgage; and that Garcia, as the one who gave the occasion for the
commission of fraud, should suffer. Villar further asseverated that the second
mortgage is a void and inexistent contract considering that its cause or object is
contrary to law, moral, good customs, and public order or public policy, insofar as
she was concerned.
The Court of Appeals reversed the RTC in a Decision.
The Court of Appeals declared that Galas was free to mortgage the subject property
even without Villar's consent as the restriction that the mortgagee's consent was
necessary in case of a subsequent encumbrance was absent in the Deed of Real
Estate Mortgage. In the same vein, the Court of Appeals said that the sale of the
subject property to Villar was valid as it found nothing in the records that would
show that Galas violated the Deed of Real Estate Mortgage prior to the sale. 34
In dismissing the complaint for judicial foreclosure of real estate mortgage with
damages, the Court of Appeals held that Garcia had no cause of action against Villar

"in the absence of evidence showing that the second mortgage executed in his
favor by Lourdes V. Galas [had] been violated and that he [had] made a demand on
the latter for the payment of the obligation secured by said mortgage prior to the
institution of his complaint against Villar."
On March 20, 2003, Garcia filed a Motion for Reconsideration 36 on the ground that
the Court of Appeals failed to resolve the main issue of the case, which was whether
or not Garcia, as the second mortgagee, could still foreclose the mortgage after the
subject property had been sold by Galas, the mortgage debtor, to Villar, the
mortgage creditor.
This motion was denied for lack of merit by the Court of Appeals in its July 2, 2003
Resolution.
Issues:
1. Whether or not the second mortgage to Garcia was valid;
2. Whether or not the sale of the subject property to Villar was valid;
3. Whether or not the sale of the subject property to Villar was in violation of the
prohibition on pactum commissorium;
4. Whether or not Garcia's action for foreclosure of mortgage on the subject
property can prosper.
Held:
Validity of second mortgage to Garcia and sale of subject property to Villar
At the onset, this Court would like to address the validity of the second mortgage to
Garcia and the sale of the subject property to Villar. We agree with the Court of
Appeals that both are valid under the terms and conditions of the Deed of Real
Estate Mortgage executed by
Galas and Villar.
While it is true that the annotation of the first mortgage to Villar on Galas's TCT
contained a restriction on further encumbrances without the mortgagee's prior
consent, this restriction was nowhere to be found in the Deed of Real Estate
Mortgage. As this Deed became the basis for the annotation on Galas's title, its
terms and conditions take precedence over the standard, stamped annotation
placed on her title. If it were the intention of the parties to impose such restriction,
they would have and should have stipulated such in the Deed of Real Estate
Mortgage itself.
Neither did this Deed proscribe the sale or alienation of the subject property during
the life of the mortgages. Garcia's insistence that Villar should have judicially or

extrajudicially foreclosed the mortgage to satisfy Galas's debt is misplaced. The


Deed of Real Estate Mortgage merely provided for the options Villar may undertake
in case Galas or Pingol fail to pay their loan. Nowhere was it stated in the Deed that
Galas could not opt to sell the subject property to Villar, or to any other person.
Such stipulation would have been void anyway, as it is not allowed under Article
2130 of the Civil Code, to wit:
Art. 2130 .A stipulation forbidding the owner from alienating the immovable
mortgaged shall be void.
Prohibition on pactum commissorium
Garcia claims that the stipulation appointing Villar, the mortgagee, as the
mortgagor's attorney-in-fact, to sell the property in case of default in the payment
of the loan, is in violation of the prohibition on pactum commissorium, as stated
under Article 2088 of the Civil Code, viz.:
Art. 2088 .The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.
The power of attorney provision in the Deed of Real Estate Mortgage reads:
Power of Attorney of MORTGAGEE. Effective upon the breach of any condition of
this Mortgage, and in addition to the remedies herein stipulated, the MORTGAGEE is
likewise appointed attorney-in-fact of the MORTGAGOR with full power and authority
to take actual possession of the mortgaged properties, to sell, lease any of the
mortgaged properties, to collect rents, to execute deeds of sale, lease, or
agreement that may be deemed convenient, to make repairs or improvements on
the mortgaged properties and to pay the same, and perform any other act which
the MORTGAGEE may deem convenient for the proper administration of the
mortgaged properties. The payment of any expenses advanced by the MORTGAGEE
in connection with the purpose indicated herein is also secured by this Mortgage.
Any amount received from the sale, disposal or administration abovementioned
maybe applied by assessments and other incidental expenses and obligations and
to the payment of original indebtedness including interest and penalties thereon.
The power herein granted shall not be revoked during the life of this Mortgage and
all acts which may be executed by the MORTGAGEE by virtue of said power are
hereby ratified.
The following are the elements of pactum commissorium:
(1) There should be a property mortgaged by way of security for the payment of the
principal obligation; and
(2) There should be a stipulation for automatic appropriation by the creditor of the
thing mortgaged in case of non-payment of the principal obligation within the
stipulated period. 39 Villar's purchase of the subject property did not violate the

