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G.R. No.

143304 July 8, 2004 Immediately, petitioner ordered respondents to render an


accounting of its various Christmas giveaways 3 they received.
SPECIAL STEEL PRODUCTS, INC., petitioner, These were intended for distribution to petitioners customers.
vs.
LUTGARDO VILLAREAL AND FREDERICK In protest, respondents demanded from petitioner payment of
SO, respondents. their separation benefits, commissions, vacation and sick leave
benefits, and proportionate 13th month pay. But petitioner
refused and instead, withheld their 13thmonth pay and other
benefits.

On April 16, 1997, respondents filed with the Labor Arbiter a


DECISION complaint for payment of their monetary benefits against
petitioner and its president, Augusto Pardo, docketed as NLRC
NCR Case No. 04-02820-97.

In due course, the Labor Arbiter rendered a Decision dated


SANDOVAL-GUTIERREZ, J.: February 18, 1998, the dispositive portion of which reads:

May an employer withhold its employees wages and benefits "WHEREFORE, decision is hereby rendered ordering
as lien to protect its interest as a surety in the latters car loan the respondents, Special Steel Products, Inc. and Mr.
and for expenses incurred in a training abroad? This is the Augusto Pardo to pay, jointly and severally,
basic issue for our resolution in the instant case. complainants Frederick G. So and Lutgardo C.
Villareal the amounts of Seventy One Thousand Two
Hundred Seventy Nine Pesos and Fifty Eight
At bar is a petition for review on certiorari under Rule 45 of the
Centavos (P71,279.58) and One Hundred Sixty Four
1997 Rules of Civil Procedure, as amended, assailing the
Thousand Eight Hundred Seventy Three Pesos
Decision1 dated October 29, 1999 and Resolution 2 dated May
(P164,873.00), respectively, representing their
8, 2000 of the Court of Appeals in CA-G.R. SP No. 50957,
commissions, retirement benefit (for Villareal),
entitled "Special Steel Products, Inc. vs. National Labor
proportionate 13th month, earned vacation and sick
Relations Commission, Lutgardo Villareal and Frederick So."
leave benefits, and attorneys fees.

The factual antecedents as borne by the records are:


xxx

Special Steel Products, Inc., petitioner, is a domestic


SO ORDERED."
corporation engaged in the principal business of importation,
sale, and marketing of BOHLER steel products. Lutgardo C.
Villareal and Frederick G. So, respondents, worked for On appeal, the National Labor Relations Commission (NLRC),
petitioner as assistant sales manager and salesman, in a Decision dated June 29, 1998, affirmed with modification
respectively. the Arbiters Decision in the sense that Pardo, petitioners
president, was exempted from any liability.
Sometime in May 1993, respondent Villareal obtained a car
loan from the Bank of Commerce, with petitioner as surety, as On September 11, 1998, petitioner filed a motion for
shown by a "continuing suretyship agreement" and "promissory reconsideration but was denied.
note" wherein they jointly and severally agreed to pay the
bank P786,611.60 in 72 monthly installments. On January 15, Hence, petitioner filed with the Court of Appeals a petition for
1997, respondent Villareal resigned and thereafter joined Hi- certiorari.
Grade Industrial and Technical Products, Inc. as executive
vice-president.
On October 29, 1999, the Court of Appeals rendered a
Decision dismissing the petition and affirming the assailed
Sometime in August 1994, petitioner "sponsored" respondent NLRC Decision, thus:
Frederick So to attend a training course in Kapfenberg, Austria
conducted by BOHLER, petitioners principal company. This
"At the outset, the Court notes that despite its
training was a reward for respondent Sos outstanding sales
Seventh Assignment of Error, petitioner does not
performance. When respondent returned nine months
question the NLRCs decision affirming the labor
thereafter, petitioner directed him to sign a memorandum
arbiters award to private respondents of
providing that BOHLER requires trainees from Kapfenberg to
commissions, proportionate 13th month pay, earned
continue working with petitioner for a period of three (3) years
vacation and sick leave benefits and retirement
after the training. Otherwise, each trainee shall refund to
benefit (for Villareal). It merely asserts that it was
BOHLER $6,000.00 (US dollars) by way of set-off or
withholding private respondents claims by reason of
compensation. On January 16, 1997 or 2 years and 4 months
their pending obligations.
after attending the training, respondent resigned from
petitioner.
Petitioner justifies its withholding of Villareals
monetary benefits as a lien for the protection of its
right as surety in the car loan. It asserts that it would

1
release Villareals monetary benefits if he would no actual accounting has ever been required before,
cause its substitution as surety by Hi-Grade. It further as in the case of then Sales Manager Benito Sayo
asserts that since Villareals debt to the Bank is now whose resignation took effect on December 31, 1996
due and demandable, it may, pursuant to Art. 2071 of but was not required to account for the Christmas
the New Civil Code, demand a security that shall giveaways. To make So account now for said items
protect him from any proceeding by the creditor and would amount to discrimination. In any event, the
from the danger of insolvency of the debtor. matter of accounting of the giveaways may be
ventilated in the proper forum.
Petitioners posture is not sanctioned by law. It may
only protect its right as surety by instituting an action Finally, petitioner may not offset its claims against
x x x to demand a security (Kuenzle and Streiff vs. private respondents monetary benefits. With
Tan Sunco, 16 Phil 670). It may not take the law into respect to its being the surety of Villareal, two
its own hands. Indeed, it is unlawful for any person, requisites of compensation are lacking, to wit: that
directly or indirectly, to withhold any amount from the each one of the obligors be bound principally, and
wages of a worker or induce him to give up any part that he be at the same time a principal creditor of the
of his wages by force, stealth, intimidation, threat or other and that (the two debts) be liquidated and
by any other means whatsoever without the workers demandable (Art. 1279 (1) and (4), New Civil Code).
consent (Art. 116, Labor Code). And in respect to its claim for liquidated damages
against So, there can be no compensation because
Moreover, petitioner has made no payment on the car his creditor is not petitioner but BOHLER (Art. 1278,
loan. Consequently, Villareal is not indebted to New Civil Code).
petitioner. On the other hand, petitioner owes Villareal
for the decreed monetary benefits. The withholding of Consequently, the NLRC committed no grave abuse
Villareals monetary benefits had effectively prevented of discretion.
him from settling his arrearages with the Bank.
WHEREFORE, the petition is DISMISSED while the
With regard to Sos money claims. We find no cogent assailed decision of the NLRC is AFFIRMED.
reason to disturb the findings of the NLRC. x x x.
SO ORDERED."
Sos all-expense paid trip to Austria was a bonus for
his outstanding sales performance. Before his sojourn On December 15, 1999, petitioner filed a motion for
to Austria, petitioner issued him a memorandum (or reconsideration but was denied by the Appellate Court in a
memo) stating that Bohler is now imposing that Resolution dated May 8, 2000.
trainees coming to Kapfenberg to stay with the local
representative for at least three (3) years after
training, otherwise, a lump sum compensation of not Hence, this petition for review on certiorari. Petitioner contends
less than US $6,000.00 will have to be refunded to that as a guarantor, it could legally withhold respondent
them by the trainee. So did not affix his signature on Villareals monetary benefits as a preliminary remedy pursuant
the memo. However, nine (9) months after coming to Article 2071 of the Civil Code, as amended. 4 As to
back from his training, he was made to sign the respondent So, petitioner, citing Article 113 of the Labor Code,
memo. In his letter to Augusto Pardo dated July 18, as amended,5 in relation to Article 1706 of the Civil Code, as
1997, So stated that his signature was needed only amended,6 maintains that it could withhold his monetary
as a formality and that he was left with no choice but benefits being authorized by the memorandum he signed.
to accommodate Augusto Pardos request. The labor
arbiter gave credence to such explanation. Article 116 of the Labor Code, as amended, provides:

Assuming arguendo that the memo is binding on So, "ART. 116. Withholding of wages and kickbacks
his more than two years post-training stay with prohibited. It shall be unlawful for any person,
petitioner is a substantial compliance with the directly or indirectly, to withhold any amount from
condition. Besides, So tendered his resignation the wages (and benefits) of a worker or induce him
effective February 16, 1997. Instead of asking So to to give up any part of his wages by force, stealth,
defer his resignation until the expiration of the three- intimidation, threat or by any other means
year period, petitioner advanced its effectivity by one whatsoever without the workers consent."
month - as of January 16, 1997. This means that
petitioner no longer needed Sos services, particularly The above provision is clear and needs no further elucidation.
the skill and expertise acquired by him from the Indeed, petitioner has no legal authority to withhold
training. More importantly, the party entitled to claim respondents 13th month pay and other benefits. What an
the US $6,000.00 liquidated damages is BOHLER employee has worked for, his employer must pay.7Thus, an
and not petitioner. Consequently, petitioner has no employer cannot simply refuse to pay the wages or benefits of
right to insist on payment of the liquidated damages, its employee because he has either defaulted in paying a loan
much less to withhold Sos monetary benefits in order guaranteed by his employer; or violated their memorandum of
to exact payment thereof. agreement; or failed to render an accounting of his employers
property.8
With regard to the Christmas giveaways. We agree
with the findings of the labor arbiter (affirmed by the Nonetheless, petitioner, relying on Article 2071 (earlier cited),
NLRC) that there is no existing memorandum contends that the right to demand security and obtain release
requiring the accounting of such giveaways and that from the guaranty it executed in favor of respondent Villareal

2
may be exercised even without initiating a separate and In fine, we rule that petitioner has no legal right to withhold
distinct action. respondents 13th month pay and other benefits to recompense
for whatever amount it paid as security for respondent
There is no guaranty involved herein and, therefore, the Villareals car loan; and for the expenses incurred by
provision of Article 2071 does not apply. respondent So in his training abroad.

A guaranty is distinguished from a surety in that a guarantor is WHEREFORE, the petition is DENIED. The Decision dated
the insurer of the solvency of the debtor and thus binds himself October 29, 1999 and Resolution dated May 8, 2000 of the
to pay if the principal is unable to pay, while a surety is the Court of Appeals in CA-G.R. SP No. 50957 are hereby
insurer of the debt, and he obligates himself to pay if the AFFIRMED.
principal does not pay.9
SO ORDERED.
Based on the above distinction, it appears that the contract
executed by petitioner and respondent Villareal (in favor of the
Bank of Commerce) is a contract of surety. In fact, it is
denominated as a "continuing suretyship agreement." Hence, G.R. No. 147561 June 22, 2006
petitioner could not just unilaterally withhold respondents
wages or benefits as a preliminary remedy under Article 2071. STRONGHOLD INSURANCE COMPANY, INC., Petitioner,
It must file an action against respondent Villareal. Thus, the vs.
Appellate Court aptly ruled that petitioner "may only protect its REPUBLIC-ASAHI GLASS CORPORATION, Respondent.
right as surety by instituting an action to demand a security."

DECISION
As to respondent So, petitioner maintains that there can be a
set-off or legal compensation between them. Consequently, it
can withhold his 13th month pay and other benefits. PANGANIBAN, CJ:

For legal compensation to take place, the requirements set Asurety companys liability under the performance bond it
forth in Articles 1278 and 1279 of the Civil Code, quoted below, issues is solidary. The death of the principal obligor does not,
must be present. as a rule, extinguish the obligation and the solidary nature of
that liability.
"ARTICLE 1278. Compensation shall take place when
two persons, in their own right, are creditors and The Case
debtors of each other.
Before us is a Petition for Review1 under Rule 45 of the Rules
"ARTICLE 1279. In order that compensation may be of Court, seeking to reverse the March 13, 2001 Decision2 of
proper, it is necessary: the Court of Appeals (CA) in CA-GR CV No. 41630. The
assailed Decision disposed as follows:
(1) That each one of the obligors be bound principally,
and that he be at the same time a principal creditor of
the other; "WHEREFORE, the Order dated January 28, 1993 issued by
the lower court is REVERSED and SET ASIDE. Let the records
of the instant case be REMANDED to the lower court for the
(2) That both debts consist in a sum of money, or if reception of evidence of all parties."3
the things due are consumable, they be of the same
kind, and also of the same quality if the latter has
been stated; The Facts

(3) That the two debts be due; The facts of the case are narrated by the CA in this wise:

(4) That they be liquidated and demandable; "On May 24, 1989, [respondent] Republic-Asahi Glass
Corporation (Republic-Asahi) entered into a contract with x x x
(5) That over neither of them there be any retention or Jose D. Santos, Jr., the proprietor of JDS Construction (JDS),
controversy, commenced by third persons and for the construction of roadways and a drainage system in
communicated in due time to the debtor." Republic-Asahis compound in Barrio Pinagbuhatan, Pasig
City, where [respondent] was to pay x x x JDS five million three
In the present case, set-off or legal compensation cannot take hundred thousand pesos (P5,300,000.00) inclusive of value
place between petitioner and respondent So because they are added tax for said construction, which was supposed to be
not mutually creditor and debtor of each other. completed within a period of two hundred forty (240) days
beginning May 8, 1989. In order to guarantee the faithful and
A careful reading of the Memorandum10 dated August 22, 1994 satisfactory performance of its undertakings x x x JDS, shall
reveals that the "lump sum compensation of not less than US post a performance bond of seven hundred ninety five
$6,000.00 will have to be refunded" by each trainee to thousand pesos (P795,000.00). x x x JDS executed, jointly and
BOHLER, not to petitioner. severally with [petitioner] Stronghold Insurance Co., Inc. (SICI)
Performance Bond No. SICI-25849/g(13)9769.

3
"On May 23, 1989, [respondent] paid to x x x JDS seven "On July 10, 1991, [petitioner] SICI filed its answer, alleging
hundred ninety five thousand pesos (P795,000.00) by way of that the [respondents] money claims against [petitioner and
downpayment. JDS] have been extinguished by the death of Jose D. Santos,
Jr. Even if this were not the case, [petitioner] SICI had been
"Two progress billings dated August 14, 1989 and September released from its liability under the performance bond because
15, 1989, for the total amount of two hundred seventy four there was no liquidation, with the active participation and/or
thousand six hundred twenty one pesos and one centavo involvement, pursuant to procedural due process, of herein
(P274,621.01) were submitted by x x x JDS to [respondent], surety and contractor Jose D. Santos, Jr., hence, there was no
which the latter paid. According to [respondent], these two ascertainment of the corresponding liabilities of Santos and
progress billings accounted for only 7.301% of the work SICI under the performance bond. At this point in time, said
supposed to be undertaken by x x x JDS under the terms of liquidation was impossible because of the death of Santos,
the contract. who as such can no longer participate in any liquidation. The
unilateral liquidation on the party (sic) of [respondent] of the
work accomplishments did not bind SICI for being violative of
"Several times prior to November of 1989, [respondents]
procedural due process. The claim of [respondent] for the
engineers called the attention of x x x JDS to the alleged
forfeiture of the performance bond in the amount
alarmingly slow pace of the construction, which resulted in the
of P795,000.00 had no factual and legal basis, as payment of
fear that the construction will not be finished within the
said bond was conditioned on the payment of damages which
stipulated 240-day period. However, said reminders went
[respondent] may sustain in the event x x x JDS failed to
unheeded by x x x JDS.
complete the contracted works. [Respondent] can no longer
prove its claim for damages in view of the death of Santos.
"On November 24, 1989, dissatisfied with the progress of the SICI was not informed by [respondent] of the death of Santos.
work undertaken by x x x JDS, [respondent] Republic-Asahi SICI was not informed by [respondent] of the unilateral
extrajudicially rescinded the contract pursuant to Article XIII of rescission of its contract with JDS, thus SICI was deprived of
said contract, and wrote a letter to x x x JDS informing the its right to protect its interests as surety under the performance
latter of such rescission. Such rescission, according to Article bond, and therefore it was released from all liability. SICI was
XV of the contract shall not be construed as a waiver of likewise denied due process when it was not notified of
[respondents] right to recover damages from x x x JDS and plaintiff-appellants process of determining and fixing the
the latters sureties. amount to be spent in the completion of the unfinished project.
The procedure contained in Article XV of the contract is against
"[Respondent] alleged that, as a result of x x x JDSs failure to public policy in that it denies SICI the right to procedural due
comply with the provisions of the contract, which resulted in the process. Finally, SICI alleged that [respondent] deviated from
said contracts rescission, it had to hire another contractor to the terms and conditions of the contract without the written
finish the project, for which it incurred an additional expense of consent of SICI, thus the latter was released from all liability.
three million two hundred fifty six thousand, eight hundred SICI also prayed for the award of P59,750.00 as attorneys
seventy four pesos (P3,256,874.00). fees, and P5,000.00 as litigation expenses.

"On January 6, 1990, [respondent] sent a letter to [petitioner] "On August 16, 1991, the lower court issued an order
SICI filing its claim under the bond for not less dismissing the complaint of [respondent] against x x x JDS and
than P795,000.00. On March 22, 1991, [respondent] again SICI, on the ground that the claim against JDS did not survive
sent another letter reiterating its demand for payment under the death of its sole proprietor, Jose D. Santos, Jr. The
the aforementioned bond. Both letters allegedly went dispositive portion of the [O]rder reads as follows:
unheeded.
ACCORDINGLY, the complaint against the defendants Jose D.
"[Respondent] then filed [a] complaint against x x x JDS and Santos, Jr., doing business under trade and style, JDS
SICI. It sought from x x x JDS payment of P3,256,874.00 Construction and Stronghold Insurance Company, Inc. is
representing the additional expenses incurred by [respondent] ordered DISMISSED.
for the completion of the project using another contractor, and
from x x x JDS and SICI, jointly and severally, payment SO ORDERED.
of P750,000.00 as damages in accordance with the
performance bond; exemplary damages in the amount
"On September 4, 1991, [respondent] filed a Motion for
of P100,000.00 and attorneys fees in the amount of at
Reconsideration seeking reconsideration of the lower courts
least P100,000.00.
August 16, 1991 order dismissing its complaint. [Petitioner]
SICI field its Comment and/or Opposition to the Motion for
"According to the Sheriffs Return dated June 14, 1991, Reconsideration. On October 15, 1991, the lower court issued
submitted to the lower court by Deputy Sheriff Rene R. an Order, the dispositive portion of which reads as follows:
Salvador, summons were duly served on defendant-appellee
SICI. However, x x x Jose D. Santos, Jr. died the previous year
WHEREFORE, premises considered, the Motion for
(1990), and x x x JDS Construction was no longer at its
Reconsideration is hereby given due course. The Order dated
address at 2nd Floor, Room 208-A, San Buena Bldg. Cor.
16 August 1991 for the dismissal of the case against
Pioneer St., Pasig, Metro Manila, and its whereabouts were
Stronghold Insurance Company, Inc., is reconsidered and
unknown.
hereby reinstated (sic). However, the case against defendant
Jose D. Santos, Jr. (deceased) remains undisturbed.

4
Motion for Preliminary hearing and Manifestation with Motion Effect of Death on the Suretys Liability
filed by [Stronghold] Insurance Company Inc., are set for
hearing on November 7, 1991 at 2:00 oclock in the afternoon. Petitioner contends that the death of Santos, the bond
principal, extinguished his liability under the surety bond.
SO ORDERED. Consequently, it says, it is automatically released from any
liability under the bond.
"On June 4, 1992, [petitioner] SICI filed its Memorandum for
Bondsman/Defendant SICI (Re: Effect of Death of defendant As a general rule, the death of either the creditor or the debtor
Jose D. Santos, Jr.) reiterating its prayer for the dismissal of does not extinguish the obligation.8 Obligations are
[respondents] complaint. transmissible to the heirs, except when the transmission is
prevented by the law, the stipulations of the parties, or the
"On January 28, 1993, the lower court issued the assailed nature of the obligation.9 Only obligations that are personal10 or
Order reconsidering its Order dated October 15, 1991, and are identified with the persons themselves are extinguished by
ordered the case, insofar as SICI is concerned, dismissed. death.11
[Respondent] filed its motion for reconsideration which was
opposed by [petitioner] SICI. On April 16, 1993, the lower court Section 5 of Rule 8612 of the Rules of Court expressly allows
denied [respondents] motion for reconsideration. x x x."4 the prosecution of money claims arising from a contract
against the estate of a deceased debtor. Evidently, those
Ruling of the Court of Appeals claims are not actually extinguished.13 What is extinguished is
only the obligees action or suit filed before the court, which is
not then acting as a probate court.14
The CA ruled that SICIs obligation under the surety agreement
was not extinguished by the death of Jose D. Santos, Jr.
Consequently, Republic-Asahi could still go after SICI for the In the present case, whatever monetary liabilities or obligations
bond. Santos had under his contracts with respondent were not
intransmissible by their nature, by stipulation, or by provision of
law. Hence, his death did not result in the extinguishment of
The appellate court also found that the lower court had erred in
those obligations or liabilities, which merely passed on to his
pronouncing that the performance of the Contract in question
estate.15 Death is not a defense that he or his estate can set up
had become impossible by respondents act of rescission. The
to wipe out the obligations under the performance bond.
Contract was rescinded because of the dissatisfaction of
Consequently, petitioner as surety cannot use his death to
respondent with the slow pace of work and pursuant to Article
escape its monetary obligation under its performance bond.
XIII of its Contract with JDS.

The liability of petitioner is contractual in nature, because it


The CA ruled that "[p]erformance of the [C]ontract was
executed a performance bond worded as follows:
impossible, not because of [respondents] fault, but because of
the fault of JDS Construction and Jose D. Santos, Jr. for failure
on their part to make satisfactory progress on the project, "KNOW ALL MEN BY THESE PRESENTS:
which amounted to non-performance of the same. x x x
[P]ursuant to the [S]urety [C]ontract, SICI is liable for the non- "That we, JDS CONSTRUCTION of 208-A San Buena
performance of said [C]ontract on the part of JDS Building, contractor, of Shaw Blvd., Pasig, MM Philippines, as
Construction."5 principal and the STRONGHOLD INSURANCE COMPANY,
INC. a corporation duly organized and existing under and by
Hence, this Petition.6 virtue of the laws of the Philippines with head office at Makati,
as Surety, are held and firmly bound unto the REPUBLIC
ASAHI GLASS CORPORATION and to any individual, firm,
Issue
partnership, corporation or association supplying the principal
with labor or materials in the penal sum of SEVEN HUNDRED
Petitioner states the issue for the Courts consideration in the NINETY FIVE THOUSAND (P795,000.00), Philippine
following manner: Currency, for the payment of which sum, well and truly to be
made, we bind ourselves, our heirs, executors, administrators,
"Death is a defense of Santos heirs which Stronghold could successors and assigns, jointly and severally, firmly by these
also adopt as its defense against obligees claim."7 presents.

More precisely, the issue is whether petitioners liability under "The CONDITIONS OF THIS OBLIGATION are as follows;
the performance bond was automatically extinguished by the
death of Santos, the principal. "WHEREAS the above bounden principal on the ___ day of
__________, 19__ entered into a contract with the REPUBLIC
The Courts Ruling ASAHI GLASS CORPORATION represented by
_________________, to fully and faithfully. Comply with the
The Petition has no merit. site preparation works road and drainage system of Philippine
Float Plant at Pinagbuhatan, Pasig, Metro Manila.
Sole Issue:

5
"WHEREAS, the liability of the Surety Company under this Elucidating on these provisions, the Court in Garcia v. Court of
bond shall in no case exceed the sum of PESOS SEVEN Appeals18 stated thus:
HUNDRED NINETY FIVE THOUSAND (P795,000.00)
Philippine Currency, inclusive of interest, attorneys fee, and "x x x. The suretys obligation is not an original and direct one
other damages, and shall not be liable for any advances of the for the performance of his own act, but merely accessory or
obligee to the principal. collateral to the obligation contracted by the principal.
Nevertheless, although the contract of a surety is in essence
"WHEREAS, said contract requires the said principal to give a secondary only to a valid principal obligation, his liability to the
good and sufficient bond in the above-stated sum to secure the creditor or promisee of the principal is said to be direct, primary
full and faithfull performance on its part of said contract, and and absolute; in other words, he is directly and equally bound
the satisfaction of obligations for materials used and labor with the principal. x x x."19
employed upon the work;
Under the law and jurisprudence, respondent may sue,
"NOW THEREFORE, if the principal shall perform well and separately or together, the principal debtor and the petitioner
truly and fulfill all the undertakings, covenants, terms, herein, in view of the solidary nature of their liability. The death
conditions, and agreements of said contract during the original of the principal debtor will not work to convert, decrease or
term of said contract and any extension thereof that may be nullify the substantive right of the solidary creditor. Evidently,
granted by the obligee, with notice to the surety and during the despite the death of the principal debtor, respondent may still
life of any guaranty required under the contract, and shall also sue petitioner alone, in accordance with the solidary nature of
perform well and truly and fulfill all the undertakings, the latters liability under the performance bond.
covenants, terms, conditions, and agreements of any and all
duly authorized modifications of said contract that may WHEREFORE, the Petition is DENIED and the Decision of the
hereinafter be made, without notice to the surety except when Court of Appeals AFFIRMED. Costs against petitioner.
such modifications increase the contract price; and such
principal contractor or his or its sub-contractors shall promptly
SO ORDERED.
make payment to any individual, firm, partnership, corporation
or association supplying the principal of its sub-contractors with
labor and materials in the prosecution of the work provided for
in the said contract, then, this obligation shall be null and void;
G.R. No. 154183 August 7, 2003
otherwise it shall remain in full force and effect. Any extension
of the period of time which may be granted by the obligee to
the contractor shall be considered as given, and any SPOUSES VICKY TAN TOH and LUIS TOH, petitioners,
modifications of said contract shall be considered as vs.
authorized, with the express consent of the Surety. SOLID BANK CORPORATION, FIRST BUSINESS PAPER
CORPORATION, KENNETH NG LI and MA. VICTORIA NG
LI, respondents.
"The right of any individual, firm, partnership, corporation or
association supplying the contractor with labor or materials for
the prosecution of the work hereinbefore stated, to institute BELLOSILLO, J.:
action on the penal bond, pursuant to the provision of Act No.
3688, is hereby acknowledge and confirmed."16 RESPONDENT SOLID BANK CORPORATION AGREED TO
EXTEND an "omnibus line" credit facility worth P10 million in
As a surety, petitioner is solidarily liable with Santos in favor of respondent First Business Paper Corporation (FBPC).
accordance with the Civil Code, which provides as follows: The terms and conditions of the agreement as well as the
checklist of documents necessary to open the credit line were
stipulated in a "letter-advise" of the Bank dated 16 May 1993
"Art. 2047. By guaranty a person, called the guarantor, binds
addressed to FBPC and to its President, respondent Kenneth
himself to the creditor to fulfill the obligation of the principal
Ng Li.1 The "letter-advise"2 was effective upon "compliance with
debtor in case the latter should fail to do so.
the documentary requirements."3

"If a person binds himself solidarily with the principal debtor,


The documents essential for the credit facility and submitted
the provisions of Section 4,17 Chapter 3, Title I of this Book
for this purpose were the (a) Board Resolution or excerpts of
shall be observed. In such case the contract is called a
the Board of Directors Meeting, duly ratified by a Notary Public,
suretyship."
authorizing the loan and security arrangement as well as
designating the officers to negotiate and sign for FBPC
xxxxxxxxx specifically stating authority to mortgage, pledge and/or assign
the properties of the corporation; (b) agreement to purchase
"Art. 1216. The creditor may proceed against any one of the Domestic Bills; and, (c) Continuing Guaranty for any and all
solidary debtors or some or all of them simultaneously. The amounts signed by petitioner-spouses Luis Toh and Vicky Tan
demand made against one of them shall not be an obstacle to Toh, and respondent-spouses Kenneth and Ma. Victoria Ng
those which may subsequently be directed against the others, Li.4 The spouses Luis Toh and Vicky Tan Toh were then
so long as the debt has not been fully collected." Chairman of the Board and Vice-President, respectively, of
FBPC, while respondent-spouses Kenneth Ng Li and Ma.
Victoria Ng Li were President and General Manager,
respectively, of the same corporation.5

