Digests

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CREDIT CASE DIGEST AY 13-14 | G01
001 PEOPLE vs. CONCEPCION

G.R. No. L-19190 November 29, 1922
TOPIC: Credit and Credit Transactions Defined
PONENTE: MALCOLM, J.
FACTS:
1. PNP President and BOD member Venancio Concepcion authorized an extension of credit (P300k) to a
partnership capitalized at P100k (Puno y Concepcion, S. en C.), half of which was owned by his wife
Rosario San Agustin. (This was based on the memorandum order of President Concepcion dated May 17,
1918, limiting the discretional power of the local manager to grant loans and discount negotiable
documents to P5,000, which, in certain cases, could be increased to P10,000.)
2. Contributions: Anacleto Concepcion (P5k), Clara vda de Concepcion (P5k), Miguel S. Concepcion (admin,
P20k), Clemente Puno (P20k), and Rosario San Agustin, "casada con Gral. Venancio Concepcion,"(P50k)
3. Venancio Concepcion, as President of the Philippine National Bank and as member of the board of
directors of this bank, was charged in the Court of First Instance of Cagayan with a violation of section 35
of Act No. 2747.
4. CFI Cagayan (Judge Enrique V. Filamor) declared him guilty of violating of Sec. 35 of Act 2747 (1y6m
imprisonment, P3k fine, with subsidiary imprisonment, costs)
5. Act 2747 (Effective 20 February 1918)
a. Sec 35: The National Bank shall not, directly or indirectly, grant loans to any of the members of the
board of the bank nor to agents of the branch banks.
b. Sec 49: Any person who shall violate any of the provisions of this Act shall be punished by a fine not to
exceed P10k, or by imprisonment not to exceed 5y, or by both.
Above sections were in effect when alleged violation took place, but were repealed by Act 2938 (app 30 Jan 1921)
ISSUE # 1
Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by Venancio
Concepcion, President of the Philippine National Bank, a "loan" within the meaning of section 35 of Act No. 2747?
Defenses Contention: documents on record do not prove that authority to make a loan was given, but only the
concession of credit.
SC: NO. Defendant is Correct. The exhibits in question speak of a "credito" (credit) and not of a " prestamo" (loan).
The "credit" of an individual means his ability to borrow money by virtue of the confidence or trust reposed by a
lender that he will pay what he may promise. A "loan" means the delivery by one party and the receipt by the
other party of a given sum of money, upon an agreement, express or implied, to repay the sum loaned, with or
without interest. The concession of a "credit" necessarily involves the granting of "loans" up to the limit of the
amount fixed in the "credit,"
ISSUE # 2
Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C.," by Venancio
Concepcion, President of the Philippine National Bank, a "loan" or a "discount"?
Defenses Contention: The provision prohibits loan, not discount.
SC: LOAN, to discount a paper is only a mode of loaning money. The demand notes signed by the firm "Puno y
Concepcion, S. en C." were not discount paper but were mere evidences of indebtedness, because (1) interest was
not deducted from the face of the notes, but was paid when the notes fell due; and (2) they were single-name and
not double-name paper.
Distinctions: (1) In a discount, interest is deducted in advance, while in a loan, interest is taken at the expiration of
a credit; (2) a discount is always on double-name paper; a loan is generally on single-name paper.
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ISSUE # 3
Was the granting of a credit of P300,000 to the copartnership, "Puno y Concepcion, S. en C." by Venancio
Concepcion, President of the Philippine National Bank, an "indirect loan" within the meaning of section 35 of Act
No. 2747?
SC: YES, it should be recalled that the wife of the defendant held one-half of the capital of this partnership.
Thus, A loan to a partnership of which a wife of a bank director is a member is an indirect loan to the director due
to conjugal partnership relations.
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002 Garcia v Thio

GR No. 154878 3/16/2007
TOPIC: General Concepts; Obligation to Deliver
PONENTE: Corona, J.
FACTS:
1. Respondent Thio received 2 crossed checks from the petitioner with the amounts of 100k USD and 500k
PHp in Feb. and Jun. of 1995, respectively. (Advance info: these are amounts loaned to Thio)
2. These checks, though received by Thio, were named to a certain Marilou Santiago. (Advance info: both
checks are named to Santiago because Thio re-loaned the amounts to the former)
3. As payment, Thio made payments of 20k PHp to the petitioner for 4 months.
4. The petitioner filed an action in the Makati-RTC because of the failure of Thio to pay the principal amounts
of the 2 checks
5. As a defense, Thio posited that she did not contract any loans with the petitioner. Instead, the petitioner
allegedly contracted with Santiago, the one in whose name the checks were issued.
6. RTC: in favor of the petitioner; Thio was ordered to pay the principal plus interest.
7. CA: reversed RTC ruling, reasons:
7.1 nothing in the record shows Thio received the money
7.2 since the checks were crossed, it can only be deposited with the acct. of Santiago.
8. Hence, this petition by the petitioner
ISSUE:
Whether or not it can be considered that Thio received the check, thus rendering him liable?
HELD:
Yes
RATIO:
1. It was upon respondents instruction that both checks were made payable to Santiago. She maintains that
it was also upon respondents instruction that both checks were delivered to her (respondent) so that she
could, in turn, deliver the same to Santiago.
2. Although respondent did not physically receive the proceeds of the checks, these instruments were placed
in her control and possession under an arrangement whereby she actually re-lent the amounts to
Santiago.
3. Respondent admitted that petitioner did not personally know Santiago.31 It was highly improbable that
petitioner would grant two loans to a complete stranger
4. In the petition for insolvency sworn to and filed by Santiago, it was Thio, not the petitioner, who was listed
as one of her (Santiagos) creditors.
CASE LAW/ DOCTRINE:
Despite the checks not being named to the respondent, it was her instruction to name the checks to Santiago. She
in effect still exercised control.
DISSENTING/CONCURRING OPINION:
- None
KEYWORDS/NOTES:
- None
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003 Saura Import and Export Co. Inc. v. DBP

G.R. No. L-24968 No. L-17474 April 27, 1972
TOPIC: Contract to Loan, Art. 1934
PONENTE: MAKALINTAL, J
FACTS:
1. Saura Inc., is engaged in the manufacturing of jute sacks. It purchased jute mill machinery on the strength of a
letter of credit extended by the Prudential Bank and Trust Co.; and that to secure its release without first paying
the draft, Saura, Inc. executed a trust receipt in favor of the said bank.
2. To support its business, it applied to the Rehabilitation Finance Corporation (RFC), before its conversion into
DBP, for an industrial loan of P500,000.00, to be used as follows: P250,000.00 for the construction of a factory
building (for the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price of the jute mill
machinery and equipment; and P9,100.00 as additional working capital. This loan was approved upon issuance of
Resolution No. 145 by RFC.
3. A real mortgage and promissory note were executed to secure the debt. However, the day before Saura was
informed of its approval, it wrote a letter to RFC, requesting a modification of the terms laid down by it because
China Engineers, Ltd., one of the guarantors, withdrew its signature. This event resulted to the reduction of the
loan to P300,000.00.
4. Saura, Inc. took exception to the cancellation of the loan and informed RFC that China Engineers, Ltd. "will at
any time reinstate their signature as co-signer of the note if RFC releases to us the P500,000.00 originally approved
by you.". RFC then restored the loan of P500,000.00 imposing additional contions: 1. That the raw materials
needed by the borrower-corporation to carry out its operation are available in the immediate vicinity; and 2. That
there is prospect of increased production thereof to provide adequately for the requirements of the factory."
5. Saura Inc., did not agree to these new conditions so it requested RFC to cancel the mortgage. RFC executed the
corresponding deed of cancellation. It appears that the cancellation was requested to make way for the
registration of a mortgage contract, over the same property in favor of the Prudential Bank and Trust Co., under
which contract Saura, Inc. had up to December 31 of the same year within which to pay its obligation on the trust
receipt heretofore mentioned.
6. 9 years after the mortgage in favor of RFC was cancelled at the request of Saura, Inc., the latter commenced the
present suit for damages, alleging failure of RFC (as predecessor of the defendant DBP) to comply with its
obligation to release the proceeds of the loan applied for and approved, thereby preventing the plaintiff from
completing or paying contractual commitments it had entered into, in connection with its jute mill project.
ISSUE:
Whether or not there was a perfected contract of loan between the parties.
HELD:
YES. The Court held in the affirmative. Article 1934 provides: An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be
perfected until delivery of the object of the contract.
RATIO:
There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of P500,000.00
was approved by resolution of the defendant, and the corresponding mortgage was executed and registered.
When an application for a loan of money was approved by resolution of the respondent corporation and the
responding mortgage was executed and registered, there arises a perfected consensual contract.
The imposition of those conditions was by no means a deviation from the terms of the agreement, but rather a
step in its implementation. When RFC turned down the request in its letter of January 25, 1955 the negotiations
which had been going on for the implementation of the agreement reached an impasse. Saura, Inc. obviously was
in no position to comply with RFC's conditions. So instead of doing so and insisting that the loan be released as
agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The action thus
taken by both parties was in the nature cf mutual desistance what Manresa terms "mutuo disenso" which is a
mode of extinguishing obligations. It is a concept that derives from the principle that since mutual agreement can
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create a contract, mutual disagreement by the parties can cause its extinguishment.
CASE LAW/ DOCTRINE:
The Court held in the affirmative. Article 1934 provides: An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be
perfected until delivery of the object of the contract. When an application for a loan of money was approved by
resolution of the respondent corporation and the responding mortgage was executed and registered, there arises
a perfected consensual contract.
DISSENTING/CONCURRING OPINION: N/A
KEYWORDS/NOTES:
Contract of loan is consensual. This case illustrates the importance of a definitive acceptance of an offer, as
opposed to a counter-offer, for the perfection of the consensual contract of loan.
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004 BPI Inv. Corp. v. CA and ALS M & D Corp.,

GR No. 133632 February 15, 2002
TOPIC: Contract to Loan, Art. 1934
PONENTE: QUISUMBING, J.
FACTS:
1. Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and Development
Corporation (AIDC), the predecessor of petitioner BPI Investment Corporation (BPIIC).
2. The said loan was for the construction of a house on his lot in Muntinlupa.
3. The house and lot were mortgaged to AIDC to secure the loan.
4. 1980: Roa sold the house and lot to private respondents ALS Management and Development Corp. and
Antonio Litonjua for P850,000. They paid P350,000 in cash and assumed the P500,000 balance of Roas
indebtedness with AIDC.
5. However, AIDC was not willing to extend the old interest rate to the respondents. They then proposed to grant
them a new loan of P500,000 to be applied to Roas debt and secured by the same property.
6. March 31, 1981: respondents executed a mortgage deed with the provision that payment of the monthly
amortization shall commence on May 1, 1981.
7. 1982: respondents paid BPIIC the sum of P190,601.35 which reduced Roas principal balance; Sept. 13, 1982:
BPIIC then released to respondents P7,146.87, purporting to be what was left of their loan after full payment of
Roas loan.
8. June 1984: BPIIC instituted foreclosure proceedings against respondents; ground: respondents failed to pay
the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted P475,585.31.
9. 1985: Respondents filed a civil case against BPIIC. Contentions: they were not in arrears in their payment, but
in fact made an overpayment as of June 30, 1984; they should not be made to pay amortization before the actual
release of the P500,000 loan; further, out of the P500,000 loan, only the total amount of P464,351.77 was
released to private respondents. Hence, applying the effects of legal compensation, the balance of P35,648.23
should be applied to the initial monthly amortization for the loan.
10. RTC: ruled in favor of respondents; it held that respondents were not in default in the payment of their
monthly amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature and made in bad
faith.
11: CA: affirmed trial courts decision; reasoned that a simple loan is perfected only upon the delivery of the
object of the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only on September
13, 1982, the date when BPIIC released the purported balance of the P500,000 loan after deducting therefrom
the value of Roas indebtedness. Thus, payment of the monthly amortization should commence only a month after
the said date, as can be inferred from the stipulations in the contract.
12. BPIICs motion for reconsideration was denied. Hence, this petition. (petition for certiorari)
13. Petitioners contention: a contract of loan is a consensual contract, and a loan contract is perfected at the time
the contract of mortgage is executed; loan contract was perfected on March 31, 1981, the date when the
mortgage deed was executed, hence, the amortization and interests on the loan should be computed from said
date
14. Respondents contention: based on Article 1934 of the Civil Code, a simple loan is perfected upon the
delivery of the object of the contract, hence a real contract. In this case, even though the loan contract was
signed on March 31, 1981, it was perfected only on September 13, 1982, when the full loan was released to
private respondents.
ISSUE:
1. WON a contract of loan is a consensual contract (as laid down in BONNEVIE VS. CA)
2. WON BPI should be held liable for moral and exemplary damages and attys fees in the face of irregular
payments made by ALS
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HELD:
1. No. A loan contract is not a consensual contract but a real contract. It is perfected only upon the delivery of
the object of the contract. Petitioner misapplied Bonnevie. The contract in Bonnevie declared by this Court as a
perfected consensual contract falls under the first clause of Article 1934, Civil Code. It is an accepted promise to
deliver something by way of simple loan.
2. No. BPI was not in bad faith because private respondents themselves admitted that they were irregular in their
payment of monthly amortizations. But BPI is liable for nominal damages because of its negligence, which resulted
in damage to private respondents.
RATIO:
1. In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other, was
perfected only on September 13, 1982, the date of the second release of the loan. Following the intentions of
the parties on the commencement of the monthly amortization, as found by the Court of Appeals, private
respondents obligation to pay commenced only on October 13, 1982, a month after the perfection of the
contract.
2. We also agree with private respondents that a contract of loan involves a reciprocal obligation, wherein the
obligation or promise of each party is the consideration for that of the other. As averred by private respondents,
the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and Litonjua shall pay the
monthly amortization commencing on May 1, 1981, one month after the supposed release of the loan. It is a basic
principle in reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. Only when a party has performed his part of the
contract can he demand that the other party also fulfills his own obligation and if the latter fails, default sets in.
Consequently, petitioner could only demand for the payment of the monthly amortization after September 13,
1982 for it was only then when it complied with its obligation under the loan contract. Therefore, in computing
the amount due as of the date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date
is October 13, 1982 and not May 1, 1981.
3. As admitted by private respondents themselves, they were irregular in their payment of monthly amortization.
We can not properly declare BPIIC in bad faith. Consequently, we should rule out the award of moral and
exemplary damages.
4.However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of mortgage,
without checking and correspondingly adjusting its records on the amount actually released to private
respondents and the date when it was released. Such negligence resulted in damage to private respondents, for
which an award of nominal damages should be given in recognition of their rights which were violated by BPIIC.
For this purpose, the amount of P25,000 is sufficient.
CASE LAW/ DOCTRINE:
A loan contract is not a consensual contract but a real contract. It is perfected only upon the delivery of the object
of the contract.
A contract of loan involves a reciprocal obligation, wherein the obligation or promise of each party is the
consideration for that of the other
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005 PANTALEON v. AMERICAN EXPRESS INTERNATIONAL, INC.

G.R. No. 174269, 25 August 2010
TOPIC: Contract to Loan
PONENTE: BRION, J.
FACTS:
1. The Pantaleons were part of an escorted tour in Western Europe. They had an itinerary of places to visit and
the corresponding time of arrival and departure at said places.
2. One of the places they visited was the Coster Diamond House. They arrived at 8:50 am. The group agreed to
meet up at 9:30 am so that they could make it in time to take a city tour of Amsterdam.
3. In the said store, Mrs. Pantaleon wanted to purchase a 2.5 diamond brilliant cut (which she planned to buy
even before the tour began), a pendant and a chain. They cost $13,826 in total.
4. To pay for these items, Pantaleon presented his American Express credit card together with his passport. At
9:20 am, the charge purchase was referred electronically to Respondents Amsterdam office.
5. At 9:30, the store informed Pantaleon that his AmexCard hasnt been approved yet. Because of the schedule
they had to follow, at 9:40, Pantaleon asked the store to cancel the sale since he was worried about further
inconveniencing the tour group. At 9:55, the store manager informed him that Respondent demanded bank
references, which Pantaleon provided.
6. At around 10 am, the store decided to release the items even without Respondents approval of the purchase
since 30 minutes had already passed from the time the tour group was supposed to leave. Upon the
Pantaleons return to the bus, they offered their apology which their tourmates answered with stony silence.
To make things worse, the tour group couldnt go to Amsterdam anymore since they had a ferry to take at 3 pm
at Belgium. (And so, Mrs. Pantaleon cried and Pantaleon had to take a tranquilizer to calm his nerves :p)
7. It turns out that the purchase was first transmitted to Respondents Amsterdam office at 9:20 am, referred to
its Manila office at 9:33 am, and finally approved at 10:19 am, with the Approval Code transmitted at 10:38 am
(all Amsterdam time).
8. After the tour ended, the Pantaleons went to the US wherein Pantaleon was able to use his AmEx card several
times without hassle or delay, except for two incidents.
a. Purchased golf equipment ($1,475) After more than 30 minutes, transaction still wasnt approved so he
cancelled the credit card purchase and borrowed money from his friend instead.
b. Purchased childrens shoes ($87) Took 20 minutes to be approved
9. Pantaleon instituted an action for damages in the RTC. RTC rendered judgment in favor of the Pantaleons. It
based judgment on the testimonies of Pantaleon and AmExs credit authorizer who both said that the normal
approval time for purchases was a matter of seconds.
10. AmEx appealed to CA. CA ruled in favor of AmEx, holding that although AmEx committed delay, it was not
attended by bad faith, malice or gross negligence; and that it exercised diligent efforts to effect the approval of
the purchases, which were allegedly not in accordance with Pantaleons charge pattern (it was his first
$13,826 single charge purchase).
ISSUE:
Whether or not there was default on the part of AmEx
HELD:
No. Since AMEX has no obligation to approve the purchase requests of its credit cardholders, Pantaleon cannot claim
that AMEX defaulted in its obligation.
RATIO:
1. Although the Court recognizes the existence of a relationship between the credit card issuer and the credit card
holder upon the acceptance by the cardholder of the terms of the card membership agreement (customarily
signified by the act of the cardholder in signing the back of the credit card), we have to distinguish this
contractual relationship from the creditor-debtor relationship which only arises after the credit card issuer has
approved the cardholders purchase request. The first relates merely to an agreement providing for credit
facility to the cardholder. The latter involves the actual credit on loan agreement involving three contracts,
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namely: the sales contract between the credit card holder and the merchant or the business establishment
which accepted the credit card; the loan agreement between the credit card issuer and the credit card holder;
and the promise to pay between the credit card issuer and the merchant or business establishment.
2. From the loan agreement perspective, the contractual relationship begins to exist only upon the meeting of the
offer and acceptance of the parties involved. In more concrete terms, when cardholders use their credit cards
to pay for their purchases, they merely offer to enter into loan agreements with the credit card company. Only
after the latter approves the purchase requests that the parties enter into binding loan contracts, in keeping
with Article 1319 of the Civil Code, which provides: Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and
the acceptance absolute. A qualified acceptance constitutes a counter-offer.
3. This finds reservation in the Card Membership Agreement itself, particularly paragraph 10, which clearly states
that AMEX reserve[s] the right to deny authorization for any requested Charge.
4. The three requisites for a finding of default are: (a) that the obligation is demandable and liquidated; (b) the
debtor delays performance; and (c) the creditor judicially or extrajudicially requires the debtors performance.
a. The first requisite is no longer met because AMEX, by the express terms of the credit card agreement, is not
obligated to approve Pantaleons purchase request. Without a demandable obligation, there can be no
finding of default.
b. Likewise, Pantaleon failed to make the demand required by law.
The use of a credit card to pay for a purchase is only an offer to the credit card company to enter a loan
agreement with the credit card holder. Before the credit card issuer accepts this offer, no obligation
relating to the loan agreement exists between them. On the other hand, a demand is defined as the
assertion of a legal right; xxx an asking with authority, claiming or challenging as due. A demand
presupposes the existence of an obligation between the parties. Thus, every time that Pantaleon used his
AMEX credit card to pay for his purchases, what the stores transmitted to AMEX were his offers to
execute loan contracts. These obviously could not be classified as the demand required by law to make the
debtor in default, given that no obligation could arise on the part of AMEX until after AMEX transmitted
its acceptance of Pantaleons offers. Pantaleons act of insisting on and waiting for the charge purchases
to be approved by AMEX is not the demand contemplated by Article 1169 of the Civil Code.
CASE DOCTRINE:
Use of a credit card to pay for a purchase is only an offer to the credit card company to enter a loan agreement with
the credit card holder. Before the credit card issuer accepts this offer, no obligation relating to the loan agreement
exists between them.
KEYWORDS/NOTES:
See case doctrine
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006 PRODUCERS BANK OF THE PHILIPPINES vs. HON. COURT OF APPEALS AND FRANKLIN VIVES
G.R. No. 115324 February 19, 2003
TOPIC: Object of Commodatum, Art. 1936
PONENTE: CALLEJO, SR., J.
FACTS:
1. Franklin Vives was asked by his neighbour and friend Angeles Sanchez to help her friend and town mate, Col.
Arturo Doronilla, in incorporating his business, the Sterela Marketing and Services (Sterela). Specifically,
Sanchez asked private respondent to deposit in a bank a certain amount of money in the bank account of
Sterela for purposes of its incorporation. She assured private respondent that he could withdraw his money
from said account within a months time. ( ang purpose nito is to make it appear that the corporation has
sufficient capital)
2. Relying on the assurances and representations of Sanchez and Doronilla, Vives issued check of P200,00 in
favour of Strela and deposited the same into Strelas newly-opened bank account (the passbook was given to
the wife of Vives and the passbook had an instruction that no withdrawals/deposits will be allowed unless the
passbook is presented).
3. Vives learned that Strela was no longer holding office in the address previously given to him. He later found out
that the funds had already been withdrawn leaving only a balance of P90, 000. The Vives spouses tried to
withdraw the amount, but it was unable to since the balance had to answer for certain post-dated checks
issued by Doronilla.
4. Doronilla made various tenders of check in favor of Vives in order to pay his debt. All of which were
dishonored.
5. Hence, Vives filed an action for recovery of sum against Doronilla, Sanchez, Dumagpi (Secretary) and
Producers Bank.
6. Both the Trial Court and the Court of Appeals ruled in favor of Vives holding the defendants liable for the sum
plus damages.
7. Defense: Petitioner contends that the transaction between private respondent and Doronilla is a simple loan
(mutuum) since all the elements of a mutuum are present: first, what was delivered by private respondent to
Doronilla was money, a consumable thing; and second, the transaction was onerous as Doronilla was obliged
to pay interest, as evidenced by the check issued by Doronilla in the amount of P212,000.00, or P12,000 more
than what private respondent deposited in Sterelas bank account thus, it argues that it cannot be held liable
for the return of private respondents P200,000.00 because it is not privy to the transaction between the
latter and Doronilla.
ISSUE: Whether or not the CA erred in upholding that the transaction was a simple loan and not commodatum.
HELD: No error was committed by the Court of Appeals when it ruled that the transaction between private respondent
and Doronilla was a commodatum and not a mutuum. RTC and CA decision affirmed.
RATIO:
Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may
use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case
the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous while Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the
borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as money, the
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contract would be a mutuum. However, there are some instances where a commodatum may have for its object a
consumable thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption
of the object, as when it is merely for exhibition. Thus, if consumable goods are loaned only for purposes of
exhibition, or when the intention of the parties is to lend consumable goods and to have the very same
goods returned at the end of the period agreed upon, the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the
actual character of a contract. In case of doubt, the contemporaneous and subsequent acts of the parties shall be
considered in such determination.
As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that private respondent
agreed to deposit his money in the savings account of Sterela specifically for the purpose of making it appear "that
said firm had sufficient capitalization for incorporation, with the promise that the amount shall be returned within
thirty (30) days." ( basically eto yung purpose nung contract nila) Private respondent merely "accommodated"
Doronilla by lending his money without consideration, as a favor to his good friend Sanchez. It was however clear to
the parties to the transaction that the money would not be removed from Sterelas savings account and would be
returned to private respondent after thirty (30) days.
Doronillas attempts to return to private respondent the amount of P200,000.00 which the latter deposited in Sterelas
account together with an additional P12,000.00, allegedly representing interest on the mutuum, did not convert the
transaction from a commodatum into a mutuum because such was not the intent of the parties and because the
additional P12,000.00 corresponds to the fruits of the lending of the P200,000.00. Article 1935 of the Civil Code
expressly states that "[t]he bailee in commodatum acquires the use of the thing loaned but not its fruits." Hence, it
was only proper for Doronilla to remit to private respondent the interest accruing to the latters money deposited with
petitioner.
As to the contention of the petitioners not being a privy to the contract:

Neither does the Court agree with petitioners contention that it is not solidarily liable for the return of private
respondents money because it was not privy to the transaction between Doronilla and private respondent. The nature
of said transaction, that is, whether it is a mutuum or a commodatum, has no bearing on the question of petitioners
liability for the return of private respondents money because the factual circumstances of the case clearly show that
petitioner, through its employee Mr. Atienza, was partly responsible for the loss of private respondents money and
is liable for its restitution.
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007 Colito Pajuyo v CA, Eddie Guevarra

GR No. 146364 6/3/2004
TOPIC: Liability for Expenses and Damages; Ordinary Expenses
PONENTE: Carpio
FACTS:
1. Pajuyo constructed a house on a lot which he acquired the rights over by paying 400 PHp.
2. Pajuyo occupied the house but after quite some time, Pajuyo executed a Kasunduan with Eddie Guevarra.
2.1. The Kasunduan provides that Guevarra may occupy the house without consideration. He only needs to
maintain its cleanliness and orderliness.
2.2 upon demand by Pajuyo, Guevarra will vacate the premises.
3. Pajuyo now needed the house, but Guevarra refused to vacate.
4. Pajuyo filed an ejectment case in the QC-MTC
4.1 Guevarra contends that Pajuyo did not have valid title or right of possession over the lot where the house
stands because the lot is within the 150 hectares set aside by Proclamation No. 137 for socialized housing.
5. MTC: ruled in favor of Pajuyo.
5.1 Pajuyo merely tolerated the occupancy of Guevarra.
5.2 their kasunduan referred to the house, and not the land on which the house stands.
6. RTC: upheld the MTC
7. CA: both Pajuyo and Guevarra are squatters.
7.1 more importantly, CA ruled that their kasunduan is not a lease contract, but a commodatum because the
agreement is not for a price certain.
8. Hence this petition.
ISSUE: Whether or not the Kasunduan was a lease contract or a commodatum? (If its a commodatum, the ejectment
case is now w/o factual or legal basis)
HELD: Yes. It is a lease contract.
RATIO:
1. In a contract of commodatum, one of the parties delivers to another something not consumable so that the
latter may use the same for a certain time and return it. An essential feature of commodatum is that it is
gratuitous.
2. The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially
gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the
property in good condition.
3. The imposition of this obligation makes the Kasunduan a contract different from a commodatum.
4. Case law on ejectment has treated relationship based on tolerance as one that is akin to a landlord-tenant
relationship where the withdrawal of permission would result in the termination of the lease.
5. Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a squatter.
Squatters, Guevarra pointed out, cannot enter into a contract involving the land they illegally occupy. Guevarra
insists that the contract is void.
5.1 SC: "Guevarra should know that there must be honor even between squatters." (Hahaha! Ouch!)
6. The Kasunduan is the undeniable evidence of Guevarras recognition of Pajuyos better right of physical
possession. Guevarra is clearly a possessor in bad faith. The absence of a contract would not yield a different
result.
7. Pajuyos withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarras transient right to
possess the property ended as well.
CASE LAW/ DOCTRINE: An essential feature of commodatum is that it is gratuitous.
KEYWORDS/NOTES: Keep in mind
1933: commodatum and mutuum
1935: bailee in commodatum acquires use, but not fruits; if there's compensation, it ceases to be commodatum
1941: bailee obliged to pay for ordinary expenses and preservation of the thing.
1943: bailee doesnt answer for deterioration if he's w/o fault.
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008 Republic v. Bagtas

GR No. G.R. No. L-17474
Date: October 25, 1962
TOPIC: Liability for Loss, Art. 1933, Art. 1942
PONENTE: PADILLA, J.
FACTS:
1. Jose Bagtas borrowed from the Republic of the Phils, through the Bureau of Animal Industry three bulls for a
period of one year for breeding purposes subject to a government charge of breeding fee of 10% of the book value
of the bulls.
2. Upon the expiration of the contract, Bagtas asked for a renewal for another one year, however, the Secretary of
Agriculture and Natural Resources approved only the renewal for one bull and other two bulls be returned.
3. Bagtas then wrote a letter to the Director of Animal Industry that he would pay the value of the three bulls with a
deduction of yearly depreciation. The Director advised him that the value cannot be depreciated and asked Bagtas
to either return the bulls or pay their book value. Bagtas neither paid nor returned the bulls.
4. The Republic then commenced an action against Bagtas ordering him to return the bulls or pay their book value.
After hearing, the trial Court ruled in favor of the Republic, as such, the Republic moved ex parte for a writ of
execution which the court granted. Felicidad Bagtas, the surviving spouse and administrator of Bagtas estate,
returned the two bulls and filed a motion to quash the writ of execution since one bull cannot be returned for it was
killed by gunshot during a Huk raid, which is a force majuere. She further contended that since the contract involved
was a contract of commodatum, it is the Republic who shall bear the loss since there is no transfer of ownerhip,
thus the Estate of Bagtas cannot be held liable.
ISSUE:
1. Whether or not Republic should bear the loss due to fortuitous event since it retained ownership over the bull.
HELD:
No, regardless of the nature of the contract, the estate of bagtas should be the one liable for the loss, not the
Republic. Note: The Court did not resolve whether the contract is commodatum or not since the purpose of the 10%
breed feeding was not clearly indicated in the contract.
RATIO:
A contract of commodatum is essentially gratuitous. If the breeding fee be considered a compensation, then the
contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to the
responsibilities of a possessor in bad faith, because she had continued possession of the bull after the expiry of the
contract.
And even if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides
that a bailee in a contract of commodatum . . . is liable for loss of the things, even if it should be through a
fortuitous event:
(2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the
bailee from responsibility in case of a fortuitous event;
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for another
period of one year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when
during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of
the appellant the bulls had each an appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at
P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of loss of the bull due to fortuitous event
the late husband of the appellant would be exempt from liability.
CASE LAW/ DOCTRINE:
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General Rule: Bailee is not liable for the value of the thing loss upon happening of the fortuitous event in a contract
of commodatum since there is no transfer on ownership upon delivery of the thing.
Exceptions:
1. Bailee used the thing other than the purpose agreed.
2. If he keeps it longer than the period stipulated . . .
3. If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee
from responsibility in case of a fortuitous event
KEYWORDS/NOTES:
This case falls under 2 and 3 exceptions. The contract entered into has already expired, in fact 4 years had elapsed
without the 3 bulls being returned.
15
009 Quintos v. Beck

G.R. No. L-46240 November 3, 1939
TOPIC: Obligation to Return
PONENTE: Imperial, J.
FACTS:
1. Plaintiff Margarita Quintos filed a case against defendant Beck to compel the latter to return her furniture
which she lent him for his use. Beck was a tenant of Quintos and occupied the latters house.
2. Upon the novation of the contract of lease between the two parties, Quintos gratuitously granted to Beck the
use of her furniture subject to the condition that Beck would return them to the her upon the latter's demand.
3. Quintos sold the property to Maria Lopez and Rosario Lopez and these three notified Beck of the conveyance,
giving him sixty days to vacate the premises under one of the clauses of the contract of lease. Quintos also
required Beck to return all the furniture transferred to him in the house where they were found.
4. Beck, through another person, wrote to Quintos reiterating that she may call for the furniture in the ground
floor of the house. Later on, Beck wrote another letter to Quintos informing her that he could not give up the
three gas heaters and the four electric lamps because he would use them until the Nov. 15, 1936 when the lease is
due to expire.
5. Quintos refused to get the furniture in view of the fact that the defendant had declined to make delivery of all
of them.
6. On November 15th, before vacating the house, Beck deposited with the Sheriff all the furniture belonging to the
Quintos and they are now on deposit in the warehouse, in the custody of the said sheriff.
7. Plaintiff s contention: the trial court incorrectly applied the law: in holding that they violated the contract by
not calling for all the furniture on November 5, 1936, when the defendant placed them at their disposal; in not
ordering the defendant to pay them the value of the furniture in case they are not delivered; in holding that they
should get all the furniture from the Sheriff at their expenses; in ordering them to pay-half of the expenses
claimed by the Sheriff for the deposit of the furniture; in ruling that both parties should pay their respective legal
expenses or the costs; and in denying pay their respective legal expenses or the costs; and in denying the motions
for reconsideration and new trial.
ISSUE:
1. Whether defendant Beck complied with his obligation to return the furniture upon the plaintiff's demand
SUB-ISSUES:
2. Whether plaintiff Quintos is bound to bear the deposit fees thereof, and whether she is entitled to the costs of
litigation
HELD:
1. No. The defendant did not comply with this obligation when he merely placed them at the disposal of the
plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps.
2. No. The Court could not legally compel her to bear the expenses occasioned by the deposit of the furniture at
the defendant's behest. The defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon
the latter's demand. The costs in both instances should be borne by the defendant because the plaintiff is the
prevailing party.
RATIO:
1. The contract entered into between the parties is one of commadatum, because under it the plaintiff
gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership thereof; by this
contract the defendant bound himself to return the furniture to the plaintiff, upon the latters demand (articles
1740, paragraph 1, and 1741 of the Civil Code).
2. The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's demand, means
that he should return all of them to the plaintiff at the latter's residence or house.
3. The defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff,
retaining for his benefit the three gas heaters and the four eletric lamps. The trial court, therefore, erred when it
came to the legal conclusion that the plaintiff failed to comply with her obligation to get the furniture when they
16
were offered to her.
Sub-issues:
4. As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's
demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the furniture at
the defendant's behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor was the
plaintiff under a duty to accept the offer to return the furniture, because the defendant wanted to retain the three
gas heaters and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof by the
defendant in case of his inability to return some of the furniture because under paragraph 6 of the stipulation of
facts, the defendant has neither agreed to nor admitted the correctness of the said value. Should the defendant
fail to deliver some of the furniture, the value thereof should be latter determined by the trial Court through
evidence which the parties may desire to present.
5. The costs in both instances should be borne by the defendant because the plaintiff is the prevailing party
(section 487 of the Code of Civil Procedure). The defendant was the one who breached the contract of
commodatum, and without any reason he refused to return and deliver all the furniture upon the plaintiff's
demand. In these circumstances, it is just and equitable that he pay the legal expenses and other judicial costs
which the plaintiff would not have otherwise defrayed.
CASE LAW/ DOCTRINE:

Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that
the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or
money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be
paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to
the borrower.
Art. 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the period
stipulated, or after the accomplishment of the use for which the commodatum has been constituted. However, if
in the meantime, he should have urgent need of the thing, he may demand its return or temporary use.
In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the
possession of the bailor. (1749a)
Art. 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium, in the
following cases:
(1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been
stipulated; or
(2) If the use of the thing is merely tolerated by the owner. (1750a)
Art. 1948. The bailor may demand the immediate return of the thing if the bailee commits any act of ingratitude
specified in Article 765.
17
010 BPI FAMILY BANK (BPI-FB) v. FRANCO

G.R. No. 123498, 23 November 2007
TOPIC: Simple Loan
PONENTE: Nachura, J.
FACTS:
1. Tevestco Arrastre Stevedoring Co., Inc. (Tevestco) opened a savings and current account with BPI-FB.
2. Soon thereafter, First Metro Investment Corporation (FMIC) opened a time deposit account with the same
branch of BPI-FB with a deposit of P100 Million, to mature after one year.
3. Subsequently, Franco opened 3 accounts: a current, savings, and time deposit, with BPI-FB. The current and
savings accounts were respectively funded with an initial deposit of P500,000.00 each, while the time deposit
account had P1 Million with a maturity date of August 31, 1990.
4. The total amount of P2 Million used to open Francos accounts is traceable to a check issued by Tevesteco
allegedly in consideration of Francos introduction of Teves, who was looking for a conduit bank to facilitate
Tevestecos business transactions, to Sebastian, who was then BPI-FB SFDMs Branch Manager. In turn, the
funding for the P2 Million check was part of the P80 Million debited by BPI-FB from FMICs time deposit
account and credited to Tevestecos current account pursuant to an Authority to Debit purportedly signed by
FMICs officers.
5. However, it appears that the signatures of FMICs officers on the Authority to Debit were forged.
Unfortunately, Tevesteco already effected several withdrawals from its current account (where the P80 Million
covered by the forged Authority to Debit was credited) amounting to P37,455,410.54, including the P2 Million
paid to Franco.
6. Because of the events that took place, BPI-FB froze Francos accounts. Thus, Franco filed the case in the RTC,
demanding that the deposits in his accounts be released to him.
7. BPI-FBs contentions:
a. It was correct in freezing Francos accounts and refusing to release his deposits, since it had a better right
to the amounts which were part of the money allegedly fraudulently withdrawn from it by Tevesteco and
ended up in Francos accounts.
BPI-FB contends that its position is similar to that of an owner of personal property who regains possession
after it is stolen. To illustrate this point, BPI-FB gives the following example: where Xs television set is
stolen by Y who thereafter sells it to Z, and where Z unwittingly entrusts possession of the TV set to X, the
latter would have the right to keep possession of the property and preclude Z from recovering possession
thereof.
In addition, BPI-FB cites Article 559 of the Civil Code, which provides: The possession of movable property
acquired in good faith is equivalent to a title. Nevertheless, one who has lost any movable or has been
unlawfully deprived thereof, may recover it from the person in possession of the same. If the possessor of a
movable lost or of which the owner has been unlawfully deprived, has acquired it in good faith at a public
sale, the owner cannot obtain its return without reimbursing the price paid therefor.
b. Moreover, it contends that the claimed consideration of P2 Million received by Franco for the introduction
he facilitated between Teves and Sebastian spoke volumes of Francos participation in the fraudulent
transaction.
11. RTC and CA rendered judgment in favour of Franco.
Note: Franco and his co-accused were acquitted of the crime of Estafa filed by BPI-FB against them. However, the
civil case remains under litigation.
ISSUE:
Whether or not it was correct for BPI-FB to freeze Francos accounts and preclude him from withdrawing deposits
HELD:
No. Although BPI-FB owns the deposits in Francos accounts, it cannot prevent him from demanding payment of BPI-
FBs obligation by drawing checks against his current account, or asking for the release of the funds in his savings
18
account. Thus, when Franco issued checks drawn against his current account, he had every right as creditor to expect
that those checks would be honored by BPI-FB as debtor.
RATIO:
1. It was wrong for BPI-FB to apply its example and Article 559 to the instant case since the movable property
mentioned in Art. 559 pertains to a specific or determinate thing. A determinate or specific thing is one that is
individualized and can be identified or distinguished from others of the same kind. In this case, the deposit in
Francos accounts consists of money which, albeit characterized as a movable, is generic and fungible.
2. The deposit of money in banks is governed by the Civil Code provisions on simple loan or mutuum.
3. As there is a debtor-creditor relationship between a bank and its depositor, BPI-FB ultimately acquired
ownership of Francos deposits, but such ownership is coupled with a corresponding obligation to pay him an
equal amount on demand. Although BPI-FB owns the deposits in Francos accounts, it cannot prevent him from
demanding payment of BPI-FBs obligation by drawing checks against his current account, or asking for the
release of the funds in his savings account. Thus, when Franco issued checks drawn against his current account,
he had every right as creditor to expect that those checks would be honored by BPI-FB as debtor.
4. More importantly, BPI-FB does not have a unilateral right to freeze the accounts of Franco based on its mere
suspicion that the funds therein were proceeds of the multi-million peso scam Franco was allegedly involved in.
5. Court held that BPI-FB was wrong for shifting the liability on the FMIC-Tevesteco transfer to Franco and the
other payees of checks issued by Tevesteco.
a. BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know the signatures of its customers.
b. Likewise, it boggles the mind why BPI-FB, even without delving into the authenticity of the signature in the
Authority to Debit, effected the transfer of P80,000,000.00 from FMICs to Tevestecos account, when
FMICs account was a time deposit and it had already paid advance interest to FMIC.
CASE DOCTRINE:
The deposit of money in banks is governed by the Civil Code provisions on simple loan or mutuum.
19
011 PEOPLE OF THE PHILIPPINES, vs. TERESITA PUIG and ROMEO PORRAS
G.R. Nos. 173654-765 February 19, 2003
TOPIC: Simple Loan; General Concepts
PONENTE: CHICO-NAZARIO, J.
Facts:
1. On 7 November 2005, the Iloilo Provincial Prosecutor's Office filed before RTC in Dumangas, Iloilo, 112 cases of
Qualified Theft against respondents Teresita Puig (Puig) and Romeo Porras (Porras) who were the Cashier and
Bookkeeper, respectively, of private complainant Rural Bank of Pototan, Inc.
2. It was alleged in the information that Teresita Puig and Romeo Porras took away P15,000 without the consent
of the owner Bank to the prejudice and damage of the bank.
3. The RTC dismissed the case for insufficiency of the information ruling that the real parties in interest are the
depositors-clients and not the bank because the bank does not acquire ownership of the money deposited in
it. It added that allowing the 112 cases for Qualified Theft filed against the respondents to push through would
be violative of the right of the respondents under Section 14(2), Article III of the 1987 Constitution which states
that in all criminal prosecutions, the accused shall enjoy the right to be informed of the nature and cause of the
accusation against him.
4. Subsequently, a motion for reconsideration was filed but was denied by the same.
5. Hence, this petition.
6. Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the provisions concerning simple loans." Corollary
thereto, Article 1953 of the same Code provides that "a person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the
same kind and quality." Thus, it posits that the depositors who place their money with the bank are
considered creditors of the bank. The bank acquires ownership of the money deposited by its clients, making
the money taken by respondents as belonging to the bank.
ISSUE: WON the 112 information for qualified theft sufficiently allege the element of taking without the consent of the
owner, and the qualifying circumstance of grave abuse of confidence. (WON the bank is the owner)
HELD: YES. Art. 1953, CC provides that a person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.
RATIO:
The Court has held that where the Informations merely alleged the positions of the respondents; that the crime was
committed with grave abuse of confidence, with intent to gain and without the knowledge and consent of the Bank,
without necessarily stating the phrase being assiduously insisted upon by respondents, of a relation by reason of
dependence, guardianship or vigilance, between the respondents and the offended party that has created a high
degree of confidence between them, which respondents abused, and without employing the word owner in lieu of
the Bank were considered to have satisfied the test of sufficiency of allegations. Allegations in the Information that
such employees acted with grave abuse of confidence, to the damage and prejudice of the Bank, without particularly
referring to it as owner of the money deposits, as sufficient to make out a case of Qualified Theft.
Depositors who place their money with the bank are considered creditors of the bank. Tellers, Cashiers, Bookkeepers
and other employees of a Bank who come into possession of the monies deposited therein enjoy the confidence
reposed in them by their employer. Banks, on the other hand, where monies are deposited, are considered the owners
thereof.
The relationship between banks and depositors has been held to be that of creditor and debtor, by virtue of Art.
1980, CC, which provides that fixed, savings, and current deposits of money in banks and similar institutions shall
be governed by the provisions concerning simple loans, and corollarily thereto, Art. 1953, CC provides that a
person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to
pay to the creditor an equal amount of the same kind and quality.
20
012 Spouses Antonio and Manuela Concepcion v CA

GR No. 122079 Date: 6/27/1997
TOPIC: Conventional Interest
PONENTE: Vitug
FACTS:
1. Home Savings Bank and Trust Co. loan to the Concepcion Spouses 1.4m PHp. The Spouses in turn executed a
promissory note and a real estate mortgage over their property in Greenhills.
2. The promissory note provided that the Spouses had authorized the bank to increase the interest rate of the
loan even without advance notice to them.
3. The bank did increase the interest from originally 16% now to 21%.
4. The president of the bank made demands on the spouses to pay but the spouses failed to pay.
5. The bank now filed with the Sheriff of Pasig to foreclose the mortgage.
6. The Spouses wasnt able to exercise their right of redemption w/in 1 year.
7. The spouses now filed an action against the bank for the cancellation of the foreclosure, for the nullification
of the unilateral increase of the interest rate, and for damages.
8. RTC: Spouses have no cause of action.
9. CA: affirmed the RTCs decision but with modification. CA invalidated the unilateral increase of the interest
rate.
10. Hence this petition for certiorari (reason: they werent notified of the foreclosure proceedings)
ISSUE:
Whether or not the unilateral increase by the bank was valid?
HELD:
No.
RATIO:
1. We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled
right to unilaterally upwardly adjust the interest on private respondents' loan. That would completely take
away from private respondents the right to assent to an important modification in their agreement, and
would negate the element of mutuality in contracts.
2. (T)he unilateral action of the PNB in increasing the interest rate on the private respondent's loan violated
the mutuality of contracts ordained in Article 1308 of the Civil Code: Art. 1308. The contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of them.
3. Even if we were to consider that petitioners were bound by their agreement allowing an increase in the
interest rate despite the lack of advance notice to them, the escalation should still be subject, as so
contractually stipulated, to a corresponding increase by the Central Bank.
CASE LAW/ DOCTRINE:
Increases cannot be unilaterally left to the banks.
21
013 Frias v. San Diego-Sison

G.R. No. 155223 April 4, 2007
TOPIC: Conventional Interest
PONENTE: AUSTRIA-MARTINEZ, J.
FACTS:
1. Petitioner Frias is the owner of the land which is the subject matter of the supposedly contract of sale. To
effectuate the said contract, Frias and Sison entered into a Memorandum agreement, which includes the following:
a) Sison has 6 months from the date of contracts execution to notify Frias of her intention to purchase the property
with the improvements at 6.4M; b) In case Frias has no other buyer within 6 months from the contracts execution,
no interest shall be charged by Sison on the 3M; c) In the event that on the 6th month, Sison would decide not to
purchase the property, Frias has 6 months to pay 3M (amount shall earn compounded bank interest for the last 6
months only); d) 3M treated as a loan and the property considered as the security for the mortgage; and e) Upon
notice of intention to purchase, Sison has 6 months to pay the balance of 3.4M (6.4M less 3M MOA consideration)
2. Frias received from Sison 3M (2M in cash; 1M post-dated check dated February 28, 1990, instead of 1991, which
rendered the check stale). Frias gave Sison the TCT and the Deed of Absolute Sale over the property. Sison decided
not to purchase the property, so she notified Frias through a letter dated March 20, 1991 [Frias received it only on
June 11, 1991], and Sison reminded Frias of their agreement that the 2M Sison paid should be considered as a loan
payable within 6 months. Frias failed to pay this amount.
3. Sison filed a complaint for sum of money with preliminary attachment. Sison averred that Frias tried to deprive
her of the security for the loan by making a false report of the loss of her owners copy of TCT, executing an affidavit
of loss and by filing a petition[1] for the issuance of a new owners duplicate copy. RTC issued a writ of preliminary
attachment upon the filing of a 2M bond.
4. RTC found that Frias was under obligation to pay Sison 2M with compounded interest pursuant to their MOA. RTC
ordered Frias to pay Sison, among others: 2M + 32% annual interest beginning December 7, 1991 until fully paid.
5. CA affirmed RTC with modification32% reduced to 25%. CA said that there was no basis for Frias to say that the
interest should be charged for 6 months only. It said that a loan always bears interest; otherwise, it is not a loan. The
interest should commence on June 7, 1991 until fully paid, with compounded bank interest prevailing at the time
[June 1991] the 2M was considered as a loan (as certified by the bank).
ISSUE: Whether or not compounded bank interest should be limited to 6 months as contained in the MOA.
HELD: No. There is nothing in the MOA that suggests that interest will be charged for 6 months only even if it takes
forever for Frias to pay the loan. A loan always bears interest otherwise it is not a loan.
The agreement that the amount given shall bear compounded bank interest for the last six months only, i.e.,
referring to the second six-month period, does not mean that interest will no longer be charged after the second six-
month period since such stipulation was made on the logical and reasonable expectation that such amount would
be paid within the date stipulated. Considering that petitioner failed to pay the amount given which under the
Memorandum of Agreement shall be considered as a loan, the monetary interest for the last six months continued
to accrue until actual payment of the loaned amount.
The payment of regular interest constitutes the price or cost of the use of money and thus, until the principal sum
due is returned to the creditor, regular interest continues to accrue since the debtor continues to use such principal
amount. (State Investment House, Inc. v. Court of Appeals, G.R. No. 90676, June 19, 1991, 198 SCRA 390, 398). It has
been held that for a debtor to continue in possession of the principal of the loan and to continue to use the same
after the maturity of the loan without payment of the monetary interest, would constitute unjust enrichment on the
part of the debtor at the expense of the creditor.
CASE LAW/ DOCTRINE: In a contract of loan, interest, even if not expressly stipulated in the contract, is payable
once there is judicial demand. In such a case, legal rate will be used and will start to run from the date of default of
payment.
KEYWORDS/NOTES:
Interest continues to run until principal is fully paid. Note that whenever there is insufficient payment of debt, such
payment will be applied first to the interest unless contrary is provided.
22
014 Sps. Juico v. China Banking Corp.,