prohibition on pactum commissorium. The power of attorney provision above did


not provide that the ownership over the subject property would automatically pass
to Villar upon Galas's failure to pay the loan on time. What it granted was the mere
appointment of Villar as attorney-in-fact, with authority to sell or otherwise dispose
of the subject property, and to apply the proceeds to the payment of the loan. 40
This provision is customary in mortgage contracts, and is in conformity with Article
2087 of the Civil Code, which reads:
Art. 2087 .It is also of the essence of these contracts 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.
Galas's decision to eventually sell the subject property to Villar for an additional
P1,500,000.00 was well within the scope of her rights as the owner of the subject
property. The subject property was transferred to Villar by virtue of another and
separate contract, which is the Deed of Sale. Garcia never alleged that the transfer
of the subject property to Villar was automatic upon Galas's failure to discharge her
debt, or that the sale was simulated to cover up such automatic transfer.
Propriety of Garcia's action for foreclosure of mortgage
The real nature of a mortgage is described in Article 2126 of the Civil Code, to wit:
Art. 2126 .The mortgage directly and immediately subjects the property upon which
it is imposed, whoever the possessor may be, to the fulllment of the obligation for
whose security it was constituted.
Simply put, a mortgage is a real right, which follows the property, even after
subsequent transfers by the mortgagor. "A registered mortgage lien is considered
inseparable from the property inasmuch as it is a right in rem." 41
The sale or transfer of the mortgaged property cannot affect or release the
mortgage; thus the purchaser or transferee is necessarily bound to acknowledge
and respect the encumbrance. 42 In fact, under Article 2129 of the Civil Code, the
mortgage on the property may still be foreclosed despite the transfer, viz.:
Art. 2129 .The creditor may claim from a third person in possession of the
mortgaged property, the payment of the part of the credit secured by the property
which said third person possesses, in terms and with the formalities which the law
establishes.
While we agree with Garcia that since the second mortgage, of which he is the
mortgagee, has not yet been discharged, we find that said mortgage subsists and is
still enforceable.
However, Villar, in buying the subject property with notice that it was mortgaged,
only undertook to pay such mortgage or allow the subject property to be sold upon