6
It is not disputed that the credit facility as well as its terms and On 17 January 1994 respondent Bank filed a complaint for
conditions was not cancelled or terminated, and that there was sum of money with ex parte application for a writ of preliminary
no prior notice of such fact as required in the "letter-advise," if attachment against FBPC, spouses Kenneth Ng Li and Ma.
any was done. Victoria Ng Li, and spouses Luis Toh and Vicky Tan Toh,
docketed as Civil Case No. 64047 of RTC-Br. 161, Pasig
On 10 May 1993, more than thirty (30) days from date of the City.14 Alias summonses were served upon FBPC and spouses
"letter-advise," petitioner-spouses Luis Toh and Vicky Tan Toh Luis Toh and Vicky Tan Toh but not upon Kenneth Ng Li and
and respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li Ma. Victoria Ng Li who had apparently absconded.15
signed the required Continuing Guaranty, which was embodied
in a public document prepared solely by respondent Meanwhile, with the implementation of the writ of preliminary
Bank.6 The terms of the instrument defined the contract arising attachment resulting in the impounding of purported properties
therefrom as a surety agreement and provided for the solidary of FBPC, the trial court was deluged with third-party claims
liability of the signatories thereto for and in consideration of contesting the propriety of the attachment.16In the end, the
"loans or advances" and "credit in any other manner to, or at Bank relinquished possession of all the attached properties to
the request or for the account" of FBPC. the third-party claimants except for two (2) insignificant items
as it allegedly could barely cope with the yearly premiums on
The Continuing Guaranty set forth no maximum limit on the the attachment bonds.17
indebtedness that respondent FBPC may incur and for which
the sureties may be liable, stating that the credit facility "covers Petitioner-spouses Luis Toh and Vicky Tan Toh filed a joint
any and all existing indebtedness of, and such other loans and answer to the complaint where they admitted being part of
credit facilities which may hereafter be granted to FIRST FBPC from its incorporation on 29 August 1991, which was
BUSINESS PAPER CORPORATION." The surety also then known as "MNL Paper, Inc.," until its corporate name was
contained a de facto acceleration clause if "default be made in changed to "First Business Paper Corporation." 18 They also
the payment of any of the instruments, indebtedness, or other acknowledged that on 6 March 1992 Luis Toh was designated
obligation" guaranteed by petitioners and respondents. So as as one of the authorized corporate signatories for transactions
to strengthen this security, the Continuing Guaranty waived in relation to FBPC's checking account with respondent
rights of the sureties against delay or absence of notice or Bank.19 Meanwhile, for failing to file an answer, respondent
demand on the part of respondent Bank, and gave future FBPC was declared in default.20
consent to the Bank's action to "extend or change the time
payment, and/or the manner, place or terms of payment," Petitioner-spouses however could not be certain whether to
including renewal, of the credit facility or any part thereof in deny or admit the due execution and authenticity of the
such manner and upon such terms as the Bank may deem Continuing Guaranty.21 They could only allege that they were
proper without notice to or further assent from the sureties. made to sign papers in blank and the Continuing Guaranty
could have been one of them.
The effectivity of the Continuing Guaranty was not contingent
upon any event or cause other than the written revocation Still, as petitioners asserted, it was impossible and absurd for
thereof with notice to the Bank that may be executed by the them to have freely and consciously executed the surety on 10
sureties. May 1993, the date appearing on its face 22 since beginning
March of that year they had already divested their shares in
On 16 June 1993 respondent FBPC started to avail of the FBPC and assigned them in favor of respondent Kenneth Ng Li
credit facility and procure letters of credit. 7 On 17 November although the deeds of assignment were notarized only on 14
1993 FBPC opened thirteen (13) letters of credit and obtained June 1993.23 Petitioners also contended that through FBPC
loans totaling P15,227,510.00.8 As the letters of credit were Board Resolution dated 12 May 1993 petitioner Luis Toh was
secured, FBPC through its officers Kenneth Ng Li, Ma. Victoria removed as an authorized signatory for FBPC and replaced by
Ng Li and Redentor Padilla as signatories executed a series of respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li and
trust receipts over the goods allegedly purchased from the Redentor Padilla for all the transactions of FBPC with
proceeds of the loans.9 respondent Bank.24 They even resigned from their respective
positions in FBPC as reflected in the 12 June 1993 Secretary's
On 13 January 1994 respondent Bank received information Certificate submitted to the Securities and Exchange
that respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li Commission25 as petitioner Luis Toh was succeeded as
had fraudulently departed from their conjugal home.10 On 14 Chairman by respondent Ma. Victoria Ng Li, while one Mylene
January 1994 the Bank served a demand letter upon FBPC C. Padilla took the place of petitioner Vicky Tan Toh as Vice-
and petitioner Luis Toh invoking the acceleration clause 11 in the President.26
trust receipts of FBPC and claimed payment for
P10,539,758.68 as unpaid overdue accounts on the letters of Finally, petitioners averred that sometime in June 1993 they
credit plus interests and penalties within twenty-four (24) hours obtained from respondent Kenneth Ng Li their exclusion from
from receipt thereof.12 The Bank also invoked the Continuing the several surety agreements they had entered into with
Guaranty executed by petitioner-spouses Luis Toh and Vicky different banks, i.e., Hongkong and Shanghai Bank, China
Tan Toh who were the only parties known to be within national Banking Corporation, Far East Bank and Trust Company, and
jurisdiction to answer as sureties for the credit facility of herein respondent Bank.27As a matter of record, these other
FBPC.13 banks executed written surety agreements that showed
respondent Kenneth Ng Li as the only surety of FBPC's
indebtedness.28

7
On 16 May 1996 the trial court promulgated its Decision in Civil response of the appellate court to this challenge was, first, the
Case No. 64047 finding respondent FBPC liable to pay "letter-advise" itself authorized the issuance of domestic letters
respondent Solid Bank Corporation the principal of of credit, and second, the several waivers extended by
P10,539,758.68 plus twelve percent (12%) interest per petitioners in the Continuing Guaranty, which included
annum from finality of the Decision until fully paid, but changing the time and manner of payment of the
absolving petitioner-spouses Luis Toh and Vicky Tan Toh of indebtedness, justified the action of respondent Bank not to
any liability to respondent Bank.29 The court a quo found that charge marginal deposits.42
petitioners "voluntarily affixed their signature[s]" on the
Continuing Guaranty and were thus "at some given point in Petitioner-spouses moved for reconsideration of the Decision,
time willing to be liable under those forms," 30although it held and after respondent Bank's comment, filed a
that petitioners were not bound by the surety contract since the lengthy Reply with Motion for Oral Argument.43 On 2 July 2002
letters of credit it was supposed to secure were opened long reconsideration of the Decision was denied on the ground that
after petitioners had ceased to be part of FBPC.31 no new matter was raised to warrant the reversal or
modification thereof.44 Hence, this Petition for Review.
The trial court described the Continuing Guaranty as effective
only while petitioner-spouses were stockholders and officers of Petitioner-spouses Luis Toh and Vicky Tan Toh argue that the
FBPC since respondent Bank compelled petitioners to Court of Appeals denied them due process when it did not
underwrite FBPC's indebtedness as sureties without the grant their motion for reconsideration and without "bother[ing]
requisite investigation of their personal solvency and capability to consider [their] Reply with Motion for Oral Argument." They
to undertake such risk.32 The lower court also believed that the maintain that the Continuing Guaranty is not legally valid and
Bank knew of petitioners' divestment of their shares in FBPC binding against them for having been executed long after they
and their subsequent resignation as officers thereof as these had withdrawn from FBPC. Lastly, they claim that the surety
facts were obvious from the numerous public documents that agreement has been extinguished by the material alterations
detailed the changes and substitutions in the list of authorized thereof and of the "letter-advise" which were allegedly brought
signatories for transactions between FBPC and the Bank, about by (a) the provision of an acceleration clause in the trust
including the many trust receipts being signed by persons receipts; (b) the flight of their co-sureties, respondent-spouses
other than petitioners,33 as well as the designation of new Kenneth Ng Li and Ma. Victoria Ng Li; (c) the grant of credit
FBPC officers which came to the notice of the Bank's Vice- facility despite the non-payment of marginal deposits in an
President Jose Chan Jr. and other officers.34 amount beyond the credit limit of P10 million pesos; (d) the
inordinate delay of the Bank in demanding the payment of the
On 26 September 1996 the RTC-Br. 161 of Pasig City denied indebtedness; (e) the presence of ghost deliveries and fictitious
reconsideration of its Decision.35 purchases using the Bank's letters of credit and trust receipts;
(f) the extension of the due dates of the letters of credit without
On 9 October 1996 respondent Bank appealed the Decision to the required 25% partial payment per extension; (g) the
the Court of Appeals, docketed as CA-G.R. CV No. approval of another letter of credit, L/C 93-0042, even after
55957.36 Petitioner-spouses did not move for reconsideration respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had
nor appeal the finding of the trial court that they voluntarily defaulted on their previous obligations; and, (h) the
executed the Continuing Guaranty. unmistakable pattern of fraud.

The appellate court modified the Decision of the trial court and Respondent Solid Bank maintains on the other hand that the
held that by signing the Continuing Guaranty, petitioner- appellate court is presumed to have passed upon all points
spouses became solidarily liable with FBPC to pay respondent raised by petitioners' Reply with Motion for Oral Argument as
Bank the amount of P10,539,758.68 as principal with twelve this pleading formed part of the records of the appellate court.
percent (12%) interest per annum from finality of the judgment It also debunks the claim of petitioners that they were
until completely paid.37 The Court of Appeals ratiocinated that inexperienced and ignorant parties who were taken advantage
the provisions of the surety agreement did not "indicate that of in the Continuing Guaranty since petitioners are astute
Spouses Luis and Vicky Toh x x x signed the instrument in their businessmen who are very familiar with the "ins" and "outs" of
capacities as Chairman of the Board and Vice-President, banking practice. The Bank further argues that the notarization
respectively, of FBPC only." 38 Hence, the court a quo deduced, of the Continuing Guaranty discredits the uncorroborated
"[a]bsent any such indication, it was error for the trial court to assertions against the authenticity and due execution thereof,
have presumed that the appellees indeed signed the same not and that the Decision of the trial court in the civil case finding
in their personal capacities."39 The appellate court also ruled the surety agreement to be valid and binding is now res
that as petitioners failed to execute any written revocation of judicata for failure of petitioners to appeal therefrom. As a final
the Continuing Guaranty with notice to respondent Bank, the point, the Bank refers to the various waivers made by
instrument remained in full force and effect when the letters of petitioner-spouses in the Continuing Guaranty to justify the
credit were availed of by respondent FBPC.40 extension of the due dates of the letters of credit.

Finally, the Court of Appeals rejected petitioners' argument that To begin with, we find no merit in petitioners' claim that the
there were "material alterations" in the provisions of the "letter- Court of Appeals deprived them of their right to due process
advise," i.e., that only domestic letters of credit were opened when the court a quo did not address specifically and explicitly
when the credit facility was for importation of papers and other their Reply with Motion for Oral Argument. While
materials, and that marginal deposits were not paid, contrary to the Resolution of the appellate court of 2 July 2002 made no
the requirements stated in the "letter-advise."41 The simple mention thereof in disposing of their arguments on
reconsideration, it is presumed that "all matters within an issue

8
raised in a case were laid before the court and passed upon contractual rights, such as, when it harnessed a provision in
it."45 In the absence of evidence to the contrary, we must rule the trust receipts executed by respondent FBPC to declare its
that the court a quo discharged its task properly. Moreover, a entire indebtedness as due and demandable and thereafter to
reading of the assailed Resolution clearly makes reference to a exact payment thereof from petitioners as sureties.49 In the
"careful review of the records," which undeniably includes same manner, we cannot disregard the provisions of the
the Reply with Motion for Oral Argument, hence there is no "letter-advise" in sizing up the panoply of commercial
reason for petitioners to asseverate otherwise. obligations between the parties herein.

This Court holds that the Continuing Guaranty is a valid and Insofar as petitioners stipulate in the Continuing Guaranty that
binding contract of petitioner-spouses as it is a public respondent Bank "may at any time, or from time to time, in [its]
document that enjoys the presumption of authenticity and due discretion x x x extend or change the time payment," this
execution. Although petitioners as appellees may raise issues provision even if understood as a waiver is confined per se to
that have not been assigned as errors by respondent Bank as the grant of an extension and does not surrender the
party-appellant, i.e., unenforceability of the surety contract, we prerequisites therefor as mandated in the "letter-advise." In
are bound by the consistent finding of the courts a quo that other words, the authority of the Bank to defer collection
petitioner-spouses Luis Toh and Vicky Tan Toh "voluntarily contemplates only authorized extensions, that is, those that
affixed their signature[s]" on the surety agreement and were meet the terms of the "letter-advise."
thus "at some given point in time willing to be liable under
those forms."46 In the absence of clear, convincing and more Certainly, while the Bank may extend the due date at its
than preponderant evidence to the contrary, our ruling cannot discretion pursuant to the Continuing Guaranty, it should
be otherwise. nonetheless comply with the requirements that domestic letters
of credit be supported by fifteen percent (15%) marginal
Similarly, there is no basis for petitioners to limit their deposit extendible three (3) times for a period of thirty (30)
responsibility thereon so long as they were corporate officers days for each extension, subject to twenty-five percent (25%)
and stockholders of FBPC. Nothing in the Continuing Guaranty partial payment per extension. This reading of the Continuing
restricts their contractual undertaking to such condition or Guaranty is consistent with Philippine National Bank v. Court of
eventuality. In fact the obligations assumed by them therein Appeals50 that any doubt on the terms and conditions of the
subsist "upon the undersigned, the heirs, executors, surety agreement should be resolved in favor of the surety.
administrators, successors and assigns of the undersigned,
and shall inure to the benefit of, and be enforceable by you, Furthermore, the assurance of the sureties in the Continuing
your successors, transferees and assigns," and that their Guaranty that "[n]o act or omission of any kind on [the Bank's]
commitment "shall remain in full force and effect until written part in the premises shall in any event affect or impair this
notice shall have been received by [the Bank] that it has been guaranty"51 must also be read "strictissimi juris" for the reason
revoked by the undersigned." Verily, if petitioners intended not that petitioners are only accommodation sureties, i.e., they
to be charged as sureties after their withdrawal from FBPC, received nothing out of the security contract they
they could have simply terminated the agreement by serving signed.52 Thus said, the acts or omissions of the Bank
the required notice of revocation upon the Bank as expressly conceded by petitioners as not affecting nor impairing the
allowed therein.47 In Garcia v. Court of Appeals[48] we ruled surety contract refer only to those occurring "in the premises,"
or those that have been the subject of the waiver in the
Regarding the petitioner's claim that he is liable only Continuing Guaranty, and stretch to no other. Stated otherwise,
as a corporate officer of WMC, the surety agreement an extension of the period for enforcing the indebtedness does
shows that he signed the same not in representation not by itself bring about the discharge of the sureties unless
of WMC or as its president but in his personal the extra time is not permitted within the terms of the waiver,
capacity. He is therefore personally bound. There is i.e., where there is no payment or there is deficient settlement
no law that prohibits a corporate officer from binding of the marginal deposit and the twenty-five percent (25%)
himself personally to answer for a corporate debt. consideration, in which case the illicit extension releases the
While the limited liability doctrine is intended to sureties. Under Art. 2055 of the Civil Code, the liability of a
protect the stockholder by immunizing him from surety is measured by the terms of his contract, and while he is
personal liability for the corporate debts, he may liable to the full extent thereof, his accountability is strictly
nevertheless divest himself of this protection by limited to that assumed by its terms.
voluntarily binding himself to the payment of the
corporate debts. The petitioner cannot therefore take It is admitted in the Complaint of respondent Bank before the
refuge in this doctrine that he has by his own acts trial court that several letters of credit were irrevocably
effectively waived. extended for ninety (90) days with alarmingly flawed and
inadequate consideration - the indispensable marginal deposit
But as we bind the spouses Luis Toh and Vicky Tan Toh to the of fifteen percent (15%) and the twenty-five percent (25%)
surety agreement they signed so must we also hold prerequisite for each extension of thirty (30) days. It bears
respondent Bank to its representations in the "letter-advise" of stressing that the requisite marginal deposit and security for
16 May 1993. Particularly, as to the extension of the due dates every thirty (30) - day extension specified in the "letter-advise"
of the letters of credit, we cannot exclude from the Continuing were not set aside or abrogated nor was there any prior notice
Guaranty the preconditions of the Bank that were plainly of such fact, if any was done.
stipulated in the "letter-advise." Fairness and justice dictate our
doing so, for the Bank itself liberally applies the provisions of
cognate agreements whenever convenient to enforce its

9
Moreover, these irregular extensions were candidly admitted other adjustments in the corporate structure of FBPC ensued
by Victor Ruben L. Tuazon, an account officer and manager of in the month of June 1993, which the Bank did not investigate
respondent Bank and its lone witness in the civil case although such were made known to it.

Q: You extended it even if there was no marginal By the same token, there is no explanation on record for the
deposit? utter worthlessness of the trust receipts in favor of the Bank
when these documents ought to have added more security to
A: Yes. the indebtedness of FBPC. The Bank has in fact no information
whether the trust receipts were indeed used for the purpose for
which they were obtained.56 To be sure, the goods subject of
Q: And even if partial payment is less than 25%?
the trust receipts were not entirely lost since the security officer
of respondent Bank who conducted surveillance of FBPC even
A: Yes x x x x had the chance to intercept the surreptitious transfer of the
items under trust: "We saw two (2) delivery vans with Plates
Q: You have repeatedly extended despite the Nos. TGH 257 and PAZ 928 coming out of the compound x x x
insufficiency partial payment requirement? [which were] taking out the last supplies stored in the
compound."57 In addition, the attached properties of FBPC,
A: I would say yes.53 except for two (2) of them, were perfunctorily abandoned by
respondent Bank although the bonds therefor were
considerably reduced by the trial court.58
The foregoing extensions of the letters of credit made by
respondent Bank without observing the rigid restrictions for
exercising the privilege are not covered by the waiver The consequence of these omissions is to discharge the
stipulated in the Continuing Guaranty. Evidently, they surety, petitioners herein, under Art. 2080 of the Civil Code,59 or
constitute illicit extensions prohibited under Art. 2079 of the at the very least, mitigate the liability of the surety up to the
Civil Code, "[a]n extension granted to the debtor by the creditor value of the property or lien released
without the consent of the guarantor extinguishes the
guaranty." This act of the Bank is not mere failure or delay on If the creditor x x x has acquired a lien upon the
its part to demand payment after the debt has become due, as property of a principal, the creditor at once becomes
was the case in unpaid five (5) letters of credit which the Bank charged with the duty of retaining such security, or
did not extend, defer or put off,54 but comprises conscious, maintaining such lien in the interest of the surety, and
separate and binding agreements to extend the due date, as any release or impairment of this security as a
was admitted by the Bank itself primary resource for the payment of a debt, will
discharge the surety to the extent of the value of the
Q: How much was supposed to be paid on 14 property or lien released x x x x [for] there
September 1993, the original LC of P1,655,675.13? immediately arises a trust relation between the
parties, and the creditor as trustee is bound to
account to the surety for the value of the security in
A: Under LC 93-0017 first matured on 14 his hands.60
September 1993. We rolled it over, extended it to
December 13, 1993 but they made partial payment
that is why we extended it. For the same reason, the grace period granted by respondent
Bank represents unceremonious abandonment and forfeiture
of the fifteen percent (15%) marginal deposit and the twenty-
Q: The question to you now is how much was five percent (25%) partial payment as fixed in the "letter-
paid? How much is supposed to be paid on advise." These payments are unmistakably additional
September 14, 1993 on the basis of the original securities intended to protect both respondent Bank and the
amount of P1,655,675.13? sureties in the event that the principal debtor FBPC becomes
insolvent during the extension period. Compliance with these
A: Whenever this obligation becomes due and requisites was not waived by petitioners in the Continuing
demandable except when you roll it over so there is Guaranty. For this unwarranted exercise of discretion,
novation there on the original respondent Bank bears the loss; due to its unauthorized
obligations55 (underscoring supplied). extensions to pay granted to FBPC, petitioner-spouses Luis
Toh and Vicky Tan Toh are discharged as sureties under the
As a result of these illicit extensions, petitioner-spouses Luis Continuing Guaranty.
Toh and Vicky Tan Toh are relieved of their obligations as
sureties of respondent FBPC under Art. 2079 of the Civil Code. Finally, the foregoing omission or negligence of respondent
Bank in failing to safe-keep the security provided by the
Further, we note several suspicious circumstances that militate marginal deposit and the twenty-five percent (25%)
against the enforcement of the Continuing Guaranty against requirement results in the material alteration of the principal
the accommodation sureties. Firstly, the guaranty was contract, i.e., the "letter-advise," and consequently releases the
executed more than thirty (30) days from the original surety.61 This inference was admitted by the Bank through the
acceptance period as required in the "letter-advise." Thereafter, testimony of its lone witness that "[w]henever this obligation
barely two (2) days after the Continuing Guaranty was signed, becomes due and demandable, except when you roll it over,
corporate agents of FBPC were replaced on 12 May 1993 and (so) there is novation there on the original obligations." As has

10
been said, "if the suretyship contract was made upon the guaranteed by Manila Surety & Fidelity Co. up to the amount of
condition that the principal shall furnish the creditor additional P75,000.00. To pay for the asphalt, ATACO constituted the
security, and the security being furnished under these Bank its assignee and attorney-in-fact to receive and collect
conditions is afterwards released by the creditor, the surety is from the Bureau of Public Works the amount aforesaid out of
wholly discharged, without regard to the value of the securities funds payable to the assignor under Purchase Order No.
released, for such a transaction amounts to an alteration of the 71947. This assignment (Exhibit "A") stipulated that:
main contract."62
The conditions of this assignment are as follows:
WHEREFORE, the instant Petition for Review is GRANTED.
The Decision of the Court of Appeals dated 12 December 2001 1. The same shall remain irrevocable until the said
in CA-G.R. CV No. 55957, Solid Bank Corporation v. First credit accomodation is fully liquidated.
Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng
Li, Luis Toh and Vicky Tan Toh, holding petitioner-spouses Luis
2. The PHILIPPINE NATIONAL BANK is hereby
Toh and Vicky Tan Toh solidarily liable with First Business
appointed as our Attorney-in-Fact for us and in our
Paper Corporation to pay Solid Bank Corporation the amount
name, place and stead, to collect and to receive the
of P10,539,758.68 as principal with twelve percent (12%)
payments to be made by virtue of the aforesaid
interest per annum until fully paid, and its Resolution of 2 July
Purchase Order, with full power and authority to
2002 denying reconsideration thereof are REVERSED and
execute and deliver on our behalf, receipt for all
SET ASIDE.
payments made to it; to endorse for deposit or
encashment checks, money order and treasury
The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig City warrants which said Bank may receive, and to apply
in Civil Case No. 64047, Solid Bank Corporation v. First said payments to the settlement of said credit
Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng accommodation.
Li, Luis Toh and Vicky Tan Toh, finding First Business Paper
Corporation liable to pay respondent Solid Bank Corporation
This power of attorney shall also remain irrevocable
the principal of P10,539,758.68 plus twelve percent (12%)
until our total indebtedness to the said Bank have
interest per annum until fully paid, but absolving petitioner-
been fully liquidated. (Exhibit E)
spouses Luis Toh and Vicky Tan Toh of any liability to
respondent Solid Bank Corporation is REINSTATED and
AFFIRMED. No costs. ATACO delivered to the Bureau of Public Works, and the latter
accepted, asphalt to the total value of P431,466.52. Of this
amount the Bank regularly collected, from April 21, 1948 to
SO ORDERED.
November 18, 1948, P106,382.01. Thereafter, for unexplained
reasons, the Bank ceased to collect, until in 1952 its
investigators found that more moneys were payable to ATACO
from the Public Works office, because the latter had allowed
G.R. No. L-20567 July 30, 1965
mother creditor to collect funds due to ATACO under the same
purchase order to a total of P311,230.41.
PHILIPPINE NATIONAL BANK, petitioner,
vs.
Its demands on the principal debtor and the Surety having
MANILA SURETY and FIDELITY CO., INC. and THE COURT
been refused, the Bank sued both in the Court of First Instance
OF APPEALS (Second Division), respondents.
of Manila to recover the balance of P158,563.18 as of
February 15, 1950, plus interests and costs.
Besa, Galang and Medina for petitioner.
De Santos and Delfino for respondents.
On October 4, 1958, the trial court rendered a decision, the
dispositive portion of which reads:
REYES, J.B.L., J.:
WHEREFORE, judgment is hereby rendered as follows:
The Philippine National Bank petitions for the review and
reversal of the decision rendered by the Court of Appeals
1. Ordering defendants, Adams & Taguba Corporation
(Second Division), in its case CA-G.R. No. 24232-R,
and Manila Surety & Fidelity Co., Inc., to pay plaintiff,
dismissing the Bank's complaint against respondent Manila
Philippines National Bank, the sum of P174,462.34 as
Surety & Fidelity Co., Inc., and modifying the judgment of the
of February 24, 1956, minus the amount of P8,000
Court of First Instance of Manila in its Civil Case No. 11263.
which defendant, Manila Surety Co., Inc. paid from
March, 1956 to October, 1956 with interest at the rate
The material facts of the case, as found by the appellate Court, of 5% per annum from February 25, 1956, until fully
are as follows: paid provided that the total amount that should be
paid by defendant Manila Surety Co., Inc., on account
The Philippine National Bank had opened a letter of credit and of this case shall not exceed P75,000.00, and to pay
advanced thereon $120,000.00 to Edgington Oil Refinery for the costs;
8,000 tons of hot asphalt. Of this amount, 2,000 tons worth
P279,000.00 were released and delivered to Adams & Taguba 2. Orderinq cross-defendant, Adams & Taguba
Corporation (known as ATACO) under a trust receipt Corporation, and third-party defendant, Pedro A.

11
Taguba, jointly and severally, to pay cross and third- exonerated the surety, pursuant to Article 2080 of the Civil
party plaintiff, Manila Surety & Fidelity Co., Inc., Code:
whatever amount the latter has paid or shall pay
under this judgment; ART. 2080. The guarantors, even though they be
solidary, are released from their obligation whenever
3. Dismissing the complaint insofar as the claim for by come act of the creditor they cannot be subrogated
17% special tax is concerned; and to the rights, mortgages and preferences of the latter.
(Emphasis supplied.)
4. Dismissing the counterclaim of defendants Adams
& Taguba Corporation and Manila Surety & Fidelity The appellant points out to its letter of demand, Exhibit "K",
Co., Inc. addressed to the Bureau of Public Works, on May 5, 1949, and
its letter to ATACO, Exhibit "G", informing the debtor that as of
From said decision, only the defendant Surety Company has its date, October 31, 1949, its outstanding balance was
duly perfected its appeal. The Central Bank of the Philippines P156,374.83. Said Exhibit "G" has no bearing on the issue
did not appeal, while defendant ATACO failed to perfect its whether the Bank has exercised due diligence in collecting
appeal. from the Bureau of Public Works, since the letter was
addressed to ATACO, and the funds were to come from
elsewhere. As to the letter of demand on the Public Works
The Bank recoursed to the Court of Appeals, which rendered
office, it does not appear that any reply thereto was made; nor
an adverse decision and modified the judgment of the court of
that the demand was pressed, nor that the debtor or the surety
origin as to the surety's liability. Its motions for reconsideration
were ever apprised that payment was not being made. The fact
having proved unavailing, the Bank appealed to this Court.
remains that because of the Bank's inactivity the other
creditors were enabled to collect P173,870.31, when the
The Court of Appeals found the Bank to have been negligent in balance due to appellant Bank was only P158,563.18. The
having stopped collecting from the Bureau of Public Works the finding of negligence made by the Court of Appeals is thus not
moneys falling due in favor of the principal debtor, ATACO, only conclusive on us but fully supported by the evidence.
from and after November 18, 1948, before the debt was fully
collected, thereby allowing such funds to be taken and
Even if the Court of Appeals erred on the second reason it
exhausted by other creditors to the prejudice of the surety, and
advanced in support of the decision now under appeal,
held that the Bank's negligence resulted in exoneration of
because the rules on application of payments, giving
respondent Manila Surety & Fidelity Company.
preference to secured obligations are only operative in cases
where there are several distinct debts, and not where there is
This holding is now assailed by the Bank. It contends the only one that is partially secured, the error is of no importance,
power of attorney obtained from ATACO was merely in since the principal reason based on the Bank's negligence
additional security in its favor, and that it was the duty of the furnishes adequate support to the decision of the Court of
surety, and not that of the creditor, owed see to it that the Appeals that the surety was thereby released.
obligor fulfills his obligation, and that the creditor owed the
surety no duty of active diligence to collect any, sum from the
WHEREFORE, the appealed decision is affirmed, with costs
principal debtor, citing Judge Advocate General vs. Court of
against appellant Philippine National Bank.
Appeals, G.R. No. L-10671, October 23, 1958.