G. R. No. 187678, April 10, 2013.
TOPIC: Interest; Conventional Interest
PONENTE: Villarama, Jr., J.
FACTS:
1. Petitioners Spouses Juico obtained a loan from respondent China Banking Corporation as evidenced by two
promissory notes for the sums of 6,216,000 and P4, 139,000, respectively.
2. A Real Estate Mortgage (REM) secured the loan over petitioners' property located in White Plains, Quezon City.
3. Petitioners failed to pay the monthly amortizations due; respondent then demanded the full payment of the
outstanding balance with accrued monthly interests.
4. As of February 23, 2001, the amount due on the two promissory notes totaled P19,201,776.63; the mortgaged
property was sold at public auction, with respondent as highest bidder for the amount of P10,300,000.
5. May 8, 2001: petitioners received a demand letter dated May 2, 2001 from respondent for the payment
of P8,901,776.63, the amount of deficiency after applying the proceeds of the foreclosure sale to the mortgage debt.
5. Petitioners failed to pay the said amount. Respondent then filed a collection suit in the trial court. In its
Complaint, respondent prayed that judgment be rendered ordering the petitioners to pay jointly and severally:
P8,901,776.63 representing the amount of deficiency, plus interests at the legal rate; an additional amount
equivalent to 1/10 of 1% per day of the total amount, until fully paid, as penalty; other additional amounts were
demanded such as attys fees, litigation and costs.
6. Petitioners contention: complaint states no cause of action considering that the principal of the loan was already
paid when the mortgaged property was extrajudicially foreclosed and sold for P10,300,000; and should they be held
liable for any deficiency, it should be only for P55,000 representing the difference between the total outstanding
obligation of P10,355,000 and the bid price of P10,300,000. Petitioners also argued that even assuming there is a
cause of action, such deficiency cannot be enforced by respondent because it consists only of the penalty and/or
compounded interest on the accrued interest, which is generally not favored under the Civil Code.
7. At the trial, respondent presented Ms. Yu, its Senior Loans Assistant, as witness. She testified that she handled the
account of petitioners and said that the interest rate changes every month based on the prevailing market rate and
she notified petitioners of the prevailing rate by calling them monthly before their account becomes past due. When
asked if there was any written authority from petitioners for respondent to increase the interest rate unilaterally, she
answered that petitioners signed a promissory note indicating that they agreed to pay interest at the prevailing rate.
8. Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required to sign a blank promissory
note and was informed that the interest rate on the loan will be based on prevailing market rates.
8. RTC: ruled in favor the respondent; it ruled that the amount realized at the auction sale was applied to the
interest, conformably with Article 1253 of the Civil Code which provides that if the debt produces interest, payment of
the principal shall not be deemed to have been made until the interests have been covered. This being the case,
petitioners' principal obligation subsists but at a reduced amount of P8,901,776.63.
9. CA: affirmed trial courts decision; it found as valid the stipulation in the promissory notes that interest will be
based on the prevailing rate.
10. Petitioners contention: the interest rates imposed by respondent are not valid as they were not by virtue of any
law or BSP regulation or any regulation that was passed by an appropriate government entity. They insist that the
bank unilaterally imposed the interest rates and thus violate the principle of mutuality of contracts. They argue that
the escalation clause in the promissory notes does not give respondent the unbridled authority to increase the
interest rate unilaterally.
11. Respondent: petitioners failed to show that their case falls under any of the exceptions wherein this Court may
review findings of fact of the CA.
ISSUE: Whether the interest rates imposed upon petitioners by the respondent are valid
HELD:
No. Modifications in the rate of interest for loans pursuant to an escalation clause must be the result of an agreement
between the parties. Unless such important change in the contract terms is mutually agreed upon, it has no binding
23
effect. In the absence of consent on the part of the petitioners to the modifications in the interest rates, the adjusted
rates cannot bind them. Hence, we consider as invalid the interest rates in excess of 15%, the rate charged for the
first year. The Court also finds the penalty charges imposed excessive and arbitrary, hence the same is hereby
reduced to 1% per month or 12% per annum.
RATIO:
1. The two promissory notes signed by petitioners provide:
I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the case may be, the interest
rate/service charge presently stipulated in this note without any advance notice to me/us in the event a law or
Central Bank regulation is passed or promulgated by the Central Bank of the Philippines or appropriate government
entities, increasing or decreasing such interest rate or service charge.
2. The provision in the promissory note authorizing respondent bank to increase, decrease or otherwise change from
time to time the rate of interest and/or bank charges "without advance notice" to petitioner, "in the event of change
in the interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines," does not give
respondent bank unrestrained freedom to charge any rate other than that which was agreed upon. Here, the monthly
upward/downward adjustment of interest rate is left to the will of respondent bank alone. It violates the essence of
mutuality of the contract. (Floirendo, Jr. v. Metropolitan Bank and Trust Company)
3. We hold that the escalation clause is void because it grants respondent the power to impose an increased rate of
interest without a written notice to petitioners and their written consent. Respondent's monthly telephone calls to
petitioners advising them of the prevailing interest rates would not suffice. A detailed billing statement based on the
new imposed interest with corresponding computation of the total debt should have been provided by the
respondent to enable petitioners to make an informed decision. An appropriate form must also be signed by the
petitioners to indicate their conformity to the new rates. Compliance with these requisites is essential to preserve the
mutuality of contracts. For indeed, one-sided impositions do not have the force of law between the parties, because
such impositions are not based on the parties' essential equality.
CASE LAW/ DOCTRINE: An escalation clause is void where the creditor unilaterally determines and imposes an
increase in the stipulated rate of interest without the express conformity of the debtor. Such unbridled right given to
creditors to adjust the interest independently and upwardly would completely take away from the debtors the right
to assent to an important modification in their agreement and would also negate the element of mutuality in their
contracts.
Concurring Opinion: Sereno, J.:
- I fully concur with the majority that the increases in interest rates unilaterally imposed by China Bank without
petitioners' assent violates the principle of mutuality of contracts. This principle renders void a contract containing a
provision that makes its fulfillment exclusively dependent upon the uncontrolled will of one of the contracting parties.
- However, I write to clarify that not all escalation clauses in loan agreements are void per se. It is actually the rule
that "escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the
value of money in long term contracts." In The Consolidated Bank and Trust Corporation v. Court of Appeals, citing
Polotan, Sr. v. Court of Appeals, this Court already accepted that, given the fluctuating economic conditions, practical
reasons allow banks to stipulate that interest rates on a loan will not be fixed and will instead depend on market
conditions.
- These points must be considered by creditors and debtors in the drafting of valid escalation clauses. Firstly, as a
matter of equity and consistent with P.O. No. 1684, the escalation clause must be paired with a de-escalation clause.
Secondly, so as not to violate the principle of mutuality, the escalation must be pegged to the prevailing market
rates, and not merely make a generalized reference to "any increase or decrease in the interest rate" in the event a
law or a Central Bank regulation is passed. Thirdly, consistent with the nature of contracts, the proposed modification
must be the result of an agreement between the parties. In this way, our credit system would be facilitated by firm
loan provisions that not only aid fiscal stability, but also avoid numerous disputes and litigations between creditors
and debtors.
24
015 EASTERN SHIPPING LINES, INC. v. COURT OF APPEALS & MERCANTILE INSURANCE COMPANY, INC.
G.R. No. 97412, 12 July 1994
TOPIC: Compensatory, Penalty or Indemnity Interest
PONENTE: VITUG, J.
FACTS:
1. Two fiber drums were shipped owned by Eastern Shipping from Japan. The shipment was insured by Mercantile
Insurance under a Marine Insurance policy.
2. Upon arrival in Manila, the drums were discharged unto the custody of the Metro Port Service, Inc. It excepted
to one drum, which was said to be in bad order and which damage was unknown the Mercantile Insurance
Company.
3. Allied Brokerage Corporation received the shipment from Metro, one drum opened and without seal.
4. Allied delivered the shipment to the consignees warehouse. The latter excepted to one drum which contained
spillages while the rest of the contents was adulterated/fake.
5. As consequence of the loss, Mercantile Insurance paid the consignee, so that it became subrogated to all the
rights of action of consignee against the defendants Eastern Shipping, Metro Port and Allied Brokerage.
6. Mercantile Insurance filed before the RTC. RTC ruled in favor of the Mercantile Insurance and ordered
defendants to pay the former with present legal interest of 12% per annum from the date of the filing of the
complaint.
7. Eastern Shipping appealed to CA. CA denied the same and affirmed in toto the decision of the RTC.
ISSUE:
Whether or not the adjudged legal interest is correct
HELD:
No. The legal interest to be paid should be SIX PERCENT (6%) on the amount due computed from the decision (not from
the filing of the complaint), dated 03 February 1988, of the court a quo.
RATIO/CASE DOCTRINE:
Jurisprudence which relate to the issue seem to vary. The Court believes that the factual circumstances may have called
for different applications, guided by the rule that the courts are vested with discretion, depending on the equities of
each case, on the award of interest. Nonetheless, the Court, by way of clarification and reconciliation, suggested the
following rules of thumb for future guidance.
1. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages.
2. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as follows:
a. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
b. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
c. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
25
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.
KEYWORDS/NOTES:
Since Sir only wants the ratio decidendi, I guess summarizing it would help
Breach of obli + Obli is a loan = Interest is that stipulated in writing. Interest shall also earn legal interest from
the time it is judicially demanded.
o If there is no interest stipulated, interest is 12% per annum computed from the time of default
Breach of obli + Obli is NOT a loan = Interest on damages is 6% per annum.
o They shall only run if demand has been established with reasonable certainty.
o Interest will run from the time demand (whether judicial or extrajudicial) was made.
o If it cannot be reasonably established when demand was made, interest shall run from the date of
judgment of the court
For all the instances above, upon judgment of the court, legal interest of 12% per annum would run on the
money awarded. It would run upon finality of the decision until payment has been made
26
016 TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA vs. HON. COURT OF APPEALS & SECURITY BANK & TRUST
COMPANY
G.R. No. 138677 February 12, 2002
PONENTE: VITUG, J.
FACTS:
1. Tolomeo Ligutan and Leonidas dela Llana (Petitioners) obtained on 11 May 1981 a loan in the amount of
P120,000.00 from respondent Security Bank and Trust Company.
2. Petitioners then executed a promissory note binding themselves, jointly and severally, to pay the sum
borrowed with an interest of 15.189% per annum upon maturity and to pay a penalty of 5% every month
on the outstanding principal and interest in case of default. In addition, petitioners agreed to pay 10% of
the total amount due by way of attorneys fees if the matter were indorsed to a lawyer for collection or if
a suit were instituted to enforce payment.
3. The obligation matured on 8 September 1981; the bank, however, granted an extension but only up until
29 December 1981.
4. Despite several demands from the bank, petitioners failed to settle the debt.
5. Bank filed a complaint for recovery of the sum with the RTC of Makati after the petitioners defaulted on
the banks final demand letter.
6. Trial Court ruled in favor of the bank (P114,416, 15.189% p.a., 2% service charge, 5% p.m. penalty charge,
commencing 20 May 1982 until fully paid, 10% atty. fees)
7. Petitioners interposed an appeal with the Court of Appeals.
8. In its decision of 7 March 1996, the appellate court affirmed the judgment of the trial court except on the
matter of the 2% service charge which was deleted pursuant to Central Bank Circular No. 783.
9. Not fully satisfied with the decision of the appellate court, both parties filed their respective motions for
reconsideration. Petitioners prayed for the reduction of the 5% stipulated penalty for being
unconscionable. The bank, on the other hand, asked that the payment of interest and penalty be
commenced not from the date of filing of complaint but from the time of default as so stipulated in the
contract of the parties.
10. CA modified the ruling reducing the 5% penalty to 3%
11. Petitioners filed an omnibus motion for reconsideration and to admit newly discovered evidence, alleging
that while the case was pending before the trial court, petitioner Tolomeo Ligutan and his wife Bienvenida
Ligutan executed a real estate mortgage on 18 January 1984 to secure the existing indebtedness of
petitioners Ligutan and dela Llana with the bank. Petitioners contended that the execution of the real
estate mortgage had the effect of novating the contract between them and the bank.
12. The motion was denied since this was already a second motion for reconsideration.
13. Hence, this appeal was made on the following issues:
ISSUE # 1
Did the respondent Court of Appeals seriously erred in not holding that the 15.189% interest and the penalty of
three (3%) percent per month or thirty-six (36%) percent per annum imposed by private respondent bank on
petitioners loan obligation are still manifestly exorbitant, iniquitous and unconscionable?
NO. It is not excessive on its face. The essence or rationale for the payment of interest, quite often referred to as
cost of money, is not exactly the same as that of a surcharge or a penalty. A penalty stipulation is not necessarily
preclusive of interest, if there is an agreement to that effect, the two being distinct concepts which may separately
be demanded. The Court of appeals exercising its good judgment even reduced the penalty interest from 5% a
month to 3% a month which petitioner still disputes. Given the circumstances, not to mention the repeated acts
of breach by petitioners of their contractual obligation, the Court sees no cogent ground to modify the ruling of
the appellate court.
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its
27
resolution would depend on such factors as, but not necessarily confined to, the type, extent and purpose of the
penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities, the
standing and relationship of the parties, and the like, the application of which, by and large, is addressed to the
sound discretion of the court.
ISSUE # 2
Did the respondent Court of Appeals gravely erred in not reducing to a reasonable level the ten (10%) percent
award of attorneys fees which is highly and grossly excessive, unreasonable and unconscionable?
NO. Bearing in mind that the rate of attorneys fees has been agreed to by the parties and intended to answer not
only for litigation expenses but also for collection efforts as well, the Court, like the appellate court, deems the
award of 10% attorneys fees to be reasonable.
ISSUE # 3
Did the respondent Court of Appeals seriously erred in not holding that there was a novation of the cause of action
of private respondents complaint in the instant case due to the subsequent execution of the real estate mortgage
during the pendency of this case and the subsequent foreclosure of the mortgage?
NO. The subsequent execution of the real estate mortgage as security for the existing loan would not have
resulted in the extinguishment of the original contract of loan because of novation. Petitioners acknowledge that
the real estate mortgage contract does not contain any express stipulation by the parties intending it to supersede
the existing loan agreement between the petitioners and the bank. Respondent bank has correctly postulated that
the mortgage is but an accessory contract to secure the loan in the promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the parties to the new
contract; third, the extinguishment of the obligation; and fourth, the validity of the new one. In order that an
obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligation be on every point incompatible with each other. An
obligation to pay a sum of money is not extinctively novated by a new instrument which merely changes the terms
of payment or adding compatible covenants or where the old contract is merely supplemented by the new one.
When not expressed, incompatibility is required so as to ensure that the parties have indeed intended such
novation despite their failure to express it in categorical terms. The incompatibility, to be sure, should take place
in any of the essential elements of the obligation, i.e., (1) the juridical relation or tie, such as from a mere
commodatum to lease of things, or from negotiorum gestio to agency, or from a mortgage to antichresis, or from a
sale to one of loan; (2) the object or principal conditions, such as a change of the nature of the prestation; or (3)
the subjects, such as the substitution of a debtor or the subrogation of the creditor. Extinctive novation does not
necessarily imply that the new agreement should be complete by itself; certain terms and conditions may be
carried, expressly or by implication, over to the new obligation.
DISPOSITIVE: Petition was denied
28
017 Siga-an v Villanueva

GR No. 173227 1/20/2009
TOPIC: Compensatory, Penalty, or Indemnity Interest
PONENTE: Chico-Nazario
FACTS:
1. Alicia Villanueva (engaged in the business of supplying materials and equipment for the Philippine Navy)
was approached by Siga-an (The PH Navy comptroller)
2. She agrees to the loan of P540k. Loan was not in writing and there was no stipulation as to payment of
interest.
3. As payment, Villanueva Issues a 500k and 200k check to Siga-an. The payment totalled 700k, but her loan
was only 540k.
4. Siga-an said the excess money Villanueva paid would be applied as interest. But Sigaan still kept pestering
her for additional interest and threatened to block her transactions with the Phil Navy if she wont comply.
With fear, Villanueva kept paying interests which totalled to 1.2m
5. Villanueva consulted a lawyer which led her to file a complaint against siga-an to return the money
(excessive interest)
6. RTC: There was overpayment.
7. CA: affirmed the RTC.
ISSUE:
Whether or not Villanueva overpayed since there was no agreement to the interest.
HELD:
Yes. Siga-an should return. Siga-an is now the one who pays interests on the amounts to be returned.
RATIO:
1. The RTC did not make a ruling therein that petitioner and respondent agreed on the payment of interest at
the rate of 7% for the loan. The RTC clearly stated that although petitioner and respondent entered into a
valid oral contract of loan amounting to P540,000.00, they, nonetheless, never intended the payment of
interest thereon.
2. Article 1956 of the Civil Code, which refers to monetary interest,20 specifically mandates that no interest
shall be due unless it has been expressly stipulated in writing.
3. payment of monetary interest is allowed only if: (1) there was an express stipulation for the payment of
interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the
two conditions is required for the payment of monetary interest.
4. It appears that petitioner and respondent did not agree on the payment of interest for the loan. Neither
was there convincing proof of written agreement between the two regarding the payment of interest.
5. There are instances in which an interest may be imposed even in the absence of express stipulation, verbal
or written, regarding payment of interest. (e.g. upon default)
5.1 compensatory interest is not chargeable in the instant case because it was not duly proven that
respondent defaulted in paying the loan.
6. Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no
stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall be applied.
6.1 In such a case, a creditor-debtor relationship is created under a quasi-contract whereby the payor
becomes the creditor who then has the right to demand the return of payment made by mistake, and the
person who has no right to receive such payment becomes obligated to return the same.
CASE LAW/ DOCTRINE:
No interest agreed upon, or no default = no liability to pay interest.
KEYWORDS/NOTES:
Compensatory interest: imposed by law or by courts as penalty or indemnity for damages
29
018 Estores v. Spouses Supangan

G.R. No. 175139 April 18, 2012
PONENTE: DEL CASTILLO, J.
FACTS:
1. Petitioner Hermojina Estores and respondent-spouses Arturo and Laura Supangan entered into a Conditional
Deed of Sale of a parcel of land located at Naic, Cavite for the sum of P4.7 million.
2. After almost seven years from the time of the execution of the contract and notwithstanding payment of P3.5
million on the part of respondent-spouses, petitioner still failed to comply with her obligation, thus the
respondents demanded the return of the amount of P3.5 million within 15 days from receipt of the letter. In
reply, petitioner acknowledged receipt of the P3.5 million and promised to return the same within 120 days.
Respondent-spouses were amenable to the proposal provided an interest of 12% compounded annually shall be
imposed on the P3.5 million. When petitioner still failed to return the amount despite demand, respondent-
spouses were constrained to file a Complaint for sum of money before the Regional Trial Court (RTC) of Malabon.
3. In their Answer with Counterclaim, petitioner and Arias averred that they are willing to return the principal
amount of P3.5 million but without any interest as the same was not agreed upon. In their Pre-Trial Brief, they
reiterated that the only remaining issue between the parties is the imposition of interest. They argued that since
the Conditional Deed of Sale provided only for the return of the down payment in case of breach, they cannot be
held liable to pay legal interest as well.
4. RTC: Respondent-spouses entitled to interest but only at the rate of 6% per annum and not 12%.
5. CA: The rate of interest shall be six percent (6%) per annum, computed from September 27, 2000 until its full
payment before finality of the judgment. If the adjudged principal and the interest (or any part thereof) remain
unpaid thereafter, the interest rate shall be adjusted to twelve percent (12%) per annum, computed from the
time the judgment becomes final and executory until it is fully satisfied.
ISSUE:
Whether or not Interest may be imposed even in the absence of stipulation in the contract.
HELD:
YES. We sustain the ruling of both the RTC and the CA that it is proper to impose interest notwithstanding the
absence of stipulation in the contract. Article 2210 of the Civil Code expressly provides that "[i]nterest may, in
the discretion of the court, be allowed upon damages awarded for breach of contract." In this case, there is no
question that petitioner is legally obligated to return the P3.5 million because of her failure to fulfill the
obligation under the Conditional Deed of Sale, despite demand. She has in fact admitted that the conditions were
not fulfilled and that she was willing to return the full amount of P3.5 million but has not actually done so.
Petitioner enjoyed the use of the money from the time it was given to her until now. Thus, she is already in
default of her obligation from the date of demand, i.e., on September 27, 2000.
RATIO:
The interest at the rate of 12% is applicable in the instant case.
Anent the interest rate, the general rule is that the applicable rate of interest "shall be computed in accordance
with the stipulation of the parties." Absent any stipulation, the applicable rate of interest shall be 12% per annum
"when the obligation arises out of a loan or a forbearance of money, goods or credits. In other cases, it shall be
six percent (6%)." In this case, the parties did not stipulate as to the applicable rate of interest. The only question
remaining therefore is whether the 6% as provided under Article 2209 of the Civil Code, or 12% under Central
Bank Circular No. 416, is due.
The contract involved in this case is admittedly not a loan but a Conditional Deed of Sale. However, the contract
provides that the seller (petitioner) must return the payment made by the buyer (respondent-spouses) if the
conditions are not fulfilled. There is no question that they have in fact, not been fulfilled as the seller (petitioner)
has admitted this. Notwithstanding demand by the buyer (respondent-spouses), the seller (petitioner) has failed
to return the money and should be considered in default from the time that demand was made on September
30
27, 2000.
With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance
of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate
of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount
of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.
CASE LAW/ DOCTRINE:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.
KEYWORDS/NOTES:
"forbearance" was defined as a "contractual obligation of lender or creditor to refrain during a given period of
time, from requiring the borrower or debtor to repay a loan or debt then due and payable." This definition
describes a loan where a debtor is given a period within which to pay a loan or debt.
31
019 Nacar v. Gallery Frames and/or Bordey

G. R. No. 189871, August 13, 2013
TOPIC: Interest; Compensatory, Penalty, or Indemnity Interest
PONENTE: Villarama, Jr., J.
FACTS:
1. Petitioner Dario Nacar filed a complaint for constructive dismissal before the NLRC against respondents Gallery
Frames (GF) and/or Felipe Bordey, Jr.
2. October 15, 1998: The Labor Arbiter (LA) rendered a decision in favor of petitioner and found that he was
dismissed from employment without a valid or just cause. Thus, petitioner was awarded backwages and
separation pay in lieu of reinstatement in the amount of P158,919.92.
3. Respondents appealed to the NLRC, but it was dismissed for lack of merit; motion for reconsideration - denied
as well; petition for review on certiorari before the CA - denied also; motion for reconsideration - denied again;
sought relief with the SEC but their petition was DENIED AGAIN!!
4. An Entry of Judgment was later issued certifying that the resolution became final and executory on May 27,
2002.
5. November 5, 2002: petitioner filed a Motion for Correct Computation, praying that his backwages be
computed from the date of his dismissal on January 24, 1997 up to the finality of the Resolution of the
Supreme Court on May 27, 2002. Upon recomputation, NLRC arrived at an updated amount in the sum of
P471,320.31.
6. The LA issued a Writ of Execution to collect from respondents the said amount. Respondents filed a Motion to
Quash Writ of Execution, arguing, among other things, that since the Labor Arbiter awarded separation pay of
P62,986.56 and limited backwages of P95,933.36, no more recomputation is required to be made of the said
awards. They claimed that after the decision becomes final and executory, the same cannot be altered or
amended anymore. LA denied their motion.
7. On appeal to the NLRC: granted the appeal in favor of the respondents and ordered the recomputation of the
judgment award. the judgment award of petitioner was reassessed to be in the total amount of only P147,560.19
This amount was later on eventually received by the petitioner.
8. However, petitioner Nacar filed a Manifestation and Motion praying for the recomputation of the monetary
award to include the appropriate interests. LA granted the motion but only up to the amount of P11,459.73.
Reason: since the decision states that the separation pay and backwages are computed only up to the
promulgation of the said decision, it is the amount of P158,919.92 that should be executed. Thus, since petitioner
already received P147,560.19, he is only entitled to the balance of P11,459.73.
9. Petitioner then appealed before the NLRC - denied; Motion for Reconsideration - denied;
10. September 23, 2008: CA - denied his petition as well. The CA opined that since petitioner no longer appealed
the October 15, 1998 Decision of the LA, which already became final and executory, a belated correction thereof is
no longer allowed. The CA stated that there is nothing left to be done except to enforce the said judgment.
10. Petitioners motion for reconsideration was denied hence, this petition.
11. Petitioners contention: notwithstanding the fact that there was a computation of backwages in the Labor
Arbiters decision, the same is not final until reinstatement is made or until finality of the decision, in case of an
award of separation pay. Petitioner maintains that the reckoning point for the computation of the backwages and
separation pay should be on May 27, 2002 and not when the decision of the Labor Arbiter was rendered on
October 15, 1998. Further, petitioner posits that he is also entitled to the payment of interest from the finality of
the decision until full payment by the respondents.
12. Respondents contention: since only separation pay and limited backwages were awarded to petitioner by the
October 15, 1998 decision of the LA, no more recomputation is required to be made of said awards; and
considering that petitioner no longer appealed the decision, petitioner is only entitled to the award as computed
by the LA in the total amount of P158,919.92.
ISSUE: Whether the CA erred in ruling that petitioner is only entitled to the award as computed by the LA in its
decision that became final and executory on May 27, 2002; hence, there can be no recomputation of the total
monetary benefits due to him.
32
HELD:
Yes. CA decision REVERSED and SET ASIDE. Respondents are ORDERED to PAY petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to May 27,
2002, when the Resolution of this Court became final and executory; (2) separation pay computed from August
1990 up to May 27, 2002 at the rate of one month pay per year of service; and (3) interest of twelve percent (
12%) per annum of the total monetary awards, computed from May 27, 2002 to June 30, 2013 and six percent
(6%) per annum from July 1, 2013 until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits
awarded and due to petitioner in accordance with this Decision.
RATIO: (related to this topic are those highlighted words only)
The guidelines laid down in the case of Eastern Shipping Lines are accordingly modified to embody BSP-MB
Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on Damages of the
Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages, except when or until the demand can be
established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit. And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall
not be disturbed and shall continue to be implemented applying the rate of interest fixed therein.
CASE LAW/ DOCTRINE:
In the absence of an express stipulation as to the rate of interest that would govern the parties, the rate of legal
interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments shall no
longer be twelve percent (12%) per annum but will now be six percent (6%) per annum effective July 1, 2013.
It should be noted, nonetheless, that the new rate could only be applied prospectively and not retroactively.
Consequently, the twelve percent (12%) per annum legal interest shall apply only until June 30, 2013. Come July
1, 2013 the new rate of six percent (6%) per annum shall be the prevailing rate of interest when applicable.
33
020 UNITED COCONUT PLANTERS BANK v. SPOUSES BELUSO

G.R. No. 159912, 17 August 2007
TOPIC: Finance Charges
PONENTE: Chico-Nazario, J.
FACTS:
1. UCPB granted the spouses Beluso a Promissory Notes Line under a Credit Agreement whereby the latter could
avail from the former credit of up to a maximum amount of P1.2 Million pesos for a term ending on 30 April
1997. The spouses Beluso constituted, other than their promissory notes, a real estate mortgage over parcels
of land in Roxas City. The Credit Agreement was subsequently amended to increase the amount of the
Promissory Notes Line to a maximum of P2.35 Million pesos and to extend the term thereof to 28 February
1998.
2. The spouses availed of the credit line under 3 promissory notes (700k, 500k, 800k). These promissory notes
were renewed several times.
3. On 30 Apr 1997, the payment of the principal and interest of the latter 2 promissory notes were debited from
the spouses UCPB account; yet, a consolidated loan for 1.3M was again released to the spouses under a
promissory note with a 28 Feb 1998 due date.
4. To completely avail of the 2.35M credit line, the spouses executed two more promissory notes (200k, 150k).
However, the spouses alleged that the amounts covered by these last two notes were never released, so they
are claiming that the principal indebtedness was only 2M (700k + 500k + 800k).
5. UCPB applied interest rates ranging from 18-34%.
6. Until Feb 1998, the spouses were able to pay a total of around 763k. From 28 Feb 10 Jun 1998, UCPB
continued to charge interest and penalty on the spouses obligations, but the latter failed to make any
payment. On 2 Sep 1998, UCPB demanded that they pay the total of around 2.9M, but the spouses still failed to
do so.
7. UCPB foreclosed the mortgaged properties on 28 Dec 1998 to secure the spouses credit line (which already
went up to around 3.7M).
8. Thus, the spouses Beluso filed a petition for annulment, accounting and damages against UCPB.
9. RTC ruled in favor of the spouses held that the interest rate used, the foreclosure, and the sheriffs
certificate of sale were void
10. CA affirmed RTC held that the imposition of interest is void , as the interest rates and the bases therefore
were determined solely by UCPB as can be seen in the following provision found in the promissory notes of the
spouses Beluso: FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND ODETTE
BELUSO (BORROWER), jointly and severally promise to pay to UNITED COCONUT PLANTERS BANK (LENDER) or
order at UCPB Bldg., Makati Avenue, Makati City, Philippines, the sum of ______________ PESOS, (P_____),
Philippine Currency, with interest thereon at the rate indicative of DBD retail rate or as determined by the
Branch Head.
ISSUE:
Whether or not the interest rate used by UCPB is valid
HELD:
No. It violates the Civil Code provision on mutuality of contracts and the Truth in Lending Act (RA 3765).
RATIO:
The rate violates the principle of mutuality of contracts because...
1. In order that obligations arising from contracts may have the force of law between the parties, there must be
mutuality between the parties based on their essential equality. A contract containing a condition which
makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is
void.
2. The provision stating that the interest shall be at the rate indicative of DBD retail rate or as determined by the
Branch Head is indeed dependent solely on the will of petitioner UCPB. If either of these two choices presents
an opportunity for UCPB to fix the rate at will, the bank can easily choose such an option, thus making the
entire interest rate provision violative of the principle of mutuality of contracts.
34
3. Re: UCPBs contention that the rate is indicative of the DBD retail rate
Such cannot be considered as valid for being akin to a prevailing rate or prime rate allowed by this Court in
Polotan. In the case of Polotan, there was a fixed margin over the reference rate: 3%. The provision in the case
at bar does not specify any margin above or below the DBD retail rate. UCPB can peg the interest at any
percentage above or below the DBD retail rate, again giving it unfettered discretion in determining the interest
rate.
4. Re: UCPBs contention that there was an authority to review the interest rate
The authority to review the interest rate was given UCPB alone as the lender. Moreover, as worded in the
provision, UCPB may give as much weight as it desires to each of the following considerations: (1) the
prevailing financial and monetary condition; (2) the rate of interest and charges which other banks or financial
institutions charge or offer to charge for similar accommodations; and/or (3) the resulting profitability to the
LENDER (UCPB) after due consideration of all dealings with the BORROWER (the spouses Beluso).
Again, as in the case of the interest rate provision, there is no fixed margin above or below these
considerations.
5. Separability Clause cannot save either of the two options of UCPB as to the interest to be imposed, as both
options violate the principle of mutuality of contracts.
6. No Estoppel since estoppel cannot be predicated on an illegal act. Validity cannot be given to it by estoppel if it
is prohibited by law or is against public policy
The rate violates the Truth in Lending Act because...

1. Re: UCPBs contention that a violation of the Truth in Lending Act, a criminal offense, cannot be inferred nor
implied from the allegations in the complaint
As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said Act
gives rise to both criminal and civil liabilities. Section 6(c) considers a criminal offense the willful
violation of the Act, imposing the penalty therefor of fine, imprisonment or both. Section 6(a), on the
other hand, clearly provides for a civil cause of action for failure to disclose any information of the
required information to any person in violation of the Act.
In the case at bar, the civil action to recover the penalty under Section 6(a) of the Truth in Lending Act
had been jointly instituted with (1) the action to declare the interests in the promissory notes void, and
(2) the action to declare the foreclosure void. This joinder is allowed under Rule 2, Section 5 of the
Rules of Court.
2. Re: Contention that in applying the Truth in Lending Act, although it was never alleged in the complaint,
violates UCPBs right to due process
This is not true because in the pre-trial briefs filed by the spouses Beluso before the RTC, the claim for
civil sanctions for violation of the Act was expressly alleged. They are so clear and unequivocal that any
attempt of UCPB to feign ignorance of the assertion of this issue is plainly hogwash.
3. Re: Contention that it is the Metropolitan Trial Court which has jurisdiction to try and adjudicate the alleged
violation of the Truth in Lending Act, considering that the present action allegedly involved a single credit
transaction as there was only one Promissory Note Line
Court disagrees. As mentioned, case involves a joinder of actions, which fall under the jurisdiction of
the RTC.
Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since the
former is merely a preparatory contract to the contract of loan or mutuum. Under such credit line, the
bank is merely obliged, for the considerations specified therefor, to lend to the other party amounts
not exceeding the limit provided. In the case at bar, the violation of the Truth in Lending Act allegedly
occurred not when the parties executed the Credit Agreement, where no interest rate was mentioned,
but when the parties executed the promissory notes, where the allegedly offending interest rate was
stipulated.
4. Re: Contention that since the Spouses were given copies of the promissory notes after their execution, the
spouses were duly notified of its terms, in substantial compliance with the Truth in Lending Act
35
Court disagrees. Truth in Lending Act clearly provides that the disclosure statement must be furnished
prior to the consummation of the transaction. In doing so, the law seeks to protect debtors by
permitting them to fully appreciate the true cost of their loan, to enable them to give full consent to
the contract, and to properly evaluate their options in arriving at business decisions.
Moreover, the promissory notes cannot be considered sufficient notification because the interest rate
provision therein does not sufficiently indicate with particularity the interest rate to be applied to the
loan. (see discussion on mutuality of contracts)
Thus, the Court imposed a 26k fine for the violation of RA 3765.
CASE DOCTRINE:
A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one
of the contracting parties, is void.
Not disclosing the true finance charges in connection with the extensions of credit is a form of deception.
36
021 Advocates for Truth in Lending, Inc. and Olaguer v. Bangko Sentral Moneraty Board
G.R. No. 192986 January 15, 2013
TOPIC: Usury; General Concepts
PONENTE: REYES, J.
FACTS:
1. Petitioner "Advocates for Truth in Lending, Inc." (AFTIL) is a non- profit, non-stock Corporation organized to
engage in pro bono concerns and activities relating to money lending issues. It filed this petition, joined by its
founder and president, Eduardo B. Olaguer, suing as a taxpayer and a citizen.
2. Petitioners here were seeking to declare that the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), replacing
the Central Bank Monetary Board (CB-MB) by virtue of Republic Act (R.A.) No. 7653, has no authority to continue
enforcing Central Bank Circular No. 905, issued by the CB-MB in 1982, which "suspended" Act No. 2655, or the
Usury Law of 1916.
3. Important events:
DATE OF STATUTE/CIRCULAR PURPOSE EFFECT ON INTEREST RATE
ENACTMENT
June 15, 1948 RA 265 Created Central Bank Empowered CB to set maximum
interest rates which banks may
charge for all types of loans/creit
transactions
March 17, 1980 P.D. 1684 Amended Usury Law Giving the CB-MB authority to
prescribe different maximum
rates of interest which may be
imposed for a loan or renewal
thereof or the forbearance of
any money, goods or credits,
provided that the changes are
effected gradually and
announced in advance
January 1, 1983 CB Circular No. 905 Suspended Usury Law (Act No. 2655) Removed the ceilings on interest
rates on loans or forbearance of
any money, goods or credits
June 14, 1993 R.A. No. 7653 created the Bangko Sentral ng None
Pilipinas (BSP) to replace CB
ISSUE # 1
Whether under R.A. No. 265 and/or P.D. No. 1684, the CB-MB had the statutory or constitutional authority to
prescribe the maximum rates of interest for all kinds of credit transactions and forbearance of money, goods or
credit beyond the limits prescribed in the Usury Law
YES.CB-MB has the statutory or constitutional authority to prescribe the maximum rates of interest for all kinds of
credit transactions and forbearance of money, goods or credit beyond the limits prescribed in the Usury Law both
under RA 265 and PD 1684.
Under RA 265
Sec. 109. Interest Rates, Commissions and Charges. The Monetary Board may fix the maximum rates of interest
which banks may pay on deposits and on other obligations. The Monetary Board may, within the limits prescribed in
the Usury Law fix the maximum rates of interest which banks may charge for different types of loans and for any
other credit operations, or may fix the maximum differences which may exist between the interest or rediscount rates
37
of the Central Bank and the rates which the banks may charge their customers if the respective credit documents are
not to lose their eligibility for rediscount or advances in the Central Bank. Any modifications in the maximum interest
rates permitted for the borrowing or lending operations of the banks shall apply only to future operations and not to
those made prior to the date on which the modification becomes effective. In order to avoid possible evasion of
maximum interest rates set by the Monetary Board, the Board may also fix the maximum rates that banks may pay to
or collect from their customers in the form of commissions, discounts, charges, fees or payments of any sort.
Under PD 1684
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or
renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever
warranted by prevailing economic and social conditions: Provided, That changes in such rate or rates may be effected
gradually on scheduled dates announced in advance. In the exercise of the authority herein granted the Monetary
Board may prescribe higher maximum rates for loans of low priority, such as consumer loans or renewals thereof as
well as such loans made by pawnshops, finance companies and other similar credit institutions although the rates
prescribed for these institutions need not necessarily be uniform. The Monetary Board is also authorized to prescribe
different maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans
of financial intermediaries.
ISSUE # 2
Whether the CB-MB exceeded its authority when it issued CB Circular No. 905, which removed all interest ceilings
and thus suspended Act No. 2655 as regards usurious interest rates
NO. The CB-MB merely suspended the effectivity of the Usury Law when it issued CB Circular No. 905. The power of
the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long been recognized and upheld in many
cases. As the Court explained in the landmark case of Medel v. CA, citing several cases, CB Circular No. 905 "did not
repeal nor in anyway amend the Usury Law but simply suspended the latters effectivity;" that "a CB Circular cannot
repeal a law, [for] only a law can repeal another law;" that "by virtue of CB Circular No. 905, the Usury Law has been
rendered ineffective;" and "Usury has been legally non-existent in our jurisdiction. Interest can now be charged as
lender and borrower may agree upon." Thus, according to the Court, by lifting the interest ceiling, CB Circular No. 905
merely upheld the parties freedom of contract to agree freely on the rate of interest. It cited Article 1306 of the New
Civil Code, under which the contracting parties may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
ISSUE # 3
Whether under R.A. No. 7653, the new BSP-MB may continue to enforce CB Circular No. 905.
YES.The BSP-MB has authority to enforce CB Circular No. 905. Section 1 of CB Circular No. 905 provides that "The rate
of interest, including commissions, premiums, fees and other charges, on a loan or forbearance of any money, goods,
or credits, regardless of maturity and whether secured or unsecured, that may be charged or collected by any person,
whether natural or juridical, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as
amended." It does not purport to suspend the Usury Law only as it applies to banks, but to all lenders. Usury law or
Act No. 2655, an earlier law, is much broader in scope, whereas R.A. No. 265, now R.A. No. 7653, merely
supplemented it as it concerns loans by banks and other financial institutions. Had R.A. No. 7653 been intended to
repeal Section 1-a of Act No. 2655, it would have so stated in unequivocal terms.
Moreover, the rule is settled that repeals by implication are not favored, because laws are presumed to be passed
with deliberation and full knowledge of all laws existing pertaining to the subject. An implied repeal is predicated
upon the condition that a substantial conflict or repugnancy is found between the new and prior laws. Thus, in the
absence of an express repeal, a subsequent law cannot be construed as repealing a prior law unless an irreconcilable
inconsistency and repugnancy exists in the terms of the new and old laws. We find no such conflict between the
provisions of Act 2655 and R.A. No. 7653.
38
CASE DOCTRINES:
The lifting of the ceilings for interest rates does not authorize stipulations charging excessive, unconscionable, and
iniquitous interest. It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche authority to raise
interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. Stipulations
authorizing iniquitous or unconscionable interests have been invariably struck down for being contrary to morals, if
not against the law. Indeed, under Article 1409 of the Civil Code, these contracts are deemed inexistent and void ab
initio, and therefore cannot be ratified, nor may the right to set up their illegality as a defense be waived.
With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows: (Following the ruling in the landmark case of Eastern
Shipping Lines v. CA) The 12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance of
money, goods, or credits, as well as to judgments involving such loan or forbearance of money, goods, or credit, while
the 6% per annum under Art. 2209 of the Civil Code applies "when the transaction involves the payment of
indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general,"
with the application of both rates reckoned "from the time the complaint was filed until the [adjudged] amount is
fully paid." In either instance, the reckoning period for the commencement of the running of the legal interest shall be
subject to the condition "that the courts are vested with discretion, depending on the equities of each case, on the
award of interest."
DISPOSITIVE: Petition was dismissed
NOTE: This is based on a good digest Ive found.

39
022
BPI v IAC and Zshornack
GR No. L-66826
Date: 8/19/1988
TOPIC: Voluntary Deposit
PONENTE: Cortes
FACTS:
1. Zshornack entrusted to Commercial Bank and Trust Company of the PH (Comtrust) 3k USD.
2. Their agreement was for safekeeping.
3. BPI then absorbed Comtrust through a merger. (kaya BPI ang petitioner)
4. When Zshornack requested the return of the USDs BPI did not return it.
5. Zshornack then files an action against BPI
6. BPI contends that the USDs were sold and converted to PHp. The amounts were then deposited to
the account of Zshornack.
6.1 Furthermore, BPI contends that their contract is a depositum as defined in Art. 1962.
7. The CFI ruled in favor of Zshornack and ordered BPI to return the USD amount plus interest plus
damages.
8. BPI went straight to SC.
ISSUE:
Whether or not BPI is liable to return the USD amount?
HELD:
No.
RATIO:
1. The object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the
transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign
Exchange Transactions, as modified by CB Circ. 281, sec. 6
2. The modification provides
3. Xxx. SEC. 6. All receipts of foreign exchange by any resident person, firm, company or corporation
shall be sold to authorized agents of the Central Bank by the recipients within one business day
following the receipt of such foreign exchange. Any resident person, firm, company or
corporation residing or located within the Philippines, who acquires foreign exchange shall not,
unless authorized by the Central Bank, dispose of such foreign exchange in whole or in part, nor
receive less than its full value, nor delay taking ownership thereof except as such delay is
customary; Provided, That, within one business day upon taking ownership or receiving payment of
foreign exchange the aforementioned persons and entities shall sell such foreign exchange to the
authorized agents of the Central Bank.
4. Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one
business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be
considered as one which falls under the general class of prohibited transactions.
4.1 Pursuant to Article 5 of the Civil Code, it is void.
4.2 It affords neither of the parties a cause of action against the other.
5. Both parties being in pari delicto, they shall have no cause of action against each other. (i.e.
Zshornack cannot recover his USDs)
CASE LAW/ DOCTRINE:
- None
- None
KEYWORDS/NOTES:
40
MEMORIZE! Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to
another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing
delivered is not the principal purpose of the contract, there is no deposit but some other contract.
41
023 Triple-V Food Services, Inc. v. Filipino Merchants Insurance Company, Inc.,
GR No. G.R. No. 160544
Date: February 21, 2005.
TOPIC: Voluntary Deposit
PONENTE: DEL CASTILLO, J.
FACTS:
1. Mary Jo-Anne De Asis (De Asis) dined at petitioner's Kamayan Restaurant at 15 West Avenue, Quezon
City. She availed valet parking service of petitioner for free and entrusted her car key to petitioner's valet
counter. A corresponding parking ticket was issued as receipt for the car. (Note: The car is owned by her
employer Crispa Textile Inc. (Crispa))
2. The car was then parked by petitioner's valet attendant, a certain Madridano, at the designated parking
area. Few minutes later, Madridano noticed that the car was not in its parking slot and its key no longer in
the box where valet attendants usually keep the keys of cars entrusted to them. The car was never
recovered.
3. Crispa filed a claim against its insurer, herein respondent Filipino Merchants Insurance Company, Inc.
(FMICI). Having indemnified Crispa in the amount of P669.500 for the loss of the subject vehicle, FMICI, as
subrogee to Crispa's rights, filed with the RTC at Makati City an action for damages against petitioner
Triple-V Food Services, Inc.,
4. Petitioner argued that the complaint failed to aver facts to support the allegations of recklessness and
negligence committed in the safekeeping and custody of the subject vehicle, claiming that it and its
employees wasted no time in ascertaining the loss of the car and in informing De Asis of the discovery of
the loss. Petitioner further argued that in accepting the complimentary valet parking service, De Asis
received a parking ticket whereunder it is so provided that "[Management and staff will not be responsible
for any loss of or damage incurred on the vehicle nor of valuables contained therein", a provision which, to
petitioner's mind, is an explicit waiver of any right to claim indemnity for the loss of the car; and that De
Asis knowingly assumed the risk of loss when she allowed petitioner to park her vehicle, adding that its
valet parking service did not include extending a contract of insurance or warranty for the loss of the
vehicle.
5. RTC: In favor of respondent FMICI.
6. Obviously displeased, petitioner appealed to the Court of Appeals reiterating its argument that it was
not a depositary of the subject car and that it exercised due diligence and prudence in the safe keeping
of the vehicle, in handling the car-napping incident and in the supervision of its employees. It further
argued that there was no valid subrogation of rights between Crispa and respondent FMICI.
7. CA: Affirmed the decision of RTC.
ISSUE:
Whether or not petitioner was a depositary of the subject vehicle
HELD:
YES. When De Asis entrusted the car in question to petitioners valet attendant while eating at petitioner's
Kamayan Restaurant, the former expected the car's safe return at the end of her meal. Thus, petitioner was
constituted as a depositary of the same car. Petitioner cannot evade liability by arguing that neither a
contract of deposit nor that of insurance, guaranty or surety for the loss of the car was constituted when
De Asis availed of its free valet parking service.
In a contract of deposit, a person receives an object belonging to another with the obligation of safely
keeping it and returning the same. A deposit may be constituted even without any consideration. It is not
necessary that the depositary receives a fee before it becomes obligated to keep the item entrusted for
safekeeping and to return it later to the depositor.
The parking claim stub embodying the terms and conditions of the parking, including that of relieving
petitioner from any loss or damage to the car, is essentially a contract of adhesion, drafted and prepared as
it is by the petitioner alone with no participation whatsoever on the part of the customers, like De Asis,
42
who merely adheres to the printed stipulations therein appearing. While contracts of adhesion are not void
in themselves, yet this Court will not hesitate to rule out blind adherence thereto if they prove to be one-
sided under the attendant facts and circumstances. Hence, and as aptly pointed out by the Court of
Appeals, petitioner must not be allowed to use its parking claim stub's exclusionary stipulation as a shield
from any responsibility for any loss or damage to vehicles or to the valuables contained therein.
In this case, it is evident that De Asis deposited the car in question with the petitioner as part of the latter's
enticement for customers by providing them a safe parking space within the vicinity of its restaurant. In a
very real sense, a safe parking space is an added attraction to petitioner's restaurant business because
customers are thereby somehow assured that their vehicle are safely kept, rather than parking them
elsewhere at their own risk. Having entrusted the subject car to petitioner's valet attendant, customer De
Asis, like all of petitioner's customers, fully expects the security of her car while at petitioner's
premises/designated parking areas and its safe return at the end of her visit at petitioner's restaurant.
CASE LAW/ DOCTRINE:
In a contract of deposit, a person receives an object belonging to another with the obligation of safely
keeping it and returning the same. A deposit may be constituted even without any consideration. It is not
necessary that the depositary receives a fee before it becomes obligated to keep the item entrusted for
safekeeping and to return it later to the depositor.
KEYWORDS/NOTES:
SUB-ISSUES:
1. There was no valid subrogation of rights between Crispa and FMICI because theft was not a risk
insured against under FMICI's Insurance Policy No. PC-5975 holds no water.
2. There is negligence on part of the petitioner.
43
024 The Roman Catholic Bishop of Jaro v. De La Pena

G.R. No. L-6913 November 21, 1913
TOPIC: Deposit; Obligation to Safekeep; Way of the Deposit
PONENTE: Moreland, J.
FACTS:
1. The Roman Catholic Bishop of Jaro (plaintiff) is the trustee of a charitable bequest made for the construction of a
leper hospital. Fr. Agustin de la Pea was the duly authorized representative of the plaintiff to receive the legacy. On the
other hand, the administrator of the estate of Father De la Pea is the defendant.
2. 1898: the books Father De la Pea showed that he had on hand, as trustee, P6,641 collected by him for the said
charitable purposes. In the same year he deposited in his personal account P19,000 in the bank (HSBC in Iloilo).
4. Shortly thereafter and during the war of the revolution, Fr. De la Pea was arrested and detained by the military
authorities as a political prisoner.
5. US military authorities confiscated his personal account; the money was turned over to the Government. His arrest
and the confiscation of the funds in the bank were the result of the claim of the military authorities that he was an
insurgent and that he collected the funds deposited for revolutionary purposes.
6. CFI of Ilo-ilo awarded to plaintiff the sum of P6,641 with interest at the legal rate. Hence, this appeal by the defendant.
ISSUE: Whether or not Father de la Pea is liable for the loss of the money under his trust
HELD: No. The fact that he placed the trust fund in the bank in his personal account does not add to his responsibility.
Such deposit did not make him a debtor who must respond at all hazards. The said money was forcibly taken from the
bank by the armed forces of the United States during the war of the insurrection; and that said Fr. De la Pea was not
responsible for its loss.
RATIO:
1. After careful examination of the case, the Court held that said trust funds were a part of the funds deposited and
which were removed and confiscated by the military authorities of the United States.
2. Fr. De la Pea's liability is determined by those portions of the Civil Code, which relate to obligations. Although the
Civil Code states that "a person obliged to give something is also bound to preserve it with the diligence pertaining to a
good father of a family" (Art.1094), it also provides, following the principle of the Roman law, major casus est, cui
humana infirmitas infirmitas resistere non potest, that "no one shall be liable for events which could not be foreseen, or
which having been foreseen were inevitable, with the exception of the cases expressly mentioned in the law or those in
which the obligation so declares." (Art. 1105.)
3. By placing the money in the bank and mixing it with his personal funds De la Pea did not thereby assume an
obligation different from that under which he would have lain if such deposit had not been made, nor did he thereby
make himself liable to repay the money at all hazards. If the money had been forcibly taken from his pocket or from his
house by the military forces of one of the combatants during a state of war, it is clear that under the provisions of the
Civil Code he would have been exempt from responsibility. The fact that he placed the trust fund in the bank in his
personal account does not add to his responsibility. Such deposit did not make him a debtor who must respond at all
hazards.
4. The precise question is not one of negligence. There was no law prohibiting him from depositing it as he did and there
was no law that changed his responsibility by reason of the deposit. While it may be true that one who is under
obligation to do or give a thing is in duty bound, when he sees events approaching the results of which will be dangerous
to his trust, to take all reasonable means and measures to escape or, if unavoidable, to temper the effects of those
events, we do not feel constrained to hold that, in choosing between two means equally legal, he is culpably negligent in
selecting one whereas he would not have been if he had selected the other.
CASE LAW/ DOCTRINE:
Although the Civil Code states that "a person obliged to give something is also bound to preserve it with the diligence
44
pertaining to a good father of a family" (Art.1094), it also provides, following the principle of the Roman law, major casus
est, cui humana infirmitas infirmitas resistere non potest, that "no one shall be liable for events which could not be
foreseen, or which having been foreseen were inevitable, with the exception of the cases expressly mentioned in the law
or those in which the obligation so declares." (Art. 1105.)
DISSENTING OPINION: J. Trent :

Father dela Penas books showed that in 1898, he had in his possession as trustee or agent the sum of P6,641 belonging
to the plaintiff as the head of the church. This money was then clothed with all the immunities and protection with which
the law seeks to invest trust funds. But when he mixed this trust fund with his own and deposited the whole in the bank
to his personal account or credit, he by this act stamped on the said fund his own private marks and unclothed it of all
the protection it had. If this money had been deposited in the name of De la Pea as trustee or agent of the plaintiff, I
think that it may be presumed that the military authorities would not have confiscated it for the reason that they were
looking for insurgent funds only.
In fact the record shows that De la Pea deposited on June 27, 1898, P5,259, on June 28 of that year P3,280, and on
August 5 of the same year P6,000. The record also shows that these funds were withdrawn and again deposited all
together on the 29th of May, 1900, this last deposit amounting to P18,970. These facts strongly indicate that De la Pea
had as a matter of fact been using the money in violation of the trust imposed in him.
If the doctrine in the majority opinion be followed, trust funds will be placed in precarious condition. The position of the
trustee will cease to be one of trust.
KEYWORDS/NOTES: CFI judgment reversed.

45
025 CA AGRO-INDUSTRIAL DEVELOPMENT CORPORATION v. COURT OF APPEALS & SECURITY BANK AND TRUST
COMPANY
GR No. 90027, 3 March 1993
TOPIC: Way of the Deposit
PONENTE: DAVIDE, JR., J.
FACTS:
1. Petitioner and the Spouses Pugao entered into an agreement whereby the former purchased 2 parcel of lands
from the latter.
2. Among the terms and conditions in their agreement was that the owner's copies of the certificate of titles shall
be deposited in a safety deposit box of any bank.
3. Petitioner and the Pugaos rented a Safety Deposit box of Security Bank and Trust Company (respondent Bank).
They signed a Contract of Lease which contains, among others, the following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control
of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it
assumes absolutely no liability in connection therewith.
4. After the execution of the contract, 2 renter's keys were given to the renters one to Petitioner and the other
to the Pugaos. A guard key remained in the possession of the respondent Bank. The safety deposit box has two
(2) keyholes, one for the guard key and the other for the renter's key, and can be opened only with the use of
both keys. It is Petitioners claim that the certificates of title were placed inside the said box.
5. A certain Mrs. Ramos offered to buy the 2 aforementioned lots. She demanded the execution of a deed of sale
which necessarily entailed the production of the certificate of titles.
6. Aguirre, accompanied by the Pugaos, proceeded to the respondent Bank to open the safety deposit box and get
the certificate of titles. However, the box yielded no such certificate.
7. Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her offer to purchase. Thus,
Petitioner filed a complaint for damages against the respondent Bank with the CFI of Pasig.
8. CFI - ruled in favor of the Bank
Basis of ruling: Paragraphs 13 and 14 of the Contract of Lease
9. CA - also ruled in favor of the Bank
It held that by virtue of the Contract of Lease, Petitioner and the Pugaos were given control over the safety
deposit box and its contents. On the other hand, the Bank retained no right to open the said box because it had
neither the possession nor control over it and its contents. As such, the contract is governed by Article 1643.
10. Petitioners contentions:
The contract for the rent of the safety deposit box is really a contract of deposit. Thus, it invokes the
application of Art. 1972.
Conditions 13 and 14 are void for being contrary to law and public policy
ISSUES & HELD:
1. What kind of contract is involved?