failure of the mortgage creditor to obtain payment from the principal debtor once
the debt matures.
Villar did not obligate herself to replace the debtor in the principal obligation, and
could not do so in law without the creditor's consent. 43 Article 1293 of the Civil
Code provides:
Art. 1293 .Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the
latter, but not without the consent of the creditor. Payment by the new debtor gives
him the rights mentioned in articles 1236 and 1237.
Therefore, the obligation to pay the mortgage indebtedness remains with the
original debtors Galas and Pingol. 44 The case of E.C. McCullough & Co. v. Veloso
and Serna 45 is square on this point:
The effects of a transfer of a mortgaged property to a third person are well
determined by the Civil Code. According to article 1879 46 of this Code, the creditor
may demand of the third person in possession of the property mortgaged payment
of such part of the debt, as is secured by the property in his possession, in the
manner and form established by the law. The Mortgage Law in force at the
promulgation of the Civil Code and referred to in the latter, provided, among other
things, that the debtor should not pay the debt upon its maturity after judicial or
notarial demand, for payment has been made by the creditor upon him. (Art. 135 of
the Mortgage Law of the Philippines of 1889.) According to this, the obligation of the
new possessor to pay the debt originated only from the right of the creditor to
demand payment of him, it being necessary that a demand for payment should
have previously been made upon the debtor and the latter should have failed to
pay. And even if these requirements were complied with, still the third possessor
might abandon the property mortgaged, and in that case it is considered to be in
the possession of the debtor. (Art. 136 of the same law.) This clearly shows that the
spirit of the Civil Code is to let the obligation of the debtor to pay the debt stand
although the property mortgaged to secure the payment of said debt may have
been transferred to a third person. While the Mortgage Law of 1893 eliminated
these provisions, it contained nothing indicating any change in the spirit of the law
in this respect. Article 129 of this law, which provides the substitution of the debtor
by the third person in possession of the property, for the purposes of the giving of
notice, does not show this change and has reference to a case where the action is
directed only against the property burdened with the mortgage. (Art. 168 of the
Regulation.) 47
This pronouncement was reiterated in Rodriguez v. Reyes 48 wherein this Court,
even before quoting the same above portion in E.C. McCullough & Co. v. Veloso and
Serna , held:
We find the stand of petitioners-appellants to be unmeritorious and untenable.

The maxim "caveat emptor" applies only to execution sales, and this was not one
such. The mere fact that the purchaser of an immovable has notice that the
acquired realty is encumbered with a mortgage does not render him liable for the
payment of the debt guaranteed by the mortgage, in the absence of stipulation or
condition that he is to assume payment of the mortgage debt. The reason is plain:
the mortgage is merely an encumbrance on the property, entitling the mortgagee to
have the property foreclosed, i.e., sold, in case the principal obligor does not pay
the mortgage debt, and apply the proceeds of the sale to the satisfaction of his
credit. Mortgage is merely an accessory undertaking for the convenience and
security of the mortgage creditor, and exists independently of the obligation to pay
the debt secured by it. The mortgagee, if he is so minded, can waive the mortgage
security and proceed to collect the principal debt by personal action against the
original mortgagor. 49 In view of the foregoing, Garcia has no cause of action
against Villar in the absence of evidence to show that the second mortgage
executed in favor of Garcia has been violated by his debtors, Galas and Pingol, i.e.,
specically that Garcia has made a demand on said debtors for the payment of the
obligation secured by the second mortgage and they have failed to pay.
8) Antichresis and Chattel Mortgage
Davao Sawmill Co., Inc. Vs Castillo
Facts:
Plaintiff operated a sawmill. The land upon which the business was conducted was
leased from another person. On the land, the sawmill company erected a building
which housed the machinery used by it. Some of the machines were mounted and
placed on foundations of cement. In the contract of lease, plaintiff agreed to turn
over free of charge all improvements and buildings erected by it on the premises
with the exception of machineries, which shall remain with the plain tiff. In an action
brought by the defendant herein, judgment was rendered against plaintiff. A writ of
execution was issued and the machineries placed on the sawmill were levied upon
as personalty by the sheriff.
Issue:
WON the machineries are immobilized and they belonged to the owner of the land.
Held:
The machinery is not immobilized, the Court explained that machinery which is
movable in its nature only becomes immobilized when placed in a plant by the
owner of the property or plant, but not when so placed by a tenant, usufructuary, or
any person having only a temporary right, unless such person acted as the agent of
the owner.

ACME vs CA
Facts:
Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic
Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of
private respondent Producers Bank of the Philippines. The mortgage stood by way of security for petitioner's
corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage agreement was to
this effect
(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. . . .
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. 1
In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained
from respondent bank additional financial accommodations totalling P2,700,000.00.