This argument of appellant Bank misses the point. The Court


of Appeals did not hold the Bank answerable for negligence in G.R. No. 120528 January 29, 2001
failing to collect from the principal debtor but for its neglect in
collecting the sums due to the debtor from the Bureau of Public
ATTY. DIONISIO CALIBO, JR., petitioner,
Works, contrary to its duty as holder of an exclusive and
vs.
irrevocable power of attorney to make such collections, since
COURT OF APPEALS and DR. PABLO U.
an agent is required to act with the care of a good father of a
ABELLA, respondents.
family (Civ. Code, Art. 1887) and becomes liable for the
damages which the principal may suffer through his non-
performance (Civ. Code, Art. 1884). Certainly, the Bank could QUISUMBING, J.:
not expect that the Bank would diligently perform its duty under
its power of attorney, but because they could not have Before us is the petition for review on certiorari by petitioner
collected from the Bureau even if they had attempted to do so. Dionisio Calibo, Jr., assailing the decision of the Court of
It must not be forgotten that the Bank's power to collect was Appeals in CA-G.R. CV No. 39705, which affirmed the decision
expressly made irrevocable, so that the Bureau of Public of the Regional Trial Court of Cebu, Branch 11, declaring
Works could very well refuse to make payments to the principal private respondent as the lawful possessor of a tractor subject
debtor itself, and a fortiori reject any demands by the surety. of a replevin suit and ordering petitioner to pay private
respondent actual damages and attorney's fees.
Even if the assignment with power of attorney from the
principal debtor were considered as mere additional security The facts of the case, as summarized by respondent court, are
still, by allowing the assigned funds to be exhausted without undisputed.
notifying the surety, the Bank deprived the former of any
possibility of recoursing against that security. The Bank thereby

12
"on January 25, 1979, plaintiff-appellee [herein and water bills the correctness of which Pablo said he
petitioner] Pablo U. Abella purchased an MF 210 still had to verify with Mike. Calibo told Pablo that he
agricultural tractor with Serial No. 00105 and Engine would accept the P2,000.00-check only if the latter
No. P126M00199 (Exhibit A; Record, p.5) which he would execute a promissory note in his favor to cover
used in his farm in Dagohoy, Bohol. the amount of the unpaid electric and water bills.
Pablo was not amenable to this proposal. The two of
Sometimes in October or November 1985, Pablo them having failed to come to an agreement, Pablo
Abella's son, Mike abella rented for residential left and went back to Cebu City, unsuccessful in his
purpose the house of defendant-appellant Dionosio R. attempt to take possession of the tractor."1
Calibo, Jr., in Tagbilaran City.
On November 25, 1988, private respondent instituted an action
In October 1986, Pablo Abella pulled out his for replevin, claiming ownership of the tractor and seeking to
aforementioned tractor from his farm in Dagohoy, recover possession thereof from petitioner. As adverted to
Bohol, and left it in the safekeeping of his son, Mike above, the trial court ruled in favor of private respondent; so
Abella, in Tagbilaran City. Mike kept the tractor in the did the Court of Appeals when petitioner appealed.
garage of the house he was leasing from Calibo.
The Court of Appeals sustained the ruling of the trial court that
Since he started renting Calibo's house, Mike had Mike Abella could not have validly pledged the subject tractor
been religiously paying the monthly rentals therefor, to petitioner since he was not the owner thereof, nor was he
but beginning November of 1986, he stopped doing authorized by its owner to pledge the tractor. Respondent court
so. The following month, Calibo learned that Mike had also rejected petitioner's contention that, if not a pledge, then a
never paid the charges for electric and water deposit was created. The Court of Appeals said that under the
consumption in the leased premises which the latter Civil Code, the primary purpose of a deposit is only
was duty-bound to shoulder. Thus, Calibo confronted safekeeping and not, as in this case, securing payment of a
Mike about his rental arrears and the unpaid electric debt.
and water bills. During this confrontation, Mike
informed Calibo that he (Mike) would be staying in the The Court of Appeals reduced the amount of actual damages
leased property only until the end of December 1986. payable to private respondent, deducting therefrom the cost of
Mike also assured Calibo that he would be settling his transporting the tractor from Tagbilaran, Bohol, to Cebu City.
account with the latter, offering the tractor as security.
Mike even asked Calibo to help him find a buyer for Hence, this petition.
the tractor so he could sooner pay his outstanding
obligation.1wphi1.nt
Essentially, petitioner claims that the tractor in question was
validly pledged to him by private respondent's son Mike Abella
In January 1987 when a new tenant moved into the to answer for the latter's monetary obligations to petitioner. In
house formerly leased to Mike, Calibo had the tractor the alternative, petitioner asserts that the tractor was left with
moved to the garage of his father's house, also in him, in the concept of an innkeeper, on deposit and that he
Tagbilaran City. may validly hold on thereto until Mike Abella pays his
obligations.
Apprehensive over Mike's unsettled account, Calibo
visited him in his Cebu City address in January, Petitioner maintains that even if Mike Abella were not the
February and March, 1987 and tried to collect owner of the tractor, a principal-agent relationship may be
payment. On all three occasions, Calibo was unable implied between Mike Abella and private respondent. He
to talk to Mike as the latter was reportedly out of town. contends that the latter failed to repudiate the alleged agency,
On his third trip to Cebu City, Calibo left word with the knowing that his son is acting on his behalf without authority
occupants of the Abella residence thereat that there when he pledged the tractor to petitioner. Petitioner argues
was a prospective buyer for the tractor. The following that, under Article 1911 of the Civil Code, private respondent is
week, Mike saw Calibo in Tagbilaran City to inquire bound by the pledge, even if it were beyond the authority of his
about the possible tractor buyer. The sale, however, son to pledge the tractor, since he allowed his son to act as
did not push through as the buyer did not come back though he had full powers.
anymore. When again confronted with his outstanding
obligation, Mike reassured Calibo that the tractor
On the other hand, private respondent asserts that respondent
would stand as a guarantee for its payment. That was
court had correctly ruled on the matter.
the last time Calibo saw or heard from Mike.

In a contract of pledge, the creditor is given the right to retain


After a long while, or on November 22, 1988, Mike's
his debtor's movable property in his possession, or in that of a
father, Pablo Abella, came to Tagbilaran City to claim
third person to whom it has been delivered, until the debt is
and take possession of the tractor. Calibo, however,
paid. For the contract to be valid, it is necessary that: (1) the
informed Pablo that Mike left the tractor with him as
pledge is constituted to secure the fulfillment of a principal
security for the payment of Mike's obligation to him.
obligation; (2) the pledgor be the absolute owner of the thing
Pablo offered to write Mike a check for P2,000.00 in
pledged; and (3) the person constituting the pledge has the
payment of Mike's unpaid lease rentals, in addition to
free disposal of his property, and in the absence thereof, that
issuing postdated checks to cover the unpaid electric
he be legally authorized for the purpose.2

13
As found by the trial court and affirmed by respondent court, WHEREFORE, the instant petition is DENIED for lack of merit,
the pledgor in this case, Mike Abella, was not the absolute and the decision of the Court of Appeals in CA-G.R. CV No.
owner of the tractor that was allegedly pledged to petitioner. 39705 is AFFIRMED. Costs against petitioner.
The tractor was owned by his father, private respondent, who
left the equipment with him for safekeeping. Clearly, the SO ORDERED.
second requisite for a valid pledge, that the pledgor be the
absolute owner of the property, is absent in this case. Hence,
there is no valid pledge.

G.R. No. 143772 November 22, 2005


"He who is not the owner or proprietor of the property
pledged or mortgaged to guarantee the fulfillment of a
principal obligation, cannot legally constitute such a DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,
guaranty as may validly bind the property in favor of vs.
his creditor, and the pledgee or mortgagee in such a PRUDENTIAL BANK, Respondent.
case acquires no right whatsoever in the property
pledged or mortgaged."3 DECISION

There also does not appear to be any agency in this case. We CORONA, J.:
agree with the Court of Appeals that:
Development Bank of the Philippines (DBP) assails in this
"As indicated in Article 1869, for an agency petition for review on certiorari under Rule 45 of the Rules of
Court the December 14, 1999 decision1 and the June 8, 2000
relationship to be deemed as implied, the principal
resolution of the Court of Appeals in CA-G.R. CV No. 45783.
must know that another person is acting on his behalf
The challenged decision dismissed DBPs appeal and affirmed
without authority. Here, appellee categorically stated the February 12, 1991 decision of the Regional Trial Court of
that the only purpose for his leaving the subject Makati, Branch 137 in Civil Case No. 88-931 in toto, while the
tractor in the care and custody of Mike Abella was for impugned resolution denied DBPs motion for reconsideration
safekeeping, and definitely not for him to pledge or for being pro forma.
alienate the same. If it were true that Mike pledged
appeellee's tractor to appellant, then Mike was acting In 1973, Lirag Textile Mills, Inc. (Litex) opened an irrevocable
not only without appellee's authority but without the commercial letter of credit with respondent Prudential Bank for
latter's knowledge as well. US$498,000. This was in connection with its importation of
5,000 spindles for spinning machinery with drawing frame,
Article 1911, on the other hand, mandates that the simplex fly frame, ring spinning frame and various accessories,
principal is solidarily liable with the agent if the former spare parts and tool gauge. These were released to Litex
allowed the latter to act as though he had full powers. under covering "trust receipts" it executed in favor of Prudential
Again, in view of appellee's lack of knowledge of Bank. Litex installed and used the items in its textile mill
Mike's pledging the tractor without any authority from located in Montalban, Rizal.
him, it stands to reason that the former could not have
allowed the latter to pledge the tractor as if he had full On October 10, 1980, DBP granted a foreign currency loan in
powers to do so."4 the amount of US$4,807,551 to Litex. To secure the loan, Litex
executed real estate and chattel mortgages on its plant site in
Montalban, Rizal, including the buildings and other
There is likewise no valid deposit in this case. In a contract of improvements, machineries and equipments there. Among the
deposit, a person receives an object belonging to another with machineries and equipments mortgaged in favor of DBP were
the obligation of safely keeping it and of returning the the articles covered by the "trust receipts."
same.5 Petitioner himself states that he received the tractor not
to safely keep it but as a form of security for the payment of Sometime in June 1982, Prudential Bank learned about DBPs
Mike Abella's obligations. There is no deposit where the plan for the overall rehabilitation of Litex. In a July 14, 1982
principal purpose for receiving the object is not safekeeping.6 letter, Prudential Bank notified DBP of its claim over the
various items covered by the "trust receipts" which had been
Consequently, petitioner had no right to refuse delivery of the installed and used by Litex in the textile mill. Prudential Bank
tractor to its lawful owner. On the other hand, private informed DBP that it was the absolute and juridical owner of
respondent, as owner, had every right to seek to repossess the the said items and they were thus not part of the mortgaged
tractor, including the institution of the instant action for assets that could be legally ceded to DBP.
replevin.1wphi1.nt
For the failure of Litex to pay its obligation, DBP extra-judicially
foreclosed on the real estate and chattel mortgages, including
We do not here pass upon the other assignment of errors
the articles claimed by Prudential Bank. During the foreclosure
made by petitioner concerning alleged irregularities in the raffle
sale held on April 19, 1983, DBP acquired the foreclosed
and disposition of the case at the trial court. A petition for properties as the highest bidder.
review on certiorari is not the proper vehicle for such
allegations.
Subsequently, DBP caused to be published in the September
2, 1984 issue of the Times Journal an invitation to bid in the
public sale to be held on September 10, 1984. It called on

14
interested parties to submit bids for the sale of the textile mill b) P50,000.00 as exemplary damages; and
formerly owned by Litex, the land on which it was built, as well
as the machineries and equipments therein. Learning of the c) 10% of the total amount due as and for attorneys fees.
intended public auction, Prudential Bank wrote a letter dated
September 6, 1984 to DBP reasserting its claim over the items
covered by "trust receipts" in its name and advising DBP not to SO ORDERED.
include them in the auction. It also demanded the turn-over of
the articles or alternatively, the payment of their value. Aggrieved, DBP filed an appeal with the Court of Appeals.
However, the appellate court dismissed the appeal and
An exchange of correspondences ensued between Prudential affirmed the decision of the trial court in toto. It applied the
Bank and DBP. In reply to Prudential Banks September 6, provisions of PD 115 and held that ownership over the
1984 letter, DBP requested documents to enable it to evaluate contested articles belonged to Prudential Bank as entrustor,
Prudential Banks claim. On September 28, 1994, Prudential not to Litex. Consequently, even if Litex mortgaged the items to
Bank provided DBP the requested documents. Two months DBP and the latter foreclosed on such mortgage, DBP was
later, Prudential Bank followed up the status of its claim. In a duty-bound to turn over the proceeds to Prudential Bank, being
letter dated December 3, 1984, DBP informed Prudential Bank the party that advanced the payment for them.
that its claim had been referred to DBPs legal department and
instructed Prudential Bank to get in touch with its chief legal On DBPs argument that the disputed articles were not proper
counsel. There being no concrete action on DBPs part, objects of a trust receipt agreement, the Court of Appeals ruled
Prudential Bank, in a letter dated July 30, 1985, made a final that the items were part of the trust agreement entered into by
demand on DBP for the turn-over of the contested articles or and between Prudential Bank and Litex. Since the agreement
the payment of their value. Without the knowledge of was not contrary to law, morals, public policy, customs and
Prudential Bank, however, DBP sold the Litex textile mill, as good order, it was binding on the parties.
well as the machineries and equipments therein, to Lyon
Textile Mills, Inc. (Lyon) on June 8, 1987. Moreover, the appellate court found that DBP was not a
mortgagee in good faith. It also upheld the finding of the trial
Since its demands remained unheeded, Prudential Bank filed a court that DBP was a trustee ex maleficio of Prudential Bank
complaint for a sum of money with damages against DBP with over the articles covered by the "trust receipts."
the Regional Trial Court of Makati, Branch 137, on May 24,
1988. The complaint was docketed as Civil Case No. 88-931. DBP filed a motion for reconsideration but the appellate court
denied it for being pro forma. Hence, this petition.
On February 12, 1991, the trial court decided2 in favor of
Prudential Bank. Applying the provisions of PD 115, otherwise Trust receipt transactions are governed by the provisions of PD
known as the "Trust Receipts Law," it ruled: 115 which defines such a transaction as follows:

When PRUDENTIAL BANK released possession of the subject Section 4. What constitutes a trust receipt transaction. A trust
properties, over which it holds absolute title to LITEX upon the receipt transaction, within the meaning of this Decree, is any
latters execution of the trust receipts, the latter was bound to transaction by and between a person referred to in this Decree
hold said properties in trust for the former, and (a) to sell or as the entruster, and another person referred to in this Decree
otherwise dispose of the same and to turn over to as entrustee, whereby the entruster, who owns or holds
PRUDENTIAL BANK the amount still owing; or (b) to return the absolute title or security interests over certain specified goods,
goods if unsold. Since LITEX was allowed to sell the properties documents or instruments, releases the same to the
being claimed by PRUDENTIAL BANK, all the more was it possession of the entrustee upon the latters execution and
authorized to mortgage the same, provided of course LITEX delivery to the entruster of a signed document called a "trust
turns over to PRUDENTIAL BANK all amounts owing. When receipt" wherein the entrustee binds himself to hold the
DBP, well aware of the status of the properties, acquired the designated goods, documents or instruments in trust for the
same in the public auction, it was bound by the terms of the entruster and to sell or otherwise dispose of the goods,
trust receipts of which LITEX was the entrustee. Simply stated, documents or instruments with the obligation to turn over to the
DBP held no better right than LITEX, and is thus bound to turn entruster the proceeds thereof to the extent of the amount
over whatever amount was due PRUDENTIAL BANK. Being a owing to the entruster or as appears in the trust receipt or the
trustee ex maleficio of PRUDENTIAL BANK, DBP is goods, documents or instruments themselves if they are
necessarily liable therefor. In fact, DBP may well be considered unsold or not otherwise disposed of, in accordance with the
as an agent of LITEX when the former sold the properties terms and conditions specified in the trust receipt, or for other
being claimed by PRUDENTIAL BANK, with the corresponding purposes substantially equivalent to any of the following:
responsibility to turn over the proceeds of the same to
PRUDENTIAL BANK.3 (Citations omitted)
1. In the case of goods or documents, (a) to sell the goods or
procure their sale; or (b) to manufacture or process the goods
The dispositive portion of the decision read: with the purpose of ultimate sale: Provided, That, in the case of
goods delivered under trust receipt for the purpose of
WHEREFORE, judgment is hereby rendered ordering manufacturing or processing before its ultimate sale, the
defendant DEVELOPMENT BANK OF THE PHILIPPINES to entruster shall retain its title over the goods whether in its
pay plaintiff PRUDENTIAL BANK: original or processed form until the entrustee has complied
fully with his obligation under the trust receipt; or (c) to load,
a) P3,261,834.00, as actual damages, with interest thereon unload, ship or tranship or otherwise deal with them in a
computed from 10 August 1985 until the entire amount shall manner preliminary or necessary to their sale; or
have been fully paid;

15
2. In the case of instruments, (a) to sell or procure their sale or We disagree.
exchange; or (b) to deliver them to a principal; or (c) to effect
the consummation of some transactions involving delivery to a The various agreements between Prudential Bank and Litex
depository or register; or (d) to effect their presentation, commonly denominated as "trust receipts" were valid. As the
collection or renewal. Court of Appeals correctly ruled, their provisions did not
contravene the law, morals, good customs, public order or
xxxxxxxxx public policy.

In a trust receipt transaction, the goods are released by the The agreements uniformly provided:
entruster (who owns or holds absolute title or security interests
over the said goods) to the entrustee on the latters execution Received, upon the Trust hereinafter mentioned from the
and delivery to the entruster of a trust receipt. The trust receipt PRUDENTIAL BANK (hereinafter referred to as BANK) the
evidences the absolute title or security interest of the entruster following goods and merchandise, the property of said
over the goods. As a consequence of the release of the goods BANK specified in the bill of lading as follows:
and the execution of the trust receipt, a two-fold obligation is
imposed on the entrustee, namely: (1) to hold the designated
goods, documents or instruments in trust for the purpose of
selling or otherwise disposing of them and (2) to turn over to Amount of Bill Description of Security Marks & Nos.
the entruster either the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the trust
receipt, or the goods, documents or instruments themselves if
they are unsold or not otherwise disposed of, in accordance
with the terms and conditions specified in the trust receipt. In and in consideration thereof, I/We hereby agree to hold said
the case of goods, they may also be released for other goods in trust for the BANK and as its property with liberty
purposes substantially equivalent to (a) their sale or the to sell the same for its account but without authority to make
procurement of their sale; or (b) their manufacture or any other disposition whatsoever of the said goods or any part
processing with the purpose of ultimate sale, in which case the thereof (or the proceeds thereof) either by way of conditional
entruster retains his title over the said goods whether in their sale, pledge, or otherwise.
original or processed form until the entrustee has complied
fully with his obligation under the trust receipt; or (c) the x x x x x x x x x6 (Emphasis supplied)
loading, unloading, shipment or transshipment or otherwise
dealing with them in a manner preliminary or necessary to their
sale.4Thus, in a trust receipt transaction, the release of the The articles were owned by Prudential Bank and they were
goods to the entrustee, on his execution of a trust receipt, is only held by Litex in trust. While it was allowed to sell the
essentially for the purpose of their sale or is necessarily items, Litex had no authority to dispose of them or any part
connected with their ultimate or subsequent sale. thereof or their proceeds through conditional sale, pledge or
any other means.
Here, Litex was not engaged in the business of selling spinning
machinery, its accessories and spare parts but in Article 2085 (2) of the Civil Code requires that, in a contract of
manufacturing and producing textile and various kinds of pledge or mortgage, it is essential that the pledgor or
fabric. The articles were not released to Litex to be sold. Nor mortgagor should be the absolute owner of the thing pledged
was the transfer of possession intended to be a preliminary or mortgaged. Article 2085 (3) further mandates that the
step for the said goods to be ultimately or subsequently sold. person constituting the pledge or mortgage must have the free
Instead, the contemporaneous and subsequent acts of both disposal of his property, and in the absence thereof, that he be
Litex and Prudential Bank showed that the imported articles legally authorized for the purpose.
were released to Litex to be installed in its textile mill and used
in its business. DBP itself was aware of this. To support its Litex had neither absolute ownership, free disposal nor the
assertion that the contested articles were excluded from goods authority to freely dispose of the articles. Litex could not have
that could be covered by a trust receipt, it contended: subjected them to a chattel mortgage. Their inclusion in the
mortgage was void7 and had no legal effect.8There being no
First. That the chattels in controversy were procured by DBPs valid mortgage, there could also be no valid foreclosure or
mortgagor Lirag Textile Mills ("LITEX") for the exclusive use of valid auction sale.9 Thus, DBP could not be considered either
its textile mills. They were not procured - as a mortgagee or as a purchaser in good faith.10

(a) to sell or otherwise procure their sale; No one can transfer a right to another greater than what he
himself has.11 Nemo dat quod non habet. Hence, Litex could
not transfer a right that it did not have over the disputed items.
(b) to manufacture or process the goods with the Corollarily, DBP could not acquire a right greater than what its
predecessor-in-interest had. The spring cannot rise higher than
purpose of ultimate sale.5 (emphasis supplied) its source.12 DBP merely stepped into the shoes of Litex as
trustee of the imported articles with an obligation to pay their
Hence, the transactions between Litex and Prudential Bank value or to return them on Prudential Banks demand. By its
were allegedly not trust receipt transactions within the meaning failure to pay or return them despite Prudential Banks
of PD 115. It follows that, contrary to the decisions of the trial repeated demands and by selling them to Lyon without
court and the appellate court, the transactions were not Prudential Banks knowledge and conformity, DBP became a
governed by the Trust Receipts Law. trustee ex maleficio.

16
On the matter of actual damages adjudged by the trial court dated December 9, 1997 denying petitioners' motion for
and affirmed by the Court of Appeals, DBP wants this Court to reconsideration.
review the evidence presented during the trial and to reverse
the factual findings of the trial court. This Court is, however, not
The following facts are not in dispute.
a trier of facts and it is not its function to analyze or weigh
evidence anew.13 The rule is that factual findings of the trial
court, when adopted and confirmed by the CA, are binding and Petitioners Cavite Development Bank (CDB) and Far East
conclusive on this Court and generally will not be reviewed on Bank and Trust Company (FEBTC) are banking institutions
appeal.14 While there are recognized exceptions to this rule, duly organized and existing under Philippine laws. On or about
none of the established exceptions finds application here. June 15, 1983, a certain Rodolfo Guansing obtained a loan in
the amount of P90,000.00 from CDB, to secure which he
With regard to the imposition of exemplary damages, the mortgaged a parcel of land situated at No. 63 Calavite Street,
appellate court agreed with the trial court that the requirements La Loma, Quezon City and covered by TCT No. 300809
for the award thereof had been sufficiently established. registered in his name. As Guansing defaulted in the payment
Prudential Banks entitlement to compensatory damages was of his loan, CDB foreclosed the mortgage. At the foreclosure
likewise amply proven. It was also shown that DBP was aware sale held on March 15, 1984, the mortgaged property was sold
of Prudential Banks claim as early as July, 1982. However, it to CDB as the highest bidder. Guansing failed to redeem, and
ignored the latters demand, included the disputed articles in on March 2, 1987, CDB consolidated title to the property in its
the mortgage foreclosure and caused their sale in a public name. TCT No. 300809 in the name of Guansing was
auction held on April 19, 1983 where it was declared as the cancelled and, in lieu thereof, TCT No. 355588 was issued in
highest bidder. Thereafter, in the series of communications
the name of CDB.1wphi1.nt
between them, DBP gave Prudential Bank the false impression
that its claim was still being evaluated. Without acting on
Prudential Banks plea, DBP included the contested articles On June 16, 1988, private respondent Lolita Chan Lim,
among the properties it sold to Lyon in June, 1987. The trial assisted by a broker named Remedios Gatpandan, offered to
court found that this chain of events showed DBPs fraudulent purchase the property from CDB. The written Offer to
attempt to prevent Prudential Bank from asserting its rights. It Purchase, signed by Lim and Gatpandan, states in part:
smacked of bad faith, if not deceit. Thus, the award of
exemplary damages was in order. Due to the award of
We hereby offer to purchase your property at #63
exemplary damages, the grant of attorneys fees was proper.15
Calavite and Retiro Sts., La Loma, Quezon City for
P300,000.00 under the following terms and
DBPs assertion that both the trial and appellate courts failed to conditions:
address the issue of prescription is of no moment. Its claim
that, under Article 1146 (1) of the Civil Code, Prudential Banks
cause of action had prescribed as it should be reckoned from (1) 10% Option Money;
October 10, 1980, the day the mortgage was registered, is not
correct. The written extra-judicial demand by the creditor (2) Balance payable in cash;
interrupted the prescription of action. 16 Hence, the four-year
prescriptive period which DBP insists should be counted from
the registration of the mortgage was interrupted when (3) Provided that the property shall be
Prudential Bank wrote the extra-judicial demands for the turn cleared of illegal occupants or tenants.
over of the articles or their value. In particular, the last demand
letter sent by Prudential Bank was dated July 30, 1988 and this Pursuant to the foregoing terms and conditions of the offer, Lim
was received by DBP the following day. Thus, contrary to paid CDB P30,000.00 as Option Money, for which she was
DBPs claim, Prudential Banks right to enforce its action had issued Official Receipt No. 3160, dated June 17, 1988, by
not yet prescribed when it filed the complaint on May 24, 1988. CDB. However, after some time following up the sale, Lim
discovered that the subject property was originally registered in
WHEREFORE, the petition is hereby DENIED. The December the name of Perfecto Guansing, father of mortgagor Rodolfo
14, 1999 decision and June 8, 2000 resolution of the Court of Guansing, under TCT No. 91148. Rodolfo succeeded in having
Appeals in CA-G.R. CV No. 45783 are AFFIRMED. the property registered in his name under TCT No. 300809, the
same title he mortgaged to CDB and from which the latter's title
(TCT No. 355588) was derived. It appears, however, that the
father, Perfecto, instituted Civil Case No. Q-39732 in the
G.R. No. 131679 February 1, 2000 Regional Trial Court, Branch 83, Quezon City, for the
cancellation of his son's title. On March 23, 1984, the trial court
CAVITE DEVELOPMENT BANK and FAR EAST BANK AND rendered a decision2 restoring Perfecto's previous title (TCT
TRUST COMPANY, petitioners, No. 91148) and cancelling TCT No. 300809 on the ground that
vs. the latter was fraudulently secured by Rodolfo. This decision
SPOUSES CYRUS LIM and LOLITA CHAN LIM and COURT has since become final and executory.
OF APPEALS, respondents.
Aggrieved by what she considered a serious misrepresentation
MENDOZA, J.: by CDB and its mother-company, FEBTC, on their ability to sell
the subject property, Lim, joined by her husband, filed on
This is a petition for review on certiorari of the decision1 of the August 29, 1989 an action for specific performance and
Court of Appeals in C.A. GR CV No. 42315 and the order damages against petitioners in the Regional Trial Court,
Branch 96, Quezon City, where it was docketed as Civil Case

17
No. Q-89-2863. On April 20, 1990, the complaint was amended nature of a contract, the courts are not bound by the name or
by impleading the Register of Deeds of Quezon City as an title given to it by the contracting parties. 7 In the case at bar,
additional defendant. the sum of P30,000.00, although denominated in the offer to
purchase as "option money," is actually in the nature of earnest
On March 10, 1993, the trial court rendered a decision in favor money or down payment when considered with the other terms
of the Lim spouses. It ruled that: (1) there was a perfected of the offer. In Carceler v. Court of Appeals,8 we explained the
contract of sale between Lim and CDB, contrary to the latter's nature of an option contract, viz.
contention that the written offer to purchase and the payment
of P30,000.00 were merely pre-conditions to the sale and still An option contract is a preparatory contract in which
subject to the approval of FEBTC; (2) performance by CDB of one party grants to the other, for a fixed period and
its obligation under the perfected contract of sale had become under specified conditions, the power to decide,
impossible on account of the 1984 decision in Civil Case No. whether or not to enter into a principal contract, it
Q-39732 cancelling the title in the name of mortgagor Rodolfo binds the party who has given the option not to enter
Guansing; (3) CDB and FEBTC were not exempt from liability into the principal contract with any other person
despite the impossibility of performance, because they could during the period; designated, and within that period,
not credibly disclaim knowledge of the cancellation of Rodolfo to enter into such contract with the one to whom the
Guansing's title without the admitting their failure to discharge option was granted, if the latter should decide to use
their duties to the public as reputable banking institutions; and the option. It is a separate agreement distinct from the
(4) CDB and FEBTC are liable for damages for the prejudice contract to which the parties may enter upon the
caused against the Lims.3 Based on the foregoing findings, the consummation of the option.
trial court ordered CDB and FEBTC to pay private
respondents, jointly and severally, the amount of P30,000.00 An option contract is therefore a contract separate from and
plus interest at the legal rate computed from June 17, 1988 preparatory to a contract of sale which, if perfected, does not
until full payment. It also ordered petitioners to pay private result in the perfection or consummation of the sale. Only when
respondents, jointly and severally, the amounts of P250,000.00 the option is exercised may a sale be perfected.
as moral damages, P50,000.00 as exemplary damages,
P30,000.00 as attorney's fees, and the costs of the suit.4
In this case, however, after the payment of the 10% option
money, the Offer to Purchase provides for the payment only of
Petitioners brought the matter to the Court of Appeals, which, the balance of the purchase price, implying that the "option
on October 14, 1997, affirmed in toto the decision of the money" forms part of the purchase price. This is precisely the
Regional Trial Court. Petitioners moved for reconsideration, but result of paying earnest money under Art. 1482 of the Civil
their motion was denied by the appellate court on December 9, Code. It is clear then that the parties in this case actually
1997. Hence, this petition. Petitioners contend that entered into a contract of sale, partially consummated as to the
payment of the price. Moreover, the following findings of the
1. The Honorable Court of Appeals erred when it held trial court based on the testimony of the witnesses establish
that petitioners CDB and FEBTC were aware of the that CDB accepted Lim's offer to purchase:
decision dated March 23, 1984 of the Regional Trial
Court of Quezon City in Civil Case No. Q-39732. It is further to be noted that CDB and FEBTC already
considered plaintiffs' offer as good and no longer
2. The Honorable Court of Appeals erred in ordering subject to a final approval. In his testimony for the
petitioners to pay interest on the deposit of THIRTY defendants on February 13, 1992, FEBTC's Leomar
THOUSAND PESOS (P30,000.00) by applying Article Guzman stated that he was then in the Acquired
2209 of the New Civil Code. Assets Department of FEBTC wherein plaintiffs' offer
to purchase was endorsed thereto by Myoresco
3. The Honorable Court of Appeals erred in ordering Abadilla, CDB's senior vice-president, with a
petitioners to pay moral damages, exemplary recommendation that the necessary petition for writ of
damages, attorney's fees and costs of suit. possession be filed in the proper court; that the
recommendation was in accord with one of the
conditions of the offer, i.e., the clearing of the property
I.
of illegal occupants or tenants (tsn, p. 12); that, in
compliance with the request, a petition for writ of
At the outset, it is necessary to determine the legal relation, if possession was thereafter filed on July 22, 1988
any, of the parties. (Exhs. 1 and 1-A); that the offer met the requirements
of the banks; and that no rejection of the offer was
Petitioners deny that a contract of sale was ever perfected thereafter relayed to the plaintiffs (p. 17); which was
between them and private respondent Lolita Chan Lim. They not a normal procedure, and neither did the banks
contend that Lim's letter-offer clearly states that the sum of return the amount of P30,000.00 to the plaintiffs.9
P30,000,00 was given as option money, not as earnest
money.5 They thus conclude that the contract between CDB Given CDB's acceptance of Lim's offer to purchase, it appears
and Lim was merely an option contract, not a contract of sale. that a contract of sale was perfected and, indeed, partially
executed because of the partial payment of the purchase price.
The contention has no merit. Contracts are not defined by the There is, however, a serious legal obstacle to such sale,
parries thereto but by principles of law.6 In determining the