It is not an ordinary contract of lease under Article 1643 (which is the Banks contention).
It is not an ordinary contract of deposit that is strictly governed by the provisions in the Civil Code on deposit
(which is Petitioners contention).
The contract is a special kind of deposit.
2. Whether or not conditions 13 and 14 are valid

No, because by exempting the Bank from liability, the stipulations are contrary to law and public policy.
3. Whether or not the Bank has possession or control of the contents of the box
It does, because (1) the safety deposit box itself is located in the Banks premises and is under its absolute control; and
(2) the Bank keeps the guard key to the said box. The renters (Petitioner and/or Pugao) cannot open the box unless the
46
Bank cooperates by presenting and using the guard key.
4. Whether or not the Bank is liable for damages

No, because no sufficient proof was shown that the certificates of title were withdrawable from the safety deposit box
only upon both parties' joint signatures. Likewise, there is no evidence that the loss of the certificates was due to the
Banks fraud or negligence.
RATIO:
For Issue #1
1. It cannot be characterized as an ordinary contract of lease under Article 1643 because the full and absolute
possession and control of the safety deposit box was not given to the joint renters the petitioner and the
Pugaos. The guard key of the box remained with the respondent Bank; without this key, neither of the renters
could open the box. On the other hand, the respondent Bank could not likewise open the box without the
renter's key.
2. Section 72 of the General Banking Act 23 pertinently provides: In addition to the operations specifically
authorized elsewhere in this Act, banking institutions other than building and loan associations may perform the
following services: (a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes
for the safeguarding of such effects... The banks shall perform the services permitted under subsections (a), (b)
and (c) of this section as depositories or as agents.
Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in
custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit
boxes is not independent from, but related to or in conjunction with, this principal function.
For Issue #2
1. A contract of deposit may be entered into orally or in writing and, pursuant to Article 1306 of the Civil Code, the
parties thereto may establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order or public policy.
2. The depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or
contravention of the tenor of the agreement. In the absence of any stipulation prescribing the degree of
diligence required, that of a good father of a family is to be observed. Hence, any stipulation exempting the
depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or
delay would be void for being contrary to law and public policy.
Issue #3 pretty much explains itself :)
For Issue #4
1. The Banks exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed from a
characterization of the impugned contract as a contract of lease.
2. Rather, it should be on the fact that no competent proof was presented to show that the Bank was actually
aware of the agreement between the petitioner and the Pugaos to the effect that the certificates of title were
withdrawable from the safety deposit box only upon both parties' joint signatures.
3. Moreover, no evidence was submitted to show that the loss of the certificates was due to fraud or negligence.
CASE LAW/ DOCTRINE:
A contract of deposit may be entered into orally or in writing and, pursuant to Article 1306 of the Civil Code, the parties
thereto may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order or public policy.
Any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of
fraud, negligence or delay would be void for being contrary to law and public policy.
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026 YHT Realty Corporation v. CA

451 SCRA 638 (2005)
TOPIC: Examples of Necessary Deposit Hotels or Inns
PONENTE: Tinga, J
FACTS:
1. Tan befriended and convinced McLoughlin (respondent) to transfer from Sheraton Hotel to Tropicana. Tan took care
of McLoughlins booking at the Tropicana from December 1984 to September 1987. Lopez served as manager of the
hotel while Lainez and Payam had custody of the keys for the safety deposit boxes of Tropicana.
2. McLoughlin arrived from Australia and registered with Tropicana. He rented a safety deposit box .
3. McLoughlin placed the following in his safety deposit box: US$15,000.00 - two envelopes, AUS$10,000.00 in another
envelope; two other envelopes containing letters and credit cards; two bankbooks; and a checkbook
4. Before leaving for a brief trip to Hongkong, McLoughlin opened his safety deposit box with his key and with the key of
the management and took therefrom the envelope containing US$5,000.00, AUS$10,000.00, his passports and his
credit cards.
5. When he arrived in Hongkong, he opened the envelope, which contained US$5,000.00 and discovered upon counting
that only US$3,000.00 were enclosed therein.
6. After returning to Manila, he checked out of Tropicana and left for Australia. When he arrived in Australia, he
discovered that the envelope was short of US$5,000. He also noticed that the jewelry which he bought in Hongkong
and stored in the safety deposit box was likewise missing, except for a diamond bracelet.
7. He again registered at Tropicana and rented a safety deposit box. He placed therein US$15,000.00, AUS$10,000.00
and other envelopes containing his traveling papers/documents.
8. On 16 April 1988, McLoughlin noticed that in the envelopes were missing.
9. When McLoughlin discovered the loss, he immediately confronted Lainez and Payam who admitted that Tan opened
the safety deposit box with the key assigned to him. Tan admitted that she had stolen McLoughlins key and was able
to open the safety deposit box with the assistance of Lopez, Payam and Lainez.
10. Lopez and Tan went to the room of McLoughlin at Tropicana and Lopez wrote on a piece of paper a promissory note
dated 21 April 1988. Tan signed the said Promissory Note.
11. McLoughlin insisted that it must be the hotel who must assume responsibility for the loss he suffered. However,
Lopez refused to accept the responsibility relying on the conditions for renting the safety deposit box.
To release and hold free and blameless TROPICANA APARTMENT HOTEL from any liability arising from any
loss in the contents and/or use of the said deposit box.
12. McLoughlin filed a compliant of damages
13. RTC of Manila rendered judgment in favor of McLoughlin.
defendants acted with gross negligence in the performance and exercise of their duties and obligations as
innkeepers and were therefore liable to answer for the losses incurred by McLoughlin
Undertaking For The Use Of Safety Deposit Box is not valid for being contrary to the express mandate of
Article 2003 of the New Civil Code and against public policy
14. CA affirmed the decision of the RTC.
ISSUE: Whether or not the Undertaking for the Use of Safety Deposit Box, admittedly executed by private respondent,
is null and void
HELD: Yes. Paragraphs (2) and (4) of the undertaking manifestly contravene Article 2003 of the New Civil Code for they
allow Tropicana to be released from liability arising from any loss in the contents and/or use of the safety deposit box for
any cause whatsoever. Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely to
apply to situations such as that presented in this case.
RATIO:
1. The hotel business like the common carriers business is imbued with public interest. Catering to the public,
hotelkeepers are bound to provide not only lodging for hotel guests and security to their persons and belongings.
48
The twin duty constitutes the essence of the business. The law in turn does not allow such duty to the public to be
negated or diluted by any contrary stipulation in so-called undertakings that ordinarily appear in prepared forms
imposed by hotel keepers on guests for their signature.
2. In the case at bar, the responsibility of securing the safety deposit box was shared not only by the guest himself but
also by the management since two keys are necessary to open the safety deposit box. Without the assistance of
hotel employees, the loss would not have occurred.
3. Thus, Tropicana was guilty of concurrent negligence in allowing Tan, who was not the registered guest, to open the
safety deposit box of McLoughlin, even assuming that the latter was also guilty of negligence in allowing another
person to use his key. To rule otherwise would result in undermining the safety of the safety deposit boxes in hotels
for the management will be given imprimatur to allow any person, under the pretense of being a family member or a
visitor of the guest, to have access to the safety deposit box without fear of any liability that will attach thereafter in
case such person turns out to be a complete stranger. This will allow the hotel to evade responsibility for any liability
incurred by its employees in conspiracy with the guests relatives and visitors.
CASE LAW/ DOCTRINE: The New Civil Code is explicit that the responsibility of the hotel-keeper shall extend to loss of, or
injury to, the personal property of the guests even if caused by servants or employees of the keepers of hotels or inns as
well as by strangers, except as it may proceed from any force majeure. It is the loss through force majeure that may
spare the hotel-keeper from liability. In the case at bar, there is no showing that the act of the thief or robber was done
with the use of arms or through an irresistible force to qualify the same as force majeure.
KEYWORDS/NOTES:
49
027 Philippine National Bank v. Se

G.R. No. 119231 April 18, 1996
TOPIC: General Bonded Warehouses
PONENTE: Hermosisima, Jr., J.
FACTS:
1. Noahs Ark Sugar Refinery issued 5 Warehouse Receipts(WR)[Quedans], covering sugar: (a) No. 18062, deposited by
Rosa Sy; (b) No. 18080 by RNS Merchandising (Rosa Ng Sy); (c) No. 18081, by St. Therese Merchandising; (d) No. 18086,
by St. Therese Merchandising; and (e) No. 18087, by RNS Merchandising. (Negotiable in form.)
2. Subsequently, WR Nos. 18080 and 18081 were negotiated and endorsed to Luis Ramos; and WR Nos. 18086, 18087
and 18062 were negotiated and endorsed to Cresencia Zoleta.
3. Ramos and Zoleta then used the quedans as security for 2 loan agreements - P15.6M and P23.5M- obtained from PNB.
4. Ramos and Zoleta failed to pay their loans, thus, PNB wrote to Noahs Ark demanding delivery of the sugar stocks
covered by the quedans endorsed to it by Zoleta and Ramos.
5. Noahs Ark refused to comply with the demand alleging ownership thereof.
6. PNB filed with the RTC of Manila a verified complaint for Specific Performance with Damages and Application for Writ
of Attachment against Noahs Ark Sugar Refinery, Looyuko, Go, and Go, identified as the sole proprietor, managing
partner, and Executive VP of Noahs Ark, respectively.
7. RTC Judge Se denied the Application for Preliminary Attachment. Reconsideration was also denied.
8. Noahs Ark and its co-defendants filed an Answer with Counterclaim and Third-Party Complaint which they claimed
that they are the owners of the quedans and the sugar.
9. PNB filed a Motion for Summary Judgment against the defendants which was denied by the RTC. PNB filed a Pet. for
Certiorari with the CA.
10. CA: Ordered the RTC to render summary judgment in favor of PNB. (RTC acted w/ grave abuse of discretion.)
11. Thereafter, the RTC dismissed the complaint against resp. and also dismissed resp. counterclaim and 3rd party
complaint. MR of PNB was denied.
12. PNB filed with the SC a Pet. for Review in Certiorari.
13. SC: Reversed and ordered that: (a) to deliver to PNB the sugar stocks covered by the Quedans which are now in the
latters possession as holder for value and in due course; (b) to pay PNB attys fees, litigation expenses & judicial costs.
14. Private respondents filed a MR and Motion Seeking Clarification of the Decision which were both denied.
15. Private respondents then filed before the TC an Omnibus Motion seeking the deferment of the proceedings until they
are heard on their claim for warehousemans lien.
16. RTC: Granted, there exists a valid warehousemans lien under Sec. 27 of R.A. 2137 and execution of the judgment is
ordered stayed and/ or precluded until the full amount of defendants lien on the sugar stocks covered by the five (5)
quedans subject shall have been satisfied.
ISSUE: Whether or not PNB is subject to pay the warehousemans lien.

HELD: Yes, Noahs Ark is a warehouseman which was obliged to deliver the sugar stocks covered by the WRs pledged by
Zoleta and Ramos to PNB pursuant to R.A. 2137.
RATIO:
1. PNB is legally bound to stand by the express terms and conditions on the face of the Warehouse Receipts as to the
payment of storage fees. Even in the absence of such a provision, law and equity dictate the payment of the
warehouseman s lien pursuant to Sections 27 and 31 of the Warehouse Receipts Law (R.A. 2137):
Sec. 27. What claims are included in the warehousemans lien. - Subject to the provisions of section thirty, a
warehouseman shall have lien on goods deposited or on the proceeds thereof in his hands, for all lawful charges for
storage and preservation of the goods; also for all lawful claims for money advanced, interest, insurance, transportation,
labor, weighing coopering and other charges and expenses in relation to such goods; also for all reasonable charges and
expenses for notice, and advertisement of sale, and for sale of the goods where default has been made in satisfying the
warehousemans lien.
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Sec. 31. Warehouseman need not deliver until lien is satisfied. - A warehouseman having a lien valid against the person
demanding the goods may refuse to deliver the goods to him until the lien is satisfied.
2. Also, according to the pertinent stipulation in the subject WRs which provides for Noahs Arks right to impose and
collect warehousemans lien:
Storage of the refined sugar quantities mentioned herein shall be free up to one (1) week from the date of the quedans
covering said sugar and thereafter, storage fees shall be charged in accordance with the Refining Contract under which
the refined sugar covered by this Quedan was produced.
3. Private respondents cannot legally be deprived of their right to enforce their claim for warehousemans lien, for
reasonable storage fees and preservation expenses.
4. As contracts, the receipts must be respected by authority of Article 1159 of the Civil Code, Obligations arising from
contracts have the force of law between the contracting parties and should be complied with in good faith.
5. Petitioner is in estoppel in disclaiming liability for the payment of storage fees due the private respondents as
warehouseman while claiming to be entitled to the sugar stocks covered by the subject Warehouse Receipts on the basis
of which it anchors its claim for payment or delivery of the sugar stocks.
The unconditional presentment of the receipts by the petitioner for payment carried with it the admission of the
existence and validity of the terms, conditions and stipulations written on the face of the Warehouse Receipts, including
the unqualified recognition of the payment of warehousemans lien for storage fees and preservation expenses.
6. Delivery to it shall be effected only upon payment of the storage fees because in accordance with Sec. 29 of the said
law, the warehouseman loses his lien upon goods by surrendering possession thereof. In other words, the lien may be
lost where the warehouseman surrenders the possession of the goods without requiring payment of his lien, because a
warehousemans lien is possessory in nature.
CASE LAW/ DOCTRINE:

R.A. 2137:
Sec. 27. What claims are included in the warehousemans lien. - Subject to the provisions of section thirty, a
warehouseman shall have lien on goods deposited or on the proceeds thereof in his hands,
Sec. 31. Warehouseman need not deliver until lien is satisfied. - A warehouseman having a lien valid against the person
demanding the goods may refuse to deliver the goods to him until the lien is satisfied.xxx.
KEYWORDS/NOTES: Storage fees are chargeable.

51
028 TRANSFIELD PHILIPPINES, INC. VS LUZON HYDRO CORPORATION AUSTRALIA

G.R. No. 146717 Date NOV 22 2004
TOPIC: LETTERS OF CREDIT
PONENTE: TINGA,J.
FACTS:
1. 1997, Transfield Philippines (the contractor) and Luzon Hydro Corporation (LHC) entered into a Turnkey Contract to
build a seventy (70)-Megawatt hydro-electric power station at the Bakun River in the provinces of Benguet and Ilocos
Sur.
2. Transfield was given the sole responsibility for the design, construction, commissioning, testing and completion of the
Project.
3. The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000, or such later
date as may be agreed upon between petitioner and respondent LHC or otherwise determined in accordance with the
Turnkey Contract; and (2) petitioner is entitled to claim extensions of time (EOT) for reasons enumerated in the Turnkey
Contract, among which are variations, force majeure, and delays caused by LHC itself. Further, in case of dispute, the
parties are bound to settle their differences through mediation, conciliation and such other means enumerated under
Clause 20.3 of theTurnkey Contract.
4. To secure performance of Transfield, Transfield opened 2 standby letters of credit (Securities) with Security Bank
Corporation (SBC), each in the amount of US$8,988,907.00.
5. Many extensions were requested because of many reasons, including a typhoon. But extensions were denied which
forced exchange of legal actions between the parties. LHC said that extensions were not warranted and according to the
agreement, Transfield must pay $75,000/day of delay.
6. Foreseeing that LHC will go after the securities because of damages suffered because of the delays, Transfield, wrote
to SBC not to let LHC withdraw the securities, but SBC said that they will honor LHC if it came to them.
7. Transfield filed a complaint for Injunction with a prayer for TRO. TRO granted and extended for another two weeks,
but after that, RTC Makati denied the Preliminary Injuntion because there was no legal right impaired nor a irreparable
injury suffered. Transfield appealed to CA. CA issued TRO, but after the TRO was lifted, LHC withdrew from SBC, leaving
only $1.8M. CA denied Preliminary Injunction. Ruling that LHC could call on the Securities pursuant to the first principle
in credit law that the credit itself is independent of the underlying transaction and that as long as the beneficiary
complied with the credit, it was of no moment that he had not complied with the underlying contract. Further, the
appellate court held that even assuming that the trial court's denial of petitioner's application for a writ of preliminary
injunction was erroneous, it constituted only an error of judgment which is not correctible by certiorari, unlike error of
jurisdiction Hence this appeal.
ISSUE: 1. Can LHC (as beneficiary) invoke independence principle which would allow it to withdraw from the securities?
2. Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities?
HELD: 1. YES.the independence doctrine works to the benefit of both the issuing bank and the beneficiary.
2. NO. petitioner failed to allege that there was a legal right impaired or an irreparable injury suffered.
RATIO:
1. Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of the
issuing bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from the
issuing bank, the party who applied for and obtained it may confidently present the letter of credit to the beneficiary as a
security to convince the beneficiary to enter into the business transaction. On the other hand, the other party to the
business transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being empowered to call on the
letter of credit as a security in case the commercial transaction does not push through, or the applicant fails to perform
his part of the transaction. It is for this reason that the party who is entitled to the proceeds of the letter of credit is
52
appropriately called "beneficiary."

Respondent banks had squarely raised the independence principle to justify their releases of the amounts due under the
Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules that the respondent banks
were left with little or no alternative but to honor the credit and both of them in fact submitted that it was
"ministerial" for them to honor the call for payment.
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of the Contract:
4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost
shall on the Commencement Date provide security to the Employer in the form of two irrevocable and confirmed
standby letters of credit (the "Securities"), each in the amount of US$8,988,907, issued and confirmed by banks or
financial institutions acceptable to the Employer. Each of the Securities must be in form and substance acceptable to the
Employer and may be provided on an annually renewable basis.
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of liquidated
damages ("Liquidated Damages for Delay") the amount of US$75,000 for each and every day or part of a day that shall
elapse between the Target Completion Date and the Completion Date, provided that Liquidated Damages for Delay
payable by the Contractor shall in the aggregate not exceed 20% of the Contract Price. The Contractor shall pay
Liquidated Damages for Delay for each day of the delay on the following day without need of demand from the
Employer.
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from
any monies due, or to become due to the Contractor and/or by drawing on the Security."
Thus, even without the use of the "independence principle," the Turnkey Contract itself bestows upon LHC the right to
call on the Securities in the event of default.
2. Petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call on the Securities which would
justify the issuance of preliminary injunction. By petitioner's own admission, the right of LHC to call on the Securities was
contractually rooted and subject to the express stipulations in the Turnkey Contract.[55] Indeed, the Turnkey Contract is
plain and unequivocal in that it conferred upon LHC the right to draw upon the Securities in case of default.
NOTE:
The other issues raised by petitioner particularly with respect to its right to recover the amounts wrongfully drawn on
the Securities, according to it, could properly be threshed out in a separate proceeding.
LHCs accusation of forum shopping against Transfield was not ruled upon by SC, SC said that they will not rule on it until
Transfield has been given ample time to respond.
CASE LAW/ DOCTRINE:

Commercial credits involve the payment of money under a contract of sale. Such credits become payable upon the
presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales
agreement. In the standby type, the credit is payable upon certification of a party's non-performance of the agreement.
The documents that accompany the beneficiary's draft tend to show that the applicant has not performed. The
beneficiary of a commercial credit must demonstrate by documents that he has performed his contract. The beneficiary
of the standby credit must certify that his obligor has not performed the contract.
By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay
money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee.[33]
A letter of credit, however, changes its nature as different transactions occur and if carried through to completion ends
up as a binding contract between the issuing and honoring banks without any regard or relation to the underlying
contract or disputes between the parties thereto.
The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from
53
the justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby; or
(b) independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby,
which is identical with the same obligations under the underlying agreement. In both cases the payment may be
enjoined if in the light of the purpose of the credit the payment of the credit would constitute fraudulent abuse of the
credit.
KEYWORDS/NOTES: Twinkle :D
54
029 COLINARES & VELOSO v. CA

G.R. No. 90828 September 5, 2000
TOPIC: III. Trust Receipts E. Rights of a Purchaser, Sec. 11
PONENTE: DAVIDE, JR., C.J.
FACTS:
1. 1979: For the amount of P40k, Melvin Colinares and Lodino Veloso (Petitioners) were contracted by the Carmelite
Sisters of Cagayan de Oro City to renovate their convent in Camaman-an.
2. Oct. 30, 1979: Petitioners obtained from CM Builders Centre for the renovation the ff. construction materials*:
Solatone Acoustical board, Tanguile Wood Tiles, Marcelo Cement Tiles, and Umylin Cement Adhesive.
3. Oct. 31, 1979: They applied for a commercial letter of credit in favor of CM Builders Centre from Philippine Banking
Corporation (PBC).
4. PBC approved the letter of credit in the amount of P22,389.80, covering the full invoice value of the goods.
5. Petitioners signed a pro-forma trust receipt as security; Due date for loan = January 29, 1980.
7. Oct. 31, 1979: P6,720 was debited by PBC from the marginal deposit of Petitioners , as partial payment of loan.
8. May 7, 1980: PBC wrote Petitioners demanding payment of the amount within 7 days from notice.
9. Petitioners requested for a grace period of until June 15, 1980 to settle their account, confessing that they lost
P19,195.83 in the Carmelite Monastery Project.
10. Oct. 16, 1980: A new demand letter was sent by PBC to Petitioners stating that as of November 17, 1979, their
outstanding balance = P20,824.40, exclusive of 25% attorneys fees.
11. Petitioners proposed a modification in terms of payment on Dec. 2, 1980. Pending approval of proposal, Petitioners
made the ff. payments to PBC: 1k on Dec. 4 80; and P500 thereafter on 2/11/81, 3/16/81, and 4/20/81.
13. PBC continued to demand payment of balance, with a separate demand for attorneys fees.
14. Jan. 14, 1983: Petitioners were charged with violation of Trust Receipts Law (PD 115) in relation to Estafa (Art. 315).
15. Information filed at RTC of CDO stated that Colinares and Veloso: (1) entered into a trust receipt agreement with
PBC, wherein the former, as entrustee, received construction materials (*see above) with a value of P22,389.80; (2) with
the obligation to hold the items in trust for entruster, or to sell on cash basis, or return the items in case on non-sale on
or before Jan. 29, 1980; that (3) after receipt of goods, with intend to defraud/cause damage to PBC failed and refuse
to remit proceeds of sale of the goods, despite repeated demands; and instead (4) converted/misappropriated the
proceeds for their personal use, to the prejudice of PBC.
16. During trial, Veloso insisted: (1) that transaction was a clean loan as per verbal agreement with PBCs former
manager, Cayo Garcia Tuiza; (2) They signed documents without reading fine print, and only learned about the
implication of trust receipts later; (3) When he brought it to the attention of PBC, Tuiza assured him that the trust
receipt was a mere formality.
17. TC: Petitioners were convicted on July 7, 1986. TC considered: (1) the transaction between PBC and Petitioners as
Trust Receipt Transaction under Sec. 4, of PD 115; (2) Use of construction materials in Carmelite Monastery Proj. as an
act of disposing under Sec. 13; (3) the charge invoice of goods issued by CM Builders as document within Sec. 3. TC
concluded: failure to turn over the P22,389.80 owed to PBC = Estafa.
18. Petitioners appealed at CA, contending that they at most can only be made civilly liable for the loan.
19. CA: Modified TC judgment = increased penalty from MIN: 2y1D; MAX: 6y1D PM to MIN: 6y1day PM; MAX: 14y8,RT
20. March 25, 1989: Filed a Motion for New Trial/Reconsideration alleging: (1) Disclosure Statement on Loan/Credit
Transaction (Disclosure Statement) signed by them and Tuiza was suppressed by PBC on trial; (2) Document would have
proved transaction = loan because it bears a 14% interest, as opposed to a trust receipt which does not at all bear any
interest; (3) When PBC allowed them to pay in instalment = agreement novated = creditor-debtor relation.
21. CA denied motion for NT/R; alleged newly discovered evidence = forgotten evidence; would not alter result.
23. Petitioned filed at SC; SOLGEN: urged SC to deny petition for lack of merit.
24. Feb. 2, 1990: Petitioners filed Motion to Dismiss on ground that they already fully paid PBC on 2/2/90, 70k as
evidenced by PBC receipts, but SOLGEN: payment of loan = voluntary surrender/plea; can only mitigate, but not
extinguish their criminal liability. SC have due course to petition on Aug. 13, 1990, and required filing of memoranda.
25. May 18, 1999: Case assigned to Ponente; asked for interest in further prosecution, whereabouts, validity of bail
55
bonds; Petitioners submitted compliance.
ISSUE: (1) W/N the CA erred in denying Petitioners motion for new trial based on newly discovered evidence (Disclosure
Statement); (2) W/N the intended transaction between PBC and Petitioners (Colinares & Veloso) constitutes a trust
receipt agreement.
HELD: (1) No; SC finds no indication in the pleadings that the Disclosure Statement is a newly discovered evidence.
(2) No; Facts show ownership of the goods were immediately with petitioners, even before application for loan.
RATIO:
1. Facts of the case reveals that the transaction intended by the parties was a simple loan, not a trust receipt agreement.
2. Petitioners received the merchandise from CM Builders on Oct. 3079. Ownership over merchandise = already
transferred to petitioners, for use on the renovation project.
3. It was only a day later, 31 October 1979, that they went to the bank to apply for a loan to pay for the merchandise.
4. Petitioners are not importers acquiring the goods for re-sale, contrary to the express provision embodied in the trust
receipt. They are contractors who obtained the fungible goods for their construction project. At no time did title over
the construction materials pass to the bank, but directly to the Petitioners from CM Builders Centre.
4. SC says: situation belies what normally obtains in a pure trust receipt transaction, where goods are owned by the
bank and only released to the importer in trust subsequent to the grant of the loan.The bank acquires a security
interest in the goods as holder of a security title for the advances it had made to the entrustee. The ownership of the
merchandise continues to be vested in the person who had advanced payment until he has been paid in full, or if the
merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his
representative or successor in interest. To secure that the bank shall be paid, it takes full title to the goods at the very
beginning and continues to hold that title as his indispensable security until the goods are sold and the vendee is called
upon to pay for them; hence, the importer has never owned the goods and is not able to deliver possession.
5. In a certain manner, trust receipts partake of the nature of a conditional sale where the importer becomes absolute
owner of the imported merchandise as soon as he has paid its price.
6. Stenographic records show that PBCs credit investigator, Grego Mutia, admitted that they were delivered to
petitioners as evidenced by charge invoice ; impliedly admitted during cross and redirect examination that the
transaction was indeed a loan; PBC also did not refute Velosos testimony.
CASE LAW/ DOCTRINE: In a pure trust receipt transaction, goods are only released to the importer in trust subsequent to
grant of loan. Ownership continues to be vested in the person who had advanced payment until he has been paid in full.
KEYWORDS/NOTES: Sec. 4, PD115: Trust receipt transaction bet. entruster (ER)and entrustee (EE). ER owns/holds
absolute title or security interest over goods; releases to EE upon execution and delivery of TR, binding to hold the goods
and to turn over proceeds owed to ER in accordance with conditions in the TR; 2 situations in TRT: (1)money received w/
duty to deliver it (entregarla) to the owner of the merchandise sold; (2) merchandise received under the obligation to
return it (devolvera) to owner. TRT Law = not for enforcing loan payment; for punishing dishonesty/abuse of
confidence the handling money/goods to prejudice of another, regardless whether latter is owner; Sec.11, PD115 Rights
of purchaser for value and in good faith. Any purchaser of goods from an entrustee with right to sell, or of documents or
instruments through their customary form of transfer, who buys the goods, documents, or instruments for value and in
good faith from the entrustee, acquires said goods, documents or instruments free from the entruster's security interest.
56
030 Tupaz IV & Tupaz v. CA & BPI, 475 SCRA 398 (2005)
G.R. No. 145578 November 18, 2005
Guaranty; Benefit of Excussion
Carpio, J
FACTS:
1. Petitioners Jose C. Tupaz IV and Petronila C. Tupaz were Vice-President for Operations and Vice-President/Treasurer,
respectively, of El Oro Engraver Corporation. El Oro had a contract with the Philippine Army to supply them with survival
bolos.
2. On behalf of El Oro Corp., petitioners applied with BPI for 2 commercial letters of credit to finance the purchase of the
raw materials for the survival bolos.
3. Their application was granted. Letters of credit were in favour of T&M together with trust receipts in favour of BPI
[A] Letter of Credit No. 2-00896-3 for P564,871.05 to Tanchaoco Inc.
[B] Letter of Credit No. 2-00914-5 for P294,000 to Maresco Corp.
4. September 30, 1981 - Jose Tupaz signed, in his personal capacity, a trust receipt corresponding to Letter of [A] where
he bound himself to sell the goods covered by the letter of credit and to remit the proceeds to BPI if sold, or to return
the goods, if not sold, on or before December 29, 1981.
5. October 9, 1981 - petitioners signed, in their capacities as officers of El Oro Corporation, a trust receipt corresponding
to [B] (where they bound themselves to sell the goods covered by that letter of credit and to remit the proceeds to
respondent bank, if sold, or to return the goods, if not sold, on or before December 8, 1981.
6. BPI paid Tanchaoco and Maresco upon the delivery of raw materials to El Oro but petitioners did not comply with their
undertaking under the trust receipts.
7. BPI made several demands for payments but El Oro Corp. only made partial payments
8. BPI sent final demand letters. El Oro replied that it could not fully pay its debt because the AFP had delayed paying for
the survival bolos.
9. BPI charged petitioners with estafa (under Sec. 13, PD No. 115 or Trust Receipts Law.
10. RTC acquitted petitioners of estafa on reasonable doubt and solidarily liable with El Oro Corpo. for the balance of El
Oros principal debt under the trust receipts.
11. CA affirmed RTC. Violation of trust receipt agreement is distinct from criminal liability (Sec 13, PD 115). Petitioners
acquittal did not operate to extinguish their civil liability under the letter of credit-trust receipt arrangement with which
they dealt both in their personal capacity and as officers of El Oro Engraver Corporation, the letter of credit applicant and
principal debtor. The trust receipt agreement indicated in clear and unmistakable terms that the accused signed the
same as surety for the corporation and that they bound themselves directly and immediately liable in the event of
default with respect to the obligation under the letters of credit which were made part of the said agreement, without
need of demand.
ISSUE: Whether petitioners bound themselves personally liable for El Oro Corporations debts under the trust receipts; If
so, whether petitioners liability is solidary with El Oro Corporation; and whether petitioners acquittal of estafa under
Section 13, PD 115 extinguished their civil liability.
HELD: YES. The petition is partly meritorious. CA affirmed. Modification that petitioner Jose Tupaz is liable as guarantor
of El Oro Corporations debt under the trust receipt dated Sept. 8, 1981.
RATIO:
1. For Oct 9, 1981 trust receipt petitioners signed as corporate representatives, did not bind themselves personally
liable for El Oro Corporations obligation. For Sept 30, 1981 trust receipt - Jose Tupaz signed in his personal capacity,
bound himself personally liable for El Oros debts.
2. Dorsal side of the trust receipt ( Sept 30, 1981) indicated that Jose Tupaz signed jointly and severally, agreeing and
promising to pay BPI and his liability in the guarantee is direct and immediate. Despite finding that he is liable as
guarantor only, Tupaz suit still stands. (1) Excussion is not a pre-requisite to secure judgment against a guarantor. The
guarantor can still demand deferment of the execution of the judgment against him until after the assets of the principal
57
debtor shall have been exhausted. (2) the benefit of excussion may be waived. Tupaz waived the benefit of excussion
under his guarantee when he agreed that his liability in [the] guaranty shall be DIRECT AND IMMEDIATE, without any
need whatsoever on xxx [the] part [of respondent bank] to take any steps or exhaust any legal remedies xxx.
3. As guarantor, he is liable for El Oros principal debt and other accessory liabilities
Payment of attorneys fees equivalent to 10% of the total amount due and an interest at the rate of 7% per
annum, or at such other rate as the bank may fix, from the date due until paid xxx.[21]
4. Drafts drawn under the letters of credit are subject to 18% per annum interest rate; considering that the face value of
each of the trust receipts is based on the drafts drawn under the letters of credit.
Formula:
TOTAL AMOUNT DUE = [principal + interest + interest on interest] partial payments made[26]
Interest = principal x 18 % per annum x no. of years from due date[27] until finality of judgment
Interest on interest = interest computed as of the filing of the complaint (17 January 1984) x 12% x no. of
years until finality of judgment
Attorneys fees is 10% of the total amount computed as of finality of judgment
Total amount due as of the date of finality of judgment will earn an interest of 18% per annum until fully
paid.
5. Although the trial court acquitted petitioner Jose Tupaz, his acquittal did not extinguish his civil liability. His liability
arose not from the criminal act of which he was acquitted (ex delito) but from the trust receipt contract (ex contractu) of
Sept. 30, 1981.
6. Other Matters: The trust receipts were not simulated. Petitioners did not deny applying for the letters of credit and
subsequently executing the trust receipts to secure payment of the drafts drawn under the letters of credit.
General Rule: A corporation, being a juridical entity, may act only through its directors, officers, and employees. Debts
incurred by these individuals, acting as such corporate agents, are not theirs but the direct liability of the corporation they
represent.
Exception: Directors or officers are personally liable for the corporations debts only if they so contractually agree
or stipulate.
CASE LAW/ DOCTRINE:

Excussion is not a pre-requisite to secure judgment against a guarantor. The guarantor can still demand deferment of the
execution of the judgment against him until after the assets of the principal debtor shall have been exhausted. the
benefit of excussion may be waived.
KEYWORDS/NOTES:
58
031 Security Bank v. Cuenca

G.R. No. 138544 October 3, 2000
TOPIC: Obligations Secured
PONENTE: Panganiban, J.
FACTS:
1. Petitioner Security Bank and Trust Company (SBTC) granted appellant Sta. Ines Melale Corporation (SIMC) a
credit line in the amount of P8million effective until November 30, 1981.
2. To secure payment, it executed a chattel mortgage over some of its machineries. And as an additional security,
its President and Chairman of the Board of Directors Rodolfo Cuenca, executed an Indemnity agreement in
favor of SBTC whereby he bound himself solidarily with SIMC.
3. The specific conditions and stipulations were:
(a) The bank reserves the right to amend any of the terms and conditions upon written notice to theBorrower.
(b) As additional security for the payment of the loan, Cuenca executed an Indemnity Agreementdated 17 December
1980 solidary binding himself:
(c) Rodolfo M. Cuenca x x hereby binds himself x x x jointly and severally with the client (SIMC) in favor of thebank
for the payment, upon demand and without the benefit of excussion of whatever amount x x x the client maybe
indebted to the bank x x by virtue of aforesaid credit accommodation(s) including the substitutions,renewals,
extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s) x x x .
4. 4 days before the expiration of the credit line, SIMC made its first drawdown of P6million, and issued a
promissory note to SBTC.
5. 1985: Cuenca resigned as President and Chairman of the Board of Directors of SIMC. Subsequently, the
shareholdings of Cuenca in Sta. Ines were sold at a public auction. After this, SIMC still availed of its credit line
and obtained 6 other loans from SBTC.
6. SIMC encountered difficulty in making payments on its loans so the 1989 Loan Agreement was made by SIMC
and SBTC. SIMCs obligations to SBTC were restructured, but the only loan incurred prior to the expiration of the
P8M-Credit Loan Facility and the only one covered by the Indemnity Agreement was not segregated from the
other loans subsequent to the expiration date which were not covered by said Indemnity Agreement.
7. SIMC and CUENCA, both refused to pay despite SBTCs demand. SBTC filed a complaint for collection of sum of
money. The Trial Court held SIMC and Cuenca solidarily liable to SBTC.
8. CA: Released Cuenca from liability because: (a) 1989 Loan Agreement novated the 1980 credit accommodation
which extinguished the Indemnity Agreement for which Cuenca was liable solidarily; (b) the 1989 Loan
Agreement had been executed without notice to, much less consent from, Cuenca who at the time was no longer
a stockholder of the corporation; (c) Cuenca was liable only for loans obtained prior to November 30, 1981, and
only for an amount not exceeding P8 million; (d) restructuring of Sta. Ines obligation under the 1989 Loan
Agreement was tantamount to a grant of an extension of time to the debtor without the consent of the surety.
Under Article 2079 of the Civil Code, such extension extinguished the surety; and (e) the surety was entitled to
notice
ISSUE:
1. WON Cuencas liability under the Indemnity Agreement covered only availments of SIMCs credit line to the extent of
P8M and made on or before November 30, 1981 which was its expiry date.
2. WON restructuring of SIMCs indebtedness under the P8M credit line was tantamount to an extension or renewal
granted to SIMC without Cuencas consent, thus extinguishing his liability under the Indemnity Agreement.
3. WON the restructuring of SIMCs indebtedness under the P8M credit line constituted a novation, thus extinguishing
Cuencas liability under the indemnity agreement.
HELD: 1) Yes. 2) No. 3) Yes.
59
RATIO:
1. While Cuenca held himself liable for the credit accommodation or any modification thereof, such clause should be
understood in the context of the P8 million limit and the November 30, 1981 term. It did not give the bank or SIMC
any license to modify the nature and scope of the original credit accommodation, without informing or getting the
consent of respondent who was solidarily liable.It has been held that a contract of surety cannot extend to more
than what is stipulated. It is strictly construed against the creditor, every doubt being resolved against enlarging the
liability of the surety.
2. To begin with, the 1989 Loan Agreement expressly stipulated that its purpose was to liquidate, not to renew or
extend, the outstanding indebtedness. Moreover, respondent Cuenca did not sign or consent to the 1989 Loan
Agreement, which had allegedly extended the original P8 million credit facility. Hence, his obligation as a surety
should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically states that [a]n
extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty
The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the
suretys consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the
creditors remedies against the principal debtor upon the maturity date. The surety is said to be entitled to protect
himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended
period.
3. Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement extinguished the obligations
obtained under the 1980 credit accommodation.
Novation of a contract is never presumed. It has been held that [i]n the absence of an express agreement, novation
takes place only when the old and the new obligations are incompatible on every point. In the text, it is evident.
1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrowers present total
outstanding Indebtedness to the Lender (the Indebtedness) while the Second Loan shall be applied to liquidate the past
due interest and penalty portion of the Indebtedness.
CASE LAW/ DOCTRINE:

A contract of surety cannot extend to more than what is stipulated. It is strictly construed against the creditor, every
doubt being resolved against enlarging the liability of the surety.
NOTES:
It is a common banking practice to require the JSS (joint and solidary signature) of a major stockholder or corporate
officer, as an additional security for loans granted to corporations. Following this practice, it was therefore logical and
reasonable for the bank to have required the JSS of respondent, who was the chairman and president of Sta. Ines in 1980
when the credit accommodation was granted. There was no reason or logic, however, for the bank or Sta. Ines to assume
that he would still agree to act as surety in the 1989 Loan Agreement, because at that time, he was no longer an officer
or a stockholder of the debtor-corporation. Indeed, the stipulation in the 1989 Loan Agreement providing for the surety
of respondent, without even informing him, smacks of negligence on the part of the bank and bad faith on that of the
principal debtor.
60
032 Palmares v. CA & M. B. Lending Corporation

G.R. No. 126490 March 31, 1998
TOPIC: Distinguished from Guaranty, Art. 2047
PONENTE: Regalado, J.
FACTS:
1. M.B Lending Corp. extended a loan of P30K to Spouses Azarraga, together with petitioner Estrella Palmares pursuant
to a promissory note.
2. No payments were made after the last payment on September 1991. The spouses and Palmares were able to pay a
total of P16,300, leaving a balance of P13,700.
3. M.B. Lending filed a complaint against Palmares on the basis of the latters solidary liability under the promissory note.
*The principal debtors were not included because they were allegedly insolvent.
4.RTC: dismissed the complaint without prejudice to the filing a separate action against Azarraga spouses.
5. CA: reversed the RTC. Declared Palmares liable to pay M.B. Lending
Declared that Palmares is a surety because she bound herself to be solidarily liable with the Azarraga spouses
when she signed as a co-maker of the promissory note.
6. The basis of petitioner Palmares' liability under the promissory note:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents of this
Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above
principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan from me
in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject to the same
conditions above-contained.
7. Palmares contends that the provisions of the 2nd and 3rd paragraph are conflicting. That although the 2nd paragraph
says that she is liable as surety, the third paragraph defines the nature of her liability as a guarantor. She avers that she
could be held liable only as a guarantor.
ISSUE: Whether or not the CA erred in declaring Palmares as a surety and therefore solidarily liable
HELD: NO. theory advanced by petitioner, that she is merely a guarantor because her liability attaches only upon default
of the principal debtor, must necessarily fail
RATIO:
1. petitioner expressly bound herself to be solidarily liable with the principal maker of the note. The terms of the contract
are clear, explicit and unequivocal that petitioner's liability is that of a surety.
2. undertaking to pay upon default of the principal debtor does not automatically remove it from the ambit of a contract
of suretyship. It has not been shown, either in the contract or the pleadings, that respondent corporation agreed to
proceed against herein petitioner only if and when the defaulting principal has become insolvent.
3. there can be no doubt that the stipulation contained in the third paragraph of the controverted suretyship contract
merely elucidated on and made more specific the obligation of petitioner as generally defined in the second paragraph
thereof.
4. Several attendant factors in lend support to our finding that petitioner is a surety.
when petitioner was informed about the failure of the principal debtor to pay the loan, she immediately offered
to settle the account with respondent corporation. Obviously, she knew that she was directly and primarily liable
upon default of her principal.
petitioner presented the receipts of the payments already made, from the time of initial payment up to the last,
which were all issued in her name and of the Azarraga spouses. This can only be construed to mean that the
payments made by the principal debtors were considered by respondent corporation as creditable directly upon
61
the account and inuring to the benefit of petitioner.
CASE LAW/ DOCTRINE:

Contract of Suretyship- wherein one leads his credit by joining in the principal debtors obligation, so as to render himself
directly and primarily responsible with him, without reference to the solvency of the principal.
SURETY/SURETYSHIP GUARANTOR/GUARANTY
Insurer of debt Insurer of solvency of the debtor
Undertaking that the debt shall be paid Undertaking that the debtor shall pay
Promises to pay the principals debt if the principal will Agrees that the creditor, after proceeding against the
not pay principal, may proceed against the guarantor if the
principal is unable to pay
Binds himself to perform if the principal does not, without Does contract that the principal will pay, but simply that
regard to his ability to do so he is able to do so
Undertakes directly for the payment and is so responsible Contracts to pay if, by the use of due diligence, the debt
at once if the principal debtor makes default cannot be made out of the principal debtor
KEYWORDS/NOTES:
A surety is usually bound with his principal by the same instrument, executed at the same time and upon the same
consideration; he is an original debtor, and his liability is immediate and direct. Thus, it has been held that where a
written agreement on the same sheet of paper with and immediately following the principal contract between the buyer
and seller is executed simultaneously therewith, providing that the signers of the agreement agreed to the terms of the
principal contract, the signers were "sureties" jointly liable with the buyer. A surety usually enters into the same
obligation as that of his principal, and the signatures of both usually appear upon the same instrument, and the same
consideration usually supports the obligation for both the principal and the surety.
62
033 E. Zobel, Inc. vs CA, Spouses Claveria, and Consolidated Bank and Trust Corporation (SOLID BANK)
GR No. 113931 Date May 06, 1998
TOPIC: Distinguished from Guaranty Article 2047
PONENTE: Martinez, J.
FACTS:
1. Respondent spouses Claveria, doing business under the name "Agro Brokers," applied for a loan with
respondent Consolidated Bank and Trust Corporation (Respondent Bank/ SOLIDBANK) in the amount of 2,
875,000.00 to finance the purchase of two (2) maritime barges and one tugboats which would be used in their
molasses business.
2. The loan was granted subject to the condition that respondent spouses execute a chattel mortgage over the
three (3) vessels to be acquired and that a continuing guarantee be executed by Ayala International Philippines,
Inc., now herein petitioner E. Zobel, Inc. in favor of SOLIDBANK. The respondent spouses agreed to the
arrangement. Consequently, a chattel mortgage and a Continuing Guaranty were executed.
3. Respondent spouses defaulted in the payment of the entire obligation upon maturity. Respondent Bank filed a
complaint for sum of money with a prayer for a writ of preliminary attachment, against respondent-spouses and
petitioner.
4. Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was
extinguished pursuant to Article 2080 of the Civil Code of the Philippines. PETITIONERS DEFENSE: It argued that
it has lost its right to be subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the
chattel mortgage with the appropriate government agency.
5. SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner is not a
guarantor but a surety.
6. TRIAL COURTS RULING: E. Zobel (petitioner) signed as SURETY. Even though the title of the document is
'Continuing Guaranty', the Court's interpretation is not limited to the title alone but to the contents and
intention of the parties more specifically if the language is clear and positive. The obligation of the defendant
Zobel being that of a surety, Art. 2080 New Civil Code will not apply as it is only for those acting as guarantor.
The failure of the plaintiff (SOLID BANK) to register the chattel mortgage with the proper government agency,
i.e. with the Office of the Collector of Customs or with the Register of Deeds makes the obligation a guaranty,
the same merits a scant consideration and could not be taken by this Court as the basis of the extinguishment of
the obligation of the defendant corporation to the plaintiff as surety.
7. Petitioner filed a petition for certiorari alleging that the judge committed a grave abuse of discretion.
ISSUE:
1. Whether or not petitioner under the "Continuing Guaranty" obligated itself to SOLIDBANK as a guarantor or a
surety.
2. Whether or not Article 2080 of the New Civil Code which provides: "The guarantors, even though they be
solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to
the rights, mortgages, and preferences of the latter," is not applicable to petitioner.
RATIO:
1. The contract executed by petitioner in favor of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a
contract of SURETY.
A contract of surety is an accessory promise by which a person binds himself for another already bound, and agrees with
the creditor to satisfy the obligation if the debtor does not. A contract of guaranty, on the other hand, is a collateral
undertaking to pay the debt of another in case the latter does not pay the debt.
Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. However,
under our civil law, they may be distinguished thus:
63
GUARANTOR SURETY
The contract of guaranty is the guarantor's own separate A surety is usually bound with his principal by the same
undertaking, in which the principal does not join. instrument, executed at the same time, and on the same
consideration.
It is usually entered into before or after that of the He is an original promissor and debtor from the
principal, and is often supported on a separate beginning, and is held, ordinarily, to know every default
consideration from that supporting the contract of the of his principal.
principal. Usually, he will not be discharged, either by the mere
The original contract of his principal is not his contract, indulgence of the creditor to the principal, or by want of
and he is not bound to take notice of its non- notice of the default of the principal, no matter how
performance. much he may be injured thereby.
He is often discharged by the mere indulgence of the A surety is the insurer of the debt, and he obligates
creditor to the principal, and is usually not liable unless himself to pay if the principal does not pay.
notified of the default of the principal.
A guarantor is the insurer of the solvency of the debtor

and thus binds himself to pay if the principal is unable to
pay.
One need not look too deeply at the contract to determine the nature of the undertaking and the intention of the
parties. The contract clearly disclosed that petitioner assumed liability to SOLIDBANK, as a regular party to the
undertaking and obligated itself as an original promissor. It bound itself jointly and severally to the obligation with the
respondent spouses. In fact, SOLIDBANK need not resort to all other legal remedies or exhaust respondent spouses'
properties before it can hold petitioner liable for the obligation. This can be gleaned from a reading of the stipulations in
the contract, to wit:
x x x If default be made in the payment of any of the instruments, indebtedness or other obligation hereby
guaranteed by the undersigned, or if the Borrower, or the undersigned should die, dissolve, fail in business, or become
insolvent, x x x , or if any funds or other property of the Borrower, or of the undersigned which may be or come into your
possession or control or that of any third party acting in your behalf as aforesaid should be attached of distrained, or
should be or become subject to any mandatory order of court or other legal process, then, or any time after the
happening of any such event any or all of the instruments of indebtedness or other obligations hereby guaranteed shall,
at your option become (for the purpose of this guaranty) due and payable by the undersigned forthwith without demand
of xxxx
The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty. Authorities
recognize that the word "guarantee" is frequently employed in business transactions to describe not the security of the
debt but an intention to be bound by a primary or independent obligation. As aptly observed by the trial court, the
interpretation of a contract is not limited to the title alone but to the contents and intention of the parties.
2. Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by petitioner, finds
no application to the case at bar. In Bicol Savings and Loan Association vs. Guinhawa, we have ruled that Article
2080 of the New Civil Code does not apply where the liability is as a surety, not as a guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel mortgage did not
release petitioner from the obligation. In the Continuing Guaranty executed in favor of SOLIDBANK, petitioner bound
itself to the contract irrespective of the existence of any collateral.
3. CAs ruling was affirmed. Costs against petitioners.
64
034 CASE TITLE: Phil Blooming Mills v. CA

Gr No.142381 October 15, 2003
TOPIC: E. Distinguished from Guaranty, Art. 2047
PONENTE: Carpio. J.
FACTS:
1. Ching was the Senior Vice President of Philippine Blooming Mills (hereon PBM). In his personal capacity and not as a
corporate officer, Ching signed a Deed of Suretyship dated 21 July 1977 amounting to Php 10,000,000.00. The surety
agreement provides Ching is liable in a solidary, direct and immediate and not contingent capacity upon demand by
Traders Royal Bank (Hereon TRB) upon default.
2. The problem arose when PBM defaulted on its payment, prompting PBM and Ching to file for a petition for suspension
of payments with SEC. The petition sought to suspend payment of PBMs obligations and prayed that the SEC allow PBM
to continue its normal business operations free from the interference of its creditors. One of the listed creditors of PBM
was TRB. On July 9, 1982 SEC approved the petition and placed all of PBMs assets, liabilities, and obligations under the
rehabilitation receivership of Kala, Escaler and Associates.
3. Ten months after the SEC placed PBM under the rehabilitation receivership, TRB filed with RTC a complaint for
collections against PBM and Ching. TRB prayed for solidary payment of the outstanding amounts. However, soon after,
TRB withdrew the complaint against PBM on the ground of the receivership BUT NOT against Ching.
Ching and PBM contends:
RTC does not have jurisdiction over the matter being a corporate matter and having been already settled by SEC.
PBM and Ching invoked the assumption of jurisdiction by the SEC over all of PBMs assets and liabilities.
TRB contends:
Ching is being sued in his personal capacity as a surety for PBM; (2) the SEC decision declaring PBM in suspension
of payments is not binding on TRB; and (3) Presidential Decree No. 1758 (PD No. 1758), which Ching relied on to
support his assertion that all claims against PBM are suspended, does not apply to Ching as the decree regulates
corporate activities only.
RTC ruling:
The trial court stressed that TRB was holding Ching liable under the Deed of Suretyship. As Chings obligation
was solidary, the trial court ruled that TRB could proceed against Ching as surety upon default of the principal debtor
PBM. The trial court also held that PD No. 1758 applied only to corporations, partnerships and associations and not to
individuals. Ching appealed in the CA.
CA ruling:
CA affirmed the ruling of the TC stating, assurety of a corporation placed under rehabilitation receivership, Ching
can answer separately for the obligations of debtor PBM. Hence the case.
ISSUE: WON Ching may be held liable as a surety of PBM

HELD: Ching is solidarily liable as surety with PBM
RATIO:
1. Ching is liable for credit obligations contracted by PBM against TRB before and after the execution of the 21 July
1977 Deed of Suretyship. This is evident from the tenor of the deed itself, referring to amounts PBM may now be
indebted or may hereafter become indebted to TRB.
The law expressly allows a suretyship for future debts. Article 2053 of the Civil Code provides:
2. A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim
against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (Emphasis supplied)
CASE LAW/ DOCTRINE:

Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not be
known at the time the guaranty is executed. This is the basis for contracts denominated as continuing guaranty or
65
suretyship. A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future
course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in
its operation and is generally intended to provide security with respect to future transactions within certain limits, and
contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. Otherwise stated, a
continuing guaranty is one which covers all transactions, including those arising in the future, which are within the
description or contemplation of the contract of guaranty, until the expiration or termination thereof. A guaranty shall be
construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal
debtor to be used from time to time either indefinitely or until a certain period; especially if the right to recall the
guaranty is expressly reserved. Hence, where the contract states that the guaranty is to secure advances to be made
from time to time, it will be construed to be a continuing one.
In other jurisdictions, it has been held that the use of particular words and expressions such as payment of any
debt, any indebtedness, or any sum, or the guaranty of any transaction, or money to be furnished the principal
debtor at any time, or on such time that the principal debtor may require, have been construed to indicate a
continuing guaranty.
KEYWORDS/NOTES:
66
035 IFC v. IMPERIAL TEXTILE MILLS, INC.