These borrowings

were on due date also fully paid.


On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million
pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial constraints,

Respondent bank thereupon applied for an extra judicial


foreclosure of the chattel mortgage, herein before cited, with the Sheriff of Caloocan City,
prompting petitioner corporation to forthwith file an action for injunction, with damages and
a prayer for a writ of preliminary injunction, before the Regional Trial Court of Caloocan City
(Civil Case No. C-12081). Ultimately, the court dismissed the complaint and ordered the
foreclosure of the chattel mortgage. It held petitioner corporation bound by the stipulations,
aforequoted, of the chattel mortgage.
the loan was not settled at maturity.

which, on 14 August 1991, affirmed, "in all


respects," the decision of the court a quo. The motion for reconsideration was denied on 24
January 1992.
Petitioner corporation appealed to the Court of Appeals

Issue:
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?
Held:
Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a
suretyship, the faithful performance of the obligation by the principal debt or is secured by
the personalcommitment 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 pledge, the

placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of the
corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of
a public instrument encumbering the real property covered thereby; and in antichresis, by a written
instrument granting to the creditor the right to receive the fruits of an immovable property with the
obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit
upon the essential condition that if the obligation becomes due and the debtor defaults, then the property
encumbered can be alienated for the payment of the obligation, 7
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so

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. 11 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.
long as these future debts are accurately described,

10

. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if
such an affidavit is not appended to the agreement, the chattel mortgage would still be valid between the

), the fact, however, that the statute has


provided that the parties to the contract must execute an oath that
parties (not against third persons acting in good faith

12

. . . (the) mortgage is made for the purpose of securing the obligation specified in the
conditions thereof, and for no other purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose of fraud. 13
makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely
contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage
contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of
the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void
or terminated.

DY vs CA
Facts:
The petitioner, Perfecto Dy and Wilfredo Dy are brothers. Sometime in 1979,
Wilfredo Dy purchased a truck and a farm tractor through financing extended by
Libra Finance and Investment Corporation (Libra). Both truck and tractor were
mortgaged to Libra as security for the loan.
The petitioner wanted to buy the tractor from his brother so on August 20, 1979, he
wrote a letter to Libra requesting that he be allowed to purchase from Wilfredo Dy
the said tractor and assume the mortgage debt of the latter.
In a letter dated August 27, 1979, Libra thru its manager, Cipriano Ares approved
the petitioner's request.

Thus, on September 4, 1979, Wilfredo Dy executed a deed of absolute sale in favor


of the petitioner over the tractor in question.
At this time, the subject tractor was in the possession of Libra Finance due to
WilfredoDy's failure to pay the amortizations.
Despite the offer of full payment by the petitioner to Libra for the tractor, the
immediate release could not be effected because Wilfredo Dy had obtained
financing not only for said tractor but also for a truck and Libra insisted on full
payment for both.
The petitioner was able to convince his sister, Carol Dy-Seno, to purchase the truck
so that full payment could be made for both. On November 22, 1979, a PNB check
was issued in the amount of P22,000.00 in favor of Libra, thus settling in full the
indebtedness of Wilfredo Dy with the financing firm. Payment having been effected
through an out-of-town check, Libra insisted that it be cleared first before Libra
could release the chattels in question.
Meanwhile, Civil Case No. R-16646 entitled "Gelac Trading, Inc. v. Wilfredo Dy", a
collection case to recover the sum of P12,269.80 was pending in another court in
Cebu.
On the strength of an alias writ of execution issued on December 27, 1979, the
provincial sheriff was able to seize and levy on the tractor which was in the
premises of Libra in Carmen, Cebu. The tractor was subsequently sold at public
auction where Gelac Trading was the alone bidder. Later, Gelac sold the tractor to
one of its stockholders, Antonio Gonzales.
It was only when the check was cleared on January 17, 1980 that the petitioner
learned about GELAC having already taken custody of the subject tractor.
Consequently, the petitioner filed an action to recover the subject tractor against
GELAC Trading with the Regional Trial Court of Cebu City.
On April 8,1988, the RTC rendered judgment in favor of the petitioner.
On appeal, the Court of Appeals reversed the decision of the RTC and dismissed the
complaint with costs against the petitioner. The Court of Appeals held that the
tractor in question still belonged to Wilfredo Dy when it was seized and levied by
the sheriff by virtue of the alias writ of execution issued in Civil Case No. R-16646.
Issues:
1) WON the ownership of the tractor had already passed to the petitioner whne
said tractor was levied on by the sheriff.
2) WON the sales of the tractor to petitioner was done in fraud of Wilfredo Dys
creditors.

Held:
The respondents claim that at the time of the execution of the deed of sale, no
constructive delivery was effected since the consummation of the sale depended
upon the clearance and encashment of the check which was issued in payment of
the subject tractor.
In the case of Servicewide Specialists Inc. v. Intermediate Appellate Court. (174
SCRA 80
[1989]), we stated that:
xxx xxx xxx
"The rule is settled that the chattel mortgagor continues to be the owner of the
property, and therefore, has the power to alienate the same; however, he is obliged
under pain of penal liability, to secure the written consent of the mortgagee.
Thus, the 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 therein.
"The absence of the written consent of the mortgagee to the sale of the mortgaged
property in favor of a third person, therefore, effects not the validity of the sale but
only the penal liability of the mortgagor under the Revised Penal Code and the
binding effect of such sale on the mortgagee under the Deed of Chattel Mortgage."
xxx xxx xxx
The mortgagor who gave the property as security under a chattel mortgage did not
part with the ownership over the same. He had the right to sell it although he was
under the obligation to secure the written consent of the mortgagee or he lays
himself open to criminal prosecution under the provision of Article 319 par. 2 of the
Revised Penal Code.
And even if no consent was obtained from the mortgagee, the validity of the sale
would still not be affected.
Thus, we see no reason why Wilfredo Dy, as the chattel mortgagor can not sell the
subject tractor. There is no dispute that the consent of Libra Finance was obtained in
the instant case. In a letter dated August 27, 1979, Libra allowed the petitioner to
purchase the tractor and assume the mortgage debt of his brother. The sale
between the brothers was therefore valid and binding as between them and to the
mortgagee, as well.
Article 1496 of the Civil Code states that the ownership of the thing sold is acquired
by the vendee from the moment it is delivered to him in any of the ways specified in
Articles 1497 to 1501 or in any other manner signing an agreement that the

possession is transferred from the vendor to the vendee. We agree with the
petitioner that Articles 1498 and 1499 are applicable in the case at bar.
Article 1498 states:
"Art. 1498. When the sale is made through a public instrument, the execution
thereof shall be equivalent to the delivery of the thing which is the object of the
contract, if from the deed the contrary does not appear or cannot clearly be
inferred."
xxx xxx xxx
Article 1499 provides:
"Article 1499. The delivery of movable property may likewise be made by the mere
consent or agreement of the contracting parties, if the thing sold cannot be
transferred to the possession of the vendee at the time of the sale, or if the latter
already had it in his possession for any other reason. (1463a)"
In the instant case, actual delivery of the subject tractor could not be made.
However, there was constructive delivery already upon the execution of the public
instrument pursuant to
Article 1498 and upon the consent or agreement of the parties when the thing sold
cannot be immediately transferred to the possession of the vendee. (Art. 1499)
The respondent court avers that the vendor must first have control and possession
of the thing before he could transfer ownership by constructive delivery. Here, it was
Libra Finance which was in possession of the subject tractor due to Wilfredo's failure
to pay the amortization as a preliminary step to foreclosure. As mortgagee, he has
the right of foreclosure upon default by the mortgagor in the performance of the
conditions mentioned in the contract of mortgage. The law implies that the
mortgagee is entitled to possess the mortgaged property because possession is
necessary in order to enable him to have the property sold.
While it is true that Wilfredo Dy was not in actual possession and control of the
subject tractor, his right of ownership was not divested from him upon his default.
Neither could it be said that Libra was the owner of the subject tractor because the
mortgagee can not become the owner of or convert and appropriate to himself the
property mortgaged.
(Article 2088, Civil Code) Said property continues to belong to the mortgagor. The
only remedy given to the mortgagee is to have said property sold at public auction
and the proceeds of the sale applied to the payment of the obligation secured by
the mortgagee.

(See Martinez v. PNB, 93 Phil. 765, 767 [1953]) There is no showing that Libra
Finance has already foreclosed the mortgage and that it was the new owner of the
subject tractor.
Undeniably, Libra gave its consent to the sale of the subject tractor to the petitioner.
It was aware of the transfer of rights to the petitioner.
Where a third person purchases the mortgaged property, he automatically steps
into the shoes of the original mortgagor. (See Industrial Finance Corp. v. Apostol,
177 SCRA 521[1989]). His right of ownership shall be subject to the mortgage of the
thing sold to him. In the case at bar, the petitioner was fully aware of the existing
mortgage of the subject tractor to Libra. In fact, when he was obtaining Libra's
consent to the sale, he volunteered to assume the remaining balance of the
mortgage debt of Wilfredo Dy which Libra undeniably agreed to.
The payment of the check was actually intended to extinguish the mortgage
obligation so that the tractor could be released to the petitioner. It was never
intended nor could it be considered as payment of the purchase price because the
relationship between Libra and the petitioner is not one of sale but still a mortgage.
The clearing or encashment of the check which produced the effect of payment
determined the full payment of the money obligation and the release of the chattel
mortgage. It was not determinative of the consummation of the sale. The
transaction between the brothers is distinct and apart from the transaction between
Libra and the petitioner. The contention, therefore, that the consummation of the
sale depended upon the encashment of the check is untenable.
The sale of the subject tractor was consummated upon the execution of the public
instrument on September 4, 1979. At this time constructive delivery was already
effected.
Hence, the subject tractor was no longer owned by Wilfredo Dy when it was levied
upon by the sheriff in December, 1979. Well settled is the rule that only properties
unquestionably owned by the judgment debtor and which are not exempt by law
from execution should be levied upon or sought to be levied upon. For the power of
the court in the execution of its judgment extends only over properties belonging to
the judgment debtor. (Consolidated
Bank and Trust Corp. v. Court of Appeals, G.R. No. 78771, January 23, 1991).
The respondents further claim that at that time the sheriff levied on the tractor and
took legal custody thereof no one ever protested or filed a third party claim.
It is inconsequential whether a third party claim has been filed or not by the
petitioner during the time the sheriff levied on the subject tractor. A person other
than the judgment debtor who claims ownership or right over levied properties is
not precluded, however, from taking other legal remedies to prosecute his claim.

(Consolidated Bank and Trust Corp. v. Court of Appeals, supra) This is precisely what
the petitioner did when he filed the action for replevin with the RTC.
Anent the second and third issues raised, the Court accords great respect and
weight to the findings of fact of the trial court. There is no sufficient evidence to
show that the sale of the tractor was in fraud of Wilfredo and creditors. While it is
true that Wilfredo and Perfecto are brothers, this fact alone does not give rise to the
presumption that the sale was fraudulent. Relationship is not a badge of fraud
(Goquiolay v. Sycip, 9 SCRA 663
[1963]). Moreover, fraud can not be presumed; it must be established by clear
convincing evidence.
We agree with the trial court's findings that the actuations of GELAC Trading were
indeed violative of the provisions on human relations. As found by the trial court,
GELAC knew very well of the transfer of the property to the petitioners on July 14,
1980 when it received summons based on the complaint for replevin filed with the
RTC by the petitioner.
Notwithstanding said summons, it continued to sell the subject tractor to one of its
stockholders on August 2, 1980.