18
rendering it impossible for CDB to perform its obligation as Code. Moreover, the Civil Code itself recognizes a
seller to deliver and transfer ownership of the property. sale where the goods are to be acquired . . . by the
seller after the perfection of the contract of sale,
Nemo dat quod non habet, as an ancient Latin maxim says. clearly implying that a sale is possible even if the
One cannot give what one does not have. In applying this seller was not the owner at the time of sale, provided
precept to a contract of sale, a distinction must be kept in mind he acquires title to the property later on.
between the "perfection" and "consummation" stages of the
contract. In the present case, however, it is likewise clear that
the sellers can no longer deliver the object of the sale
A contract of sale is perfected at the moment there is a to the buyers, as the buyers themselves have already
meeting of minds upon the thing which is the object of the acquired title and delivery thereof from the rightful
contract and upon the price.10 It is, therefore, not required that, owner, the DBP. Thus, such contract may be deemed
at the perfection stage, the seller be the owner of the thing sold to be inoperative and may thus fall, by analogy, under
or even that such subject matter of the sale exists at that point item No. 5 of Article 1409 of the Civil Code: Those
in time.11 Thus, under Art. 1434 of the Civil Code, when a which contemplate an impossible service. Article 1459
person sells or alienates a thing which, at that time, was not of the Civil Code provides that "the vendor must have
his, but later acquires title thereto, such title passes by a right to transfer the ownership thereof [subject of the
operation of law to the buyer or grantee. This is the same sale] at the time it is delivered." Here, delivery of
principle behind the sale of "future goods" under Art. 1462 of ownership is no longer possible. It has become
the Civil Code. However, under Art. 1459, at the time of impossible.15
delivery or consummation stage of the sale, it is required that
the seller be the owner of the thing sold. Otherwise, he will not In this case, the sale by CDB to Lim of the property mortgaged
be able to comply with his obligation to transfer ownership to in 1983 by Rodolfo Guansing must, therefore, be deemed a
the buyer. It is at the consummation stage where the principle nullity for CDB did not have a valid title to the said property. To
of nemo dat quod non habet applies. be sure, CDB never acquired a valid title to the property
because the foreclosure sale, by virtue of which, the property
In Dignos v. Court of Appeals,12 the subject contract of sale had been awarded to CDB as highest bidder, is likewise void
was held void as the sellers of the subject land were no longer since the mortgagor was not the owner of the property
the owners of the same because of a prior sale. 13 Again, foreclosed.
in Nool v. Court of Appeals,14 we ruled that a contract of
repurchase, in which the seller does not have any title to the A foreclosure sale, though essentially a "forced sale," is still a
property sold, is invalid: sale in accordance with Art. 1458 of the Civil Code, under
which the mortgagor in default, the forced seller, becomes
We cannot sustain petitioners' view. Article 1370 of obliged to transfer the ownership of the thing sold to the
the Civil Code is applicable only to valid and highest bidder who, in turn, is obliged to pay therefor the bid
enforceable contracts. The Regional Trial Court and price in money or its equivalent. Being a sale, the rule that the
the Court of Appeals rules that the principal contract seller must be the owner of the thing sold also applies in a
of sale contained in Exhibit C and the auxiliary foreclosure sale. This is the reason Art. 2085 16 of the Civil
contract of repurchase in Exhibit D are both void. This Code, in providing for the essential requisites of the contract of
conclusion of the two lower courts appears to find mortgage and pledge, requires, among other things, that the
support in Dignos v. Court of Appeals, where the mortgagor or pledgor be the absolute owner of the thing
Court held: pledged or mortgaged, in anticipation of a possible foreclosure
sale should the mortgagor default in the payment of the loan.
Be that as it may, it is evident that when
petitioners sold said land to the Cabigas There is, however, a situation where, despite the fact that the
spouses, they were no longer owners of the mortgagor is not the owner of the mortgaged property, his title
same and the sale is null and void. being fraudulent, the mortgage contract and any foreclosure
sale arising therefrom are given effect by reason of public
policy. This is the doctrine of "the mortgagee in good faith"
In the present case, it is clear that the sellers no
based on the rule that all persons dealing with property
longer had any title to the parcels of land at the time
covered by a Torrens Certificate of Title, as buyers or
of sale. Since Exhibit D, the alleged contract of
mortgagees, are not required to go beyond what appears on
repurchase, was dependent on the validity of Exhibit
the face of the title.17 The public interest in upholding the
C, it is itself void. A void contract cannot give rise to a
indefeasibility of a certificate of title, as evidence of the lawful
valid one. Verily, Article 1422 of the Civil Code
ownership of the land or of any encumbrance thereon, protects
provides that (a) contract which is the direct result of a
a buyer or mortgagee who, in good faith, relied upon what
previous illegal contract, is also void and inexistent.
appears on the face of the certificate of title.

We should however add that Dignos did not cite its


This principle is cited by petitioners in claiming that, as a
basis for ruling that a "sale is null and void" where the
mortgagee bank, it is not required to make a detailed
sellers "were no longer the owners" of the property.
investigation of the history of the title of the property given as
Such a situation (where the sellers were no longer
security before accepting a mortgage.
owners) does not appear to be one of the void
contracts enumerated in Article 1409 of the Civil

19
We are not convinced, however, that under the circumstances Lim was asked by CDB to pay the 10% option money, CDB
of this case, CDB can be considered a mortgagee in good already knew that it was no longer the owner of the said
faith. While petitioners are not expected to conduct an property, its title having been cancelled.22 Petitioners contend
exhaustive investigation on the history of the mortgagor's title, that: (1) such finding of the appellate court is founded entirely
they cannot be excused from the duty of exercising the due on speculation and conjecture; (2) neither CDB nor FEBTC
diligence required of banking institutions. In Tomas was a party in the case where the mortgagor's title was
v. Tomas,18 we noted that it is standard practice for banks, cancelled; (3) CDB is not privy to any problem among the
before approving a loan, to send representatives to the Guansings; and (4) the final decision cancelling the
premises of the land offered as collateral and to investigate mortgagor's title was not annotated in the latter's title.
who are real owners thereof, noting that banks are expected to
exercise more care and prudence than private individuals in As a rule, only questions of law may be raised in a petition for
their dealings, even those involving registered lands, for their review, except in circumstances where questions of fact may
business is affected with public interest. We held thus: be properly raised.23 Here, while petitioners raise these factual
issues, they have not sufficiently shown that the instant case
We, indeed, find more weight and vigor in a doctrine falls under any of the exceptions to the above rule. We are
which recognizes a better right for the innocent thus bound by the findings of fact of the appellate court. In any
original registered owner who obtained his certificate case, we are convinced of petitioners' negligence in approving
of title through perfectly legal and regular the mortgage application of Rodolfo Guansing.
proceedings, than one who obtains his certificate from
a totally void one, as to prevail over judicial III.
pronouncements to the effect that one dealing with a
registered land, such as a purchaser, is under no
We now come to the civil effects of the void contract of sale
obligation to look beyond the certificate of title of the
between the parties. Article 1412(2) of the Civil Code provides:
vendor, for in the latter case, good faith has yet to be
established by the vendee or transferee, being the
most essential condition, coupled with valuable If the act in which the unlawful or forbidden cause
consideration, to entitle him to respect for his newly consists does not constitute a criminal offense, the
acquired title even as against the holder of an earlier following rules shall be observed:
and perfectly valid title. There might be circumstances
apparent on the face of the certificate of title which xxx xxx xxx
could excite suspicion as to prompt inquiry, such as
when the transfer is not by virtue of a voluntary act of (2) When only one of the contracting parties is at fault,
the original registered owner, as in the instant case, he cannot recover what he has given by reason of the
where it was by means of a self-executed deed of contract, or ask for the fulfillment of what has been
extra-judicial settlement, a fact which should be noted promised him. The other, who is not at fault, may
on the face of Eusebia Tomas certificate of title. demand the return of what he has given without any
Failing to make such inquiry would hardly be obligation to comply with his promise.
consistent with any pretense of good faith, which the
appellant bank invokes to claim the right to be
protected as a mortgagee, and for the reversal of the Private respondents are thus entitled to recover the
judgment rendered against it by the lower court.19 P30,000,00 option money paid by them. Moreover, since the
filing of the action for damages against petitioners amounted to
a demand by respondents for the return of their money, interest
In this case, there is no evidence that CDB observed its duty of thereon at the legal rate should be computed from August 29,
diligence in ascertaining the validity of Rodolfo Guansing's title. 1989, the date of filing of Civil Case No. Q-89-2863, not June
It appears that Rodolfo Guansing obtained his fraudulent title 17, 1988, when petitioners accepted the payment. This is in
by executing an Extra-Judicial Settlement of the Estate With accord with our ruling in Castillo v. Abalayan24 that in case of
Waiver where he made it appear that he and Perfecto avoid sale, the seller has no right whatsoever to keep the
Guansing were the only surviving heirs entitled to the property, money paid by virtue thereof and should refund it, with interest
and that Perfecto had waived all his rights thereto. This self- at the legal rate, computed from the date of filing of the
executed deed should have placed CDB on guard against any complaint until fully paid. Indeed, Art. 1412(2) which provides
possible defect in or question as to the mortgagor's title. that the non-guilty party "may demand the return of what he
Moreover, the alleged ocular inspection report20 by CDB's has given" clearly implies that without such prior demand, the
representative was never formally offered in evidence. Indeed, obligation to return what was given does not become legally
petitioners admit that they are aware that the subject land was demandable.
being occupied by persons other than Rodolfo Guansing and
that said persons, who are the heirs of Perfecto Guansing,
contest the title of Rodolfo.21 Considering CDB's negligence, we sustain the award of moral
damages on the basis of Arts. 21 and 2219 of the Civil Code
and our ruling in Tan v. Court of Appeals25 that moral damages
II. may be recovered even if a bank's negligence is not attended
with malice and bad faith. We find, however, that the sum of
The sale by CDB to Lim being void, the question now arises as P250,000.00 awarded by the trial court is excessive. Moral
to who, if any, among the parties was at fault for the nullity of damages are only intended to alleviate the moral suffering
the contract. Both the trial court and the appellate court found undergone by private respondent, not to enrich them at the
petitioners guilty of fraud, because on June 16, 1988, when

20
expenses of the petitioners.26 Accordingly, the award of moral The spouses Graciano and Mamerta Jayme are the registered
damages must be reduced to P50,000.00. owners of Lot 2700, situated in the Municipality of Mandaue
(now Mandaue City), Cebu, consisting of 2,568 sq.m. and
Likewise, the award of P50,000.00 as exemplary damages, covered by Transfer Certificate of Title No. 8290.
although justified under Art. 2232 of the Civil Code, is
excessive and should be reduced to P30,000.00. The award of On January 8, 1973, they entered into a Contract of
P30,000.00 attorney's fees based on Art. 2208, pars. 1, 2, 5 Lease5 with George Neri, president of Airland Motors
and 11 of the Civil Code should similarly be reduced to Corporation (now Cebu Asiancars Inc.), covering one-half of
P20,000.00. Lot 2700. The lease was for twenty (20) years.

WHEREFORE, the decision of the Court of Appeals is The terms and conditions of the lease contract 6 stipulated that
AFFIRMED with the MODIFICATION as to the award of Cebu Asiancars Inc. (hereafter, Asiancars) may use the leased
damages as above stated.1wphi1.nt premises as a collateral to secure payment of a loan which
Asiancars may obtain from any bank, provided that the
SO ORDERED. proceeds of the loan shall be used solely for the construction of
a building which, upon the termination of the lease or the
voluntary surrender of the leased premises before the
expiration of the contract, shall automatically become the
G.R. No. 128669 October 4, 2002 property of the Jayme spouses (the lessors).

MAMERTA VDA. DE JAYME, A Special Power of Attorney7 dated January 26, 1974, was
and her children and/or heirs of the late GRACIANO executed in favor of respondent George Neri, who used the lot
JAYME, namely: WILFREDO, MARCIAL, MANUEL, to secure a loan of P300,000 from the General Bank and Trust
ANTONIO, all surnamed JAYME; Company. The loan was fully paid on August 14, 1977.8
the heirs of DOMINADOR JAYME, namely: SUPREMA
(surviving spouse) and his children, namely: ARMANDO, In October 1977, Asiancars obtained a loan of P6,000,000 from
NICANOR, ZENAIDA, CATHERINE, ROSALINE, DORIS, the Metropolitan Bank and Trust Company (MBTC). The entire
VICKY and MARILYN, all surnamed JAYME; Lot 2700 was offered as one of several properties given as
and the heirs of the late NILIE JAYME SANCHEZ, namely, collateral for the loan. As mortgagors, the spouses signed a
INOCENCIO SANCHEZ (surviving spouse) and her Deed of Real Estate Mortgage9 dated November 21, 1977 in
children: ELSA, CONCEPCION, CLEOFE, ALEJANDRO, favor of MBTC. It stated that the deed was to secure the
EFREN and MACRINA, all surnamed SANCHEZ; payment of a loan obtained by Asiancars from the bank.
and FLORA JAYME RAVANES, assisted by her husband,
CESAR RAVANES, petitioners, To assure the Jayme spouses, Neri and the other officers of
vs. Asiancars, namely Benny Liongben Lee, William Leong Koc
HON. COURT OF APPEALS, SIXTEENTH DIVISION, CEBU Lee, Connie U. Neri, Edward James Lee, Roberto Uykim and
ASIANCARS INC., Charles P. Uykim, executed an undertaking10 dated November
GEORGE NERI, CONNIE NERI, WILLIAM LEONG KOC 7, 1977. In it they promised, in their personal capacities and/or
LEE, in representation of Cebu Asiancars, Inc., "to compensate Mr.
EDUARD JAMES LEE, ROBERTO UY KIM, AND CHARLES & Mrs. Graciano Jayme for any and all or whatever damage
UY KIM;1 they may sustain or suffer by virtue and arising out of the
METROPOLITAN BANK AND TRUST COMPANY, RENE mortgage to MBTC of the aforestated parcel of land."11 In
NATIVIDAD AND/OR JOHN DOE in substitution of MAXIMO addition, Neri wrote a letter dated September 1,
PEREZ, 198112 addressed to Mamerta Jayme acknowledging her
sued in his capacity as City Sheriff of Mandaue "confidence and help" extended to him, his family and
City, respondents. Asiancars. He promised to pay their indebtedness to MBTC
before the loan was due.
DECISION
Meeting financial difficulties and incurring an outstanding
QUISUMBING, J.: balance on the loan, Asiancars conveyed ownership of the
building on the leased premises to MBTC, by way of "dacion
This petition assails the decision2 dated September 19, 1996, en pago."13 The building was valued at P980,000 and the
of the Court of Appeals in CA-G.R. CV No. 46496 and its amount was applied as partial payment for the loan. There still
resolution3 dated February 21, 1997, denying the motion for remained a balance of P2,942,449.66, which Asiancars failed
reconsideration. Said decision had affirmed that of the to pay.
Regional Trial Court of Cebu City, Branch 15, in Civil Case No.
CEB-21369 for Annulment of Contract and Damages with Eventually, MBTC extrajudicially foreclosed the mortgage. A
Prayer for the Issuance of Preliminary Injunction. 4 public auction was held on February 4, 1981. MBTC was the
highest bidder for P1,067,344.35. A certificate of sale was
The following facts are borne by the records: issued and was registered with the Register of Deeds on
February 23, 1981.

21
Meanwhile, Graciano Jayme died, survived by his widow 4. Holding the defendants George Neri, William Leong
Mamerta and their children. As a result of the foreclosure, Koc, Connie U. Neri, Edward James Lee, Roberto
Gracianos heirs filed a civil complaint, 14 in January of 1982, for Uykim, and Charles Uykim jointly liable on their
Annulment of Contract with Damages with Prayer for Issuance Undertaking dated November 7, 1977 as they are
of Preliminary Injunction, against respondent Asiancars, its hereby required to reimburse the Jaymes the amount
officers and incorporators and MBTC. Later, in 1999, Mamerta that the Jaymes will pay to Metropolitan Bank and
Jayme also passed away. Trust Co. for the redemption;

Petitioners claim that Neri and Asiancars did not tell them that 5. Requiring the defendants George Neri, William
the indebtedness secured by the mortgage was for P6,000,000 Leong Koc, Connie U. Neri, Edward James Lee,
and that the security was the whole of Lot 2700. Petitioners Roberto Uykim and Charles Uykim to pay jointly
allege that the deed presented to the Jayme spouses was in attorneys fees to the Jaymes in the amount of
blank, without explanation on the stipulations contained P50,000.00;
therein, except that its conditions were identical to those of the
stipulations when they mortgaged half the lots area previously 6. Requiring the defendants George Neri, William
with General Bank. Petitioners also alleged that the Jayme Leong Koc, Connie U. Neri, Edwards James Lee,
spouses were illiterate and only knew how to sign their names. Roberto Uykim and Charles Uykim to pay jointly the
That because they did not know how to read nor write, and had cost of this suit.
given their full trust and confidence to George Neri, the
spouses were deceived into signing the Deed of Real Estate
SO ORDERED.15
Mortgage. Their intention as well as consent was only to be
bound as guarantors.
Petitioners and respondent MBTC elevated the case to the
Court of Appeals, which affirmed the ruling of the RTC, with
Respondents deny that any fraud was employed, nor was
modifications stated in this wise:
there a scheme to make the spouses sign as mortgagors
instead of guarantors. They aver that the spouses were fully
advised and compensated for the use of their property as 1. Declaring valid and binding the Real Estate
collateral with MBTC; that they voluntarily signed the deed of Mortgage executed by plaintiffs in favor of defendant
mortgage upon the request of George Neri, whom they MBTC;
previously trusted and who fulfilled his promise to pay the loan
to General Bank and who obtained the release of the same 2. Declaring valid the foreclosure of the mortgage and
property by faithfully paying his indebtedness with General the foreclosure sale;
Bank.
3. Declaring that the period to redeem Lot 2700 had
After trial, the RTC rendered a decision, disposing as follows: expired on February 23, 1982 without plaintiffs
redeeming it;
WHEREFORE, in view of the foregoing evidences, arguments
and considerations, this Court hereby renders judgment as 4. Ordering the Sheriff of Mandaue City to issue a
follows: definite Deed of Sale covering Lot 2700 in favor of
defendant MBTC;
1. Declaring the Real Estate Mortgage executed
by the Jaymes in favor of Metrobank as valid and 5. Declaring valid and binding the dacion en pago
binding; executed by defendant Asiancars in favor of
defendant MBTC;
2. Declaring the Undertaking executed by George
Neri, Benny Leongben Lee already deceased, William 6. Declaring defendant MBTC as owner of the
Leong Koc, Connie U. Neri, Edward James Lee, building on Lot 2700;
Roberto Uykim, and Charles P. Uykim on November
7, 1977 to be valid and binding as well upon the 7. Ordering defendant MBTC to pay to plaintiffs the
signatories thereof; amount of P92,083.33 for the use of the land from
December 18, 1981 to February 23, 1982, with six
3. Allowing the Jaymes to redeem the mortgaged percent (6%) interest per annum until paid;
property, Lot 2700 covered by TCT 8290 of the
Register of Deeds of Mandaue City for the amount of 8. Ordering defendant Asiancars, Neris, Uykims, Lee
P2,942,448.66 plus interest at the rate of 6% per and Koc to pay jointly and severally the plaintiffs the
annum within ninety (90) days from date of finality of (a) actual value of the lot in the amount of
this judgment until paid. However, if the plaintiffs fail P3,852,000.00; (b) P400,000.00 moral damages; (c)
to redeem said property, then let a Certificate of P150,000.00 exemplary damages and P100,000.00
Sale/definite Deed of Sale be issued in favor of attorneys fee, all with six percent (6%) interest per
Metropolitan Bank and Trust Co. covering said Lot annum until fully paid;
2700;

22
9. Cost against defendants Asiancars, Neris, Uykims, THAT THE LOWER COURT COMMITTED GRAVE ABUSE OF
Lee and Koc. DISCRETION, AMOUNTING TO EXCESS OF JURISDICTION,
IN DECLARING VALID AND BINDING THE MORTGAGE AND
SO ORDERED.16 THE CORRESPONDING FORECLOSURE, FOR SAID
DECLARATION IS ILLEGAL, IN VIOLATION OF ARTS. 1231
(5), 1245 AND 1255, CIVIL CODE AND BY THE INDUBITABLE
Petitioners filed a motion for reconsideration, which the CA
EVIDENCE OF ALL THE PARTIES TESTIMONIAL AND
denied. Hence, this petition which assigns the following errors:
DOCUMENTARY, TO THE EFFECT THAT THE SIX (6)
MILLION INDEBTEDNESS OF CEBU ASIANCARS WAS
I OVERPAID, THUS MBTC ALSO VIOLATED ARTS. 2142,
CIVIL CODE OF THE PHILIPPINES;
THAT WITH GRAVE ABUSE OF DISCRETION, AMOUNTING
TO EXCESS OF JURISDICTION, THE LOWER COURT VI
GROSSLY AND SERIOUSLY ERRED IN DECLARING VALID
AND BINDING THE REAL ESTATE MORTGAGE EXECUTED
THAT WITH GRAVE ABUSE OF DISCRETION, THE LOWER
BY THE PLAINTIFFS IN FAVOR OF THE MBTC, FOR SAID
COURT ERRED BY VIOLATING EXH. "C", THE CONTRACT
DECLARATION IS ILLEGAL AND NOT WELL-FOUNDED IN
OF LEASE, WHICH IS THE LAW BETWEEN THE PARTIES,
LAW BECAUSE IT ULTIMATELY VIOLATED ARTS. 2058,
AND INSTEAD, DELIBERATELY DECLARED VALID AND
2076 AND 2077, CIVIL CODE OF THE PHILIPPINES, SINCE
BINDING THE MORTGAGE EXH. "G", AND THE
THE REAL ESTATE MORTGAGE, EXH. "G", IS NOT
FORECLOSURE OF MORTGAGE, AND IN NOT ORDERING
LEGALLY A REAL ESTATE MORTGAGE, BUT RATHER A
MBTC TO VACATE THE PREMISES UPON THE
DEED OF GUARANTY, CONSIDERING THAT THE
TERMINATION OF THE CONTRACT OF LEASE ON
PLAINTIFF MAMERTA VDA. DE JAYME AND HER HUSBAND
JANUARY 9, 1993 PURSUANT TO EXH. "C", AND LIKEWISE
GRACIANO JAYME, NOW DECEASED, SIGNED
PAY RENTAL THEREAFTER, FOR ITS USE AT P96,300.00
INNOCENTLY THE SAID DOCUMENT AS
MONTHLY UNTIL MBTC ACTUALLY VACATES THE
GUARANTORS/ACCOMODATORS ONLY AND DEFINITELY
PREMISES.17
NOT AS DEBTORS/MORTGAGORS;

On March 13, 2002, the Court set a hearing on this petition,


II
and parties were given thirty days for simultaneous submission
of their respective memoranda. Petitioners additionally
THAT WITH GRAVE ABUSE OF DISCRETION, THE LOWER submitted "reply/rejoinder" and respondent MBTC also
COURT ERRED IN DECLARING THE PERIOD TO REDEEM submitted its "rejoinder sur-rejoinder."
LOT NO. 2700 HAD EXPIRED ON FEBRUARY 23, 1982,
WITHOUT THE PLAINTIFFS REDEEMING IT FOR SUCH
Two main issues are for our resolution. First, whether or not
DECLARATION IS NOT WELL-FOUNDED IN LAW AND IN
the REM should be annulled on the ground of vitiated consent;
FACT;
and second, whether or not the dacion en pago by Asiancars in
favor of MBTC is valid and binding despite the stipulation in the
III lease contract that ownership of the building will vest on the
Jaymes at the termination of the lease.
THAT WITH GRAVE ABUSE OF DISCRETION, THE LOWER
COURT ERRED IN DECLARING VALID AND BINDING THE The facts show that the spouses affixed their signature on the
DACION EN PAGO EXECUTED BY DEFENDANT CEBU Deed of Real Estate Mortgage, in the presence of two
ASIAN- CARS IN FAVOR OF DEFENDANT MBTC, FOR SAID instrumental witnesses, and duly notarized by Atty. Rodolfo Y.
DECLARATION IS ILLEGAL AND IS CLEARLY FOUNDED ON Cabrera. As a notarized document, it has in its favor the
WANTON BAD FAITH COMMITTED BY BOTH PARTIES, IN presumption of regularity, and to overcome this presumption,
VIOLATION OF ART. 1312, CIVIL CODE OF THE there must be evidence that is clear, convincing and more than
PHILIPPINES AND SEC. 10, ART. III, CONSTITUTION OF merely preponderant that there was irregularity in its execution;
THE PHILIPPINES; otherwise, the document should be upheld.18

IV The Deed of Real Estate Mortgage entered into by the Jayme


spouses partake of a Third Party Mortgage under Art. 2085 (3)
GRANTING ARGUENDO THAT THE DACION EN PAGO IS of the Civil Code which reads:
VALID, STILL THE LOWER COURT COMMITTED GRAVE
ABUSE OF DISCRETION, BY NOT DECLARING THAT THE The following requisites are essential to the contracts of pledge
P574,690.00 INDEBTEDNESS, INCLUDING INTEREST AND and mortgage: xxx (3) That the persons constituting the pledge
ADDITIONAL CHARGES OF CEBU ASIANCARS WAS or mortgage have the free disposal of their property, and in the
COMPLETELY EXTINGUISHED OR PAID OFF, BY WAY OF absence thereof, that they be legally authorized for the
DACION EN PAGO PURSUANT TO ARTS. 1255, 2076 AND purpose.
2077 OF THE CIVIL CODE OF THE PHILIPPINES.
Third persons who are not parties to the principal obligation
V may secure the latter by pledging or mortgaging their own
property.