G.R. No. 160324 Date November 15, 2005
TOPIC: SURETY DISTINGUISHED FROM GUARANTY
PONENTE: Panganiban, J.
FACTS:
1. Dec. 17, 1974: A loan agreement was entered into between International Finance Corporation (IFC) and Philippine
Polyamide Industrial Corporation (PPIC) where IFC extended to PPIC a loan in the amount of $7,000,000 payable in 16
semi-annual instalments beginning January 1, 1977 to December 1, 1984 with an interest rate of 10% per annum.
2. On the same date, a Guarantee Agreement was executed between Imperial Textile Mills, Inc. (ITM), Grand Textile
Manufacturing Corporation (Grandtex) and IFC where ITM and Grandtex agreed to guarantee PPICs obligations under
the loan agreement.
3. PPIC was able to pay the first three installments and requested for a rescheduling of the payments for the next
installments. But, despite the reschedule, PPIC defaulted.
4. April 1, 1985: IFC sent a written notice of default to PPIC demanding for the payment of the outstanding principal loan
and its accrued interests. Despite of the notice, PPIC was not able to pay.
5. Since PPIC was not able to pay, IFC applied for the extrajudicial foreclosure of mortgages on the real estate, buildings,
machinery, equipment plant and all improvements owned by PPIC, located at Calamba, Laguna, with the regional sheriff
of the province.
6. July 30, 1985: The deputy sheriff of Calamba issued a notice of extrajudicial sale. IFC and DBP were the only bidders
during the auction sale. IFCs bid wasP99,269,100 which was equivalent to $5,250,000. But, the outstanding
loan amounted to $8,083,967 leaving a balance of $2,833,967. PPIC failed to pay the remaining balance. As a result, IFC
demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding balance but no payment was made.
7. May 20, 1988: IFC filed a complaint with the RTC of Manila against PPIC and ITM for the payment of the outstanding
balance plus interests and attorneys fees
RTC Ruling: PPIC is liable for the payment of the outstanding loan plus interest and attorneys fees. It relieved ITM
of its obligation as guarantor and dismissed the complaint against it.
CA: ITM bound itself under the Guarantee Agreement to pay PPICs obligation upon default. Its liability as a guarantor
would arise only if and when PPIC could not pay. Since PPICs inability to comply with its obligation was not sufficiently
established, ITM could not immediately be made to assume the liability.
ISSUE: Whether ITM is a surety, and thus solidarily liable with PPIC for the payment of the loan?
HELD: YES.
RATIO:
1. While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was jointly and
severally liable. To put emphasis on the nature of that liability, the Contract further stated that ITM was a primary
obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and to all legal intents and
purposes, it was a surety. Indubitably therefore, ITM bound itself to be solidarily liable with PPIC for the latters
obligations under the Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not be deemed
merely secondarily liable.
2. Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITMs liability commenced only when it
guaranteed PPICs obligation. It became a surety when it bound itself solidarily with the principal obligor. Thus, the
applicable law is as follows:
Article 2047. By guaranty, a person, called the guarantor binds himself to the creditor to fulfill the obligation of the
principal in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book
shall be observed. In such case the contract shall be called suretyship.
3. The Court does not find any ambiguity in the provisions of the Guarantee Agreement. When qualified by the term
jointly and severally, the use of the word guarantor to refer to a surety does not violate the law. As Article 2047
67
provides, a suretyship is created when a guarantor binds itself solidarily with the principal obligor. Likewise, the phrase
in the Agreement -- as primary obligor and not merely as surety -- stresses that ITM is being placed on the same level
as PPIC. Those words emphasize the nature of their liability, which the law characterizes as a suretyship.
4. The use of the word guarantee does not ipso facto make the contract one of guaranty. This Court has recognized
that the word is frequently employed in business transactions to describe the intention to be bound by a primary or an
independent obligation. The very terms of a contract govern the obligations of the parties or the extent of the obligors
liability. Thus, this Court has ruled in favor of suretyship, even though contracts were denominated as a Guarantors
Undertaking or a Continuing Guaranty. Contracts have the force of law between the parties, who are free to stipulate
any matter not contrary to law, morals, good customs, public order or public policy. None of these circumstances are
present, much less alleged by respondent. Hence, this Court cannot give a different meaning to the plain language of the
Guarantee Agreement.
*SIDE ISSUES:
1. Whether or not the Petition raises a question of law? NO. The general rule is that only questions of law may be raised
in a Petition for Review. But the Court has recognized exceptions, one of which applies to the present case. The assailed
Decision was based on a misapprehension of facts, which particularly related to certain stipulations in the Guarantee
Agreement -- stipulations that had not been disputed by the parties. This circumstance compelled the Court to review
the Contract firsthand and to make its own findings and conclusions accordingly.
2. Whether or not the Petition raises a theory not raised in the lower court? NO. Petitioners arguments before the trial
court (that ITM was a primary obligor) and before the CA (that ITM was a surety) were related and intertwined in the
action to enforce the solidary liability of ITM under the Guarantee Agreement. The terms primary obligor and surety
were premised on the same stipulations in Section 2.01 of the Agreement. Both terms had the same legal consequences.
There was therefore effectively no change of theory on appeal.
KEYWORDS/NOTES:
A suretyship is merely an accessory or collateral to a principal obligation. Although a surety contract is secondary
to the principal obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a
regular party to the undertaking. A surety becomes liable to the debt and duty of the principal obligor even
without possessing a direct or personal interest in the obligations constituted by the latter.
A surety is considered in law to be on the same footing as the principal debtor in relation to whatever is
adjudged against the latter
68
036 Escano & Silos v. Ortigas, Jr.,

526 SCRA 26 (June 29, 2007)
TOPIC: Distinguished from Joint and Solidary Obligations
PONENTE: Tinga, J;
FACTS:
1. Private Development Corporation of the Philippines (PDCP) entered into a loan agreement with Falcon Minerals, Inc.
(Falcon) to lend the latter the amount of US$320,000.00.
2. On the same day, three stockholders-officers of Falcon, namely: respondent Rafael Ortigas, Jr. (Ortigas), George A.
Scholey and George T. Scholey executed an Assumption of Solidary Liability whereby they agreed to assume in
[their] individual capacity, solidary liability with [Falcon] for the due and punctual payment of the loan contracted by
Falcon with PDCP.
3. In the meantime, two separate guaranties were executed:
One Guaranty was executed by petitioner Salvador Escao (Escao), while the other by petitioner Mario M. Silos
(Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J. Rodriguez (Rodriguez).
4. Two years later, an agreement developed to cede control of Falcon to Escao, Silos and Joseph M. Matti (Matti).
Thus, contracts were executed whereby Ortigas, George A. Scholey, Inductivo assigned their shares of stock in Falcon
to Escao, Silos and Matti. Part of the consideration that induced the sale of stock was a desire by Ortigas, et al., to
relieve themselves of all liability arising from their previous joint and several undertakings with Falcon, including
those related to the loan with PDCP.
5. An Undertaking was executed by the concerned parties, namely: with Escao, Silos and Matti identified in the
document as SURETIES, on one hand, and Ortigas, Inductivo and the Scholeys as OBLIGORS,
6. Falcon eventually availed of the sum of US$178,655.59 from the credit line extended by PDCP. It would also execute
a Deed of Chattel Mortgage over its personal properties to further secure the loan. However, Falcon subsequently
defaulted in its payments. After PDCP foreclosed on the chattel mortgage, there remained a subsisting deficiency of
P5,031,004.07, which Falcon did not satisfy despite demand
7. PDCP filed a complaint for sum of money with the Regional Trial Court of Makati (RTC) against Falcon, Ortigas,
Escao, Silos, Silverio and Inductivo.
8. Escao, Ortigas and Silos made a compromise agreement with PDCP.
9. Ortigas pursued his claims against Escao, Silos and Matti, on the basis of the Undertaking.
10. RTC issued the Summary Judgment, ordering Escao, Silos and Matti to pay Ortigas, jointly and severally.
11. The appellate court found that the RTC did not err in rendering the summary judgment since the three appellants did
not effectively deny their execution of the Undertaking.
ISSUE: Whether or not the obligation to repay is solidary?

HELD: No. Jointly
RATIO:
1. The Undertaking does not contain any express stipulation that the petitioners agreed to bind themselves jointly and
severally in their obligations to the Ortigas group, or any such terms to that effect. Hence, such obligation
established in the Undertaking is presumed only to be joint. Ortigas, as the party alleging that the obligation is in fact
solidary, bears the burden to overcome the presumption of jointness of obligations. We rule and so hold that he
failed to discharge such burden.
2. As provided in Article 2047 in a surety agreement the surety undertakes to be bound solidarily with the principal
debtor. Thus, a surety agreement is an ancillary contract as it presupposes the existence of a principal contract. It
appears that Ortigass argument rests solely on the solidary nature of the obligation of the surety under Article 2047.
In tandem with the nomenclature SURETIES accorded to petitioners and Matti in the Undertaking, however, this
argument can only be viable if the obligations established in the Undertaking do partake of the nature of a
suretyship as defined under Article 2047 in the first place. That clearly is not the case here, notwithstanding the use
of the nomenclature SURETIES in the Undertaking.
69
3. Article 2047, a suretyship requires a principal debtor to whom the surety is solidarily bound by way of an ancillary
obligation of segregate identity from the obligation between the principal debtor and the creditor. The suretyship
does bind the surety to the creditor, inasmuch as the latter is vested with the right to proceed against the former to
collect the credit in lieu of proceeding against the principal debtor for the same obligation. At the same time, there is
also a legal tie created between the surety and the principal debtor to which the creditor is not privy or party to. The
moment the surety fully answers to the creditor for the obligation created by the principal debtor, such obligation is
extinguished. At the same time, the surety may seek reimbursement from the principal debtor for the amount paid,
for the surety does in fact become subrogated to all the rights and remedies of the creditor.
CASE LAW/ DOCTRINE: Solidary or several obligations, however, does not mean that suretyship is withdrawn from the
applicable provisions governing guaranty. For if that were not the implication, there would be no material difference
between the surety as defined under Article 2047 and the joint and several debtors, for both classes of obligors would be
governed by exactly the same rules and limitations.
KEYWORDS/NOTES:
70
037 Development Bank of the Philippines v. Court of Appeals

G.R. No. 118342 January 5, 1998
TOPIC: Pactum Commissorium; Effects on Pledge or Mortgage
PONENTE: Davide, Jr., J
FACTS:
1. Lydia Cuba was a grantee of a Fishpond Lease Agreement from the government.
2. She obtained 3 loans from DBP (P109,000, P109,000, and P98,700 respectively).
3. The security of the loans were 2 Deeds of Assignment of her Leasehold Rights.
4. She failed to pay the loans upon maturity and without foreclosure proceedings, DBP appropriated said rights.
5. DBP executed a Deed of Conditional Sale to Cuba, which Cuba again failed to pay the amortizations.
6. DBP sent a notice of Rescission to Cuba.
7. DBP, then, executed another Deed of Conditional Sale to Agripina Caperal which she was also awarded by the Ministry
of Agriculture the Fishpond Lease Agreement.
8. Thus, Cuba filed a complaint with the RTC of Pangasinan seeking the following: (1) the declaration of nullity of DBPs
appropriation of Cubas rights, title, and interests over a 44-hectare fishpond in Pangasinan, being violative of Art. 2088
of the CC; (2) the annulment of the Deed of Conditional Sale executed in her favor by DBP; (3) the annulment of DBPs
sale of the subject fishpond to Caperal; (4) the restoration of her rights, title, and interests over the fishpond; and (5) the
recovery of damages, attorneys fees, and expenses of litigation.
9. RTC: In favor of Cuba. Declared the 2 Deeds of Conditional Sale null and void. Awarded Cuba damages and attys fees.
10. Both parties appealed. Cuba sought an increase in the amt of damages while DBP questioned the RTC ruling.
11. CA: RTC erred in declaring void the 2 Deeds of Coditional Sale. That the deeds of assignment represented the
voluntary act of CUBA in assigning her property rights in payment of her debts, which amounted to a novation of the
promissory notes executed by CUBA in favor of DBP. That Cuba was estopped from questioning the assignment of the
leasehold rights, since she agreed to repurchase the said rights under a deed of conditional sale; and that condition no.
12 of the deed of assignment was an express authority from Cuba for DBP to sell whatever right she had.
ISSUE1: Whether or not the act of DBP in appropriating Cubas leasehold rights without foreclosure proceedings was
contrary to Art. 2088 of the CC.
ISSUE2: Whether or not the assignment of leasehold rights was a mortgage contract.
HELD:
ISSUE1: Yes, DBPs act of appropriating CUBAs leasehold rights was violative of Article 2088 of the Civil Code, which
forbids a creditor from appropriating, or disposing of, the thing given as security for the payment of a debt.
ISSUE2: Yes, as pointed out by Cuba, the deeds of assignment constantly referred to the assignor (CUBA) as borrower;
the assigned rights, as mortgaged properties; and the instrument itself, as mortgage contract.
RATIO:
1. It is undisputed that Cuba obtained from DBP 3 separate loans each of which was covered by a promissory note. In all
of these notes, there was a provision that: In the event of foreclosure of the mortgage securing this notes, I/We further
bind myself/ourselves, jointly and severally, to pay the deficiency, if any. Moreover, under condition no. 22 of the deed,
it was provided that failure to comply with the terms and condition of any of the loans shall cause all other loans to
become due and demandable and all mortgages shall be foreclosed. And, condition no. 33 provided that if foreclosure
is actually accomplished, the usual 10% attorneys fees and 10% liquidated damages of the total obligation shall be
imposed. There is, therefore, no shred of doubt that a mortgage was intended.
2. In Peoples Bank & Trust Co. v. Odom, the Court held that an assignment to guarantee an obligation is in effect a
mortgage.
3. The Court does not agree with DBPs contention that the assignment novated the promissory notes in that the
obligation to pay a sum of money the loans was substituted by the assignment of the rights over the fishpond (under the
deed of assignment). The said assignment merely complemented or supplemented the notes; both could stand together.
Neither did the assignment amount to payment by cession under Art. 1255 of the CC for the plain and simple reason that
71
there was only one creditor, DBP. Art.1255 contemplates the existence of two or more creditors and involves the
assignment of all the debtors property. Nor did the assignment constitute dation in payment. We do not, however, buy
Cubas argument that condition no. 12 of the deed of assignment constituted pactum commissorium.
4. The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor
of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.
5. Condition no. 12 did not provide that the ownership over the leasehold rights would automatically pass to DBP upon
CUBAs failure to pay the loan on time. It merely provided for the appointment of DBP as attorney-in-fact with authority,
among other things, to sell or otherwise dispose of the said real rights, in case of default by Cuba, and to apply the
proceeds to the payment of the loan. This provision is a standard condition in mortgage contracts and is in conformity
with Article 2087 of the Civil Code, which authorizes the mortgagee to foreclose the mortgage and alienate the
mortgaged property for the payment of the principal obligation.
6. DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment. DBP cannot take refuge
in condition no. 12 of the deed of assignment to justify its act of appropriating the leasehold rights. As stated earlier,
condition no. 12 did not provide that CUBAs default would operate to vest in DBP ownership of the said rights. Besides,
an assignment to guarantee an obligation, as in the present case, is virtually a mortgage and not an absolute
conveyance of title which confers ownership on the assignee.
7. DBP should have foreclosed the mortgage, as has been stipulated in condition no. 22 of the deed of assignment.
8. In view of the false representation of DBP that it had already foreclosed the mortgage, said acts which were predicated
on such false representation, as well as the subsequent acts emanating from DBPs appropriation of the leasehold rights,
should therefore be set aside. To validate these acts would open the floodgates to circumvention of Article 2088 of the
Civil Code. DBP should render an accounting of the income derived from the operation of the fishpond in question.
CASE LAW/ DOCTRINE:

ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.
NOTE: Condition no.12. That effective upon the breach of any condition of this assignment, the Assignor hereby
appoints the Assignee his Attorney-in-fact with full power and authority to take actual possession of the property above-
described, together with all improvements thereon,xxx.
72
038 BUSTAMANTE VS ROSEL

G.R. No. 126800 Date NOV 29 1999
TOPIC: PACTUM COMMISSORIUM (Effects on Pledge or Mortgage)
PONENTE: PARDO, J.
FACTS:
1. Norma Rosel entered into a loan agreement with Natalia Bustamante and her late husband Ismael C. Bustamante,
under the following terms and conditions:
1. That the borrowers are the registered owners of a parcel of land, evidenced by TRANSFER CERTIFICATE OF TITLE No.
80667, containing an area of FOUR HUNDRED TWENTY THREE (423) SQUARE Meters, more or less, situated along
Congressional Avenue.
2. That the borrowers were desirous to borrow the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS from the
LENDER, for a period of two (2) years, counted from March 1, 1987, with an interest of EIGHTEEN (18%) PERCENT per
annum, and to guaranty the payment thereof, they are putting as a collateral SEVENTY (70) SQUARE METERS portion,
inclusive of the apartment therein, of the aforestated parcel of land, however, in the event the borrowers fail to pay, the
lender has the option to buy or purchase the collateral for a total consideration of TWO HUNDRED THOUSAND
(P200,000.00) PESOS, inclusive of the borrowed amount and interest therein;
3. That the lender do hereby manifest her agreement and conformity to the preceding paragraph, while
the borrowers do hereby confess receipt of the borrowed amount.
2. When the loan was about to mature, Rosel proposed to buy the seventy (70) square meters parcel of land given as
collateral to guarantee payment of the loan. Bustamante refused and requested for extension to pay and offered to sell
ANOTHER lot with the principal loan plus interest to be used as down payment.
3. Rosel refused to extend and to accept the lot in Road 20 because it was occupied by squatters and the Bustamtes did
not own the lot, only care takers.
4. Bustamante tendered payment of the loan but Rosel refused to accept, insisting to buy the collateral lot. February -
Rosel filed a complaint for specific performance with consignation against petitioner and her spouse.
The Rosels even sent a demand letter asking the Bustamantes to sell the collateral pursuant to the option to buy in the
loan agreement. Bustamante deposited the amount of P153,000.00 with the City Treasurer of Quezon City. While Rosel
deposited 47000 with the RTC-QC as the remaining balance for the lot if ever the sale will be executed.
Computation:
P100,000.00 (principal loan)
+ P52,500.00 (18%/annum interest)
P152,500.00 P200,000 (pre-rated price of the optional lot) = [P 47,500.00]
5. RTC dismissed complaint. No specific performance. Ordered Bustamante to pay the rest of the loan.
CA reversed. Ordered Bustamante to accept the 47500 and sign the deed of sale.
ISSUE: 1. WON petitioner failed to pay the loan at its maturity date
2. WON the stipulation in the loan contract was valid and enforceable.
HELD: 1. NO. petitioner tendered payment to settle the loan which respondents refused to accept, insisting that
petitioner sell to them the collateral of the loan. When respondents refused to accept payment, petitioner consigned the
amount with the trial court.
2. NO. It is within the concept of pactum commissorium. Such stipulation is void.
73
RATIO:
1. The sale of the collateral is an obligation with a suspensive condition.[20] It is dependent upon the happening of an
event, without which the obligation to sell does not arise. Since the event did not occur, respondents do not have the
right to demand fulfillment of petitioner's obligation, especially where the same would not only be disadvantageous to
petitioner but would also unjustly enrich respondents considering the inadequate consideration (P200,000.00) for a 70
square meter property situated at Congressional Avenue, Quezon City.
2. Contracts have the force of law between the contracting parties and must be complied with in good faith. There are,
however, certain exceptions to the rule, specifically Article 1306 of the Civil Code, which provides:
"Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy."
A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to acquire the property given as
security for the loan. This is embraced in the concept of pactum commissorium, which is proscribed by law.
"The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security
for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the
creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.
A significant task in contract interpretation is the ascertainment of the intention of the parties and looking into the words
used by the parties to project that intention. In this case, the intent to appropriate the property given as collateral in
favor of the creditor appears to be evident, for the debtor is obliged to dispose of the collateral at the pre-agreed
consideration amounting to practically the same amount as the loan. In effect, the creditor acquires the collateral in
the event of non-payment of the loan. This is within the concept of pactum commissorium. Such stipulation is void.
CASE LAW/ DOCTRINE:

The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor
of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.
THIS IS VOID.
KEYWORDS/NOTES: Hindi pwedeng hindi mo tanggapin yung bayad ng nangutang sayo para makuha mo yung property
na ginawang collateral. Bawal yun.
Twinkle :D
74
039 SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-ONG v. ROBAN LENDING CORPORATION
G.R. No. 172592 July 9, 2008
TOPIC: F. Pactum Commissorium - 2. Effects of Pledge or Mortgage
PONENTE:AUSTRIA-MARTINEZ
FACTS:
1. From July 14, 1999 to March 20, 2000, Spouses Ong (Wilfredo and Edna) obtained 4M loan in total, from Roban
Lending Corp (ROBAN). The loan was secured by a real estate mortgage on parcels of land owned by the spouses in
Binauganan, Tarlac (TCT 297840).
2. Feb. 12, 2001 Ong spouses and ROBAN executed an Amendment to Amended Real Estate Mortgage, which
consolidated their loans, inclusive of charges, for a total of P5,916,117.50.
3. Spouses Ong also executed a Dacion in Payment Agreement, assigning the above mentioned Tarlac property to
ROBAN, in settlement of their total obligation.
4. Pertinent provisions of the MOA stated that: (1) ROBAN and Spouses Ong agree to consolidate and restructure their
loans, which were due and delinquent since April 19, 2000, with a total amount of P5,916,117.50; (2) Ong spouses
executed another promissory covering the 5M amount, with a promise to pay ROBAN within a year from date of
consolidation/restructuring; (3) failure to pay = execution of Dacion inPayment, in favour of ROBAN.
5. April 2002: Ong Spouses filed in RTC of Tarlac, for abandonment of the mortgage contract, annulment of deeds,
illegal exaction, unjust enrichment, accounting, and damages, on the ground that: (1) that the executed MOA and
Dacion in Payment Agreement (DPA) are void for being pactum commissorium; (2) additional charges/interest rate
placed on their loans were illegal, iniquitous, unconscionable; (3) Previous payments were made by them, but due
to the illegal charges, the total balance appeared unchanged.
6. ROBAN answered with a counterclaim, maintaining legality of its transactions with Spouses ong, and stating that: (1)
allegation of pactum commissorium cannot stand, because the voluntary execution of the MOA and DPA novated the
Real Estate Mortgage; (2) DPA is lawful and valid under Art. 1245 of the Civil Code as a special form of payment,
wherein a debtor alienates property to the creditor to satisfy their monetary obligation; (3) largeness of accumulated
interest for more than 2 years were reasonable and valid, considering the principal loan is 4M; accumulation of
interest amount = fault of Spouses Ong.
7. April 21, 2004: RTC Tarlac dismissed the complaint, finding no pactum commissorium,
8. CA: upheld RTC decision that there was no pactum commissorium; found the error in nomenclature "to be mere
semantics with no bearing on the merits of the case."
ISSUE: Whether or not the MOA and DPA are null and void for being a pactum commissorium (Whether both contracts
constitute pactum commissorium or dacion en pago)
HELD: YES; CA decision REVERSED and SET ASIDE. MOA and DPA between Spouses Ong and ROBAN are NULL and VOIC
for being pactum commissorium.
RATIO:
1. SC finds the MOA and DPA constitute pactum commissorium, which is prohibited under Article 2088 of the Civil
Code which provides: The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void."
2. Elements of pactum commissorium, which enables the mortgagee to acquire ownership of the mortgaged property
without the need of any foreclosure proceedings, are: (1) there should be a property mortgaged by way of security
for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the
creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.
3. MOA and DPA contains no provisions for foreclosure proceedings nor redemption. Under MOA, failure of Spouses
Ong to pay their debt in 1 year, gives right to ROBAN to enforce the DPA, which in effect, automatically transfers
ownership of the Bulacan property to the latter (ILLEGAL!)
4. Though law law recognizes dacion en pago as a special form of payment whereby the debtor alienates property to
75
the creditor in satisfaction of a monetary obligation, this is not applicable in this case because: (1)In true dacion en
pago, the assignment of the property extinguishes the monetary debt; (2) in this case, alienation by Spouses Ong of
the properties was by way of security, and not by way of satisfying the debt.
5. The Dacion in Payment did not extinguish petitioners obligation to respondent. On the contrary, under the MOA
executed on the same day as the DPA, Spouses Ong had to execute a promissory note for the 5M, payable in a year.
6. Re: charges on loans = unconscionable; Court reduces interest rates: (1) interest rate of 42% to 12% per annum;
penalty fee from 60% to 12%; Attorneys fees to 25% of principal amount only.
7. Case remanded for further evidence re: claims of partial payments made on the loans.
CASE LAW/ DOCTRINE:

An agreement without provision for foreclosure proceedings or redemption, which provides for the automatic
transfer of ownership to creditor of property pledged or mortgaged by debtor is void for being pactum
commissorium.
Pactum commissorium is prohibited under Art. 2088, which provides: The creditor cannot appropriate the things given
by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void."
76
040 Estate of Litton v. Mendoza & CA, 163 SCRA 246 (1988)
G.R. No. L-49120 June 30, 1988
Pledge; Ownership of Collateral
Gancayco, J
FACTS:
1. Sps. Bernal engaged in the manufacture of embroidery, garments and cotton materials.
2. September 1963 - C.B.M. Products, with Mendoza as president, offered to sell to the Bernals textile cotton materials.
For this purpose, Mendoza introduced the Bernals to Alfonso Tan.
3. The Bernals purchased on credit from Tan some cotton materials worth P 80,796.62, payment of which was
guaranteed by Mendoza.
4. Tan delivered the said cotton materials to the Bernals
5. In view of the said agreement, C.B.M. Products, through Mendoza, asked and received from the Bernals a check for P
80,796.62 with the understanding that the said check will remain in the possession of Mendoza until the cotton materials
are finally manufactured into garments after which time Mendoza will sell the finished products for the Bernals.
6. The said check matured without having been cashed and Mendoza demanded the issuance of another check in the
same amount without a date.
7. On the other hand, Mendoza issued two (2) PNB checks in favor of Tan in the total amount of P 80,796.62 and
informed the Bernals of the checks and told them that they are indebted to him (Mendoza) and asked the latter to sign
an instrument whereby Mendoza assigned the said amount to Insular Products Inc.
8. Tan had the two checks issued by Mendoza discounted in a bank. However, the said checks were later returned to Tan
with the words stamped "stop payment" which appears to have been ordered by Mendoza for failure of the Bernals to
deposit sufficient funds for the check that the Bernals issued in favor of Mendoza.
9. Tan brought an action against Mendoza docketed while the Bernals brought an action for interpleader for not knowing
whom to pay.
10. While both actions were pending resolution by the trial court, Tan assigned in favor of George Litton, Sr. his litigatious
credit against Mendoza, duly submitted to the court, with notice to the parties.
RTC: The said PNB checks were issued by Mendoza in favor of Tan for a commission in the sum of P 4,847.79. Mendoza is
liable as a drawer whose liability is primary and not merely as an endorser and thus directed Mendoza to pay Tan the
sum of P 76,000.00, the sum still due, plus damages and attorney's fees. 10
CA: Mendoza is liable as drawer. RTC affirmed in toto RTC
11. Mendoza entered into a compromise agreement with Tan wherein the latter acknowledged that all his claims against
Mendoza had been settled and that by reason of said settlement both parties mutually waive, release and quit whatever
claim, right or cause of action one may have against the other, with a provision that the said compromise agreement
shall not in any way affect the right of Tan to enforce by appropriate action his claims against the Bernal spouses.
12. Tan died pending resolution of the MR. The estate of George Litton, Sr., had personality, as represented by James
Litton, son of George Litton, Sr. and administrator of the former's estate, to appeal the said resolution to the SC.
ISSUE:
Whether or not the compromise should be set aside on the ground that previous thereto, Tan executed a deed of
assignment in favor of George Litton, Sr. involving the same litigated credit. YES
Will such previous knowledge on the part of the defendant of the assignment made by the plaintiff estop said defendant
from invoking said compromise as a ground for dismissal of the action against him? YES
HELD: The compromise agreement it should be set aside. It is null and void, and a new one is hereby rendered
RATIO:
1. The purpose of a compromise is to replace and terminate controverted claims. A compromise once approved by final
order of the court has the force of res judicata between parties and should not be disturbed except for vices of consent
77
or forgery.
2. The fact that the deed of assignment was done by way of securing or guaranteeing Tan's obligation in favor of George
Litton, Sr., as observed by the appellate court, will not in any way alter the resolution on the matter. The validity of the
guaranty or pledge in favor of Litton has not been questioned.
3. Tan may validly alienate the litigatious credit as ruled by the appellate court, citing Article 1634 of the Civil Code, but it
is not an absolute right on the part of the assignor Tan to indiscriminately dispose of the thing or the right given as
security. Art. 1634 should be read in consonance with Article 2097 of the same code.
4. Although the pledgee or the assignee, Litton, Sr. did not ipso facto become the creditor of private respondent
Mendoza, the pledge being valid, the incorporeal right assigned by Tan in favor of the former can only be alienated by
the latter with due notice to and consent of Litton, Sr. or his duly authorized representative. To allow the assignor to
dispose of or alienate the security without notice and consent of the assignee will render nugatory the very purpose of a
pledge or an assignment of credit.
5. Under Article 1634, the debtor has a corresponding obligation to reimburse the assignee, Litton, Sr. for the price he
paid or for the value given as consideration for the deed of assignment. Failing in this, the alienation of the litigated
credit made by Tan in favor of private respondent by way of a compromise agreement does not bind the assignee,
petitioner herein.
6. Mendoza is estopped from entering into a compromise agreement involving the same litigated credit without notice to
and consent of the assignee. He acted in bad faith and in connivance with assignor Tan so as to defraud the Litton in
entering into the compromise agreement.
CASE LAW/ DOCTRINE:

Article 1634 of the Civil Code should not be taken to mean as a grant of an absolute right on the part of the assignor to
indiscriminately dispose of the thing or the right given as security. The provision should be read in consonance with
Article 2097 of the same code.
KEYWORDS/NOTES:
78
041 Manila Banking Corporation v. Teodoro, Jr. and Teodoro

G.R. No. L-53955 January 13, 1989
TOPIC: Pledge; Rights to Possession; Right to Payment
PONENTE: Bidin, J.
FACTS:
1. April 25, 1966: Defendants, together with Anastacio Teodoro Sr. (ATS), jointly and severally, executed in favour of
plaintiff Manila Banking Corporation, a Promissory note for P10,420. Defendants failed to pay said amount despite
demand.
2. May 3, 1966: Defendants ATS and Anastacio Teodoro Jr. (ATJ) executed in favour of plaintiff two Promissory Notes
for P8k and P1k. They made partial payments but left an unpaid balance.
3. The three Promissory Notes stipulated that any interest due if not paid at the end of every month shall be added to
the total amount then due, the whole amount to bear interest at the rate of 12% per annum until fully paid.
4. Jan 24, 1964: ATJ executed in favour of plaintiff a Deed of Assignment of Receivables from the Emergency
Employment Administration in the sum of P44,635.
5. The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts and other
credit accommodations extended to defendants as security for the payment of said sum and the interest thereon,
and that defendants do hereby remise, release and quitclaim all its rights, title, and interest in and to the accounts
receivables. Further:
(a) The title and right of possession to said accounts receivable is to remain in the assignee, and it shall have the
right to collect the same from the debtor, and whatsoever the Assignor does in connection with the collection of
said accounts, it agrees to do as agent and representative of the Assignee and in trust for said Assignee
6. In their stipulations of Fact, it is admitted by the parties that plaintiff extended loans to defendants on the basis and
by reason of certain contracts entered into by the defunct Emergency Employment Administration (EEA) with
defendants for the fabrication of fishing boats, and that the Philippine Fisheries Commission succeeded the EEA after
its abolition; that non-payment of the notes was due to the failure of the Commission to pay defendants after the
latter had complied with their contractual obligations; and that the President of plaintiff Bank took steps to collect
from the Commission, but no collection was effected.
7. For failure of defendants to pay the sums due on the Promissory Note, this action was instituted on November 13,
1969, originally against ATS, ATJ, and the latter's wife. Because the ATS died, however, during the pendency of the
suit, the case as against him was dismissed. The action, then is against defendants ATJ and his wife.
8. TC: rendered judgment against defendants Teodoros.
ISSUE:
1. WON the assignment of receivables has the effect of payment of all the loans contracted by Teodoros from appellee
bank
2. WON appellee bank must first exhaust all legal remedies against the Philippine Fisheries Commission before it can
proceed against appellants Teodoros for collections of loan under the promissory notes which are plaintiffs bases in
the action for collection in Civil Case No. 78178.
HELD: Trial court decision is affirmed.
1. No. 2. No.
RATIO:
1. The assignment of receivables executed by appellants did not transfer the ownership of the receivables to appellee
bank and release appellants from their loans with the bank incurred. The Deed of Assignment provided:
that it was for and in consideration of certain credits, loans extended to appellants by appellee bank
as security for the payment of said sum and the interest thereon;
that appellants as assignors, remise, release, and quitclaim to assignee bank all their rights, title and interest in and
to the accounts receivable assigned (lst paragraph).
will also stand as a continuing guaranty for future loans of appellants to appellee bank
79
assignment shall also extend to all the accounts receivable; appellants shall also obtain in the future, until the
consideration on the loans secured by appellants from appellee bank shall have been fully paid by them (No. 9).
The appellants contend that the deed of assignment is a quitclaim in consideration of their indebtedness to appellee
bank, not mere guaranty, in view of the provisions of the deed of assignment.
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 American Jurisprudence said:
The characters of the transaction between the parties is to be determined by their intention, regardless of what
language was used or what the form of the transfer was. If it was intended to secure the payment of money, it
must be construed as a pledge. However, even though a transfer, if regarded by itself, appellate to have been
absolute, its object and character might still be qualified and explained by a contemporaneous writing declaring
it to have been a deposit of the property as collateral security. It has been Id that a transfer of property by the
debtor to a creditor, even if sufficient on its farm to make an absolute conveyance, should be treated as a pledge
if the debt continues in existence and is not discharged by the transfer, and that accordingly, the use of the terms
ordinarily exporting conveyance, of absolute ownership will not be given that effect in such a transaction if they
are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of
absolute ownership, in the absence of clear and ambiguous language or other circumstances excluding an intent
to pledge. (Lopez v. Court of Appeals, 114 SCRA 671 [1982]).
The deed of assignment was intended as collateral security for the bank loans of appellants, as a continuing guaranty for
whatever sums would be owing by defendants to plaintiff, as stated in stipulation No. 9 of the deed. In case of doubt as
to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the
lesser transmission of rights and interests (Lopez v. Court of Appeals, supra).
2. The obligation of appellants under the promissory notes not having been released by the assignment of receivables,
appellants remain as the principal debtors of appellee bank rather than mere guarantors. The deed of assignment
merely guarantees said obligations. That the guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor, under Article
2058 of the New Civil Code does not therefore apply to them. It is of course of the essence of a contract of pledge or
mortgage that when the principal obligation becomes due, the things in which the pledge or mortgage consists may
be alienated for the payment to the creditor (Article 2087, New Civil Code). In the instant case, appellants are both
the principal debtors and the pledgors or mortgagors. Resort to one is, therefore, resort to the other.
The receivable became virtually worthless leaving appellants' loans from appellee bank unsecured. It is but proper that
after their repeated demands, appellee bank should proceed against appellants.
CASE LAW/ DOCTRINE:

Transfer of property by the debtor to a creditor, even if sufficient on its farm to make an absolute conveyance, should be
treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly, the use
of the terms ordinarily exporting conveyance, of absolute ownership will not be given that effect in such a transaction if
they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and ambiguous language or other circumstances excluding an intent to pledge.
80
Feliciano, J., Concurring:

I would merely wish to add a few lines in respect of the point made by Bidin, J., that "the character of the
transactions between the parties is not, however, determined by the language used in the document but by their
intention.'
The point that appears to me to be worth making is that although in its form, the deed of assignment of receivables
partakes of the nature of a complete alienation of the receivables assigned, such form should be taken in conjunction
with, and indeed must be qualified and controlled by, other language showing an intent of the parties that title to
the receivables shall pass to the assignee for the limited purpose of securing another, principal; obligation owed by
the assignor to the assignee. Title moves from assignor to asignee but that title is defeasible being designed to
collateralize the principal obligation. Operationally, what this means is that the assignee is burdened with an
obligation of taking the proceeds of the receivables assigned and applying such proceeds to the satisfaction of the
principal obligation and returning any balance remaining thereafter to the assignor.
The parties gave the deed of assignment the form of an absolute conveyance of title over the receivables assigned,
essentially for the convenience of the assignee. Without such formally unlimited conveyance of title, the assignee would
have to treat the deed of assignment as no more than a deed of pledge or of chattel mortgage.
Should the assignee seek to realize upon the security given to him through the deed of assignment (which would
then have to comply with the documentation and registration requirements of a pledge or chattel mortgage), the
assignee would have to foreclose upon the securities or credits assigned and place them on public sale and there
acquire the same. It should be recalled that under the principle which forbids a pactum commisorium Article 2088,
Civil Code), a mortgagee or pledgee is prohibited from simply taking and appropriating the personal property turned
over to him as security for the payment of a principal obligation. A deed of assignment by way of security avoids the
necessity of a public sale impose by the rule on pactum commisorium, by in effect placing the sale of the collateral up
front. (Emphasis supplied)
The foregoing is applicable where, as in the present instance, the deed of assignment of receivables combines
elements of both a complete or absolute alienation of the credits being assigned and a security arrangement to
assure payment of a principal obligation. Where the second element is absent, that is, where there is nothing to
indicate that the parties intended the deed of assignment to function as a security device, it would of course
follow that the simple absolute conveyance embodied in the deed of assignment would be operative; the
assignment would constitute essentially a mode of payment or dacion en pago.
Put a little differently, in order that a deed of assignment of receivables which is in form an absolute conveyance of
title to the credits being assigned, may be qualified and treated as a security arrangement, language to such effect
must be found in the document itself and that language, precisely, is embodied in the deed of assignment in the
instant case. Finally, it might be noted that that deed simply follows a form in standard use in commercial banking.
81
042 Chu v. Court of Appeals et al.

G.R. No. L-78519, September 26, 1989
TOPIC: Right to Payment, Art. 2102, Art. 2118
PONENTE: Grino-Aquino, J.
FACTS:
1. Victoria Chu had been purchasing cement on credit from CAMS Trading Enterprises.
2. To guaranty for her cement purchase, she executed, in favor of CAMS, deeds of assignment of her time deposit of
P320,000 in the Family Savings Bank.
3. July 24, 1980 : CAMS notified the Bank that Mrs. Chu had an unpaid amount of P314,639.5. It asked that it be allowed
to encash the time deposit certificates which had been assigned to it by Mrs. Chu
4. The Bank verbally advised Mrs. Chu about the request of CAMS to encash her time deposit and in obtaining her
conformity, the Bank agreed to encash the certificates.
5. The Bank delivered to CAMS P283,737.75
6. Upon being informed of the encashment, Mrs. Chu demanded from the Bank and CAMS to return her time deposit.
Neither complied
7. Mrs. Chu filed a complaint to recover P283, 737.75 from them
8. RTC: dismissed the case for lack of merit
9. CA: affirmed RTC
ISSUE: Whether or not the CA erred in not annulling the encashment of her time deposit certificate
HELD: NO.
RATIO:
1. The Court of Appeals found that the deeds of assignment were contracts of pledge, but, as the collateral was also
money or an exchange of "peso for peso," the provision in Article 2112 of the Civil Code for the sale of the thing pledged
at public auction to convert it into money to satisfy the pledgor's obligation, did not have to be followed. All that had to
be done to convert the pledgor's time deposit certificates into cash was to present them to the bank for encashment
after due notice to the debtor.
2. the security for the debt is also money deposited in a bank, the amount of which is even less than the debt, it was not
illegal for the creditor to encash the time deposit certificates to pay the debtors' overdue obligation, with the latter's
consent.
CASE LAW/ DOCTRINE:

A pacto commissorio is a provision for the automatic appropriation of the pledged or mortgaged property by the creditor
in payment of the loan upon its maturity. The prohibition against a pacto commissorio is intended to protect the obligor,
pledgor, or mortgagor against being overreached by his creditor who holds a pledge or mortgage over property whose
value is much more than the debt.
KEYWORDS/NOTES:
Art. 2112. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to
the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the
owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first
auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is
no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance
for his entire claim.
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.
82
043 Citibank, NA and Investors Finance Corporation, doing business under the name & style of FNCB Finance vs.
Sabeniano
GR No. 156132 Date October 12, 1996
TOPIC: Right to Payment Art. 2102, Art. 2118
PONENTE: Chico-Nazario, J.
FACTS:
1. Respondent filed a Complaint against petitioners before RTC of Makati City. Respondent claimed to have
substantial deposits and money market placements with the petitioners, as well as money market placements
with the Ayala Investment and Development Corporation (AIDC), the proceeds of which were supposedly
deposited automatically and directly to respondent's accounts with petitioner Citibank.
2. Respondent alleged that petitioners refused to return her deposits and the proceeds of her money market
placements despite her repeated demands, thus, compelling respondent to file a civil case against petitioners for
"Accounting, Sum of Money and Damages."
3. In their Answer, petitioners admitted that respondent had deposits and money market placements with them,
including dollar accounts in the Citibank branch in Geneva, Switzerland (Citibank-Geneva). Petitioners further
alleged that the respondent later obtained several loans from petitioner Citibank, for which she executed
Promissory Notes (PNs), and secured by (a) a Declaration of Pledge of her dollar accounts in Citibank-Geneva,
and (b) Deeds of Assignment of her money market placements with petitioner FNCB Finance. When respondent
failed to pay her loans despite repeated demands by petitioner Citibank, the latter exercised its right to off-set or
compensate respondent's outstanding loans with her deposits and money market placements, pursuant to the
Declaration of Pledge and the Deeds of Assignment executed by respondent in its favor.
4. Petitioner Citibank supposedly informed respondent Sabeniano of the foregoing compensation through letters.
Petitioners were therefore surprised when six years later, respondent and her counsel made repeated requests
for the withdrawal of respondent's deposits and money market placements with petitioner Citibank, including
her dollar accounts with Citibank-Geneva and her money market placements with petitioner FNCB Finance. Thus,
petitioners prayed for the dismissal of the Complaint and for the award of actual, moral, and exemplary
damages, and attorney's fees.
5. TRIAL COURT: Declared that the set-off effected by the Bank is NULL AND VOID and ordered the bank to refund
the said amount to the plaintiff. It also declared that Sabeniano is indebted to the bank and dismissed all
counterclaims and other claims.
6. CA: Affirmed with modification.
ISSUE:
1. Whether or not there is an existing loan contracted by Respondent Sabeniano with Petitioner Citibank: YES
2. Whether or not Respondent Sabeniano already paid the existing loan and in effect, extinguish the said obligation
rendering the compensation made by the bank as void or ineffective: ONLY PARTIAL COMPENSATION SHOULD
BE MADE.
RATIO:
1. After going through the testimonial and documentary evidence presented by both sides to this case, it is this
Court's assessment that respondent did indeed have outstanding loans with petitioner Citibank at the time it
effected the off-set or compensation. The totality of petitioners' evidence as to the existence of the said loans
preponderates over respondent's. Preponderant evidence means that, as a whole, the evidence adduced by one
side outweighs that of the adverse party.
Respondent's outstanding obligation for P1,920,000.00 had been sufficiently documented by petitioner Citibank.
The second set of PNs is a mere renewal of the prior loans originally covered by the first set of PNs, except for PN No.
34534. The first set of PNs is supported, in turn, by the existence of the MCs that represent the proceeds thereof
received by the respondent.
The Court finds applicable herein the presumptions that private transactions have been fair and regular and that the
ordinary course of business has been followed. There is no question that the loan transaction between petitioner
Citibank and the respondent is a private transaction. The transactions revolving around the crossed MCs from their
issuance by petitioner Citibank to respondent as payment of the proceeds of her loans; to its deposit in respondent's
83
accounts with several different banks; to the clearing of the MCs by an independent clearing house; and finally, to the
payment of the MCs by petitioner Citibank as the drawee bank of the said checks are all private transactions which
shall be presumed to have been fair and regular to all the parties concerned. In addition, the banks involved in the
foregoing transactions are also presumed to have followed the ordinary course of business in the acceptance of the
crossed checks for deposit in respondent's accounts, submitting them for clearing, and their eventual payment and
cancellation.
2. Petitioner Citibank did admit that respondent was able to pay for some of these PNs, and what it identified as
the first and second sets of PNs were only those which remained unpaid. It thus became incumbent upon
respondent to prove that the checks received by Mr. Tan were actually applied to the PNs in either the first or
second set; a fact that, unfortunately, cannot be determined from the provisional receipts submitted by
respondent since they only generally stated that the checks received by Mr. Tan were payment for respondent's
loans.
Mr. Tan, in his deposition, further explained that provisional receipts were issued when payment to the bank was made
using checks, since the checks would still be subject to clearing. The purpose for the provisional receipts was merely to
acknowledge the delivery of the checks to the possession of the bank, but not yet of payment. This bank practice finds
legitimacy in the pronouncement of this Court that a check, whether an MC or an ordinary check, is not legal tender and,
therefore, cannot constitute valid tender of payment.
In the case at bar, the issuance of an official receipt by petitioner Citibank would have been dependent on whether the
checks delivered by respondent were actually cleared and paid for by the drawee banks.
3. Only Partial Compensation should be made.
The liquidation of respondent's outstanding loans were valid in so far as petitioner Citibank used respondent's savings
account with the bank and her money market placements with petitioner FNCB Finance; but illegal and void in so far
as petitioner Citibank used respondent's dollar accounts with Citibank-Geneva.
Compensation is a recognized mode of extinguishing obligations. Relevant provisions of the Civil Code provides
Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each
other.
Art. 1279. In order that compensation may be proper, it is necessary;
(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
There is little controversy when it comes to the right of petitioner Citibank to compensate respondent's outstanding
loans with her deposit account. As already found by this Court, petitioner Citibank was the creditor of respondent for her
outstanding loans. At the same time, respondent was the creditor of petitioner Citibank, as far as her deposit account
was concerned, since bank deposits, whether fixed, savings, or current, should be considered as simple loan
or mutuum by the depositor to the banking institution. Both debts consist in sums of money.
***WHY IS IT VALID INSOFAR AS MONEY MARKET PLACEMENTS WITH FNCB FINANCE? (very important!!!)
- Petitioner Citibank actually did was to exercise its rights to the proceeds of respondent's money market placements
with petitioner FNCB Finance by virtue of the Deeds of Assignment executed by respondent (Sabeniano) in its favor (for
FNCB Finance).
-It is invalid insofar as to Citibank-Geneva because Petitioner Citibank had no authority to demand the remittance of
respondent's dollar accounts with Citibank-Geneva and to apply them to her outstanding loans. It cannot effect legal
compensation under Article 1278 of the Civil Code since, petitioner Citibank itself admitted that Citibank-Geneva is a
distinct and separate entity. As for the dollar accounts, respondent was the creditor and Citibank-Geneva is the debtor;
and as for the outstanding loans, petitioner Citibank was the creditor and respondent was the debtor. The parties in
these transactions were evidently not the principal creditor of each other.
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044 CASE TITLE Paray v. Rodriguez, et al.

