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Bachrach Moter Co. v. Esteva


No. 40233, 14 February 1934

FACTS:

Esteva bought trucks from Teal Motor Co., Inc through promissory notes, secured by a chattel
mortgage. Teal Motor Co., Inc endorsed the notes to Bachrach Motor Co., Inc. Esteva failed to
make payments of certain notes. Teal Motor Co., Inc initiated foreclosure proceedings.
Subsequently, Bachrach Motor Co., Inc began to secure payments from Esteva and Teal.

ISSUE:

Whether the foreclosure of the mortgage by Teal Motor Co., Inc is lawful?

HELD: YES

RATIO:

In the law of chattel mortgages, the debt is the principal thing, while the mortgage is but an
incident to the debt. Thus, when it is separated from the principal, as in this case where the
notes were endorsed without the mortgage, it has no determinate value. Therefore, the
separation of the notes from the mortgage and both the foreclosure of the mortgage and a suit
of the notes cant be countenanced.
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Sps. Ong v. Roban Lending Corporation


GR No. 172592, 9 July 2008

FACTS:

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.

On February 12, 2001, petitioners and respondent executed an Amendment to Amended Real
Estate Mortgage consolidating their loans inclusive of charges thereon which totaled
P5,916,117.50. On even date, the parties executed a Dacion in Payment Agreement wherein
petitioners assigned the properties covered by TCT No. 297840 to respondent in settlement of
their total obligation, and a Memorandum of Agreement.

In April 2002 petitioners filed a complaint 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.

ISSUE:

Whether the Memorandum of Agreement and Dacion in Payment was pactum


commissorium

HELD: YES

RATIO:

The elements of pactum commissorium, which enables the mortgagee to acquire ownership of
the mortgaged property without the need of any foreclosure proceedings are:
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(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.

In the case at bar, the Memorandum of Agreement and the Dation 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 Dation 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.

Bustamante v. Sps. Rosel


GR No. 126800, 29 November 1999

FACTS:

In 1987, Rosel entered into a loan agreement with Bustamante for P100,000 and placed a
70sqm lot as collateral. In the agreement the lender has the option to buy the collateral for
P200,000 if the borrowers failed to pay. When the loan was about to mature respondents
proposed to buy the lot but petitioner refused and requested for extension and offered to another
lot. Respondents refused to extend and to accept the lot. When petitioner tendered payment
respondents refused to accept insisting on petitioners signing a deed of absolute sale of the
collateral.

Respondents filed with the RTC a complaint for specific performance with consignation against
petitioner and also sent a demand letter asking petitioners to sell. Petitions on the other hand
filed in the RTC a petition for consignation and deposited with the City Treasurer P153,000.
When petitioner refused to sell respondents consigned P47,500 with the trial court.

The RTC denied the prayer for execution of the Deed of Sale and ordered petitioners to pay the
loan. The CA reversed the RTC decision and ordered petitioners to accept the P47,500 and to
execute the Deed of Sale.

ISSUE:
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Whether the stipulation giving respondents right to purchase the collateral was valid and
enforceable.

HELD: NO

RATIO:

The stipulation is within the concept of pactum commissorium which is prohibited by law. The
intent to appropriate the collateral is evident, for the debtor is obliged to dispose of it at the pre-
agreed consideration amounting to practically the same amount as the loan. The creditor
acquires the collateral in the event of non-payment of the loan.

PNB v. Mallorca

FACTS:

In 1950, Ruperta Lavilles mortgaged her own 48,965 sq. m. parcel of land situated in Passi,
Iloilo to the Philippine National Bank as security for a loan of P1,800.00. This mortgage was duly
recorded.

In 1958, while this lot was still mortgaged, Lavilles sold to Mallorca 20,000 sq. m. of the land,
without knowledge and consent from PNB. Mallorca moved the court to have the sale duly
annotated on the title, as well as to require PNB to surrender the owners copy of the title to the
Register of Deeds. The court directed PNB to do so, and warned that the mortgage in favor of
PNB is duly registered in the Register of Deeds and that to whom the land is sold, the buyer will
assume responsibility of the mortgage. The Register cancelled the surrendered title, issued a
new one, making two co-owner copies one each for Lavilles and for Mallorca. Here, PNBs
mortgage lien was annotated.
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Lavilles failed to pay her debt. PNB then, foreclosed the mortgage extrajudicially. PNB became
the rightful owner through auction. The certificate of sale was registered with the Register of
Deeds.Mallorca sued PNB to enforce her right of redemption, which the court granted that she
may exercise such right within the limits specified by law. However, she failed to exercise this
right. Final deed of sale named to PNB, was presented to the Register of Deeds for registation.
However, the latter refused to register without Mallorcas co-owners copy. By letter, she was
required by the Register to surrender said copy. She did not comply. Case was filed for her to be
required to surrender the same, and was granted by the court. She was ordered to surrender the
co-owners copy. But she positioned that her undivided interest in the 20,000 sq. m. of the
mortgaged lot remained unaffected by the foreclosure and subsequent sale to PNB as she was
not a party to the real estate mortgage, and that she neither secured or contracted a loan with
the said bank.

ISSUE: Whether Mallorcas stand is valid

HELD: NO

RATIO:

Her stand clahes with the well-entrenched precepts of law a 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. Sale or transfer cannot
affect or release the mortgage. A purchases is bound to acknowledge and respect the
encumbrance to which is subjected the purchased thing and which is at the disposal of the
creditor to recover the amount of his credits.

A recorded real estate is a right in rem. The personality of the owner is disregarded and
the mortgage subsists notwithstanding the changes of ownership. So it is, that a mortgage lien
is inseparable from the property mortgaged. Mortgage, until discharge, follows the property.
Also, a real estate mortgage is indivisible. Each and every parcel of land under mortgage
answers for the totality of the debt.

PNB v. Amores
GR No. L-54551, 9 November 1987

FACTS:

Maximo Kalaw Investment Corporation (Kalaw) is the registered owner of lot located in Oriental
Mindoro with the area of 3,132,122 square meters more or less. Kalaw obtained a loan from
PNB in the amount of P150,000 where the aforesaid lot was mortgaged. 45.186 hectares of the
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said lot were subjected to Operations Land Transfer in favour of tenants-beneficiaries in


accordance with PD No. 27 and Agrarian Reform Code or RA 3844, as amended by PD No.
251. In 1977, LBP paid PNB for the account of Kalaw P14,588.50 in cash and LBP Bonds with a
total face value of P130,000. However, PNB applied the LBP Bonds on a one-to-one basis or
only a total of P90,400, on a discounted basis. Kalaw contested PNB on its manner of
application of LBP Bonds to the payment of his obligation but was denied thereby seeking
judicial relief. The Court of First Instance of Manila granted the declaratory relief prayed for by
Kalaw where it ordered PNB to accept the LBP Bonds on its face value, the entire amount of
P130,000 without any discount.

ISSUE:

Whether the PNB may affirm that lands not subject to PD 27 are also not subject to Section 80
of RA 3844, as amended by PD 251.

HELD: NO

RATIO:

The Supreme Court (SC) held that PNBs interpretation not only unduly stretches the scope of
PD 251 but is also antithetical to the objectives of the land reform program. Explicit is the law
that a mortgage obligation is one and indivisible. Every portion of the property mortgaged is
answerable for the whole obligation as soon as the latter falls due. The mortgagor cannot opt
much less compel the mortgagee, to apply any payment made by him on a specific portion of
the mortgaged property to effect release. Neither may the mortgagee apply payments to it on,
and consequently release a portion of the mortgaged property and effect foreclosure on the rest.
It is clear that PNB cannot be allowed to de precisely what it had done in the case at bar. PNBs
method evidently contravenes the principle of indivisibility of mortgage for it applied the LBP
Bonds as payment on a one-to-one basis pro tanto of the mortgage debt secured by the land
acquired by LBP. There is nothing in the said law which can be construed to mean that when the
area actually land reformed is just a portion of the property encumbrance, only that portion of
the loan value corresponding to the area actually taken will be paid with LBP Bonds at their face
value. PNB is obliged to accept LBP Bonds at their par or face value as payment by Kalaw, and
may not discount said payment but must apply the full face value of the bonds on the
outstanding balance.
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Dizon v. Suntay
GR No. L-30817, 29 September 1972

FACTS:

A diamond ring was turned over to a certain Clarita R. Sison, close friend of Suntays cousin, for
sale on commission, along with other pieces of jewelry of respondent Suntay. It was then
pledged, under pawnshop receipt serial -B no. 65606 dated 15 June 1962, to Dizon who owns
and operates a pawnshop. Since what was done was violative of the terms of the agency, there
was an attempt on Suntays part to recover possession thereof from Dizon, who refused. Due to
Dizons refusal, Suntay filed an action for recovery. Suntay asked for the provisional remedy of
replevin by the delivery of the ring. Lower court rendered decision sustaining the right to
possession of Suntay by issuing a writ of replevin. CA affirmed lower courts judgment. Dizon
elevated the matter to Supreme Court.

ISSUE:

Whether Suntay has right to recover possession of the ring from pawnshop where third
person had pledge it without authority.

HELD: YES

RATIO:

Supreme Court (SC) held that the owner of a diamond ring may recover the possession of the
same from a pawnshop where another person had pledged it without authority to do so.

Where the owner delivered the diamond ring to another solely for sale on commission but the
latter instead pawned the same without authority to do so, the owner is not estopped from
pursuing an action against the pawnshop for the recovery of the possession of the said ring.
CREDIT TRANSACTIONS CASE DIGESTS

Fort Bonifacio Dev. v. Yllas Lending Co.


GR No.158997, 6 October 2008

FACTS:

FBDC executed a lease contract in favor of Tirreno, Inc. (Tirreno). Two provisions in the lease
contract are pertinent: Section 20, which is about the consequences in case of default of the
lessee, and Section 22, which is about the lien on the properties of the lease. Tirreno began to
be in default. FBDC and Tirreno entered into a settlement agreement on 8 Aug. 2000. Tirreno
still failed to settle his obligations. FBDC then entered and occupied the leased premises. FBDC
also appropriated the equipment and properties left by Tirreno pursuant to Sec. 22 of their
Contract of Lease as partial payment.

On 4 March 2002, Yllas Lending Corporation and its President asked for the seizure of items of
Tirreno. In their complaint, respondents alleged that they lent a total of P1.5M to Tirreno and two
others (they executed a Deed of Chattel Mortgage in favor of respondents as security for the
loan). On the same day, FBDC gave an affidavit of title and third party claim. The sheriff
proceeded with the seizure of certain items from FBDCs premises. The trial court stated that
the case raises the questions of who has a better right over the properties of Tirreno and
whether FBDC has a right to intervene in respondents complaint for foreclosure of chattel
mortgage. RTC declared that Sec. 22 of the lease contract between FBDC and Tirreno void.
Respondents, as well as the trial court, contend that Section 22 constitutes a pactum
commissorium, a void stipulation in a pledge contract. FBDC, on the other hand, states that
Section 22 is merely a dacion en pago.

ISSUE:

Whether pledge exists in this case

HELD: NO

RATIO:
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Section 22, as worded, gives FBDC a means to collect payment from Tirreno in case of
termination of the lease contract or the expiration of the lease period and there are unpaid
rentals, charges, or damages. The existence of a contract of pledge, however, does not arise
just because FBDC has means of collecting past due rent from Tirreno other than direct
payment. The trial court concluded that Section 22 constitutes a pledge because of the
presence of the first three requisites of a pledge: Tirrenos properties in the leased premises
secure Tirrenos lease payments; Tirreno is the absolute owner of the said properties; and the
persons representing Tirreno have legal authority to constitute the pledge. However, the fourth
requisite, that the thing pledged is placed in the possession of the creditor, is absent.
There is non-compliance with the fourth requisite even if Tirrenos personal properties are found
in FBDCs real property. Tirrenos personal properties are in FBDCs real property because of
the Contract of Lease, which gives Tirreno possession of the personal properties. Since Section
22 is not a contract of pledge, there is no pactum commissorium.

Integrated Realty v. PNB


GR No.60907, 28 June 1989

FACTS:

Raul L. Santos made two time deposits with defendant OBM in the amount of P500, 000 and
P200, 000 at separate dates. IRC, thru its president Raul L. Santos, applied for a loan and/or
credit line in the amount of P700,000.00 with plaintiff bank. To secure the said loan, defendant
Raul L. Santos executed on August 11, 1967 a Deed of Assignment of the two time deposits in
favor of plaintiff. The defendant OBM did not pay plaintiff PNB. Plaintiff demanded payment from
defendants IRC and Raul L. Santos and from defendant OBM. Defendants IRC and Raul L.
Santos replied that the obligation (loan) of defendant IRC was deemed paid with the irrevocable
assignment of the time deposit certificates. PNB filed a complaint to collect from IRC and
Santos the loan of P700, 000.00 with interest.

ISSUE:

Whether the liability of IRC and Santos with PNB should be deemed to have been paid by
virtue of the deed of assignment.

HELD: NO

RATIO:
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The Court held that for all intents and purposes, the deed of assignment in this case is
actually a pledge since the intention of the petitioners was only to secure the payment of money.
The deed of assignment has satisfied the requirements of a contract of pledge (1) that it be
constituted to secure the fulfillment of a principal obligation; (2) that the pledgor be the absolute
owner of the thing pledged; (3) that the persons constituting the pledge have the free disposal of
their property, and in the absence thereof, that they be legally authorized for the purpose. The
further requirement that the thing pledged be placed in the possession of the creditor, or of a
third person by common agreement the deed of assignment in favor of PNB. It must also be
emphasized that Santos, as assignor, made an express undertaking that he would remain liable
for any outstanding balance of his obligation should PNB be unable to actually receive or collect
the assigned sums was complied with by the execution of resulting from any agreements, orders
or decisions of them court or for any other cause whatsoever. The term for any cause
whatsoever is broad enough to include the situation involved in the present case.

Unionbank v. Juniat
GR No.171569, 1 August 2011

FACTS:

Petitioner Union Bank is a universal banking corporation organized and existing under Philippine
Laws. Respondents Winwood and Wingyan are domestic corporations engaged in the business
of apparel manufacturing, which are owned and operated by respondent Juniat.

On September 3, 1992, petitioner filed with RTC a complaint for the issuance of ex-parte writs of
preliminary attachment and replevin against respondents, and Nonwoven, the person in
possession of the mortgaged motorized sewing machines and equipment. Petitioner alleged that
Juniat, acting for and in behalf of Winwood and Wingyan, executed a promissory note date April
11, 1992 and a chattle mortgage date March 27, 2992 over several motorized sewing machines
and other allied equipment and other equipment to secure their obligation arising from expert
bills transactions to petitioner in the amount of P1,131,134.35; that as additional security for the
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obligation, Juniat executed a Continuing Surety Agreement dated April 11, 1992 in favor of the
petitioner; that the loan remains unpaid; and that the mortgaged motorized sewing machines are
insufficient to answer for the obligation.

Nonwoven contends that the unnotarized chattel mortgage executed in favor of the petitioner
has no binding effect on Nonwoven and that it has a better title over the motorized sewing
machines and equipment because there were assigned to it by Juniat pursuant to their
Agreement date May 9, 1992.

On May 18, 1993, petitioner sold the attached properties, before the RTC could act on it, for the
amount of P1,350,000.00.

RTC rendered decision in favor of petitioner and the Agreement dated May 9, 1992 in favor of
Nonwoven have no obligatory effect on third person because those documents were not
notarized. However, since the chattel mortgage in favor of the petitioner was executed earlier,
petitioner has a better right over the motorized sewing machines and equipment.

CA reversed the RTC ruling and ruled that the contract of pledge entered into between Juniat
and Nonwoven is valid and binding, and that the motorized sewing machines and equipment
were ceded to Nonwoven by Juniat by virtue of dacion en pago. Declaring Nonwoven entitled to
the proceeds of the sale of the attached properties.

ISSUE:

Whether the Agreement dated May 9, 1992 binds the petitioner.

HELD: NO

RATIO:
A perusal of the said Agreement clearly shows that the sewing machines, snap machines and
boilers were pledged to Nonwoven by Juniat to guarantee his obligation. However, under Article
2096 of the Civil Code. [a] pledge shall not take effect against third persons if a description of
the thing pledged and the date of the pledge does not appear in public instrument. Hence, the
pledge executed by Juniat in favor of Nonwoven cannot bind petitioner.

No evidence was presented by Nonwoven to show that the attached properties were
subsequently sold to it by way of dacion en pago. Also, there is nothing in the Agreement to
indicate that the sewing machines, snap machines and boilers were ceded to Nonwoven as
payment for the Wingyans and Winwoods obligation.
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There can be no transfer of ownership if the delivery of the property to the creditor is by
way of security. In case of doubt, whether a transaction is a pledge or dacion en pago, the
presumption is that it is a pledge as this involves a lesser transmission of rights and interests.
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Estate of George Litton v. Mendoza


No. L-49120, 30 June 1988

FACTS:

The Bernal spouses are engaged in the manufacture of embroidery, garments and cotton
materials. Sometime in September 1963, C.B.M. Products, with Mendoza as president, offered
to sell to the Bernals textile cotton materials, for this purpose, Mendoza introduced the Bernals
to Alfonso Tan. The Bernals purchased on credit from Tan some cotton materials worth
P80,796.62 whose payment was guaranteed by Mendoza. Tan delivered the cotton materials to
the Bernals and in view of the arrangement, Mendoza, on November 1963, received from the
Bernals a check worth P80,796.62 dated 20 February 1964 with the understanding that he said
check will remain with Mendoza until after the cotton materials are manufactured into garments
and will be sold by Mendoza for the Bernals. The check later on matured without having been
encashed and Mendoza demanded that another undated check of the same amount be issued.
On the other hand, Mendoza issued 2 checks in favor of Tan covering the whole amount and
informed the Bernals of the same and told them they were indebted to him and asked them to
sign an instrument whereby Mendoza assigned the said amount to Insular Products Inc. Tan
had the 2 checks discounted in a bank however such were returned stamped "stop payment"
which appears to have been ordered by Mendoza due to the failure of the Bernals to deposit
sufficient funds.

Tan brought an action against Mendoza for the collection of sum of money by way of guaranty
(pledge) with a commission while the Bernals brought an action for not knowing whom to pay.
While both actions were pending resolution, Tan assigned in favor of George Litton, Sr. his
litigatous credit in the civil case against Mendoza, duly submitted to the court, with notice to the
parties.

ISSUE:

Whether subsequent pledge is valid.

HELD: NO

RATIO:

The deed of assignment done by Tan on his litigatous credit shows that it fulfills the requisites of
a pledge hence is valid however the alienation of a litigatous credit under Article 1634 should be
read in consonance with Article 2097 of the NCC where "with the consent of the pledgee, the
thing pledged may be alienated by the pledgor or owner, subject to the pledge. The ownership of
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the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to
the alienation, but the latter shall continue in possession."

Although the pledgee or the assignee, Litton, Sr. did not ipso facto become the creditor of
private respondent Mendoza, the pledge being valid, the right assigned by Tan in favor of
Litton,Sr. can only be alienated by Tan with due notice to and consent of Litton,Sr. or his duly
authorized representative. To allow the assignor to dispose of or alienate the security without
notice and consent of the assignee will render nugatory the very purpose of a pledge or an
assignment of credit.
Estate of George Litton v. Mendoza
No. L-49120, 30 June 1988

FACTS:

The Bernal spouses are engaged in the manufacture of embroidery, garments and cotton
materials. Sometime in September 1963, C.B.M. Products, with Mendoza as president, offered
to sell to the Bernals textile cotton materials, for this purpose, Mendoza introduced the Bernals
to Alfonso Tan. The Bernals purchased on credit from Tan some cotton materials worth
P80,796.62 whose payment was guaranteed by Mendoza. Tan delivered the cotton materials to
the Bernals and in view of the arrangement, Mendoza, on November 1963, received from the
Bernals a check worth P80,796.62 dated 20 February 1964 with the understanding that he said
check will remain with Mendoza until after the cotton materials are manufactured into garments
and will be sold by Mendoza for the Bernals. The check later on matured without having been
encashed and Mendoza demanded that another undated check of the same amount be issued.
On the other hand, Mendoza issued 2 checks in favor of Tan covering the whole amount and
informed the Bernals of the same and told them they were indebted to him and asked them to
sign an instrument whereby Mendoza assigned the said amount to Insular Products Inc. Tan
had the 2 checks discounted in a bank however such were returned stamped "stop payment"
which appears to have been ordered by Mendoza due to the failure of the Bernals to deposit
sufficient funds.

Tan brought an action against Mendoza for the collection of sum of money by way of guaranty
(pledge) with a commission while the Bernals brought an action for not knowing whom to pay.
While both actions were pending resolution, Tan assigned in favor of George Litton, Sr. his
litigatous credit in the civil case against Mendoza, duly submitted to the court, with notice to the
parties.

ISSUE:

Whether subsequent pledge is valid.


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HELD: NO

RATIO:

The deed of assignment done by Tan on his litigatous credit shows that it fulfills the requisites of
a pledge hence is valid however the alienation of a litigatous credit under Article 1634 should be
read in consonance with Article 2097 of the NCC where "with the consent of the pledgee, the
thing pledged may be alienated by the pledgor or owner, subject to the pledge. The ownership of
the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to
the alienation, but the latter shall continue in possession."

Although the pledgee or the assignee, Litton, Sr. did not ipso facto become the creditor of
private respondent Mendoza, the pledge being valid, the right assigned by Tan in favor of
Litton,Sr. can only be alienated by Tan with due notice to and consent of Litton,Sr. or his duly
authorized representative. To allow the assignor to dispose of or alienate the security without
notice and consent of the assignee will render nugatory the very purpose of a pledge or an
assignment of credit.
Tay v. CA
GR No. 126891, 05 August 1998

FACTS:

Respondent Sy Guiok secured a loan from petitioner, Lim Tay, in the amount of Php 40k. As
security, Guiok executed a Contract of Pledge wherein he pledged his 300 shares of stock in
respondent company, Go Fay & Co. Inc.

The contract provides that in case the respondent fails to pay the amount, the petitioner is
authorized to foreclose the pledge upon the shares of stock to be sold at a private or public sale
with or without notice to the respondent.

Respondents failed to pay their respective loans causing the petitioner to file a petition for
mandamus before the SEC in order to compel the corporate secretary of Go Fay & Co., Inc to
register the stock transfers and issue new certificates in favor of the petitioner.

SEC: Dismissed the action. Mandamus can only be issued upon a clear showing of ownership
over the assailed shares of stock which is within the jurisdiction of regular courts and not with
SEC.
CA: Denied

ISSUE:
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Whether conducting a foreclosure or sale of shares through a private or public auction is


indispensable in order to pass ownership from the pledgor to the pledgee in accordance
with Article 2103 and Article 2112 of the Civil Code.

HELD: YES

RATIO:

Article 2103 provides that unless the things is expropriated, the debtor continues to be the
owner thereof. In addition, Article 2112 provides that if a credit has not been satisfied in due
time, the creditor may proceed to the sale of the thing pledged. If at the first auction the thing is
not sold, a second one shall be held, and if there is no sale at the second auction, it is only then
that the creditor may appropriate the thing pledged.

In this case, the petitioner failed to show that he has attempted to foreclose or sell the shares
through a public or private auction as required in their stipulation and under the said provisions
of the code. In such case, the respondent as the pledgor, remains the owner of the shares
during the pendency of the pledge and prior its foreclosure and sale.

Gidwani v. Domestic Insurance


GR No. L-31142, 24 June 1983

FACTS:

Manufacturers Bank and Trust Company granted Plastic Era Manufacturing Co. a discounting
line of P20,000. Plastic Era issued a surety bond issued by the Domestic Insurance Company of
the Philippines to secure payment of any loans. Plastic Era, Bhagwandas Gidwani and Kishu
Gidwani executed an indemnity agreement, binding themselves solidarily to pay Domestic
Insurance for all damages and losses because of the surety bond. Plastic Era executed a
promissory note in favor of Manufacturers. Domestic Insurance required additional security, so
Sati Gidwani, wife of Bhagwandas, pledged her shares in Marinduque Iron Mines and several
other corporations, to secure Plastic Era's fulfillment to indemnify Domestic Insurance.

Plastic Era failed to pay the promissory note. Manufacturers Bank filed a claim against Domestic
Insurance, which paid by virtue of the surety bond. Domestic Insurance filed a case against
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Plastic Era, Kishu and Bhagwandas for recovery. CFI rendered judgment based on a
compromise agreement where defendants would pay, but anything in excess of P20,000 would
be due one year later.

Domestic Insurance requested the sale at public auction of the Marinduque shares pledged by
Sati. Shares were sold to Domestic Insurance, the highest bidder. New certificates of stock were
issued in Domestic Insurance's name. Sps. Gidwani later wrote to Marinduque, stating that they
have assigned their shares to Samuel Sharuff. Marinduque refused, saying that the shares were
pledged to Domestic Insurance, the pledge was foreclosed, and the same acquired them at the
auction sale. Sps. Gidwani and Samuel Sharuff sued Domestic Insurance for extinguishment of
Sati Gidwani's shares, nullification of auction sale to Domestic Insurance, and issuance of stock
certificates over said shares to Sharuff.

ISSUE:

Whether Domestic Insurances action, based on counter-guaranty, released its lien on the
pledged shares.

HELD: NO

RATIO:

Had Domestic Insurance sued only Plastic Era under its subrogation to the rights of
Manufacturers Bank to collect, it would be barred from enforcing its claim against the shares
pledged as security. However, as Domestic Insurance filed a claim against the counter-
guarantors Plastic Era, Kishu, and Bhagwandas, it could enforce such against both securities.
Foreclosure of pledged shares needed no action, while the counter-guaranty suit needed such.
The pledge, being additional security for indemnification for damages and losses Domestic
Insurance suffered under its surety bond for Plastic Era, did not release the obligation of the
indemnitors.