23
In the case of Lustan vs. CA, et al.,19 this Court recognized the At the time of the foreclosure, Asiancars had a remaining
abovecited provision and held that "so long as valid consent balance of P2,010,633.28. Thus, MBTC had every right to
was given, the fact that the loans were solely for the benefit of effect the extrajudicial foreclosure of the mortgaged properties
(the debtor) would not invalidate the mortgage with respect to to satisfy its claim.
petitioners property. In consenting thereto even granting that
petitioner may not be assuming personal liability for the debt, The appellate court found that the spouses lost their right to
her property shall nevertheless secure and respond for the redeem their property. Under Section 78 of the General
performance of the principal obligation." Banking Act then in force,24 the mortgagor or debtor whose real
property has been foreclosed and sold at public auction, has
Clearly, the law recognizes instances when persons not the right to redeem the property within one year from the sale
directly parties to a loan agreement may give as security their of the real estate as a result of the foreclosure. The reckoning
own properties for the principal transaction. In this case, the date in the case of a registered land is from the date of
spouses should not be allowed to disclaim the validity of a registration of the certificate of sale.25 If no redemption is timely
transaction they voluntarily and knowingly entered into for the made, the buyer in a foreclosure sale becomes the absolute
simple reason that such transaction turned out prejudicial to owner of the property purchased.26 In this case, the certificate
them later on. of sale was registered on February 23, 1981, giving petitioners
until February 23, 1982 to redeem the property. This they failed
Both the trial and appellate courts found that no fraud attended to do, hence, ownership of the property already vested in the
the execution of the deed of mortgage. This is a factual finding purchaser, private respondent MBTC.
that binds this Court. Further, the records clearly show that the
spouses Jayme agreed to use their property as collateral for Much as we sympathize with petitioners plight, we are unable
Neris loan because Neri had their full trust and confidence. to find merit in their plea for the annulment of the deed of sale
Mamerta herself testified that she and her husband were covering Lot 2700 as a result of foreclosure of mortgage.
assured by Neris promise that he would take full responsibility Petitioners failed to show the required quantum of evidence
for whatever happens to the property of the spouses and that that they were fraudulently made to sign as mortgagors. As
he would comply with his obligations to the bank.20 early as Vales v. Villa, 35 Phil. 769 (1916), this Court has
sounded a note of warning to litigants:
The spouses were assisted by their own lawyer, Atty. Cirilo
Sanchez, in all their transactions, including the ones with The law furnishes no protection to the inferior simply
Asiancars and MBTC. Atty. Sanchez even signed as an because he is inferior any more than it protects the strong
instrumental witness to a Special Power of Attorney executed because he is strong. The law furnishes protection to both alike
by the spouses in favor of Neri, authorizing the latter to to one no more or less than the other. It makes no distinction
mortgage the same property to MBTC. Although the said SPA between the wise and the foolish, the great and the small, the
was eventually not used because MBTC required that the strong and the weak. The foolish may lose all they have to the
spouses themselves execute the REM, still, the fact remains wise; but that does not mean that the law will give it back to
that the spouses were already set on allowing the mortgage. In them again. Courts cannot follow one every step of his life and
addition, we note that Nelia Sanchez, the daughter of the extricate him from bad bargains, protect him from unwise
spouses and one of the petitioners herein, admitted that their investments, relieve him from one-sided contracts, or annul the
parents consulted her and her siblings before their parents effects of foolish acts.27
executed the Deed.21
Petitioners however, are not without recourse for the loss of
With the assistance of a lawyer and consultation with their their property. Although they cannot go after respondent
literate children, the spouses though illiterate could not feign MBTC, they have in their favor the undertaking executed by
ignorance of the stipulations in the deed. Patently, theirs was George Neri and other members of his family. The undertaking
not a vitiated consent. It could not now be justifiably asserted also bound respondent Asiancars, as well as its officers who
by petitioners that the Jayme spouses only intended to be were signatories to the aforesaid Undertaking, to reimburse
bound as guarantors and not as mortgagors. petitioners for the damages they suffered by reason of the
mortgage.
In this jurisdiction, when the property of a third person which
has been expressly mortgaged to guarantee an obligation to The alienation of the building by Asiancars in favor of MBTC for
which the said person is a stranger, said property is directly the partial satisfaction of its indebtedness is, in our view, also
and jointly liable for the fulfillment thereof, in the same manner valid. The ownership of the building had been effectively in the
as the mortgaged property of the debtor himself.22 name of the lessee-mortgagor (Asiancars), though with the
provision that said ownership be transferred to the Jaymes
In the case at bar, when Asiancars failed to pay its obligations upon termination of the lease or the voluntary surrender of the
with MBTC, the properties given as security (one of them being premises. The lease was constituted on January 8, 1973 and
the land owned by the Jaymes) became subject to foreclosure. was to expire 20 years thereafter, or on January 8, 1993. The
When several things are given to secure the same debt in its alienation via dacion en pago was made by Asiancars to MBTC
entirety, all of them are liable for the debt, and the creditor on December 18, 1980, during the subsistence of the lease. At
does not have to divide his action by distributing the debt this point, the mortgagor, Asiancars, could validly exercise
among the various things pledged or mortgaged. Even when rights of ownership, including the right to alienate it, as it did to
only a part of the debt remains unpaid, all the things are liable MBTC.
for such balance.23

24
Dacion en pago is the delivery and transmission of ownership WHEREFORE, the assailed decision of the Court of Appeals is
of a thing by the debtor to the creditor as an accepted AFFIRMED with the MODIFICATION that private respondent
equivalent of the performance of the obligation. 28 It is a special MBTC is ordered to pay petitioners rentals in the total amount
mode of payment where the debtor offers another thing to the of P602,083.33, with six (6) percent interest per annum until
creditor who accepts it as equivalent of payment of an fully paid. In all other respects, the assailed decision and
outstanding debt. The undertaking really partakes in one sense resolution of the Court of Appeals are AFFIRMED.
of the nature of sale, that is the creditor is really buying the
thing or property of the debtor, payment for which is to be SO ORDERED.
charged against the debtors debt. As such, the essential
elements of a contract of sale, namely, consent, object certain,
and cause or consideration must be present. In its modern
concept, what actually takes place in dacion en pago is an
objective novation of the obligation where the thing offered as
an accepted equivalent of the performance of an obligation is
considered as the object of the contract of sale, while the debt
is considered as the purchase price. In any case, common
consent is an essential prerequisite, be it sale or novation, to
have the effect of totally extinguishing the debt or obligation.29

We also find that the Court of Appeals did not err in


considering MBTC as a purchaser in good faith. MBTC had no
knowledge of the stipulation in the lease contract. Although the
same lease was registered and duly annotated on the
certificate of title of Lot 2700, MBTC was charged with
constructive knowledge only of the fact of lease of the land and
not of the specific provision stipulating transfer of ownership of
the building to the Jaymes upon termination of the lease. There
was no annotation on the title of any encumbrance. 30 While the
alienation was in violation of the stipulation in the lease
contract between the Jaymes and Asiancars, MBTCs own
rights could not be prejudiced by Asiancars actions
unbeknownst to MBTC. Thus, the transfer of the building in
favor of MBTC was properly held valid and binding by
respondent Court of Appeals.

One point, however, has to be cleared. The appellate court


ordered MBTC to pay rentals to petitioners at the rate of
P25.00 monthly per square meter. For the Asiancars building
stood on the lot owned by the petitioners, until the time MBTC
also consolidated its ownership over the lot. Rentals would
have to be paid starting on December 18, 1980, when the
buildings ownership was transferred to MBTC, until February
23, 1982, when MBTC finally consolidated its ownership over
Lot 2700. Hence, we agree that there was error in the
computation of rentals by the CA. 31 From December 18, 1980
until February 23, 1982, is a period of 1 year, 2 months and 5
days. Thus, MBTC should pay to petitioners rentals for the use
of the occupied lot,32 consisting of 1,700 sq. m. at the monthly
rate of P25.00 per sq. m. for that period, in the total amount of
P602,083.33, with six (6) percent interest per annum until fully
paid.

Finally, we are in agreement that bad faith attended Asiancars


transfer of the building to MBTC. Asiancars was well aware of
its covenant with the Jaymes that the buildings ownership was
to be transferred to the Jaymes upon termination of the lease.
Indeed, petitioners suffered mental anxiety and nervous shock
upon learning that the ownership of the building standing on
their property had already been transferred to MBTC. The
apparent disregard of petitioners right by Asiancars and other
private respondents provides enough basis for an award of
moral as well as exemplary damages33 by the appellate court.

25
HON. MIDPANTAO L. ADIL, Presiding Judge, Branch II,
Court of First Instance of Iloilo, THE PROVINCIAL
SHERIFF OF ILOILO, and PIO SERVANDO, respondents.

YAP, J.:

Petitioners seek the annulment of various orders issued by the


respondent Presiding Judge of Branch II, Court of First
Instance of Iloilo, in Civil Case No. 12312 entitled "Pio
Servando versus Jose Y. Servando et al." A temporary
restraining order was issued by this Court on May 9, 1979,
staying until further orders the execution of the decision
rendered by the respondent Judge in said case.

The case under review is for the annulment of a deed of sale


dated March 11, 1978, executed by defendant Jose Y.
Servando in favor of his co-defendants, the petitioners herein,
covering three parcels of land situated in Iloilo City. Claiming
that the said parcels of land were mortgaged to him in 1970 by
the vendor, who is his cousin, to secure a loan of P20,000.00,
the plaintiff Pio Servando impugned the validity of the sale as
being fraudulent, and prayed that it be declared null and void
and the transfer certificates of title issued to the vendees be
cancelled, or alternatively, if the sale is not annulled, to order
the defendant Jose Servando to pay the amount of
P20,000.00, plus interests, and to order defendants to pay
damages. Attached to the complaint was a copy of the private
document evidencing the alleged mortgage (Annex A), which is
quoted hereunder:

August 20, 1970

This is to certify that I, Jose Yusay Servando,


the sole owner of three parcel of land under
Tax Declaration No. 28905, 44123 and
31591 at Lot No. 1, 1863-Portion of 1863 &
1860 situated at Sto. Nino St., Arevalo,
Compania St. & Compania St., Interior Molo,
respectively, have this date mortgaged the
said property to my cousin Pio Servando, in
the amount of TWENTY THOUSAND
PESOS (P20,000.00), redeemable for a
period not exceeding ten (10) years, the
mortgage amount bearing an interest of 10%
per annum.

I further certify that in case I fail to redeem


the said properties within the period stated
above, my cousin Pio Servando, shall
become the sole owner thereof.

(SGD.) JOSE YUSAY SERVANDO

G.R. No. L-49940 September 25, 1986 WITNESSES:

GEMMA R. HECHANOVA, accompanied by her husband, (Sgd) Ernesto G. Jeruta


NICANOR HECHANOVA, JR., and PRESCILLA R. MASA,
accompanied by her husband, FRANCISCO (Sgd) Francisco B. Villanueva
MASA, petitioners,
vs.

26
The defendants moved to dismiss the complaint on the was validly mortgaged to the plaintiff, his recourse was to
grounds that it did not state a cause of action, the alleged foreclose the mortgage, not to seek annulment of the sale.
mortgage being invalid and unenforceable since it was a mere
private document and was not recorded in the Registry of WHEREFORE, the decision of the respondent court dated
Deeds; and that the plaintiff was not the real party in interest August 25, 1973 and its Order of February 2, 1979 are set
and, as a mere mortgagee, had no standing to question the aside, and the complaint filed by plaintiff dated February 4,
validity of the sale. The motion was denied by the respondent 1978 is hereby dismissed.
Judge, in its order dated June 20, 1978, "on the ground that
this action is actually one for collection."
SO ORDERED.

On June 23, 1978, defendant Jose Y. Servando died. The


defendants filed a Manifestation and Motion, informing the trial
court accordingly, and moving for the dismissal of the G.R. No. L-53955 January 13, 1989
complaint pursuant to Section 21 of Rule 3 of the Rules of
Court, pointing out that the action was for. recovery of money
THE MANILA BANKING CORPORATION, plaintiff-appellee,
based on an actionable document to which only the deceased
vs.
defendant was a party. The motion to dismiss was denied on
ANASTACIO TEODORO, JR. and GRACE ANNA
July 25, 1978, "it appearing from the face of the complaint that
TEODORO, defendants-appellants.
the instant action is not purely a money claim, it being only
incidental, the main action being one for annulment and
damages." Formoso & Quimbo Law Office for plaintiff-appellee.

On August 1, 1978, plaintiff filed a motion to declare Serafin P. Rivera for defendants-appellants.
defendants in default, and on the very next day, August 2, the
respondent Judge granted the motion and set the hearing for
presentation of plaintiff's evidence ex-parte on August 24,
1978. BIDIN, J.:

On August 2, 1978, or the same day that the default order was This is an appeal from the decision* of the Court of First
issued, defendants Hechanova and Masa filed their Answers, Instance of Manila, Branch XVII in Civil Case No. 78178 for
denying the allegations of the complaint and repeating, by way collection of sum of money based on promissory notes
of special and affirmative defenses, the grounds stated in their executed by the defendants-appellants in favor of plaintiff-
motions to dismiss. appellee bank. The dispositive portion of the appealed decision
(Record on Appeal, p. 33) reads as follows:
On August 25, 1978, a judgment by default was rendered
against the defendants, annulling the deed of sale in question WHEREFORE judgment is hereby rendered
and ordering the Register of Deeds of Iloilo to cancel the titles (a) sentencing defendants, Anastacio
issued to Priscilla Masa and Gemma Hechanova, and to revive Teodoro, Jr. and Grace Anna Teodoro jointly
the title issued in the name of Jose Y. Servando and to deliver and severally, to pay plaintiff the sum of
the same to the plaintiff. P15,037.11 plus 12% interest per annum
from September 30, 1969 until fully paid, in
The defendants took timely steps to appeal the decision to the payment of Promissory Notes No. 11487,
Court of Appeals by filing a notice of appeal, an appeal bond, plus the sum of P1,000.00 as attorney's fees;
and a record on appeal. However, the trial court disapproved and (b) sentencing defendant Anastacio
the record on appeal due to the failure of defendants to comply Teodoro, Jr. to pay plaintiff the sum of
with its order to eliminate therefrom the answer filed on August P8,934.74, plus interest at 12% per annum
2, 1978 and accordingly, dismissed the appeal, and on from September 30, 1969 until fully paid, in
February 2, 1978, issued an order granting the writ of payment of Promissory Notes Nos. 11515
execution prayed for by plaintiff. and 11699, plus the sum of P500.00 an
attorney's fees.
We find the petition meritorious, and the same is hereby given
due course. With Costs against defendants.

It is clear from the records of this case that the plaintiff has no The facts of the case as found by the trial court are as follows:
cause of action. Plaintiff has no standing to question the
validity of the deed of sale executed by the deceased On April 25, 1966, defendants, together with
defendant Jose Servando in favor of his co-defendants Anastacio Teodoro, Sr., jointly and severally,
Hechanova and Masa. No valid mortgage has been constituted executed in favor of plaintiff a Promissory
plaintiff's favor, the alleged deed of mortgage being a mere Note (No. 11487) for the sum of P10,420.00
private document and not registered; moreover, it contains a payable in 120 days, or on August 25, 1966,
stipulation (pacto comisorio) which is null and void under at 12% interest per annum. Defendants
Article 2088 of the Civil Code. Even assuming that the property failed to pay the said amount inspire of
repeated demands and the obligation as of

27
September 30, 1969 stood at P 15,137.11 (6) The Assignor
including accrued interest and service guarantees the existence
charge. and legality of said
accounts receivable, and
On May 3, 1966 and June 20, 1966, the due and punctual
defendants Anastacio Teodoro, Sr. (Father) payment thereof unto the
and Anastacio Teodoro, Jr. (Son) executed in assignee, ... on
favor of plaintiff two Promissory Notes (Nos. demand, ... and further,
11515 and 11699) for P8,000.00 and that Assignor warrants the
P1,000.00 respectively, payable in 120 days solvency and credit
at 12% interest per annum. Father and Son worthiness of each and
made a partial payment on the May 3, 1966 every account.
promissory Note but none on the June 20,
1966 Promissory Note, leaving still an (7) The Assignor does
unpaid balance of P8,934.74 as of hereby guarantee the
September 30, 1969 including accrued payment when due on all
interest and service charge. sums payable under the
contracts giving rise to the
The three Promissory Notes stipulated that accounts receivable ...
any interest due if not paid at the end of including reasonable
every month shall be added to the total attorney's fees in enforcing
amount then due, the whole amount to bear any rights against the
interest at the rate of 12% per annum until debtors of the assigned
fully paid; and in case of collection through accounts receivable and
an attorney-at-law, the makers shall, jointly will pay upon demand, the
and severally, pay 10% of the amount over- entire unpaid balance of
due as attorney's fees, which in no case said contract in the event
shall be leas than P200.00. of non-payment by the
said debtors of any
monthly sum at its due
It appears that on January 24, 1964, the Son
date or of any other default
executed in favor of plaintiff a Deed of
by said debtors;
Assignment of Receivables from the
Emergency Employment Administration in
the sum of P44,635.00. The Deed of xxx xxx xxx
Assignment provided that it was for and in
consideration of certain credits, loans, (9) ... This Assignment
overdrafts and other credit accommodations shall also stand as a
extended to defendants as security for the continuing guarantee for
payment of said sum and the interest any and all whatsoever
thereon, and that defendants do hereby there is or in the future
remise, release and quitclaim all its rights, there will be justly owing
title, and interest in and to the accounts from the Assignor to the
receivables. Further. Assignee ...

(1) The title and right of In their stipulations of Fact, it is admitted by


possession to said the parties that plaintiff extended loans to
accounts receivable is to defendants on the basis and by reason of
remain in the assignee, certain contracts entered into by the defunct
and it shall have the right Emergency Employment Administration
to collect the same from (EEA) with defendants for the fabrication of
the debtor, and fishing boats, and that the Philippine
whatsoever the Assignor Fisheries Commission succeeded the EEA
does in connection with after its abolition; that non-payment of the
the collection of said notes was due to the failure of the
accounts, it agrees to do Commission to pay defendants after the
as agent and latter had complied with their contractual
representative of the obligations; and that the President of plaintiff
Assignee and in trust for Bank took steps to collect from the
said Assignee ; Commission, but no collection was effected.

xxx xxx xxx For failure of defendants to pay the sums


due on the Promissory Note, this action was
instituted on November 13, 1969, originally

28
against the Father, Son, and the latter's wife. MOVE IN THE PREMISES within thirty days from notice, and
Because the Father died, however, during in case they fail to make the proper manifestation within the
the pendency of the suit, the case as against required period, (2) to consider the case terminated and closed
him was dismiss under the provisions of with the entry of judgment accordingly made thereon (Rollo, p.
Section 21, Rule 3 of the Rules of Court. The 40).
action, then is against defendants Son and
his wife for the collection of the sum of P On April 27, 1988, appellee moved for a resolution of the
15,037.11 on Promissory Note No. 14487; appeal review interposed by defendants-appellants (Rollo, p.
and against defendant Son for the recovery 41).
of P 8,394.7.4 on Promissory Notes Nos.
11515 and 11699, plus interest on both
The major issues raised in this case are as follows: (1) whether
amounts at 12% per annum from September
or not the assignment of receivables has the effect of payment
30, 1969 until fully paid, and 10% of the
of all the loans contracted by appellants from appellee bank;
amounts due as attorney's fees.
and (2) whether or not appellee bank must first exhaust all
legal remedies against the Philippine Fisheries Commission
Neither of the parties presented any before it can proceed against appellants for collections of loan
testimonial evidence and submitted the case under the promissory notes which are plaintiffs bases in the
for decision based on their Stipulations of action for collection in Civil Case No. 78178.
Fact and on then, documentary evidence.
Assignment of credit is an agreement by virtue of which the
The issues, as defined by the parties are: (1) owner of a credit, known as the assignor, by a legal cause,
whether or not plaintiff claim is already such as sale, dation in payment, exchange or donation, and
considered paid by the Deed of Assign. without the need of the consent of the debtor, transfers his
judgment of Receivables by the Son; and (2) credit and its accessory rights to another, known as the
whether or not it is plaintiff who should assignee, who acquires the power to enforce it to the same
directly sue the Philippine Fisheries extent as the assignor could have enforced it against the
Commission for collection.' (Record on debtor. ... It may be in the form of a sale, but at times it may
Appeal, p. 29- 32). constitute a dation in payment, such as when a debtor, in order
to obtain a release from his debt, assigns to his creditor a
On April 17, 1972, the trial court rendered its judgment adverse credit he has against a third person, or it may constitute a
to defendants. On June 8, 1972, defendants filed a motion for donation as when it is by gratuitous title; or it may even be
reconsideration (Record on Appeal, p. 33) which was denied merely by way of guaranty, as when the creditor gives as a
by the trial court in its order of June 14, 1972 (Record on collateral, to secure his own debt in favor of the assignee,
Appeal, p. 37). On June 23, 1972, defendants filed with the without transmitting ownership. The character that it may
lower court their notice of appeal together with the appeal bond assume determines its requisites and effects. its regulation,
(Record on Appeal, p. 38). The record of appeal was forwarded and the capacity of the parties to execute it; and in every case,
to the Court of Appeals on August 22, 1972 (Record on Appeal, the obligations between assignor and assignee will depend
p. 42). upon the judicial relation which is the basis of the assignment:
(Tolentino, Commentaries and Jurisprudence on the Civil Code
In their appeal (Brief for the Appellants, Rollo, p. 12), of the Philippines, Vol. 5, pp. 165-166).
appellants raised a single assignment of error, that is
There is no question as to the validity of the assignment of
THAT THE DECISION IN QUESTION receivables executed by appellants in favor of appellee bank.
AMOUNTS TO A JUDICIAL REMAKING OF
THE CONTRACT BETWEEN THE The issue is with regard to its legal effects.
PARTIES, IN VIOLATION OF LAW; HENCE,
TANTAMOUNT TO LACK OR EXCESS OF I
JURISDICTION.
It is evident that the assignment of receivables executed by
As the appeal involves a pure question of law, the Court of appellants on January 24, 1964 did not transfer the ownership
Appeals, in its resolution promulgated on March 6, 1980, of the receivables to appellee bank and release appellants
certified the case to this Court (Rollo, p. 24). The record on from their loans with the bank incurred under promissory notes
Appeal was forwarded to this Court on March 31, 1980 (Rollo, Nos. 11487,11515 and 11699.
p. 1).
The Deed of Assignment provided that it was for and in
In the resolution of May 30, 1980, the First Division of this consideration of certain credits, loans, overdrafts, and their
Court ordered that the case be docketed and declared credit accommodations in the sum of P10,000.00 extended to
submitted for decision (Rollo, p. 33). appellants by appellee bank, and as security for the payment
of said sum and the interest thereon; that appellants as
On March 7, 1988, considering the length of time that the case assignors, remise, release, and quitclaim to assignee bank all
has been pending with the Court and to determine whether their rights, title and interest in and to the accounts receivable
supervening events may have rendered the case moot and assigned (lst paragraph). It was further stipulated that the
academic, the Court resolved (1) to require the parties to assignment will also stand as a continuing guaranty for future

29
loans of appellants to appellee bank and correspondingly the Definitely, the assignment of the receivables did not result from
assignment shall also extend to all the accounts receivable; a sale transaction. It cannot be said to have been constituted
appellants shall also obtain in the future, until the consideration by virtue of a dation in payment for appellants' loans with the
on the loans secured by appellants from appellee bank shall bank evidenced by promissory note Nos. 11487, 11515 and
have been fully paid by them (No. 9). 11699 which are the subject of the suit for collection in Civil
Case No. 78178. At the time the deed of assignment was
The position of appellants, however, is that the deed of executed, said loans were non-existent yet. The deed of
assignment is a quitclaim in consideration of their assignment was executed on January 24, 1964 (Exh. "G"),
indebtedness to appellee bank, not mere guaranty, in view of while promissory note No. 11487 is dated April 25, 1966 (Exh.
the following provisions of the deed of assignment: 'A), promissory note 11515, dated May 3, 1966 (Exh. 'B'),
promissory note 11699, on June 20, 1966 (Exh. "C"). At most, it
was a dation in payment for P10,000.00, the amount of credit
... the Assignor do hereby remise, release
from appellee bank indicated in the deed of assignment. At the
and quit-claim unto said assignee all
time the assignment was executed, there was no obligation to
its rights, title and interest in the accounts
be extinguished except the amount of P10,000.00. Moreover,
receivable described hereunder. (Emphasis
in order that an obligation may be extinguished by another
supplied by appellants, first par., Deed of
which substitutes the same, it is imperative that it be so
Assignment).
declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other
... that the title and right of possession to (Article 1292, New Civil Code).
said account receivable is to remain in said
assignee and it shall have the right to collect
Obviously, the deed of assignment was intended as collateral
directly from the debtor, and whatever the
security for the bank loans of appellants, as a continuing
Assignor does in connection with the
guaranty for whatever sums would be owing by defendants to
collection of said accounts, it agrees to do so
plaintiff, as stated in stipulation No. 9 of the deed.
as agent and representative of the Assignee
and it trust for said Assignee ...(Ibid. par. 2 of
Deed of Assignment).' (Record on Appeal, p. In case of doubt as to whether a transaction is a pledge or a
27) dation in payment, the presumption is in favor of pledge, the
latter being the lesser transmission of rights and interests
(Lopez v. Court of Appeals, supra).
The character of the transactions between the parties is not,
however, determined by the language used in the document
but by their intention. Thus, the Court, quoting from the In one case, the assignments of rights, title and interest of the
American Jurisprudence (68 2d, Secured Transaction, Section defendant in the contracts of lease of two buildings as well as
50) said: her rights, title and interest in the land on which the buildings
were constructed to secure an overdraft from a bank
amounting to P110,000.00 which was increased to
The characters of the transaction between
P150,000.00, then to P165,000.00 was considered by the
the parties is to be determined by their
Court to be documents of mortgage contracts inasmuch as
intention, regardless of what language was
they were executed to guarantee the principal obligations of
used or what the form of the transfer was. If
the defendant consisting of the overdrafts or the indebtedness
it was intended to secure the payment of
resulting therefrom. The Court ruled that an assignment to
money, it must be construed as a pledge.
guarantee an obligation is in effect a mortgage and not an
However, even though a transfer, if regarded
absolute conveyance of title which confers ownership on the
by itself, appellate to have been absolute, its
assignee (People's Bank & Trust Co. v. Odom, 64 Phil. 126
object and character might still be qualified
[1937]).
and explained by a contemporaneous writing
declaring it to have been a deposit of the
property as collateral security. It has been Id II
that a transfer of property by the debtor to a
creditor, even if sufficient on its farm to make As to whether or not appellee bank must have to exhaust all
an absolute conveyance, should be treated legal remedies against the Philippine Fisheries Commission
as a pledge if the debt continues in existence before it can proceed against appellants for collection of loans
and is not discharged by the transfer, and under their promissory notes, must also be answered in the
that accordingly, the use of the terms negative.
ordinarily exporting conveyance, of absolute
ownership will not be given that effect in The obligation of appellants under the promissory notes not
such a transaction if they are also commonly having been released by the assignment of receivables,
used in pledges and mortgages and appellants remain as the principal debtors of appellee bank
therefore do not unqualifiedly indicate a rather than mere guarantors. The deed of assignment merely
transfer of absolute ownership, in the guarantees said obligations. That the guarantor cannot be
absence of clear and ambiguous language compelled to pay the creditor unless the latter has exhausted
or other circumstances excluding an intent to all the property of the debtor, and has resorted to all the legal
pledge. (Lopez v. Court of Appeals, 114 remedies against the debtor, under Article 2058 of the New
SCRA 671 [1982]). Civil Code does not therefore apply to them. It is of course of

30
the essence of a contract of pledge or mortgage that when the The defendants, after the overruling of a demurrer to the
principal obligation becomes due, the things in which the complaint herein, answered denying generally and specifically
pledge or mortgage consists may be alienated for the payment all the allegations contained in the complaint, except those
to the creditor (Article 2087, New Civil Code). In the instant which were expressly admitted, and alleged that the amount
case, appellants are both the principal debtors and the claimed included the interest; and that the principal borrowed
pledgors or mortgagors. Resort to one is, therefore, resort to was only 200 pesos and that the interest was 280 pesos,
the other. although in drawing the document by mutual consent of the
parties thereto the amount of indebtedness was made to
Appellee bank did try to collect on the pledged receivables. As appear in the sum of 480 pesos; and that as their special
the Emergency Employment Agency (EEA) which issued the defense defendants alleged that they offered to pay the plaintiff
receivables had been abolished, the collection had to be the sum of 480 pesos, but the plaintiff had refused to accept
coursed through the Office of the President which disapproved the same, therefore they persisted in making said offer and
the same (Record on Appeal, p. 16). The receivable became tender of payment, placing at the disposal of the plaintiff the
virtually worthless leaving appellants' loans from appellee bank said 480 pesos first tendered; and defendants asked for the
unsecured. It is but proper that after their repeated demands costs of action.
made on appellants for the settlement of their obligations,
appellee bank should proceed against appellants. It would be After having taken the evidence of both parties and attaching
an exercise in futility to proceed against a defunct office for the the documents presented in evidence to the record, the judge
collection of the receivables pledged. on November 27, 1905, rendered a judgment ordering the
defendants to deliver to the plaintiff the house and lot, the
WHEREFORE, the appeal is Dismissed for lack of merit and object of this litigation, and to pay the costs of the action, not
the appealed decision of the trial court is affirmed in toto. making any finding upon the question of loss or damages by
reason of the absence of proof on these points. The
defendants duly took exception to this decision, and asked for
SO ORDERED.
a new trial of the case on the ground that the findings of the
court below in its decision were plainly contrary to law, which
motion was overruled and from which ruling defendants also
excepted.
G.R. No. 3227 March 22, 1907

We have in this case a contract of loan and a promise of sale


PEDRO ALCANTARA, plaintiff-appellee,
of a house and lot, the price of which should be the amount
vs.
loaned, if within a fixed period of time such amount should not
AMBROSIO ALINEA, ET AL., defendants-appellants.
be paid by the debtor-vendor of the property to the creditor-
vendee of same.
S.D. Reyes for appellants.
J. Gerona for appellee.
Either one of the contracts are perfectly legal and both are
authorized respectively by articles 1451, 1740, and 1753, and
TORRES, J.: those following, of the Civil Code. The fact that the parties
have agreed at the same time, in such a manner that the
On the 13th day of March, 1905, the plaintiff filed a complaint fulfillment of the promise of sale would depend upon the
in the Court of First Instance of La Laguna, praying that nonpayment or return of the amount loaned, has not produced
judgment be rendered in his behalf ordering the defendants to any charge in the nature and legal conditions of either contract,
de liver to him the house and lot claimed, and to pay him in or any essential defect which would tend to nullify the same.
addition thereto as rent the sum of 8 pesos per month from
February of that year, and to pay the costs of the action; and If the promise of sale is not vitiated because, according to the
the plaintiff alleged in effect that on the 29th day of February, agreement between the parties thereto, the price of the same
1904, the defendants, Ambrosio Alinea and Eudosia is to be the amount loaned and not repaid, neither would the
Belarmino, borrowed from him the sum of 480 pesos, payable loan be null or illegal, for the reason that the added agreement
in January of said year 1905 under the agreement that if, at the provides that in the event of failure of payment the sale of
expiration of the said period, said amount should not be paid it property as agreed will take effect, the consideration being the
would be understood that the house and lot, the house being amount loaned and not paid. No article of the Civil Code, under
constructed of strong materials, owned by the said defendants the rules or regulations of which such double contract was
and located in the town of San Pablo on the street of the same executed, prohibits expressly, or by inference from any of its
name, Province of La Laguna, be considered as absolutely provisions, that an agreement could not be made in the form in
sold to the plaintiff for the said sum; that the superficial extent which the same has been executed; on the contrary, article
and boundaries of said property are described in the complaint; 1278 of the aforesaid code provides that "contracts shall be
and that, notwithstanding that the time for the payment of said binding, whatever may be the form in which they may have
sum has expired and no payment has been made, the been executed, provided the essential conditions required for
defendants refuse to deliver to plaintiff the said property, their validity exist." This legal prescription appears firmly
openly violating that which they contracted to do and depriving sustained by the settled practice of the courts.
him to his loss of the rents which plaintiff should received, the
same counting from February, 1905.
The property, the sale of which was agreed to by the debtors,
does not appear mortgaged in favor of the creditor, because in

31
order to constitute a valid mortgage it is indispensable that the of four years, or in case of default to transfer direct
instrument be registered in the Register of Property, in domain of the properties described in the obligation
accordance with article 1875 of the Civil Code, and the and to execute the necessary sale; and the term
document of contract, Exhibit A, does not constitute a having expired and the aforesaid amount not having
mortgage, nor could it possibly be a mortgage, for the reason been paid, said plaintiff has his right free from
of said document is not vested with the character and impediment to claim same against the heirs of the
conditions of a public instrument. debtor.