G.R. No. 132287 January 24, 2006
TOPIC: Effect of Notarial Sale: Right of Redemption
PONENTE: TINGA, J.:
FACTS:
1. Respondents were the owners of shares of stock in Quirino-Leonor-Rodriguez Realty Inc. In 1979 to 1980,respondents
secured by way of pledge of some of their shares of stock to petitioners Bonifacio and Faustina Paray (Parays) the
payment of certain loan obligations.
2. When the Parays attempted to foreclose the pledges on account of respondents failure to pay their loans,
respondents filed complaints with RTC of Cebu City. The actions sought the declaration of nullity of the pledge
agreements, among others. However the RTC dismissed the complaint and gave due course to the foreclosure and sale at
public auction of the various pledges. This decision attained finality after it was affirmed by the Court of Appeals and the
Supreme Court.
3. Respondents then received Notices of Sale which indicated that the pledged shares were to be sold at public auction.
However, before the scheduled date of auction, the respondents caused the consignation with the RTC Clerk of Court
of various amounts. They claimed that they had attempted to tender payments to the Parays, but had been rejected.
4. Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal Espeleta
successfully bidding for all of the pledged shares. None of respondents participated or appeared at the auction.
Respondents instead filed a complaint with the RTC seeking the declaration of nullity of the concluded public auction.
Respondents argument:
Respondents argued that their tender of payment and subsequent consignations served to extinguish their loan
obligations and discharged the pledge contracts.
Petitioners argument:
Petitioners countered that the auction sale was conducted pursuant to a final and executory judgment and that
the tender of payment and consignations were made long after their obligations had fallen due. They pointed out that
the amounts consigned could not extinguish the principal loan obligations of respondents since they were not sufficient
to cover the interests due on the debt. They likewise argued that the essential procedural requisites for the auction sale
had been satisfied.
Ruling of RTC:
The RTC dismissed the complaint, expressing agreement with the position of the Parays. It held that respondents
had failed to tender or consign payments within a reasonable period after default and that the proper remedy of
respondents was to have participated in the auction sale.
Ruling of CA:
The Court of Appeals however reversed the RTC on appeal, ruling that the consignations extinguished the loan
obligations and the subject pledge contracts; and the auction sale as null and void. It (CA) chose to uphold the sufficiency
of the consignations owing to an imputed policy of the law that favored redemption and mandated a liberal construction
to redemption laws. The attempts at payment by respondents were characterized as made in the exercise of the right
of redemption.CA likewise found fault with the auction sale, holding that there was a need to individually sell the various
shares of stock as they had belonged to different pledgors. Hence the case.
ISSUE: WON right of redemption exists over personal properties

HELD: No law or jurisprudence establishes or affirms such right. Indeed, no such right exists.
RATIO:
1. The right of redemption over mortgaged real property sold extrajudicially is established by Act No. 3135, as amended.
The said law does not extend the same benefit to personal property. In fact, there is no law in our statute books which
vests the right of redemption over personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have
served as the vehicle for any legislative intent to bestow a right of redemption over personal property, since that law
governs the extrajudicial sale of mortgaged personal property, but the statute is definitely silent on the point.
85
2. The right of redemption as affirmed under Rule 39 of the Rules of Court applies only to execution sales, more precisely
execution sales of real property.
3. It must be clarified that the subject sale of pledged shares was an extrajudicial sale, specifically a notarial sale, as
distinguished from a judicial sale as typified by an execution sale. Under the Civil Code, the foreclosure of a pledge occurs
extrajudicially, without intervention by the courts. All the creditor needs to do, if the credit has not been satisfied in due
time, is to proceed before a Notary Public to the sale of the thing pledged.
4. In this case, petitioners attempted to proceed extrajudicially with the sale of the pledged shares by public auction.
However, extrajudicial sale was stayed with the filing of Civil Cases which sought to annul the pledge contracts. The final
and executory judgment in those cases affirmed the pledge contracts and disposed them. Said judgment did not direct
the sale by public auction of the pledged shares, but instead upheld the right of the Parays to conduct such sale at their
own volition.
CASE LAW/ DOCTRINE:
KEYWORDS/NOTES:
86
045 PCI LEASING & FINANCE, INC. v. TROJAN METAL INDUSTRIES INC., et al.
G.R. No. 176381 Date December 15, 2010
TOPIC: CHATTEL MORTGAGE General Concepts
PONENTE: Carpio, J.
FACTS:
1. Respondent Trojan Metal Industries, Inc. (TMI) seeks to obtain a loan from petitioner PCI Leasing and Finance,
Inc. (PCILF). Instead of extending a loan, PCILF offered to buy some equipments (such as a Verson double
action hydraulic press with cushion, a Hinohara powerpress 75-tons capacity, a USI-clearing powerpress 60-
tons capacity, a Watanabe powerpress 60-tons capacity, a YMGP powerpress 30-tons capacity, a YMGP
powerpress 15-tons capacity, a lathe machine, a vertical milling machine, and a radial drill) of TMI and the
latter agreed. Deeds of sale were executed confirming the sale of the equipments for P 2,865,070.00.
2. PCILF and TMI then entered into a lease agreement where TMI leased from the former the equipments it
previously owned. TMI issued postdated checks representing 24 monthly installments.
Monthly rental for double action hydraulic press: P62,328
Monthly rental for 5 powerpresses: P49,259
Monthly rental for the lathe machine, milling machine, and redial drill: P22,205
3. Pursuant to the lease agreement, TMI gave PCILF a guaranty deposit of P1,030,350. Such would serve as
security for the timely performance of TMIs obligations under the lease agreement and would be
automatically forfeited should TMI return the leased equipment before the expiration of the lease. Spouses
Dizon, TMIs President and Vice-President, executed a Continuing Guaranty of Lease Obligations in favour of
PCILF where they agreed to immediately pay whatever obligations would be due PCILF in case TMI failed to
meet its obligations under the lease agreement.
4. TMI used the leased equipment as temporary collateral to obtain additional loan from another financing
company. PCILF considered this a violation of the lease agreement. (By this time, TMIs partial payment
reached P1,717,091.) So PCI sent a demand letter for the payment of the outstanding obligation. This demand
remained unheard.
5. PCILF filed a complaint against TMI for recovery of sum of money and personal property with prayer for
issuance of a writ of replevin. The RTC issued the replevin and ordered the sheriff to take custody of the
leased equipments. PCILF then sold the leased equipment to a third party and collected the proceeds.
*TMIs answer: The sale with lease agreement was a mere scheme to facilitate the financial lease between PCILF
and TMI. It explained that in a simulated financial lease, property of the debtor would be sold to the creditor to be
repaid through rentals; at the end of the lease period, the property sold would revert back to the debtor. TMI also
prayed that they be allowed to reform the lease agreement to show the true agreement between the parties,
which was a loan secured by a chattel mortgage.
RTC Ruling: the lease agreement must be presumed valid as the law between the parties even if some of its
provisions constituted unjust enrichment on the part of PCILF.
CA Ruling: the sale with lease agreement was in fact a loan secured by chattel mortgage
ISSUE:
1. Whether the sale with lease agreement the parties entered into was a financial lease or a loan secured by chattel
mortgage? A loan secured by a chattel mortgage
2. Whether PCILF should pay TMI, by way of refund, the amount of P1,166,826.52? YES.
PCILFs contention: the transaction between the parties was a sale and leaseback financing arrangement where the client
sells movable property to a financing company, which then leases the same back to the client. (NOT A FINANCIAL
LEASING because it does not contemplate an extension of credit to assist a buyer in acquiring movable property which
the buyer can use and eventually own.) It also stresses that the guaranty deposit should be forfeited in its favour
because this case does not involve mere failure to pay rentals, it deals with a flagrant violation of the lease agreement.
87
TMIs contention: transfer to PCILF of ownership over the subject equipments was never the intention of the parties.
Under the lease agreement, the guaranty deposit would be forfeited if TMI returned the leased equipment to PCILF
before the expiration of the lease agreement; thus, since TMI never returned the leased equipment voluntarily, but
through a writ of replevin ordered by the RTC, the guaranty deposit should not be forfeited.
RATIO:
ISSUE No. 1
1. In a true financial leasing, a finance company purchases on behalf of a cash-strapped lessee the equipment the
latter wants to buy, but, due to financial limitations, is incapable of doing so. The finance company then leases
the equipment to the lessee in exchange for the latter's periodic payment of a fixed amount of rental. In the case
at bar, TMI already owned the subject equipment before it transacted with PCI. Therefore the transaction
between the parties cannot be deemed to be in the nature of a financial leasing as defined in law.
2. The facts of this case are analogous to those in Cebu Contractors v. CA:
Cebu Contractors wanted a loan from Makati. Makati Leasing agreed to extend financial assistance but
instead of a loan with collateral, Makati Leasing induced Cebu Contractors to adopt a sale and leaseback
scheme: several of Cebus equipment were made to appear as sold to Makati and then leased back to
Cebu, which in turn paid lease rentals. The rentals were treated as installment payments to repurchase
the equipment.
SC held that the transaction between Cebu and Makati was NOT a financial leasing, but simply a loan
secured by a chattel mortgage. Where the client already owned the equipment but needed additional
working capital and the finance company purchased such equipment with the intention of leasing it back
to him, the lease agreement was simulated to disguise the true transaction that was a loan with security.
The intention of the parties was NOT to enable the client to ACQUIRE and use the equipment, BUT to
extend to him a LOAN
3. In Investors Finance Corp v Ca, the SC differentiated between a true financial leasing and a loan with mortgage in
the guise of a lease: A financial leasing contemplates the extension of credit to assist a buyer in acquiring
movable property which he can use and eventually own. If the movable property already belonged to the
borrower-lessee, the transaction between the parties was a loan with mortgage in the guise of a lease.
Thus upon TMI's default, PCILF was entitled to seize the mortgaged equipment, not as owner but as creditor-
mortgagee for the purpose of foreclosing the chattel mortgage. PCI's sale to a third party of the mortgaged
equipment and collection of the proceeds of the sale can be deemed in the exercise of its right to foreclose the
chattel mortgage as creditor-mortagee.
ISSUE No. 2
4. From the computed total amount should be deducted P1,025,000.00 representing the proceeds of the sale already in
PCILFs hands. The difference represents overpayment by TMI, which the law requires PCILF to refund to TMI.
Sec 14 of the Chattel Mortgage Law:
Section 14. Sale of property at public auction; officers return; fees; disposition of proceeds. x x x The proceeds
of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then
to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to
persons holding subsequent mortgages in their order, and the balance, after paying the mortgages, shall
be paid to the mortgagor or person holding under him on demand.
5. Section 14 of the Chattel Mortgage Law expressly entitles the debtor-mortgagor to the balance of the proceeds, upon
satisfaction of the principal loan and costs. TMIs right to the refund accrued from the time PCILF received the proceeds
of the sale of the mortgaged equipment. However, since TMI never made a counterclaim or demand for refund due on
the resulting overpayment after offsetting the proceeds of the sale against the remaining balance on the principal loan
plus applicable interest, no interest applies on the amount of refund due. Nonetheless, in accord with prevailing
jurisprudence, the excess amount PCILF must refund to TMI is subject to interest at 12% per annum from finality of this
Decision until fully paid.
88
046 ACME Shoe, Rubber & Plastic Corporation v. CA,

260 SCRA 714 (1996)
TOPIC: Chattle Mortgage - Obligations Secured
PONENTE: Vitug, J;
FACTS:
1. Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic Corporation,"
executed a chattel mortgage in favor of private respondent Producers Bank of the Philippines.
2. With this stipulation:
a. In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former note, as
an extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts, letters of
credit, acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall
also stand as security for the payment of the said promissory note or notes and/or accommodations without the
necessity of executing a new contract and this mortgage shall have the same force and effect as if the said
promissory note or notes and/or accommodations were existing on the date thereof. This mortgage shall also stand
as security for said obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of
whatever kind and nature, whether such obligations have been contracted before, during or after the constitution
of this mortgage."
3. The mortgage stood by way of security for petitioner's corporate loan P3,000,000.00. In due time, the loan of
P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained from respondent bank additional
financial accommodations totalling P2,700,000.00. These borrowings were on due date also fully paid.
4. The bank yet again extended to petitioner corporation a loan of P1,000,000.00 covered by four promissory notes for
P250,000.00 each. Due to financial constraints, the loan was not settled at maturity. Respondent bank thereupon
applied for an extrajudicial foreclosure of the chattel mortgage, with the Sheriff of Caloocan City.
5. Petitioner corporation to forthwith file an action for injunction, with damages and a prayer for a writ of preliminary
injunction.
6. Ultimately, the court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held petitioner
corporation bound by the stipulations, of the chattel mortgage.
7. Court of Appeals affirmed.
ISSUE: Whether or not Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise
extend its coverage to obligations yet to be contracted or incurred? (meaning if the 1st Chattle Mortgage can be applied
with the subsequent Mortgages?)
HELD: No. a chattel mortgage can only cover obligations existing at the time the mortgage is constituted.
RATIO:
1. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding
commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after
a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel
mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law.
2. Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can
constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written
but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life
of the chattel mortgage sought to be foreclosed.
3. A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the Chattel
Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not
doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid between
the parties (not against third persons acting in good faith), the fact, however, that the statute has provided that the
parties to the contract must execute an oath that - "x x x (the) mortgage is made for the purpose of securing the
obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid
89
obligation, and one not entered into for the purpose of fraud."
4. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the
P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law,
the payment of the obligation automatically rendered the chattel mortgage void or terminated.
5. The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased to exist
coincidentally with the full payment of the P3,000,000.00 loan,[16] there no longer was any chattel mortgage that
could cover the new loans that were concluded thereafter.
CASE LAW/ DOCTRINE: A mortgage that contains a stipulation in regard to future advances in the credit will take effect
only from the date the same are made and not from the date of the mortgage.
KEYWORDS/NOTES:
90
047 Makati Leasing and Finance Corporation v. Wearever Textile Mills, Inc. and CA
G.R. No. L-58469 May 16, 1983
TOPIC: Object of Chattel Mortgage
PONENTE: De Castro, J.
FACTS:
1. Wearever Textile Mills, Inc., discounted and assigned several receivables with Makati Leasing and Finance Corp. in
order to obtain financial accomodation, under a Receivable Purchase Agreement. To secure the collection of the
receivables assigned, Wearever executed a Chattel Mortgage over certain raw materials inventory as well as a machinery
described as an Artos Aero Dryer Stentering Range.
2. Upon Wearever's default, Makati Leasing filed a petition for extrajudicial foreclosure of the properties mortgage to it.
However, the Deputy Sheriff assigned to implement the foreclosure failed to gain entry into private respondent's
premises and was not able to effect the seizure.
3. Makati Leasing thereafter filed a complaint for judicial foreclosure with the CFI of Rizal wherein a writ of seizure was
issued. However, the enforcement was subsequently restrained upon private respondent's filing of MR.
4. After several incidents, the lower court finally issued an order lifting the restraining order for the enforcement of the
writ of seizure.
5. The sheriff enforcing the seizure order, repaired to the premises of private respondent and removed the main drive
motor of the subject machinery.
6. Wearever filed certiorari and prohibition with the CA.
7. CA: Set aside the Orders of the CFI and ordered the return of the drive motor seized by the sheriff, after ruling that the
machinery in suit cannot be the subject of replevin, much less of a chattel mortgage, because it is a real property
pursuant to Art. 415 of the new CC, the same being attached to the ground by means of bolts and the only way to
remove it from respondent's plant would be to drill out or destroy the concrete floor.
6. MR of Makati Leasing denied. Thus, the petition.
ISSUE: Whether or not the disputed machinery is a real property.

HELD: No, the characterization of the subject machinery as chattel by the private respondent is indicative of intention
and impresses upon the property the character determined by the parties.
RATIO:
1. In Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by
agreement treat as personal property that which by nature would be real property, as long as no interest of third parties
would be prejudiced thereby.
2. As aptly pointed out by petitioner and not denied by the respondent, the status of the subject machinery as movable
or immovable was never placed in issue before the lower court and the Court of Appeals except in a supplemental
memorandum in support of the petition filed in the appellate court. Moreover, even granting that the charge is true,
such fact alone does not render a contract void ab initio, but can only be a ground for rendering said contract voidable,
or annullable pursuant to Article 1390 of the new Civil Code, by a proper action in court.
3. There is nothing on record to show that the mortgage has been annulled. Neither is it disclosed that steps were taken
to nullify the same. On the other hand, as pointed out by petitioner and again not refuted by respondent, the latter has
indubitably benefited from said contract. Equity dictates that one should not benefit at the expense of another. Private
respondent could not therefore be allowed to impugn the efficacy of the chattel mortgage after it has benefited.
CASE LAW/ DOCTRINE:

The parties to a contract may by agreement treat as personal property that which by nature would be real property, as
long as no interest of third parties would be prejudiced.
91
048 PERFECTO DY vs. COURT OF APPEALS

G.R. No. 92989 Date JULY 8 1991
TOPIC: OWNERSHIP OF COLLATERAL
PONENTE: GUTTIEREZ,JR., J.
FACTS:
1. Wilfredo Dy, Perfectos brother purchased a truck and a farm tractor through financing extended by Libra Finance and
Investment Corporation (Libra). Both truck and tractor were mortgaged to Libra as security for the loan.
2. Perfecto bought the tractor upon approval of LIBRA. Perfecto also assumed the mortgage debt of Wilfredo.
3. Despite the offer of full payment by the petitioner to Libra for the tractor, LIBRA insisted also for the payment of the
farm truck. Perfecto convinced his sister Carol to purchase the truck. She paid it in check (P22,000).
4. Libra insisted that it be cleared first before Libra could release the truck and tractor.
5. Meanwhile, "Gelac Trading, Inc. v. Wilfredo Dy", a collection case to recover the sum of P12,269.80 was pending in
another court in Cebu. With an alias writ of execution the provincial sheriff seized and levied on the tractor which was in
the premises of Libra and sold it at a public auction where Gelac Trading was the alone bidder. Then Gelac sold the
tractor to one of its stockholders, Antonio Gonzales.
6. When the check was cleared in January, Perfecto then learned that GELAC already took the tractor. Wilfredo filed an
action to recover the tractor. RTC ruled in favour of Perfecto. CA reversed. Hence this appeal.
ISSUE: WON ownership of the farm tractor had already passed to Perfecto when it was seized by the sheriff?
HELD: YES. Where a third person purchases the mortgaged property, he automatically steps into the shoes of the
original mortgagor.
SC: reversed CA decision. Reinstated RTC decision.
RATIO:
1. "The rule is settled that the chattel mortgagor continues to be the owner of the property, and therefore, has the
power to alienate the same; however, he is obliged under pain of penal liability, to secure the written consent of the
mortgagee. (Francisco, Vicente, Jr., Revised Rules of Court in the Philippines, (1972), Volume IV-s Part I, p. 5251 Thus, the
instruments of mortgage are binding, while they subsist, not only upon the parties executing them but also upon those
who later, by purchase or otherwise, acquire the properties referred to therein.
The mortgagor who gave the property as security under a chattel mortgage did not part with the ownership over the
same. He had the right to sell it although he was under the obligation to secure the written consent of the mortgagee
or he lays himself open to criminal prosecution under the provision of Article 319 par. 2 of the Revised Penal Code. And
even if no consent was obtained from the mortgagee, the validity of the sale would still not be affected.
Where a third person purchases the mortgaged property, he automatically steps into the shoes of the original
mortgagor. (See Industrial Finance Corp. v. Apostol, 177 SCRA 521[1989]). His right of ownership shall be subject to the
mortgage of the thing sold to him. In the case at bar, the petitioner was fully aware of the existing mortgage of the
subject tractor to Libra. In fact, when he was obtaining Libra's consent to the sale, he volunteered to assume the
remaining balance of the mortgage debt of Wilfredo Dy which Libra undeniably agreed to.
Article 1496 of the Civil Code states that the ownership of the thing sold is acquired by the vendee from the moment it is
delivered to him in any of the ways specified in Articles 1497 to 1501 or in any other manner signing an agreement that
the possession is transferred from the vendor to the vendee. We agree with the petitioner that Articles 1498 and 1499
are applicable in the case at bar.
Article 1498 states: "Art. 1498. When the sale is made through a public instrument, the execution thereof shall be
equivalent to the delivery of the thing which is the object of the contract, if from the deed the contrary does not appear
or cannot clearly be inferred."
92
Article 1499 provides: "Article 1499. The delivery of movable property may likewise be made by the mere consent or
agreement of the contracting parties, if the thing sold cannot be transferred to the possession of the vendee at the time
of the sale, or if the latter already had it in his possession for any other reason. (1463a)"
In the instant case, actual delivery of the subject tractor could not be made. However, there was constructive delivery
already upon the execution of the public instrument pursuant to Article 1498 and upon the consent or agreement of the
parties when the thing sold cannot be immediately transferred to the possession of the vendee. (Art. 1499)
While it is true that Wilfredo Dy was not in actual possession and control of the subject tractor, his right of ownership
was not divested from him upon his default. Neither could it be said that Libra was the owner of the subject tractor
because the mortgagee cannot become the owner of or convert and appropriate to himself the property mortgaged.
(Article 2088, Civil Code) Said property continues to belong to the mortgagor.
ON GELACs allegation that there was fraud:

Moreover, fraud cannot be presumed; it must be established by clear convincing evidence. Just because Perfecto and
Wilfredo are brothers, doesnt mean there was already fraud. We agree with the trial court's findings that the actuations
of GELAC Trading were indeed violative of the provisions on human relations. As found by the trial court, GELAC knew
very well of the transfer of the property to the petitioners on July 14, 1980 when it received summons based on the
complaint for replevin filed with the RTC by the petitioner. Notwithstanding said summons, it continued to sell the
subject tractor to one of its stockholders on August 2, 1980
CASE LAW/ DOCTRINE: The rule is settled that the chattel mortgagor continues to be the owner of the property, and
therefore, has the power to alienate the same; however, he is obliged under pain of penal liability, to secure the written
consent of the mortgagee
Where a third person purchases the mortgaged property, he automatically steps into the shoes of the
original mortgagor
KEYWORDS/NOTES:
Twinkle :D
93
049 RCBC v. ROYAL CARGO CORPORATION

G.R. No. 179756 October 2, 2009
TOPIC: F. Foreclosure of Chattel Mortgage 3. Right of Redemption
PONENTE: CARPIO MORALES, J.
FACTS:
1. Terrymanila Inc. (TMI) filed for voluntary insolvency with RTC of Bataan on Feb. 13, 1991.
2. RCBC is one of its creditors. TMIs obligation to RCBC is P3M, secured by chattel mortgage dated 2/16/89, duly
recorded by notary public Castano in Bataan.
3. Royal Cargo Corp (ROYAL) is another creditor of TMI. ROYAL filed with RTC of Manila for collection of money and
preliminarily attached some of TMIs personal properties on 3/5/91 to satisfy its judgment award of P296,772.16,
exclusive of interests and attorneys fees.
4. Terry Manila was declared insolvent by RTC Bataan on 4/12/91. Manila RTC rendered judgment in collection case
favour of Royal on 6/11/91. RCBC sought to extrajudicially foreclose the chattel mortgage in the insolvency
proceedings at RTC Bataan, which was granted on 2/3/92. ROYAL filed for reconsideration, but was denied.
5. RCBC was the sole and winning bidder of the Bataan properties for 1.5M at the public auction sale scheduled by the
provincial sheriff on 6/16/92. Properties were sold eventually by RCBC to Domingo Bondoc and Victoriano See.
6. ROYAL filed on 7/30/92 at RTC of Manila against provincial sheriff of RTC Bataan for annulment of auction sale.
7. ROYAL questioned: (1) the inclusion in the auction of some properties it had attached; and (2) the failure to notify it
of the sale at least 10 days before the sale, citing Section 14 of Act No. 1508 or the Chattel Mortgage Law. ROYAL
claims that its counsel received a notice only on the day of the sale.
8. RCBC filed motion to dismiss, alleging no cause of action, but was denied by RTC Manila. On CA, appeal was denied.
9. Trial on merits of annulment of sale case, rendered judgment in favour of ROYAL, ordering RCBC to pay P296,662.16
to royal, plus 8k attorneys fees, and dismissed petition against the sheriff.
10. Appeal at CA denied RCBCs appeal, and increased ROYALs grant of attorneys fees to 50k. RCBC was also ordered to
pay 100k in exemplary damages, and 12% interest on the principal 296k until paid.
ISSUE: Whether ROYAL CARGO had a right to be timely informed (10-day prior notice) of the foreclosure sale.
HELD: NO; WHEREFORE, the petition for review is GRANTED. CA decision REVERSED and SET ASIDE; RTC Case dismissed
for lack of merit; ROYAL ordered TO PAY RCBC 250k and as for Attorneys fees.
RATIO:
1. Terrymanila had been judicially declared insolvent. ROYALs recourse was thus to demand the satisfaction of its
judgment award before the insolvency court as its judgment award is a preferred credit under Article 224444 of the Civil
Code. To now allow respondent have its way in annulling the auction sale and at the same time let it proceed with its
claims before the insolvency court would neither rhyme with reason nor with justice.
2. Prior to receiving, through counsel, a mailed notice of the auction sale on the date of the auction sale itself on June 16,
1992, respondent was already put on notice of the impending foreclosure sale of the mortgaged chattels. It could thus
have expediently exercised its equity of redemption, at the earliest when it received the insolvency courts Order of
March 20, 1992 denying its Motion for Reconsideration of the February 3, 1992 Order
3. Despite its window of opportunity to exercise its equity of redemption, however, respondent chose to be technically
shrewd about its chances, preferring instead to seek annulment of the auction sale, which was the result of the
foreclosure of the mortgage, permission to conduct which it had early on opposed before the insolvency court.
4. Its negligence or omission to exercise its equity of redemption within a reasonable time, or even on the day of the
auction sale, warrants a presumption that it had either abandoned it or opted not to assert it.43 Equitable
considerations thus sway against it.
5. Section 13 of the Chattel Mortgage Law allows the would-be redemptioner thereunder to redeem the mortgaged
property only before its sale. The redemption cited in Section 13 partakes of an equity of redemption, which is the right
of the mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the
mortgage but before the sale of the property37 to clear it from the encumbrance of the mortgage. It is not the same as
94
right of redemption which is the right of the mortgagor to redeem the mortgaged property after registration of the
foreclosure sale, and even after confirmation of the sale.
6. While respondent had attached some of Terrymanilas assets to secure the satisfaction of a P296,662.16 judgment
rendered in another case, what it effectively attached was Terrymanilas equity of redemption. That respondents claim
is much lower than the P1.5 million actual bid of petitioner at the auction sale does not defeat respondents equity of
redemption. Having thus attached Terrymanilas equity of redemption, respondent had to be informed of the date of
sale of the mortgaged assets for it to exercise such equity of redemption over some of those foreclosed properties, as
provided for in Section 13.
7. It has long been settled by this Court that "the right of those who acquire said properties should not and can not be
superior to that of the creditor who has in his favor an instrument of mortgage executed with the formalities of the
law, in good faith, and without the least indication of fraud.
8. It bears noting that the chattel mortgage in favor of RCBC was registered more than two years before the issuance of a
writ of attachment over some of Terrymanilas chattels in favor of ROYAL. This is significant in determining who
between petitioner and respondent should be given preference over the subject properties. Since the registration of a
chattel mortgage is an effective and binding notice to other creditors of its existence and creates a real right or lien that
follows the property wherever it may be, the right of respondent, as an attaching creditor or as purchaser, had it
purchased the mortgaged chattel at the auction sale, is subordinate to the lien of the mortgagee who has in his favor a
valid chattel mortgage.
CASE LAW/ DOCTRINE:

1. Redemption under Sec. 13 of Chattel Mortgage law partakes of an equity of redemption, which is the right of the
mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage
but before the sale of the property, to clear it from the encumbrance of the mortgage. It is not the same as right of
redemption which is the right of the mortgagor to redeem the mortgaged property after registration of the
foreclosure sale, and even after confirmation of the sale.
2. Negligence or omission to exercise equity of redemption within a reasonable time, or even on the day of the
auction sale, warrants a presumption that it had either abandoned it or opted not to assert it.
3. The registration of a chattel mortgage is an effective and binding notice to other creditors of its existence and creates
a real right or lien that follows the property wherever it may be. Right an attaching creditor or purchaser who
acquired the mortgaged chattel at an auction sale, is subordinate to the lien of the mortgagee who has in his favor a
valid chattel mortgage.
KEYWORDS/NOTES: Chattel Mortgage Law, Sec. 14. The mortgagee, his executor, administrator or assign, may, after
thirty days, from the time of condition broken, cause the mortgaged property, or any part thereof, to be sold at public
auction by a public officer at a public place in the municipality where the mortgagor resides, or where the property is
situated, provided at least ten days notice of the time, place, and purpose of such sale has been posted at two or more
public places in such municipality, and the mortgagee, his executor, administrator or assignee shall notify the mortgagor
or person holding under him and the persons holding subsequent mortgages of the time and place of sale, either by
notice in writing directed to him or left at his abode, if within the municipality, or sent by mail if he does not reside in
such municipality, at least ten days previous to the date.
95
050 Servicewide Specialists, Inc. v. CA, Hilda Tee and Alberto Villafranca, 318 SCRA 493 (1999).
G.R. No. 110048. November 19, 1999
Foreclosure of Chattel Mortgage; Right to Possession
Purisima, J
FACTS:
1. May 14, 1976 - Leticia L. Laus of QC purchased on credit a Colt Galant xxx from Fortune Motors (Phils.) Corporation
and executed a promissory note for the amount of P56,028.00, inclusive of interest at 12% per annum, payable within a
period of 48 months starting August, 1976 at a monthly instalment of P1,167.25 due and demandable on the 17th day of
each month.
2. It was agreed that in case of default in the payment of any instalment the total principal sum, together with the
interest, shall become immediately due and payable. As a security for the promissory note, a chattel mortgage was
constituted over the said motor vehicle with a deed of assignment incorporated therein such that the credit and
mortgage rights were assigned by Fortune Motors Corp. in favor of Filinvest Credit Corporation with the consent of the
mortgagor-debtor Leticia Laus.
3. The vehicle was registered in the name of Laus with the chattel mortgage annotated on said certificate.
4. September 25, 1978 - Filinvest Credit Corporation in turn assigned the credit in favor of Servicewide Specialists, Inc.
transferring unto the latter all its rights under the promissory note and the chattel mortgage with the corresponding
notice of assignment sent to the registered car owner.
5. April 18, 1977 - Leticia Laus failed to pay the monthly instalment for that month, and succeeding 17 months were not
likewise fully paid.
5. September 25, 1978 - Servicewide demanded payment of the entire outstanding balance of P46,775.24 inclusive of
interests
6. Servicewide sent a statement of account to Leticia Laus and demanded payment of the amount of P86,613.32
representing the outstanding balance plus interests up to July 25, 1985, attorneys fees, liquidated damages, estimated
repossession expense, and bonding fee.
7. Laus vehicle was foreclosed for failure to settle her obligation or at least to surrender possession of the motor vehicle.
8. Servicewide instituted a complaint for replevin, impleading Hilda Tee and John Dee in whose custody the vehicle was
believed to be at the time of the filing of the suit. Tee possessed the motor vehicle for the purpose of defeating its
mortgage lien; and that a sufficient bond had been filed in court.
9. RTC Makati: approved the replevin bond but Alberto Villafranca filed a third party claim contending that he is the
absolute owner of the subject motor vehicle duly evidenced by the Bureau of Land Transportations Certificate of
Registration issued in his name on June 22, 1984. The said automobile was taken from his residence by Deputy Sheriff
Bernardo Bernabe pursuant to the seizure order issued by the court a quo.
10. Upon motion of the plaintiff below, Alberto Villafranca was substituted as defendant. Summons was served upon
him.
11. RTC granted Villafrancas move for the dismissal of the complaint on the ground that there is another action pending
between the same parties before RTC Makati involving the seizure of subject motor vehicle and the indemnity bond
posted by Servicewide. The complaint was dismissed for insufficiency of evidence.
12. CA affirmed RTC, no reversible error when it dismissed the case for insufficiency of evidence against Hilda Tee and
Alberto Villafranca since the evidence adduced pointed to Leticia Laus as the party liable for the obligation sued upon
ISSUE: Whether or not a case for replevin may be pursued against the defendant, Alberto Villafranca, without impleading
the absconding debtor-mortgagor?
HELD: NO. Rule 60 of the Revised Rules of Court requires that an applicant for replevin must show that he is the owner
of the property claimed, particularly describing it, or is entitled to the possession thereof. Where the right of the
plaintiff to the possession of the specified property is so conceded or evident, the action need only be maintained
against him who so possesses the property. In rem action est per quam rem nostram quae ab alio possidetur petimus, et
semper adversus eum est qui rem possidet.
96
RATIO:
1. Northern Motors, Inc. vs. Herrera,[7] the Court said in the case of BA Finance: When in default of the mortgagor, the
mortgagee is thereby constituted as attorney-in-fact of the mortgagor, enabling such mortgagee to act for and in behalf
of the owner.
2. In a suit for replevin, a clear right of possession must be established. A foreclosure under a chattel mortgage may
properly be commenced only once there is default on the part of the mortgagor of his obligation secured by the
mortgage.
The replevin in this case has been resorted to in order to pave the way for the foreclosure of what is covered by
the chattel mortgage.
3. The debtor or the mortgagor himself must be included when the mortgagees right of possession is conditioned upon
the actual fact of default which itself may be controverted in order to allow a full and conclusive determination of the
case.
When the mortgagee seeks a replevin in order to effect the eventual foreclosure of the mortgage, it is not only
the existence of, but also the mortgagors default on, the chattel mortgage that, among other things, can properly
uphold the right to replevy the property. The burden to establish a valid justification for such action lies with the
plaintiff.
4. Laus, being an indispensable party, should have been impleaded in the complaint for replevin and damages, being one
whose interest will be affected by the courts action in the litigation, and without whom no final determination of the
case can be had.
The partys interest in the subject matter of the suit and in the relief sought are so inextricably intertwined with
the other parties that his legal presence as a party to the proceeding is an absolute necessity. In his absence, there
cannot be a resolution of the dispute of the parties before the Court which is effective, complete, or equitable.
5. Servicewide cannot use failure to locate the mortgagor, Leticia Laus, as an excuse for resorting to a procedural short-
cut. It could have properly impleaded the mortgagor.
CASE LAW/ DOCTRINE:

An indispensable party is a party who has such an interest in the controversy or subject matter that a final adjudication
cannot be made, in his absence, without injuring or affecting that interest[;] a party who has not only an interest in the
subject matter of the controversy, but also has an interest of such nature that a final decree cannot be made without
affecting his interest or leaving the controversy in such a condition that its final determination may be wholly
inconsistent with equity and good conscience. It has also been considered that an indispensable party is a person in
whose absence there cannot be a determination between the parties already before the court which is effective,
complete, or equitable. Further, an indispensable party is one who must be included in an action before it may properly
go forward.
KEYWORDS/NOTES:
97
051 PAMECA Wood Treatment Plant, Inc. V. CA

G.R. No. 106435 July 14, 1999
TOPIC: Foreclosure of Chattel Mortgage; Right to Surplus or Deficiency, Act. No 1508, Sec. 14
PONENTE: Gonzaga-Reyes, J.
FACTS:
1. April 17, 1980: Petitioner PAMECA obtained a loan equivalent to P2M from respondent DBP Bank. So, PAMECA,
through its President executed a promissory note and as security for said loan, a chattel mortgage was executed
over PAMECAs furniture and equipment to cover the whole value of the loan.
2. PAMECA Failed to pay and respondent bank extrajudicially foreclosed the chattel mortgage, and as sole bidder in
the public auction, purchased the foreclosed properties for a sum of P322,350.00
3. Respondent bank filed a complaint for the collection of the balance of P4,366,332 against PAMECA and private
petitioners, as solidary debtors with PAMECA under the promissory note.
4. RTC: ordered the defendants to pay jointly and severally to the plaintiff the sum of P4,366,332
5. CA: affirmed the RTC decision.
6. Petitioners contention:
that P322,350.00 at which respondent bank bid for and purchased the mortgaged properties was unconscionable
and inequitable considering that, at the time of the public sale, the mortgaged properties had a total value of more
than P2,000,000.00 and this is evident from an inventory dated March 31, 1980.
to hold private petitioners, officers and stockholders of PAMECA, liable with PAMECA for the obligation under the
loan obtained from respondent bank, is contrary to the doctrine of separate and distinct corporate personality
invoking the equity jurisdiction of the SC, petitioners submit that Articles 1484 and 2115 of the Civil Code be applied
in analogy to the instant case to preclude the recovery of a deficiency claim
ISSUE:
WON the public auction sale of petitioner PAMECAs chattels were tainted with fraud, as the chattels of the said
petitioner were bought by private respondent as sole bidder in only 1/6 of the market value of the property, hence
unconscionable and inequitable, and therefore null and void
HELD:
No.
RATIO:
1. This Court reversed the ruling of the lower court and held that the provisions of the Chattel Mortgage Law regarding
the effects of foreclosure of chattel mortgage, being contrary to the provisions of Article 2115, Article 2115 in
relation to Article 2141, may not be applied to the case. Section 14 of Act No. 1508, as amended, or the Chattel
Mortgage Law, states:
The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the same in
the office of the Registry of Deeds where the mortgage is recorded, and the Register of Deeds shall record the same....
The return shall particularly describe the articles sold, and state the amount received for each article, and shall operate
as a discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be applied to the payment,
first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such
mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after
paying the mortgage, shall be paid to the mortgagor or persons holding under him on demand. (Emphasis supplied)
2. It is clear from the above provision that the effects of foreclosure under the Chattel Mortgage Law run inconsistent
with those of pledge under Article 2115. Whereas, in pledge, the sale of the thing pledged extinguishes the entire
principal obligation, such that the pledgor may no longer recover proceeds of the sale in excess of the amount of the
principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles the mortgagor to the balance of the
proceeds, upon satisfaction of the principal obligation and costs.
98
3. Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds there is a
corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction in the price at
public auction.
4. Having nonetheless examined the inventory and chattel mortgage document as part of the records, We are not
convinced that they effectively prove that the mortgaged properties had a market value of at least P2,000,000.00 on
January 18, 1984, the date of the foreclosure sale. At best, the chattel mortgage contract only indicates the
obligation of the mortgagor to maintain the inventory at a value of at least P2,000,000.00, but does not evidence
compliance therewith.
5. The mere fact that respondent bank was the sole bidder for the mortgaged properties in the public sale does not
warrant the conclusion that the transaction was attended with fraud. Fraud is a serious allegation that requires full
and convincing evidence, and may not be inferred from the lone circumstance that it was only respondent bank that
bid in the sale of the foreclosed properties
6. We likewise affirm private petitioners joint and several liability with petitioner corporation in the loan. As found by
the trial court and the Court of Appeals, the terms of the promissory note unmistakably set forth the solidary nature
of private petitioners commitment
CASE LAW/ DOCTRINE:

The effects of foreclosure under the Chattel Mortgage Law run inconsistent with those of pledge under Article 2115.
Whereas, in pledge, the sale of the thing pledged extinguishes the entire principal obligation, such that the pledgor may
no longer recover proceeds of the sale in excess of the amount of the principal obligation, Section 14 of the Chattel
Mortgage Law expressly entitles the mortgagor to the balance of the proceeds, upon satisfaction of the principal
obligation and costs.
99
052 Prudential Bank v. Alviar & Alviar

G.R. No. 150197 July 28, 2005
TOPIC: Real Estate Mortgage; Obligation Secured
PONENTE: Tinga, J
FACTS:
1.Spouses Don Alviar and Georgia Alviar executed a deed of REM in favour of Prudential Bank to secure the payment
of a loan worth P250,000. The mortgage was annotated at the back of TCT No. 438157 which covers their land in San
Juan
2. Aug. 4, 1975: spouses executed a promissory note,PN BD#75/C-252 covering the said loan and that the note is
secured by a REM.
3. Don Alviar executed another promissory note, PN BD#76/C-345, for P2,640,000 secured by a hold-out on Alviars
foreign currency saving account with the bank
4. spouses executed for Donalco Trading, which they are officers, a promissory note, PN BD#76/C-430, covering
P545,000. It is secured by Clean-Phase out TOD CA 3923 which means that the temporary overdraft incurred by
Donalco with the bank is to be converted into an ordinary loan in compliance with a Central Bank circular directing
the discontinuance of overdrafts.
5. March 1979 : spouses paid the bank P2,000,000 to be applied to the obligations of G.B Alviar Realty and for the
release of the REM for the P450,000 loan covering the lots in San Juan.
6. January 15, 1980: the bank moved for the extrajudicial foreclosure of the mortgage on the property covered by
TCT No. 438157. the spouses had the total obligation of P1,608,256.68, covering the 3 promissory notes
7. the spouses filed a complaint for damages and praying for issuance of writ of preliminary injunction with RTC
Claiming that they have paid their principal loan secured by the mortgaged property, and thus the mortgage
should not be foreclosed
8. RTC: dismissed the complaint. Ordered the Sheriff to proceed with the extrajudicial foreclosure
9. RTC: set aside its earlier decision upon a motion for reconsideration.
It found that only the P250,000 loan is secured by the mortgage on the land covered by No. 43815.
P382,680.83 loan is secured by the foreign currency deposit account of Don Alviar
P545,000 was an unsecured loan, being a mere conversion of temporary overdraft
blanket mortgage clause (meaning can be found at the doctrine part) relied upon by the Bank applies only
to future loans obtained by the mortgagors and not by the parties other than the mortgagors.
10.CA:affirmed the order of the RTC
Parties executed different promissory notes agreeing to a particular security for each loan
ISSUE: Whether or not the blanket mortgage clause covers not only the promissory note covering the P250,000
loan but also the other 2 promissory notes
HELD: NO
RATIO:
1. The parties having conformed to the blanket mortgage clause or dragnet clause, it is reasonable to conclude
that they also agreed to an implied understanding that subsequent loans need not be secured by other securities, as
the subsequent loans will be secured by the first mortgage. But of course, there is no prohibition, as in the
mortgage contract in issue, against contractually requiring other securities for the subsequent loans. Thus, when
the mortgagor takes another loan for which another security was given it could not be inferred that such loan was
made in reliance solely on the original security with the dragnet clause, but rather, on the new security given.
2. It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of
non-payment of all the three promissory notes. While the existence and validity of the dragnet clause cannot be
denied, there is a need to respect the existence of the other security given for PN BD#76/C-345. The foreclosure of
the mortgaged property should only be for theP250,000.00 loan covered by PN BD#75/C-252, and for any amount
100
not covered by the security for the second promissory note.
CASE LAW/ DOCTRINE:
A blanket mortgage clause, also known as a dragnet clause in American jurisprudence, is one which is
specifically phrased to subsume all debts of past or future origins. Mortgages of this character enable the parties to
provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they
avoid the expense and inconvenience of executing a new security on each new transaction. A dragnet clause
operates as a convenience and accommodation to the borrowers as it makes available additional funds without their
having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal
services, recording fees, et cetera.
Under American jurisprudence, two schools of thought have emerged on this question. One school advocates that a
dragnet clause so worded as to be broad enough to cover all other debts in addition to the one specifically secured
will be construed to cover a different debt, although such other debt is secured by another mortgage.] The contrary
thinking maintains that a mortgage with such a clause will not secure a note that expresses on its face that it is
otherwise secured as to its entirety, at least to anything other than a deficiency after exhausting the security
specified therein, such deficiency being an indebtedness within the meaning of the mortgage, in the absence of a
special contract excluding it from the arrangement. The latter school represents the better position.
KEYWORDS/NOTES:
The blanket mortgage clause in the instant case states:
That for and in consideration of certain loans, overdraft and other credit accommodations
obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to,
irrespective of number, as DEBTOR, and to secure the payment of the same and those that may
hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand
(P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and
records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage
unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list
inserted on the back of this document, and/or appended hereto, together with all the buildings and
improvements now existing or which may hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .
101
053 Peoples Bank and Trust Company and Atlantic Gulf and Pacific Co. of Manila vs. Dahican Lumber Company et.al.
GR No. L-17500 Date May 16, 1967
TOPIC: Object of Real Estate Mortgage- After Acquired Properties
PONENTE: Dizon, J.
FACTS:
1. ATLANTIC, a duly licensed corporation, sold and assigned all its rights in the Dahican Lumber concession to
Dahican Lumber Company (DALCO) for the total sum of $500,000.00, of which only the amount of $50,000.00
was paid.
2. To develop the concession, DALCO obtained various loans from the BANK amounting to P200,000.00. In addition,
DALCO obtained, through the BANK, a loan of $250,000.00 from the Export-Import Bank of Washington D.C.,
evidenced by five promissory notes of $50,000.00 each, maturing on different dates, executed by both DALCO
and the Dahican America Lumber Corporation (DAMCO), a foreign corporation and a stockholder of DALCO, all
payable to the BANK or its order.
3. As security for the payment of the abovementioned loans, DALCO executed in favor of the BANK the latter
acting for itself and as trustee for the Export-Import Bank of Washington D.C. a deed of mortgage covering
five parcels of land situated in the province of Camarines Norte together with all the buildings and other
improvements existing thereon and all the personal properties of the mortgagor.
4. On the same date, DALCO executed a second mortgage on the same properties in favor of ATLANTIC to secure
payment of the unpaid balance of the sale price of the lumber concession amounting to the sum of $450,000.00.
Both deeds contained the following provision extending the mortgage lien to properties to be subsequently
acquired referred to hereafter as "after acquired properties" by the mortgagor:
All property of every nature and description taken in exchange or replacement, and all buildings, machinery,
fixtures, tools equipment and other property which the Mortgagor may hereafter acquire, construct, install,
attach, or use in, to, upon, or in connection with the premises, shall immediately be and become subject to the
lien of this mortgage in the same manner and to the same extent as if now included therein, and the Mortgagor
shall from time to time during the existence of this mortgage furnish the Mortgagee with an accurate inventory
of such substituted and subsequently acquired property.
5. Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the BANK paid the same
to the Export-Import Bank of Washington D.C., and the latter assigned to the former its credit and the first
mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO up to April 1, 1953 to pay the overdue
promissory note.
6. After the date of execution of the mortgages mentioned above DALCO purchased various machineries,
equipment, spare parts and supplies in addition to, or in replacement of some of those already owned and used
by it on the date aforesaid. Pursuant to the provision of the mortgage deeds quoted theretofore regarding "after
acquired properties," the BANK requested DALCO to submit complete lists of said properties but the latter failed
to do so.
7. The Board of Directors of DALCO passed a resolution agreeing to rescind the alleged sales of equipment, spare
parts and supplies by CONNELL and DAMCO to it. Thereafter, the corresponding agreements of rescission of sale
were executed between DALCO and DAMCO, on the one hand and between DALCO and CONNELL, on the other.
8. The BANK, in its own behalf and that of ATLANTIC, demanded that said agreements be cancelled but CONNELL
and DAMCO refused to do so. As a result, ATLANTIC and the BANK, commenced foreclosure proceedings in the
Court of First Instance of Camarines Norte against DALCO and DAMCO.
9. TRIAL COURTS RULING: Condemns Dahican to pay Peoples Bank, Atlantic Gulf, and Connel Bros.
ISSUE:
Whether or not DAMCO and CONNELL have rights over the "after acquired properties" superior to the mortgage lien
constituted thereon in favor of plaintiffs (DALCO)
Other Issues (not-so-important):
1. Whether or not the proceeds obtained from the sale of the "after acquired properties" should have been
awarded exclusively to the plaintiffs or to DAMCO and CONNELL, and if in law they should be distributed among
said parties, whether or not the distribution should be pro-rata or otherwise;
102
2. Whether or not plaintiffs are entitled to damages; and

3. Lastly, whether or not the expenses incidental to the Receivership should be borne by all the parties on a pro-
rata basis or exclusively by one or some of them are of a secondary nature as they are already impliedly resolved
by what has been said.
RATIO:
MAIN ISSUE
No, DAMCO and CONNELL do not have rights over the after acquired properties. The report of the auditors and its
annexes show that neither DAMCO nor CONNELL had supplied any of the goods of which they respective claimed to be
the unpaid seller; that all items were supplied by different parties, neither of whom appeared to be DAMCO or CONNELL
that, in fact, CONNELL collected a 5% service charge on the net value of all items it claims to have sold to DALCO and
which, in truth, it had purchased for DALCO as the latter's general agent; that CONNELL had to issue its own invoices in
addition to those o f the real suppliers in order to collect and justify such service charge.
Taking into account the above circumstances together with the fact that DAMCO was a stockholder and CONNELL was
not only a stockholder but the general agent of DALCO, their claim to be the suppliers of the "after acquired required
properties" would seem to be preposterous. The most that can be claimed on the basis of the evidence is that DAMCO
and CONNELL probably financed some of the purchases. But if DALCO still owes them any amount in this connection, it is
clear that, as financiers, they can not claim any right over the "after acquired properties" superior to the lien constituted
thereon by virtue of the deeds of mortgage under foreclosure. Indeed, the execution of the rescission of sales mentioned
heretofore appears to be but a desperate attempt to better or improve DAMCO and CONNELL's position by enabling
them to assume the role of "unpaid suppliers" and thus claim a vendor's lien over the "after acquired properties". The
attempt, of course, is utterly ineffectual, not only because they are not the "unpaid sellers" they claim to be but also
because there is abundant evidence in the record showing that both DAMCO and CONNELL had known and admitted
from the beginning that the "after acquired properties" of DALCO were meant to be included in the first and second
mortgages under foreclosure.
OTHER ISSUES:
1. As regard the proceeds obtained from the sale of the of after acquired properties" and the "undebated
properties", it is clear that said proceeds should be awarded exclusively to the plaintiffs in payment of the money
obligations secured by the mortgages under foreclosure.
2. On the question of plaintiffs' right to recover damages from the defendants, the law (Articles 1313 and 1314 of
the New Civil Code) provides that creditors are protected in cases of contracts intended to defraud them; and
that any third person who induces another to violate his contract shall be liable for damages to the other
contracting party. Similar liability is demandable under Arts. 20 and 21 which may be given retroactive effect
(Arts. 225253) or under Arts. 1902 and 2176 of the Old Civil Code.
3. It is, however, our considered opinion that, upon the facts established, all the expenses of the Receivership,
which was deemed necessary to safeguard the rights of the plaintiffs, should be borne by the defendants, jointly
and severally, in the same manner that all of them should pay to the plaintiffs, jointly a severally, attorney's fees
awarded in the appealed judgment.
*Case was remanded for further proceedings.
103
054 CASE TITLE : Star Two (SPV-AMC), Inc., v. Paper City Corporation of the Philippines
G.R. No. 169211 March 6, 2013
TOPIC: Object of Real estate Mortgage: Effect and Extent
PONENTE: PEREZ, J
FACTS:
1. From 1990-1991, Paper City applied for and was granted four (4) loans and credit accommodations by Rizal
Commercial Banking Corporation (RCBC), now substituted by Star Two (SPV-AMC), Inc by virtue of Republic Act No.
9182. The loans were secured by four (4) Deeds of Continuing Chattel Mortgages on its machineries and equipments
found inside its paper plants. However, RCBC eventually executed a unilateral Cancellation of Deed of Continuing Chattel
Mortgage.
2. In 1992, RCBC, as the trustee bank, together with Metrobank and Union Bank, entered into a Mortgage Trust
Indenture (MTI), with Paper City. In the said MTI, Paper City acquired additional loans secured by five (5) Deed of Real
Estate Mortgage, plus real and personal properties in an annex to the MTI, which covered the machineries and
equipment of Paper City. The MTI was later on amended and supplemented three (3) times, wherein the loan was
increased and included the same mortgages with an additional building and other improvements in the plant site. Paper
City was able to comply with the loans but only until 1997 due to an economic crisis. RCBC filed a petition for extra-
judicial foreclosure against the real estate executed by Paper City including all the improvements because of payment
default. The property was foreclosed and subjected to public auction.
3. The three banks and the highest bidder were issued a Certificate of Sale. Paper City filed a complaint alleging that the
sale was null and void due to lack of prior notice. During the pendency of the complaint, Paper City filed a motion to
remove machinery out of the foreclosed land and building, that the same were not included in the foreclosure of the real
estate mortgage. The trial court denied the motion, ruling that the machineries and equipment were included.
Thereafter, Paper City's Motion for Reconsideration, the trial court granted the same and justified the reversal by finding
that the machineries and equipment are chattels by agreement thru the four Deeds of Continuing Chattel Mortgages;
and that the deed of cancellation executed by RCBC of said mortgage was not valid because it was one unilaterally.
RCBC's Motion for Reconsideration was denied.
CA Petion:
1. That Paper City gave its consent to consider the disputedmachineries and equipment as real properties when they
signed the MTI's and all its amendments; 2. That the machineries and equipment are the same as inthe MTI's, hence
treated by agreement of the parties as real properties.
The CA affirmed the orders of the trial court because it relied on the plain language of the MTI's stating that
nowhere from any of the MTIs executed by the parties can we find the alleged "express" agreement adverted to by
petitioner. There is no provision in any of the parties MTI, which expressly states to the effect that the parties shall treat
the equipments and machineries as real property. On the contrary, the plain and unambiguous language of the
aforecited MTIs, which described the same as personal properties, contradicts petitioners claims. Hence the case.
ISSUE: Whether the subsequent contracts of the parties such as Mortgage Trust Indenture as well as the subsequent
supplementary amendments included in its coverage of mortgaged properties the subject machineries and equipment;
and
Whether or not the subject machineries and equipment were considered real properties and should therefore be
included in the extra-judicial foreclosure which in turn were sold to the banks.
HELD: The petition was granted
RATIO:
1. Repeatedly, the parties stipulated that the properties mortgaged by Paper City to RCBC are various parcels of land
including the buildings and existing improvements thereon as well as the machineries and equipments, which as stated in
the granting clause of the original mortgage, are "more particularly described and listed that is to say, the real and
personal properties listed in Annexes A and B x x x of which the Paper City is the lawful and registered owner."
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Significantly, Annexes "A" and "B" are itemized listings of the buildings, machineries and equipments typed single spaced
in twenty-seven pages of the document made part of the records. As held in Gateway Electronics Corp. v. Land Bank of
the Philippines, the rule in this jurisdiction is that the contracting parties may establish any agreement, term, and
condition they may deem advisable, provided they are not contrary to law, morals or public policy. The right to enter into
lawful contracts constitutes one of the liberties guaranteed by the Constitution.
2. Contrary to the finding of the CA, the Extra-Judicial Foreclosure of Mortgage includes the machineries and equipments
of respondent. Considering that the Indenture which is the instrument of the mortgage that was foreclosed exactly
states through the Deed of Amendment that the machineries and equipments listed in Annexes "A" and "B" form part of
the improvements listed and located on the parcels of land subject of the mortgage, such machineries and equipments
are surely part of the foreclosure of the "real estate properties, including all improvements thereon" as prayed for in the
petition. The real estate mortgages which specifically included the machineries and equipments were subsequent to the
chattel mortgages. Without doubt, the real estate mortgages superseded the earlier chattel mortgages.
3. The real estate mortgage over the machineries and equipments is even in full accord with the classification of such
properties by the Civil Code of the Philippines as immovable property. Thus:
Article 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds adhered to the soil; xxx
(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works
which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said
industry or works;
CASE LAW/ DOCTRINE:
KEYWORDS/NOTES:
105
055 GARCIA V VILLAR

G.R. No. 158891 Date June 27, 2012
TOPIC: REAL ESTATE MORTGAGE Right to alienate collateral
PONENTE: Leonardo-De Castro, J.
FACTS:
1. Galas was the original owner of the subject property located Quezon City.
2. July 6, 1993: Galas, with her daughter Pingol (as co-maker) mortgaged the property to Villar as security for a
loan in the amount of P2.2M.
3. October 10, 1994: Galas, again with Pingol as her co-maker, mortgaged the same property to Garcia to secure
her loan of P1.8M. Both mortgages were annotated at the back of the TCT with a restriction that mortgagees
consent is necessary in case of subsequent encumbrance or alienation of the property.
4. November 21, 1996: Galas sold the subject property to Villar for P1.5M and declared in the Deed of Sale that
the property was free from all liens and encumbrances. The Deed of Sale was registered and subsequently, a
new TCT was issued in the name of Villar. Both Villars and Garcias mortgages were annotated at the back of
Villars new TCT.
5. October 27, 1999: Garcia filed a Petition for Mandamus with Damages against Villar with the RTC QC. But later
on amended his petition to a Complaint for Foreclosure of Real Estate Mortgage with Damages alleging that
Villar acted in bad faith when she purchased the property because she knowingly and willfully disregarded the
provisions on laws on judicial and extrajudicial foreclosure of mortgaged property. Also, when Villar
purchased the subject property, Galas was relieved of her contractual obligation and the characters of
creditor and debtor were merged in the person of Villar. Therefore, Garcia, as the second mortgagee, was
subrogated to Villars original status as first mortgagee, which is the creditor with the right to foreclose.
*Villars Answer: the complaint stated no cause of action and that the second mortgage was done in bad faith as it
was without her consent and knowledge. Theres no subrogation as the assignment of credit was done with
neither her knowledge nor prior consent.
RTC: in favour of Garcia - the direct sale of the subject property to Villar, the first mortgagee, could not operate to
deprive Garcia of his right as a second mortgagee. Upon Galass failure to pay her obligation, Villar should have
foreclosed the subject property pursuant to Act No. 3135 as amended, to provide junior mortgagees like Garcia,
the opportunity to satisfy their claims from the residue, if any, of the foreclosure sale proceeds The second
mortgage constituted in Garcias favor had not been discharged, and that Villar, as the new registered owner of
the subject property with a subsisting mortgage, was liable for it
CA: reversed TCs decision - Galas was free to mortgage the subject property even without Villars consent as the
restriction that the mortgagees consent was necessary in case of a subsequent encumbrance was absent in the
Deed of Real Estate Mortgage.
ISSUE:
1. Whether or not the second mortgage to Garcia was valid? YES
2. Whether or not the sale of the subject property to Villar was valid? YES
3. Whether or not the sale of the subject property to Villar was in violation of the prohibition on pactum
commissorium; NO.
4. Whether or not Garcias action for foreclosure of mortgage on the subject property can prosper? NO.
RATIO:
ISSUE Nos. 1 and 2
a. Both the sale of the subject property and the second mortgage are valid. While it is true that the annotation of the first
mortgage to Villar on Galass TCT contained a restriction on further encumbrances without the mortgagees prior
consent, this restriction was nowhere to be found in the Deed of Real Estate Mortgage. As this Deed became the basis
for the annotation on Galass title, its terms and conditions take precedence over the standard, stamped annotation
placed on her title. If it were the intention of the parties to impose such restriction, they would have and should have
stipulated such in the Deed of Real Estate Mortgage itself. Neither did this Deed proscribe the sale or alienation of the
subject property during the life of the mortgages. Garcias insistence that Villar should have judicially or extrajudicially
foreclosed the mortgage to satisfy Galass debt is misplaced. The Deed of Real Estate Mortgage merely provided for the
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options Villar may undertake in case Galas or Pingol fail to pay their loan. Nowhere was it stated in the Deed that Galas
could not opt to sell the subject property to Villar, or to any other person. Such stipulation would have been void
anyway, as it is not allowed under Article 2130 of the Civil Code, to wit:
Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void.
Issue No. 3
Elements of pactum commissorium: (1) There should be a property mortgaged by way of security for the payment of the
principal obligation; and (2) There should be a stipulation for automatic appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal obligation within the stipulated period.
Villars purchase of the subject property did not violate the prohibition on pactum commissorium. The power of
attorney provision above did not provide that the ownership over the subject property would automatically pass to
Villar upon Galass failure to pay the loan on time. What it granted was the mere appointment of Villar as attorney-in-
fact, with authority to sell or otherwise dispose of the subject property, and to apply the proceeds to the payment of
the loan. This provision is customary in mortgage contracts, and is in conformity with Article 2087 of the Civil Code,
which reads:
Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes
due, the things in which the pledge or mortgage consists may be alienated for the payment to the
creditor.
Galass decision to eventually sell the subject property to Villar for an additional P1,500,000.00 was well within
the scope of her rights as the owner of the subject property. The subject property was transferred to Villar by virtue of
another and separate contract, which is the Deed of Sale. Garcia never alleged that the transfer of the subject property
to Villar was automatic upon Galass failure to discharge her debt, or that the sale was simulated to cover up such
automatic transfer.
Issue No. 4
While we agree with Garcia that since the second mortgage, of which he is the mortgagee, has not yet been discharged,
we find that said mortgage subsists and is still enforceable. However, Villar, in buying the subject property with notice
that it was mortgaged, only undertook to pay such mortgage or allow the subject property to be sold upon failure of the
mortgage creditor to obtain payment from the principal debtor once the debt matures. Villar did not obligate herself to
replace the debtor in the principal obligation, and could not do so in law without the creditors consent. Thus, the
obligation to pay the mortgage indebtedness remains with the original debtors Galas and Pingol. Garcia has no cause of
action against Villar in the absence of evidence to show that the second mortgage executed in favor of Garcia has been
violated by his debtors, Galas and Pingol, i.e., specifically that Garcia has made a demand on said debtors for the
payment of the obligation secured by the second mortgage and they have failed to pay.
NOTES:
Mortgage is merely an encumbrance on the property, entitling the mortgagee to have the property foreclosed,
i.e., sold, in case the principal obligor does not pay the mortgage debt, and apply the proceeds of the sale to the
satisfaction of his credit. Mortgage is merely an accessory undertaking for the convenience and security of the
mortgage creditor, and exists independently of the obligation to pay the debt secured by it. The mortgagee, if he
is so minded, can waive the mortgage security and proceed to collect the principal debt by personal action
against the original mortgagor.
107
056 Korea Exchange Bank v. Filkor Business Integrated, Inc.

380 SCRA 381 (2002)
TOPIC: Judgment on Foreclosure
PONENTE: QUISUMBING, J.:
FACTS:
1. Filkor Business Integrated, Inc. (Filkor), borrowed US$140,000 from petitioner Korea Exchange Bank in order to
secure payment of all its obligations, Filkor executed a Real Estate Mortgage.
2. It mortgaged to petitioner the improvements belonging to it constructed on the lot it was leasing at the Cavite Export
Processing Zone Authority. Only US$40,000 was paid by Filkor.
3. Petitioner in the Regional Trial Court of Cavite In its complaint, petitioner prayed that (a) it be paid by respondents;
(b) the property mortgaged be foreclosed and sold at public auction in case respondents failed to pay petitioner
within ninety days from entry of judgment; and (c) other reliefs just and equitable be granted.
4. It appears that the only reason defendants deny all the material allegations in the complaint is because the
documents attached thereto are mere photocopies and not the originals thereof.
5. The trial court then rendered judgment in favor of petitioner, however, failed to order that the property mortgaged
by respondent Filkor be foreclosed and sold at public auction.
6. Petitioner filed a motion for partial reconsideration of the trial courts order, praying that the foreclosure and sale at
public auction be granted.
7. Trial court denied petitioners motion: The rule is now settled that a mortgage creditor may elect to waive his
security and bring, instead, an ordinary action to recover the indebtedness with the right to execute a judgment
thereon on all the properties of the debtor including the subject matter of the mortgage, subject to the qualification
that if he fails in the remedy by him elected, he cannot pursue further the remedy he has waived.
ISSUE: Whether or not the petitioner had abandoned the Real Estate Mortgage in its favor, because it filed a smiple
collection case?
HELD: No. The Court finds no indication whatsoever that petitioner had waived its rights under the real estate mortgage
executed in its favor. Thus, the trial court erred in concluding that petitioner had abandoned its mortgage lien on Filkors
property, and that what it had filed was an action for collection of a sum of money.
RATIO:
1. Petitioners allegations in its complaint, and its prayer that the mortgaged property be foreclosed and sold at public
auction, indicate that petitioners action was one for foreclosure of real estate mortgage. We have consistently ruled
that what determines the nature of an action, as well as which court or body has jurisdiction over it, are the allegations
of the complaint and the character of the relief sought. In addition, we find no indication whatsoever that petitioner
had waived its rights under the real estate mortgage executed in its favor. Thus, the trial court erred in concluding that
petitioner had abandoned its mortgage lien on Filkors property, and that what it had filed was an action for collection
of a sum of money.
2. Petitioners action being one for foreclosure of real estate mortgage, it was incumbent upon the trial court to order
that the mortgaged property be foreclosed and sold at public auction in the event that respondent Filkor fails to pay its
outstanding obligations.
CASE LAW/ DOCTRINE: If upon the trial in such action the court shall find the facts set forth in the complaint to be true,
it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other
charges as approved by the court, and costs, and shall render judgment for the sum so found due and order that the
same be paid to the court or to the judgment obligee within a period of not less than (90) days nor more than (120) days,
and that in default of such payment the property shall be sold at public auction to satisfy the judgment.
108
057 Huerta Alba Resort, Inc. v. Court of Appeals

G.R. No. 128567 September 1, 2000
TOPIC: Right of Redemption
PONENTE: Purisima, J.
FACTS:
1. Syndicated Management Group, Inc., filed a complaint for judicial foreclosure of mortgage with preliminary injunction
filed with the RTC of Makati City. It sought the foreclosure of 4 parcels of land mortgaged by petitioner to Intercon Fund
Resource, Inc.
2. Syndicated Management filed the case as mortgagee-assignee of a loan amounting to P8.5M obtained by petitioner
from Intercon, in whose favor petitioner mortgaged the aforesaid parcels of land as security for the said loan.
3. Petitioner questioned the assignment by Intercon of its mortgage right, on the ground that the same was ultra vires.
4. RTC granted the judicial foreclosure. CA dismissed petitioners appeal due to late payment of docket fees. Petitioner
then filed with the SC a pet. for certiorari which was also dismissed.
5. The order became final and executory and was entered in the Book of Entried of Judgement.
6. Syndicated Mgmt. then filed with the RTC a motion for execution of judgment which was granted.
7. Pet. then filed an urgent motion to quash and set aside the writ of execution alleging grave abuse of discretion. Pet.
argued that the records of the case were still with the CA and therefore, issuance of the writ of execution was premature
since the 150-day period for petitioner to pay the judgment obligation had not yet lapsed and petitioner had not yet
defaulted in the payment thereof since no demand for its payment was made by the private respondent. (RTC denied.)
8. Pet. filed once more with the CA another petition for certiorari and prohibition with preliminary injunction.
9. Consequently, the scheduled auction sale of subject pieces of properties proceeded and the private respondent was
declared the highest bidder. Thus, it was awarded subject properties. Certificate of Sale issued in its favor was registered
with the Registry of Deeds.
10. Pet. filed an Ex-Parte Motion for Clarification asking the trial court to clarify whether or not the 12 month period of
redemption for ordinary execution applied in the case. The trial court ruled that the period of redemption of subject
property should be governed by the rule on the sale of judicially foreclosed property under Rule 68 of the ROC.
11. Meanwhile, the CA ls resolved the issues raised by the petitioner and held that the 150-day period within which
petitioner may redeem subject properties should be computed from the date petitioner was notified of the Entry of
Judgment; and that the 150-day period within which petitioner may exercise its equity of redemption expired on
September 11, 1994. (MR denied.)
12. Then, the lower court confirmed the sale of subject properties to the private respondent. The Order declared that all
pending incidents relating to the Order had become moot and academic. The Transfer Certificates of Title to subject
pieces of property were then issued to the private respondent.
ISSUE: Whether or not the petitioner has the 1-year right of redemption of subject properties under Section 78 of
Republic Act No. 337 otherwise known as the General Banking Act.
HELD: No, petitioner failed to exercise its equity of redemption within the prescribed period, redemption can no longer
be effected. The confirmation of the sale and the issuance of the TCTs covering the subject properties was in order.
RATIO:
1. It can be gleaned that what petitioner has been adjudged to have was only the equity of redemption over subject
properties. On the distinction between the equity of redemption and right of redemption, the case of Limpin vs. IAC held:
The right of redemption in relation to a mortgage - understood in the sense of a prerogative to re-acquire mortgaged
property after registration of the foreclosure sale - exists only in the case of the extrajudicial foreclosure of the mortgage.
No such right is recognized in a judicial foreclosure except only where the mortgagee is the Philippine National Bank or a
bank or banking institution. Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of
redemption within one (1) year from the registration of the sheriffs certificate of foreclosure sale.
Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares that a
judicial foreclosure sale, when confirmed by an order of the court, x x shall operate to divest the rights of all the parties
109
to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.
Such rights exceptionally allowed by law (i.e., even after confirmation by an order of the court) are those granted by the
charter of the Philippine National Bank (Acts No. 2747 and 2938), and the General Banking Act (R.A. 337). These laws
confer on the mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem the
property sold on foreclosure - after confirmation by the court of the foreclosure sale - which right may be exercised
within a period of one (1) year, counted from the date of registration of the certificate of sale in the Registry of Property.
Thus, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is not the PNB or a
bank or banking institution. In such a case, the foreclosure sale, when confirmed by an order of the court. x x shall
operate to divest the rights of all the parties to the action and to vest their rights in the purchaser. There then exists only
what is known as the equity of redemption. This is simply the right of the defendant mortgagor to extinguish the
mortgage and retain ownership of the property by paying the secured debt within the 90-day period after the judgment
becomes final, in accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation.
2. Section 2, Rule 68 provides that: x x If upon the trial x x the court shall find the facts set forth in the complaint to be
true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and costs,
and shall render judgment for the sum so found due and order the same to be paid into court within a period of not less
than ninety (90) days from the date of the service of such order, and that in default of such payment the property be sold
to realize the mortgage debt and costs. This is the mortgagors equity (not right) of redemption which may be
exercised by him even beyond the 90-day period from the date of service of the order, and even after the foreclosure
sale itself, provided it be before the order of confirmation of the sale. After such order of confirmation, no redemption
can be effected any longer.
3. It was too late in the day for petitioner to invoke a right to redeem under Section 78 of R.A. No. 337. Petitioner failed
to assert a right to redeem in several crucial stages of the proceedings. (Pet. failed to allege and prove that private
respondent's predecessor in interest was a credit institution.)
4. Moreover, the claim that pet. is entitled to the beneficial provisions of Sec 78 of R.A. No. 337 - since private
respondents predecessor-in-interest is a credit institution - is in the nature of a compulsory counterclaim which should
have been averred in petitioners answer to the compliant for judicial foreclosure. (A counterclaim is a cause of action
existing in favor of the defendant against the plaintiff. It is a claim which, if established, will defeat or in some way qualify
a judgment or relief to which plaintiff is otherwise entitled.) The very purpose of a counterclaim would have been served
had petitioner alleged in its answer its purported right under Section 78 of R.A. No. 337.
5. The failure of petitioner to seasonably assert its alleged right under Section 78 of R.A. No. 337 precludes it from so
doing at this late stage of the case. Estoppel may be successfully invoked if the party fails to raise the question in the
early stages of the proceedings.
CASE LAW/ DOCTRINE:

The right of redemption in relation to a mortgage - understood in the sense of a prerogative to re-acquire mortgaged
property after registration of the foreclosure sale - exists only in the case of the extrajudicial foreclosure of the mortgage.
No such right is recognized in a judicial foreclosure except only where the mortgagee is the Philippine National Bank or a
bank or banking institution.
KEYWORDS/NOTES: Sec. 78 of R.A. No. 337 provides that in case of a foreclosure of a mortgage in favor of a bank,
banking or credit institution, whether judicially or extrajudicially, the mortgagor shall have the right, within one year
after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the property. (Not
applicable in the case.)
110
058 Grand Farms and Philippine Shares Corporation vs Court of Appeals

G.R. No. 91779 Date Feb 7 1991
TOPIC: JUDICIAL FORECLOSURE (b. Judgment on Foreclosure)
FACTS:
1. Grand Farms filed an annulment and/or declaration of nullity of the extrajudicial foreclosure proceedings over their
mortgaged properties with damages against respondents clerk of court, deputy sheriff and herein private respondent
Banco Filipino Savings and Mortgage Bank in RTC-Valenzuela.
2. After Banco Filipino and Mortgage Bank filed their answer, Grand Farms filed a request for admission by private
respondent of the allegation, inter alia, that no formal notice of intention to foreclose the real estate mortgage was sent
by private respondent to petitioners.
3. Banco Filipino averred that that petitioners were "notified of the auction sale by the posting of notices and the
publication of notice in the Metropolitan Newsweek, a newspaper of general circulation in the province where the
subject properties are located.
4. With this, Grand Farms filed a motion for summary judgment contending that the foreclosure was violative of the
mortgage contract, specifically:
"k) All correspondence relative to this Mortgage, including demand letters, summons, subpoena or notifications of any
judicial or extrajudical actions shall be sent to the Mortgagor at the address given above or at the address that may
hereafter be given in writing by the Mortgagor to the Mortgagee, and the mere act of sending any correspondence by
mail or by personal delivery to the said address shall be valid and effective notice to the Mortgagor for all legal
purposes, and the fact that any communication is not actually received by the Mortgagor, or that it has been returned
unclaimed to the Mortgagee, or that no person was found at the address given, or that the address is fictitious, or
cannot be located, shall not excuse or relieve the Mortgagor from the effects of such notice;"
5. Banco Filipino maintains that paragraph (k) of the mortgage contract fails to consider paragraphs (b) and (d) of the
same contract, which respectively provide as follows:
"b) . . . For the purpose of extra-judicial foreclosure, the Mortgagor (plaintiff) hereby appoints the Mortgagee (BF) his
attorney-in-fact to sell the property mortgaged, to sign all documents and perform any act requisite and necessary to
accomplish said purpose and to appoint its substitutes as such attorney-in-fact, with the same powers as above-
specified. The Mortgagor hereby expressly waives the term of thirty (30) days or any other term granted or which may
hereafter be granted him by law as the period which must elapse before the Mortgagee shall be entitled to foreclose this
mortgage, it being specifically understood and agreed that the said Mortgagee may foreclose this mortgage at any time
after the breach of any conditions hereof . . ."
"d) Effective upon the breach of any conditions of the mortgage and in addition to the remedies herein stipulated, the
Mortgagee is hereby likewise appointed attorney-in-fact of the Mortgagor with full powers and authority, with the use
of force, if necessary, to take actual possession of the mortgaged property, without the necessity for any judicial order
or any permission of power to collect rents, to eject tenants, and perform any other act which the Mortgagor may
deem convenient . . ."
6. RTC denied Grand Farms motion for summary judgment. Motion for Reconsideration also denied. CA ruled that no
notice was required, paragraph (k) merely specified where the notice should be sent (address), therefore, complaint
dismissed. Hence this appeal.
ISSUE: WON personal notice is required before foreclosure?

HELD: YES. As expressly provided in the mortgage contract.
SC: implied admission that there was no PERSONAL NOTICE, other issues are unnecessary to discuss. REMANDED to TC.
RATIO:
1. Applying said criteria to the case at bar, we find petitioners' action in the court below for annulment and/or
111
declaration of nullity of the foreclosure proceedings and damages ripe for summary judgment. Private respondent tacitly
admitted in its answer to petitioners' request for admission that it did not send any formal notice of foreclosure to
petitioners. Stated otherwise, and as is evident from the records, there has been no denial by private respondent that
no personal notice of the extrajudicial foreclosure was ever sent to petitioners prior thereto. This omission, by itself,
rendered the foreclosure defective and irregular for being contrary to the express provisions of the mortgage contract.
There is thus no further necessity to inquire into the other issues cited by the trial court, for the foreclosure may be
annulled solely on the basis of such defect.
While private respondent was constituted as their attorney-in-fact by petitioners, the inclusion of the aforequoted
paragraph (k) in the mortgage contract nonetheless rendered personal notice to the latter indispensable.
We do not agree with respondent court that paragraph (k) of the mortgage contract in question was intended merely to
indicate the address to which the communications stated therein should be sent. This interpretation is rejected by the
very text of said paragraph as above construed.
What private respondent would want is to have paragraph (k) considered as non-existent and consequently disregarded,
a proposition which palpably does not merit consideration. Furthermore, it bears mention that private respondent
having caused the formulation and preparation of the printed mortgage contract in question, any obscurity that it
imputes thereto or which supposedly appears therein should not favor it as a contracting party.
CASE LAW/ DOCTRINE: When it is stated in the contract that PERSONAL notice is necessary, it is necessary.
KEYWORDS/NOTES:
Twinkle :D
112
059 SPOUSES FRANCISCO and MERCED RABAT v. PNB

G.R. No. 158755 June 18, 2012
TOPIC: Extrajudicial Foreclosure Conduct of Sale
PONENTE: BERSAMIN, J.
FACTS:
1. Parties are before the court a second time. First case: PNB v. Rabat, decided in Nov. 15, 2000, G.R. Np. 134406. Facts
are based on above mentioned case.
2. Aug. 25, 1979: Spouses Rabat (RABATS) applied, and were granted a loan by PNB on 01/14/80, a medium term loan of
Php4M, to mature in 3 years.
3. January 28, 1980: (1) RABATS signed a credit agreement; (2) executed a real estate mortgage over 12 parcels of land.
4. Loan stipulation states interest = 17% per year, plus service charge, and penalty of 3% on amount unpaid or not
renewed when due.
5. September 25, 1980: RABATS executed an Amendment of the Credit Agreement to increase interest rate from 17 to
21%. Also executed another real estate mortgage on 9 parcels of land located in Davao Oriental (agricultura, commercial,
and residential) as additiona security for their Php4M loan.
6. Loans of RABATS reached total amount of Php3,517,380, due 3/14/83, evidenced by several PNs.
7. RABATS failed to pay their outstanding balance when it became due.
8. July 24, 1986: PNB responded with a denial to request of RABAT for extension of time for settlement. PNB have a
deadline of until 4/30/86 for settlement, which they sent to address at Wilson St, San Juan, MM.
9. PNB filed for extrajudicial foreclosure of mortgage executed by RABATS.
10. Parcels of land were sold at Public auction, with PNB as highest bidder at Php3,874,800.
11. Proceeds were inadequate to satisfy entire obligation, so PNB sent additional demand letters to RABAT (2 at Wilson,
San Juan on 11/15/90, and 8/30/91, and another at Davao Oriental)
12. PNB filed with RTC of Manila a complaint for a sum of money, due to failure by RABATS to settle obligation which had
already amounted to Php14,745,398.25 (with interest, penalties, and other charges).
13. RABATS: (1) admitted loan availments and default in payment, but (2) assailed validity of the auction sales, for want
of notice to them before and after the foreclosure sales.
14. RABATS also claim: (1) They have been residents of Mati, Davao Oriental since 1970-present; (2) received nor heard
about the foreclosure proceedings, in spite of PNBs claim of publication in San Pedro Times; (3) Latter is not a
newspaper of general circulation; (4) bid price was grossly inadequate and unconscionable; (5) accumulated interest and
penalty charges were invalid because properties were sold in 87, but PNB waited till 92 to file the case. Therefore, they
should not be made to suffer payment of interest and penalty charges from May 87 to present, because such would
allow PNB to profit from its questionable scheme
15. RTC dismissed the complaint; Auction sales of the properties were set aside, and PNB was ordered to reconvey to
RABATS the remaining properties after sufficient sale of properties to satisfy the obligation.
16. PNB appealed to CA, which upheld RTCs decision for nullification of foreclosure sales.
17. PNB appealed to SC (G.R. No. 134406). SC granted petition. Case was remanded to CA to DECIDE on the basis of the
errors raised by petitioner PNB in its brief. CA amended its decision, resolving errors assigned by PNB, but still affirmed
RTC decision. On MR, however, CA found for PNB.
18. RABATS moved for reconsideration, but was denied, hence appeal by them to SC.
ISSUE: (1) W/N the inadequacy of PNBs bid price renders the forced sale of the properties invalid; (2) W/N PNB was
entitled to recover any deficiency from the RABATS.
HELD: (1) NO; SC ruled against spouses Rabat. Auction bid was valid. (2) YES; PNB is entitled to recover from the RABATS.
RATIO:
1. The mode of forced sale utilized by petitioner was an extrajudicial foreclosure of real estate mortgage which is
governed by Act No. 3135, as amended. Law reveals nothing to the effect that there should be a minimum bid price or
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that the winning bid should be equal to the appraised value of the foreclosed property or to the amount owed by the
mortgage debtor. What is clearly provided is that a mortgage debtor is given the opportunity to redeem the foreclosed
property "within the term of one year from and after the date of sale." In the case at bar, other than the mere
inadequacy of the bid price at the foreclosure sale, respondent did not allege any irregularity in the foreclosure
proceedings nor did she prove that a better price could be had for her property under the circumstances.
2.PNBs bid price of P 3,874,800.00 not outrageously low as to be shocking to the conscience. Bid price was almost equal
to both the P 4M applied for by RABATS, to the total sum of P 3,517,380.00 of their actual availment from PNB.
3.In Bank of the Philippine Islands, etc. v. Reyes: unlike in an ordinary sale, inadequacy of the price at a forced sale is
immaterial and does not nullify a sale since, in a forced sale, a low price is more beneficial to the mortgage debtor for it
makes redemption of the property easier.
4.Hulst v. PR Builders: [G]ross inadequacy of price does not nullify an execution sale. In an ordinary sale, for reason of
equity, a transaction may be invalidated on the ground of inadequacy of price, or when such inadequacy shocks ones
conscience as to justify the courts to interfere; such does not follow when the law gives the owner the right to redeem as
when a sale is made at public auction, upon the theory that the lesser the price, the easier it is for the owner to effect
redemption. When there is a right to redeem, inadequacy of price should not be material because the judgment
debtor may re-acquire the property or else sell his right to redeem and thus recover any loss he claims to have
suffered by reason of the price obtained at the execution sale. Thus, respondent stood to gain rather than be harmed
by the low sale value of the auctioned properties because it possesses the right of redemption. x x x
SECOND ISSUE:
1.PNB was legally entitled to recover the penalty charge of 3% per annum and attorneys fees equivalent to 10% of the
total amount due. The documents relating to the loan and the real estate mortgage showed that the Spouses Rabat had
expressly conformed to such additional liabilities; hence, they could not now insist otherwise. To be sure, the law
authorizes the contracting parties to make any stipulations in their covenants provided the stipulations are not contrary
to law, morals, good customs, public order or public policy. Equally axiomatic are that a contract is the law between the
contracting parties, and that they have the autonomy to include therein such stipulations, clauses, terms and conditions
as they may want to include.
2. Inasmuch as the Spouses Rabat did not challenge the legitimacy and efficacy of the additional liabilities being charged
by PNB, they could not now bar PNB from recovering the deficiency representing the additional pecuniary liabilities that
the proceeds of the forced sales did not cover.
3.Prudential Bank v. Martinez,23 the fact that the mortgaged property was sold at an amount less than its actual market
value should not militate against the right to such recovery.
CASE LAW/ DOCTRINE: Inadequacy of the bid price at a forced sale, unlike that in an ordinary sale, is immaterial and
does not nullify the sale; in fact, in a forced sale, a low price is considered more beneficial to the mortgage debtor
because it makes redemption of the property easier.
The inadequacy of the bid price in an extrajudicial foreclosure sale of mortgaged properties will not per se invalidate the
sale. Additionally, the foreclosing mortgagee is not precluded from recovering the deficiency should the proceeds of the
sale be insufficient to cover the entire debt.
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060 Goldenway Merchandising Corporation v. Equitable PCI Bank

GR No. 195540 March 13, 2013
Extrajudicial Foreclosure, Right of Redemption
Villarama, Jr., J
FACTS:
1. Nov. 29, 1985 A Real Estate Mortgage was executed by Goldenway Merchandising Corp. In favour of Equitable PCI
Bank over its real properties situated in Valenzuela, Bulacan (Now Valenzuela). It was security for a P2 Million loan grant
by the Bank to Goldenway
2. Petitioner failed to settle its loan obligation so the Bank extrajudicially foreclosed the mortgage.
3. During public auction, the mortgaged properties were sold for P3.5 Million to the Bank.
4. March 12, 2001 Petitioners counsel met with Banks counsel with intention to exercise the right of redemption.
However, they were told that such redemption is no longer possible because the certificate of sale had already been
registered. The titles had already been consolidated and new certificates were issued in the name of Bank.
5. Dec. 7, 2001 Petitioner filed a complaint for specific performance and damages.
6. Petitioners contention: that the one-year period of redemption under Act No. 3135 should be applied to the real
estate mortgage, not RA 8791 which would impair the obligation of contracts and violation of the equal protection clause
under the Constitution
7. Respondent Banks contention: Petitioner cannot claim that it was unaware of the redemption price which is clearly
provided in Sec. 47, RA 8791, and that they had all the opportune time to redeem the foreclosed properties.
7. TC: dismissed complaint AND counter-claim. Petitioner never raised the issue of constitutionality of RA No. 8791.
Petitioners counsel was not duly authorized by their Board of Directors to transact for and in their behalf.
8. CA affirmed TC for failure of petitioner to justify unconstitutionality. The redemption period for juridical persons have
been shortened when RA No. 8791 took effect. MR likewise denied.
ISSUE:
Whether RA No. 8791 is unconstitutional.
HELD:
NO. It is constitutional and does not impair the obligation of contract. RA No. 8791 is validly applied in the case of a real
estate mortgage contract which was executed in 1985 and the mortgage foreclosed.
RATIO:
1. Purpose of the non-impairment clause: safeguard the integrity of contracts against unwarranted interference by the
State. Sec. 47 did not divest juridical persons of the right to redeem their foreclosed properties but only modified the
time for the exercise of such right by reducing the one-year period
Under Sec. 6 of Act No. 3135 (of 1924) as amended by Act 4118, the one-year redemption is be counted from the
date of the registration of the certificate of sale. However, Sec. 47 of RA No. 8791 (The General Banking Law of 2000)
provides an exception in the case of juridical persons in exercising the right of redemption: only until, but not after, the
registration of the certificate of foreclosure sale and in no case more than 3 months after foreclosure, whichever comes
first.
2. There is no retroactive application of the new redemption period because Sec 47 exempts from its operation those
properties foreclosed prior to its effectivity and whose owners shall retain their redemption rights under Act No. 3135.
3. Section 47 embodied one of such safe and sound practices aimed at ensuring the solvency and liquidity of our banks. It
cannot therefore be disputed that the said provision amending the redemption period in Act 3135 was based on
reasonable classification and germane to the purpose of the law.
4. Right of redemption, being statutory, must be exercised in the manner prescribed by the statute, and within the
prescribed time limit. It has to give way to police power exercised for public welfare.
5. The Bank is imbued with public interest and must submit to the States power of regulation.
6. Regulations must be subject to change from time to time
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CASE LAW/ DOCTRINE:

Non-impairment clause of the Constitution must yield to the loftier purposes targeted by the Government. The right
granted by this provision must submit to the demands and necessities of the States power of regulation.
KEYWORDS/NOTES:
116
061 Medida et al v. CA
G.R. No. 98334 May 8, 1992
TOPIC: Right of Redemption, Act No 3135, Sec. 6 A.M. No. 99-10-05-0; Who may redeem Act No. 3135, Sec. 6, Rules of
Court, Rule 9, Sec. 27
FACTS:
1. Plaintiff spouses, alarmed of losing their right of redemption over Lot 4731 of Cebu City from Mr. Juan who
purchased it at a foreclosure sale, obtained a loan of P30,000 from Abellana who is the president of defendant
corporation. Also, the spouses son also obtained a loan for P25,000 with Lot No. 4731 as security
2. When the loan became due and demandable without plaintiff paying, defendant association caused the
extrajudicial foreclosure of the mortgage. After the posting and publication requirements were complied with,
the land was sold at public auction on April 19, 1976 to defendant association being the highest bidder
3. May 24, 1971: no redemption having been effected by plaintiff, TCT was cancelled and a new one was issued in
the name of defendant association
4. Private respondents filed for the annulment of the sale at public auction and issuance of certificate of sale. They
claim that the foreclosure sale violated Act No. 3135, as amended. But the defendant association denied the
material allegations of the complaint and averred that the present private respondent spouses may still avail of
their right of redemption over the land in question.
5. TC: upheld the validity of the loan and the real estate mortgage, but annulling the extrajudicial foreclosure
inasmuch as the same failed to comply with the notice requirements in Act. No. 3135, as amended.
6. CA: modified the decision of the TC, and modified declaring as void and ineffective the real estate mortgage
executed by plaintiffs in favour of defendant association.
ISSUE: Whether or not a mortgagor, whose property has been extrajudicially foreclosed and sold at a corresponding
foreclosure sale, may validly execute a mortgage contract over the same property in favor of a third party during the
period of redemption
HELD: Yes.
The decision of respondent Court of Appeals, insofar as it modifies the judgment of the trial court, is REVERSED and SET
ASIDE
RATIO:
1. During the said period of redemption, it cannot be said that the mortgagor is no longer the owner of the foreclosed
property since the rule up to now is the right of a purchaser of a foreclosure sale is merely inchoate until after the
period of redemption has expired without the right being exercised. The title to the land sold under mortgage
foreclosure remains in the mortgagor or his grantee until the expiration of the redemption period and the
conveyance of the master deed. The mortgagor remains as the absolute owner of the property during the
redemption period and has the free disposal of his property, there would be compliance with Article. 2085 of the
Civil Code for the constitution of another mortgage on the property. To hold otherwise would create an inequitable
situation wherein the mortgagor would be deprived of the opportunity, which may be his last recourse, to raise
funds to timely redeem his property through another mortgage.
2. CA declared the real estate mortgage in question void for the reason that the mortgagor spouses, at the time when
the said mortgage was executed, were no longer the owners of the lot, having supposedly lost the same when the lot
was sold to a purchaser in the foreclosure sale under the prior mortgage. This holding cannot be sustained.
The CA, in making its decision, relied only on an obiter dictum of a case Dizon v. Gaborro.
3. The American rule is similarly to the effect that the redemption of property sold under a foreclosure sale defeats the
inchoate right of the purchaser and restores the property to the same condition as if no sale had been attempted.
Further, it does not give to the mortgagor a new title, but merely restores to him the title freed of the encumbrance
of the lien foreclosed.
4. We cannot rule on the plaint of petitioners that the trial court erred in declaring ineffective the extrajudicial
117
foreclosure and the sale of the property to petitioner bank. The court below spelled out at length in its decision the
facts which it considered as violative of the provisions of Act No. 3135, as amended, by reason of which it nullified
the extrajudicial foreclosure proceeding and its effects. Such findings and ruling of the trial court are already final and
binding on petitioners and can no longer be modified, petitioners having failed to appeal therefrom.
CASE LAW/ DOCTRINE:

it is undisputed that the real estate mortgage in favor of petitioner bank was executed by respondent spouses during the
period of redemption. We reiterate that during said period it cannot be said that the mortgagor is no longer the owner of
the foreclosed property since the rule up to now is that the right of a purchaser at a foreclosure sale is merely inchoate
until after the period of redemption has expired without the right being exercised. The title to land sold under mortgage
foreclosure remains in the mortgagor or his grantee until the expiration of the redemption period and conveyance by the
master's deed. To repeat, the rule has always been that it is only upon the expiration of the redemption period, without
the judgment debtor having made use of his right of redemption, that the ownership of the land sold becomes
consolidated in the purchaser.
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062 Spouses Yap v. Spouses Dy, et al.

G.R.No. 171991 and 171868, July 27, 2011
TOPIC: How to redeem
PONENTE: Villarama, Jr.,J.
FACTS:
1. Tirambulos owned 6 parcels of land(Lot 1 and Lots 3-6 and Lot 8).
2. Dec. 3,1976: Tirambulos executed a Real Estate Mortgage over Lots 1,4,5,6 and 8 in favour of Rural Bank of
Dumaguete, predecessor of Dumaguete Rural Bank (DRBI), to secure P105,000 loan extended by the bank to them.
3. Tirambulos obtained a second loan of P28,000 secured with REM over Lot 3 in favour of DRBI
4.Tirambulos sold all lots to the Dy spouses and to the Maximo spouses without the consent and knowledge of DRBI.
5. After the sale, Tirambulos failed to pay their loans to DRBI
6. DRBI extrajudicially foreclosed the Dec.3 mortgage and had Lots 1,4,5,6 and 8 sold at public auction. DRBI was
proclaimed the highest bidder and bought the lots for P216, 040.93
7. After the sale was registered, DRBI sold Lots 1,3 and 6 to Yap spouses under a Deed of Sale with Agreement to
Mortgage (**Lot 3 was not among the 5 lots foreclosed and bought by DRBI at the auction)
8. A month before the 1 year redemption period was set to expire, the Dys and Maxinos attempted to redeem Lots 1, 3
and 6. They tendered the amount to DRBI and the Yaps, but both refused, contending that the redemption should be for
the full amount of P216,040.93.
9. Dys and Maxinos paid P50,625.29 to the Office of the Sheriff to effect the redemption.
10. The Yaps refused to take the delivery of the redemption price contesting that the mortgage is indivisible and one
cannot redeem only some of the lots foreclosed because all the parcels were sold for a single price at the auction sale.
11. Dys and Maxinos filed a civil case for accounting, injunction, declaration of nullity of Deed of Sale with Agreement to
Mortgage (with regard to Lot 3), and damages. They also consigned an additional P83,850.50 representing the remaining
balance of the purchase price that Yaps still owed DBRI
12. Yaps filed a civil case for consolidation of ownership, annulment of certificate of redemption, and damages. The 2
civil cases were tried jointly
13. RTC: rendered decision in favor of the Yaps
Dys and Maxinos failed to offer evidence
Deed of Sale with Agreement to Mortgage is not contrary to law, morals, good customs, public policy or order
Dys and Maxinos failed to exercise their rights of redemption properly and timely. They deposited only
P50,625.29 where the amount due is P216,040.93.
14.CA: reversed the decision of RTC.
15. Yaps argue that there is no valid redemption of the properties extrajudicially foreclosed
ISSUE: 1. Was there a valid redemption by the Dys and Maxinos

2. Whether or not the Dys and Maxinos are entitled to redeem
3. Whether or not the mortgage is indivisible
HELD: 1 & 2: YES.
3. NO. Dys and Maxinos can effect the redemption of even only two of the five properties foreclosed. And since
they can effect a partial redemption, they are not required to pay the P216,040.93 considering that it is the purchase
price for all the five properties foreclosed.
RATIO:
1. Dys and the Maxinos complied with Section 31, Rule 39 of the Rules of Court. Well within the redemption period, they
initially attempted to pay the redemption money not only to the purchaser, DRBI, but also to the Yaps. Both DRBI and the
Yaps however refused, insisting that the Dys and Maxinos should pay the whole purchase price at which all the
foreclosed properties were sold during the foreclosure sale. Because of said refusal, the Dys and Maxinos correctly
availed of the alternative remedy by going to the sheriff who made the sale. As held in a case, the tender of the
redemption money may be made to the purchaser of the land or to the sheriff. If made to the sheriff, it is his duty to
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accept the tender and execute the certificate of redemption.
2. Dys and Maxinos have legal personality to redeem the subject properties despite the fact that the sale to the Dys and
Maxinos was without DRBIs consent. In a case, the Court held that the sale by the mortgagor of the mortgaged property
to a third person notwithstanding the lack of written consent by the mortgagee is valid, and likewise recognized the third
persons right to redeem the foreclosed property, the buyer steps into the shoes of the mortgagor on account of such
sale and was in effect, their successor-in-interest.
3. It is undisputed that the Dys and the Maxinos made the redemption within the 12-month period from the registration
of the sale. The Dys and Maxinos effected the redemption on May 24, 1984, with the Provincial Sheriff, and on June 19,
1984, when they deposited an additional. Both dates were well within the one-year redemption period reckoned from
the June 24, 1983 date of registration of the foreclosure sale. Likewise, the Provincial Sheriff who made the sale was
properly notified of the redemption since the Dys and Maxinos deposited with him the redemption money after both
DRBI and the Yaps refused to accept it.
4. Debtor cannot ask for the release of any portion of the mortgaged property or of one or some of the several lots
mortgaged unless and until the loan thus, secured has been fully paid, notwithstanding the fact that there has been a
partial fulfillment of the obligation. <-This does not apply to the case. It is actually intended for the protection of the
mortgagee, specifically refers to the release of the mortgage which secures the satisfaction of the indebtedness and
naturally presupposes that the mortgage is existing. Once the mortgage is extinguished by a complete foreclosure
thereof, said doctrine of indivisibility ceases to apply since, with the full payment of the debt, there is nothing more to
secure. Nothing in the law prohibits the piecemeal redemption of properties sold at one foreclosure proceeding. In fact,
in several early cases decided by this Court, the right of the mortgagor or redemptioner to redeem one or some of the
foreclosed properties was recognized.
CASE LAW/ DOCTRINE:

The requisites for a valid redemption are:
(1) the redemption must be made within twelve (12) months from the time of the registration of the sale in the Office of
the Register of Deeds;
(2) payment of the purchase price of the property involved, plus 1% interest per month thereon in addition, up to the
time of redemption, together with the amount of any assessments or taxes which the purchaser may have paid thereon
after the purchase, also with 1% interest on such last named amount; and
(3) written notice of the redemption must be served on the officer who made the sale and a duplicate filed with the
Register of Deeds of the province.
Once the mortgage is extinguished by a complete foreclosure thereof, said doctrine of indivisibility ceases to apply
since, with the full payment of the debt, there is nothing more to secure
KEYWORDS/NOTES:
120
063 Heirs of the late spouses FLAVIANO MAGLASANG and SALUD ADAZA-MAGLASANG, namely, OSCAR A.
MAGLASANG, EDGAR A. MAGLASANG, CONCEPCION CHONA A. MAGLASANG, GLENDA A. MAGLASANG-ARNAIZ,
LERMA A. MAGLASANG, FELMA A. MAGLASANG, FE DORIS A. MAGLASANG, LEOLINO A. MAGLASANG, MARGIE LEILA
A. MAGLASANG,MA. MILALIE A. MAGLASANG, SALUD A. MAGLASANG, and MA. FLASALIE A. MAGLASANG,
REPRESENTING THE ESTATES OF THEIR AFORE-NAMED DECEASED PARENTS, Petitioners
vs.
Manila Banking Corporation, now substituted by FIRST SOVEREIGN ASSET MANAGEMENT SPV-AMC, INC.
FSAMI, Respondent.
GR No. 171206 Date September 23, 2013
TOPIC: Right to Deficiency, Rules of Court, Rule 86, Section 7
PONENTE: Perlas-Bernabe, J.
FACTS:
1. Spouses Flaviano and Salud Maglasang obtained a credit line from respondent in the amount of P350,000.00
which was secured by a real estate mortgage executed over 7 of their properties located in Ormoc City,
Leyte. They availed of their credit line by securing loans in the amounts of P209,790.50 and P139,805.83 both of
which becoming due and demandable within a period of one year. Further, the parties agreed that the said loans
would earn interest at 12% per annum and an additional 4% penalty would be charged upon default.
2. After Flaviano Maglasang died intestate, his widow Salud and their surviving children, herein petitioners,
appointed their brother petitioner Edgar Maglasang as their attorney-in-fact. Thus, Edgar filed a verified petition
for letters of administration of the intestate estate of Flaviano before the then Court of First Instance of Leyte,
Ormoc City, Branch 5. Thereafter, the probate court issued an Order granting the petition, thereby appointing
Edgar as the administrator of Flavianos estate.
3. In view of the issuance of letters of administration, the probate court, issued a Notice to Creditors for the filing of
money claims against Flavianos estate. Accordingly, as one of the creditors of Flaviano, respondent notified the
probate court of its claim in the amount of P382,753.19 exclusive of interests and charges.
4. During the pendency of the intestate proceedings, Edgar and Oscar were able to obtain several loans from
respondent, secured by promissory notes which they signed.
5. In an Order, the probate court terminated the proceedings with the surviving heirs executing an extra-judicial
partition of the properties of Flavianos estate. The loan obligations owed by the estate to respondent, however,
remained unsatisfied due to respondents certification that Flavianos account was undergoing a restructuring.
Nonetheless, the probate court expressly recognized the rights of respondent under the mortgage and
promissory notes executed by the Sps. Maglasang, specifically, its "right to foreclose the same within the
statutory period."
6. In this light, respondent proceeded to extra-judicially foreclose the mortgage covering the Sps. Maglasangs
properties and emerged as the highest bidder at the public auction for the amount of P350,000.00. There,
however, remained a deficiency on Sps. Maglasangs obligation to respondent. Thus, on June 24, 1981,
respondent filed a suit to recover the deficiency amount.
RTC RULING: After trial on the merits, the RTC rendered a Decision directing the petitioners to pay respondent, jointly
and severally, the amount of P434,742.36 with interest at the rate of 12% p.a., plus a 4% penalty charge, reckoned from
September 1984 until fully paid. The RTC found that it was shown, by a preponderance of evidence, that petitioners,
after the extra-judicial foreclosure of all the properties mortgaged, still have an outstanding obligation in the amount and
as of the date as above-stated. The RTC also found in order the payment of interests and penalty charges as above-
mentioned as well as attorneys fees equivalent to 10% of the outstanding obligation.
CA RULING: Petitioners elevated the case to the CA on appeal that the remedies available to respondent under Section 7,
Rule 86 of the Rules of Court (Rules) are alternative and exclusive, such that the election of one operates as a waiver or
abandonment of the others. Thus, when respondent filed its claim against the estate of Flaviano in the proceedings
before the probate court, it effectively abandoned its right to foreclose on the mortgage. Moreover, even on the
assumption that it has not so waived its right to foreclose, it is nonetheless barred from filing any claim for any deficiency
amount.
The CA denied the petitioners appeal and affirmed the RTCs Decision. Further, the CA held that Section 7, Rule 86 of the
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Rules does not apply to the present case since the same does not involve a mortgage made by the administrator over any
property belonging to the estate of the decedent. According to the CA, what should apply is Act No. 3135 which entitles
respondent to claim the deficiency amount after the extra-judicial foreclosure of the real estate mortgage of Sps.
Maglasangs properties.
Petitioners motion for reconsideration was subsequently denied in a Resolution. Hence, the present recourse.
ISSUE:
1. Whether or not the CA erred in affirming the RTCs award of the deficiency amount in favor of respondent.
2. Whether or not the extra-judicial foreclosure of the subject properties was null and void since the same was
conducted in violation of the stipulation in the real estate mortgage contract stating that the auction sale should be held
in the capital of the province where the properties are located, i.e., the Province of Leyte.
RATIO:
1. Yes, the CA erred. It bears to stress that the CAs reliance on Philippine National Bank v. CA was misplaced as the
said case did not, in any manner, limit the scope of Section 7, Rule 86. It only stated that the aforesaid section
equally applies to cases where the administrator mortgages the property of the estate to secure the loan he
obtained. Clearly, the pronouncement was a ruling of inclusion and not one which created a distinction. It
cannot, therefore, be doubted that it is Section 7, Rule 86 which remains applicable in dealing with a creditors
claim against the mortgaged property of the deceased debtor, as in this case, as well as mortgages made by the
administrator, as that in the PNB case.
Claims against deceased persons should be filed during the settlement proceedings of their estate. Such proceedings are
primarily governed by special rules found under Rules 73 to 90 of the Rules. Among these special rules, Section 7, Rule 86
of the Rules (Section 7, Rule86) provides the rule in dealing with secured claims against the estate:
SEC. 7. Mortgage debt due from estate. A creditor holding a claim against the deceased secured by a mortgage or other
collateral security, may abandon the security and prosecute his claim in the manner provided in this rule, and share in the
general distribution of the assets of the estate; or he may foreclose his mortgage or realize upon his security, by action in
court, making the executor or administrator a party defendant, and if there is a judgment for a deficiency, after the sale
of the mortgaged premises, or the property pledged, in the foreclosure or other proceeding to realize upon the security,
he may claim his deficiency judgment in the manner provided in the preceding section; or he may rely upon his mortgage
or other security alone, and foreclose the same at any time within the period of the statute of limitations, and in that
event he shall not be admitted as a creditor, and shall receive no share in the distribution of the other assets of the estate;
but nothing herein contained shall prohibit the executor or administrator from redeeming the property mortgaged or
pledged, by paying the debt for which it is held as security, under the direction of the court, if the court shall adjudged it
to be for the best interest of the estate that such redemption shall be made.
As the foregoing generally speaks of "a creditor holding a claim against the deceased secured by a mortgage or other
collateral security" as above-highlighted, it may be reasonably concluded that the aforementioned section covers all
secured claims, whether by mortgage or any other form of collateral, which a creditor may enforce against the estate of
the deceased debtor.
***Jurisprudence breaks down the rule under Section 7, Rule 86 and explains that the secured creditor has three
remedies/options that he may alternatively adopt for the satisfaction of his indebtedness. In particular, he may choose
to:
***(a) waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim;
(b) foreclose the mortgage judicially and prove the deficiency as an ordinary claim; and
(c) rely on the mortgage exclusively, or other security and foreclose the same before it is barred by prescription, without
the right to file a claim for any deficiency.
***It must, however, be emphasized that these remedies are distinct, independent and mutually exclusive from each
other; Thus, the election of one effectively bars the exercise of the others.
To eliminate any confusion, the Court observes that the operation of Act No. 3135 does not entirely discount the
application of Section 7, Rule 86, or vice-versa. Rather, the two complement each other within their respective spheres
of operation. Thus, having unequivocally opted to exercise the third option of extra-judicial foreclosure under Section 7,
Rule 86, respondent is now precluded from filing a suit to recover any deficiency amount as earlier discussed. (See ***)
2. No, the extra-judicial foreclosure is not null and void. As may be gleaned from the records, the stipulation under the
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real estate mortgage executed by Sps. Maglasang which fixed the place of the foreclosure sale at Tacloban City lacks
words of exclusivity which would bar any other acceptable for a wherein the said sale may be conducted, to wit:
It is hereby agreed that in case of foreclosure of this mortgage under Act 3135, the auction sale shall be held at the
capital of the province if the property is within the territorial jurisdiction of the province concerned, or shall be held in the
city if the property is within the territorial jurisdiction of the city concerned; x x x.
In particular, Section 2 of Act No. 3135 allows the foreclosure sale to be done within the province where the property to
be sold is situated, viz.:
SEC. 2. Said sale cannot be made legally outside of the province which the property sold is situated; and in case the place
within said province in which the sale is to be made is subject to stipulation, such sale shall be made in said place or in the
municipal building of the municipality in which the property or part thereof is situated.
In this regard, since the auction sale was conducted in Ormoc City, which is within the territorial jurisdiction of the
Province of Leyte, then the Court finds sufficient compliance with the above-cited requirement.
All told, finding that the extra-judicial foreclosure subject of this case was properly conducted in accordance with the
formalities of Act No. 3135, the Court upholds the same as a valid exercise of respondent's third option under Section 7,
Rule 86. To reiterate, respondent cannot, however, file any suit to recover any deficiency amount since it effectively
waived its right thereto when it chose to avail of extra-judicial foreclosure as jurisprudence instructs.
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064 Suico v. PNB

G.R. No. 170215, August 28, 2007
TOPIC: Extra-judicial foreclosure: Right to surplus
PONENTE: Chico -Nazario
FACTS:
1. The spouses Suico obtained a loan from PNB secured by a real estate mortgage on real properties in the name of
the spouses. The problem arose when the spouses were unable to pay their obligation prompting PNB to
extrajudicially foreclose the mortgage over the subject properties before the City Sherriff of Mandaue City.
2. The spouses thereafter filed a complaint against the PNB declaring nullity of extrajudicial foreclosure of
mortgage. PNB filed with the Office of the Sheriff for the extrajudicial foreclosure of properties for the
outstanding loan amounting to P1,001.770.38.
Spouses Petitioner contends:
During the auction, PNB, as the lone bidder, offered a bid in the amount of P8,5,11.00. However PNB did not pay the
sheriff the said amount.
Since the amount of the bid grossly exceeded the amount of the obligation. PNB has the legal duty to deliver the
excess amount of the bid after deducting the amount of the outstanding obligation.
Hence the auction should be deemed null and void