By the aforesaid document, Exhibit A, said property could not The document of contract has been recognized by the
be pledged, not being personal property, and notwithstanding defendant Alinea and by the witnesses who signed same with
the said double contract the debtor continued in possession him, being therefore an authentic and efficacious document, in
thereof and the said property has never been occupied by the accordance with article 1225 of the Civil Code; and as the
creditor. amount loaned has not been paid and continues in possession
of the debtor, it is only just that the promise of sale be carried
Neither was there ever nay contract of antichresis by reason of into effect, and the necessary instrument be executed by the
the said contract of loan, as is provided in articles 1881 and vendees.
those following of the Civil Code, inasmuch as the creditor-
plaintiff has never been in possession thereof, nor has he Therefore, by virtue of the reasons given above and accepting
enjoyed the said property, nor for one moment ever received the findings given in the judgment appealed from, we affirm the
its rents; therefore, there are no proper terms in law, taking into said judgment herein, with the costs against the appellants.
consideration the terms of the conditions contained in the
aforesaid contract, whereby this court can find that the contract After expiration of twenty days from the date of the notification
was null, and under no consideration whatever would it be just of this decision let judgment be entered in accordance herewith
to apply to the plaintiff articles 1859 and 1884 of the same and ten days thereafter let the case be remanded to the court
code. from whence it came for proper action. So ordered.

The contract ( pactum commissorium) referred to in Law 41,


title 5, and law 12, title 12, of the fifth Partida, and perhaps
included in the prohibition and declaration of nullity expressed G.R. No. 77465 May 21, 1988
in articles 1859 and 1884 of the Civil Code, indicates the
existence of the contracts of mortgage or of pledge or that SPOUSES UY TONG & KHO PO GIOK, petitioners,
of antichresis, none of which have coincided in the loan vs.
indicated herein. HONORABLE COURT OF APPEALS, HONORABLE
BIENVENIDO C. EJERCITO, Judge of the Court of First
It is a principle in law, invariably applied by the courts in the Instance of Manila, Branch XXXVII and BAYANIHAN
decisions of actions instituted in the matter of compliance with AUTOMOTIVE CORPORATION, respondents.
obligations, that the will of the contracting parties is the law of
contracts and that a man obligates himself to that to which he Platon A. Baysa for petitioner.
promises to be bound, a principle in accordance with Law 1,
title 1, book 10 of the Novisima Recopilacion, and article 1091
Manuel T. Ybarra for respondents.
of the Civil Code. That which is agreed to in a contract is law
between the parties, a doctrine established, among others, in
judgments of the supreme court of Spain of February 20, 1897,
and February 13, 1904.
CORTES, J.:
It was agreed between plaintiff and defendants herein that if
defendants should not pay the loan of 480 pesos in January, In the present petition, petitioners assail the validity of a deed
1905, the property belonging to the defendants and described of assignment over an apartment unit and the leasehold rights
in the contract should remain sold for the aforesaid sum, and over the land on which the building housing the said apartment
such agreement must be complied with, inasmuch as there is stands for allegedly being in the nature of a pactum
no ground in law to oppose the compliance with that which has commissorium.
been agreed upon, having been so acknowledged by the
obligated parties. The facts are not disputed.

The supreme court of Spain, applying the aforementioned laws Petitioners Uy Tong (also known as Henry Uy) and Kho Po
of Spanish origin to a similar case, establishes in its decision of Giok (SPOUSES) used to be the owners of Apartment No. 307
January 16, 1872, the following legal doctrine: of the Ligaya Building, together with the leasehold right for
ninety- nine (99) years over the land on which the building
Basing the complaint upon the obligation signed by stands. The land is registered in the name of Ligaya
the debtor, which judicially recognized his signature; Investments, Inc. as evidenced by Transfer Certificate of Title
and after confessing to have received from the No. 79420 of the Registry of Deeds of the City of Manila. It
plaintiff a certain amount, binding himself to return appears that Ligaya Investments, Inc. owned the building
same to the satisfaction of the plaintiff within the term which houses the apartment units but sold Apartment No. 307

32
and leased a portion of the land in which the building stands to from July 1, 1970 until full payment. In the
the SPOUSES. event of their failure to do so within thirty
(30) days from notice of this judgment, they
In February, 1969, the SPOUSES purchased from private are hereby ordered to execute the
respondent Bayanihan Automotive, Inc. (BAYANIHAN) seven corresponding deed of absolute sale in favor
(7) units of motor vehicles for a total amount of P47,700.00 of the plaintiff and/or the assignment of
payable in three (3) installments. The transaction was leasehold rights over the defendant's
evidenced by a written "Agreement" wherein the terms of apartment located at 307 Ligaya Building,
payment had been specified as follows: Alvarado Street, Binondo, Manila, upon the
payment by the plaintiff to the defendants of
the sum of P3,535.00. [emphasis supplied].
That immediately upon signing of this
Agreement, the VENDEE shall pay unto the
VENDOR the amount of Seven Thousand Pursuant to said judgment, an order for execution pending
Seven Hundred (P7,000.00) Pesos, appeal was issued by the trial court and a deed of assignment
Philippine Currency, and the amount of dated May 27, 1972, was executed by the SPOUSES [Exhibit
Fifteen Thousand (P15,000.00) Pesos shah "B", CFI Records, p. 127] over Apartment No. 307 of the
be paid on or before March 30, 1969 and the Ligaya Building together with the leasehold right over the land
balance of Twenty Five Thousand on which the building stands. The SPOUSES acknowledged
(P25,000.00) Pesos shall be paid on or receipt of the sum of P3,000.00 more or less, paid by
before April 30, 1969, the said amount again BAYANIHAN pursuant to the said judgment.
to be secured by another postdated check
with maturity on April 30, 1969 to be drawn Notwithstanding the execution of the deed of assignment the
by the VENDEE; SPOUSES remained in possession of the premises.
Subsequently, they were allowed to remain in the premises as
That it is fully understood that should the two lessees for a stipulated monthly rental until November 30,1972.
(2) aforementioned checks be not honored
on their respective maturity dates, herein Despite the expiration of the said period, the SPOUSES failed
VENDOR will give VENDEE another sixty to surrender possession of the premises in favor of
(60) days from maturity dates, within which BAYANIHAN. This prompted BAYANIHAN to file an ejectment
to pay or redeem the value of the said case against them in the City Court of Manila docketed as Civil
checks; Case No. 240019. This action was however dismissed on the
ground that BAYANIHAN was not the real party in interest, not
That if for any reason the VENDEE should being the owner of the building.
fail to pay her aforementioned obligation to
the VENDOR, the latter shall become On February 7, 1979, after demands to vacate the subject
automatically the owner of the former's apartment made by BAYANIHAN's counsel was again ignored
apartment which is located at No. 307, by the SPOUSES, an action for recovery of possession with
Ligaya Building, Alvarado St., Binondo, damages was filed with the Court of First Instance of Manila,
Manila, with the only obligation on its part to docketed as Civil Case No. 121532 against the SPOUSES and
pay unto the VENDEE the amount of Three impleading Ligaya Investments, Inc. as party defendant. On
Thousand Five Hundred Thirty Five March 17, 1981, decision in said case was rendered in favor of
(P3,535.00) Pesos, Philippine Currency; and BAYANIHAN ordering the following:
in such event the VENDEE shall execute the
corresponding Deed of absolute Sale in WHEREFORE, judgment is hereby rendered
favor of the VENDOR and or the Assignment in favor of the plaintiff and against the
of Leasehold Rights. [emphasis supplied]. defendants spouses UY TONG and KHO
(Quoted in Decision in Civil Case No. 80420, GIOK and defendant Ligaya Investment,
Exhibit "A" of Civil Case No. 1315321]. Inc., dismissing defendants' counterclaim
and ordering:
After making a downpayment of P7,700.00, the SPOUSES
failed to pay the balance of P40,000.00. Due to these unpaid 1. The defendants spouses UY TONG and
balances, BAYANIHAN filed an action for specific performance KHO PO GIOK and any andlor persons
against the SPOUSES docketed as Civil Case No. 80420 with claiming right under them, to vacate,
the Court of First Instance of Manila. surrender and deliver possession of
Apartment 307, Ligaya Building, located at
On October 28, 1978, after hearing, judgment was rendered in 64 Alvarado Street, Binondo, Manila to the
favor of BAYANIHAN in a decision the dispositive portion of plaintiff;
which reads:
2. Ordering defendant Ligaya Investment,
WHEREFORE, judgment is hereby Inc. to recognize the right of ownership and
rendered, ordering the defendants, jointly possession of the plaintiff over Apartment
and severally, to pay the plaintiffs, the sum of No. 307, Ligaya Building;
P40,000.00, with interest at the legal rate

33
3. Ordering Ligaya Investment, Inc. to The prohibition on pactum commissorium stipulations is
acknowledge plaintiff as assignee-lessee in provided for by Article 2088 of the Civil Code:
liue of defendants spouses Uy Tong and Kho
Po Giok over the lot on which the building Art. 2088. The creditor cannot appropriate
was constructed; the things given by way of pledge or
mortgage, or dispose of the same. Any
4. Ordering the defendants spouses Uy Tong stipulation to the contrary is null and void.
and Kho Po Giok to pay to the plaintiff the
sum of P200.00 commencing from June, The aforequoted provision furnishes the two elements
1971 to November 30, 1972, or a total for pactum commissorium to exist: (1) that there should be a
amount of P3,400.00 as rental for the pledge or mortgage wherein a property is pledged or
apartment, and the sum of P200.00 from mortgaged by way of security for the payment of the principal
December 1, 1972 until the premises are obligation; and (2) that there should be a stipulation for an
finally vacated and surrendered to the automatic appropriation by the creditor of the thing pledged or
plaintiff, as reasonable compensation for the mortgaged in the event of non-payment of the principal
use of the apartment; and obligation within the stipulated period.

5. Ordering the defendants spouses Uy Tong A perusal of the terms of the questioned agreement evinces no
and Kho Po Giok to pay P3,000.00 as and basis for the application of the pactum
for attorney's fees to the plaintiff, and the commissorium provision. First, there is no indication of 'any
costs of this suit. contract of mortgage entered into by the parties. It is a fact that
the parties agreed on the sale and purchase of trucks.
Not satisfied with this decision, the SPOUSES appealed to the
Court of Appeals. On October 2,1984, the respondent Court of Second, there is no case of automatic appropriation of the
Appeals affirmed in toto the decision appealed from [Petition, property by BAYANIHAN. When the SPOUSES defaulted in
Annex "A", Rollo, pp. 15-20]. A motion for reconsideration of their payments of the second and third installments of the
the said decision was denied by the respondent Court in a trucks they purchased, BAYANIHAN filed an action in court for
resolution dated February 11, 1987 [Petition, Annex "C", Rollo, specific performance. The trial court rendered favorable
pp. 31- 34]. judgment for BAYANIHAN and ordered the SPOUSES to pay
the balance of their obligation and in case of failure to do so, to
Petitioners-SPOUSES in seeking a reversal of the decision of execute a deed of assignment over the property involved in
the Court of Appeals rely on the following reasons: this case. The SPOUSES elected to execute the deed of
assignment pursuant to said judgment.
I. The deed of assignment is null and void
because it is in the nature of a pactum Clearly, there was no automatic vesting of title on BAYANIHAN
commissorium and/or was borne out of the because it took the intervention of the trial court to exact
same. fulfillment of the obligation, which, by its very nature is ". .
anathema to the concept of pacto commissorio" [Northern
II. The genuineness and due Prosecution of Motors, Inc. v. Herrera, G.R. No. L-32674, February 22, 1973,
the deed of assignment was not deemed 49 SCRA 392]. And even granting that the original agreement
admitted by petitioner. between the parties had the badges of pactum commissorium,
the deed of assignment does not suffer the same fate as this
was executed pursuant to a valid judgment in Civil Case No.
III. The deed of assignment is unenforceable
80420 as can be gleaned from its very terms and conditions:
because the condition for its execution was
not complied with.
DEED OF ASSIGNMENT
IV. The refusal of petitioners to vacate and
surrender the premises in question to private KNOW ALL MEN BY THESE PRESENTS:
respondent is justified and warranted by the
circumstances obtaining in the instant case. This deed made and entered into by Uy
Tiong also known as Henry Uy and Kho Po
I. In support of the first argument, petitioners bring to the fore Giok, both of legal age, husband and wife,
the contract entered into by the parties whereby petitioner Kho respectively, and presently residing at 307
Po Giok agreed that the apartment in question will Ligaya Bldg., Alvarado St., Binondo, Manila,
automatically become the property of private respondent and hereinafter to be known and called as
BAYANIHAN upon her mere failure to pay her obligation. This the ASSIGNORS, in favor of Bayanihan
agreement, according to the petitioners is in the nature of Automotive Corporation, an entity duly
a pactum commissorium which is null and void, hence, the organized and existing under the laws of the
deed of assignment which was borne out of the same Philippines, with principal business address
agreement suffers the same fate. at 1690 Otis St., Paco, Manila and
hereinafter to be known and called the
ASSIGNEE;

34
-witnesseth- leasehold rights over the lot on which the
said building is constructed, in favor of the
WHEREAS, the ASSIGNEE has filed a civil hererein ASSIGNEE, its heirs or assigns.
complaint for "Specific Performance with
Damages" against the ASSIGNORS in the IN WITNESS WHEREOF, We have hereunto
Court of First Instance of Manila, Branch V, signed our names this 27th day of May, 1971
said case having been docketed as Civil at Manila, Philippines.
Case No. 80420;
UY TONG/HENRY UY KHO PO GIOK
WHEREAS, the ASSIGNEE was able to
obtain a judgment against the ASSIGNOR Assignor Assignor
wherein the latter was ordered by the court
as follows, to wit:
ACR-2151166 Manila 1/13/51 ACR-C-
001620
WHEREFORE, judgment
is hereby rendered
Manila March 3, 1965
ordering the defendants,
jointly and severally to pay
the plaintiff the sum of This being the case, there is no reason to impugn the validity
P40,000.00, with interest of the said deed of assignment.
at the legal rate from July
31, 1970 until full payment. II. The SPOUSES take exception to the ruling of the Court of
In the event of their failure Appeals that their failure to deny the genuineness and due
to do so within thirty (30) execution of the deed of assignment was deemed an
days from notice of this admission thereof. The basis for this exception is the
judgment, they are hereby SPOUSES' insistence that the deed of assignment having
ordered to execute the been borne out of pactum commissorio is not subject to
corresponding deed of ratification and its invalidity cannot be waived.
absolute sale in favor of
the plaintiff and/or the There is no compelling reason to reverse the abovementioned
assignment of leasehold, ruling of the appellate court. Considering this Court's above
rights over the defendants' conclusion that the deed of assignment is not invalid, it follows
apartment located at No. that when an action founded on this written instrument is filed,
307 Ligaya Building, the rule on contesting its genuineness and due execution must
Alvarado Street, Binondo, be followed.
Manila, upon the payment
by the plaintiff to the
defendants the sum of P That facts reveal that the action in Civil Case No. 121532 was
3,535.00. The defendants founded on the deed of assignment. However, the SPOUSES,
shall pay the costs. in their answer to the complaint, failed to deny under oath and
specifically the genuineness and due execution of the said
deed. Perforce, under Section 8, Rule 8 of the Revised Rules
WHEREAS, the court, upon petition by of Court, the SPOUSES are deemed to have admitted the
herein ASSIGNEE and its deposit of deed's genuineness and due execution. Besides, they
sufficient bond, has ordered for the themselves admit that ". . . the contract was duly executed and
immediate execution of the said decision that the same is genuine" [Sur-Rejoinder, Rollo, p. 67]. They
even pending appeal of the aforesaid cannot now claim otherwise.
decision;
III. The SPOUSES also question the enforceability of the deed
WHEREAS, the ASSIGNORS have elected of assignment. They contend that the deed is unenforceable
to just execute the necessary deed of sale because the condition for its execution was not complied with.
and/or assignment of leasehold rights over What petitioners SPOUSES refer to is that portion of the
the apartment mentioned in the decision in disposition in Civil Case No. 80420 requiring BAYANIHAN to
favor of the herein ASSIGNEE; pay the former the sum of P 3,535.00. To buttress their claim of
non- compliance, they invoke the following receipt issued by
NOW, THEREFORE, for and in the SPOUSES to show that BAYANIHAN was P535.00 short of
consideration of the foregoing premises, the the complete payment.
ASSIGNORS have transferred assigned and
ceded, and by these presents do hereby RECEIPT
transfer, assign and cede all their rights and
interests over that place known as Apartment
No. 307 at the Ligaya Building which is This is to acknowledge the fact that the
located at No. 864 Alvarado St., Binondo, amount of THREE THOUSAND (P3,000.00)
Manila, together with the corresponding PESOS, more or less as indicated in the
judgment of the Hon. Conrado Vasquez,

35
Presiding Judge of the Court of First defendants, and which was already
Instance of Manila, Branch V, in Civil Case submitted in open court for the consideration
entitled "Bayanihan Automotive Corp. v. Pho of the sum of P3,535.00. [Emphasis
(sic) Po Giok, etc." and docketed as Civil supplied]. [Decision, Civil Case No. 121532,
Case No. 80420 has been applied for the pp. 3-4].
payment of the previous rentals of the
property which is the subject matter of the This Court agrees with private respondent BAYANIHAN's
aforesaid judgment. [emphasis supplied.] reasoning that inasmuch as the decision in Civil Case No.
80420 imposed upon the parties correlative obligations which
(Sgd.) Pho
were
(sic)simultaneously
Po Glok demandable so much so that if private
respondent refused to comply with its obligation under the
judgment
(Sgd.) Henry Uy to pay the sum of P 3,535.00 then it could not
compel petitioners to comply with their own obligation to
execute the deed of assignment over the subject premises.
August 21, 1971
The fact that petitioners executed the deed of assignment with
the assistance of their counsel leads to no other conclusion
The issue presented involves a question of fact which is not that private respondent itself had paid the full amount.
within this Court's competence to look into. Suffice it to say that
this Court is of the view that findings and conclusion of the trial
IV. Petitioners attempt to justify their continued refusal to
court and the Court of Appeals on the question of whether
vacate the premises subject of this litigation on the following
there was compliance by BAYANIHAN of its obligation under
grounds:
the decision in Civil Case No. 80420 to pay the SPOUSES the
sum of P3,535.00 is borne by the evidence on record. The
Court finds merit in the following findings of the trial court: (a) The deed of assingnment is in the nature
of a pactum commissorium and, therefore,
null and void.
... Defendants 'contention that the P
3,535.00 required in the decision in Civil
Case No. 80420 as a condition for the (b) There was no full compliance by private
execution of the deed of assignment was not respondent of the condition imposed in the
paid by the plaintiff to the defendants is deed of assignment.
belied by the fact that the
defendants acknowledged payment of (c) Proof that petitioners have been allowed
P3,000.00, more or less, in a receipt dated to stay in the premises, is the very admission
August 21, 1971. This amount was expressly of private respondent who declared that
mentioned in this receipt as indicated in the petitioners were allowed to stay in the
judgment of the Honorable Conrado premises until November 20, 1972. This
Vasquez, presiding Judge of the CFI of admission is very significant. Private
Manila, Branch V, in Civil Case entitled respondent merely stated that there was a
Bayanihan Automotive Corp. versus Kho Po term-until November 30, 1972-in order to
Giok, docketed as Civil Case No. 80420, and give a semblance of validity to its attempt to
also expressly mentioned as having been dispossess herein petitioners of the subject
applied for the payment of the previous premises. In short, this is one way of
rentals of the property subject matter of the rendering seemingly illegal petitioners
said judgment. Nothing could be more 'possession of the premises after November
explicit. The contention that there is still a 30, 1972.
difference of P535.00 is had to believe
because the spouses Kho Po Giok and Uy The first two classifications are mere reiterations of the
Tong executed the deed of assignment arguments presented by the petitioners and which had been
without first demanding from the plaintiff the passed upon already in this decision. As regards the third
payment of P535.00. Indeed, as contended ground, it is enough to state that the deed of assignment has
by the plaintiff, for it to refuse to pay this vested in the private respondent the rights and interests of the
small amount and thus gave defendants a SPOUSES over the apartment unit in question including the
reason not to execute the Deed of leasehold rights over the land on which the building stands.
Assignment. is hard to believe Defendants BAYANIHAN is therefore entitled to the possession thereof.
further confirm by the joint manifestation of These are the clear terms of the deed of assignment which
plaintiff and defendants, duly assisted by cannot be superseded by bare allegations of fact that find no
counsel, Puerto and Associates, dated support in the record.
September, 1971, Exhibit "O", wherein it was
stated that plaintiff has fully complied with its
WHEREFORE, the petition is hereby DENIED for lack of merit
obligation to the defendants caused upon it
and the decision of the Court of Appeals is AFFIRMED in toto.
(sic) by the pronouncement of the judgment
as a condition for the execution of their (sic)
leasehold rights of defendants, as evidenced SO ORDERED.
by the receipt duly executed by the

36
revolting to the conscience as they hardly allow any borrower
any chance of survival in case of default."10
G.R. No. 172592 July 9, 2008
Petitioners further alleged that they had previously made
SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO- payments on their loan accounts, but because of the illegal
ONG, Petitioners, exactions thereon, the total balance appears not to have
vs. moved at all, hence, accounting was in order.11
ROBAN LENDING CORPORATION, Respondent.
Petitioners thus prayed for judgment:
AUSTRIA-MARTINEZ,*
a) Declaring the Real Estate Mortgage Contract and
DECISION its amendments x x x as null and void and without
legal force and effect for having been renounced,
CARPIO MORALES, J.: abandoned, and given up;

On different dates from July 14, 1999 to March 20, 2000, b) Declaring the "Memorandum of Agreement" xxx
petitioner-spouses Wilfredo N. Ong and Edna Sheila Paguio- and "Dacion in Payment" x x x as null and void for
Ong obtained several loans from Roban Lending Corporation being pactum commissorium;
(respondent) in the total amount of P4,000,000.00. These
loans were secured by a real estate mortgage on petitioners c) Declaring the interests, penalties, Evat [sic] and
parcels of land located in Binauganan, Tarlac City and covered attorneys fees assessed and loaded into the loan
by TCT No. 297840.1 accounts of the plaintiffs with defendant as unjust,
iniquitous, unconscionable and illegal and therefore,
On February 12, 2001, petitioners and respondent executed an stricken out or set aside;
Amendment to Amended Real Estate Mortgage2consolidating
their loans inclusive of charges thereon which d) Ordering an accounting on plaintiffs loan accounts
totaled P5,916,117.50. On even date, the parties executed a to determine the true and correct balances on their
Dacion in Payment Agreement3 wherein petitioners assigned obligation against legal charges only; and
the properties covered by TCT No. 297840 to respondent in
settlement of their total obligation, and a Memorandum of
e) Ordering defendant to [pay] to the plaintiffs: --
Agreement4 reading:

e.1 Moral damages in an amount not less


That the FIRST PARTY [Roban Lending Corporation] and the
than P100,000.00 and exemplary damages
SECOND PARTY [the petitioners] agreed to consolidate and
of P50,000.00;
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 e.2 Attorneys fees in the amount of
hereby sign [sic] another promissory note in the amount of P50,000.00 plus P1,000.00 appearance fee
P5,916,117.50 (a copy of which is hereto attached and forms per hearing; and
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 e.3 The cost of suit.12
consolidation and restructuring, otherwise the SECOND
PARTY agree to have their "DACION IN PAYMENT" as well as other just and equitable reliefs.
agreement, which they have executed and signed today in
favor of the FIRST PARTY be enforced[.]5
In its Answer with Counterclaim,13 respondent maintained the
legality of its transactions with petitioners, alleging that:
In April 2002 (the day is illegible), petitioners filed a
Complaint,6 docketed as Civil Case No. 9322, before the
xxxx
Regional Trial Court (RTC) of Tarlac City, for declaration of
mortgage contract as abandoned, annulment of deeds, illegal
exaction, unjust enrichment, accounting, and damages, If the voluntary execution of the Memorandum of Agreement
alleging that the Memorandum of Agreement and the Dacion in and Dacion in Payment Agreement novated the Real Estate
Payment executed are void for being pactum commissorium.7 Mortgage then the allegation of Pactum Commissorium has no
more legal leg to stand on;
Petitioners alleged that the loans extended to them from July
14, 1999 to March 20, 2000 were founded on several uniform The Dacion in Payment Agreement is lawful and valid as it is
promissory notes, which provided for 3.5% monthly interest recognized x x x under Art. 1245 of the Civil Code as a special
rates, 5% penalty per month on the total amount due and form of payment whereby the debtor-Plaintiffs alienates their
demandable, and a further sum of 25% attorneys fees property to the creditor-Defendant in satisfaction of their
thereon,8 and in addition, respondent exacted certain sums monetary obligation;
denominated as "EVAT/AR."9 Petitioners decried these
additional charges as "illegal, iniquitous, unconscionable, and

37
The accumulated interest and other charges which were that, except as to the amount of damages, there is no genuine
computed for more than two (2) years would stand reasonable issue as to any material fact.23
and valid taking into consideration [that] the principal loan
is P4,000,000 and if indeed it became beyond the Plaintiffs Nevertheless, finding the error in nomenclature "to be mere
capacity to pay then the fault is attributed to them and not the semantics with no bearing on the merits of the case", 24the
Defendant[.]14 Court of Appeals upheld the RTC decision that there was
no pactum commissorium.25
After pre-trial, the initial hearing of the case, originally set on
December 11, 2002, was reset several times due to, among Their Motion for Reconsideration26 having been
other things, the parties efforts to settle the case 27
denied, petitioners filed the instant Petition for Review on
amicably.151avvphi1 Certiorari,28 faulting the Court of Appeals for having committed
a clear and reversible error
During the scheduled initial hearing of May 7, 2003, the RTC
issued the following order: I. . . . WHEN IT FAILED AND REFUSED TO APPLY
PROCEDURAL REQUISITES WHICH WOULD
Considering that the plaintiff Wilfredo Ong is not around on the WARRANT THE SETTING ASIDE OF THE
ground that he is in Manila and he is attending to a very sick SUMMARY JUDGMENT IN VIOLATION OF
relative, without objection on the part of the defendants APPELLANTS RIGHT TO DUE PROCESS;
counsel, the initial hearing of this case is reset to June 18,
2003 at 10:00 oclock in the morning. II. . . . WHEN IT FAILED TO CONSIDER THAT TRIAL
IN THIS CASE IS NECESSARY BECAUSE THE
Just in case [plaintiffs counsel] Atty. Concepcion cannot FACTS ARE VERY MUCH IN DISPUTE;
present his witness in the person of Mr. Wilfredo Ong in the
next scheduled hearing, the counsel manifested that he will III. . . . WHEN IT FAILED AND REFUSED TO HOLD
submit the case for summary judgment.16(Underscoring THAT THE MEMORANDUM OF AGREEMENT (MOA)
supplied) AND THE DACION EN PAGO AGREEMENT (DPA)
WERE DESIGNED TO CIRCUMVENT THE LAW
It appears that the June 18, 2003 setting was eventually AGAINST PACTUM COMMISSORIUM; and
rescheduled to February 11, 2004 at which both counsels were
present17 and the RTC issued the following order: IV. . . . WHEN IT FAILED TO CONSIDER THAT THE
MEMORANDUM OF AGREEMENT (MOA) AND THE
The counsel[s] agreed to reset this case on April 14, 2004, at DACION EN PAGO (DPA) ARE NULL AND VOID
10:00 oclock in the morning. However, the counsels are FOR BEING CONTRARY TO LAW AND PUBLIC
directed to be ready with their memorand[a] together with all POLICY.29
the exhibits or evidence needed to support their respective
positions which should be the basis for the judgment on the The petition is meritorious.
pleadings if the parties fail to settle the case in the next
scheduled setting.
Both parties admit the execution and contents of the
Memorandum of Agreement and Dacion in Payment. They
x x x x18 (Underscoring supplied) differ, however, on whether both contracts constitute pactum
commissorium or dacion en pago.
At the scheduled April 14, 2004 hearing, both counsels
appeared but only the counsel of respondent filed a This Court finds that the Memorandum of Agreement and
memorandum.19 Dacion in Payment constitute pactum commissorium, which is
prohibited under Article 2088 of the Civil Code which provides:
By Decision of April 21, 2004, Branch 64 of the Tarlac City
RTC, finding on the basis of the pleadings that there was The creditor cannot appropriate the things given by way of
no pactum commissorium, dismissed the complaint.20 pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void."
On appeal,21 the Court of Appeals22 noted that
The elements of pactum commissorium, which enables the
x x x [W]hile the trial court in its decision stated that it was mortgagee to acquire ownership of the mortgaged property
rendering judgment on the pleadings, x x x what it actually without the need of any foreclosure proceedings, 30 are: (1)
rendered was a summary judgment. A judgment on the there should be a property mortgaged by way of security for
pleadings is proper when the answer fails to tender an issue, the payment of the principal obligation, and (2) there should be
or otherwise admits the material allegations of the adverse a stipulation for automatic appropriation by the creditor of the
partys pleading. However, a judgment on the pleadings would thing mortgaged in case of non-payment of the principal
not have been proper in this case as the answer tendered an obligation within the stipulated period.31
issue, i.e. the validity of the MOA and DPA. On the other hand,
a summary judgment may be rendered by the court if the In the case at bar, the Memorandum of Agreement and the
pleadings, supporting affidavits, and other documents show Dacion in Payment contain no provisions for foreclosure
proceedings nor redemption. Under the Memorandum of

38
Agreement, the failure by the petitioners to pay their debt contrived one, is an issue of fact that requires the presentation
within the one-year period gives respondent the right to of evidence.48 As mentioned above, petitioners prayer for
enforce the Dacion in Payment transferring to it ownership of accounting requires the presentation of evidence on the issue
the properties covered by TCT No. 297840. Respondent, in of partial payment.
effect, automatically acquires ownership of the properties upon
petitioners failure to pay their debt within the stipulated period. But neither is a judgment on the pleadings proper. A judgment
on the pleadings may be rendered only when an answer fails
Respondent argues that the law recognizes dacion en pago as to tender an issue or otherwise admits the material allegations
a special form of payment whereby the debtor alienates of the adverse partys pleadings.49 In the case at bar,
property to the creditor in satisfaction of a monetary respondents Answer with Counterclaim disputed petitioners
obligation.32 This does not persuade. In a true dacion en pago, claims that the Memorandum of Agreement and Dation in
the assignment of the property extinguishes the monetary Payment are illegal and that the extra charges on the loans are
debt.33 In the case at bar, the alienation of the properties was unconscionable.50Respondent disputed too petitioners
by way of security, and not by way of satisfying the debt. 34 The allegation of bad faith.51
Dacion in Payment did not extinguish petitioners obligation to
respondent. On the contrary, under the Memorandum of WHEREFORE, the challenged Court of Appeals Decision is
Agreement executed on the same day as the Dacion in REVERSED and SET ASIDE. The Memorandum of Agreement
Payment, petitioners had to execute a promissory note and the Dacion in Payment executed by petitioner- spouses
for P5,916,117.50 which they were to pay within one year.35 Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent
Roban Lending Corporation on February 12, 2001 are declared
Respondent cites Solid Homes, Inc. v. Court of NULL AND VOID for being pactum commissorium.
Appeals36 where this Court upheld a Memorandum of
Agreement/Dacion en Pago.37 That case did not involve the In line with the foregoing findings, the following terms of the
issue of pactum commissorium.38 loan contracts between the parties are MODIFIED as follows:

That the questioned contracts were freely and voluntarily 1. The monthly interest rate of 3.5%, or 42% per
executed by petitioners and respondent is of no annum, is reduced to 12% per annum;
moment, pactum commissorium being void for being prohibited
by law.39
2. The monthly penalty fee of 5% of the total amount
due and demandable is reduced to 12% per annum,
Respecting the charges on the loans, courts may reduce to be computed from the time of demand; and
interest rates, penalty charges, and attorneys fees if they are
iniquitous or unconscionable.40
3. The attorneys fees are reduced to 25% of the
principal amount only.
This Court, based on existing jurisprudence,41 finds the
monthly interest rate of 3.5%, or 42% per annum
Civil Case No. 9322 is REMANDED to the court of origin only
unconscionable and thus reduces it to 12% per annum. This
for the purpose of receiving evidence on petitioners prayer for
Court finds too the penalty fee at the monthly rate of 5% (60%
accounting.
per annum) of the total amount due and demandable
principal plus interest, with interest not paid when due added to
and becoming part of the principal and likewise bearing interest SO ORDERED.
at the same rate, compounded monthly42 unconscionable
and reduces it to a yearly rate of 12% of the amount due, to be
computed from the time of demand. 43 This Court finds the
attorneys fees of 25% of the principal, interests and interests G.R. No. 199420 August 27, 2014
thereon, and the penalty fees unconscionable, and thus
reduces the attorneys fees to 25% of the principal amount PHILNICO INDUSTRIAL CORPORATION, Petitioner,
only.44 vs.
PRIVATIZATION AND MANAGEMENT OFFICE, Respondent.
The prayer for accounting in petitioners complaint requires
presentation of evidence, they claiming to have made partial x-----------------------x
payments on their loans, vis a vis respondents denial
thereof.45 A remand of the case is thus in order. G.R. No. 199432

Prescinding from the above disquisition, the trial court and the PRIVATIZATION AND MANAGEMENT OFFICE, Petitioner,
Court of Appeals erred in holding that a summary judgment is vs.
proper. A summary judgment is permitted only if there is no PHILNICO INDUSTRIAL CORPORATION, Respondent.
genuine issue as to any material fact and a moving party is
entitled to a judgment as a matter of law.46 A summary
judgment is proper if, while the pleadings on their face appear DECISION
to raise issues, the affidavits, depositions, and admissions
presented by the moving party show that such issues are not LEONARDO-DE CASTRO, J.:
genuine.47 A genuine issue, as opposed to a fictitious or

39
Before the Court are the consolidated Petitions for Review on Buyer shall pledge the Shares to the Seller and
Certiorari under Rule 45 of the Rules of Court involving the execute a pledge agreement (the "Pledge
Decision1 dated January 31, 2011 and Resolution2 dated Agreement") in favor of the Seller in substantially the
November 18, 2011 of the Court of Appeals in CA-G.R. SP. No. form of Annex A. The Buyer shall also pledge to the
111108, which affirmed the Order3 dated August 25, 2009 of the Seller the Converted Shares and the New Shares as
Regional Trial Court (R TC), Branch 64 of Makati City in Civil security for the payment of the Purchase Price upon
Case No. 03-114. the issuance of such shares in the name of the Buyer.

THE PARTIES xxxx

The Petition in G.R. No. 199420 was filed by Philnico Industrial 2.07 Closing
Corporation (PIC). It is a corporation duly organized under the
laws of the Philippines and which, together withPhilnico (a) The closing of the sale and purchase of the
Processing Corporation (PPC) and Pacific Nickel Philippines, Shares and the Tranche B Receivables under this
Inc. (PNPI), form the Philnico Group. The Philnico Group is Agreement shall take place on the Closing Date and
engaged in nickel mining and refining business. PIC and PNPI at such place as may be agreed between the Buyer
hold a Mineral Production Sharing Agreement over nickel and the Seller upon the fulfillment of all of the
mining areas in Nonoc and Dinagat Islands inSurigao, while conditions precedent specified in Sections 4.01 and
PPC owns a nickel refinery complex also in Nonoc Island.4 4.02 (unless any such condition precedent shall have
been waived by the Buyer or the Seller, as the case
The Petition in G.R. No. 199432 was filed by the Privatization may be). At the closing, the following transactions
and Management Office (PMO), an attached agency of the shall take place:
Department of Finance. PMO succeeded the Asset
Privatization Trust (APT), when the latters life ended on (1) the Seller shall execute and deliver to the
December 31, 2000.5 The PMO serves as the marketing arm of Buyer the necessary deed of sale
the Government with respect to Transferred Assets, transferring to the Buyer all of the Sellers
Government Corporations and other properties assigned to it right, title and interest in and to the Shares
by the Privatization Council (PrC) for disposition. Together, the and deliver to the Buyer the stock certificates
mission of the PMO and PrC is to take title to and possession representing such shares, each duly
of, conserve, provisionally manage, and dispose of assets endorsed, or with separatestock transfer
previouslyidentified for privatization; and, in the process, powers attached, in favor of the Buyer
reduce the Governments maintenance expense on together with the duly executed resignations
nonperforming assets, generating maximum cash recovery for of the directors of the Company named in
the National Government.6 Schedule 6;

ANTECEDENT FACTS (2) the Company shall issue in the name of,
and deliver to, the Buyer new stock
The Development Bank of the Philippines and Philippine certificates representing the Shares;
National Bank, by virtue of foreclosure proceedings, became
the holders of all the shares of stock in PPC (then still the (3) the Buyer shall execute and deliver the
Nonoc Mining and Industrial Corporation). The banks Pledge Agreement covering the Shares and
eventually transferred their PPC shares of stock to PMO (then deliver to the Seller the stock certificates
still the APT) in 1987. representing such shares;

On May 10, 1996, PMO, PIC (then still the Philnico Mining and xxxx
Industrial Corporation), and PPC executed a contract,
denominated as the Amended and Restated Definitive
(b) From and after the Closing Date, the Buyer shall
Agreement (ARDA), which laid down the terms and conditions
exercise all the rights (including the right to vote) of a
of the purchase and acquisition by PIC from PMO of
shareholder in respect of the Shares (subject to the
22,500,000 shares of stock of PPC (representing 90% of
negative covenants contained in the Pledge
ownership of PPC), as well as receivables of PMO from PPC.
Agreement).8
Under the ARDA, PIC agreed to pay PMO the peso equivalent
of US$333,762,000.00 as purchase price, payable in
installments and in accordance with the schedule also set out Also worthy of note herein is Section 8 of the ARDA on default,
in the ARDA.7 which states:

Among the provisions of the ARDA relevant to the instant SECTION 8. DEFAULT AND DEFAULT REMEDIES
cases are Sections 2.04 and 2.07, which govern the rights and
obligations of the parties as regards the PPC shares of stock, 8.01 Events of Default
viz: 2.04 Security
Subject to any applicable curing period, each of the following
(a) As security for the payment of the Purchase Price events shall constitute an Event of Default hereunder:
in accordance with the terms of this Agreement, the

40
(a) The Buyer shall, subject tothe provisions of The following shall be considered Events of Default under this
Section 2.03(b), fail to pay any two consecutive Pledge Agreement:
installments on the Purchase Price in accordance with
the terms of Section 2.03. (a) [PIC] shall fail to pay when duethe obligations after
giving effect to any applicable period of grace; or
(b) The Buyer shall fail to complywith or observe any
other material term, obligation or covenant contained (b) [PIC] or PNPI shall fail to comply with or observe
in this Agreement or in the Pledge Agreement. any other material term, obligation or covenant
contained in this Pledge Agreement or the Definitive
(c) The Buyer shall commit any act of bankruptcy or Agreement; or
insolvency, or shall file any petition or action for relief
under any bankruptcy, reorganization, insolvency or (c) [PIC] or PNPI shall commit any act of bankruptcy
moratorium law or other law or laws for the relief of or insolvency, or shall file any petition or action for
debtors. relief under any bankruptcy, reorganization,
insolvency or moratorium law or other x x x laws for
8.02 Consequence of Default the relief of debtors; or

At any time after the happening of an Event of Default, and (d) The priority of the lien of or the security interest
provided that the same shall not have been remedied within granted by this Pledge Agreement shall be impaired,
ninety (90) days from receipt by the Buyer of written notice or this Pledge Agreement shall cease to be a first and
from the Seller, the Seller may declare the buyer in default and, preferred lien upon the Pledged Shares.
asa consequence thereof, exercise such rights and remedies
as it may have under this Agreement and applicable laws 5.02 Consequences of Default
(including the cancellation of these Agreement); provided that
in case of default under Section 8.01(a), the title to the Existing
If an Event of Default shall have occurred, then at any time
Shares and the Converted Shares shall ipso facto revertto the
thereafter, if any such event shall then be continuing after the
Seller without need of demand in case such payment default is
applicable grace period, if any, the [PMO] is hereby authorized:
not remedied by the Buyer within ninety (90) days from the due
date of the second installment. (Emphasis supplied.)9
(a) To sell in one or more sales, either public or
private, at any time the whole or any part of the
In accordance with the ARDA, PMO executed and delivered to
Pledged Shares in such order and number as the
PIC the necessary documents to transfer the formers rights,
[PMO] may elect at its place of business or elsewhere
title, and interests to and in the PPC shares of stock to the
and the [PMO] may, in all allowable cases, be the
latter; and PPC issued new certificates for the same shares of
purchaser of any or all Pledged Shares so sold and
stock in the name of PIC and/or its nominees.
hold the same thereafter in its own right free from any
claim of [PIC] or any right of redemption;
On May 2, 1997, PIC and PNPI as pledgors and PMO as
pledgee executed a Pledge Agreement10 which began with
(b) To issue receipts and to execute and deliver any
"Whereas Clauses" that read:
instrument or document or do any act necessary for
the transferand assignment of all rights, title and
WHEREAS, [PIC] and the [PMO] have entered into an interest of [PIC] in the Pledged Shares to the
Amended and Restated Definitive Agreement, dated May 10, purchaser or purchasers thereof; and
1996, involving the purchase by the [PIC] from the [PMO] of
22,500,000 shares of common stock of [PPC] and certain
(c) To apply, at the [PMOs] option, the proceeds of
receivables of the [PMO] from said corporation; and
any said sale, as well as all sums received orcollected
by the [PMO] from or on account of such Pledged
WHEREAS, to secure the obligation of [PIC] to pay the Shares to (i) the payment of expenses incurred or
purchase price and all other amounts due the [PMO] under the paid by the [PMO] in connection with any sale,
aforesaid Definitive Agreement and the performance by [PIC] transfer or delivery of the Pledged Shares and (ii) the
of its other obligations thereunder and under this Pledge payment of the Obligations or any part thereof.13
Agreement, the [PIC and PNPI] have agreed to execute and
deliver thisPledge Agreement, giving unto the [PMO] a good
In the meantime, the nickel refinery complex of PPC, which last
and valid pledge over the pledge[d] shares[.]11
operated in the 1980s, had become obsolete and much of the
facilities therein were already scrap. The estimated cost in
Sections 3.01 and 3.02 of the Pledge Agreement expressly 2003 for building an entirely new refinery plant based on new
acknowledged that PIC delivered its certificates of shares of technology was about US$1 Billion. The Philnico Group, which
stock in PPC and that PMO received said certificates.12 Section had already invested at least US$60 Million, was inviting and
5 of the same Agreement covered default and the available negotiating withprospective foreign investors who could assist
remedies in case thereof, thus: SECTION [5]. DEFAULT in its business.
REMEDIES, ETC.
On account of the huge financial cost of building a new nickel
5.01 Events of Default refinery plant, coupled with the economic problems then

41
affecting the AsiaPacific Region, PMO, PIC, and PPC executed provided by the Civil Code relative to reciprocal
an Amendment Agreement14 on September 27, 1999 which obligations.
provided for the restructuring of the payment terms of the
entire obligation under the ARDA, the repayment of advances, [PIC] prays for such further and equitable relief as may be just
the conditions for borrowings or financing, a new cash break- and equitable in the premises.15
even formula, and the adoption of an investment plan.
After the summary hearing held on February 7, 2003, the RTC
Three years later, in a letter dated November 6, 2002, PMO issued a temporary restraining order (TRO), effective for 20
notified PIC that the latter had defaulted in the payment of its days, restraining PMO, PPC, and the PPC Corporate
obligations and demanded that PIC settle its unpaid Secretary from effecting the reversion of the 22,500,000
amortizations in the total amount of US$275,000.00 within 90 shares of stock of PPC.
days, or on or about February 5, 2003, or else the PMO would
enforce the automatic reversion of the PPC shares of stock
The RTC then conducted hearings on the prayer of PIC for the
under Section 8.02 of the ARDA. PIC replied in a letter dated
issuance of a writ of preliminary injunction. The RTC
January 7, 2003 requesting PMO to set aside its notice of
subsequently issued an Order16 on February 27, 2003 finding
default; to not rescind the sale of the PPC shares of stock; and
PIC entitled to the issuance of such a writ for the following
to give PIC an opportunity to conclude its fund-raising efforts
reasons:
for its business, particularly with a group of investors from
China. In another letter dated January 22, 2003 to PIC, PMO
clearly indicated its intention to enforce Section 8.02 of the While the failure of [PIC] to meet its amortization with respect
ARDA should PIC fail to settle its outstanding obligations after to the smaller portion of the purchase price cannot be denied,
February 5, 2003. said default cannot automatically result in the reversion of the
shares of stocks to PMO. The provision in the ARDA providing
for ipso facto reversion of the shares of stock is null and void
On February 4, 2003, a day before the deadline for payment
for being a pactum commissorium. x x x.
set by PMO in its letters, PIC filed beforethe RTC a Complaint
for Prohibition against Reversion of Shares with Prayer for Writ
of Preliminary Injunction and/or Temporary Restraining Order, xxxx
Suspension of Payment and Fixing of Period of Payment,
against PMO, PPC, and the PPC Corporate Secretary. The automatic reversion of the shares of stock is by itself
automatic appropriation of the thing pledged, which is contrary
On February 7, 2003, PIC filed an Amended Complaint raising, to good morals and public policy. It would alsoresult in unjust
among other arguments, the need for mutual restitution in case enrichment on the part of defendant PMO. Even in case of
the ARDAis rescinded by the RTC. Ultimately, PIC prayed of rescission, mutual restitution is allowed so as not to enrich one
the RTC that: party to the prejudice of the other. It would be tantamount to
confiscation ofproperty without due process. The seller had the
option of foreclosing the property pledged. The seller cannot
(a) Upon the filing of this complaint, a temporary
automatically appropriate the same to himself when the
restraining order be issued under Sec. 5 of Rule 58 of
ownership is already transferred to [PIC]. Thus, even for the
[the] 1997 Rules of Civil Procedure prohibiting [PMO,
time being when foreclosure of the shares pledge[d] isbeing
PPC, and the PPC Corporate Secretary] from
considered, and the question of rescission is being deliberated,
reverting the 22,500,000 shares covered by Stock
[PIC] has a right to be protected and therefore entitled to the
Certificate Nos. 018, 022, 024, 025, 026, 027, 028,
relief of preliminary injunction.
030 and 031 x x x in the name of [PIC] to defendant
PMO.
Regarding the provision on referral to arbitration, granting that
the case is proper for arbitration, [PIC] isnonetheless entitled to
(b) After hearing
the writ of preliminary injunction pending the arbitration
proceeding.
(i) A writ of preliminary injunction be issued prohibiting
[PMO, PPC, and the PPC Corporate Secretary] from
xxxx
effecting the reversion of the aforementioned shares
in favor of defendant PMO until further orders from
the Court; and thereafter, One of the requirements for the issuance of the writ of
preliminary injunction is when there is an urgent and
paramount necessity for the writ to prevent an irreparable
(c) Judgment issue
damage. Irreparable means one that can not be rectified. [PIC]
is in danger of losingits investment in the project without any
(i) Making the injunction permanent and ordering the recourse if PMO will be allowed the automatic reversion of the
suspension of the payment of the amortizations as ownership of the 22,500,000 shares. The right of [PIC] will be
provided for in the ARDA and fixing a reasonable prejudiced if the writ of preliminary injunction will not be issued
period within which said payment should be due; and in the meantime.17

(d) Or in the alternative, in the remote possibility that The RTC thus decreed:
the ARDA x x x be considered rescinded, mutual
restitution be ordered by the Honorable Court as

42
WHEREFORE, premises considered, the Writ of Preliminary the said project will inure to the benefit ofdefendant PMO with
Injunction is GRANTED. [PIC] getting nothing.

Until further Order from this Court,and subject to [PICs] filing The present case does not violate the principles of autonomy
of a bond in the amount of P100,000,000.00 to pay for all the of contract[s]. [PIC] seeks to prohibit the implementation of the
damages which [PMO, PPC, and the PPC Corporate ipso facto reversion clause in the ARDA, which is contrary to
Secretary] may sustain by reason of the injunction if the Court law being a pactum commissorium. This is a limitation imposed
will finally decide that [PIC] is not entitled thereto, defendants by law, which is considered to be part of a contract. Contracts
Privatization and Management Office (PMO), Philnico must respect the law, for the law forms part of the contract.
Processing Corporation (PPC), and the Corporation Secretary While the contract is the law between the parties, the Court
of PPC are enjoined from effecting the reversion to PMO of the may stop its enforcement if it is contrary to law, morals, good
22,500,000 shares purchased by plaintiff Philnico Industrial customs or public policy (San Andres vs. Rodriguez, 332
Corporation and from selling the same to any third party.18 SCRA 69).

PMO filed a Motion for Reconsideration of the RTC Order While the ARDA provides for arbitration as mode of settlement
dated February 27, 2003, insisting that the provision on ipso of the dispute (Section 9.05), the present complaint involves
factoreversion in the ARDA did not constitute pactum interpretation of the provisions of the ARDA. Interpretation of
commissoriumand would not result in unjust enrichment on the contracts is within the domain of the Court. The ipso facto
part of PMO. PMO likewise filed a Motion to Dismiss on the reversion of the shares in the ARDA can never be subject of
ground that the complaint of PIC did not state a cause of arbitration but it is within the domain of the court to declare
action. In its Order19 dated June 19, 2003, the RTC found no whether or not the same is valid or null and void.20
merit in both Motions and held that:
In the same Order, the RTC directed PMO, PPC, and the PPC
1. The Motion for Reconsideration is DENIED. This Court Secretary to file their answer to the complaint of PIC. PMO no
maintains that [PIC] is entitled to the issuance of the Writ of longer challenged the RTC Orders dated February 27, 2003
Preliminary Injunction. and June 19, 2003 before the appellate courts. Instead, PMO
complied with the RTC directive and already filed with the said
[PIC] has already acquired ownership of the 22,500,000 shares trial court its Answer and Amended Answer to the complaint of
when the ARDA was executed between the parties. The ARDA PIC. The RTC proceeded to pre-trial when the parties failed to
merely provides for the transfer of the subject shares to [PIC]. arrive at an amicable settlement. On February 6,2009, the RTC
As a matter of fact, [PIC] has executed a Pledge Agreement as issued its Pre-trial Order21 in which it enumerated the
a security for the payment of [PICs] obligation with defendant respective issues for resolution submitted by PIC and PMO, to
PMO. wit:

xxxx ISSUES ([PIC])

Under the ARDA, the relationship of [PIC] and defendant PMO 1. Whether or not the ipso facto reversion clause in
is that of a pledgor and pledgee and no longer as a buyer and the ARDA is valid, and, whether or not it is a specie[s]
seller. As such, the ipso facto reversion of the shares in the of pactum commissoriumwhich is outlawed.
ARDA constitutes pactum commissorium. The execution of the
Pledge Agreement is precisely made to secure the payment of 2. Whether or not [PIC] is in default under the terms of
[PICs] obligation with defendant PMO. The automatic the ARDA which clearly contemplates the actual
reversion of the shares if allowed will in fact constitute operation of the plant before the subsequent
automatic appropriation of the thing pledged which is installments after the third year will be due, as it even
proscribed being pactum commissorium. The automatic recognizes deferment of payment of installment if the
appropriation itself will prejudice the investment made by [PIC] Nonoc mining plant and refinery is not yet in full
in the said project and all improvements will inure to defendant operation and has not produced sufficient cash
PMO which the law abhors. Even in case of rescission, mutual equivalent for payment to seller.
restitution is allowed so as not to enrich one party at the
expense of the other. This forfeitureclause in the ARDA is 3. Even assuming that the schedule of payment is not
contrary to law, good morals and public policy. modified by the other terms of the ARDA (as actual
operation of the plant and refinery), whether or not
2. With respect to the Motion To Dismiss, the same is DENIED. [PIC] may be considered as in default considering the
fortuitous events which are unforeseen and beyond
Cause of action is the act or omission by which a party violates the control of [PIC] which had prevented [PIC] from
a right of another (Sec. 2, Rule 2 of the 1997 Rules on Civil complying with its obligation under the scheduled
Procedure). As already stated in the resolution of the motion amortization. 4. Whether or not [PIC] is entitled to be
for reconsideration, the ipso facto reversion of the shares reimbursed what it had already paid and spent to
pursuant to Section 8.02 of the ARDA constitute[s] pactum implement the contract, in the remote event that
commissorium, and therefore null and void being contrary to APT/PMO may be allowed to exercise right [of]
morals, law and public policy. As such, the ipso facto reversion rescission.
of the shares will result inunjust enrichment on the part of
defendant PMO for the reason that all investment of [PIC] with

43
5. Whether or not plaintiff [PIC] is required to resort to and (7) PMO thought it prudent to no longer assail the RTC
arbitration to enforce its cause of action in the Orders dated February 27, 2003 and June 19, 2003 before the
complaint. appellate courts believing that such a move would only cause
further delay in the resolution of the case and cause more
ISSUES ([PMO]) irreparable damage to the

1. Whether or not defendant PMO may be prohibited National Government. PMO sought several reliefs from the
from ipso facto reverting the shares pursuant to the RTC in its Omnibus Motion, quoted as follows:
ARDA considering that [PIC] defaulted in its payment
and there is an express provision in the ARDA (1) That the Writ of Preliminary Injunction be
providing for the said provision. dissolved;

2. Whether or not the terms and modes of payments (2) That a representative of defendant PMO be
as provided in the ARDA may be suspended or fixed appointed to the PPCs and PNPIs board of directors
anew by reason of unforeseen events cited by [PIC]. or management; and

3. Whether or not defendant PMO may be enjoined by (3) That [PIC] be required to submit an accounting of
this Honorable Court in the performance of its its books and financial reports from the year 2003 to
functions and duties in connection with the sale or 2008.
disposition of assets transferred to it pursuant to
Proclamation No. 50-A.22 (Emphases supplied.) Other just and equitable reliefs are also prayed for.23

PIC filed a Manifestation and Motion praying for the Following hearings and exchange ofpleadings by the parties,
modification of the foregoing Pre-trial Order dated February 6, the RTC collectively resolved the pending motions of PIC and
2009 of the RTC by deleting Issue Nos. 1 and 5 in the PMO in its Order dated August 25, 2009.
Statement of Issues of PIC. PIC posited that these two issues
were already resolved by the RTC in the Order dated June 19,
The RTC determined that there was sufficient basis to grant
2003 and should no longer be among the issuesto be tried in
the Manifestation and Motion of PIC to delete two issues from
the course of subsequent proceedings.
the Pre-Trial Order dated February 6, 2009:

PMO countered in its Comment/Opposition that the RTC


The Court will not disturb the earlier findings of the previous
Orders dated February 27, 2003 and June 19, 2003 concerned
judge that the ipso factoreversion clause in the ARDA is invalid
only the issuance of the Writ of Preliminary Injunction; and the
and that it constitute[s] pactum commissorium. The Court finds
findings and conclusions of the trial court on the propriety of
no legal and factual reasons to change the previous findings of
the issuance of the injunctive writ are premised on initial and
the Honorable Delia H. Panganiban that [PIC] has already
incomplete evidence, which should be considered merely as
acquired ownership of the 22,500,000 shares sold to it and that
provisional. Said RTC Orders should not bind the trial court in
the ARDA is merely a scheme for the transfer of the said share
its determination of the merits of the caseand to hold otherwise
to the latter. As such, the relation between [PIC] and defendant
would result in the prejudgment of the case or disposition of
PMO has become that ofa mortgagor and mortgagee.
the main case without a fullblown trial. Consequently, PMO
Accordingly, the proviso in the ARDA for the ipso
prayed that the RTC deny the Manifestation and Motion of PIC.
factoreversion constitutes pactum commissorium.

PMO also successively filed an Omnibus Motion and a


The Court disagrees with [PMO] that the said finding is merely
Supplement to Omnibus Motion, asserting that: (1) the Writ of
initiatory as it was a finding on a legal issue. No other evidence
Preliminary Injunction was issued in 2003 by the RTC without
is needed to change the same. In fact, said issue was
jurisdiction and was therefore void, because there was no
extensively and exhaustively argued by the parties in their
compliance with the arbitration clause in the ARDA; (2) the
respective pleadings in relation thereto. It is presumed that the
continuance of the Writ of Preliminary Injunction is causing
previous Presiding Judge of this Court has considered all the
irreparable damage to the National Government; (3) since the
arguments raised by the parties.Section 3(o) of Rule 131 of the
issuance of the Writ of Preliminary Injunction six years before,
Revised Rules of Court provides: that all matters within an
PIC had effectively achieved and obtained the reliefs it had
issue raised in a case were laid before the court and passed
prayed for in its complaint as it was able to suspend the
upon by it. In addition, based on the personal analysis of its
payment of monthly amortization and prevent the reversion, or
new Presiding Judge, the Court is judiciously convinced of the
even the selling, of the PPC shares of stock in the event of
soundness of its earlier findings. More importantly, it appears
default; (4) the amount of injunction bond is insufficient and
from the records that defendant PMO never challenged such
grossly disproportionate to the enormity of the damages that
finding in a higher judicial arena. Thus, this Court deems its
PMO stands to suffer; (5) the injunctive writ is supposed to be
resolution to be incontestable at this stage. Consequently,
a "strong arm of equity" and should not be used as an
since the said finding has attained finality, any error that
instrument of perpetrating injustice against the National
thisCourt may have committed in resolving the said issue may
Government; (6) in accordance with Rule 58, Section 6 of the
only be raised in an appeal to be made by the adverse party.
Rules of Court, PMO is signifying its intention to post a
counterbond that would answer for the damages PIC might
suffer by the dissolution of the Writ of Preliminary Injunction;

44
This Court also finds merit [i]n plaintiffs prayer for the deletion 1. Manifestation [and] Motion filed by [PIC] and
of the fifth issue raised during the pre-trial of this case. The hereby DELETES issues numbers 1 and 5 in pages 5
denial of the motion to dismiss previously filed by defendant and 6 of its Pre-Trial Order of February 6, 2009.
PMO also [constitutes] as an adjudication on the issue as to
whether or not the subject matter of this case is a proper 2. The Omnibus Motion on requiring [PIC] to submit
subject of arbitration proceedings as provided for in ARDA. The an accounting and financial reportto the defendant
Court reached the said conclusion based on jurisprudential law [PMO], and submit to this Court a manifestation of its
which up to this date is unchanged. Said conclusionhas also compliance thereto; and DENIESthe following:
become immutable when [PMO, PPC, and the PPCCorporate
Secretary] similarly failed to challenge the same.24
1. The dissolution of the Writ of Preliminary
Injunction for lack of merit.
As for the Omnibus Motion and Supplement to Omnibus
Motion of PMO, the RTC only conceded to requiring PIC to
2. The appointment of a representative of
submit accounting and financial reports to PMO:
[PMO to the] Board of Directors for lack of
merit.
On defendant PMOs omnibus motion and its supplemental
thereto, the Court resolves the first motion in the negative. As
3. The posting of counter bond for lack of
stated above[,] this instant case does not involve matters which
merit.26
can be adjudicated through arbitration. It involves the
interpretation of contract which falls within the jurisdiction of
this Court. This Court agrees with [PIC] that there can be no PMO assailed the RTC Order dated August 25,2009 before the
damage whenwhat is being restrained is an illegal act. It need Court of Appeals viaa Petition for Certiorari, averring that:
not be said that no right can emanate from an illegal act. In this
instant case, what is being restrained by the Writ is the I.
enforcement by defendant PMO of the reversion clause in the
ARDA. Having unequivocally declared such reversion clause PUBLIC RESPONDENT COMMITTED GRAVE
illegal, the Court has no reason to terminate the efficacy of the ABUSE OF DISCRETION AMOUNTING TO LACK
Writ it issued. The Court notes that defendant PMO did not lift OR EXCESS OF JURISDICTION IN HOLDING THAT
a finger during the time that it should have done so. Thus, the THE IPSO FACTOREVERSION CLAUSE IN THE
delay, if there be any, is not solely attributable to [PIC]. Having ARDA IS A SPECIE[S] OF PACTUM
impliedly consented thereto, defendant PMO must suffer the COMMISSORIUMAND SUCH DISPOSITION IS A
consequences of its inaction. The same is true on the FINAL DETERMINATION OF THE COURT WHICH
allegation of insufficiency of the injunction bond filed by [PIC]. CAN ONLY BE QUESTIONED ON APPEAL; AND
The defendant PMOs failure to question the same
withinreasonable time the amount of the injunction bond
posted by [PIC] is fatal to its cause as it galvanized the II.
resolution of the Court on the matter.
PUBLIC RESPONDENT COMMITTED GRAVE
The Court will not act on defendant PMOs prayer for the ABUSE OF DISCRETION AMOUNTING TO LACK
appointment of a representative in [PICs] Board of Director[s]. OR EXCESS OF JURISDICTION IN DENYING
As stated by [PIC] in its opposition to the pending incident, that [PMOS] MOTION TO DISSOLVE THE WRIT OF
it is not preventing defendant PMO to appoint a representative PRELIMINARY INJUNCTION AND MOTION TO FILE
[in the] former, the Court will no longer discuss the said motion. A COUNTERBOND FOR THE DISSOLUTION
The parties, however, are directed to notify this Court of the THEREOF.27
appointmentby [PMO] of a representative in [PICs] Board of
Director[s]. Ondefendant PMOs motion to submit accounting The Court of Appeals, in itsDecision dated January 31, 2011,
report, while it may be true that [PIC] is submitting its financial disagreed with the finding of the RTC that the instant case
statements to the Bureau ofInternal Revenue and the involves a pactum commissorium, but still affirmed the denial
Securities and Exchange Commission, the Court finds no legal by the RTC of the motion of PMO to dissolve the Writ of
obstacle not to direct [PIC] to submit a copy of the said Preliminary Injunction issued in 2003.
documents to [PMO]. Lastly, on the motion of [PMO] to post
counter bond, the Court finds the same to [be] without According to the Court of Appeals, Section 8.02 of the ARDA
merit.The Court cannot allow, even if a bond is posted, [PMO] does not constitute pactum commissorium:
to commit an act which it has declared to be illegal. There is no
premium for an illegal act.25 The elements of pactum commissoriumare: (1) that there
should be a pledge or mortgage wherein a property is pledged
The dispositive portion of the RTC Order dated August 25, or mortgaged by way of security for the payment of the
2009 reads: principal obligation; and (2) that there should be a stipulation
for an automatic appropriation by the creditor of the thing
WHEREFORE, premises considered, the Court GRANTS the pledged or mortgaged in the event of nonpayment of the
following motion: principal obligation within the stipulated period.

45
In the instant case, the subject ARDA basically pertains to the Accordingly, [PIC] is entitled to be protected of his rights
contract of sale of shares of stock. There was nothing given by through the issuance of the Writ of Preliminary Injunction. And
way of pledge or mortgage in said contract, through which it is but proper to deny the dissolution of said writ. Itshould be
[PMO] could have appropriated the shares to itself should of no moment that it has been in effect for several years now.
default in the payment thereof arise. Until the matter has been settled on whether [PIC] has
substantially breached its obligation as to constitute default,
At this point, We have to agree with [PMO] that the ARDA is then, the shares of stock cannotas yet be foreclosed and sold,
separate and distinct from the Pledge Agreement. The two in accordance with the terms and conditionsof the Pledge
agreements have separate terms and conditions, especially Agreement, to satisfy [PMOs] alleged claims. 29 (Citations
concerning the consequences of default. Under the ARDA, omitted.)
[PMO] may effect the ipso factoreversion of the title over the
sharesof stock of [PIC], without need of demand. On the other The Court of Appeals accordingly ruled in the end:
hand, under the Pledge Agreement, [PMO] may conduct a
public or private sale of the shares of stock of [PIC], wherein it In view of all the foregoing, We simply cannot ascribe grave
may opt to buy the same. abuse of discretion to public respondent. While We may have a
different take on the matter at hand, it is axiomatic thatnot
Furthermore, the first element of pactum commissoriumonly every erroneous conclusion of law or fact is abuse of
holds true under the Pledge Agreement whilethe second discretion.
element with respect to the stipulation for automatic
appropriation can be found under the ARDA. Thus, it is plainly WHEREFORE, premises considered, the instant petition is
irreconcilable how pactum commissoriumcan be made to apply DENIED. The assailed Order dated 25 August 2009 issued by
in the present case, absentthe two elements concurring in one public respondent, Hon. Judge Gina M. Bibat-Palamos of RTC
contract.28 Makati, Branch 64, in Civil Case No. 03-114 is hereby
AFFIRMED.30 (Citation omitted.)
Notwithstanding its aforequotedpronouncements, the Court of
Appeals still declared the ipso factoreversion clause in the PIC filed a Motion for Partial Reconsideration, while PMO filed
ARDA invalid: a Motion for Reconsideration of the Decision dated January 31,
2011 of the Court of Appeals, which the appellatecourt both
Nevertheless, the questioned provision on automatic reversion denied in its Resolution dated November 18, 2011.
of shares still cannot be held valid. While the contracting
parties may establish such stipulations, clauses, terms and Hence, the instant Petitions.
conditions as they may deem convenient, they should,
however, be not contrary to law, morals, good customs, public
In its Petition in G.R. No. 199420, PICassigned the following
order, or public policy.
errors on the part of the Court of Appeals:

In a contract of sale involving shares of stock, ownership is


I
deemed transferred upon the issuance ofcertificate of stock.
Section 63 of the Corporation Code provides that "shares of
stock so issued are personal property and may be transferred THE HONORABLE COURT OF APPEALS COMMITTED
by delivery of the certificate or certificates indorsed by the GROSS ERROR, ACTED WITH GRAVE ABUSE OF
owner or his attorney-in-fact or other person legally authorized DISCRETION WHEN IT DECIDED A QUESTION OF
to make the transfer." SUBSTANCE NOT IN ACCORD WITH LAW AND
ESTABLISHED JURISPRUDENCE BY HOLDING THAT THE
ESSENTIAL ELEMENTS OFPACTUM COMMISSORIUM,
The word "transfer," as contemplatedin that particular section
NAMELY, 1) THAT THERE SHOULD BE A [PLEDGE] OR
of the Corporation Code, means any act by which the share of
[MORTGAGE] WHEREIN A PROPERTY PLEDGED OR
stock of one person is vested in another, that is, he is divested
MORTGAGED BY WAY OF SECURITY FOR THE PAYMENT
and another acquires ownership of such stock.
OF THE PRINCIPAL OBLIGATION; AND 2) THAT THERE
SHOULD BE A STIPULATION FOR AN AUTOMATIC
Applying these principles, ownership over the stock of shares APPROPRIATION BY THE CREDITOR OF THE THING
was already transferred to [PIC] when it was issued new PLEDGED OR MORTGAGED IN THE EVENT OF
certificates of stock. [PMO] cannot oblige [PIC] to automatically NONPAYMENT OF THE PRINCIPAL OBLIGATION WITHIN
part with its ownership over the shares in favor of the former on THE STIPULATED PERIOD, MUST CONCUR OR BE
the occasion of default or nonpayment, even if they have PRESENT IN ONE CONTRACT UNLIKE IN THE CASE AT
previously agreed upon the same. Such stipulation contained BENCH WHERE ONE ELEMENT PURPORTEDLY APPEARS
in the ARDA is contraryto law, hence, null and void. IN THE ARDA WHILE THE OTHER APPEARS INTHE
PLEDGE AGREEMENT.
It bears stressing that what is being declared null and void here
is the "automatic reversion of shares" clause and not the II
provision for the rescission/cancellation of ARDA, as what has
been impressed by [PMO] in its arguments.
THE HONORABLE COURT OF APPEALS COMMITTED
GROSS ERROR, ACTED WITH GRAVE ABUSE OF
DISCRETION AND NOT IN ACCORD WITH LAW AND

46
ESTABLISHED JURISPRUDENCE WHEN IT GAVE DUE obligor fails to live up to his undertakings, without further
COURSE AND RULED ON [PMOS] PETITION FOR formality, such as foreclosure proceedings, and a public
CERTIORARI ASSAILING THE ORDER ISSUED BY THE sale."33 It is explicitly prohibited under Article 2088 of the Civil
TRIAL COURT ON FEBRUARY 27, 2003 HOLDING THAT Code which provides:
THE IPSO FACTOOR AUTOMATIC REVERSION TO PMO OF
THE PLEDGED SHARES OF STOCK UNDER SECTION 8.02 ART. 2088. The creditor cannot appropriate the things given by
OF THE ARDA IS PACTUM COMMISSORIUMWHEN SAID way of pledge or mortgage, or dispose of them. Any stipulation
ORDER HAD LONG BECOME FINAL AND THEREFORE THE to the contrary is null and void.
PETITION ASSAILING IT IS TIME-BARRED AND SHOULD
HAVE BEEN DISMISSED OUTRIGHT.31
There are two elements for pactum commissoriumto exist: (1)
that there should be a pledge or mortgage wherein a property
On the other hand, PMO raised the following arguments in its is pledged or mortgaged by way of security for the payment of
Petition in G.R. No. 199432: the principal obligation; and (2) that there should be a
stipulation for an automatic appropriation by the creditor of the
I thing pledged or mortgaged in the event of nonpayment of the
principal obligation within the stipulated period.34
THE HONORABLE COURT OF APPEALS ERRED IN RULING
THAT THE IPSO FACTOREVERSION CLAUSE OF THE Both elements of pactum commissoriumare present in the
ARDA IS CONTRARY TO LAW IN THE ABSENCE OF ANY instant case: (1) By virtue of the Pledge Agreement dated May
LAW ALLEGEDLY VIOLATED BYTHE SAID CLAUSE. 2,1997, PIC pledged its PPC shares of stock in favor of PMO
as security for the fulfillment of the formers obligations under
II the ARDA dated May 10, 1996 and the Pledge Agreement
itself; and (2) There is automatic appropriation as under
Section 8.02 of the ARDA, in the event of default by PIC, title to
THE HONORABLE COURT OF APPEALS ERRED IN
the PPC shares of stock shall ipso factorevert from PIC to
DENYING [PMOS] PRAYER FOR THE DISSOLUTION OF
PMO without need of demand.
THE WRIT OF PRELIMINARY INJUNCTION EVEN IF THE
PURPOSE FOR WHICH IT WAS ISSUED HAD ALREADY
BEEN MET AND ITS CONTINUED IMPLEMENTATION The Court of Appeals, in ruling that there is no pactum
DEPRIVED [PMO] OF REMEDIES UNDER THE LAW AND commissorium, adopted the position of PMO that the ARDA
THE ARDA. and the Pledge Agreement are entirely separate and distinct
contracts. Neither contract contains both elements of pactum
commissorium: the ARDA solely has the second element, while
III
the Pledge Agreement only has the first element.

THE DISSOLUTION OF THE WRIT AFTER THE LAPSE OF


The Court disagrees.
ALMOST NINE (9) YEARS IS IN ORDER AND IN THE
INTEREST OF EQUITABLE JUSTICE.32
In Blas v. Angeles-Hutalla,35 the Court recognized that the
agreement of the parties may be embodied in only one
RULING OF THE COURT
contract or in two or more separate writings. In case of the
latter, the writings of the parties should be read and interpreted
The allegations and arguments of PIC and PMO in their together in sucha way as to render their intention effective.
respective Petitions essentially boil down to two fundamental
issues: (1) Whether Section 8.02 of the ARDA on ipso factoor
The agreement between PMO and PIC isthe sale of the PPC
automatic reversion of the PPC shares of stock to PMO in case
shares of stock by the former to the latter, to besecured by a
of default by PIC constitutes pactum commissorium; and (2)
pledge on the very same shares of stock. The ARDA and the
Whether the Writ of Preliminary Injunction should be dissolved.
Pledge Agreement herein, although executed in separate
The Court resolves the first issue in the positive and the
written instruments, are integral to one another. On one hand,
second issue in the negative.
Section 2.04 of the ARDA explicitly requires the execution of a
pledge agreement as security for the payment by PIC of the
Section 8.02 of the ARDA constitutes pactum commissorium purchase price for the PPC shares of stock and receivables,
and, thus, null and void for being contrary to Article 2088 of the and even provides the form for said pledge agreement in
Civil Code. Annex A thereof. Section 2.07 of the ARDA also states that the
closing of the sale and purchase of the PPCshares of stock
Article 1305 of the Civil Code allowscontracting parties to and receivables shall take place on the same date that PIC
establish such stipulation, clauses, terms,and conditions shall execute and deliver the pledge agreement, together with
asthey may deem convenient, provided, however, that theyare the certificates of shares of stock, to PMO. On the other hand,
not contrary to law, morals, good customs, public order, or the "Whereas Clauses" of the Pledge Agreement expressly
public policy. mentions the ARDA and explains that the Pledge Agreement is
being executed to securepayment by PIC of the purchase price
Pactum commissoriumis among the contractual stipulations and all other amounts due to PMO under the ARDA, aswell as
that are deemed contrary to law. It is defined as "a stipulation the performance by PIC of its other obligations under the
empowering the creditor to appropriate the thing given as ARDA and the Pledge Agreement itself. Clearly, itwas the
guaranty for the fulfillment of the obligation in the event the

47
intention of the parties to enter into and execute both contracts purporting to be a sale with right to repurchase shall be
for a complete effectuation of their agreement. construed as an equitable mortgage.

To reiterate, the Pledge Agreement secures, for the benefit of Petitioner, to prove her claim, cannot rely on the stipulation in
PMO, the performance by PIC of its obligations under both the the contract providing that complete and absolute title shall be
ARDA and the Pledge Agreement itself. It is withthe execution vested on the vendee should the vendors fail to redeem the
of the Pledge Agreement that PIC turned over possession of its property on the specified date. Such stipulation that the
certificates of shares of stock in PPC to PMO. As the RTC ownership of the property would automatically pass to the
pertinently observed in its Order dated June 19, 2003, there vendee in case no redemption was effected within the
had already been a shift in the relations of PMO and PIC, from stipulated period is void for being a pactum
mere seller and buyer, to creditor-pledgee and debtor-pledgor. commissoriumwhich enables the mortgagee to acquire
Having enjoyed the security and benefits of the Pledge ownership of the mortgaged property without need of
Agreement, PMO cannot now insist on applying Section 8.02 foreclosure. Its insertion in the contract is an avowal of the
of the ARDAand conveniently and arbitrarily exclude and/or intention to mortgage rather that to sell the property.
ignore the Pledge Agreement so as to evade the prohibition
against pactum commissorium. Indeed, in Reyes v. Sierra, this Court categorically ruled that a
mortgagees mere act of registering the mortgaged property in
More importantly, the Court, in determining the existence of his own name upon the mortgagors failure to redeem the
pactum commissorium, had focused more on the evident property amounted to the exercise of the privilege of a
intention of the parties, rather than the formal or written form. mortgagee in a pactum commissorium. Obviously, from the
In A. Francisco Realty and Development Corporation v. Court nature of the transaction, applicants predecessor-in-interest is
of Appeals,36 therein petitioner similarly denied the existence of a mere mortgagee, and ownership of the thing mortgaged is
pactum commissoriumbecause the proscribed stipulation was retained by Basilia Beltran, the mortgagor. The mortgagee,
found in the promissory note and not in the mortgage deed. however, may recover the loan, although the mortgage
The Court held that: document evidencing the loan was nonregistrable being a
purely private instrument. Failure ofmortgagor to redeem the
The contention is patently without merit. To sustain the theory property does not automatically vest ownership of the property
of petitioner would be to allow a subversion of the prohibition in to the mortgagee, which would grant the latter the right to
Art. 2088. appropriate the thing mortgaged or dispose of it. This violates
the provision of Article 2088 of the New Civil Code, which
reads:
In Nakpil v. Intermediate Appellate Court, which involved the
violation of a constructive trust, nodeed of mortgage was
expressly executed between the parties in that case. The creditor cannot appropriate the things given by way of
Nevertheless, this Court ruled that an agreement whereby pledge or mortgage, or dispose by them. Any stipulation to the
property held in trust was ceded to the trustee upon failure of contrary is null and void.
the beneficiary to pay his debt to the former as secured by the
said property was void for being a pactum commissorium. It The act of applicant inregistering the property in his own name
was there held: upon mortgagorsfailure to redeem the property would amount
to a pactum commissoriumwhich is against good moralsand
The arrangement entered into between the parties, whereby public policy.
Pulong Maulapwas to be "considered sold to him (respondent)
x x x" incase petitioner fails to reimburse Valdes, must then be Thus, in the case at bar, the stipulations in the promissory
construed as tantamount to a pactum commissoriumwhich is notes providing that, upon failure of respondent spouses to pay
expressly prohibited by Art. 2088 of the Civil Code. For, there interest, ownership of the property would be automatically
was to be automatic appropriation of the property by Valdez in transferred to petitioner A. Francisco Realty and the deed of
the event of failure of petitioner to pay the value of the sale in its favor would be registered, are in substance a pactum
advances. Thus, contrary to respondents manifestations, all commissorium. They embody the two elements of pactum
the elements of a pactum commissoriumwere present: there commissoriumas laid down in Uy Tong v. Court of Appeals, x x
was a creditordebtor relationship between the parties; the x. (Citations omitted.)
property was used as security for the loan; and, there was
automatic appropriation by respondent of Pulong Maulap in Appreciating the ARDA together with the Pledge Agreement,
case of default of petitioner. the Court can only conclude that Section 8.02 of the ARDA
constitutes pactum commissoriumand, therefore, null and void.
Similarly, the Court has struck down such stipulations as
contained in deeds of sale purporting to be pacto de retrosales PMO though insists that there is no valid Pledge Agreement,
but found actually to be equitable mortgages. arguing that PIC could not have validly pledged the PPC
shares of stock because it is not yet the absolute owner of said
It has been consistently held that the presence of even one of shares. According to PMO, the sale of the PPC shares of stock
the circumstancesenumerated in Art. 1602 of the New Civil to PIC is subject to the resolutory condition of nonpayment by
Code is sufficient to declare a contract of sale with right to PIC of the installmentsdue on the purchase price.
repurchase an equitable mortgage. This is so because pacto
de retrosales with the stringent and onerous effects that Again, the Court is unconvinced.
accompany them are not favored. In case of doubt, a contract

48
Among the requirements of a contract ofpledge is that the Even though PMO had previouslyacknowledged the need for
pledgor is the absolute owner of the thing pledged. 37Based on restitution or restoration following rescission, it also qualified
the provisions of the ARDA, ownership of the PPC shares that such restitution or restoration shall still be "subject x x x to
ofstock had passed on to PIC, hence, enabling PIC to pledge the fair determination of the amount to be restored asmay be
the very same shares to PMO. In accordance with Section deemed reasonable and substantiated."41
2.07(a)(1) and 2.07(a)(2) of the ARDA, PMO had transferred to
PIC all rights, title, and interests in and to the PPC sharesof Section 8.02 of the ARDA provides for the ipso factoreversion
stock, and delivered to PIC the certificates for said shares for of the pledged shares of PIC to PMO in case ofdefault on the
cancellation and replacement of new certificates already in the part of the former, which as explained above, is prohibited by
name ofPIC. In addition, Section 2.07(b) of the ARDA explicitly Article 2088 of the Civil Code. The said Section does not
declares that PIC asbuyer shall exercise all the rights, mention the broader concept of rescission of the entire ARDA.
including the right to vote, of a shareholder in respect of the
PPC shares of stock.
In its Petition in G.R. No. 199432, PMO is asking the Court,
among other things, to already declare the ARDA
PMO cannot maintain that the ownership of the PPC shares of rescinded.1wphi1 The Court cannot grant or deny such
stock did not pass on to PIC, but in the same breath claim that prayer at this point for there are questions of fact and law
non-payment by PIC of the installments due on the purchase which are still under litigation before the RTC.
price is a resolutory condition for the contract of sale these
two arguments are actually contradictory. As the Court clearly
There is no basis for dissolving the Writ of Preliminary
explained in Heirs of Paulino Atienza v. Espidol38:
Injunction.

Regarding the right to cancel the contract for nonpayment of


The Court emphasizes that the Writ of Preliminary Injunction
an installment, there is need to initially determine if what the
was granted in the RTC Order dated February 27, 2003; and
parties had was a contract of sale or a contract to sell. In a
the Motion for Reconsideration of the issuance of saidWrit filed
contract of sale, the title to the property passes to the buyer
by the PMO was denied in the RTC Order dated June 19, 2003
upon the delivery of the thing sold. In a contract to sell, on the
both of which are interlocutory orders. Under Rule 65 of the
other hand, the ownership is, by agreement, retained by the
Rules of Court,the PMO only had 60 days from notice to file
seller and is not to pass to the vendee until full payment of the
with the Court of Appeals a petition for certiorariassailing said
purchase price. In the contract of sale, the buyers nonpayment
orders. However, PMO did not file such a petition and lost the
of the price is a negative resolutory condition;in the contract to
right to avail itself of the remedy.
sell, the buyers full payment of the price is a positive
suspensive condition to the coming into effect of the
agreement. In the first case, the seller has lost and cannot PMO, in challenging the RTC Order dated August 25, 2009,
recover the ownership of the property unless he takes action to cannot be allowed to revive the issues of pactum
set aside the contract of sale.In the second case, the title commissoriumand the arbitration clause, together with its
simply remains in the seller if the buyer does not comply with opposition to the Writ of Preliminary Injunction, which were
the condition precedent of making payment at the time already settled and ruled upon six years before in the RTC
specified in the contract. x x x. (Emphases supplied, citation Orders dated February 27, 2003 and June 19, 2003. The
omitted.) removal of said issues from those submitted for trial before the
R TC is thus justified. That the R TC issued the
aforementioned Orders of 2003 based only on initial and
So that it could invoke the resolutory condition of nonpayment
incomplete evidence is incorrect. The issues of pactum
of an installment, PMO must necessarily concede that its
commisorium and arbitration clause are questions of law that
contract with PIC was a one of sale and that ownership of the
do not require the review or evaluation of evidence. The RTC,
PPC shares of stock had indeed passed on to PIC. And even
before issuing said Orders of 2003, conducted hearings and
then, having lostownership of the shares, PMO cannot
required the submission of pleadings, so the parties were given
automatically recover the same without taking steps to set
the opportunity to present their arguments on said questions of
aside the contract of sale.
law. In particular, the ruling of the RTC that Section 8.02 of the
ARDA constitutes pactum commissorium, cannot be set aside
Moreover, the general rule is that in the absence of a and the Writ of Injunction issued based on such ruling cannot
stipulation, a party cannot unilaterally and extrajudicially be dissolved, even if there be changes in the factual
rescind a contract. A party must invoke the right to rescind a circumstances of the parties, for as long as the applicable law
contract judicially.39 It is also settled that the rescission of a remains the same.
contract based on Article 1191 of the Civil Code requires
mutual restitution to bring back the parties to their original
There are still several remaining issues in the Pre-Trial Order
situation prior to the inception of the contract.
dated February 6, 2009 that the RTC needs to resolve, among
Rescissioncreates the obligation to return the object of the
others, the alleged default under the ARDA. They involve both
contract. It can be carried out only when the one who demands
questions of fact and law, so their resolution requires further
rescission can return whatever he may be obliged to restore.40
hearings for presentation of evidence by the parties. Hence,
PMO cannot claim pre-judgment of its case with the issuance
by the RTC of the Orders dated February 27, 2003 and June
19, 2003. Despite the declaration that Section 8.02 of the
ARDA is null and void as it constitutes pactum commissorium,
PMO and PIC shall have the opportunity to thresh-out other

49
issues between them which are not resolved in these cases, (2) DENIES the Petition for Review of PMO in G.R.
such as the issue of default, during the trial on the merits No. 199432 for lack of merit; and
before the RTC. WHEREFORE, premises considered, the
Court: (3) DIRECTS the RTC to resolve Civil Case No. 03-
114 with utmost dispatch.
(1) GRANTS the Petition for Review of PIC in G.R.
No. 199420 by declaring that Section 8.02 of the SO ORDERED.
ARDA constitutes pactum commissorium and, thus,
null and void;

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