Respondent PNB contends in the Motion to dismiss:
Other obligations of the spouses have already accrued hence the amount of the auction covered such obligations.
The rest of the amount was paid for expenses incurred in the case such as attorneys fees.
PNB admitted the non-deliver of the bid price to the sheriff.
RTC Ruling:
RTC ruled in favor of the spouses declaring nullity to the auction and ordering restitution to the spouses. It
argued that petitioners had other loan obligation which had not yet matured on March 19, 1992 but became due by the
date of the auction sale. It does not justify the shortcut taken by PNB and will not excuse it from paying to the Sheriff
who conducted the auction sale the excess bid in the foreclosure sale. PNB appealed in the CA
CA Ruling:
Reversed and set aside the ruling of the RTC. It argued that spouses expressly admitted their outstanding
obligations by offering to redeem the properties through letters. All those offers made by the [petitioners] not only
contradicted their very assertion that their obligation is merely that amount appearing on the petition for foreclosure but
are also indicative of the fact that they have admitted the validity of the extra judicial foreclosure proceedings and in
effect have cured the impugned defect. Hence the case.
ISSUE: WON the Spouses Suico has a right to the surplus of the auction payment.
HELD: The Supreme Court ruled that PNB should return the surplus of the auction sale to the spouses
RATIO:
Rule 68, Section 4 of the Rules of Court provides:
SEC. 4. Disposition of proceeds of sale.- The amount realized from the foreclosure sale of the mortgaged
property shall, after deducting the costs of the sale, be paid to the person foreclosing the mortgage, and when
there shall be any balance or residue, after paying off the mortgage debt due, the same shall be paid to
junior encumbrancers in the order of their priority, to be ascertained by the court, or if there be no
suchencumbrancers or there be a balance or residue after payment to them, then to the mortgagor or his duly
authorized agent, or to the person entitled to it.
Under the above rule, the disposition of the proceeds of the sale in foreclosure shall be as follows:
(a) first, pay the costs
(b) secondly, pay off the mortgage debt
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(c) thirdly, pay the junior encumbrancers, if any in the order of priority
(d) fourthly, give the balance to the mortgagor, his agent or the person entitled to it]
Based on the foregoing, after payment of the costs of suit and satisfaction of the claim of the first
mortgagee/senior mortgagee, the claim of the second mortgagee/junior mortgagee may be satisfied from the surplus
proceeds. The application of the proceeds from the sale of the mortgaged property to the mortgagors obligation is an
act of payment, not payment by dacion; hence, it is the mortgagees duty to return any surplus in the selling price to the
mortgagor. Perforce, a mortgagee who exercises the power of sale contained in a mortgage is considered a custodian of
the fund and, being bound to apply it properly, is liable to the persons entitled thereto if he fails to do so. And even
though the mortgagee is not strictly considered a trustee in a purely equitable sense, but as far as concerns the
unconsumed balance, the mortgagee is deemed a trustee for the mortgagor or owner of the equity of redemption.]
Thus it has been held that if the mortgagee is retaining more of the proceeds of the sale than he is entitled to, this
fact alone will not affect the validity of the sale but simply give the mortgagor a cause of action to recover such surplus.
CASE LAW/ DOCTRINE:
KEYWORDS/NOTES:
125
065 CHU, ET.AL V. LACQUI & PBComm

G.R. No. 169190 Date February 11, 2010
TOPIC: REAL ESTATE MORTGAGE Extrajudicial foreclosure: right to possession after consolidation of ownership
PONENTE: Carpio, J.
FACTS:
1. Petitioners (Spouses Castro and Chu) obtained a P3.2M loan from private respondent Phil. Bank of
Communication. To secure the loan, petitioners executed a deed of real estate mortgage over the property of
petitioner spouses. Petitioners executed an Amendment to the Deed of Real Estate Mortgage increasing the
amount of the loan to P5M.
2. Since petitioners failed to pay the full amount of the outstanding loan upon demand, private respondent applied
for the extrajudicial foreclosure of the real estate mortgage. At the foreclosure sale, private respondent emerged
as the highest bidder. After the lapse of the one-year redemption period, it filed an affidavit of consolidation to
consolidate its ownership and title to the foreclosed property. A new TCT was issued in the name of private
respondent.
3. The private respondent applied for the issuance of a writ of possession of the foreclosed property. Petitioners
filed an opposition. The trial court granted private respondents motion for a declaration of general default and
allowed private respondent to present evidence ex parte. The trial court denied petitioners notice of appeal.
Undeterred, petitioners filed in the Court of Appeals a petition for certiorari. The appellate court dismissed the
petition. It also denied petitioners motion for reconsideration
TC: 8 October 2004 Order granted private respondents motion for a declaration of general default and allowed
private respondent to present evidence ex parte. 6 January 2005 Order denied petitioners motion for
reconsideration of the prior order. 24 February 2005 Order denied petitioners notice of appeal.
CA: dismissed the petition for certiorari of petitioners since counsel for petitioners failed to indicate in the petition
the updated PTR Number and petitioners right to due process was not violated even if they were not given a chance
to file their opposition (a proceeding for the issuance of a writ of possession is ex parte in nature)
ISSUE: Whether the writ of possession was properly issued despite the pendency of a case questioning the validity of the
extrajudicial foreclosure sale and despite the fact that petitioners were declared in default in the proceeding for the
issuance of a writ of possession.
HELD: YES.
RATIO:
1. In the present case, the certificate of sale of the foreclosed property was annotated on TCT No. 22990 on 7 June 2002.
The redemption period thus lapsed on 7 June 2003, one year from the registration of the sale. When private respondent
applied for the issuance of a writ of possession on 18 August 2004, the redemption period had long lapsed. Since the
foreclosed property was not redeemed within one year from the registration of the extrajudicial foreclosure sale, private
respondent had acquired an absolute right, as purchaser, to the writ of possession. It had become the ministerial duty of
the lower court to issue the writ of possession upon mere motion pursuant to Section 7 of Act No. 3135, as amended.
Moreover, once ownership has been consolidated, the issuance of the writ of possession becomes a
ministerial duty of the court, upon proper application and proof of title. In the present case, when private respondent
applied for the issuance of a writ of possession, it presented a new transfer certificate of title issued in its name dated 8
July 2003. The right of private respondent to the possession of the property was thus founded on its right of ownership.
As the purchaser of the property at the foreclosure sale, in whose name title over the property was already issued, the
right of private respondent over the property had become absolute, vesting in it the corollary right of possession.
2. Petitioners are wrong in insisting that they were denied due process of law when they were declared in default despite
the fact that they had filed their opposition to the issuance of a writ of possession. The application for the issuance of a
writ of possession is in the form of an ex parte motion. It issues as a matter of course once the requirements are
fulfilled. No discretion is left to the court. Petitioners cannot oppose or appeal the courts order granting the writ of
possession in an ex parte proceeding. The remedy of petitioners is to have the sale set aside and the writ of possession
cancelled in accordance with Section 8 of Act No. 3135, as amended, to wit:
SEC. 8. The debtor may, in the proceedings in which possession was requested, but not later than
thirty days after the purchaser was given possession, petition that the sale be set aside and the writ of
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possession cancelled, specifying the damages suffered by him, because the mortgage was not violated or
the sale was not made in accordance with the provisions hereof. x x x
Any question regarding the validity of the extrajudicial foreclosure sale and the resulting cancellation of the writ
may be determined in a subsequent proceeding as outlined in Section 8 of Act No. 3135, as amended. Such question
should not be raised as a justification for opposing the issuance of a writ of possession since under Act No. 3135, as
amended, the proceeding for this is ex parte.
Further, the right to possession of a purchaser at an extrajudicial foreclosure sale is not affected by a pending
case questioning the validity of the foreclosure proceeding. The latter is not a bar to the former. Even pending such
latter proceeding, the purchaser at a foreclosure sale is entitled to the possession of the foreclosed property.
127
066 BPI Family Savings Bank, Inc. v. Golden Power Diesel Sales Center, Inc.
639 SCRA 405 (2011)
TOPIC: Right to Possession When Held by a Third Party
PONENTE: Carpio, J;
FACTS:
1. CEDEC Transport, Inc. (CEDEC) mortgaged two parcels of land in favor of BPI Family to secure a loan of
P6,570,000. CEDEC obtained from BPI Family additional loans of P2,160,000 and P1,140,000, respectively, and
again mortgaged the same properties.
2. Despite demand, CEDEC defaulted in its mortgage obligations.
3. BPI Family filed with Regional Trial Court of Pasay City a petition for extrajudicial foreclosure of real estate
mortgage over the properties. After due notice and publication, the sheriff sold the properties at public auction.
BPI Family, as the highest bidder, acquired the properties for P13,793,705.31.
4. The one-year redemption period expired without CEDEC redeeming the properties. Thus, the titles to the
properties were consolidated in the name of BPI Family. However, despite several demand letters, CEDEC
refused to vacate the properties and to surrender possession to BPI Family.
5. BPI Family filed an Ex-Parte Petition for Writ of Possession, the trial court granted BPI Familys petition
6. On 29 July 2002, respondents Golden Power Diesel Sales Center, Inc. and Renato C. Tan (respondents) filed a
Motion to Hold Implementation of the Writ of Possession.
7. Respondents alleged that they are in possession of the properties which they acquired from CEDEC on 10
September 1998 pursuant to the Deed of Absolute Sale with Assumption of Mortgage (Deed of Sale).
Respondents argued that they are third persons claiming rights adverse to CEDEC, the judgment obligor and they
cannot be deprived of possession over the properties.
8. The trial court denied respondents motion. Thereafter, the trial court issued an alias writ of possession which
was served upon CEDEC and all other persons claiming rights under them.
9. However, the writ of possession expired without being implemented. BPI Family filed an Urgent Ex-Parte Motion
to Order the Honorable Branch Clerk of Court to Issue Alias Writ of Possession. In an Order dated 27 January
2003, the trial court granted BPI Familys motion.
10. Before the alias writ could be implemented, respondent Renato C. Tan filed with the trial court an Affidavit of
Third Party Claim on the properties. Instead of implementing the writ, the sheriff referred the matter to the
trial court for resolution.
11. The trial court denied BPI Familys motion and ordered the sheriff to suspend the implementation of the alias
writ of possession. According to the trial court, the order granting the alias writ of possession should not affect
third persons holding adverse rights to the judgment obligor. The trial court admitted that in issuing the first
writ of possession it failed to take into consideration respondents complaint claiming ownership of the
property. The trial court also noted that respondents were in actual possession of the properties and had been
updating the payment of CEDECs loan balances with BPI Family.
12. BPI Family then filed a petition for mandamus and certiorari with application for a temporary restraining order or
preliminary injunction before the Court of Appeals. The Court of Appeals dismissed BPI Familys petition.
ISSUE: Whether or not private respondents being the vendee of the properties in question, they are categorized as third
persons in possession who are claiming a right adverse to that of the debtor/mortgagor CEDEC.
HELD: No. Respondents are CEDECs successors-in-interest. Therefore, respondents hold title to and possess the
properties as CEDECs transferees and any right they have overthe properties is derived from CEDEC. As transferees of
CEDEC, they merely stepped into CEDECs shoes and are bound to acknowledge and respect the mortgage CEDEC had
executed in favor of BPI Family.
RATIO:
1. It is thus settled that the buyer in a foreclosure sale becomes the absolute owner of the property purchased if it
is not redeemed during the period of one year after the registration of the sale. As such, he is entitled to the
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possession of the said property and can demand it at any time following the consolidation of ownership in his
name and the issuance to him of a new transfer certificate of title. The buyer can in fact demand possession of
the land even during the redemption period except that he has to post a bond in accordance with Section 7 of
Act No. 3135, as amended. No such bond is required after the redemption period if the property is not
redeemed. Possession of the land then becomes an absolute right of the purchaser as confirmed owner. Upon
proper application and proof of title, the issuance of the writ of possession becomes a ministerial duty of the
court.
2. It is clear that respondents acquired possession over the properties pursuant to the Deed of Sale which provides
that for P15,000,000 CEDEC will sell, transfer and convey to respondents the properties free from all liens and
encumbrances excepting the mortgage as may be subsisting in favor of the BPI FAMILY SAVINGS BANK.
Moreover, the Deed of Sale provides that respondents bind themselves to assume the payment of the unpaid
balance of the mortgage indebtedness of the VENDOR (CEDEC) amounting to P7,889,472.48, as of July 31, 1998,
in favor of the aforementioned mortgagee (BPI Family) by the mortgage instruments and does hereby further
agree to be bound by the precise terms and conditions therein contained.
3. Respondents cannot assert that their right of possession is adverse to that of CEDEC when they have no
independent right of possession other than what they acquired from CEDEC. Since respondents are not holding
the properties adversely to CEDEC, being the latters successors-in-interest, there was no reason for the trial
court to order the suspension of the implementation of the writ of possession.
4. It is settled that a pending action for annulment of mortgage or foreclosure sale does not stay the issuance of the
writ of possession. The trial court, where the application for a writ of possession is filed, does not need to look
into the validity of the mortgage or the manner of its foreclosure. The purchaser is entitled to a writ of
possession without prejudice to the outcome of the pending annulment case. (see case law/doctrine)
CASE LAW/ DOCTRINE:

The general rule is that a purchaser in a public auction sale of a foreclosed property is entitled to a writ of possession
and, upon an ex parte petition of the purchaser; it is ministerial upon the trial court to issue the writ of possession in
favor of the purchaser.
Exception: Upon the expiration of the right of redemption, the purchaser or redemptioner shall be substituted to and
acquire all the rights, title, interest and claim of the judgment obligor to the property as of the time of the levy. The
possession of the property shall be given to the purchaser or last redemptioner by the same officer unless a third party is
actually holding the property adversely to the judgment obligor.
KEYWORDS/NOTES:
129
067 Nagtalon v. United Coconut Planters Bank

G.R. No. 172504 July 31, 2013
TOPIC: Right to Possession
PONENTE: Brion, J.
FACTS:
1. Roman Nagtalon and the petitioner (Spouses Nagtalon) entered into a credit accommodation agreement (credit
agreement) with UCPB. In order to secure the credit agreement, Spouses Nagtalon, together with the Spouses Lao,
executed deeds of real estate mortgage over several properties in Kalibo, Aklan.
2. Thereafter, the Spouses Nagtalon failed to abide and comply with the terms and conditions of the credit agreement
and the mortgage.
3. UCPB then filed with the Ex-Officio Provincial Sheriff a verified petition for extrajudicial foreclosure of the mortgage.
4. The mortgaged properties were consequently foreclosed and sold at public auction for the sum of P3,215,880.30.
UCPB emerged as the sole and highest bidder.
5. After the issuance of the sheriffs certificate of sale, UCPB caused the entry of the sale in the records of the Registry of
Deeds of Kalibo, Aklan and its annotation on the transfer certificates of titles.
6. With the lapse of the 1 year redemption period and the petitioners failure to exercise her right to redeem the
foreclosed properties, UCPB consolidated the ownership over the properties, resulting in the cancellation of the titles in
the name of the petitioner and the issuance of TCTs in the name of UCPB.
7. UCPB filed an ex parte petition for the issuance of a writ of possession with the RTC, to which pet. opposed alleging
the pendency of a Civil Case for declaration of nullity of the foreclosure and the sale.
8. RTC: Ordered the holding in abeyance of the issuance of the writ of possession.
9. CA: Reversed RTC ruling. It ruled that equitable and peculiar circumstances must first be shown to exist before the
issuance of a writ of possession may be deferred.
ISSUE: Whether or not the pendency of a civil case challenging the validity of the credit agreement, the promissory notes
and the mortgage can bar the issuance of a writ of possession after the foreclosure and sale of the mortgaged properties;
and the lapse of the 1 year redemption period.
HELD: No, the issuance of a writ of possession to a purchaser in a public auction is a ministerial function of the court,
which cannot be enjoined or restrained, even by the filing of a civil case for the declaration of nullity of the foreclosure
and consequent auction sale.
RATIO:
1. Once title to the property has been consolidated in the buyers name upon failure of the mortgagor to redeem the
property within the one-year redemption period, the writ of possession becomes a matter of right belonging to the
buyer. Consequently, the buyer can demand possession of the property at anytime. Its right to possession has then
ripened into the right of a confirmed absolute owner and the issuance of the writ becomes a ministerial function that does
not admit of the exercise of the courts discretion. The court, acting on an application for its issuance, should issue the
writ as a matter of course and without any delay.
2. In Spouses Sagun v. PBC and CA, the Court laid down the established rule on the issuance of a writ of possession,
pursuant to Act 3135, as amended. The Court said that a writ of possession may be issued either (1) within the one-year
redemption period, upon the filing of a bond, or (2) after the lapse of the redemption period, without need of a bond.
3. During the one-year redemption period, as contemplated by Section 7 of the above-mentioned law, a purchaser may
apply for a writ of possession by filing an ex parte motion under oath in the registration or cadastral proceedings if the
property is registered, or in special proceedings in case the property is registered under the Mortgage Law. In this case, a
bond is required before the court may issue a writ of possession.
4. Upon the lapse of the redemption period, a writ of possession may be issued in favor of the purchaser in a foreclosure
sale, also upon a proper ex parte motion. This time, no bond is necessary for its issuance; the mortgagor is now
considered to have lost any interest over the foreclosed property. The purchaser then becomes the owner of the
foreclosed property, and he can demand possession at any time following the consolidation of ownership of the property
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and the issuance of the corresponding TCT in his/her name. It is at this point that the right of possession of the purchaser
can be considered to have ripened into the absolute right of a confirmed owner. The issuance of the writ, upon proper
application, is a ministerial function that effectively forbids the exercise by the court of any discretion.
5. We have ruled in the past that any question regarding the validity of the mortgage or its foreclosure is not a legal
ground for refusing the issuance of a writ of execution/writ of possession.
6. Exceptions to the rule that issuance of a writ of possession is a ministerial function: (a) gross inadequacy of pruchase
price, (b) 3rd party claiming right adverse to debtor/mortgagor, and (c) failure to pay the surplus proceeds of the sale to
mortgagor. The petitioners case is not analogous to any of the exceptions.
7. Petitioner was also accorded due process. The law does not require that the writ of possession be granted only after
the issues raised in a civil case on nullity of the loan and mortgage are resolved and decided with finality. To do so would
completely defeat the purpose of an ex parte petition under Sections 6 and 7 of Act 3135 that, by its nature, should be
summary; we stress that it would render nugatory the right given to a purchaser to acquire possession of the property
after the expiration of the redemption period.
CASE LAW/ DOCTRINE:

Upon the lapse of the redemption period, a writ of possession may be issued in favor of the purchaser in a foreclosure
sale, also upon a proper ex parte motion.
The issuance of the writ, upon proper application, is a ministerial function that effectively forbids the exercise by the
court of any discretion.
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068 DIEGO VS FERNANDO

G.R. No. L-15128 Date Aug 25 1960
TOPIC: ANTICHRESIS (D. Foreclosure of antichresis)
PONENTE: Reyes, J.
FACTS:
1. Segundo Fernando executed a deed of mortgage in favor of Cecilio Diego over two parcels of land registered in his
name, to secure a P2,000 loan, without interest, payable in four years from the date of the mortgage. Possession of the
mortgaged properties were turned over to the mortgagee.
2. Fernando failed to pay the loan after four years, the mortgagee Diego made several demands but to no avail. Hence
this action for foreclosure of mortgage.
3. Fernando contends that the true transaction was an antichresis and not of mortgage; and that as plaintiff had allegedly
received a total of 120 cavans of palay from the properties given as security, which, at the rate of P10 a cavan,
represented a value of P5,200, his debt had already been paid, with plaintiff still owing him a refund of some P2,720.00.
4. RTC ruled that it was a mortgage. The fact that possession of the mortgaged properties were turned over to the
mortgagee did not alter the transaction; that the parties must have intended that the mortgagee would collect the fruits
of the mortgaged properties as interest on his loan, and that the evidence showed that Diego had already received 55
cavans from the properties during the period of his possession.
5. Certified to the SC, because the issue is question of law.
ISSUE: WON the transaction is an antichresis or a mortgage.

HELD: A mortgage. it is not an essential requisite of a mortgage that possession of the mortgaged premises be retained
by the mortgagor
SC: modified TC. that the amount of appellee's principal recovery is reduced to P1,505, with an obligation on the part of
appellee to render an accounting of all the fruits received by him
RATIO:
1. To be antichresis, it must be expressly agreed between creditor and debtor that the former, having been given
possession of the properties given as security, is to apply their fruits to the payment of the interest, if owing, and
thereafter to the principal of his credit so that if a contract of loan with security does not stipulate the payment of
interest but provides for the delivery to the creditor by the debtor of the property given as security, in order that the
latter may gather its fruits, without stating that said fruits are to be applied to the payment of interest, if any, and
afterwards that of the principal, the contract is a mortgage and not antichresis. The court below, therefore, did not err in
holding that the contract Exhibit "A" is a true mortgage and not an antichresis.
The above conclusion does not mean, however, that appellee, having received the fruits of the properties mortgaged,
will be allowed to appropriate them for himself and not be required to account for them to the appellant. The true
position of appellee herein under his contract with appellant is a "mortgage in possession" as that term is understood in
American equity jurisprudence; that is, "one who has lawfully acquired actual or constructive possession of the premises
mortgaged to him, standing upon his rights as mortgagee and not claiming under another title, for the purpose of
enforcing his security upon such property or making its income help to pay his debt". As such mortgagee in possession,
his rights and obligations are, as pointed out by this Court in Macapinlac vs. Gutierrez Repide, similar to those of an
antichretic creditor.
In the present case, the parties having agreed that the loan was to be without interest, and the appellant not having
expressly waived his right to the fruits of the properties mortgaged during the time they were in appellee's possession,
the latter, like an antichretic creditor, must account for the value of the fruits received by him, and deduct it from the
loan obtained by appellant.
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CASE LAW/ DOCTRINE:

Antichresis: possession of property as security, its fruits as interest
Mortgage: possession not necessary, fruits remains to the owner of the properties, not used as interest.
KEYWORDS/NOTES:
Twinkle :D
133
069 MAGDALENA C. DE BARRETO et. al v. JOSE G. VILLANUEVA

G.R. No. L-14938 January 28, 1961
TOPIC: Classification of Credits Special Preferred Credits
PONENTE: GUTIERREZ DAVID, J.
FACTS:
1. May 10, 1948: Rosario Cruzado, wife and administratrix of Pedro, in a special proceeding of the CFI of Manila,
obtained from Rehabilitation Finance Corp (RFC) a loan of 11k. As security, she mortgaged the land then covered
by TCT 61358 under her name and her deceased husband.
2. Failure to pay resulted in the foreclosure and acquisition of the property by RFC for 11k, subject to redemption.
3. July 26, 1951: Upon application, land was sold back conditionally to Rosario for P14,269.03, payable in 7 years.
4. Feb. 13, 153: Rosario, as guardian for her minor children, instituted Special Proceedings in CFI of Manila and was
authorized to sell the land for 19k to Pura L. Villanueva, with RFCs consent.
5. Sale was made pursuant to the authority. Pura received all rights, interest, title and dominion over the parcel of
land, with existing improvements and use and an annex thereon, free from charges and encumbrances, with
the exception of the sum of P11,009.52 which Rosario still owed to RFC. Terms stated that Pura assumes to pay
RFC, the amount Rosario still owed, under the same terms and conditions in that deed of sale dated 7/26/51.
6. Pura paid P500 in advanced, in consideration of sale, and executed a PN dated March 9, 1953 to Rosario,
undertaking to pay balance of P17,500.0 in monthly installments.
7. April 22, 1953: Pura made an additional payment of P5,500.00 on the PN, and subsequently secured a TCT in her
name, covering the property (32526).
8. July 10, 1953: Pura mortgaged the property to Magdalena C. Barretto as security for a loan of 30k.
9. Pura Villanueva failed to pay remaining balance of 12k, so a complaint for recovery of the amount was filed
against her and her spouse on 9/21/63 by Rosario Cruzado in her right and in behalf of her minor children.
10. Pending trial, a lien was placed on the property in favor of the Cruzados, which was annotated in the TCT.
11. Decision rendered ordering Pura and her husband to solidarily pay Cruzado 12k+interest +1.5k atty. fees.s
12. Pura also failed to pay the 39k indebetedness to Barreto, so the latter and her husband filed an action to
foreclose on the mortgage. Rosario Cruzado and her children were impleaded as party defendants.
13. TC decision absolved the Cruzados, and sentenced Villanuevas to pay Barrettos solidarily.
14. Upon finality, Barrettos filed a motion for the issuance of a writ of execution, which TC granted.
15. August 14, 1958: the Cruzados filed their "Vendor's Lien" in the amount of P12k, plus legal interest, over the real
property subject of the foreclosure suit, representing unpaid balance of purchase price.
16. Court ordered for annotation on TCT, and that property be sold at public auction in foreclosure proceedings, with
Cruzados credited their pro-rata share of proceeds pursuant to Art. 2248 and 2249 in relation to 2242 of NCC.
17. Barretos filed MR on 9/12/58, but Sheriff acted on order on the same date and sold the property.
18. Barretos were themselves, the highest bidder, for 49k. CFI issued order confirming the sale, and ordered Register
of deeds to issue them a certificate of title, subject to the order of vendors lien of the Cruzados.
1. Barretos claims the decision of the CFI awarding 12k to Cruzado cannot constitute as basis for vendors lien,
because civil case was a merely to recover the balance of a PN.
19. Barretos sought reconsideration giving due course to vendors lien, but was denied.
ISSUE: Whether or not CFI erred in awarding Cruzado 12k, on the basis of vendors lien on the property.
HELD: NO; order appealed is affirmed. Cruzado is entitled to payment.
RATIO:
1. While the action , apparently, the action was to recover the remaining obligation of promissor Pura Villanueva on
the note, the fact remains that Rosario P. Cruzado as guardian of her minor children, was an unpaid vendor., of
the realty in question, and the promissory note, was, precisely, for the unpaid balance of the price of the
property bought by, said Pura Villanueva.
2. Article 2242 of the new Civil, Code enumerates the claims, mortgage and liens that constitute an encumbrance
134
on specific immovable property, and among them are:

(2) For the unpaid price of real property sold, upon the immovable sold; and
(5) Mortgage credits recorded in the Registry of Property."
3. Article 2249 provides that "if there are two or more credits with respect to the same specific real property or real
rights, they shall be satisfied pro-rata after the payment of the taxes and assessment upon the immovable
property or real rights.
4. Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-rata with the
appellants the proceeds of the foreclosure sale.
5. Article 2242 of NCC enumerating the preferred claims, mortgages and liens on immovables, specifically requires
that unlike the unpaid price of real property sold, mortgage credits, in order to be given preference, should be
recorded in the Registry of Property. If the legislative intent was to impose the same requirement in the case of
the vendor's lien, or the unpaid price of real property sold, the lawmakers could have easily inserted the same
qualification which now modifies the mortgage credits. The law, however, does not make any distinction
between registered and unregistered vendor's lien, which only goes to show that any lien of that kind enjoys the
preferred credit status.
6. Appellants also argue that to give the unrecorded vendor's lien the same standing as the registered mortgage
credit would be to nullify the principle in land registration system that prior unrecorded interests cannot
prejudice persons who subsequently acquire interests over the same property. The Land Registration Act itself,
however, respects without reserve or qualification the paramount rights of lien holders on real property. Thus,
section 70 of that Act provides that:
Registered land, and ownership therein shall in all respects be subject to the same burdens and incidents
attached by law to unregistered land. Nothing contained in this Act shall in any way be construed to relieve
registered land or the owners thereof from any rights incident to the relation of husband and wife, or from
liability to attachment on mesne process or levy, on execution, or from liability to any lien of any description
established by law on land and the buildings thereon, or the interest of the owners of such land or buildings, or to
change the laws of descent, or the rights of partition between co-owners, joint tenants and other co-tenants or
the right to take the same by eminent domain, or to relieve such land from liability to be appropriated in any
lawful manner for the payment of debts, or to change or affect in any other way any other rights or liabilities
created by law and applicable to unregistered land, except as otherwise expressly provided in this Act or in the
amendments thereof, (Emphasis supplied).
7. Articles of the Civil Code on concurrence and preference of credits are applicable only to the insolvent debtor,
suffice it to say that nothing in the law shows any such limitation. If we are to interpret this portion of the Code
as intended only for insolvency cases, then other creditor-debtor relationships where there are concurrence of
credits would be left without any rules to govern them, and it would render purposeless the special laws an
insolvency.
CASE LAW/ DOCTRINE:

Article 2249: "if there are two or more credits with respect to the same specific real property or real rights, they
shall be satisfied pro-rata after the payment of the taxes and assessment upon the immovable property or real rights.
Although Article 2242 of NCC enumerates that preferred claims, mortgages and liens on immovables, unlike
the unpaid price of real property sold, mortgage credits, should be recorded in Registry of Property, the law does not
make any distinction between registered and unregistered vendor's lien, which only goes to show that any lien of that
kind enjoys the preferred credit status.
135
070 De Barreto, Magdalena and Jose (spouses) v. Villanueva, et al.

G.R. No. L-14938 December 29, 1962
Insolvency; Classification of Credits; Special Preferred Credits
Reyes, J.B.L., J
FACTS:
1. Rosario Cruzado, with Court authority (in Cruzado v. Villanueva), sold all her right, title, and interest and that of her
children in the house and lot herein involved to Pura L. Villanueva for P19,000.
2. Villanueva paid P1,500 in advance, and executed a promissory note for the P17,500 balance. However, she could only
pay P5,500 on account of the note, for which reason the vendor obtained judgment for the unpaid balance.
3. In the meantime, Villanueva was able to secure a clean certificate of title and mortgaged the property to Magdalena C.
Barretto, married to Jose, to secure a loan of P30,000.03
4. Villanueva defaulted on the mortgage loan in favor of Barretto
5. The spouses foreclosed the mortgage in her favor, obtained judgment, and upon its becoming final asked for execution
6. Aug 14, 1958 - Cruzado filed a motion for recognition for her "vendor's lien" in the amount of P12,000.00 plus legal
interest, invoking Articles 2242, 2243, and 2249 of the new Civil Code.
7. LC ordered the "lien" annotated on the back of Certificate of Title No. 32526, with the proviso that in case of sale
under the foreclosure decree, the vendor's lien and the mortgage credit of appellant Barretto should be paid pro
rata from the proceeds
8. Spouses Barretto filed a motion urging that decision of 28 January 1961 be reconsidered and set aside, and a new one
entered declaring that their right as mortgagees remain superior to the unrecorded claim of herein appellee for the
balance of the purchase price of her rights, title, and interest in the mortgaged property.
ISSUE:
Whether the original decision should be set aside
HELD:
YES. The order of the Court of First Instance of Manila is incorrect. Proceeds of the foreclosure sale cannot be
apportioned only between appellant and appellee. Appellant Barrettos are entitled to the full satisfaction of their
mortgage credit out of the proceeds of the foreclosure sale in the hands of the Sheriff of the City of Manila.
RATIO:
1. The vendor's lien, under Articles 2242 and 2243 of the new Civil Code of the Philippines, can only become effective in
the event of insolvency of the vendee. There is no proof that Villanueva was insolvent.
2. The previous decision failed to take fully into account the radical changes introduced by the Civil Code the Philippines
into the system of priorities among creditors ordained by the Civil Code of 1889.
Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real property under Article
1923 were to be resolved according to an order of priorities established by Article 1927, whereby one class of creditors
could exclude the creditors of lower order until the claims of the former were fully satisfied out of the proceeds of the
sale of the real property subject of the preference, and could even exhaust such proceeds if necessary.
3. There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor, did not acquire the character
and rank of a statutory lien co-equal to the mortgagee's recorded encumbrance, and must remain subordinate to the
latter.
4. Appellee Cruzado is not a true vendor of the foreclosed property. Spouses Villanueva obtained a new Transfer
Certificate of Title No. 32526 in their name.
Ownership of the property had passed to the Rehabilitation Finance Corporation since 1950, when it
consolidated its purchase at the foreclosure sale and obtained a certificate of title in its corporate name.
The subsequent contract of resale in favor of the Cruzados did not revert ownership in them, since they failed to
comply with its terms and conditions, and the contract itself provided that the title should remain in the name of the RFC
until the price was fully paid.
136
Cruzados sold to Villanueva "their rights, title, interest and dominion" to the property. They merely assigned whatever
rights or claims they might still have thereto; the ownership of the property rested with the RFC. The sale from Cruzado
to Villanueva, therefore, was not much a sale of the land and its improvements as it was a quitclaim deed in favor of
Villanueva.
Cruzados transferred to Villanueva an option to acquire the property. They did not transfer the property itself.
Their credit, therefore, cannot legally constitute a vendor's lien on the corpus of the property that should stand on an
equal footing with mortgaged credit held by appellants Barretto.
CASE LAW/ DOCTRINE:

In the event of insolvency, a principal objective should be to effect an equitable distribution of the insolvents property
among his creditors. To accomplish this there must first be some proceeding where notice to all of the insolvents
creditors may be given and where the claims of preferred creditors may be bindingly adjudicated.
Article 2243 states that the claims and liens enumerated in articles 2241 and 2242 shall be considered as mortgages or
pledges of real or personal property, or liens within the purview of legal provisions governing insolvency.
KEYWORDS/NOTES:
137
071 Develoment Bank of the Philippines v. CA

G.R. No. 126200 August 16, 2001
TOPIC: Classification of Credits; Special Preferred Credits
PONENTE: Kapunan, J.
FACTS:
1. Marinduque Mining Industrial Corporation (Marinduque Mining), engaged in manufacture of nickel, obtained
from the PNB various loan accommodations. To secure the loans, it executed a Deed of Real Estate Mortgage and
Chattel mortgage in favor of PNB. The mortgage covered all of its real properties in Surigao del Norte, Negros
Occidental, and Antipolo, Rizal, including improvements thereon. Loans extended amounted to P4Billion
2. Marinduque Mining executed in favour of PNB and DBP a second Mortgage Trust Agreement wherein it
mortgaged to PNB and DBP all its real properties in same places including improvements. The mortgage also
covered all its chattels and assets which Marinduque Mining may subsequently acquire in substitution to the
properties covered by the previous Deed of Real and Chattel Mortgage. Its loans totalled to P2Billion.
3. Marinduque Mining executed in favor of PNB and DBP an Amendment to Mortgage Trust Agreement by virtue of
which Marinduque Mining mortgaged in favor of PNB and DBP all other real and personal properties and other
real rights subsequently acquired by Marinduque Mining
4. For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted sometime on July and
August 1984 extrajudicial foreclosure proceedings over the mortgaged properties
5. PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984, purposely, in order to ensure the
continued operation of the Nickel refinery plant and to prevent the deterioration of the assets foreclosed,
assigned and transferred to Nonoc Mining and Industrial Corporation all their rights, interest and participation
over the foreclosed properties of MMIC located at Nonoc Island, Surigao del Norte for an initial consideration of
P14,361,000,000.00
6. Also a Deed of Transfer dated June 6, 1984, PNB and DBP assigned and transferred in favor of Maricalum Mining
Corp. all its rights, interest and participation over the foreclosed properties of MMIC at Sipalay, Negros
Occidental for
7. Pursuant to Proclamation No. 50 as amended, again assigned, transferred and conveyed to the National
Government thru the Asset Privatization Trust (APT) all its existing rights and interest over the assets of MMIC,
earlier assigned to Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation and Island Cement
8. Between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and caused to be delivered
construction materials and other merchandise from Remington Industrial Sales Corporation (Remington) worth
P921,755.95
9. The purchases remained unpaid as of August 1, 1984. Remington filed a complaint for a sum of money and
damages against Marinduque Mining, PNB and DBP, Nonoc Mining, Maricalum Mining, Island Cement Corp. for
the value of the unpaid construction materials
10. RTC: ruled in favour of Remington; ordered all defendants to pay, jointly and severally, the sum of P920,755.95
11. CA: affirmed decision of RTC
12. DBP and other defendants contends that Remington has no cause of action against them
13. Remington contends that the transfer of properties was made in fraud of creditors
ISSUE: WON Marinduque Mining, PNB and DBP, Nonoc Mining, Maricalum Mining and island Cement are solidarily liable
to Remington for the unpaid construction materials
HELD: No, they are not.
RATIO:
1. Transfer was not made in fraud of creditors. We do not find any fraud on the part of Marinduque Mining and its
transferees to warrant the piercing of the corporate veil. PNB and DBP are mandated to foreclose on the mortgage
when the past due account had incurred arrearages of more than 20% of the total outstanding obligation. Section 1
of Presidential Decree No. 385 (The Law on Mandatory Foreclosure)
138
2. Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining, Maricalum and Island
Cement. As Remington itself concedes, DBP is not authorized by its charter to engage in the mining business. The
creation of the three corporations was necessary to manage and operate the assets acquired in the foreclosure sale
lest they deteriorate from non-use and lose their value
3. The OLD civil code - conflicts among creditors entitled to preference as to specific real property under Article 1923
were to be resolved according to an order of priorities established by Article 1927, whereby one class of creditors
could exclude the creditors of lower order until the claims of the former were fully satisfied out of the proceeds of
the sale of the real property subject of the preference, and could even exhaust proceeds if necessary.
Under the PRESENT civil code - only taxes enjoy a similar absolute preference. All the remaining thirteen classes of
preferred creditors under Article 2242 enjoy no priority among themselves, but must be paid pro rata, i.e., in
proportion to the amount of the respective credits. Thus, Article 2249 provides:
"If there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied
pro rata, after the payment of the taxes and assessments upon the immovable property or real rights."
But to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to 14 of Article 2242 (or such of
them as have credits outstanding) must necessarily be convened, and the import of their claims ascertained. It is thus
apparent that the full application of Articles 2249 and 2242 demands that there must be first some proceeding where the
claims of all the preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of decedent's
estate under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that -
"The claims or credits enumerated in the two preceding articles shall be considered as mortgages or pledges of real or
personal property, or liens within the purview of legal provisions governing insolvency xxx
4. The question as to whether the Civil Code and the Insolvency Law can be harmonized is settled by this Article (2243).
The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the
Insolvency Law."
Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale (as in
the case now before us) is not the proceeding contemplated by law for the enforcement of preferences under Article
2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for
taxes, a dispute between two creditors will not enable the Court to ascertain the pro rata dividend corresponding to
each, because the rights of the other creditors likewise enjoying preference under Article 2242 can not be
ascertained. Wherefore, the order of the Court of First Instance of Manila now appealed from, decreeing that the
proceeds of the foreclosure sale be apportioned only between appellant and appellee, is incorrect, and must be
reversed.
CASE LAW/ DOCTRINE:

One preferred creditor's third-party claim to the proceeds of a foreclosure sale (as in the case now before us) is not the
proceeding contemplated by law for the enforcement of preferences under Article 2242, unless the claimant were
enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two
creditors will not enable the Court to ascertain the pro rata dividend corresponding to each, because the rights of the
other creditors likewise enjoying preference under Article 2242 can not be ascertained.
139
072 J.L. Bernardo Construction v. CA

G.R. No. 105827 January 31, 2000
TOPIC: Special Preferred Credits
PONENTE: Gonzaga-Reyes, J.
FACTS:
1. A Construction Agreement was entered into by the Municipality of San Antonio thru Mayor Salonga (respondent) and
petitioner J.L. Bernardo Construction
The Municipality agreed to assume the expenses for the demolition, clearing and site filling of the construction
site(public market) in the amount of P1,150,000 and to provide cash equity of P767,305.99 to be remitted directly to
petitioners
2.J.L Construction alleged that when the whole amount of the cash equity became due, the Municipality refused to pay
the same, despite repeated demands
3. J.L. Construction filed a complaint for breach of contract, specific performance, and collection of a sum of money with
prayer for preliminary injunction and enforcement of contractors lien against the Municipality and Salonga in his
personal and official capacity as mayor.
4. RTC: issued a writ of preliminary attachment prayed by J.L Construction and granted it the right to maintain possession
of the public market and to operate the same.
trial court held that since plaintiffs have not been reimbursed for the cash equity and for the demolition, clearing
and site filling expenses, they stand in the position of an unpaid contractor and as such are entitled, pursuant to
articles 2242 and 2243 of the Civil Code, to a lien in the amount of P2,653,576.84
5. Salonga filed a motion for the approval of his counterbond. During the pendency of his motion, respondent Salonga
filed with the Court of Appeals a petition for certiorari under Rule 65 with prayer for a writ of preliminary injunction and
temporary restraining order
6. CA: reversed the ruling of RTC
Article 2242 of the Civil Code finds application only in the context of insolvency proceedings, as expressly stated
in Article 2243. Even if it is conceded that plaintiffs are entitled to retain possession of the market under its
contractors lien, the appellate court held that the same right cannot be expanded to include the right to use the
building
ISSUE: Whether or not the CA erred in reversing the ruling of the trial court of granting the contractors lien in favor of
J.L. Construction
HELD: No. The Court upholds the CAs ruling
RATIO:
1. The contractors lien claimed by petitioners is granted under the third paragraph of Article 2242 which provides that
the claims of contractors engaged in the construction, reconstruction or repair of buildings or other works shall be
preferred with respect to the specific building or other immovable property constructed.
Article 2242 only finds application when there is a concurrence of credits, i.e. when the same specific property of the
debtor is subjected to the claims of several creditors and the value of such property of the debtor is insufficient to pay in
full all the creditors. In such a situation, the question of preference will arise, that is, there will be a need to determine
which of the creditors will be paid ahead of the others. Fundamental tenets of due process will dictate that this statutory
lien should then only be enforced in the context of some kind of a proceeding where the claims of all the preferred
creditors may be bindingly adjudicated, such as insolvency proceedings.
2. The action filed by petitioners in the trial court does not partake of the nature of an insolvency proceeding. It is
basically for specific performance and damages. Thus, even if it is finally adjudicated that petitioners herein actually
stand in the position of unpaid contractors and are entitled to invoke the contractors lien granted under Article 2242,
such lien cannot be enforced in the present action for there is no way of determining whether or not there exist other
preferred creditors with claims over the San Antonio Public Market. The records do not contain any allegation that
140
petitioners are the only creditors with respect to such property. The fact that no third party claims have been filed in the
trial court will not bar other creditors from subsequently bringing actions and claiming that they also have preferred liens
against the property involved.
3. Petitioners may only obtain possession and use of the public market by means of a preliminary attachment upon such
property, in the event that they obtain a favorable judgment in the trial court. The trial courts order of September 5,
1991 granting possession and use of the public market to petitioners does not adhere to the procedure for attachment
laid out in the Rules of Court. In issuing such an order, the trial court gravely abused its discretion and the appellate
courts nullification of the same should be sustained
CASE LAW/ DOCTRINE:
KEYWORDS/NOTES:
Under our rules of procedure, a writ of attachment over registered real property is enforced by the sheriff by filing with
the registry of deeds a copy of the order of attachment, together with a description of the property attached, and a
notice that it is attached, and by leaving a copy of such order, description, and notice with the occupant of the property,
if any. If judgment be recovered by the attaching party and execution issue thereon, the sheriff may cause the judgment
to be satisfied by selling so much of the property as may be necessary to satisfy the judgment. Only in the event that
petitioners are able to purchase the property will they then acquire possession and use of the same.
141
073 Jose C. Cordova vs. Reyes Daway Lim Bernardo Lindo Rosales Law Offices, Atty. Wendell Coronel, and the
Securities and Exchange Commission
GR No. 146555 Date July 03, 2007
TOPIC: Common Credits- Arts. 2245, 2251
PONENTE: Corona, J.
FACTS:
1. Petitioner Jose C. Cordova bought from PHILFINANCE certificates of stock of Celebrity Sports Plaza Incorporated
and shares of stock of various other corporations. He was issued a confirmation of sale. The CSPI shares were
physically delivered by Philfinance to the former Filmanbank and Philtrust Bank, as custodian banks, to hold
these shares in behalf of and for the benefit of petitioner.
2. PHILFINANCE was placed under receivership by public respondent Securities and Exchange Commission (SEC).
Thereafter, Reyes Daway Lim Bernardo Lindo Rosales Law Offices and Atty. Wendell Coronel (private
respondents) were appointed as liquidators. Without the knowledge and consent of petitioner and without
authority from the SEC, private respondents withdrew the CSPI shares from the custodian banks. The private
respondents sold the shares to Northeast Corporation and included the proceeds thereof in the funds of
Philfinance. Petitioner learned about the unauthorized sale of his shares. He lodged a complaint with private
respondents but the latter ignored it prompting him to file a formal complaint against private respondents in the
receivership proceedings with the SEC, for the return of the shares.
3. SECS RULING: Thereafter, SEC rendered judgment dismissing the petition. However, it reconsidered this decision
in a resolution and granted the claims of petitioner. It held that petitioner was the owner of the CSPI shares by
virtue of a confirmation of sale (which was considered as a deed of assignment) issued to him by Philfinance. But
since the shares had already been sold and the proceeds commingled with the other assets of Philfinance,
petitioners status was converted into that of an ordinary creditor for the value of such shares.
4. CAs RULING: On appeal, the CA affirmed the SEC. It agreed that petitioner was indeed the owner of the CSPI
shares but the recovery of such shares had become impossible. Petitioners motion for reconsideration was
denied.
ISSUE:
1. Whether or not petitioner was indeed a creditor of Philfinance;
2. If YES, whether or not petitioner should be considered as a preferred (and secured) creditor of Philfinance;
3. Whether or not petitioner can recover the full value of his CSPI shares or merely 15% thereof like all other
ordinary creditors of Philfinance; and
4. Whether petitioner is entitled to legal interest.
RATIO:
1. YES, the petitioner become a creditor of Philfinance. The SEC, after holding that petitioner was the owner of the
shares, stated:
Petitioner is seeking the return of his CSPI shares which, for the present, is no longer possible, considering
that the same had already been sold by the respondents, the proceeds of which are ADMITTEDLY
commingled with the assets of PHILFINANCE.
This being the case, petitioner is now but a claimant for the value of those shares. As a claimant, he shall be
treated as an ordinary creditor in so far as the value of those certificates is concerned. Certainly, petitioner had
the right to demand the return of his CSPI shares. He, in fact, filed a complaint in the liquidation proceedings in
the SEC to get them back but was confronted by an impossible situation as they had already been
sold. Consequently, he sought instead to recover their monetary value.
142
2. No, the petitioner is not a preferred creditor. He is only an ORDINARY CREDITOR. Petitioners argument
that he is a preferred creditor is incorrect. He invoked the Civil Code provision Article 2241 but Article
2241 refers only to specific movable property. His claim was for the payment of money is generic
property and not specific or determinate.
Article 2241 provides: With reference to specific movable property of the debtor, the following claims
or liens shall be preferred:
xxx xxx xxx
(2) Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed in
the performance of their duties, on the movables, money or securities obtained by them;
Considering that petitioner did not fall under any of the provisions applicable to preferred creditors, he was deemed an
ordinary creditor under Article 2245:
Credits of any other kind or class, or by any other right or title not comprised in the four preceding
articles, shall enjoy no preference.
This being so, Article 2251 (2) states that:

Common credits referred to in Article 2245 shall be paid pro rata regardless of dates.
3. YES, like all the other ordinary creditors or claimants against Philfinance, he was entitled to a rate of recovery of
only 15% of his money claim.
4. NO, under this ruling, petitioner was not entitled to legal interest of 12% per annum (from demand) because the
amount owing to him was not a loan or forbearance of money.
The guidelines for awarding interest were laid down in Eastern Shipping Lines, Inc. v. CA:
With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest

on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until
the demand can be established with reasonable certainty.
When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
143
Neither was he entitled to legal interest of 6% per annum under Article 2209 of the Civil Code since this provision
applies only when there is a delay in the payment of a sum of money which is not applicable in the given case.
***Considering that petitioner had already received the amount of P5,062,500, the obligation of the SEC as
liquidator of Philfinance was totally extinguished. The Court noted that there is an undisputed finding by the SEC and CA
that private respondents sold the subject shares without authority from the SEC. Petitioner evidently has a cause of
action against private respondents for their bad faith and unauthorized acts, and the resulting damage caused to him.
144
074 CASE TITLE RCBC v. IAC

G.R. No. 74851. December 9, 1999
TOPIC: Stay or Suspension Orders: General Concept
PONENTE: MELO, J.:
FACTS:
1. On September 28, 1984, BF Homes filed a Petition for Rehabilitation and for Declaration of Suspension of Payments
with the SEC.
2. RCBC, one of the creditors listed in BF Homes inventory of creditors and liabilities, on October 26,
1984, requested the Provincial Sheriff of Rizal to extra-judicially foreclose its real estate mortgage on some properties of
BF Homes. BF Homes opposed the auction sale and the SEC ordered the issuance of a writ of preliminary injunction upon
petitioners filing of a bond. Presumably unaware of the filing of the bond on the very day of the auction sale, the
sheriff proceeded with the public auction sale in which RCBC was the highest bidder for the properties auctioned. But
because of the proceedings in the SEC, the sheriff withheld the delivery to RCBC of the certificate of sale covering the
auctioned properties.
3. On March 13, 1985, despite the SEC case, RCBC filed with RTC an action for mandamus against the provincial sheriff of
Rizal to compel him to execute in its favour a certificate of sale of the auctioned properties. On March 18, 1985, the SEC
appointed a Management Committee for BF Homes.
Ruling of RTC:
Consequently, the trial court granted RCBCs motion for judgment on the pleading ordering respondents to
execute and deliver to petitioner the Certificate of Auction Sale.
CA & SC Ruling:
On appeal, the SC affirmed CAs decision (setting aside RTCs decision dismissing the mandamus case and
suspending issuance to RCBC of new land titles until the resolution of the SEC case) ruling that whenever a distressed
corporation asks the SEC for rehabilitation and suspension of payments, preferred creditors may no longer assert such
preference but stand on equal footing with other creditors. Hence, this Motion for Reconsideration.
ISSUE: When should the suspension of actions for claims against BF Homes take effect
HELD: Suspension of actions for claims commences only from the time a management committee or receiver is
appointed by the SEC
RATIO:
1. The issue of whether or not preferred creditors of distressed corporations stand on equal footing with all other
creditors gains relevance and materiality only upon the appointment of a management committee, rehabilitation
receiver, board or body.
2. Upon cursory reading of Section 6, par (c) of PD 902-A, it is adequately clear that suspension of claims against a
corporation under rehabilitation is counted or figured up only upon the appointment of a management committee or a
rehabilitation takes effect as soon as the application or a petition for rehabilitation is filed with the SEC may to some, be
more logical and wise but unfortunately, such is incongruent with the clear language of the law. To insist on such ruling,
no matter how practical and noble would be to encroach upon legislative prerogative to define the wisdom of the law ---
plainly judicial legislation.
3. Once a management committee, rehabilitation receiver, board or body is appointed pursuant to PD 902-A, all actions
for claims against a distressed corporation pending before any court, tribunal, board or body shall be suspended
accordingly; Suspension shall not prejudice or render ineffective the status of a secured creditor as compared to a totally
unsecured creditor. What it merely provides is that all actions for claims against the corporation, partnership or
association shall be suspended. This should give the receiver a chance to rehabilitate the corporation if there should still
be a possibility for doing so. In the event that rehabilitation is no longer feasible and claims against the distressed
corporation would eventually have to be settled, the secured creditors shall enjoy preference over the unsecured
creditors subject only to the provisions of the Civil Code on Concurrence and Preferences of Credit.
145
075 SOBREJUANITE V. ASB DEVELOPMENT CORPORATION

G.R. No. 165675 Date September 30, 2005
TOPIC: REHABILITATION Stay or Suspension Order: General Concepts
PONENTE: Ynares-Santiago, J.
FACTS:
1. Spouses Sobrejuanite entered into a Contract to Sell with ASBDC over a condominium unit and a parking space in
the BSA Twin Tower-B Condominum in Mandaluyong city. Despite their full payment and demands, ASBDC failed
to deliver the property on or before December 1999 as agreed. Thus, they filed a complaint with HLURB for the
rescission of the contract, refund of payments amounting to P2,674,637.10 and payment of moral and exemplary
damages, attorneys fees, litigation expenses, appearance fee and costs of the suit.
2. ASBDC filed a motion to dismiss or suspend proceedings in view of the approval by the SEC of the rehabilitation
plan of ASB Group of Companies, which includes ASBDC, and the appointment of a rehabilitation receiver. But,
HLURB arbiter denied the motion and ordered the continuation of the proceedings.
HLURB Arbiter: Under the Contract to Sell, ASBDC should have delivered the property to Sobrejuanite in December
1999; that the latter had fully paid their obligations except the P50,000.00 which should be paid upon completion of
the construction; and that rescission of the contract with damages is proper because ASBDC failed to deliver the
property to Sobrejuanite within the prescribed period
HLURB Board of Commissioners: affirmed ruling of arbiter - the approval of the rehabilitation plan and the
appointment of a rehabilitation receiver by the SEC did not have the effect of suspending the proceedings before the
HLURB
Office of the President: dismissed ASBDCs appeal
CA: granted ASBDCs petition - the approval by the SEC of the rehabilitation plan and the appointment of the receiver
caused the suspension of the HLURB proceedings. Sobrejuanites complaint for rescission and damages is a claim
under the SEC Reorganization Act because it seeks to enforce a pecuniary demand; thus, it is within SECs jurisdiction,
not HLURB.
ISSUE:
1. Whether the CA erred in ruling that SEC, not HLURB, has jurisdiction over petitioners complaint? NO, petitioners
complaint for rescission of contract with damages is a claim within the contemplation of PD No. 902-A
2. Whether the CA erred in ruling that the approval of the corporate rehabilitation plan and the appointment of a
receiver had the effect of suspending the proceeding in HLURB? NO.
RATIO:
ISSUE 1
Section 6(c) of PD No. 902-A empowers the SEC:
c) To appoint one or more receivers of the property, real and personal, which is the subject of the
action pending before the Commission whenever necessary in order to preserve the rights of the
parties-litigants and/or protect the interest of the investing public and creditors: Provided, finally, That
upon appointment of a management committee, rehabilitation receiver, board or body, pursuant to this
Decree, all actions for claims against corporations, partnerships or associations under management or
receivership pending before any court, tribunal, board or body shall be suspended accordingly.
The purpose for the suspension of the proceedings is to prevent a creditor from obtaining an advantage or
preference over another and to protect and preserve the rights of party litigants as well as the interest of the investing
public or creditors. Such suspension is intended to give enough breathing space for the management committee or
rehabilitation receiver to make the business viable again, without having to divert attention and resources to litigations
in various fora. The suspension would enable the management committee or rehabilitation receiver to effectively
exercise its/his powers free from any judicial or extra-judicial interference that might unduly hinder or prevent the
rescue of the debtor company. To allow such other action to continue would only add to the burden of the
management committee or rehabilitation receiver, whose time, effort and resources would be wasted in defending
claims against the corporation instead of being directed toward its restructuring and rehabilitation.
Thus, in order to resolve whether the proceedings before the HLURB should be suspended, it is necessary to
determine whether the complaint for rescission of contract with damages is a claim within the contemplation of PD No.
146
902-A.
In Finasia Investments and Finance Corp. v. Court of Appeals, claim refers only to debts or demands pecuniary in
nature. In Arranza v. B.F. Homes, Inc., claim is defined as referring to actions involving monetary considerations. Finasia
Investments and Finance Corp. v. Court of Appeals and Arranza v. B.F. Homes, Inc. were promulgated prior to the
effectivity of the Interim Rules of Procedure on Corporate Rehabilitation on December 15, 2000. The interim rules define
a claim as referring to all claims or demands, of whatever nature or character against a debtor or its property, whether
for money or otherwise. The definition is all-encompassing as it refers to all actions whether for money or otherwise.
There are no distinctions or exemptions. Incidentally, although the petition for rehabilitation with prayer for suspension
of actions and proceedings was filed before the SEC on May 2, 2000, or prior to the effectivity of the interim rules, the
same would still apply pursuant to Section 1, Rule 1 thereof which provides:
Section 1. Scope These Rules shall apply to petitions for rehabilitation filed by corporations,
partnerships, and associations pursuant to Presidential Decree No. 902-A, as amended.
Clearly then, the complaint filed by Sobrejuanite is a claim as defined under the Interim Rules of Procedure on
Corporate Rehabilitation. Even under our rulings in Finasia Investments and Finance Corp. v. Court of Appeals and
Arranza v. B.F. Homes, Inc., the complaint for rescission with damages would fall under the category of claim
considering that it is for pecuniary considerations.
ISSUE 2
The HLURB arbiter should have suspended the proceedings upon the approval by the SEC of the ASB Group of
Companies rehabilitation plan and the appointment of its rehabilitation receiver. By the suspension of the proceedings,
the receiver is allowed to fully devote his time and efforts to the rehabilitation and restructuring of the distressed
corporation.
It is well to note that even the execution of final judgments may be held in abeyance when a corporation is
under rehabilitation. Hence, there is more reason in the instant case for the HLURB arbiter to order the suspension of
the proceedings as the motion to suspend was filed soon after the institution of the complaint. By allowing the
proceedings to proceed, the HLURB arbiter unwittingly gave undue preference to Sobrejuanite over the other creditors
and claimants of ASBDC, which is precisely the vice sought to be prevented by Section 6(c) of PD 902-A. Thus:
As between creditors, the key phrase is equality is equity. When a corporation threatened by
bankruptcy is taken over by a receiver, all the creditors should stand on equal footing. Not anyone of
them should be given any preference by paying one or some of them ahead of the others. This is precisely
the reason for the suspension of all pending claims against the corporation under receivership. Instead of
creditors vexing the courts with suits against the distressed firm, they are directed to file their claims with
the receiver who is a duly appointed officer of the SEC.
147
076 Town and Country Enterprises, Inc. v. Quisumbing

G.R. No. 173610, October 1, 2012
TOPIC: Court-Supervised Rehabilitation - Stay or Suspension Order
PONENTE: Perez, J;
FACTS:
1. Town & Country Enterprises, Inc. (TCEI) obtained loans in the aggregate sum of P 12,000,000.00 from respondent
Metropolitan Bank & Trust Co. (Metrobank). To secure the prompt payment of the loan, TCEI executed in favor
of Metrobank a thrice amended Deed of Real Estate Mortgage over twenty parcels of land.
2. For failure of TCEI to heed its demands for the payment of the loan, Metrobank caused the real estate mortgage
to be extrajudicially foreclosed and the subject realties to be sold at public auction. As highest bidder, Metrobank
was issued the corresponding Certificate of Sale.
3. In view of TCEIs further refusal to heed its demands to turn over actual possession of the properties, Metrobank
filed the petition for issuance of a writ of possession before the Regional Trial Court (RTC), in Imus, Cavite.
4. Claiming difficulty in servicing its obligations as a consequence of the Asian financial crisis, on the other hand,
TCEI filed the petition for declaration of a state of suspension of payments, with approval of a proposed
rehabilitation plan, before the same court, sitting as a Special Commercial Court (Rehabilitation Court).
5. With the issuance of a Stay Order on 8 October 2002 in the corporate rehabilitation case, TCEI filed a motion to
suspend the proceedings which was granted by respondent judge
6. Metrobank filed the Rule 65 petition for certiorari. The CA then Fifth Division rendered the Decision, directing
respondent judge "to continue with the proceedings in [LRC Case No. 2128-02 and eventually to issue the
required writ of possession in favor of [Metrobank] over the foreclosed properties.
7. TCEI is enjoined to comply strictly with the provisions of the Rehabilitation Plan, perform its obligations and take
all actions necessary to carry out the Plan, failing which, the Court shall either, upon motion, motu proprio or
upon the recommendation of the Rehabilitation Receiver, terminate the proceeding.
8. The RTC issued in LRC Case No. 2128-02 an order granting Metrobanks petition for issuance of a writ of
possession and directing the Clerk of Court to issue the writ therein sought.
9. Aggrieved, TCEI and the Spouses Campos perfected the appeal, on the ground that it had been denied due
process a quo and that the writ of possession issued is contrary to the rules on corporate rehabilitation.
10. The affirming the RTCs appealed Order. In denying the appeal, the CA ruled that, as purchaser of the foreclosed
properties, Metrobank was entitled to the writ of possession without delay since, under Section 8 of Act No.
3135, the remedy of the mortgagor is to set aside the sale and the writ of possession within 30 days after the
purchaser was placed in possession and, if aggrieved from the resolution thereof, to appeal in accordance with
Section 14 of Act No. 496, otherwise known as the Land Registration Act.
ISSUE: Whether or not the granting of the Writ of Possession by the RTC in favor of Metrobank is valid, in asmuch as the
Stay Order issued by the SEC in the rehabilitation proceeding to the TCEI
HELD: Yes.
RATIO:
1. Having purchased the subject realties at public auction, Metrobank undoubtedly acquired ownership over the
same when TCEI failed to exercise its right of redemption within the three-month period prescribed under the
foregoing provision. With ownership already vested in its favor as of 6 February 2002, it matters little that
Metrobank caused the certificate of sale to be registered with the Cavite Provincial Registry only on 10 April 2002
and/or executed an affidavit consolidating its ownership over the same properties only on 25 April 2003.
2. The rule is settled that the mortgagor loses all interest over the foreclosed property after the expiration of the
redemption period and the purchaser becomes the absolute owner thereof when no redemption is made.
3. An essential function of corporate rehabilitation is, admittedly, the Stay Order which is a mechanism of
suspension of all actions and claims against the distressed corporation upon the due appointment of a
management committee or rehabilitation receiver.
148
4. The Stay Order issued by the Rehabilitation Court in SEC Case No. 023-02 cannot, however, apply to the
mortgage obligations owing to Metrobank which had already been enforced even before TCEIs filing of its
petition for corporate rehabilitation on 1 October 2002.
5. Metrobank acted well-within its rights in applying for a writ of possession, the issuance of which has consistently
been held to be a ministerial function which cannot be hindered by an injunction or an action for the annulment
of the mortgage or the foreclosure itself. While it is true that the function ceases to be ministerial where the
property is in the possession of a third party claiming a right adverse to that of the judgment debtor, the
rehabilitation receivers power to take possession, control and custody of TCEIs assets is far from adverse to the
latter. A rehabilitation receiver is an officer of the court who is appointed for the protection of the interests of
the corporate investors and creditors. It has been ruled that there is nothing in the concept of corporate
rehabilitation that would ipso facto deprive the officers of a debtor corporation of control over its business or
properties.
6. Not having exercised its right of redemption in the intervening period, TCEI cannot be heard to complain about
the cancellation of its titles and the issuance of new ones in favor of Metrobank on 26 June 2003.
CASE LAW/ DOCTRINE: A principal feature of corporate rehabilitation is the Stay Order which defers all actions or claims
against the corporation seeking corporate rehabilitation from the date of its issuance until the dismissal of the petition or
termination of the rehabilitation proceedings.
KEYWORDS/NOTES:
149
077 Metropolitan Waterworks and Sewerage System v. Hon. Daway, as presiding judge of RTC of QC and Maynilad
Water Services, Inc.
G.R. No. 160732 June 21, 2004
TOPIC: Exceptions to Stay or Suspension Order
PONENTE: Azcuna, J.
FACTS:
1. MWSS granted Maynilad under a Concession Agreement a 20-year period to manage, operate, repair, decommission
and refurbish the existing MWSS water delivery and sewerage services in the West Zone Service Area, for which
Maynilad undertook to pay the corresponding concession fees on the dates agreed upon in said agreement.
2. Maynilad was required under Section 6.9 of said contract to put up a bond, bank guarantee or other security
acceptable to MWSS.
3. In compliance with this requirement, Maynilad arranged for a 3-year facility with a number of foreign banks, led by
Citicorp International Limited, for the issuance of an Irrevocable Standby Letter of Credit in the amount of
US$120,000,000 in favor of MWSS for the full and prompt performance of Maynilads obligations to MWSS.
4. Maynilad requested MWSS for a mechanism by which it hoped to recover the losses it had allegedly incurred and
would be incurring as a result of the depreciation of the Philippine Peso against the US Dollar.
5. Failing to get what it desired, Maynilad issued a Force Majeure Notice and unilaterally suspended the payment of the
concession fees. In an effort to salvage the Concession Agreement, the parties entered into a Memorandum of
Agreement wherein Maynilad was allowed to recover foreign exchange losses under a formula agreed by them.
6. Maynilad again filed another Force Majeure Notice and, since MWSS could not agree with the terms of said Notice, the
matter was referred to the Appeals Panel for arbitration.
7. An amendment of the Concession Agreement was made known as Amendment No. 1.
8. However, Maynilad served upon MWSS a Notice of Event of Termination, claiming that MWSS failed to comply with its
obligations under the Concession Agreement and Amendment No. 1 regarding the adjustment mechanism that would
cover Maynilads foreign exchange losses.
9. Maynilad filed a Notice of Early Termination of the concession, which was challenged by MWSS. This matter was
eventually brought before the Appeals Panel by MWSS. The Appeals Panel ruled that there was no Event of Termination
as defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement and that, therefore, Maynilad should pay the
concession fees that had fallen due.
10. MWSS, thereafter, submitted a written notice to Citicorp, as agent for the participating banks, that by virtue of
Maynilads failure to perform its obligations, it was drawing on the Irrevocable Standby Letter of Credit and demanded
payment of US$98,923,640.15.
11. Prior to this, however, Maynilad had filed a petition for rehabilitation before the court a quo which resulted in the
issuance of the Stay Order.
12. MWSS filed before the SC a pet. for review on certiorari questioning the legality of the said order.
ISSUE: Whether or not the stay order issued by the judge was in excess of its authority or jurisdiction.
HELD: Yes, in enjoining petitioner from claiming from an asset that did not belong to the debtor and over which it did not
acquire jurisdiction, the rehabilitation court acted in excess of its jurisdiction.
RATIO:
1. The claim is not one against the debtor but against an entity that respondent Maynilad has procured to answer for its
non-performance of certain terms and conditions of the Concession Agreement, particularly the payment of concession
fees.
2. Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors and sureties,
but only those claims against guarantors and sureties who are not solidarily liable with the debtor. Respondent
Maynilads claim that the banks are not solidarily liable with the debtor does not find support in jurisprudence. In Feati
Bank & Trust Company v. CA, the Court held that the concept of guarantee vis--vis the concept of an irrevocable letter
of credit are inconsistent with each other. The guarantee theory destroys the independence of the banks responsibility
150
from the contract upon which it was opened and the nature of both contracts is mutually in conflict with each other. In
contracts of guarantee, the guarantors obligation is merely collateral and it arises only upon the default of the person
primarily liable. On the other hand, in an irrevocable letter of credit, the bank undertakes a primary obligation. We have
also defined a letter of credit as an engagement by a bank or other person made at the request of a customer that the
issuer shall honor drafts or other demands of payment upon compliance with the conditions specified in the credit
3. Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the
presentation of documents and is thus a commitment by the issuer that the party in whose favor it is issued and who can
collect upon it will have his credit against the applicant of the letter, duly paid in the amount specified in the letter.
4. The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the prohibition is
on the enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the
debtor. The participating banks obligation are solidary with respondent Maynilad in that it is a primary, direct, definite
and an absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtors assets. These are the
same characteristics of a surety or solidary obligor.
5. The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks are not solidary
with those of respondent Maynilad. On the contrary, it is issued at the request of and for the account of Maynilad Water
Services, Inc., in favor of the Metropolitan Waterworks and Sewerage System, as a bond for the full and prompt
performance of the obligations by the concessionaire under the Concession Agreement and herein petitioner is
authorized by the banks to draw on it by the simple act of delivering to the agent a written certification substantially in
the form of the Letter of Credit. It provides further in Sec. 6, that for as long as the Standby Letter of Credit is valid and
subsisting, the Banks shall honor any written Certification made by MWSS.
6. We hold that except when a letter of credit specifically stipulates otherwise, the obligation of the banks issuing letters
of credit are solidary with that of the person or entity requesting for its issuance, the same being a direct, primary,
absolute and definite undertaking to pay the beneficiary upon the presentation of the set of documents required therein.
7. The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act on the obligation
of the banks under the Letter of Credit under the argument that this was not a solidary obligation with that of the
debtor.
CASE LAW/ DOCTRINE:

Being a solidary obligation, the letter of credit is excluded from the jurisdiction of the rehabilitation court and therefore
in enjoining petitioner from proceeding against the Standby Letters of Credit to which it had a clear right under the law
and the terms of said Standby Letter of Credit, public respondent acted in excess of his jurisdiction.
151
078 Panlilio vs RTC and SSS

G.R. No. 173846 Date Feb 2 2011
TOPIC: Court Supervised Rehabilitation
PONENTE: Peralta, J.
FACTS:
1. Jose Marcel Panlilio, Erlinda Panlilio, Nicole Morris and Marlo Cristobal (petitioners), as corporate officers of Silahis
International Hotel, Inc. (SIHI), filed with RTC- Manila a petition for Suspension of Payments and Rehabilitation. RTC
issued an Order staying all claims against SIHI upon finding the petition sufficient in form and substance.
xxx the Court hereby: x x x x
2) Stays the enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action
or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor.
2. At the same time, there were a number of criminal charges pending against petitioners. These criminal charges were
initiated by Social Security System (SSS) and involved charges of violations of Social Security Act of 1997 (SSS law), in
relation Estafa. Consequently, petitioners filed with the RTC of Manila, Branch 51, a Manifestation and Motion to
Suspend Proceedings arguing that the stay order issued by Branch 24 should also apply to the criminal charges pending in
Branch 51. Petitioners now pray that Branch 51 suspend its proceedings until the petition for rehabilitation was finally
resolved. Branch 51 denied motion to suspend proceedings. It ruled that the stay order issued by Branch 24 did not cover
criminal proceedings. MR denied. CA, affirmed RTC. MR denied. Hence this appeal.
ISSUE: 1. Whether the stay order issued by the RTC commercial court, Branch 24 includes the above-captioned criminal
cases.
2. Does the suspension of "all claims" as an incident to a corporate rehabilitation also contemplate the suspension of
criminal charges filed against the corporate officers of the distressed corporation?
HELD: 1. NO.
2. NO. The rehabilitation of SIHI and the settlement of claims against the corporation is not a legal ground for
the extinction of petitioners criminal liabilities. There is no reason why criminal proceedings should be
suspended during corporate rehabilitation.
SC: Petition denied.
RATIO:
1. Corporate rehabilitation connotes the restoration of the debtor to a position of successful operation and solvency, if
it is shown that its continued operation is economically feasible and its creditors can recover more, by way of the
present value of payments projected in the rehabilitation plan, if the corporation continues as a going concern than if it
is immediately liquidated. A principal feature of corporate rehabilitation is the suspension of claims against the
distressed corporation. Section 6 (c) of Presidential Decree No. 902-A, as amended, provides for suspension of claims
against corporations undergoing rehabilitation, to wit:
Section 6 (c).x x x Provided, finally, that upon appointment of a management committee, rehabilitation receiver, board
or body, pursuant to this Decree, all actions for claims against corporations, partnerships or associations under
management or receivership pending before any court, tribunal, board or body, shall be suspended accordingly.
2. The filing of the case for violation of B.P. Blg. 22 is not a "claim" that can be enjoined within the purview of P.D. No.
902-A. True, although conviction of the accused for the alleged crime could result in the restitution, reparation or
indemnification of the private offended party for the damage or injury he sustained by reason of the felonious act of the
accused, nevertheless, prosecution for violation of B.P. Blg. 22 is a criminal action.
The rehabilitation of SIHI and the settlement of claims against the corporation is not a legal ground for the extinction
152
of petitioners criminal liabilities. There is no reason why criminal proceedings should be suspended during corporate
rehabilitation, more so, since the prime purpose of the criminal action is to punish the offender in order to deter him and
others from committing the same or similar offense, to isolate him from society, reform and rehabilitate him or, in
general, to maintain social order.
The prosecution of the officers of the corporation has no bearing on the pending rehabilitation of the corporation,
especially since they are charged in their individual capacities. Such being the case, the purpose of the law for the
issuance of the stay order is not compromised, since the appointed rehabilitation receiver can still fully discharge his
functions as mandated by law. It bears to stress that the rehabilitation receiver is not charged to defend the officers of
the corporation. If there is anything that the rehabilitation receiver might be remotely interested in is whether the court
also rules that petitioners are civilly liable. Such a scenario, however, is not a reason to suspend the criminal proceedings,
because as aptly discussed in Rosario, should the court prosecuting the officers of the corporation find that an award or
indemnification is warranted, such award would fall under the category of claims, the execution of which would be
subject to the stay order issued by the rehabilitation court.
CASE LAW/ DOCTRINE:

Stay Order. - If the court finds the petition to be sufficient in form and substance, it shall, not later than five (5) days from
the filing of the petition, issue an Order x x x; (b) staying enforcement of all claims, whether for money or otherwise and
whether such enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily
liable with the debtor;
KEYWORDS/NOTES:
Congress has recently enacted Republic Act No. 10142, or the Financial Rehabilitation and Insolvency Act of 2010.30
Section 18 thereof explicitly provides that criminal actions against the individual officer of a corporation are not subject
to the Stay or Suspension Order in rehabilitation proceedings, to wit:
The Stay or Suspension Order shall not apply:
(g) any criminal action against individual debtor or owner, partner, director or officer of a debtor shall not be affected
by any proceeding commenced under this Act.
TWinkle :D
153
079 BPI v. SEC

G.R. No. 16461 December 20, 2007.
TOPIC: Rehabilitation Plan Cram down effect (sec. 63-73)
PONENTE: TINGA, J.
FACTS:
1. BPI extended credit accommodations to ASB group, in the amount of Php86.8M secured by 2 properties in Greenhills,
San Juan, throught its predecessor in interest, Far East Bank and Trust Company (FEBTC) .
2. May 2, 2000: ASB filed for rehabilitation and suspension of payments with SEC, and on August 18, the interim receiver
submitted its Proposed Rehabilitation Plan(Rehab Plan) for ASB group.
3. Rehab Plan provides,a dacion en pago by the ASB Group to BPI of #35 Eisenhower property, mortgaged to the latter
at selling value of Php84M against the total amount of the ASB Groups exposure to the BPI. In return, ASB requests the
release of the #27 Annapolis property which will be placed in the ASB creditors asset pool. The dacion would constitute
full payment of the entire obligation due to BPI because the balance was then to be considered waived, as per the
Rehabilitation Plan.
4. BPI opposed the Rehab Plan, and moved for dismissal of the petition for rehabilitation.
5. April 26, 2001 SEC approved ASBs proposal, and appointed Mr. Fortunato Cruz as rehab. receiver.
6. BPI filed petition for review, imputing grave abuse on the part of hearing panel.
7. BPI argued that the order violates BPIs right to contract, since Rehab plan compelled it to enter in a dacion en pago
agreement. SEC en banc denied petition.
8. CA: appeal dismissed. MR was denied.
9. Before the SC, BPI asserts that the CA erred in ruling that the approval by the SEC of the ASB Groups Rehabilitation
Plan did not violate BPIs rights as a creditor.
10. BPIs position: (1) the dacion en pago is a form of coercion or compulsion, and violative of the rights of secured
creditors; (2) To be feasible and legally tenable, the conditions in Rehab Plan should not be imposed but agreed upon by
the parties; (3) SEC hearing panels approval of Rehab Plan totally disregarded the efficacy of the mortgage agreements
between the parties and sanctioned a mode of payment that unilaterally benefits ASB group only; (4) that despite BPIs
rejection of rehab plan, no effort was made to resolve valuation of the mortgaged properties. With no repayment
scheme for secured creditors not accepting the Rehabilitation Plan, the same has become discriminatory.
11. SEC through SOLGEN: (1) Rehab Plan does not violate BPIs right as creditor, because the dacion en pago transaction
contemplated in the plan can only proceed upon mutual agreement of the parties; (2)Being a secured creditor, BPI
enjoys preference over unsecured creditors, thus there is no reason for BPI to fear the non-payment of the loan, or the
inability to assert its preferred right over the mortgaged property.
12. ASB Group: (1) non-impairment clause in the Consti relied on by BPI not applicable, because it is a limit on the
exercise of legislative power and not of judicial or quasi-judicial power, and the approval of the Rehab plan was an
exercise of SECs adjudicatory power as an admin. agency; (2) no coercion or compulsion would be employed under
Rehab Plan, and that the latter contemplates settling of obligations to secured creditors like BPI at selling prices, in case
of failure of dacion en pago to materialize; (3) BPI failed to submit any valuation of the properties to substantiate its
objections to the Rehab Plan.
ISSUE: Whether the dacion en pago contained in the Rehab Plan violates BPIs rights as a secured creditor.
HELD: NO; Petition denied, CA ruling affirmed, costs against petitioner.
RATIO:
1. SC found no element of compulsion in the dacion en pago provision of the Rehabilitation Plan. It was not the
only solution presented by the ASB to pay its creditors. In fact, it was stated in the Rehabilitation Plan that:
x x x. If the dacion en pago herein contemplated does not materialize for failure of the secured creditors to
agree thereto, the rehabilitation plan contemplates to settle the obligations (without interest, penalties and
154
other related charges accruing after the date of the initial suspension order) to secured creditors with
mortgaged properties at ASB selling prices for the general interest of the employees, creditors, unit buyers,
government, general public and the economy.39
2. Thus, if BPI does not find the dacion en pago modality acceptable, the ASB Group can propose to settle its debts
at such amount as is equivalent to the selling price of the mortgaged properties. If BPI still refuses this option, it
can assert its rights in the liquidation and distribution of the ASB Groups assets. It will not lose its status as a
secured creditor, retaining its preference over unsecured creditors when the assets of the corporation are finally
liquidated.
3. Same issues were confronted in the case of of Metropolitan Bank & Trust Company v. ASB Holdings, et al There,
SC ruled that there is no impairment of contracts because the approval of the Rehabilitation Plan and the
appointment of a rehabilitation receiver merely suspends the action for claims against the ASB Group, and
MBTC may still enforce its preference when the assets of the ASB Group will be liquidated. But if the
rehabilitation is found to be no longer feasible, then the claims against the distressed corporation would have to
be settled eventually and the secured creditors shall enjoy preference over the unsecured ones. Moreover, the
Court stated that there is no compulsion to enter into adacion en pago agreement, nor to waive the interests,
penalties and related charges, since these are merely proposals to creditors such as MBTC, such that in the
event the secured creditors refuse the dacion, the Rehabilitation Plan proposes to settle the obligations to
secured creditors with mortgaged properties at selling prices.
CASE LAW/ DOCTRINE:
Dacion en Pago transaction can only proceed upon mutual agreement of parties.
There is no compulsion to enter into adacion en pago agreement, nor to waive the interests, penalties and related
charges, since these are merely proposals to creditors, such that in the event the secured creditors refuse the dacion,
the Rehabilitation Plan proposes to settle the obligations to secured creditors with mortgaged properties at selling
prices.
Dacion en Pago in Rehabilitation Plans have an equitable and rehabilitative purpose. On the one hand, they attempt to
provide for the efficient and equitable distribution of an insolvent debtors remaining assets to its creditors; and on the
other, to provide debtors with a "fresh start" by relieving them of the weight of their outstanding debts and permitting
them to reorganize their affairs. Rationale of P.D. No. 902-A, as amended, is to "effect a feasible and viable
rehabilitation," by preserving a foundering business as going concern, because the assets of a business are often more
valuable when so maintained than they would be when liquidated
155
080 Bank of the Philippine Islands v. Sarabia Manor Hotel Corp.

G.R. No. 175844 July 29, 2013
Insolvency; Rehabilitation Plan; Cram Down Effect
Perlas-Bernabe, J:
FACTS:
1. Sarabia is a corporation with business in 101 Gen. Luna St, Iloilo City. It was Incorporated on February 22, 1982 with
authorized capital stock ofP10M, fully subscribed and paid-up.
Primary purpose: owning, leasing, managing and/or operating hotels, restaurants, barber shops, beauty parlors,
sauna and steam baths, massage parlors and such other businesses incident to or necessary in the management
or operation of hotels
2. 1997 For expansion, Sarabia obtained P150 M special loan package from Far East Bank and Trust Company (FEBTC) to
finance the construction of a 5-storey hotel building (New Building). An additional P20M stand-by credit line was
approved by FEBTC.
3. Foregoing debts were secured by real estate mortgages over several parcels of land owned by Sarabia and a
comprehensive surety agreement dated September 1, 1997 signed by its stockholders.
4. By virtue of a merger, BPI assumed all of FEBTCs rights against Sarabia.
5. Sarabia started to pay interests on its loans as soon as the funds were released but incurred various cash flow
problems that were largely because of the delayed completion of the New Building.
6. Despite having more assets than liabilities at that time, it filed a Petition for corporate rehabilitation with prayer for
the issuance of a stay order before the RTC as it foresaw the impossibility to meet its maturing obligations to its creditors
when they fall due.
7. Sarabia claimed that it was forced to take-over the construction due to the recurring default of its contractor, Santa
Ana AJ Construction Corporation, and its subsequent abandonment of the said project.
8. The New Building was completed only 2 years past the original target date of August 1998. This skewed Sarabias
projected revenues. Sarabia was compelled to divert some of its funds in order to cover cost overruns. They were also
affected when the grace period ended in 2000 which resulted in higher amortizations.
9. External events such as the Sept. 11, 2001 terrorist attacks and the Abu Sayyaf issue, also contributed to Sarabias
financial difficulties.
10. Sarabia failed to generate enough cash flow to service its maturing obligations to its creditors
11. Proposed rehabilitation plan: restructuring of all its outstanding loans, submitting that the interest payments on the
same be pegged at a uniform escalating rate
12. RTC issued a Stay Order finding Sarabias rehabilitation petition sufficient in form and substance, and appointed
Liberty B. Valderrama as Sarabias rehabilitation receiver (Receiver).
13. RTC approved the rehabilitation petition after referring to the Receivers evaluation and recommendations as
realistic. It was practical in terms of the interest rate pegged at 6.75% per annum based on Sarabias ability to pay and
the creditors perceived cost of money.
It was likewise found to be viable since, based on the extrapolations made by the Receiver, Sarabias revenue
projections, albeit projected to slow down, remained to have a positive business/profit outlook altogether.
Sarabia was still able to comply with its obligations to its employees and suppliers and pay its taxes to both local
and national government without disrupting the day-to-day operations of its business as an on-going concern.
14. CA affirmed the RTCs ruling with the modification of reinstating the surety obligations of Sarabias stockholders to
BPI as an additional safeguard for the effective implementation of the approved rehabilitation plan.
ISSUE:
Whether or not the CA correctly affirmed Sarabias rehabilitation plan as approved by the RTC, with the modification on
the reinstatement of the surety obligations of Sarabias stockholders
HELD:
YES. The petition has no merit.
156
RATIO:
1. BPIs petition is improper and dismissible as the issues raised therein involve questions of fact which are beyond the
ambit of a Rule 45 petition for review.
2. Sarabias rehabilitation is feasible.
Sarabias 30-year operation is considered a landmark in Iloilo, being one of its kind in the province and having
helped bring progress to the community.
a.Results of the financial examination and analysis clearly indicate that there lies a reasonable probability that the
distressed corporation could be revived and that liquidation would, in fact, better subserve the interests of its
stakeholders, then it may be said that a rehabilitation would be feasible.
3. Sarabia has the financial capability to undergo rehabilitation.
Sarabias financial history shows that it has the inherent capacity to generate funds to repay its loan obligations if
applied through the proper financial framework.
Despite its financial constraints, Sarabia likewise continues to be profitable with its hotelier business as its
operations have not been disrupted. The prospect of substantial and continuous revenue generation is a realistic goal.
A cram-down cause is necessary to curb the majority creditors natural tendency to dictate their own terms
and conditions to the rehabilitation, absent due regard to the greater long-term benefit of all stakeholders.
It forces the creditors to accept the terms and conditions of the rehabilitation plan, preferring long-term viability
over immediate but incomplete recovery.
4. Sarabia has the ability to have sustainable profits over a long period of time.
Receiver concluded that Sarabias projected revenues shall have a steady year-on-year growth from the time that
it applied for rehabilitation until the end of its rehabilitation plan in 2018, albeit with decreasing growth rates (growth
rate is at 26% in 2003, 5% in 2004-2007, 3% in 2008-2018)
Sarabia would have the ability not just to pay off its existing debts but also to carry on with its intended expansion.
5. The interests of Sarabias creditors are well-protected.
6. BPIs opposition was manifestly unreasonable.
BPI counter-proposes unrealistic payment terms and conditions which would, more likely than not, impede
rather than aid its rehabilitation. It becomes further manifest if the rehabilitation plan, in fact, provides for adequate
safeguards to fulfil the majority creditors claims, and yet the latter persists on speculative or unfounded assumptions
that his credit would remain unfulfilled.
CASE LAW/ DOCTRINE:

"cram-down" clause
Section 23, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules) states that a
rehabilitation plan may be approved even over the opposition of the creditors holding a majority of the corporations
total liabilities if there is a showing that rehabilitation is feasible and the opposition of the creditors is manifestly
unreasonable.
KEYWORDS/NOTES:
157
081 Consuelo Metal Corporation v. Planters Development Bank

G.R. No. 152580 June 26, 2008
TOPIC: Common to Liquidation of Individual and Juridical Debtors, Sec. 111; Claims, Sec. 4 (c); Secured Creditor Claims,
Sec. 113, Sec. 114
PONENTE: Carpio, J.
FACTS:
1. Consuelo Metal Corporation filed before the SEC a petition to be declared in a state of suspension of payment for
rehabilitation, and for the appointment of a rehabilition receiver/management committee.
2. SEC declared that all actions for claims against CMC pending before any court, tribunal, office, board, body
and/or commission are deemed suspended immediately until further order" from the SEC
3. SEC directed the creation of management committee to undertake CMCs rehabilitation. SEC issued an Omnibus
Order directing the dissolution and liquidation of CMC. SEC also directed that, the proceedings on and
implementation of the order of liquidation be commenced at the Regional Trial Court to which this case shall be
transferred
4. Respondent Planters Bank, one of CMCs creditors, commenced the extra-judicial foreclosure of CMCs real
estate mortgage. Public auctions were scheduled on 30 January 2001 and 6 February 2001.
5. CMC filed a motion for the issuance of a TRO with the SEC to enjoin the foreclosure of the REM. The SEC issued a
TRO
Trial court denied CMCs motion for issuance of a TRO and ruled that: a) that since the SEC had already terminated and
decided on the merits CMCs petition for suspension of payment, the trial court no longer had legal basis to act on CMCs
motion; b) CMCs petition for suspension of payment could not be converted into a petition for dissolution and
liquidation because they covered different subject matters and were governed by different rules; c) CMCs remedy was
to file a new petition for dissolution and liquidation either with the SEC or the trial court.
6. CMC filed a petition for certiorari with the CA.
7. Planters Bank extra-judicially foreclosed the real estate mortgage.
8. CA: dismissed the petition and ruled, trial court correctly denied CMCs motion for the issuance of a temporary
restraining order because it was only an ancillary remedy to the petition for suspension of payment which was
already terminate
9. CMC filed an MR, arguing that that it does not have to file a new petition for dissolution and liquidation with the
SEC but that the case should just be remanded to the SEC as a continuation of its jurisdiction over the petition for
suspension of payment and asked that Planters Banks foreclosure of the REM be declared void.
10. CA: remanded the case to the SEC and ruled that since the SEC already ordered CMCs dissolution and
liquidation, Planters Banks foreclosure of the real estate mortgage was in order
ISSUE:
1. Whether the present case falls under Section 121 of the Corporation Code, which refers to the SECs jurisdiction over
CMCs dissolution and liquidation, or is only a continuation of the SECs jurisdiction over CMCs petition for suspension of
payment.
2. Whether Planters Banks foreclosure of the real estate mortgage is valid.
HELD:
1. The SEC has jurisdiction to order CMCs dissolution but the trial court has jurisdiction over CMCs liquidation.
2. Yes. It is valid.
RATIO:
1. SECs jurisdiction does not extend to the liquidation of a corporation. While the SEC has jurisdiction to order the
dissolution of a corporation, jurisdiction over the liquidation of the corporation now pertains to the appropriate
regional trial courts. This is the correct procedure because the liquidation of a corporation requires the settlement of
claims for and against the corporation, which clearly falls under the jurisdiction of the regular courts. The trial court is
in the best position to convene all the creditors of the corporation, ascertain their claims, and determine their
158
preferences.
2. In Rizal Commercial Banking Corporation v. Intermediate Appellate Court, we held that if rehabilitation is no longer
feasible and the assets of the corporation are finally liquidated, secured creditors shall enjoy preference over
unsecured creditors, subject only to the provisions of the Civil Code on concurrence and preference of credits.
Creditors of secured obligations may pursue their security interest or lien, or they may choose to abandon the
preference and prove their credits as ordinary claims.
Planters Bank, as a secured creditor, enjoys preference over a specific mortgaged property and has a right to
foreclose the mortgage under Section 2248 of the Civil Code. The creditor-mortgagee has the right to foreclose the
mortgage over a specific real property whether or not the debtor-mortgagor is under insolvency or liquidation
proceedings. The right to foreclose such mortgage is merely suspended upon the appointment of a management
committee or rehabilitation receiver or upon the issuance of a stay order by the trial court. However, the creditor-
mortgagee may exercise his right to foreclose the mortgage upon the termination of the rehabilitation proceedings
or upon the lifting of the stay order.21
Foreclosure proceedings have in their favor the presumption of regularity and the burden of evidence to rebut the
same is on the party that seeks to challenge the proceedings. CMCs challenge to the foreclosure proceedings has no
merit. The notice of sale clearly specified that the auction sale will be held "at 10:00 oclock in the morning or soon
thereafter, but not later than 2:00 oclock in the afternoon." The Sheriffs Minutes of the Sale stated that "the
foreclosure sale was actually opened at 10:00 A.M. and commenced at 2:30 P.M." There was nothing irregular about
the foreclosure proceedings.
***CMC contends that the foreclosure is void because it was undertaken without the knowledge and previous consent of
the liquidator and other lien holders. CMC adds that the rules on concurrence and preference of credits should apply in
foreclosure proceedings. CMC argues that the foreclosure is still void because it was conducted in violation of Section 15,
Rule 39 of the Rules of Court which states that the sale "should not be earlier than nine oclock in the morning and not
later than two oclock in the afternoon."
***Planters Bank argues that it has the right to foreclose the real estate mortgage because of non-payment of the loan
obligation. Planters Bank adds that the rules on concurrence and preference of credits and the rules on insolvency are
not applicable in this case because CMC has been not been declared insolvent and there are no insolvency proceedings
against CMC.
CASE LAW/ DOCTRINE:

If rehabilitation is no longer feasible and the assets of the corporation are finally liquidated, secured creditors shall enjoy
preference over unsecured creditors, subject only to the provisions of the Civil Code on concurrence and preference of
credits. Creditors of secured obligations may pursue their security interest or lien, or they may choose to abandon the
preference and prove their credits as ordinary claims.
159
082 Consuelo Metal Corp. v. Planters Development Bank and Maningas

G.R. No. 152580 June 26, 2008
TOPIC: Secured Creditor Claims
PONENTE: Carpio, J.
FACTS:
1. Consuelo Metal Corp. (CMC) filed before SEC a petition to be declared in a state of suspension of payment, for
rehabilitation, and for the appointment of a rehabilitation receiver or management committee.
2.SEC declared that all actions for claims against CMC pending before any court, tribual, office, board, body and/or
commission are deemed suspended immediately until order from the SEC.
3. SEC issued an order directing the dissolution and liquidation of CMC. It directed that proceedings in the liquidation be
commenced at the RTC
4. Planters Development Bank, one of CMCs creditors, commenced the extrajudicial foreclosure of CMCs real estate
mortgage.
5. CMC filed a motion for the issuance of a temporary restraining order and a writ of preliminary injunction with SEC to
enjoin the foreclosure of the real estate mortgage. SEC issued TRO and the immediate transfer of the case to the RTC
6. case was transferred to RTC. RTC denied the CMCs motion for issuance of TRO
SEC had already terminated and decided on the merits CMCs petition for suspension of payment, the trial court no
longer had legal basis to act on CMCs motion
trial court ruled that CMCs petition for suspension of payment could not be converted into a petition for
dissolution and liquidation because they covered different subject matters and were governed by different rules.
7. CA: upheld the order of the RTC
trial court correctly denied CMCs motion for the issuance of a temporary restraining order because it was only an
ancillary remedy to the petition for suspension of payment which was already terminated.
Arguments:
8. CMC also asked that Planters Banks foreclosure of the real estate mortgage be declared void.
CMC : foreclosure is void because it was undertaken without the knowledge and previous consent of the liquidator
and other lien holders.
: rules on concurrence and preference of credits should apply in foreclosure proceedings.
9. Planters Bank: it has the right to foreclose the real estate mortgage because of non-payment of the loan obligation.
: rules on concurrence and preference of credits and the rules on insolvency are not applicable in this case
because CMC has been not been declared insolvent and there are no insolvency proceedings against CMC
ISSUE: Whether or not Planters Banks foreclosure of the real estate mortgage is valid.
HELD: Yes. The foreclosure of the REM was valid
RATIO:
1. Planters Bank, as a secured creditor, enjoys preference over a specific mortgaged property and has a right to foreclose
the mortgage under Section 2248 of the Civil Code. The creditor-mortgagee has the right to foreclose the mortgage over a
specific real property whether or not the debtor-mortgagor is under insolvency or liquidation proceedings. The right to
foreclose such mortgage is merely suspended upon the appointment of a management committee or rehabilitation
receiver or upon the issuance of a stay order by the trial court. However, the creditor-mortgagee may exercise his right to
foreclose the mortgage upon the termination of the rehabilitation proceedings or upon the lifting of the stay order.
CASE LAW/ DOCTRINE:

In Rizal Commercial Banking Corporation v. Intermediate Appellate Court, we held that if rehabilitation is no longer feasible
and the assets of the corporation are finally liquidated, secured creditors shall enjoy preference over unsecured creditors,
subject only to the provisions of the Civil Code on concurrence and preference of credits. Creditors of secured obligations
may pursue their security interest or lien, or they may choose to abandon the preference and prove their credits as
ordinary claims.
160
083 Manuel D. Yngson, Jr. (in his capacity as ARCAM liquidator) vs. Philippine National Bank
GR No. 171132 Date August 15, 2012
TOPIC: Secured Creditor Claims Secs. 113, 114 (See Republic Act 10142)
PONENTE: Villarama, J.
FACTS:
1. ARCAM is engaged in the operation of a sugar mill in Pampanga. Between 1991 and 1993, ARCAM applied for
and was granted a loan by respondent Philippine National Bank (PNB). To secure the loan, ARCAM executed a
Real Estate Mortgage over a 350,004-square meter parcel of land covered by A Transfer Certificate of Title and a
Chattel Mortgage over various personal properties consisting of machinery, generators, field transportation, and
heavy equipment.
2. ARCAM, however, defaulted on its obligations to PNB. Thus, pursuant to the provisions of the Real Estate
Mortgage and Chattel Mortgage, PNB initiated extrajudicial foreclosure proceedings in the Office of the Clerk of
Court/Ex Officio Sheriff of the Regional Trial Court. The public auction was scheduled.
3. ARCAM filed before the SEC a Petition for Suspension of Payments, Appointment of a Management or
Rehabilitation Committee, and Approval of Rehabilitation Plan, with application for issuance of a temporary
restraining order (TRO) and writ of preliminary injunction. The SEC issued a TRO and subsequently a writ of
preliminary injunction, enjoining PNB and the Sheriff of the RTC of Guagua, Pampanga from proceeding with the
foreclosure sale of the mortgaged properties.
4. The SEC ruled that ARCAM can no longer be rehabilitated. The SEC noted that the petition for suspension of
payment was filed and six years had passed but the potential investor had not infused the much needed capital
to bail out ARCAM from its financial difficulties. With this development, PNB revived the foreclosure case and
requested the RTC Clerk of Court to re-schedule the sale at public auction of the mortgaged properties.
5. Contending that foreclosure during liquidation was improper, petitioner filed with the SEC a Motion for the
Issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction to enjoin the foreclosure sale of
ARCAMs assets. The SEC en banc issued a TRO effective for seventy-two (72) hours, but said TRO lapsed without
any writ of preliminary injunction being issued by the SEC. Consequently, on July 28, 2000, PNB resumed the
proceedings for the extrajudicial foreclosure sale of the mortgaged properties. PNB emerged as the highest
winning bidder in the auction sale, and certificates of sale were issued in its favor.
6. PETITIONERS CONTENTION: Petitioner filed with the SEC a motion to nullify the auction sale. Petitioner posited
that all actions against companies which are under liquidation, like ARCAM, are suspended because liquidation is
a continuation of the petition for suspension proceedings. Petitioner argued that the prohibition against
foreclosure subsisted during liquidation because payment of all of ARCAMs obligations was proscribed except
those authorized by the Commission. Moreover, petitioner asserted that the mortgaged assets should be
included in the liquidation and the proceeds shared with the unsecured creditors.
7. RESPONDENTS CONTENTION: PNB asserted that neither Presidential Decree (P.D.) No. 902-A nor the SEC rules
prohibits secured creditors from foreclosing on their mortgages to satisfy the mortgagors debt after the
termination of the rehabilitation proceedings and during liquidation proceedings.
8. SECS RULING: Therefore, SEC issued a Resolution denying petitioners motion to nullify the auction sale. It held
that PNB was not legally barred from foreclosing on the mortgages. Aggrieved, petitioner filed on February 28,
2005, a petition for review in the CA questioning the January 4, 2005 Resolution of the SEC.
9. CAS RULING: By Resolution, the CA dismissed the petition.
ISSUE:
(1) Whether the CA correctly dismissed the petition for failure to attach material documents referred to in the petition;
and
(2) Whether PNB, as a secured creditor, can foreclose on the mortgaged properties of a corporation under liquidation
without the knowledge and prior approval of the liquidator or the SEC.
RATIO:
1. No. However, the Court find it more appropriate to decide the merits of the case in the interest of speedy justice
considering that the parties have adequately argued all points and issues raised. It is the policy of the Court to
161
strive to settle an entire controversy in a single proceeding, and to leave no root or branch to bear the seeds of
future litigation. The ends of speedy justice would not be served by a remand of this case to the CA especially
since any ruling of the CA on the matter could end up being appealed to this Court.
The Resolution also contains the SECs findings on the legality of PNBs foreclosure of the mortgages. The SEC held that
when the rehabilitation proceeding was terminated and the suspensive effect of the order staying the enforcement of
claims was lifted, PNB could already assert its preference over unsecured creditors, and the secured asset and the
proceeds need not be included in the liquidation and shared with the unsecured creditors. Before the CA, petitioner
raised only the same legal questions as there was no controversy involving factual matters. Petitioner claimed that the
SEC erred in not applying the rules on concurrence and preference of credits, and in denying its motion to nullify the
auction sale of the secured properties. Therefore, the assailed SEC Resolution is the only material portion of the record
that should be annexed with the petition for the CA to decide on the correctness of the SECs interpretation of the law
and jurisprudence on the matter before it.
2. No, the SEC did not err in ordering liquidation without the prior knowledge and approval of SEC. In the case
of Consuelo Metal Corporation v. Planters Development Bank, the court has already settled the above question
and upheld the right of the secured creditor to foreclose the mortgages in its favor during the liquidation of a
debtor corporation.
In Rizal Commercial Banking Corporation v. Intermediate Appellate Court, the Court held that if rehabilitation is no longer
feasible and the assets of the corporation are finally liquidated, secured creditors shall enjoy preference over unsecured
creditors, subject only to the provisions of the Civil Code on concurrence and preference of credits. Creditors of secured
obligations may pursue their security interest or lien, or they may choose to abandon the preference and prove their
credits as ordinary claims.
Republic Act No. 10142, otherwise known as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010, the right of a
secured creditor to enforce his lien during liquidation proceedings is retained. Section 114 of said law thus provides:
SEC. 114. Rights of Secured Creditors. The Liquidation Order shall not affect the right of a secured creditor to enforce
his lien in accordance with the applicable contract or law. A secured creditor may:
(a) waive his rights under the security or lien, prove his claim in the liquidation proceedings and share in the distribution
of the assets of the debtor; or
(b) maintain his rights under his security or lien;
If the secured creditor maintains his rights under the security or lien:
(1) the value of the property may be fixed in a manner agreed upon by the creditor and the liquidator.1wphi1 When the
value of the property is less than the claim it secures, the liquidator may convey the property to the secured creditor and
the latter will be admitted in the liquidation proceedings as a creditor for the balance; if its value exceeds the claim
secured, the liquidator may convey the property to the creditor and waive the debtors right of redemption upon
receiving the excess from the creditor;
(2) the liquidator may sell the property and satisfy the secured creditors entire claim from the proceeds of the sale; or
(3) the secured creditor may enforce the lien or foreclose on the property pursuant to applicable laws. (Emphasis
supplied)
In this case, PNB elected to maintain its rights under the security or lien; hence, its right to foreclose the mortgaged
properties should be respected, in line with our pronouncement in Consuelo Metal Corporation.
As to petitioner's argument on the right of first preference as regards unpaid wages, the Court has elucidated in the case
of Development Bank of the Philippines v. NLRC that a distinction should be made between a preference of credit and a
lien. A preference applies only to claims which do not attach to specific properties. A lien creates a charge on a particular
property. The right of first preference as regards unpaid wages recognized by Article 110 of the Labor Code, does not
constitute a lien on the property of the insolvent debtor in favor of workers. It is but a preference of credit in their favor,
a preference in application. It is a method adopted to determine and specify the order in which credits should be paid in
the final distribution of the proceeds of the insolvent's assets. It is a right to a first preference in the discharge of the
funds of the judgment debtor. Consequently, the right of first preference for unpaid wages may not be invoked in this
case to nullify the foreclosure sales conducted pursuant to PNB 's right as a secured creditor to enforce its lien on specific
properties of its debtor, ARCAM.

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1

CREDIT CASE DIGEST AY 13-14 | G01

001 PEOPLE vs. CONCEPCION

Defenses Contention: The provision prohibits loan, not discount.

002 Garcia v Thio

003 Saura Import and Export Co. Inc. v. DBP

004 BPI Inv. Corp. v. CA and ALS M & D Corp.,

005 PANTALEON v. AMERICAN EXPRESS INTERNATIONAL, INC.

As to the contention of the petitioners not being a privy to the contract:

007 Colito Pajuyo v CA, Eddie Guevarra

008 Republic v. Bagtas

009 Quintos v. Beck

were offered to her.

CASE LAW/ DOCTRINE:

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

010 BPI FAMILY BANK (BPI-FB) v. FRANCO

012 Spouses Antonio and Manuela Concepcion v CA

013 Frias v. San Diego-Sison

014 Sps. Juico v. China Banking Corp.,

017 Siga-an v Villanueva

018 Estores v. Spouses Supangan

019 Nacar v. Gallery Frames and/or Bordey

020 UNITED COCONUT PLANTERS BANK v. SPOUSES BELUSO

The rate violates the Truth in Lending Act because...

DISPOSITIVE: Petition was dismissed

NOTE: This is based on a good digest Ive found.

024 The Roman Catholic Bishop of Jaro v. De La Pena

CASE LAW/ DOCTRINE:

DISSENTING OPINION: J. Trent :

KEYWORDS/NOTES: CFI judgment reversed.

1. What kind of contract is involved?

2. Whether or not conditions 13 and 14 are valid

Bank cooperates by presenting and using the guard key.

4. Whether or not the Bank is liable for damages

Issue #3 pretty much explains itself :)

026 YHT Realty Corporation v. CA

027 Philippine National Bank v. Se

ISSUE: Whether or not PNB is subject to pay the warehousemans lien.

CASE LAW/ DOCTRINE:

KEYWORDS/NOTES: Storage fees are chargeable.

028 TRANSFIELD PHILIPPINES, INC. VS LUZON HYDRO CORPORATION AUSTRALIA

appropriately called "beneficiary."

CASE LAW/ DOCTRINE:

029 COLINARES & VELOSO v. CA

bonds; Petitioners submitted compliance.

CASE LAW/ DOCTRINE:

031 Security Bank v. Cuenca

CASE LAW/ DOCTRINE:

032 Palmares v. CA & M. B. Lending Corporation

the account and inuring to the benefit of petitioner.

CASE LAW/ DOCTRINE:

A guarantor is the insurer of the solvency of the debtor

034 CASE TITLE: Phil Blooming Mills v. CA

ISSUE: WON Ching may be held liable as a surety of PBM

CASE LAW/ DOCTRINE:

035 IFC v. IMPERIAL TEXTILE MILLS, INC.

036 Escano & Silos v. Ortigas, Jr.,

ISSUE: Whether or not the obligation to repay is solidary?

037 Development Bank of the Philippines v. Court of Appeals

CASE LAW/ DOCTRINE:

038 BUSTAMANTE VS ROSEL

CASE LAW/ DOCTRINE:

CASE LAW/ DOCTRINE: