MARLOU L. VELASQUEZ v. SOLIDBANK CORPORATION, G.R. No.

157309 March 28, 2008

REYES, R.T., J.:

PARTIES may not impugn the effectivity of a contract, after much benefit has been gained to the prejudice of another. They are bound by the obligations
they expressly set out to do.
Before Us is a petition for review on certiorari of the Decision[1] of the Court of Appeals (CA) which affirmed with modification that of the Regional
Trial Court (RTC) in Cebu City,[2] holding petitioner Marlou Velasquez liable under his letter of undertaking to respondent Solidbank Corporation.
The Facts
Petitioner is engaged in the export business operating under the name Wilderness Trading. Respondent is a domestic banking corporation
organized under Philippine laws.
The case arose out of a business transaction for the sale of dried sea cucumber for export to South Korea between Wilderness Trading, as seller,
and Goldwell Trading of Pusan, South Korea, as buyer. To facilitate payment of the products, Goldwell Trading opened a letter of credit in favor of Wilderness
Trading in the amount of US$87,500.00[3] with the Bank of Seoul, Pusan, Korea.
On November 12, 1992, petitioner applied for credit accommodation with respondent bank for pre-shipment financing. The credit
accommodation was granted. Petitioner was successful in his first two export transactions both drawn on the letter of credit. The third export shipment,
however, yielded a different result.
On February 22, 1993, petitioner submitted to respondent the necessary documents for his third shipment. Wanting to be paid the value of the
shipment in advance, petitioner negotiated for a documentary sight draft to be drawn on the letter of credit, chargeable to the account of Bank of Seoul. The
sight draft represented the value of the shipment in the amount of US$59,640.00.[4]
As a condition for the issuance of the sight draft, petitioner executed a letter of undertaking in favor of respondent. Under the terms of the letter
of undertaking, petitioner promised that the draft will be accepted and paid by Bank of Seoul according to its tenor. Petitioner also held himself liable if the
sight draft was not accepted. The letter of undertaking provided:

SOLIDBANK CORPORATION Feb. 22, 1993

32 Borromeo Street
Cebu City

Gentlemen: Re: PURCHASE OF ONE DOC. SIGHT DRAFT DRAWN UNDER LC#M2073210NS00040 FOR US$59,640.00 UNDER OUR
CEBP93/102.

In consideration of your negotiating the above described draft(s), we hereby warrant that the above referred to draft(s) and
accompanying documents are genuine and accurately represent the facts stated therein and that the draft(s) will be accepted and
paid in accordance with its/their tenor. We further undertake and agree, jointly and severally, to hold you free and harmless from
and to defend all actions, claims and demands whatsoever, and to pay on demand all damages, actual or compensatory, including
attorneys fees, in case of suit, at least equal to __% of the amount due, which you may suffer arising by reason of or on account of
your negotiating the above draft(s) because of the following discrepancies or reasons or any other discrepancy or reason whatever:

1) B/L MARKED SAID TO CONTAIN & SHIPPERS LOAD, STOWAGE & COUNT.
2) LATE SHIPMENT.
3) QUANTITY SHIPPED @ US$14.00 OVERDRAWN BY 0.06 TON.
4) NO INSPECTION CERTIFICATE PRESENTED.

We hereby undertake to pay on demand the full amount of the draft(s) or any unpaid balance of the draft(s), with interest at the
prevailing rate of today from the date of negotiation, plus all charges and expenses whatsoever incurred in connection therewith. You
shall neither be obligated to contest or dispute any refusal to accept or to pay the whole or any part of the above draft(s) nor to
proceed in anyway against the drawee thereof, the issuing bank, or against any indorser thereof before making a demand on us for
the payment of the whole or any unpaid balance of the draft(s).[5] (Emphasis added)

By virtue of the letter of undertaking, respondent advanced the value of the shipment which, at the current rate of exchange at that time
was P1,495,115.16, less bank charges, to petitioner. Respondent then sent all the documents pertinent to the export transaction to the Bank of Seoul.
Respondent failed to collect on the sight draft as it was dishonored by non-acceptance by the Bank of Seoul. The reasons given for the dishonor
were late shipment, forged inspection certificate, and absence of countersignature of the negotiating bank on the inspection certificate.[6] Goldwell Trading
likewise issued a stop payment order on the sight draft because most of the bags of dried sea cucumber exported by petitioner contained soil.
Due to the dishonor of the sight draft and the stop payment order, respondent demanded restitution of the sum advanced.[7] Petitioner failed
to heed the demand.
On June 3, 1993, respondent filed a complaint for recovery of sum of money[8] with the RTC in Cebu City. In his answer, petitioner alleged that
his liability under the sight draft was extinguished when respondent failed to protest its non-acceptance, as required under the Negotiable Instruments Law
(NIL). He also alleged that the letter of undertaking is not binding because it is a superfluous document, and that he did not violate any of the provisions of
the letter of credit.[9]
RTC and CA Dispositions
On September 25, 1996, the RTC rendered judgment[10] in favor of respondent with the following fallo:
IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering the defendant:
(1) to pay the plaintiff the principal sum of P1,495, 115.16 plus interest at 20% per annum counted
from February 22, 1993 up to the time the entire amount shall have been fully paid;
(2) to pay attorneys fees equivalent to 10% of the total amount due the plaintiff; and
(3) to pay the costs.
SO ORDERED.[11]
The RTC ratiocinated:
This court is not convinced with the defendants argument that because of plaintiffs failure to protest the dishonor of the
sight draft, his liability is extinguished because his liability remains under the letter of undertaking which he signed and without which
plaintiff would not have advanced or credited to him the amount.

Section 152 of the Negotiable Instruments Law under which defendant claims extinguishment of his liability to plaintiff
is not a bar to the filing of other appropriate remedies which the aggrieved party may pursue to vindicate his rights and in this instant
case, plaintiff wants his right vindicated by virtue of the letter of undertaking which defendant signed. By the letter of undertaking,
defendant bound himself to pay on demand all damages including attorneys fees which plaintiff may suffer arising by reason of or on
account of negotiating the above draftbecause of the following discrepancies or any other discrepancy or reasons whatsoever and
further to pay on demand full amount of any unpaid balance with interest at the prevailing rate.He should be bound to the fulfillment
of what he expressly obligated himself to do and perform in the letter of undertaking without which, plaintiff would not have advance
(sic) and credited to him the amount in the draft. He should not enrich himself at the expense of plaintiff.[12] (Emphasis added)
Disagreeing, petitioner elevated the matter to the CA.
On June 27, 2002, the CA affirmed with modification the RTC decision, disposing as follows:
WHEREFORE, premises considered, the assailed Decision is hereby AFFIRMED with MODIFICATION. Defendant-appellant
Marlou L. Velasquez is hereby ordered to pay plaintiff-appellee Solidbank Corporation, the following: (1) the principal amount of One
 Million Four Hundred Ninety-Five Thousand One Hundred Fifteen and Sixteen Centavos (P1,495,115.16) plus interest at twelve
percent (12%) per annum from February 22, 1993 until fully paid, (2) attorneys fees equivalent to five percent (5%) of the total
amount due, and (3) costs of the suit.

SO ORDERED.[13]
In ruling against petitioner, the CA opined:
The fact that said draft was dishonored and not paid by the Bank of Seoul-Korea, (sic) it is incumbent upon defendant-appellant
Velasquez to comply with his obligation under the Letter of Undertaking. He cannot be allowed to impugn the contract of undertaking
he entered into by saying that it was a superfluous document, and therefore, not binding on him. The contract of undertaking is the
law between them, and must be enforced accordingly. This is in accord with Article 1159 of the New Civil Code, which provides that
obligations arising from contracts have the force of law between the contracting parties and should be complied with in good
faith. And parties to a contract are bound to the fulfillment of what has expressly been stipulated therein, regardless of the fact that
it turn (sic) out to be financially disadvantageous.[14]

xxxx

The fact that Defendant-appellant benefited from the advance payment made by Plaintiff appellee, (sic) it is incumbent upon him to
return what he received because the purpose of the advance payment was not attained and/or realized, as the sight draft was not
paid accordingly, otherwise, it will result to unjust enrichment on the part of Defendant-appellant at the expense of Plaintiff-
appellee, in violation of Articles 19 and 22 of the New Civil Code. The doctrine of unjust enrichment and restitution simply means
that the exercise of a right ends when the right disappears, and it disappears when it is abused, especially to the prejudice of
others.[15] (Emphasis added)
Petitioner moved for reconsideration[16] but his motion was denied.[17] Hence, the present recourse.
Issues
Petitioner raises twin issues for Our consideration, to wit:
THE COURT OF APPEALS HAS DECIDED A QUESTION OF SUBSTANCE, NOT HERETOFORE DETERMINED BY THIS HONORABLE COURT,
OR HAS DECIDED IT IN A WAY PROBABLY NOT IN ACCORD WITH LAW OR WITH THE APPLICABLE DECISIONS OF THIS HONORABLE
COURT, IN THAT:
I.
THE COURT OF APPEALS RULED THAT PETITIONER IS LIABLE ON THE ACCESSORY CONTRACT, THE LETTER OF
UNDERTAKING, DESPITE THE FACT THATPETITIONER WAS ALREADY RELEASED FROM LIABILITY UNDER THE SIGHT DRAFT,
THE PRINCIPAL CONTRACT, UNDER THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW AND THE CIVIL CODE.
II.
THE COURT OF APPEALS HELD PETITIONER LIABLE UNDER THE ACCESSORY CONTRACT, THE LETTER OF UNDERTAKING,
DESPITE THE FACT THAT THERE WAS NO PROOF WHATSOEVER THAT PETITIONER VIOLATED EITHER THE PRINCIPAL
CONTRACT, THE SIGHT DRAFT, OR EVEN THE LETTER OF UNDERTAKING.[18] (Underscoring supplied)
The main issue is whether or not petitioner should be held liable to respondent under the sight draft or the letter of undertaking. There is no dispute that
petitioner duly signed and executed these documents. It is likewise admitted that the sight draft was dishonored by non acceptance by the Bank of Seoul.
Our Ruling
The petition is without merit.
Petitioner is not liable under the sight draft but he is liable under his letter of undertaking; liability under the letter of undertaking was not extinguished by non-
protest of the dishonor of the sight draft.

Petitioner argues that he cannot be held liable under either the sight draft or the letter of undertaking. He claims that the failure of respondent
to protest the dishonor of the sight draft under Section 152 of the NIL discharged him from liability under the negotiable instrument. It is also contended
that his liability under the letter of undertaking is that of a mere guarantor; that the letter of undertaking is only an accessory contract to the sight draft. Since
he was discharged from liability under the sight draft, he cannot be held liable under the letter of undertaking.
For its part, respondent counters that petitioners liability springs from the letter of undertaking, independently of the sight draft. It would not
have advanced the amount without the letter of undertaking. According to respondent, the letter of undertaking is an independent agreement and not
merely an accessory contract. To permit petitioner to escape liability under the letter of undertaking would result in unjust enrichment.
Petitioners liability under the letter of undertaking is independent from his liability under the sight draft. He may be held liable under either the
sight draft or the letter of undertaking or both.
Admittedly, petitioner was discharged from liability under the sight draft when respondent failed to protest it for non-acceptance by the Bank of
Seoul. A sight draft made payable outside the Philippines is a foreign bill of exchange.[19] When a foreign bill is dishonored by non-acceptance or non-
payment, protest is necessary to hold the drawer and indorsers liable. Verily, respondents failure to protest the non-acceptance of the sight draft resulted
in the discharge of petitioner from liability under the instrument.
Section 152 of the NIL is explicit:
Section 152. In what cases protest necessary. Where a foreign bill appearing on its face to be such is dishonored by non-
acceptance, it must be duly protested for non-acceptance, and where such a bill which has not been previously dishonored by non-
acceptance, is dishonored by non-payment, it must be duly protested for non-payment. If it is not so protested, the drawer and
indorsers are discharged. Where a bill does not appear on its face to be a foreign bill, protest thereof in case of dishonor is
unnecessary. (Emphasis added)
Petitioner, however, can still be made liable under the letter of undertaking. It bears stressing that it is a separate contract from the sight
draft. The liability of petitioner under the letter of undertaking is direct and primary. It is independent from his liability under the sight draft. Liability subsists
on it even if the sight draft was dishonored for non-acceptance or non-payment.
Respondent agreed to purchase the draft and credit petitioner its value upon the undertaking that he will reimburse the amount in case the sight
draft is dishonored. The bank would certainly not have agreed to grant petitioner an advance export payment were it not for the letter of undertaking. The
consideration for the letter of undertaking was petitioners promise to pay respondent the value of the sight draft if it was dishonored for any reason by the
Bank of Seoul.
We cannot accept petitioners thesis that he is only a mere guarantor under the letter of credit. Petitioner cannot be both the primary debtor
and the guarantor of his own debt. This is inconsistent with the very purpose of a guarantee which is for the creditor to proceed against a third person if the
debtor defaults in his obligation. Certainly, to accept such an argument would make a mockery of commercial transactions.
Petitioner bound himself liable to respondent under the letter of undertaking if the sight draft is not accepted. He also warranted that the sight
draft is genuine; will be paid by the issuing bank in accordance with its tenor; and that he will be held liable for the full amount of the draft upon demand,
without necessity of proceeding against the drawee bank.[20] Petitioner breached his undertaking when the Bank of Seoul dishonored the sight draft and
Goldwell Trading ordered a stop payment order on it for discrepancies in the export documents.

Petitioner is liable without need for respondent to establish collateral facts such as violations of the letter of credit.
It is also argued that petitioner cannot be held liable under the letter of undertaking because respondent failed to prove that he violated any of
the provisions in the letter of credit or that sixty (60) of the seventy-one (71) bags shipped to Goldwell Trading contained soil instead of dried sea cucumber.
We cannot agree. Respondent need not prove that petitioner violated the provisions of the letter of credit in order to be held liable under the
letter of undertaking. Parties are bound to fulfill what has been expressly stipulated in the contract. [21] Petitioners liability under the letter of undertaking is
clear. He is liable to respondent if the sight draft is not accepted by the Bank of Seoul. Mere non-acceptance of the sight draft is sufficient for liability to
attach. Here, the sight draft was dishonored for non-acceptance. The non-acceptance of the sight draft triggered petitioners liability under the letter of
undertaking.
 Records also show that the Bank of Seoul found discrepancies in the documents submitted by petitioner. Goldwell Trading issued a stop payment
order because the products shipped were defective. It found that most of the bags shipped contained soil instead of dried sea cucumber. If petitioner disputes
the finding of Goldwell Trading, he can file a case against said company but he cannot dispute his liability under either the sight draft or the letter of
undertaking.
As We see it, this is a straightforward case of collection of sum of money on the basis of a letter of undertaking. Respondent advanced the export
payment to petitioner on the understanding that the draft will be honored and paid. The draft was dishonored. Justice and equity dictate that petitioner be
held liable to respondent bank.
WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court of Appeals dated June 27, 2002 is hereby AFFIRMED. SO ORDERED.

047 Philippine Blooming Mills v. CA Author: Jade

G.R. No. 142381. October 15, 2003 Notes:
Ponente: CARPIO, J

FACTS:
The case stemmed from an action to compel Alfredo Ching to pay Traders Royal Bank (TRB) the following amounts:
1. P959,611.96 under Letter of Credit No. 479 AD covered by Trust Receipt No. 106
2. P1,191,137.13 under Letter of Credit No. 563 AD covered by Trust Receipt No. 113 and
3. P3,500,000 under the trust loan covered by a notarized Promissory Note

Ching was the Senior Vice President of Philippine Blooming Mills (PBM). In his personal capacity and not as a corporate officer, Ching signed a Deed of Suretyship dated 21 July
1977 binding himself as primary obligor on PBMs obligations to TRB.

PBM defaulted in its payment of Trust Receipt No. 106 (Letter of Credit No. 479 AD) for P959,611.96, and of Trust Receipt No. 113 (Letter of Credit No. 563 AD) for
P1,191,137.13. PBM also defaulted on its P3,500,000 trust loan.

On 1 April 1982, PBM and Ching filed a petition for suspension of payments with the Securities and Exchange Commission. 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 9 July 1982, the SEC placed all of PBMs assets, liabilities, and obligations under the rehabilitation receivership of Kalaw, Escaler and Associates.

On 13 May 1983, TRB filed with the trial court a complaint for collection against PBM and Ching. On 25 May 1983, TRB moved to withdraw the complaint against PBM on the
ground that the SEC had already placed PBM under receivership. The trial court thus dismissed the complaint against PBM.

On 23 June 1983, PBM and Ching also moved to dismiss the complaint on the ground that the trial court had no jurisdiction over the subject matter of the case. PBM and Ching
invoked the assumption of jurisdiction by the SEC over all of PBMs assets and liabilities.

TRB filed an opposition to the Motion to Dismiss. TRB argued that (1) 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 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.

The trial court denied the motion to dismiss with respect to Ching and affirmed its dismissal of the case with respect to PBM. It 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 filed a Petition for Certiorari and Prohibition before the Court of Appeals. The appellate court granted Chings petition and ordered the dismissal of the case. The appellate
court ruled that the SEC assumed jurisdiction over Ching and PBM to the exclusion of courts or tribunals of coordinate rank.

TRB assailed the Court of Appeals Decision before the Supreme Court. SC upheld TRB and ruled that Ching was merely a nominal party in SEC Case No. 2250. Creditors may sue
individual sureties of debtor corporations, like Ching, in a separate proceeding before regular courts despite the pendency of a case before the SEC involving the debtor
corporation.

Ching denied liability as surety and accommodation co-maker of PBM. He claimed that the SEC had already issued a decision approving a revised rehabilitation plan for PBMs
creditors, and that PBM obtained the credit accommodations for corporate purposes that did not redound to his personal benefit. He further claimed that even as a surety, he
has the right to the defenses personal to PBM. Thus, his liability as surety would attach only if, after the implementation of payments scheduled under the rehabilitation plan,
there would remain a balance of PBMs debt to TRB. Although Ching admitted PBMs availment of the credit accommodations, he did not show any proof of payment by PBM or
by him.

TRB admitted certain partial payments on the PBM account made by PBM itself and by the SEC-appointed receiver.

The trial court found Ching liable to TRB for P19,333,558.16 under the Deed of Suretyship. The liability of Ching as a surety attaches independently from his capacity as a
stockholder of the Philippine Blooming Mills.

On appeal, Ching stated that as surety and solidary debtor, he should benefit from the changed nature of the obligation. Ching claimed that his liability should likewise be
reduced since the equitable apportionment of PBMs remaining assets among its creditors under the rehabilitation proceedings would have the effect of reducing PBMs liability.
CA decided in favor of TRB. CA also denied Chings Motion for Reconsideration.
ISSUE: Whether or not Ching is liable to TRB for the obligations contracted by PBM after his execution of the Deed of Suretyship

HELD: CA decision that Ching is liable to TRB but with modifications on the amount of liability
(1) on the credit accommodations under the trust receipts, the total principal amount of P2,150,749.09 with legal interest at 12% per annum from 14 May 1983 until full
payment
(2) on the trust loan evidenced by the Promissory Note, the principal sum of P3,500,000 with 20% interest per annum from 14 May 1983 until full payment
(3) on the total accrued interest as of 13 May 1983, P2,075,058.84 with 12% interest per annum from 14 May 1983 until full payment. Petitioner Alfredo Ching shall also pay
attorneys fees to respondent Traders Royal Bank equivalent to 5% of the total principal and interest.

RATIO:
Ching asserted that the Deed of Suretyship dated 21 July 1977 could not answer for obligations not yet in existence at the time of its execution. Specifically, Ching maintained
that the Deed of Suretyship could not answer for debts contracted by PBM in 1980 and 1981.

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.

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.
In granting the loan to PBM, TRB required Chings surety precisely to insure full recovery of the loan in case PBM becomes insolvent or fails to pay in full. This was the very
purpose of the surety. Thus, Ching cannot use PBMs failure to pay in full as justification for his own reduced liability to TRB. As surety, Ching agreed to pay in full PBMs loan in
case PBM fails to pay in full for any reason, including its insolvency. TRB, as creditor, has the right under the surety to proceed against Ching for the entire amount of PBMs loan.
This is clear from Article 1216 of the Civil Code.

Ching further claims a reduced liability under TRB Board Resolution No. 5935. However, his own witness testified that Resolution No. 5935 was never implemented. For one,
PBM or its receiver never paid the P150,000 initial payment to TRB. TRB also rejected the document that PBMs receiver presented which would have released Ching from his
suretyship. Clearly, Ching cannot rely on Resolution No. 5935 to escape liability under his suretyship.

Chings attempts to have this Court review the factual issues of the case are improper. It is not a function of the Supreme Court to assess and evaluate again the evidence,
testimonial and evidentiary, adduced by the parties particularly where the findings of both the trial court and the appellate court coincide on the matter.

Ching is still liable for the amounts stated in the letters of credit covered by the trust receipts. Other than his bare allegations, Ching has not shown proof of payment or
settlement with TRB.

Presidential Decree No. 115, otherwise known as the Trust Receipts Law, expressly allows TRB to take possession of the goods covered by the trust receipts. Even though TRB
took possession of the goods covered by the trust receipts, PBM and Ching remained liable for the entire amount of the loans covered by the trust receipts.

Absent proof of payment or settlement of PBM and Chings credit obligations with TRB, Chings liability is what the Deed of Suretyship stipulates, plus the applicable interest and
penalties. The trust receipts, as well as the Letter of Undertaking dated 16 April 1980 executed by PBM, stipulate in writing the payment of interest without specifying the rate.
In such a case, the applicable interest rate shall be the legal rate, which is now 12% per annum.

On the other hand, the Promissory Note evidencing the P3,500,000 trust loan provides for 18% interest per annum plus 2% penalty interest per annum in case of default. This
stipulated interest should continue to run until full payment of the P3,500,000 trust loan. In addition, the accrued interest on all the credit accommodations should earn legal
interest from the date of filing of the complaint
DOCTRINE:

NCC Article 2053 - 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)

Dio v. Court of Appeals 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 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.

NCC ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be
an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. (Emphasis supplied)

Section of 7 of PD No. 115 - Rights of the entruster. The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a
trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in
case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of this Decree.

The entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon
default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee, and the
entruster in possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days
after serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become a purchaser. The
proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and
storing the goods, documents or instruments; (c) to the satisfaction of the entrustees indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to
the entruster for any deficiency. Notice of sale shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to
the entrustees last known business address. (Emphasis supplied)

049 ATOK FINANCE v CA AUTHOR: Krystelle

G.R. No. 80078 May 18, 1993
Topic: Extinguishment of Guaranty
Ponente: Feliciano, J.

FACTS
1. Private respondents Sanyu Chemical corporation ("Sanyu Chemical") as principal and Sanyu Trading Corporation ("Sanyu Trading") along with individual priva
stockholders of Sanyu Chemical, namely, private respondent spouses Danilo E. Halili and Pablico Bermundo as sureties, executed in the continuing Suretyship Agreeme
in favor of Atok Finance as creditor. Under this Agreement, Sanyu Trading and the individual private respondents who were officers and stockholders of Sanyu Chemi
did:
(1) For valuable and/or other consideration . . ., jointly and severally unconditionally guarantee to ATOK FINANCE CORPORATION
(hereinafter called Creditor), the full, faithful and prompt payment and discharge of any and all indebtedness of [Sanyu Chemical] . . .
(hereinafter called Principal) to the Creditor.
2. Sanyu Chemical assigned its trade receivables outstanding as of 27 November 1981 with a total face value of P125,871.00, to Atok Finance in consideration of rece
from Atok Finance of the amount of P105,000.00. The assigned receivables carried a standard term of thirty (30) days; it appeared, however, that the standard commerc
practice was to grant an extension up to one hundred twenty (120) days without penalties.
3. Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance with a total face value of P100,378.45.
4. Atok Finance commenced action against Sanyu Chemical, the Arrieta spouses, Pablito Bermundo and Leopoldo Halili before the Regional Trial Court of Manila to colle
the sum of P120,240.00 plus penalty charges amounting to P0.03 for every peso due and payable for each month starting from 1 September 1983. Atok Finance alleg
that Sanyu Chemical had failed to collect and remit the amount due under the trade receivables.
5. Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground that such claim had prescribed under Article 1629 of the C
Code and for lack of cause of action. The private respondents contended that the Continuing Suretyship Agreement, being an accessory contract, was null and void sin
at the time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance.
6. At the trial, Sanyu Chemical and the individual private respondents failed to present any evidence on their behalf, although the individual private respondents submitt
a memorandum in support of their argument.
7. TC: in favor of the plaintiffs Atok Finance
8. Respondents appealed but it was dismissed upon the ground of abandonment, since the private respondents had failed to file their appeal brief notwithstanding rece
of the notice to do so. Repsondents filed a petition for relief from judgement and it was granted because of "in the paramount interest of justice."
9. CA: reversed and set aside the decision of the TC
 10. PR's contention: the suretyship agreement is null and void because it is not in consonance with the laws on guaranty and security. The said agreement was entered in
by the parties two years before the Deed of Assignment was executed. Thus, allegedly, it ran counter to the provision that guaranty cannot exist independently becau
by nature it is merely an accessory contract.
11. Hence, this appeal.
ISSUE: Whether or not the individual private respondents may be held solidarily liable with Sanyu Chemical under the provisions of the Continuing Suretyship Agreement.

HELD: Yes. Suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more that there would be in saying th
obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent.

RATIO:
Although obligations arising from contracts have the force of law between the contracting parties, (Article 1159 of the Civil Code) this does not mean that the law is inferior to it; t
terms of the contract could not be enforces if not valid. So, even if, as in this case, the agreement was for a continuing suretyship to include obligations enumerated in paragraph
of the agreement, the same could not be enforced. First, because this contract, just like guaranty, cannot exist without a valid obligation (Art. 2052, Civil Code); and, second, althou
it may be given as security for future debt (Art. 2053, C.C.),the obligation contemplated in the case at bar cannot be considered "future debt" as envisioned by this law.

There is no proof that when the suretyship agreement was entered into, there was a pre-existing obligation which served the principal obligation between the parties. Furthermo
the "future debts" alluded to in Article 2053 refer to debts already existing at the time of the constitution of the agreement but the amount thereof is unknown, unlike in the case
bar where the obligation was acquired two years after the agreement.

We consider that the Court of Appeals here was in serious error. It is true that a serious guaranty or a suretyship agreement is an accessory contract in the sense that it is enter
into for the purpose of securing the performance of another obligation which is denominated as the principal obligation. It is also true that Article 2052 of the Civil Code states th
"a guarantee cannot exist without a valid obligation." This legal proposition is not, however, like most legal principles, to be read in an absolute and literal manner and carried to t
limit of its logic.

The Court of Appeals apparently overlooked our caselaw interpreting Articles 2052 and 2053 of the Civil Code. In National Rice and Corn Corporation (NARIC) v. Jose A. Fojas and A
Surety Co., Inc., the private respondents assailed the decision of the trial court holding them liable under certain surety bonds filed by private respondent Fojas and issued by priva
respondent Alto Surety Co. in favor of petitioner NARIC, upon the ground that those surety bonds were null and void "there being no principal obligation to be secured by said bond
In affirming the decision of the trial court, this Court, speaking through Mr. Justice J.B.L. Reyes, made short shrift of the private respondents' doctrinaire argument:

Under his third assignment of error, appellant Fojas questions the validity of the additional bonds (Exhs. D and D-1) on the theory that when they were
executed, the principal obligation referred to in said bonds had not yet been entered into, as no copy thereof was attached to the deeds of suretyship. This
defense is untenable, because in its complaint the NARIC averred, and the appellant did not deny that these bonds were posted to secure the additional
credit that Fojas has applied for, and the credit increase over his original contract was sufficient consideration for the bonds. That the latter were signed and
filed before the additional credit was extended by the NARIC is no ground for complaint.Article 1825 of the Civil Code of 1889, in force in 1948, expressly
recognized that "a guaranty may also be given as security for future debts the amount of which is not yet known." (Emphasis supplied)

In Rizal Commercial Banking Corporation v. Arro, the Court was confronted again with the same issue, that is, whether private respondent was liable to pay a promissory note dat
29 April 1977 executed by the principal debtor in the light of the provisions of a comprehensive surety agreement which petitioner bank and the private respondent had earl
entered into on 19 October 1976. Under the comprehensive surety agreement, the private respondents had bound themselves as solidary debtors of the Diacor Corporation not o
in respect of existing obligations but also in respect of future ones. In holding private respondent surety (Residoro Chua) liable under the comprehensive surety agreement, the Co
said:

The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal
one, which, in this case is the loan obtained by Daicor as evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was the
surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms that are unequivocal,
it can be clearly seen that the surety agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally allowable under
the Civil Code. Thus

Article 2053. A guarantee 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. 13 (Emphasis supplied)

It is clear to us that the Rizal Commercial Banking Corporation and the NARIC cases rejected the distinction which the Court of Appeals in the case at bar sought to make with respe
to Article 2053, that is, that the "future debts" referred to in that Article relate to "debts already existing at the time of the constitution of the agreement but the amount [of whic
is unknown," and not to debts not yet incurred and existing at that time. Of course, a surety is not bound under any particular principal obligation until that principal obligation
born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to
secured thereby is born, any more that there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of t
condition precedent.

Comprehensive or continuing surety agreements are in fact quite commonm place in present day financial and commercial practice. A bank or a financing company which anticipat
entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with
sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such surety agreement, the
would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor. As we understand it, this is precis
what happened in the case at bar.
CASE LAW/ DOCTRINE:
Art. 2052. A guaranty cannot exist without a valid obligation. Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contra
It may also guaranty a natural obligation."

Art. 2053. 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
conditional obligation may also be secured.
DISSENTING/CONCURRING OPINION: N/A

Willex Plastic Industries, Corp. vs CA and International Corporate Bank

GR No. 103066 April 25, 1996
Topic: Nature and Extent of Guaranty
Facts:
- Sometime in 1978, Inter-Resin Industrial Corp. (IRIC) opened a letter of credit with the Manila Banking Corp. which was secured through credit
accommodation by Investment and Underwriting Corporation of the Philippines (IUCP).
- IRIC and IUCP bound themselves solidarily, through a Continuing Surety Agreement, to pay obligations of every kind to Manilabank; two
agreements were entered into by IRIC with Manilabank, first was with US$333,830 credit limit while the second was with US$334,087 limit
- Meanwhile, on April 2, 1979, IRIC together with Willex Plastic Industries Corp. executed a Continuing Guaranty in favor of IUCP whereby for
and in consideration of the sums obtained and/or to be obtained by IRIC from IUCP, IRIC and Willex Plastic jointly and severally guaranteed the
prompt and punctual payment at maturity of the note/s issued by the debtor/s
- On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of P4,334,280.61 representing Inter-Resin Industrials
outstanding obligation
 - On February 23 and 24, 1981, Atrium Capital Corp., which in the meantime had succeeded IUCP, demanded from IRIC and Willex Plastic the
payment of what IUCP had paid to Manilabank. As neither one of the sureties paid, Atrium filed this case in the court below against Inter-Resin
Industrial and Willex Plastic
- RTC rendered judgment ordering IRIC and Willex jointly and severally to pay to Interbank P3,646,780.61 representing their indebtedness to the
plaintiff
- CA affirmed RTCs decision

Issue: WON under the Continuing Guaranty petitioner Willex may be held jointly and severally liable with IRIC for the amount paid by Interbank to
Manilabank

Ruling:
- Yes, Willex is jointly and severally liable with IRIC, CA affirmed
- Willex argued that the Continuing Guaranty, being an accessory contract, cannot legally exist because of the absence of a valid principal obligation
- Its contention is based on the fact that it is not a party either to the Continuing Surety Agreement or to the loan agreement between Manilabank
and Interbank
- However, the agreement between Willex and IRIC provides that I/we hereby jointly and severally and unconditionally guarantee unto you and/or
your principals, successors and assigns the prompt and punctual payment at maturity of the note/s
- Put in another way the consideration necessary to support a surety obligation need not to pass directly to the surety, a consideration moving to
the principal alone being sufficient
- For a guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto
- It is never necessary that a guarantor or surety should receive any or part or benefit if such there be, accruing to his principal

JOSE C. TUPAZ IV and PETRONILA C. TUPAZ, THE COURT OF APPEALS and BANK OF THE PHILIPPINE ISLANDS, G.R. No. 145578 November 18, 2005
CARPIO, J.:
The Case
This is a petition for review[1] of the Decision[2] of the Court of Appeals dated 7 September 2000 and its Resolution dated 18 October 2000. The 7 September
2000 Decision affirmed the ruling of the Regional Trial Court, Makati, Branch 144 in a case for estafa under Section 13, Presidential Decree No. 115. The
Court of Appeals Resolution of 18 October 2000 denied petitioners motion for reconsideration.

The Facts
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz (petitioners) were Vice-President for Operations and Vice-President/Treasurer, respectively, of El Oro
Engraver Corporation (El Oro Corporation). El Oro Corporation had a contract with the Philippine Army to supply the latter with survival bolos.

To finance the purchase of the raw materials for the survival bolos, petitioners, on behalf of El Oro Corporation, applied with respondent Bank of the Philippine
Islands (respondent bank) for two commercial letters of credit. The letters of credit were in favor of El Oro Corporations suppliers, Tanchaoco Manufacturing
Incorporated[3](Tanchaoco Incorporated) and Maresco Rubber and Retreading Corporation [4] (Maresco Corporation). Respondent bank granted petitioners
application and issued Letter of Credit No. 2-00896-3 for P564,871.05 to Tanchaoco Incorporated and Letter of Credit No. 2-00914-5 for P294,000 to Maresco
Corporation.

Simultaneous with the issuance of the letters of credit, petitioners signed trust receipts in favor of respondent bank. On 30 September 1981,
petitioner Jose C. Tupaz IV (petitioner Jose Tupaz) signed, in his personal capacity, a trust receipt corresponding to Letter of Credit No. 2-00896-3
(for P564,871.05). Petitioner Jose Tupaz bound himself to sell the goods covered by the letter of credit and to remit the proceeds to respondent bank, if sold,
or to return the goods, if not sold, on or before 29 December 1981.

On 9 October 1981, petitioners signed, in their capacities as officers of El Oro Corporation, a trust receipt corresponding to Letter of Credit No.
2-00914-5 (for P294,000). Petitioners 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 8 December 1981.

After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials to El Oro Corporation, respondent bank paid the former P564,871.05
and P294,000, respectively.

Petitioners did not comply with their undertaking under the trust receipts. Respondent bank made several demands for payments but El Oro Corporation
made partial payments only. On 27 June 1983 and 28 June 1983, respondent banks counsel [5] and its representative[6] respectively sent final demand letters
to El Oro Corporation. El Oro Corporation replied that it could not fully pay its debt because the Armed Forces of the Philippines had delayed paying for the
survival bolos.

Respondent bank charged petitioners with estafa under Section 13, Presidential Decree No. 115 (Section 13) [7] or Trust Receipts Law (PD 115). After
preliminary investigation, the then Makati Fiscals Office found probable cause to indict petitioners. The Makati Fiscals Office filed the corresponding
Informations (docketed as Criminal Case Nos. 8848 and 8849) with the Regional Trial Court, Makati, on 17 January 1984 and the cases were raffled to Branch
144 (trial court) on 20 January 1984. Petitioners pleaded not guilty to the charges and trial ensued. During the trial, respondent bank presented evidence on
the civil aspect of the cases.

The Ruling of the Trial Court

On 16 July 1992, the trial court rendered judgment acquitting petitioners of estafa on reasonable doubt. However, the trial court found petitioners solidarily
liable with El Oro Corporation for the balance of El Oro Corporations principal debt under the trust receipts. The dispositive portion of the trial courts Decision
provides:
WHEREFORE, judgment is hereby rendered ACQUITTING both accused Jose C. Tupaz, IV and Petronila Tupaz based upon
reasonable doubt.

However, El Oro Engraver Corporation, Jose C. Tupaz, IV and Petronila Tupaz, are hereby ordered, jointly and solidarily, to pay the
Bank of the Philippine Islands the outstanding principal obligation of P624,129.19 (as of January 23, 1992) with the stipulated interest
at the rate of 18% per annum; plus 10% of the total amount due as attorneys fees; P5,000.00 as expenses of litigation; and costs of
the suit.[8]

In holding petitioners civilly liable with El Oro Corporation, the trial court held:
[S]ince the civil action for the recovery of the civil liability is deemed impliedly instituted with the criminal action, as in
fact the prosecution thereof was actively handled by the private prosecutor, the Court believes that the El Oro Engraver Corporation
and both accused Jose C. Tupaz and Petronila Tupaz, jointly and solidarily should be held civilly liable to the Bank of the Philippine
Islands. The mere fact that they were unable to collect in full from the AFP and/or the Department of National Defense the proceeds
of the sale of the delivered survival bolos manufactured from the raw materials covered by the trust receipt agreements is no valid
defense to the civil claim of the said complainant and surely could not wipe out their civil obligation. After all, they are free to institute
an action to collect the same.[9]
 Petitioners appealed to the Court of Appeals. Petitioners contended that: (1) their acquittal operates to extinguish [their] civil liability and (2) at
any rate, they are not personally liable for El Oro Corporations debts.

The Ruling of the Court of Appeals

In its Decision of 7 September 2000, the Court of Appeals affirmed the trial courts ruling. The appellate court held:

It is clear from [Section 13, PD 115] that civil liability arising from the violation of the trust receipt agreement is distinct from the criminal liability
imposed therein. In the case of Vintola vs. Insular Bank of Asia and America, our Supreme Court held that acquittal in the estafa case (P.D. 115) is
no bar to the institution of a civil action for collection. This is because in such cases, the civil liability of the accused does not arise ex delicto but
rather based ex contractu and as such is distinct and independent from any criminal proceedings and may proceed regardless of the result of the
latter. Thus, an independent civil action to enforce the civil liability may be filed against the corporation aside from the criminal action against the
responsible officers or employees.
xxx
[W]e hereby hold that the acquittal of the accused-appellants from the criminal charge of estafa did not operate to extinguish their civil
liability under the letter of credit-trust receipt arrangement with plaintiff-appellee, 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.
Appellants argued that they cannot be held solidarily liable with their corporation, El Oro Engraver Corporation, alleging that they executed the
subject documents including the trust receipt agreements only in their capacity as such corporate officers. They said that these instruments are
mere pro-forma and that they executed these instruments on the strength of a board resolution of said corporation authorizing them to apply for
the opening of a letter of credit in favor of their suppliers as well as to execute the other documents necessary to accomplish the same.

Such contention, however, is contradicted by the evidence on record. 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. Even in the
application for the letter of credit, it is likewise clear that the undertaking of the accused is that of a surety as indicated [in] the following words: In
consideration of your establishing the commercial letter of credit herein applied for substantially in accordance with the foregoing, the undersigned
Applicant and Surety hereby agree, jointly and severally, to each and all stipulations, provisions and conditions on the reverse side hereof.
xxx
Having contractually agreed to hold themselves solidarily liable with El Oro Engraver Corporation under the subject trust receipt agreements with
appellee Bank of the Philippine Islands, herein accused-appellants may not, therefore, invoke the separate legal personality of the said corporation
to evade their civil liability under the letter of credit-trust receipt arrangement with said appellee, notwithstanding their acquittal in the criminal
cases filed against them. The trial court thus did not err in holding the appellants solidarily liable with El Oro Engraver Corporation for the
outstanding principal obligation of P624,129.19 (as of January 23, 1992) with the stipulated interest at the rate of 18% per annum, plus 10% of the
total amount due as attorneys fees, P5,000.00 as expenses of litigation and costs of suit.[10]

Hence, this petition. Petitioners contend that:

1. A JUDGMENT OF ACQUITTAL OPERATE[S] TO EXTINGUISH THE CIVIL LIABILITY OF PETITIONERS[;]
2. GRANTING WITHOUT ADMITTING THAT THE QUESTIONED OBLIGATION WAS INCURRED BY THE CORPORATION, THE SAME
IS NOT YET DUE AND PAYABLE;
3. GRANTING THAT THE QUESTIONED OBLIGATION WAS ALREADY DUE AND PAYABLE, xxx PETITIONERS ARE NOT PERSONALLY
LIABLE TO xxx RESPONDENT BANK, SINCE THEY SIGNED THE LETTER[S] OF CREDIT AS SURETY AS OFFICERS OF EL ORO, AND
THEREFORE, AN EXCLUSIVE LIABILITY OF EL ORO; [AND]
4. IN THE ALTERNATIVE, THE QUESTIONED TRANSACTIONS ARE SIMULATED AND VOID.[11]

The Issues
The petition raises these issues:
(1) Whether petitioners bound themselves personally liable for El Oro Corporations debts under the trust receipts;
(2) If so
(a) whether petitioners liability is solidary with El Oro Corporation; and
(b) whether petitioners acquittal of estafa under Section 13, PD 115 extinguished their civil liability.

The Ruling of the Court

The petition is partly meritorious. We affirm the Court of Appeals ruling with the modification that petitioner Jose Tupaz is liable as guarantor of El Oro
Corporations debt under the trust receipt dated 30 September 1981.

On Petitioners Undertaking Under the Trust Receipts

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. [12] As an exception, directors or officers are personally liable for the
corporations debts only if they so contractually agree or stipulate.[13]

Here, the dorsal side of the trust receipts contains the following stipulation:
To the Bank of the Philippine Islands

In consideration of your releasing to under the terms of this Trust Receipt the goods described herein, I/We, jointly and severally,
agree and promise to pay to you, on demand, whatever sum or sums of money which you may call upon me/us to pay to you, arising
out of, pertaining to, and/or in any way connected with, this Trust Receipt, in the event of default and/or non-fulfillment in any
respect of this undertaking on the part of the said . I/we further agree that my/our liability in this guarantee shall be DIRECT AND
IMMEDIATE, without any need whatsoever on your part to take any steps or exhaust any legal remedies that you may have against
the said . before making demand upon me/us.[14] (Capitalization in the original)

In the trust receipt dated 9 October 1981, petitioners signed below this clause as officers of El Oro Corporation. Thus, under petitioner Petronila Tupazs
signature are the words Vice-PresTreasurer and under petitioner Jose Tupazs signature are the words Vice-PresOperations. By so signing that trust receipt,
petitioners did not bind themselves personally liable for El Oro Corporations obligation. In Ong v. Court of Appeals,[15] a corporate representative signed a
solidary guarantee clause in two trust receipts in his capacity as corporate representative. There, the Court held that the corporate representative did not
undertake to guarantee personally the payment of the corporations debts, thus:

[P]etitioner did not sign in his personal capacity the solidary guarantee clause found on the dorsal portion of the trust
receipts. Petitioner placed his signature after the typewritten words ARMCO INDUSTRIAL CORPORATION found at the end of the
solidary guarantee clause. Evidently, petitioner did not undertake to guaranty personally the payment of the principal and interest
of ARMAGRIs debt under the two trust receipts.

Hence, for the trust receipt dated 9 October 1981, we sustain petitioners claim that they are not personally liable for El Oro Corporations obligation.
For the trust receipt dated 30 September 1981, the dorsal portion of which petitioner Jose Tupaz signed alone, we find that he did so in his
personal capacity. Petitioner Jose Tupaz did not indicate that he was signing as El Oro Corporations Vice-President for Operations. Hence, petitioner Jose
Tupaz bound himself personally liable for El Oro Corporations debts. Not being a party to the trust receipt dated 30 September 1981, petitioner Petronila
Tupaz is not liable under such trust receipt.

The Nature of Petitioner Jose Tupazs Liability Under the Trust Receipt Dated 30 September 1981

As stated, the dorsal side of the trust receipt dated 30 September 1981 provides:
To the Bank of the Philippine Islands

In consideration of your releasing to under the terms of this Trust Receipt the goods described herein, I/We, jointly and severally,
agree and promise to pay to you, on demand, whatever sum or sums of money which you may call upon me/us to pay to you, arising
out of, pertaining to, and/or in any way connected with, this Trust Receipt, in the event of default and/or non-fulfillment in any
respect of this undertaking on the part of the said . I/we further agree that my/our liability in this guarantee shall be DIRECT AND
IMMEDIATE, without any need whatsoever on your part to take any steps or exhaust any legal remedies that you may have against
the said . Before making demand upon me/us. (Underlining supplied; capitalization in the original)

The lower courts interpreted this to mean that petitioner Jose Tupaz bound himself solidarily liable with El Oro Corporation for the latters debt under that
trust receipt.

This is error.
In Prudential Bank v. Intermediate Appellate Court,[16] the Court interpreted a substantially identical clause[17] in a trust receipt signed by a
corporate officer who bound himself personally liable for the corporations obligation. The petitioner in that case contended that the stipulation we jointly
and severally agree and undertake rendered the corporate officer solidarily liable with the corporation. We dismissed this claim and held the corporate
officer liable as guarantor only. The Court further ruled that had there been more than one signatories to the trust receipt, the solidary liability would exist
between the guarantors. We held:

Petitioner [Prudential Bank] insists that by virtue of the clear wording of the xxx clause x x x we jointly and severally agree and
undertake x x x, and the concluding sentence on exhaustion, [respondent] Chis liability therein is solidary.
xxx
Our xxx reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of
a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case
because the space therein for the party whose property may not be exhausted was not filled up. Under Article 2058 of the Civil Code, the defense
of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the
questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, described the guaranty
as solidary between the guarantors; this would have been correct if two (2) guarantors had signed it. The clause we jointly and severally agree
and undertake refers to the undertaking of the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer
to the undertaking between either one or both of them on the one hand and the petitioner on the other with respect to the liability described
under the trust receipt. xxx
Furthermore, any doubt as to the import or true intent of the solidary guaranty clause should be resolved against the petitioner. The
trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chis participation
therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; as such, it must be strictly construed against the
party responsible for its preparation.[18] (Underlining supplied; italicization in the original)

However, respondent banks suit against petitioner Jose Tupaz stands despite the Courts finding that he is liable as guarantor only. First, 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.[19] Second, the benefit of excussion may be waived.[20] Under the trust receipt dated 30
September 1981, petitioner Jose Tupaz waived excussion 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. The clear import of this stipulation is that
petitioner Jose Tupaz waived the benefit of excussion under his guarantee.

As guarantor, petitioner Jose Tupaz is liable for El Oro Corporations principal debt and other accessory liabilities (as stipulated in the trust receipt
and as provided by law) under the trust receipt dated 30 September 1981. That trust receipt (and the trust receipt dated 9 October 1981) provided for
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] In the applications for the letters of credit, the parties stipulated that drafts drawn under the letters of credit are subject
to interest at the rate of 18% per annum.[22]

The lower courts correctly applied the 18% interest rate per annum considering that the face value of each of the trust receipts is based on the
drafts drawn under the letters of credit. Based on the guidelines laid down in
Eastern Shipping Lines, Inc. v. Court of Appeals,[23] the accrued stipulated interest earns 12% interest per annum from the time of the filing of the Informations
in the Makati Regional Trial Court on 17 January 1984. Further, the total amount due as of the date of the finality of this Decision will earn interest at 18% per
annum until fully paid since this was the stipulated rate in the applications for the letters of credit.[24]

The accounting of El Oro Corporations debts as of 23 January 1992, which the trial court used, is no longer useful as it does not specify the
amounts owing under each of the trust receipts. Hence, in the execution of this Decision, the trial court shall compute El Oro Corporations total liability under
each of the trust receipts dated 30 September 1981 and 9 October 1981 based on the following formula: [25]

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.

In so delegating this task, we reiterate what we said in Rizal Commercial Banking Corporation v. Alfa RTW Manufacturing Corporation[28] where we also ordered
the trial court to compute the amount of obligation due based on a formula substantially similar to that indicated above:

The total amount due xxx [under] the xxx contract[] xxx may be easily determined by the trial court through a simple
mathematical computation based on the formula specified above. Mathematics is an exact science, the application of which needs
no further proof from the parties.

Petitioner Jose Tupazs Acquittal did not Extinguish his Civil Liability

The rule is that where the civil action is impliedly instituted with the criminal action, the civil liability is not extinguished by acquittal

[w]here the acquittal is based on reasonable doubt xxx as only preponderance of evidence is required in civil cases; where the court
expressly declares that the liability of the accused is not criminal but only civil in nature xxx as, for instance, in the felonies of estafa,
 theft, and malicious mischief committed by certain relatives who thereby incur only civil liability (See Art. 332, Revised Penal Code);
and, where the civil liability does not arise from or is not based upon the criminal act of which the accused was
acquitted xxx.[29] (Emphasis supplied)

Here, respondent bank chose not to file a separate civil action[30] to recover payment under the trust receipts. Instead, respondent bank sought
to recover payment in Criminal Case Nos. 8848 and 8849. Although the trial court acquitted petitioner Jose Tupaz, his acquittal did not extinguish his civil
liability. As the Court of Appeals correctly held, his liability arose not from the criminal act of which he was acquitted (ex delito) but from the trust receipt
contract (ex contractu) of 30 September 1981. Petitioner Jose Tupaz signed the trust receipt of 30 September 1981 in his personal capacity.

On the other Matters Petitioners Raise

Petitioners raise for the first time in this appeal the contention that El Oro Corporations debts under the trust receipts are not yet due and demandable.
Alternatively, petitioners assail the trust receipts as simulated. These assertions have no merit. Under the terms of the trust receipts dated 30 September
1981 and 9 October 1981, El Oro Corporations debts fell due on 29 December 1981 and 8 December 1981, respectively.

Neither is there merit to petitioners claim that the trust receipts were simulated. During the trial, 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.

WHEREFORE, we GRANT the petition in part. We AFFIRM the Decision of the Court of Appeals dated 7 September 2000 and its Resolution dated 18 October
2000 with the following MODIFICATIONS:

1) El Oro Engraver Corporation is principally liable for the total amount due under the trust receipts dated 30 September 1981 and 9 October
1981, as computed by the Regional Trial Court, Makati, Branch 144, upon finality of this Decision, based on the formula provided above;
2) Petitioner Jose C. Tupaz IV is liable for El Oro Engraver Corporations total debt under the trust receipt dated 30 September 1981 as thus
computed by the Regional Trial Court, Makati, Branch 144; and
3) Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not liable under the trust receipt dated 9 October 1981.

SO ORDERED.

Syquia v. Palma
G.R. No. L-41320 Date November 9, 1934
Topic: Benefit of Excussion
Facts:
BPI obtained a judgment against Perfecto and Felipe Jacinto and Rafael Palma on a promissory note for the sum of P22,000 + interest.
BPI assigned and transferred said judgment to Gregorio Syquia.
The widow of Gregorio Syquia filed suit in the Court of First Instance of Manila against Perfecto and Felipe Jacinto and Rafael Palma.
Defendants set up as a special defense that debt was fully paid: BPI caused the public sale three attached properties belonging to Jacinto
where the bank was the highest bidder;
The said parcels of land with their improvements consisting of four houses yielded a monthly revenue of P880 or P10,560 a year. During the
year allowed for redemption, the bank took control and possession and collected the P10,560 and never applied the amount as credit on said
judgement.
Trial Court - stated the judgment debt as of April 18, 1925, was 28,741 from which is to be deducted P15,045 the value of the two parcels sold
to the bank on April 18, 1925, leaving a balance due of P13,696.24
Palma filed no separate answer nor special defenses available to him as guarantor but merely joined in the answer of his codefendants pleading
that the bank had been fully paid.
Issue: W/N Palma, as guarantor is liable for the debt
Ruling: No, Palma is only CONTINGENTLY liable for P 3,034 upon exhausting all remedies against principal debtor.
Held:
It is view of the writer that this defense so far as the guarantor is concerned is premature.
In his brief and upon the oral argument the appellant has pressed upon our attention several defenses available to guarantors under our law which,
he claims, entitle him to a reversal of the judgment. With reference to all these defences, it suffices to say that it is conceded that Palma as
guarantor is still entitled to the benefits of articles 1830,1832 and 1852 of the Civil Code. Up to the present, the judgment creditor has made no
demand on Palma. Joining him in the suit against the principal debtor is not the demand intended articles 1832 of the Civil Code. That demand can
be made only after judgment on the debt, for obviously the "exhaustion of the principal's property" the benefit of which the guarantor claims
cannot even begin to take place before judgment has been obtained. Only then can the creditor "levy upon the property of the principal" only then
can the liability of the creditor begin under article 1833 of the Civil Code. It would be absurd and futile to point out "saleable property of the debtor" at
the inception of the suit, when it cannot be seized or sold, and require the creditor to make a "levy" upon it.
There is no competent evidence that the principal debtors, Perfecto and Felipe Jacinto, are insolvent even if they were now, there can be no
certainty that they may not be in funds when an exemption on the revived judgment is issued.
So far as this record shows, the judgment creditor has not exhausted his remedies against the principal debtors and he is still looking to them for
payment. It is not for the guarantor to anticipate that there will be a return of nulla bona on the execution, when and if issued. Nor is it for him to
anticipate a demand on him under article 1832 and to offer defences thereto which have not matured.
The appellant's defences may be all be considered when they are property presented at the proper time. The case which he now presents, in
anticipation of a demand which has not yet been made, is purely hypothetical. The courts do not undertake to decide hypothetical cases.
Separate Opinion
AVANCEA, C.J., concurring:
I concur in this decision. Although I dissented in the decision in the case of Powell vs. National Bank (54 Phil., 54), I have agree with it as long as it is not
revoked by the majority.
IMPERIAL, J., concurring:
On December 15, 1924, judgment was rendered in civil cause No. 26942 of the Court of First Instance of Manila in favor of the Bank of the Philippine
Islands and againts Perfecto Jacinto, as principals, and Rafael Palma, as guarantor, for the amount of P24,000 together with interest at the rate of 9 per
cent per annum from May 27, 1923, plus 1 per cent on the said amount, as attorney's fees, and cots of the proceedings. It was ordered in the said
judgment that no execution shall be issued against the guarantor until after salable properties of the principal debtors shall have been exhausted. The
judgment became final and the law between the parties. On February 20, 1925, execution of the judgment was issued against the Jacintos and the sheriff
levied upon real properties belonging to them which were purchased at public auction by the Bank of the Philippine Islands for P15,045. During the year of
redemption the properties so sold earned rental amounting to P10,560 which were collected and actually received by Gregorio Syquia, with the knowledge
and consent of the judgment creditor. On August 16, 1928, the judgment creditor sold the same date but in separate instrument it also sold to Gregorio
Syquia for the nominal value of P1 and for other valuable considerations all its rights, participation and interest on the aforesaid judgment. This purchaser
died without taking any further step and his administratrix on July 12, 1932, after the lapse of about eight years from the date of the judgment, instituted
another action against the same debtors and guarantor for the revival of the judgment.
The guarantor appealed from the judgment rendered by the lower court whereby he was condemned to pay, as guarantor, to the administratrix the sum of
P13,596.24 plus costs of the suit. His counterclaim for the rental was dismissed.
The appellant, being a mere guarantor, no execution could be issued against him without first exhausting the salable properties of his principal, as provided
by article 1830 of the Civil Code. Same provisions was made in the original judgment rendered against him. Pursuant to article 1832 the benefit of
exhaustion is not vailable to the guarantor until demand for payment is made upon him by the creditor. In view of the change in our procedural system in
civil litigations the proper and only time for a formal demand for payment could only be made at the time the execution of the judgment is issued; but it
happened that the execution actually issued has never been directed against the guarantor.
This being the case and because both the Bank of the Philippine Islands and its assignee remained inactive for many years and due to this attitude the
principal debtors became insolvent the guarantor cannot now be subrogated to the rights and privileges of said creditors as againts the principal debtors
and for this reason his obligation on the surety has been released in accordance with the provisions of article 1852 of the said Code.
It is argued that the insolvency of the principal debtors has not been proven, but such fact is virtually admitted by both parties and the circumstance that
neither the Bank of the Philippine Islands nor its assignee has taken any step to secure an alias writ of execution against the principal debtors is a clear
indication of the latter's insolvency.
It is also estimated that inasmuch as there is no positive evidence of the principal debtors' insolvency and that the guarantor failed to allege it in his answer
as a special defense it is now premature to pass upon the obligation contracted by the guarantor. On this point it might be said that if guarantor has really
been released by positive acts performed by the Bank of the Philippine Islands and its assignee, as shown above, the right of the guarantor to be
exonerated has accrued and he is entitled right now to a complete discharge. Further proceedings are useless and will only promote multiplicity of actions.
The matter presents another feature which calls for solution under the principles of justice and equity. The judgment of the bank was only for P24,000,
plus interest and costs. It bought the real properties of the principal debtors for P15,045 but afterwards it sold them to Gregorio Syquia for the sum of
P45,000.00, thus realizing a profit which amounted to P29,955. As to the assignee, it is true that he paid P45,000, but the properties so bought are worth
more than P68,000 and in addition to this bargain he collected the rentals during the year of redemption which amounted to the substantial sum of
P10,560. Under these circumstances and applying the principles of justice and equity it should have been held that the judgment, which is sought to be
revived, has fully been satisfied. Any other determination on this particular point will encourage enrichment of a person to the prejudice of an innocent
one.
There can be no question that the late Gregorio Syquia has collected the rents of the properties assigned to him during the year allowed by the law for
redemption. The testimony of Perfecto Jacinto on this point is positive, clear and convincing and it was not contradicted by nay evidence of the appellee.
Said rentals amounted to P10,560 and it should have been credited to the judgment debtors. (Pabico vs. Ong Pauco, 43 Phil., 572; Flores vs. Lim, 50 Phil.,
738; and Angeles and De Angeles vs. Lozada and Saguisag, 54 Phil., 184.)
Other members of this court further maintain the opinion that the defendant-appellant Rafael Palma has been relieved from further responsibility as
surety through the failure of the Bank of the Philippine Islands, the predecessor in interest of the herein plaintiff-appellee, to secure a writ of execution
after it was ascertained, through the levy of the writ of execution issued against the principals Perfecto Jacinto et al. that the latter had not sufficient
property to satisfy the judgment, thus depriving the defendant-appellant of the opportunity to point out other properties of the judgment debtor upon
which a levy could be made. To this I am also agreeable.
The foregoing reasons, as can readily be seen, call for a dissenting opinion, but in order to expedite the matter with a sufficient number of votes and
inasmuch as defendant-appellant is given credit for the yearly rentals earned by the properties sold and his right of exhaustion is upheld and reserved, I
concur in the result of the majority decision.
Malcolm, Villa-Real and Abad Santos, JJ., concur.
GODDARD, J., dissenting:
I dissent.
Upon a sale of real property, under a writ of execution, the purchaser is substituted to and acquires all the right, interest, title and claim of the judgment
debtor thereto, subject only to the right of redemption. The officer making the sale must give the purchaser a certificate of sale containing a particular
description of the property sold; the price paid for each distinct lot or parcel; the whole price paid and the date when the right of redemption expires. (Sec.
463, Code of Civil Procedure.)
The judgment debtor, or the redemptioners mentioned in section 464 of the Code of Civil Procedure, may redeem the property from the purchaser at any
time within twelve months after the sale, on paying the purchaser the amount of his purchase, with one per cent per month interest 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 purchase, and interest
on such last-named amount at the same rate. (Section 465, Code of Civil Procedure.)
The purchaser, from the time of the sale until a redemption, is entitled to receive from the tenant in possession the rents of the property sold or the value
of the use and occupation thereof. But when any rents have been received by the judgment creditor or purchaser from property thus sold preceding such
redemption, the amounts of such rents and profits shall be a credit upon the redemption money to be paid. (See. 469, Code of Civil Procedure.)
Is there any provision in our Code of Civil Procedure aside from that contained in section 469 of that Code, quoted above, that authorizes this court to
allow a judgment debtor a credit for the amount of the rents and profits of land sold under execution? No. Was there any "redemption money" paid the
purchaser by the judgment debtor in this case? No. Have the above quoted sections of the Code of Civil Procedure been repealed or modified? Not by the
Legislature. "However, the majority of the court are of the opinion that there should be credited upon the judgment for the benefit of the guarantor alone
the sum of P10,560, being the revenues collected and retained during the year of redemption by Gregorio Syquia from said properties, according to the
testimony of Perfecto Jacinto (t.s.n., 19, 20, 22)." Majority opinion.
In short the "majority are of the opinion" that the defendant-appellant, Rafael Palma, is entitled to the rents and profits on the property during the year of
redemption, although the law clearly provides that the purchaser, from the time of the sale until a redemption, is entitled to receive such rents and profits
and, pursuant to that opinion, Palma is allowed a credit of P10,560 upon the judgment against him, not upon "redemption money" which he might have
profitably paid the purchaser. I say might have profitably paid, because this appellant, in his brief, puts the value of the property sold under execution at
P88,000. The purchaser only paid P15,045. Let us suppose the appellant had redeemed the property on the last day of the year or redemption, he would
have had to pay the purchaser the sum of P15,045 plus 12 per cent, a total of P16,850.40 less a credit of P10,560, the alleged value of the rents and profits
for the year of redemption, or a total of only P6,290 for property worth P88,000, a clear profit of P81,710.
The sections of our Code of Civil Procedure, cited above, are taken from the California Code of Civil Procedure. The courts of that state, interpreting the
phrase "upon a sale of real property, the purchaser shall be substituted and acquire all the right, title, interest and claim of the judgment debtor thereto",
have held that it is by the sale that the title passes, or, in other words, that at the sale the purchaser acquires the legal title to the land subject to
defeasance by the happening of the condition subsequent (redemption). (McNutt vs. Nuevo Land Co., 167 Cal., 459; 140 Pac., 6; Leet vs. Armbruster, 143
Cal., 663; 77 Pac., 653; Pollard vs. Harlow, 138 Cal., 390; 71 Pac., 454, 648; Reynolds vs. London & Lancashire F. Ins. Co., 128 Cal., 16; 79 Am. St. Rep., 17;
60 Pac., 467; Breedlove vs. Norwich etc. Ins. Society, 124 Cal., 164; 58 Pac., 770 ["It is by the sale that the title passes"]; Leaver vs. Smith, 47 Cal., App., 474;
190 Pac., 1050; Wangenheim vs. Garner, 42 Cal. App., 332; 183 Pac., 670; Youd vs. German Savings & Loan Society, 3 Cal. App., 706; 86 Pac., 991. In
McQueeney vs. Toomey, 36 Mont., 282; 122 Am. St. Rep., 358; 13 Ann. Cas., 316; 92 Pac., 561, the courts holds that the title passes to the purchaser on
the sale and notes that in Simpson vs. Castle, 52 Cal., 664, the statute so providing was overlooked.)
It is also held that the various qualifications to the purchaser's title are not inconsistent with the vesting of the legal title in him and that even the
continued possession of the land by the judgment debtor is no more incompatible with the existence of a legal title in another than in the ordinary case of
a tenant and his landlord. (Pollard vs. Harlow, 138 Cal., 390, 393; 71 Pac., 454, 648.)
It is undoubtedly true that independent of some express statutory provision to that effect a purchaser at an execution sale would not be entitled to rents
and profits during the time allowed for redemption. In California, however, the courts have held that this right has been expressly conferred upon
purchasers at sales on civil judgments obtained in the ordinary administration of justice, it being provided, in the Code of Civil Procedure of that State, as it
is in our Code, that "The purchaser from the time of the sale until a redemption . . . is entitled to receive, from the tenant in possession, the rents of the
property sold, or the value of the use and occupation thereof. . . ." (Mayo vs. Woods, 31 Cal., 269; California Code of Civil Procedure, section 707; Yndart
vs. Den, 125 Cal., 85; Robinson vs. Thornton, 102 Cal., 675.)
The courts of California have also held that the "tenant in possession" is liable to the purchaser at sheriff's sale for the rents and profits of the land sold.
The phrase "tenant in possession" has been held to be a generic term designed to apply to all cases of tenancy. In a broad sense, a "tenant" is held to be
"one that holds or possesses lands or tenements, by any kind of title, either in fee, for life, years, or at will." Under this definition the owner in fee in
possession is no less, in legal contemplation, a tenant, than the one who occupies under him. (Harris vs. Reynolds, 13 Cal., 514; 73 Am. Dec.,
600.)1awphil.net
The phrase "tenant in possession" also includes a mortgagee of the judgment debtor (Knight vs. Truett, 18 Cal., 113), the trustee and his successor in
interest under a trust deed from the judgment debtor (Shores vs. Scott River Co., 21 Cal., 135) and the administrator of the estate of the judgment debtor
(Walls vs. Walker, 37 Cal., 424; 99 Am. Dec., 290), when they are in possession after a sheriff's sale.
In California, prior to 1869, the purchaser at an execution sale was given the rents and profits of the property without any liability to account for them in
case of a redemption. (Page vs. Rogers, 31 Cal., 293; Kline vs. Chase, 17 Cal., 596, holding that a debtor who received rent from his tenants between the
sale and a redemption is liable to the purchaser for the amount received.) In that year the rule was changed by the adoption of an amendment to section
707 of the Code of Civil Procedure of that state under which the amount of any rents or profits received by the judgment creditor or purchaser will be a
credit upon the redemption money to be paid. This section thus liberalized in favor of the judgment debtor is section 496 of our Code of Civil Procedure.
It is, however, evident that the majority of this court is of the opinion that the Legislature of the State of California and the Philippine Legislature did not do
enough for the judgment debtor, who, for some reason or other, fails to redeem his property within a year after it is sold under a writ of execution. Well,
Mr. Judgment Debtor, cheer up! If you fail to redeem your land within the year provided by law, your cruel judgment creditor, if he be the purchaser of
your property sold under execution, will now be obliged to allow you a credit on his judgment against you equal to the amount of the rents and profits that
he may have received from your property during the year of redemption.
Suppose the judgment creditor is not the purchaser and a third party buys the property of the judgment debtor at the execution sale, the former will
receive the purchase price to be credited against the amount of the judgment. In case the judgment debtor fails to redeem from the third party purchaser,
who has received the rents and profits during the redemption period, would the majority of this court hold that the judgment debtor then had a right to a
credit against the judgment equal to the value of the rents and profits received by the purchaser during the period of redemption? In other words would
the judgment creditor have to repay his judgment debtor the value of such rents and profits? If it be legal and logical to allow such a credit in the case
under consideration, the answer to these questions must be in the affirmative. However, it would also be just as legal and logical to compel the third party
purchaser to return the rents and profits to the judgment debtor even though the latter failed to redeem his property within the period fixed by law.
In view of the provisions of our Code of Civil Procedure and the decisions of the courts of California, cited above, it is clear that in the case of a sale of real
property, under a writ of execution, the purchaser, whether he be the judgment creditor or a third party, is regarded as the owner of such property during
the period elapsing between the sale and the time for redemption; that he is entitled to the rents and profits, or the value of the use and occupation
thereof during said period and that when such rents, etc. have been received by the purchaser and the judgment debtor redeems the property within the
period provided by law, then and then only, is the latter entitled to a credit of the amount of such rents, etc., upon the redemption money to be paid by
him to the purchaser.
The judgment of the trial court should be affirmed with costs in both instances against the defendant-appellant.

GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES, represented by the BUREAU OF SUPPLY COORDINATION plaintiff-appellee, vs. MARCELINO TIZON, ET
AL., defendants. CAPITAL INSURANCE and SURETY CO., INC., defendant-appellant. G.R. No. L-22108 August 30, 1967
ANGELES, J.:
Appeal from an order of the Court of First Instance of Manila, dated September 11, 1963, expunging from the record of the case the answer of the Capital
Insurance & Surety, Co., Inc. and remanding said record to the City Court of Manila for execution against the Surety of the decision rendered by the latter
court.
It appears that in a bidding conducted by the Bureau of Supply Coordination of the Department of General Services, for the supply of "one (1) Baylift
portable heavy-duty truck and auto lift, fully air operated, 500 lbs. capacity, and two (2) Baylift Ramps, U.S. manufacture", Tizon engineering, of which
Marcelino Tizon was the sole owner and proprietor, won the bid, having offered the lowest bid of P4,000.00. To guarantee faithful performance of the
conditions of the bid, the Bureau of Supply Coordination required Tizon Engineering to give a bond in the sum of P10,000.00. On September 12, 1958, the
Surety issued its bond for the said amount in favor of the Republic of the Philippines. Tizon Engineering failed to comply with the conditions of the bid,
failing as he did to deliver the equipment called for in the Buyer's order No. 42546 of the Bureau of Supply, constraining the latter to purchase the
equipment from Fema Trading, the second lowest bidder, resulting in a loss of P2,975.00 to the Government. Notwithstanding demands made by the
Bureau of Supply on defendants Marcelino Tizon and the Surety to pay said amount, they failed and refused. Hence, complaint was filed in the City Court of
Manila by the Republic of the Philippines to recover the said sum with legal interests, plus attorney's fees and costs.
Defendant Tizon averred in his answer that: (a) "the alleged bidding conducted by the Bureau of Supply is in utter disregard and wanton violation of the
Rules and Regulations of the said office"; (b) "that assuming that a corresponding buyer's order was prepared, the same was not delivered to and duly
received by him, such that there has never been a binding contract between plaintiff and the answering defendant; furthermore, the plaintiff deliberately
failed to notify the answering defendant as to the acceptance of his bid, thus again violating the Rules and Regulations mentioned above"; (c) that the
bond-issued by the Surety "answers only (for) those contracts legally entered into by the herein defendants with the Bureau of Supply and certainly not
those contracts and/or bids which are of doubtful legality, as in the present case."
The defendant Surety, in answer to the complaint, admitted having executed a bond in favor of the Republic of the Philippines for the purpose as therein
stated, but denied "that it failed and refused to pay the demand (of the plaintiff), the truth of the matter being that its co-defendant, Marcelino Tizon,
doing business under the name of Tizon Engineering, has put it on notice not to settle the claim because he is not in any way whatsoever liable to plaintiff."
As cross-claim against defendant Tizon, the Surety asserted that if it is made liable to the plaintiff on its bond, Marcelino Tizon should be ordered to make
the corresponding reimbursement, with interest of 12%, plus attorney's fees.
After trial, judgment was rendered in favor of the plaintiff and against the defendants, ordering the latter to pay,jointly and severally, the sum of P2,972.00
with legal interests from November 12, 1960, and the costs of suit. On the cross-claim of the Surety, defendant Tizon was ordered to reimburse the cross-
plaintiff of whatever amount the latter might have paid to the plaintiff, plus P100.00 as attorney's fees.
Only defendant Tizon appealed from the decision to the Court of First Instance of Manila.
Within fifteen days from receipt of notice from the clerk of the Court of First Instance of Manila, that the case has been received and docketed in said
court, the defendants, Tizon and the Surety, each filed separate manifestations that they were reproducing their respective answers filed in the City Court.
On August 29, 1963, the plaintiff filed a motion praying "(a) To strike out the answer filed by the Surety reproducing its answer filed in the City Court; (b) To
remand the case to the City Court, as concerns the Surety, for execution of the judgment rendered in said court."
The Surety opposed the motion on two grounds: (a) that although it did not appeal from the decision of the inferior court, the appeal interposed by its co-
defendant inured to its benefit, because the obligation sued on "is so dependent on that of the principal debtor, that the Surety is considered in law as
being the same party in relation to whatever is adjudged, touching the obligation of its co-defendant"; and (b) the appeal of its co-defendant, the principal
debtor, "should be considered in law as to include the defendant Surety, in view of the latter's cross-claim against the former." The opposition was over-
ruled in the order appealed from.
The issue at this instance is whether an appeal by one of the parties sentenced to pay solidarily a sum of money, inures to the benefit of the other who did
not appeal. The pronouncements in the case of Municipality of Orion vs. Concha, 50 Phil. 682, provide ample guideposts in the resolution of the issue at
bar. In said case this Court held:
The judgment was joint and several, which means that they are severally liable. We have made a careful examination of numerous authorities and
believe that we are correct in saying that the effect of the appeal by one judgment debtor upon the co-debtors depends upon the particular facts
and conditions in each case. The difference in the apparently conflicting opinions may be well illustrated in this very case.
Suppose, for example, that F. B. Concha, the contractor, had appealed from the judgment of the lower court upon the ground that he had either
completed his contract within time or that the municipality had suffered no damages whatever, and the Supreme Court had reversed the judgment
of the lower court on his appeal. Certainly that judgment would have the effect of relieving the bondsmen from any liability whatever, for the
reason that their liability was consequent upon the liability of the contractor; and the court having declared that no liability for damages had
resulted from the execution of said contract, then certainly the bondsmen would have been relieved because their liability depended upon the
liability of the principal. That example gives us a clear case, showing that the effect of the appeal of the one of the judgment debtors would
necessarily have the effect of releasing his co-judgment debtors.
xxx xxx xxx
As we have already said, whether an appeal by one of several judgment debtors will affect the liability of those who did not appeal must depend
upon the facts in each particular case. If the judgment can only be sustained upon the liability of the one who appeals and the liability of the other
co-judgment debtors depends solely upon the question whether or not the appellant is liable, and the judgment is revoked as to that appellant,
then the result of his appeal will inure to the benefit of all. . . .
The rule is quite general that a reversal as to parties appealing does not necessitate a reversal as to parties not appealing, but that the judgment
may be affirmed or left undisturbed as to them. An exception to the rule exists, however, where a judgment cannot be reversed as to the party
appealing without affecting the rights of his co-debtor. (4 C.J. 1184)
A reversal of a judgment on appeal is binding on the parties to the suit, but does not inure to the benefit of parties against whom judgment was
rendered in the lower court who did not join in the appeal, unless their rights and liabilities and those of the parties appealing are so interwoven and
dependent as to be inseparable, in which case a reversal as to one operates as a reversal as to all. (4 C.J., 1206; Alling vs. Wenzel, 133 Ill., 264-278.)
 In the case of Brashear vs. Carlin, Curator (19 La. 395) a judgment was rendered in the lower court against the principal debtor and his surety to
pay damages. The principal debtor alone appealed and the judgment was reversed. When the question of the liability of the surety under the
judgment of the lower court was raised, the court said:
"It is obvious, that the judgment of the inferior court could not be reversed as to the principal debtor in this case, and continue in
force against the surety. The latter could not remain bound, after the former had been released; although the surety had not
joined in the appeal, the judgment rendered in this court inured to his benefit. The obligation of a surety is so dependent on that of
the principal debtor, that he is considered in law as being the same party as the debtor in relation to whatever is adjudged,
touching the obligation of the latter; provided it be not on grounds personal to such principal debtor; it is for this reason, that a
judgment in favor of the principal debtor can be invoked as res judicata by the surety."
In the case of Schoenberger vs. White (75 Con. 605) a joint judgment was rendered against husband and wife for a sum of money in an action ex contractu.
The wife appealed. As to the effect of the appeal of the wife upon the liability of both, the court said:
"Such a judgment is an entirety, and upon appeal to this court must be affirmed or set aside in toto."
"That the husband was not so made a party does not vary this rule. After the filing of the notice of appeal, he had the right to be heard in this
court as to all the questions brought up for review. As he has not exercised this right, it may be assumed that he is content with the judgment
against him as it stands; but he might complain of it, were we to modify it by reducing the amount which it requires his wife to pay, and thus
reducing the amount of the contribution which he might be able to call upon her to make, in case he paid all that it requires of him."
In the case of Philippines International Surety Co., Inc. vs. Commissioner of Customs, L-22790, December 17, 1966, this Court, speaking through Chief
Justice Concepcion, sanctioned the view, albeit impliedly, that under a given set of facts, the appeal of the principal debtor, if successful, may inure to the
benefit of the surety. Held this Court in that case:
Although the appeal taken from said decision by the importer (principal debtor) might have, perhaps, inured to the benefit of the surety, if, the
result of that appeal had been favorable to said importer, the fact is he had failed in his appeal.1wph1.t
Solution of the question posed in this appeal hinges on the nature of the obligation assumed by the Surety under its bond. As Article 1222 of the new Civil
Code provides:
A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of
those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself
thereof only as regards that part of the debt for which the latter are responsible.
Pertinent parts of the surety bond provides:
That we, Tizon Engineering, as principal, and the Capital Insurance & Surety Co., Inc., as surety, . . . are held and firmly bound unto the Republic
of the Philippines, in the penal sum of P10,000.00, for the payment of which sum, well and truly to be made, we bind ourselves, Jointly and
Severally, by these presents.
Whereas, the principal agrees to comply with all the terms and conditions of the proposal with the Bureau of Supply;
NOW THEREFORE, the conditions of this obligations are such that if the above bounden principal shall, in case he becomes the successful
bidder in any of the proposal of the Bureau of Supply (a) accept a contract with the Republic of the Philippines, represented by the Bureau
of Supply; (b) faithfully and truly performs in good faith the contract; (c) to pay to the Republic of the Philippines, in case of delay and/or
default in the execution of the contract, any loss or damages which the latter may suffer by reason thereof, not to exceed the sum of
P10,000.00, Philippine currency, then this obligation shall be void, otherwise it shall remain in full force and effect.
It thus appears that the Surety bound itself, jointly and severally, with the principal obligor to pay the Republic of the Philippines any loss or damage the
latter may suffer, not exceeding P10,000.00, "in case of delay and/or default in the execution of the contract."
However, although the defendants bound themselves in solidum, the liability of the Surety under its bond would arise only if its co-defendant, the principal
obligor, should fail to comply with the contract. To paraphrase the ruling in the case of Municipality of Orion vs. Concha, the liability of the Surety is
"consequent upon the liability" of Tizon, or "so dependent on that of the principal debtor" that the Surety "is considered in law as being the same party as
the debtor in relation to whatever is adjudged, touching the obligation of the latter"; or the liabilities of the two defendants herein "are so interwoven and
dependent as to be inseparable." Changing the expression, if the defendants are held liable, their liability to pay the plaintiff would be solidary, but the
nature of the Surety's undertaking is such that it does not incur liability unless and until the principal debtor is held liable.
True, it is that the Surety did not appeal the decision of the inferior court to the Court of First Instance, and on account of its failure to appeal, it lost its
personality to appear in the latter court or to file an answer therein. However this may be, it is not certain at this stage of the proceeding that the Surety's
liability unto plaintiff has attached. The principal debtor has asserted on appeal that it has no liability whatsoever to the plaintiff, and, if this assertion be
proven and sustained, the reversal of the judgment of the inferior court would operate as a reversal on the Surety, even though it did not appeal, in view of
the dependency of its obligation upon the liability of the principal debtor. The principal debtor might succeed in his appeal; in such eventuality, the
judgment of the inferior court could not continue in force against the Surety. Consequently, it is premature at this juncture to execute said judgment
against the Surety.
The situation of the Surety may be likened to that of a defaulting defendant whose right is protected under Section 4, Rule 18 of the Rules of Court as
follows:
Judgment When Some Defendants Answer and Others make Default.When a complaint states a common cause of action against several
defendants, some of whom answer, and the others fail to do so, the court shall try the case against all upon the answer thus filed and render
judgment upon the evidence presented. The same procedure applies when a common cause of action is pleaded in a counterclaim, cross-claim
and third-party claim.
Albeit it may not personally be allowed to file an answer in the Court of First Instance, having failed to interpose an appeal, the Surety can rely on the
answer of its co-defendant and derive benefit therefrom if the judgment on appeal should turn out to be favorable to the answering defendant (Castro vs.
Pea, 80 Phil. 488, 502).
The decision in Ishar Singh vs. Liberty Insurance Corp. and Leonardo Anne, et al., (third-party defendants in the third-party complaint of Liberty Insurance
Corp.), L-16860, July 31, 1963, relied upon by the appellee, is not applicable to the facts of the case at bar. In said case, Liberty Insurance Corp. was the
only defendant and the decision was against said defendant alone. The third party defendants were impleaded as such upon the third party complaint filed
against them by the Liberty Insurance Corp. And as stated in the decision in said case, "the record does not disclose whether the third-party defendants
filed an answer to the third-party complaint or not." Moreover, the liability of the third-party defendants to the third-party plaintiff stemmed from the
indemnity agreement executed by them in favor of the Liberty Insurance Corp., and the third-party defendants did not have privity of contract with the
creditor Ishar Singh.
Upon the foregoing considerations, that portion of the appealed order remanding the record of the case to the City Court of Manila for execution of the
decision of said court is hereby set aside, without costs.

ANTONIO GARCIA, JR., Petitioner, v. COURT OF APPEALS, LASAL DEVELOPMENT CORPORATION, Respondents. [G.R. No. 80201. November 20, 1990.]
SYLLABUS
1. CIVIL LAW; SPECIAL CONTRACTS; SURETYSHIP; NATURE AND PURPOSE THEREOF. The petitioners first ground is that, as found by the trial court, the
surety agreement was invalid because no consideration had been paid to him by PISO for executing the contract and that the amount of the entire loan
had been received and enjoyed by WMC. He cites the following articles of the Civil Code in support of his contention that lack of consideration was a
personal defense available to him as surety. The point is not well taken in view of the nature and purpose of a surety agreement. Suretyship is a contractual
relation resulting from an agreement whereby one person, the surety, engages to be answerable for the debt, default or miscarriage of another, known as
the principal. The peculiar nature of a surety agreement is that it is regarded as valid despite the absence of any direct consideration received by the surety
either from the principal obligor or from the creditor. A contract of surety, like any other contract, must generally be supported by a sufficient
consideration. However, the consideration necessary to support a surety obligation need not pass directly to the surety; a consideration moving to the
principal alone will suffice. It has been held that if the delivery of the original contract is contemporaneous with the delivery of the suretys obligation, each
contract becomes completed at the same time, and the consideration which supports the principal contract likewise supports the subsidiary one. (Faust v.
Rodelheim, 77 NJL 740, 73 A 491; Ballard v. Burton, 64 Vt 387, 24 A 769). And this is the kind of surety contract to which the rule of strict construction
applies as opposed to a compensated surety contract undertaken by surety corporations which are organized for the purpose of conducting an indemnity
business at established rates and compensation unlike an ordinary surety agreement where the surety binds his name through motives of friendship and
accomodation. (Pastoral v. Mutual Security Insurance Corp., 14 SCRA 1011).

2. ID.; ID.; ID.; OBLIGATION AND LIABILITY OF A SURETY. The suretys obligation is not an original and direct one for the performance of his own act, but
merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to
a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; (Sykes v. Everett, 167 NC 600),
in other words, he is directly and equally bound with the principal. The surety therefore becomes liable for the debt or duty of another although he
possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom. (Miners Merchants Bank v. Gidley, 150 WVa 229,
144 SE 2d 711).

3. ID.; ID.; ID.; SURETY NOT AFFECTED BY THE CHANGE IN THE RATE OF INTEREST, SUCH BEING MERELY A COLLATERAL AGREEMENT BETWEEN THE
CREDITOR AND THE PRINCIPAL DEBTOR. As for the compounded interest, we apply by analogy the case of Bank of the Philippine Islands v. Gooch and
Redfern, (45 Phil. 514) which was affirmed in the later case of the Bank of the Philippine Islands v. Albaladejo & Cia (53 Phil. 141). In the said cases, the
respective sureties claimed that since the creditor changed the rate of interest in the principal obligation without their knowledge or consent, they were
relieved from liability under their contract. It was held, however, that the change in the rate of interest was merely a collateral agreement between the
creditor bank and the principal debtor that did not affect the surety. When the debtor promised to pay the extra rate of interest on demand of the plaintiff,
the liability he assumed was his alone and was separate and apart from the original contract. His agreement to pay the additional rate of interest was an
additional burden upon him and him only. That obligation in no way affected the original contract of the surety, whose liability remained unchanged.
(Keenes Admr. v. Miller, 103 Ky, 628; Parson on Bills and Notes, 571, Chitty on Bills, 212; Malteson v. Ellsworth, 33 Wis 488).

4. ID.; OBLIGATIONS AND CONTRACTS; NOVATION; REQUISITES THEREOF; NOT ESTABLISHED IN THE CASE AT BAR. The petitioner cites other supposed
agreements in support of his theory of novation such as the prepayment of the restructured loans of WMC before the distribution of dividends to the
common stockholders, the proposed sale on installments of its assets to Negros Occidental Copperfield Mines, and the preference given to other creditors
of WMC over PISO. But we do not think these are material as, to be so, the alteration must change the legal effects of the original contract. The alleged
alterations do not have that effect. The most important argument against the alleged novation is the failure of the petitioner to establish the validity of the
new contract, an essential requisite for the novation of a previous valid obligation. Petitioner insists that the various communications made by WMC with
DBP, together with the memorandum of agreement (Annexes 1 to 7), are sufficient to establish the new undertaking made by WMC with all its creditors,
including DBP. We do not think so. It is true as a general rule no form of words or writing is necessary to give effect to a novation. (Re Dissolution of F.
Yeager Bridge Culvert Co., 150 Mich. App. 386, NW 2d 99). Nevertheless, since the parties involved here are corporations, it must first be proved that the
contracts, assuming they were made, were executed by the persons possessing the proper authority to bind their respective principals. Annexes 1-4 are a
mere exchange of correspondence between the officers of WMC and DBP. Although they contain the provisions and proposals that, according to
petitioner, should suffice to establish that the original contract between WMC and PISO has been materially altered, they cannot be considered per se
sufficient to give rise to a valid new obligation. WMC was in fact directed by Joseph W. Edralin, the Assistant Executive Officer of the DBP, to communicate
with Atty. Hilario Oraolino of the Office of the Chief Legal Counsel for the preparation and execution of the necessary legal documents to cover the
approval and confirmation of the several proposals made. No such documents, as duly signed by the parties, were ever presented in court. Annexes 5 to 7
are also incomplete documents and not binding without the signatures of the supposed contracting parties. We approve the following observations made
by the Court of Appeals: Novation of contract cannot be presumed. 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 obligations be on every point incompatible with each other (Art.
1292, Civil Code). In every novation there are four essential requisites. (1) a previous valid obligation; (2) the agreement of all the parties to the new
contract; (3) the extinguishment of the old contract; and (4) validity of the new one. Novation requires the creation of new contractual relations as well as
the extinguishment of the old. There must be a consent of all the parties to the substitution, resulting in the extinction of the old obligation and the
creation of a valid new one (Tiu Siuco v. Habana, 45 Phil. 707). The acceptance of the promissory note by the plaintiff is not novation of the contract. The
legal doctrine is that an obligation to pay a sum of money is not novated in a new instrument by changing the term of payment and adding other
obligations not incompatible with the old one (Inchausti & Co. v. Yulo, 34 Phil. 978). It is not proper to consider an obligation novated as in the case at bar
by the mere granting of extension of payment which did not even alter its essence. To sustain novation necessitates that the same be so declared in
unequivocal terms or that there is complete and substantial incompatibility between the two obligations (Sandico v. Paquing, 42 SCRA 322). An obligation
to pay a sum of money is not novated in a new instrument wherein the old is ratified by changing only the terms of payment and adding other obligations
not incompatible with the old one or wherein the old contract is merely supplementing the new one (Dungo v. Lopea, L-19377, Dec. 29, 1962, 6 SCRA
1007; Magdalena Estates, Inc. v. Rodriguez, 18 SCRA 967; Rizal Commercial Banking Corp. v. Militante, AC GR CV 04077, Sept. 20, 1985; Investors Finance
Corp. v. Cruz, AC GR CV 04710, Nov. 27, 1985).

5. COMMERCIAL LAW; CORPORATIONS; LIMITED LIABILITY DOCTRINE; MAY BE WAIVED WHEN THE CORPORATE OFFICER VOLUNTARILY BINDS HIMSELF TO
ANSWER FOR CORPORATE DEBTS. Regarding the petitioners claim that he is liable only as a corporate officer of WMC, the surety agreement shows that
he signed the same not in representation of WMC or as its president but in his personal capacity. He is therefore personally bound. There is no law that
prohibits a corporate officer from binding himself personally to answer for a corporate debt. While the limited liability doctrine is intended to protect the
stockholder by immunizing him from personal liability for the corporate debts, he may nevertheless divest himself of this protection by voluntarily binding
himself to the payment of the corporate debts. The petitioner cannot therefore take refuge in this doctrine that he has by his own acts effectively waived.

6. ID.; ID.; CREDITORS MUST BE PAID FIRST BEFORE DISTRIBUTION OF DIVIDENDS AMONG STOCKHOLDERS; UNSECURED CREDITORS, GIVEN PREFERENCE
IN BANKRUPTCY OR INSOLVENCY PROCEEDINGS. It is axiomatic, and only fair, that the creditors of a corporation must be paid first before dividends may
be distributed among the stockholders. Unsecured creditors are given preference in bankruptcy or insolvency proceedings because secured creditors can
after all go against the security given by the debtor. As for the installment sale of WMCs assets to Negros Occidental Copperfield Mines, which might make
it difficult for the petitioner to recover any amount it may have to pay on the loan of WMC, this was a risk he took when he signed the surety agreement.
As it did not prohibit the alienation of the properties of the principal debtor, the sale to Negros cannot be considered a novation of the original agreement.
In fact, the proposed sale was intended precisely to enable WMC to meet its pending obligations.

7. REMEDIAL LAW; ISSUE NOT RAISED IN THE COURT A QUO CANNOT BE RAISED FOR THE FIRST TIME ON APPEAL. The argument of subrogation cannot
be considered at this stage as it is being invoked only now. It is settled that an issue not raised in the court a quo cannot be raised for the first time on
appeal because this would be offensive to the basic rules of fair play. (Filipino Merchants v. Court of Appeals, G.R. No. 85141, November 28, 1989; Ramos
v. IAC, 175 SCRA 70).
DECISION
CRUZ, J.:
On April 15, 1977, the Western Minolco Corporation (WMC) obtained from the Philippine Investments Systems Organization (PISO) two loans for
P2,500,000.00 and P1,000,000.00 for which it issued the corresponding promissory notes payable on May 30, 1977. On the same date, Antonio Garcia and
Ernest Kahn executed a surety agreement binding themselves jointly and severally for the payment of the loan of P2,500,000.00 on due date.

Upon failure of WMC to pay after repeated demands, demand was made on Garcia pursuant to the surety agreement. Garcia also failed to pay. Hence, on
April 5, 1983, Lasal Development Corporation (to which the credit had been assigned earlier by PISO) sued Garcia for recovery of the debt in the Regional
Trial Court of Makati.

On May 18, 1983, Garcia moved to dismiss on the grounds that: (a) the complaint stated no cause of action; (b) the suit would result in unjust enrichment
of the plaintiff because he had not received any consideration from PISO; (c) the surety agreement violated the doctrine of the limited liability of
corporations; and (d) the principal obligation had been novated.

After considering the arguments and evidence of the parties, the trial court granted the motion and dismissed the complaint on the ground that the surety
agreement was invalid for absence of consideration.

The plaintiff moved for reconsideration and when this was denied elevated the matter to the Court of Appeals. In a decision dated June 23, 1987, the
respondent court reversed Judge Jesus M. Elbinias and remanded the records of the case for trial on the merits. Garcia then came to this Court in this
petition for review on certiorari, pleading the same arguments raised in the trial court.chanrobles.com:cralaw:red

The petitioners first ground is that, as found by the trial court, the surety agreement was invalid because no consideration had been paid to him by PISO
for executing the contract and that the amount of the entire loan had been received and enjoyed by WMC. He cites the following articles of the Civil Code
in support of his contention that lack of consideration was a personal defense available to him as surety:chanrob1es virtual 1aw library

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should
fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the
contract is called a suretyship.

Art. 1222. A solidary debtor may, in action filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of
those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof
only as regards that part of the debt for which the latter are responsible.

The point is not well taken in view of the nature and purpose of a surety agreement.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph

Suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be answerable for the debt, default or
miscarriage of another, known as the principal. The suretys obligation is not an original and direct one for the performance of his own act, but merely
accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid
principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; 1 in other words, he is directly and
equally bound with the principal. The surety therefore becomes liable for the debt or duty of another although he possesses no direct or personal interest
over the obligations nor does he receive any benefit therefrom. 2

The peculiar nature of a surety agreement is that it is regarded as valid despite the absence of any direct consideration received by the surety either from
the principal obligor or from the creditor. A contract of surety, like any other contract, must generally be supported by a sufficient consideration. However,
the consideration necessary to support a surety obligation need not pass directly to the surety; a consideration moving to the principal alone will suffice.

It has been held that if the delivery of the original contract is contemporaneous with the delivery of the suretys obligation, each contract becomes
completed at the same time, and the consideration which supports the principal contract likewise supports the subsidiary one. 3 And this is the kind of
surety contract to which the rule of strict construction applies as opposed to a compensated surety contract undertaken by surety corporations which are
organized for the purpose of conducting an indemnity business at established rates and compensation unlike an ordinary surety agreement where the
surety binds his name through motives of friendship and accomodation. 4

It follows from the above principles that Lasal would not be unjustly enriched if the petitioner were to be held liable for the obligation contracted by WMC.
The creditor would only be recovering the amount of its loan plus its increments. The petitioner, for his part, can still go against WMC for the amount he
may have to pay Lasal as assignee of the PISO credit.

Regarding the petitioners claim that he is liable only as a corporate officer of WMC, the surety agreement shows that he signed the same not in
representation of WMC or as its president but in his personal capacity. He is therefore personally bound. There is no law that prohibits a corporate officer
from binding himself personally to answer for a corporate debt. While the limited liability doctrine is intended to protect the stockholder by immunizing
him from personal liability for the corporate debts, he may nevertheless divest himself of this protection by voluntarily binding himself to the payment of
the corporate debts. The petitioner cannot therefore take refuge in this doctrine that he has by his own acts effectively waived.cralawnad

Concerning the issue of novation, we note first the following provisions of the memorandum of agreement supposedly entered into by WMC and its
creditors which the petitioner argues had the effect of releasing him from the surety agreement:chanrob1es virtual 1aw library

IV. Release of JSS

The CREDITORS expressly agree to release and hereby release the Joint and Several Signatories (JSS) of MINOLCOs officers from any liability whatsoever on
the obligations which they have personally guaranteed or secured. Any action therefore against all the aforesaid signatories are waived in view of the
promissory notes to be issued by NDC which are fully and unconditionally guaranteed by the Philippine Government, in payment of MINOLCOs obligations
to said CREDITORS.
x x x
VI. The CREDITORS who have filed cases in court against MINOLCO and who are signatories to this agreement agree to dismiss the case with prejudice,
accepting the repayment scheme set forth in paragraph II as a just and equitable procedure for collecting their credits.

Significantly, however, the agreement (Annex 5) was signed only by Don M. Ferry as chairman of the board of directors of WMC and does not carry the
signature of any of the creditors. 5 Hence, it has no binding force whatsoever on such creditors.

The petitioner cites other developments or transactions between the parties to the original loans that he contends had the effect of novating the said
contracts and consequently extinguished the surety agreement. Among these are the extension of the original period of payment and the compounding of
the interest on the principal obligations, both of which operated to the prejudice of the petitioner.

The petitioner invokes Article 2079 of the Civil Code, which provides:chanrob1es virtual 1aw library

Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The mere failure on the part
of the creditor to demand payment after the debt has become due does not of itself constitute any extension of time referred to herein.

However, Paragraph 5 of the surety agreement clearly stipulated as follows:chanrobles virtual lawlibrary

The sureties expressly waive all rights to demand payment and notice of non-payment and protest, and agree that the securities of every kind, that now or
may hereafter be left with the lender, its successors, indorsees or assigns, as collateral, for the said loan, or any evidence of debt or obligations, or upon
which a lien may exist may be withdrawn or surrendered at any time, and the time of payment thereof extended, without notice to or consent by the
sureties, and the liability on this suretyship shall be solidary, direct and immediate and not contingent upon any pursuit by the lender, its successors,
indorsees or assigns, of whatever remedies the lender may have against the principal or the securities or liens it may possess. (Emphasis supplied.)

Since in the surety contract, the petitioner not only consented to an extension in the payment of the obligation but even waived his right to be notified of
such extension, he cannot now claim that he has been released from his undertaking because of the extension granted to the principal.chanrobles.com :
virtual law library

As for the compounded interest, we apply by analogy the case of Bank of the Philippine Islands v. Gooch and Redfern, 6 which was affirmed in the later
case of the Bank of the Philippine Islands v. Albaladejo & Cia. 7 In the said cases, the respective sureties claimed that since the creditor changed the rate of
interest in the principal obligation without their knowledge or consent, they were relieved from liability under their contract. It was held, however, that the
change in the rate of interest was merely a collateral agreement between the creditor bank and the principal debtor that did not affect the surety. When
the debtor promised to pay the extra rate of interest on demand of the plaintiff, the liability he assumed was his alone and was separate and apart from
the original contract. His agreement to pay the additional rate of interest was an additional burden upon him and him only. That obligation in no way
affected the original contract of the surety, whose liability remained unchanged. 8

Thus, despite the compounding of the interest, the liability of the surety remains only up to the original uncompounded interest, as stipulated in the
promissory note, that is, 17% per annum, with a penalty charge of 2 1/2% per month until full payment.

The petitioner cites other supposed agreements in support of his theory of novation such as the prepayment of the restructured loans of WMC before the
distribution of dividends to the common stockholders, the proposed sale on installments of its assets to Negros Occidental Copperfield Mines, and the
preference given to other creditors of WMC over PISO. But we do not think these are material as, to be so, the alteration must change the legal effects of
the original contract. The alleged alterations do not have that effect.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph

It is axiomatic, and only fair, that the creditors of a corporation must be paid first before dividends may be distributed among the stockholders. Unsecured
creditors are given preference in bankruptcy or insolvency proceedings because secured creditors can after all go against the security given by the debtor.
As for the installment sale of WMCs assets to Negros Occidental Copperfield Mines, which might make it difficult for the petitioner to recover any amount
it may have to pay on the loan of WMC, this was a risk he took when he signed the surety agreement. As it did not prohibit the alienation of the properties
of the principal debtor, the sale to Negros cannot be considered a novation of the original agreement. In fact, the proposed sale was intended precisely to
 enable WMC to meet its pending obligations.

The most important argument against the alleged novation is the failure of the petitioner to establish the validity of the new contract, an essential requisite
for the novation of a previous valid obligation. Petitioner insists that the various communications made by WMC with DBP, together with the
memorandum of agreement (Annexes 1 to 7), are sufficient to establish the new undertaking made by WMC with all its creditors, including DBP. We do not
think so.

It is true as a general rule no form of words or writing is necessary to give effect to a novation. 9 Nevertheless, since the parties involved here are
corporations, it must first be proved that the contracts, assuming they were made, were executed by the persons possessing the proper authority to bind
their respective principals. Annexes 1-4 are a mere exchange of correspondence between the officers of WMC and DBP. Although they contain the
provisions and proposals that, according to petitioner, should suffice to establish that the original contract between WMC and PISO has been materially
altered, they cannot be considered per se sufficient to give rise to a valid new obligation. WMC was in fact directed by Joseph W. Edralin, the Assistant
Executive Officer of the DBP, to communicate with Atty. Hilario Oraolino of the Office of the Chief Legal Counsel for the preparation and execution of the
necessary legal documents to cover the approval and confirmation of the several proposals made. No such documents, as duly signed by the parties, were
ever presented in court. Annexes 5 to 7 10 are also incomplete documents and not binding without the signatures of the supposed contracting
parties.chanrobles.com.ph : virtual law library

The argument of subrogation cannot be considered at this stage as it is being invoked only now. It is settled that an issue not raised in the court a quo
cannot be raised for the first time on appeal because this would be offensive to the basic rules of fair play. 11

As for the alleged substitution of debtors, nowhere in the record can we find evidence of this claim. The commitment made by DBP to the creditors of
WMC was that, although they had a first mortgage lien over substantially all the assets of WMC (which if foreclosed would leave most of its creditors
without recourse), they would nevertheless defer proceedings against those assets and instead allow their sale to NDC (with better terms) to enable WMC
to meet the obligations. 12 In effect, what DBP did was merely to restructure its credit with WMC and make additional accommodations in the form of
investments on preferred and common shares of stock of WMC. It was clearly an effort to assist WMC perform its obligations with its creditors. But not
more than that.

Concerning the promissory notes supposedly issued by NDC to the creditors of WMC and with the full and unconditional guaranty of the Philippine
Government as contained in Annex 5, suffice it to repeat that such Annex 5 (memorandum of agreement between WMC and DBP), as well as Annex 6
(addendum to Annex 5, making NOCOMIN, instead of NDC as the buyer) and Annex 7 (contract of sale between WMC and NOCOMIN), are all not signed by
the contracting parties and therefore have no evidentiary weight or binding force.cralawnad

We approve the following observations made by the Court of Appeals:chanrob1es virtual 1aw library

Novation of contract cannot be presumed. 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 obligations be on every point incompatible with each other (Art. 1292, Civil Code). In
every novation there are four essential requisites. (1) a previous valid obligation; (2) the agreement of all the parties to the new contract; (3) the
extinguishment of the old contract; and (4) validity of the new one. Novation requires the creation of new contractual relations as well as the
extinguishment of the old. There must be a consent of all the parties to the substitution, resulting in the extinction of the old obligation and the creation of
a valid new one (Tiu Siuco v. Habana, 45 Phil. 707). The acceptance of the promissory note by the plaintiff is not novation of the contract. The legal doctrine
is that an obligation to pay a sum of money is not novated in a new instrument by changing the term of payment and adding other obligations not
incompatible with the old one (Inchausti & Co. v. Yulo, 34 Phil. 978). It is not proper to consider an obligation novated as in the case at bar by the mere
granting of extension of payment which did not even alter its essence. To sustain novation necessitates that the same be so declared in unequivocal terms
or that there is complete and substantial incompatibility between the two obligations (Sandico v. Paquing, 42 SCRA 322). An obligation to pay a sum of
money is not novated in a new instrument wherein the old is ratified by changing only the terms of payment and adding other obligations not incompatible
with the old one or wherein the old contract is merely supplementing the new one (Dungo v. Lopea, L-19377, Dec. 29, 1962, 6 SCRA 1007; Magdalena
Estates, Inc. v. Rodriguez, 18 SCRA 967; Rizal Commercial Banking Corp. v. Militante, AC GR CV 04077, Sept. 20, 1985; Investors Finance Corp. v. Cruz, AC
GR CV 04710, Nov. 27, 1985).chanrobles.com : virtual law library

WHEREFORE, the petition is DENIED and the challenged decision of the respondent court AFFIRMED, with costs against the petitioner. SO ORDERED.

SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs. RODOLFO M. CUENCA, respondent. [G.R. No. 138544. October 3, 2000]
DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor of the solidary
debtor. The fundamental rules of fair play require the creditor to obtain the consent of the surety to any material alteration in the principal loan agreement,
or at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtained in excess of the amount or beyond the period
stipulated in the original agreement, absent any clear stipulation showing that the latter waived his right to be notified thereof, or to give consent
thereto. This is especially true where, as in this case, respondent was no longer the principal officer or major stockholder of the corporate debtor at the time
the later obligations were incurred. He was thus no longer in a position to compel the debtor to pay the creditor and had no more reason to bind himself
anew to the subsequent obligations.
The Case

This is the main principle used in denying the present Petition for Review under Rule 45 of the Rules of Court. Petitioner assails the December 22,
1998 Decision[1] of the Court of Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which reads as follows:
WHEREFORE, the judgment appealed from is hereby amended in the sense that defendant-appellant Rodolfo M. Cuenca [herein respondent]
is RELEASED from liability to pay any amount stated in the judgment.
Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for lack of merit.
In all other respect[s], the decision appealed from is AFFIRMED.[2]
Also challenged is the April 14, 1999 CA Resolution,[3] which denied petitioners Motion for Reconsideration.
Modified by the CA was the March 6, 1997 Decision[4] of the Regional Trial Court (RTC) of Makati City (Branch 66) in Civil Case No. 93-1925, which
disposed as follows:
WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff
Security Bank & Trust Company the sum of P39,129,124.73 representing the balance of the loan as of May 10, 1994 plus 12% interest per annum until fully
paid, and the sum of P100,000.00 as attorneys fees and litigation expenses and to pay the costs.
SO ORDERED.
The Facts

The facts are narrated by the Court of Appeals as follows: [5]

The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (Sta. Ines) is a corporation engaged in logging operations. It was a
holder of a Timber License Agreement issued by the Department of Environment and Natural Resources (DENR).
On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines Melale Corporation [SIMC] a credit line in the amount of [e]ight
[m]llion [p]esos (P8,000,000.00) to assist the latter in meeting the additional capitalization requirements of its logging operations.
The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be effective until 30 November 1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the lines plus JSS of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein the companys duly authorized signatory/ies;
3. Reasonable/compensating deposit balances in current account shall be maintained at all times; in this connection, a Makati account shall be opened
prior to availment on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower. (Emphasis supplied.)
To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line, SIMC executed a Chattel Mortgage dated 23
December 1980 (Exhibit A) over some of its machinery and equipment in favor of [Petitioner] SBTC. As additional security for the payment of the loan,
[Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he solidarily
bound himself with SIMC as follows:
xxxxxxxxx
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC) in favor of the bank for the payment, upon demand and
without the benefit of excussion of whatever amount x x x the client may be indebted to the bank x x x by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit
accommodation(s) x x x . (Emphasis supplied).
On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the P8M-Credit Loan Facility, appellant SIMC made a first
drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00). To cover said
drawdown, SIMC duly executed promissory Note No. TD/TLS-3599-81 for said amount (Exhibit C).
Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of Directors of defendant-appellant Sta. Ines. Subsequently, the
shareholdings of [Respondent] Cuenca in defendant-appellant Sta. Ines were sold at a public auction relative to Civil Case No. 18021 entitled Adolfo A.
Angala vs. Universal Holdings, Inc. and Rodolfo M. Cuenca. Said shares were bought by Adolfo Angala who was the highest bidder during the public auction.
Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix
[m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos.
DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts of the abovementioned additional
loans against the credit line.
Appellant SIMC, however, encountered difficulty[6] in making the amortization payments on its loans and requested [Petitioner] SBTC for a complete
restructuring of its indebtedness. SBTC accommodated appellant SIMCs request and signified its approval in a letter dated 18 February 1988 (Exhibit G)
wherein SBTC and defendant-appellant Sta. Ines, without notice to or the prior consent of [Respondent] Cuenca, agreed to restructure the past due
obligations of defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed to extend to defendant-appellant Sta. Ines the following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos (P8,800,000.00), to be applied to liquidate the principal portion
of defendant-appellant Sta. Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit G, Expediente, at Vol. II, p. 336;
Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (P3,400,000.00), to be applied to liquidate the past due interest
and penalty portion of the indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit G, Expediente, at Vol. II, p. 336;
Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34).
It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to [Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81
in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00), which was the only loan incurred prior to the expiration of the P8M-
Credit Loan Facility on 30 November 1981 and the only one covered by the Indemnity Agreement dated 19 December 1980 (Exhibit 3-Cuenca, Expediente,
at Vol. II, p. 331), was not segregated from, but was instead lumped together with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86,
DLS/74/28/86 and DLS/74/47/86 (Exhibits D, E, and F, Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-appellant Sta. Ines which were not
secured by said Indemnity Agreement.
Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank, defendant-appellant Sta. Ines thus executed the following
promissory notes, both dated 09 March 1988 in favor of [Petitioner] Security Bank:
PROMISSORY NOTE NO. AMOUNT
RL/74/596/88 P8,800,000.00
RL/74/597/88 P3,400,000.00
-------------------
TOTAL P12,200,000.00
(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).
To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines, [Petitioner] Security Bank and defendant-appellant Sta.
Ines executed a Loan Agreement dated 31 October 1989 (Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan Agreement
dated 31 October 1989 provides:
1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of TWELVE MILLION TWO HUNDRED THOUSAND PESOS
(P12,200,000.00), Philippines [c]urrency (the Loan). The loan shall be released in two (2) tranches of P8,800,000.00 for the first tranche (the First Loan)
and P3,400,000.00 for the second tranche (the Second Loan) to be applied in the manner and for the purpose stipulated hereinbelow.
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. (Underscoring
supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol. I, p. 33)
From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments to [Petitioner] Security Bank in the amount of [o]ne
[m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to
165)
Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite demands made upon appellant SIMC and
CUENCA, the last of which were made through separate letters dated 5 June 1991 (Exhibit K) and 27 June 1991 (Exhibit L), respectively.
Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed a complaint for collection of sum of money on 14 June 1993,
resulting after trial on the merits in a decision by the court a quo, x x x from which [Respondent] Cuenca appealed.
Ruling of the Court of Appeals

In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had novated the 1980 credit accommodation earlier
granted by the bank to Sta. Ines.Accordingly, such novation extinguished the Indemnity Agreement, by which Cuenca, who was then the Board chairman and
president of Sta. Ines, had bound himself solidarily liable for the payment of the loans secured by that credit accommodation. It noted that 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.
The appellate court also noted that the Credit Approval Memorandum had specified that the credit accommodation was for a total amount of P8
million, and that its expiry date was November 30, 1981. Hence, it ruled that Cuenca was liable only for loans obtained prior to November 30, 1981, and only
for an amount not exceeding P8 million.
It further held that the 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.
The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided to materially alter or modify the principal obligation
after the expiry date of the credit accommodation.
Hence, this recourse to this Court.[7]
The Issues

In its Memorandum, petitioner submits the following for our consideration: [8]
A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca from liability as surety under the Indemnity
Agreement for the payment of the principal amount of twelve million two hundred thousand pesos (P12,200,000.00) under Promissory
Note No. RL/74/596/88 dated 9 March 1988 and Promissory Note No. RL/74/597/88 dated 9 March 1988, plus stipulated interests,
penalties and other charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent Cuencas liability under the Indemnity
Agreement covered only availments on SIMCs credit line to the extent of eight million pesos (P8,000,000.00) and made
on or before 30 November 1981;
ii. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of SIMCs indebtedness under the P8
million credit accommodation was tantamount to an extension granted to SIMC without Respondent Cuencas consent,
thus extinguishing his liability under the Indemnity Agreement pursuant to Article 2079 of the Civil Code;
 iii. Whether or not the Honorable Court of appeals erred in ruling that the restructuring of SIMCs indebtedness under the P8
million credit accommodation constituted a novation of the principal obligation, thus extinguishing Respondent Cuencas
liability under the indemnity agreement;
B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was extinguished by the payments made by SIMC;
C. Whether or not petitioners Motion for Reconsideration was pro-forma;
D. Whether or not service of the Petition by registered mail sufficiently complied with Section 11, Rule 13 of the 1997 Rules of Civil Procedure.
Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989 Loan Agreement novated the original credit accommodation
and Cuencas liability under the Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of and to give consent to any substitution,
renewal, extension, increase, amendment, conversion or revival of the said credit accommodation. As preliminary matters, the procedural questions raised
by respondent will also be addressed.
The Courts Ruling

The Petition has no merit.

Preliminary Matters: Procedural Questions

Motion for Reconsideration Not Pro Forma

Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in merely rehashing the arguments already passed upon by the
appellate court, was pro forma; that as such, it did not toll the period for filing the present Petition for Review. [9] Consequently, the Petition was filed out of
time.[10]
We disagree. A motion for reconsideration is not pro forma just because it reiterated the arguments earlier passed upon and rejected by the appellate
court. The Court has explained that a movant may raise the same arguments, precisely to convince the court that its ruling was erroneous.[11]
Moreover, there is no clear showing of intent on the part of petitioner to delay the proceedings. In Marikina Valley Development Corporation v.
Flojo,[12] the Court explained that a pro forma motion had no other purpose than to gain time and to delay or impede the proceedings. Hence, where the
circumstances of a case do not show an intent on the part of the movant merely to delay the proceedings, our Court has refused to characterize the motion
as simply pro forma. It held:
We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon the reality and substance of the statutory right
of appeal, that doctrine should be applied reasonably, rather than literally. The right to appeal, where it exists, is an important and valuable right. Public
policy would be better served by according the appellate court an effective opportunity to review the decision of the trial court on the merits, rather than
by aborting the right to appeal by a literal application of the procedural rules relating to pro forma motions for reconsideration.
Service by Registered Mail Sufficiently Explained

Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:

SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing of pleadings and other papers shall be done
personally. Except with respect to papers emanating from the court, a resort to other modes must be accompanied by a written explanation why the
service or filing was not done personally. A violation of this Rule may be cause to consider the paper as not filed.
Respondent maintains that the present Petition for Review does not contain a sufficient written explanation why it was served by registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort[13] that the aforecited rule was mandatory, and that only when personal service
or filing is not practicable may resort to other modes be had, which must then be accompanied by a written explanation as to why personal service or filing
was not practicable to begin with.
In this case, the Petition does state that it was served on the respective counsels of Sta. Ines and Cuenca by registered mail in lieu of personal service
due to limitations in time and distance.[14] This explanation sufficiently shows that personal service was not practicable. In any event, we find no adequate
reason to reject the contention of petitioner and thereby deprive it of the opportunity to fully argue its cause.
First Issue: Original Obligation Extinguished by Novation

An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which reads as follows:
ART. 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be on every point incompatible with each other.
Novation of a contract is never presumed. It has been held that [i]n the absence of an express agreement, novation takes place only when the old
and the new obligations are incompatible on every point.[15] Indeed, the following requisites must be established: (1) there is a previous valid obligation; (2)
the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid new contract. [16]
Petitioner contends that there was no absolute incompatibility between the old and the new obligations, and that the latter did not extinguish the
earlier one. It further argues that the 1989 Agreement did not change the original loan in respect to the parties involved or the obligations incurred. It adds
that the terms of the 1989 Contract were not more onerous.[17]Since the original credit accomodation was not extinguished, it concludes that Cuenca is still
liable under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement extinguished the
obligation[18] obtained under the 1980 credit accomodation. This is evident from its explicit provision to liquidate the principal and the interest of the earlier
indebtedness, as the following shows:
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.[19] (Italics supplied.)
The testimony of an officer[20] of the bank that the proceeds of the 1989 Loan Agreement were used to pay-off the original indebtedness serves to
strengthen this ruling.[21]
Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation demonstrate that the two cannot coexist. While
the 1980 credit accommodation had stipulated that the amount of loan was not to exceed P8 million,[22] the 1989 Agreement provided that the loan
was P12.2 million. The periods for payment were also different.
Likewise, the later contract contained conditions, positive covenants and negative covenants not found in the earlier obligation. As an example of a
positive covenant, Sta. Ines undertook from time to time and upon request by the Lender, [to] perform such further acts and/or execute and deliver such
additional documents and writings as may be necessary or proper to effectively carry out the provisions and purposes of this Loan Agreement.[23] Likewise,
SIMC agreed that it would not create any mortgage or encumbrance on any asset owned or hereafter acquired, nor would it participate in any merger or
consolidation.[24]
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity Agreement, an accessory obligation, was
necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which provides:
ART. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit
third persons who did not give their consent.
Alleged Extension

Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8 million original accommodation; it was not a novation.[25]
This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated that its purpose was to liquidate, not to renew or
extend, the outstanding indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which had allegedly extended the
original P8 million credit facility. Hence, his obligation as a surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically
states that [a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. x x x. In an earlier case,[26] the
Court explained the rationale of this provision in this wise:
The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the suretys consent would deprive the
surety of his right to pay the creditor and to be immediately subrogated to the creditors remedies against the principal debtor upon the maturity date. The
surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended
period.
Binding Nature of the Credit Approval Memorandum

As noted earlier, the appellate court relied on the provisions of the Credit Approval Memorandum in holding that the credit accommodation was only
for P8 million, and that it was for a period of one year ending on November 30, 1981. Petitioner objects to the appellate courts reliance on that document,
contending that it was not a binding agreement because it was not signed by the parties. It adds that it was merely for its internal use.
We disagree. It was petitioner itself which presented the said document to prove the accommodation. Attached to the Complaint as Annex A was a
copy thereof evidencing the accommodation.[27] Moreover, in its Petition before this Court, it alluded to the Credit Approval Memorandum in this wise:
4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted by the Bank a credit line in the aggregate amount of Eight Million Pesos
(P8,000,000.00) to assist SIMC in meeting the additional capitalization requirements for its logging operations. For this purpose, the Bank issued a Credit
Approval Memorandum dated 10 November 1980.
Clearly, respondent is estopped from denying the terms and conditions of the P8 million credit accommodation as contained in the very document it
presented to the courts. Indeed, it cannot take advantage of that document by agreeing to be bound only by those portions that are favorable to it, while
denying those that are disadvantageous.
Second Issue: Alleged Waiver of Consent

Pursuing another course, petitioner contends that Respondent Cuenca impliedly gave his consent to any modification of the credit accommodation
or otherwise waived his right to be notified of, or to give consent to, the same.[28] Respondents consent or waiver thereof is allegedly found in the Indemnity
Agreement, in which he held himself liable for the credit accommodation including [its] substitutions, renewals, extensions, increases, amendments,
conversions and revival. It explains that the novation of the original credit accommodation by the 1989 Loan Agreement is merely its renewal, which connotes
cessation of an old contract and birth of another one x x x.[29]
At the outset, we should emphasize that an essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes
the latters obligation. As the Court held in National Bank v. Veraguth,[30] [i]t is fundamental in the law of suretyship that any agreement between the creditor
and the principal debtor which essentially varies the terms of the principal contract, without the consent of the surety, will release the surety from liability.
In this case, petitioners assertion - that respondent consented to the alterations in the credit accommodation -- finds no support in the text of the
Indemnity Agreement, which isreproduced hereunder:
Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila
for and in consideration of the credit accommodation in the total amount of eight million pesos (P8,000,000.00) granted by the SECURITY BANK AND
TRUST COMPANY, a commercial bank duly organized and existing under and by virtue of the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro
Manila hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter referred to as the CLIENT, with the
stipulated interests and charges thereon, evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed and delivered by the CLIENT in favor of
the BANK hereby bind(s) himself/themselves jointly and severally with the CLIENT in favor of the BANK for the payment , upon demand and without benefit
of excussion of whatever amount or amounts the CLIENT may be indebted to the BANK under and by virtue of aforesaid credit accommodation(s) including
the substitutions, renewals, extensions, increases, amendment, conversions and revivals of the aforesaid credit accommodation(s), as well as of the amount
or amounts of such other obligations that the CLIENT may owe the BANK, whether direct or indirect, principal or secondary, as appears in the accounts,
books and records of the BANK, plus interest and expenses arising from any agreement or agreements that may have heretofore been made, or may
hereafter be executed by and between the parties thereto, including the substitutions, renewals, extensions, increases, amendments, conversions and
revivals of the aforesaid credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor of the BANK for the faithful compliance
of all the terms and conditions contained in the aforesaid credit accommodation(s), all of which are incorporated herein and made part hereof by
reference.
While respondent held himself liable for the credit accommodation or any modification thereof, such clause should be understood in the context of
the P8 million limit and the November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify the nature and scope of the original credit
accommodation, without informing or getting the consent of respondent who was solidarily liable. Taking the banks submission to the extreme, respondent
(or his successors) would be liable for loans even amounting to, say, P100 billion obtained 100 years after the expiration of the credit accommodation, on
the ground that he consented to all alterations and extensions thereof.
Indeed, it has been held that a contract of surety cannot extend to more than what is stipulated. It is strictly construed against the creditor, every
doubt being resolved against enlarging the liability of the surety.[31] Likewise, the Court has ruled that it is a well-settled legal principle that if there is any
doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety x x x. Ambiguous contracts are construed
against the party who caused the ambiguity.[32] In the absence of an unequivocal provision that respondent waived his right to be notified of or to give
consent to any alteration of the credit accommodation, we cannot sustain petitioners view that there was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly shows that the bank did not have absolute authority to unilaterally change
the terms of the loan accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to this condition:
5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower. [33]
We reject petitioners submission that only Sta. Ines as the borrower, not respondent, was entitled to be notified of any modification in the original
loan accommodation.[34] Following the banks reasoning, such modification would not be valid as to Sta. Ines if no notice were given; but would still be valid
as to respondent to whom no notice need be given. The latters liability would thus be more burdensome than that of the former. Such untenable theory is
contrary to the principle that a surety cannot assume an obligation more onerous than that of the principal. [35]
The present controversy must be distinguished from Philamgen v. Mutuc,[36] in which the Court sustained a stipulation whereby the surety consented
to be bound not only for the specified period, but to any extension thereafter made, an extension x x x that could be had without his having to be notified.
In that case, the surety agreement contained this unequivocal stipulation: It is hereby further agreed that in case of any extension of renewal of the
bond, we equally bind ourselves to the Company under the same terms and conditions as herein provided without the necessity of executing another
indemnity agreement for the purpose and that we hereby equally waive our right to be notified of any renewal or extension of the bond which may be granted
under this indemnity agreement.
In the present case, there is no such express stipulation. At most, the alleged basis of respondents waiver is vague and uncertain. It confers no clear
authorization on the bank orSta. Ines to modify or extend the original obligation without the consent of the surety or notice thereto.
Continuing Surety

Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner maintains that there was no need for respondent to
execute another surety contract to secure the 1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the scope of the principal
obligation inordinately.[37] In Dino v. CA,[38] the Court held that 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.
To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the credit accommodation: (1) that the obligation
should not exceed P8 million, and (2) that the accommodation should expire not later than November 30, 1981. Hence, it was a continuing surety only in
regard to loans obtained on or before the aforementioned expiry date and not exceeding the total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on November 26, 1991. It did not secure the subsequent loans,
purportedly under the 1980 credit accommodation, that were obtained in 1986. Certainly, he could not have guaranteed the 1989 Loan Agreement, which
was executed after November 30, 1981 and which exceeded the stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan obtained after the payment of the original one, which
was covered by a continuing surety agreement. At the risk of being repetitious, we hold that in Dino, the surety Agreement specifically provided that each
suretyship is a continuing one which shall remain in full force and effect until this bank is notified of its revocation. Since the bank had not been notified of
such revocation, the surety was held liable even for the subsequent obligations of the principal borrower.
No similar provision is found in the present case. On the contrary, respondents liability was confined to the 1980 credit accommodation, the amount
and the expiry date of which were set down in the Credit Approval Memorandum.
Special Nature of the JSS

It is a common banking practice to require the JSS (joint and solidary signature) of a major stockholder or corporate officer, as an additional security
for loans granted to corporations. There are at least two reasons for this. First, in case of default, the creditors recourse, which is normally limited to the
corporate properties under the veil of separate corporate personality, would extend to the personal assets of the surety. Second, such surety would be
compelled to ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the corporation.
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. Verily, he was not in a position then to ensure the payment of the obligation.Neither did he have any reason to bind himself further to a bigger
and more onerous obligation.
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. Since that Loan Agreement constituted a new indebtedness, the old loan having been already
liquidated, the spirit of fair play should have impelled Sta. Ines to ask somebody else to act as a surety for the new loan.
 In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who was in a position to ensure the payment of the
loan. Even a perfunctory attempt at credit investigation would have revealed that respondent was no longer connected with the corporation at the time. As
it is, the bank is now relying on an unclear Indemnity Agreement in order to collect an obligation that could have been secured by a fairly obtained surety. For
its defeat in this litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under the 1980 P8 million credit accommodation. Hence, the
Indemnity Agreement, which had been an accessory to the 1980 credit accommodation, was also extinguished. Furthermore, we reject petitioners
submission that respondent waived his right to be notified of, or to give consent to, any modification or extension of the 1980 credit accommodation.
In this light, we find no more need to resolve the issue of whether the loan obtained before the expiry date of the credit accommodation has been
paid.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner. SO ORDERED.

ESTRELLA PALMARES, petitioner, vs. COURT OF APPEALS and M.B. LENDING CORPORATION, respondents. G.R. No. 126490 March 31, 1998
REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the principal debtor in case the latter defaults
in the payment of the loan, is such undertaking of the former deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the
solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation extended a loan to the spouses Osmea and Merlyn
Azarraga, together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with compounded interest at the
rate of 6% per annum to be computed every 30 days from the date thereof.1 On four occasions after the execution of the promissory note and even after
the loan matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were
made after the last payment on September 26, 1991.2
Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent corporation filed a complaint3 against petitioner
Palmares as the lone party-defendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter.
In her Amended Answer with Counterclaim,4 petitioner alleged that sometime in August 1990, immediately after the loan matured, she offered to settle the
obligation with respondent corporation but the latter informed her that they would try to collect from the spouses Azarraga and that she need not worry
about it; that there has already been a partial payment in the amount of P17,010.00; that the interest of 6% per month compounded at the same rate per
month, as well as the penalty charges of 3% per month, are usurious and unconscionable; and that while she agrees to be liable on the note but only upon
default of the principal debtor, respondent corporation acted in bad faith in suing her alone without including the Azarragas when they were the only ones
who benefited from the proceeds of the loan.
During the pre-trial conference, the parties submitted the following issues for the resolution of the trial court: (1) what the rate of interest, penalty and
damages should be; (2) whether the liability of the defendant (herein petitioner) is primary or subsidiary; and (3) whether the defendant Estrella Palmares is
only a guarantor with a subsidiary liability and not a co-maker with primary liability.5
Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the memoranda to be submitted by them. On November 26,
1992, the Regional Trial Court of Iloilo City, Branch 23, rendered judgment dismissing the complaint without prejudice to the filing of a separate action for a
sum of money against the spouses Osmea and Merlyn Azarraga who are primarily liable on the instrument.6 This was based on the findings of the court a
quo that the filing of the complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga spouses, amounted to a discharge of a prior
party; that the offer made by petitioner to pay the obligation is considered a valid tender of payment sufficient to discharge a person's secondary liability on
the instrument; as co-maker, is only secondarily liable on the instrument; and that the promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered judgment declaring herein petitioner Palmares liable to pay
respondent corporation:
1. The sum of P13,700.00 representing the outstanding balance still due and owing with interest at six percent (6%) per month computed from
the date the loan was contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding balance;
3. Attorney's fees at 25% of the total amount due per stipulations;
4. Plus costs of suit.7
Contrary to the findings of the trial court, respondent appellate court declared that petitioner Palmares is a surety since she bound herself to be jointly and
severally or solidarily liable with the principal debtors, the Azarraga spouses, when she signed as a co-maker. As such, petitioner is primarily liable on the note
and hence may be sued by the creditor corporation for the entire obligation. It also adverted to the fact that petitioner admitted her liability in her Answer
although she claims that the Azarraga spouses should have been impleaded. Respondent court ordered the imposition of the stipulated 6% interest and 3%
penalty charges on the ground that the Usury Law is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it rationalized that even if the
promissory note were to be considered as a contract of adhesion, the same is not entirely prohibited because the one who adheres to the contract is free to
reject it entirely; if he adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable to pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do not establish Palmares' solidary liability.
2. The promissory note contains provisions which establish the co-maker's liability as that of a guarantor.
3. There is no sufficient basis for concluding that Palmares' liability is solidary.
4. The promissory note is a contract of adhesion and should be construed against M. B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly imposing the interests and penalty charges on the outstanding
balance of the promissory note.
The foregoing contentions of petitioner are denied and contradicted in their material points by respondent corporation. They are further refuted by accepted
doctrines in the American jurisdiction after which we patterned our statutory law on surety and guaranty. This case then affords us the opportunity to make
an extended exposition on the ramifications of these two specialized contracts, for such guidance as may be taken therefrom in similar local controversies in
the future.
The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:
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.8
Petitioner contends that the provisions of the second and third paragraph are conflicting in that while the second paragraph seems to define her liability as
that of a surety which is joint and solidary with the principal maker, on the other hand, under the third paragraph her liability is actually that of a mere
guarantor because she bound herself to fulfill the obligation only in case the principal debtor should fail to do so, which is the essence of a contract of
guaranty. More simply stated, although the second paragraph says that she is liable as a surety, the third paragraph defines the nature of her liability as that
of a guarantor. According to petitioner, these are two conflicting provisions in the promissory note and the rule is that clauses in the contract should be
interpreted in relation to one another and not by parts. In other words, the second paragraph should not be taken in isolation, but should be read in relation
to the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers that she could be held liable only as a guarantor for several
reasons. First, the words "jointly and severally or solidarily liable" used in the second paragraph are technical and legal terms which are not fully appreciated
by an ordinary layman like herein petitioner, a 65-year old housewife who is likely to enter into such transactions without fully realizing the nature and extent
of her liability. On the contrary, the wordings used in the third paragraph are easier to comprehend. Second, the law looks upon the contract of suretyship
with a jealous eye and the rule is that the obligation of the surety cannot be extended by implication beyond specified limits, taking into consideration the
peculiar nature of a surety agreement which holds the surety liable despite the absence of any direct consideration received from either the principal obligor
or the creditor. Third, the promissory note is a contract of adhesion since it was prepared by respondent M.B. Lending Corporation. The note was brought to
petitioner partially filled up, the contents thereof were never explained to her, and her only participation was to sign thereon. Thus, any apparent ambiguity in
the contract should be strictly construed against private respondent pursuant to Art. 1377 of the Civil Code.9
Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the third paragraph of the promissory note to be that of a
guarantor.
Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the principal debtors cannot be considered in default in the
absence of a judicial or extrajudicial demand. It is true that the complaint alleges the fact of demand, but the purported demand letters were never attached
to the pleadings filed by private respondent before the trial court. And, while petitioner may have admitted in her Amended Answer that she received a
demand letter from respondent corporation sometime in 1990, the same did not effectively put her or the principal debtors in default for the simple reason
that the latter subsequently made a partial payment on the loan in September, 1991, a fact which was never controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of P2,745,483.39 in favor of private respondent when, in truth and in fact,
the outstanding balance of the loan is only P13,700.00. Where the interest charged on the loan is exorbitant, iniquitous or unconscionable, and the obligation
has been partially complied with, the court may equitably reduce the penalty10 on grounds of substantial justice. More importantly, respondent corporation
never refuted petitioner's allegation that immediately after the loan matured, she informed said respondent of her desire to settle the obligation. The court
should, therefore, mitigate the damages to be paid since petitioner has shown a sincere desire for a compromise.11
After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the petition for lack of merit, but to except therefrom the issue
anent the propriety of the monetary award adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory note executed between the parties is a contract of adhesion, it has
been the consistent holding of the Court that contracts of adhesion are not invalid per se and that on numerous occasions the binding effects thereof have
been upheld. The peculiar nature of such contracts necessitate a close scrutiny of the factual milieu to which the provisions are intended to apply. Hence, just
as consistently and unhesitatingly, but without categorically invalidating such contracts, the Court has construed obscurities and ambiguities in the restrictive
provisions of contracts of adhesion strictly albeit not unreasonably against the drafter thereof when justified in light of the operative facts and surrounding
circumstances.12 The factual scenario obtaining in the case before us warrants a liberal application of the rule in favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such
case the contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties,
the literal meaning of its stipulation shall control.13 In the case at bar, petitioner expressly bound herself to be jointly and severally or 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.
Her pretension that the terms "jointly and severally or solidarily liable" contained in the second paragraph of her contract are technical and legal terms which
could not be easily understood by an ordinary layman like her is diametrically opposed to her manifestation in the contract that she "fully understood the
contents" of the promissory note and that she is "fully aware" of her solidary liability with the principal maker. Petitioner admits that she voluntarily affixed
her signature thereto; ergo, she cannot now be heard to claim otherwise. Any reference to the existence of fraud is unavailing. Fraud must be established by
clear and convincing evidence, mere preponderance of evidence not even being adequate. Petitioner's attempt to prove fraud must, therefore, fail as it was
evidenced only by her own uncorroborated and, expectedly, self-serving allegations.14
Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped to assert that she did so under a misapprehension or
in ignorance of their legal effect, or as to the legal effect of the undertaking.15 The rule that ignorance of the contents of an instrument does not ordinarily
affect the liability of one who signs it also applies to contracts of suretyship. And the mistake of a surety as to the legal effect of her obligation is ordinarily no
reason for relieving her of liability.16
Petitioner would like to make capital of the fact that although she obligated herself to be jointly and severally liable with the principal maker, her liability is
deemed restricted by the provisions of the third paragraph of her contract wherein she agreed "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," which makes her contract one of guaranty and
not suretyship. The purported discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor.17 A suretyship is an undertaking that the debt shall be paid;
a guaranty, an undertaking that the debtor shall pay.18 Stated differently, a surety promises to pay the principal's debt if the principal will not pay, while a
guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay.19 A surety binds
himself to perform if the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal will pay,
but simply that he is able to do so.20 In other words, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes
default, while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor.21
Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove it from the ambit of a contract of suretyship. The
second and third paragraphs of the aforequoted portion of the promissory note do not contain any other condition for the enforcement of respondent
corporation's right against petitioner. 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. A contract of suretyship, to repeat, is that wherein one lends his credit by
joining in the principal debtor's obligation, so as to render himself directly and primarily responsible with him, and without reference to the solvency of the
principal.22
In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule on strictissimi juris, which holds that when the meaning of a
contract of indemnity or guaranty has once been judicially determined under the rule of reasonable construction applicable to all written contracts, then the
liability of the surety, under his contract, as thus interpreted and construed, is not to be extended beyond its strict meaning.23 The rule, however, will apply
only after it has been definitely ascertained that the contract is one of suretyship and not a contract of guaranty. It cannot be used as an aid in
determining whether a party's undertaking is that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, 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. Resultantly, the
theory advanced by petitioner, that she is merely a guarantor because her liability attaches only upon default of the principal debtor, must necessarily fail for
being incongruent with the judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall also be principally
considered.24 Several attendant factors in that genre lend support to our finding that petitioner is a surety. For one, 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, in her mind, she knew
that she was directly and primarily liable upon default of her principal. For another, and this is most revealing, 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.25 This can only be
construed to mean that the payments made by the principal debtors were considered by respondent corporation as creditable directly upon the account and
inuring to the benefit of petitioner. The concomitant and simultaneous compliance of petitioner's obligation with that of her principals only goes to show that,
from the very start, petitioner considered herself equally bound by the contract of the principal makers.
In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the principal,26 and as such is deemed an original promisor
and debtor from the beginning.27 This is because in suretyship there is but one contract, and the surety is bound by the same agreement which binds the
principal.28 In essence, the contract of a surety starts with the agreement,29 which is precisely the situation obtaining in this case before the Court.
It will further be observed that petitioner's undertaking as co-maker immediately follows the terms and conditions stipulated between respondent
corporation, as creditor, and the principal obligors. 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.30 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.31 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.32
There is no merit in petitioner's contention that the complaint was prematurely filed because the principal debtors cannot as yet be considered in default,
there having been no judicial or extrajudicial demand made by respondent corporation. Petitioner has agreed that respondent corporation may demand
payment of the loan from her in case the principal maker defaults, subject to the same conditions expressed in the promissory note. Significantly, paragraph
(G) of the note states that "should I fail to pay in accordance with the above schedule of payment, I hereby waive my right to notice and demand." Hence,
demand by the creditor is no longer necessary in order that delay may exist since the contract itself already expressly so declares.33 As a surety, petitioner is
equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the commencement of the suit is a sufficient
demand.34 On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal's default.
Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the
surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal's default and to
perform the obligation. He cannot complain that the creditor has not notified
him in the absence of a special agreement to that effect in the contract of suretyship.35
The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by not attaching copies thereof to its pleadings, is likewise
immaterial. In the absence of a statutory or contractual requirement, it is not necessary that payment or performance of his obligation be first demanded of
the principal, especially where demand would have been useless; nor is it a requisite, before proceeding against the sureties, that the principal be called on to
account.36 The underlying principle therefor is that a suretyship is a direct contract to pay the debt of another. A surety is liable as much as his principal is
liable, and absolutely liable as soon as default is made, without any demand upon the principal whatsoever or any notice of default.37 As an original promisor
and debtor from the beginning, he is held ordinarily to know every default of his principal.38
Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of the principal debtors who allegedly were the only ones who
benefited from the proceeds of the loan. What petitioner is trying to imply is that the creditor, herein respondent corporation, should have proceeded first
against the principal before suing on her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently of his right to proceed against the principal.39 Under Article 1216 of the Civil Code, the
creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and
several, the creditor has the right to proceed even against the surety alone.40 Since, generally, it is not necessary for the creditor to proceed against a principal
in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same that of the principal, then soon as the principal
is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal.41 Perforce, in
accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper remedy is to pay
the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the
application of the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal,
particularly where both principal and surety are equally bound.42
We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not release her from liability. Where a
creditor refrains from proceeding against the principal, the surety is not exonerated. In other words, mere want of diligence or forbearance does not affect
the creditor's rights vis-a-vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the
principal does not discharge the surety whether given at the principal's request or without it, and whether it is yielded by the creditor through sympathy or
from an inclination to favor the principal, or is only the result of passiveness. The neglect of the creditor to sue the principal at the time the debt falls due
does not discharge the surety, even if such delay continues until the principal becomes insolvent.43 And, in the absence of proof of resultant injury, a surety is
not discharged by the creditor's mere statement that the creditor will not look to the surety,44 or that he need not trouble himself.45 The consequences of the
delay, such as the subsequent insolvency of the principal,46 or the fact that the remedies against the principal may be lost by lapse of time, are immaterial.47
The raison d'tre for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time.48 At any rate, if the surety is
dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the
rights and remedies of the creditor.49
It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in the time when the debt might be
demanded, does not constitute an extension of the time of payment, which would release the surety.50 In order to constitute an extension discharging the
surety, it should appear that the extension was for a definite period, pursuant to an enforceable agreement between the principal and the creditor, and that it
was made without the consent of the surety or with a reservation of rights with respect to him. The contract must be one which precludes the creditor from,
or at least hinders him in, enforcing the principal contract within the period during which he could otherwise have enforced it, and which precludes the surety
from paying the debt.51
None of these elements are present in the instant case. Verily, the mere fact that respondent corporation gave the principal debtors an extended period of
time within which to comply with their obligation did not effectively absolve here in petitioner from the consequences of her undertaking. Besides, the
burden is on the surety, herein petitioner, to show that she has been discharged by some act of the creditor,52 herein respondent corporation, failing in which
we cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty charges on the outstanding balance of the loan cannot be
imposed for being illegal and unconscionable. Petitioner additionally theorizes that respondent corporation intentionally delayed the collection of the loan in
order that the interests and penalty charges would accumulate. The statement, likewise traversed by said respondent, is misleading.
In an affidavit53 executed by petitioner, which was attached to her petition, she stated, among others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan has been released and that she has not paid the same upon
its maturity. I received a telephone call from Mr. Augusto Banusing of MB Lending informing me of this fact and of my liability arising from the
promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmea Azarraga. At the same time, I offered to pay MB Lending the
outstanding balance of the principal obligation should he fail to collect from Merlyn and Osmea Azarraga. Mr. Banusing advised me not to worry
because he will try to collect first from Merlyn and Osmea Azarraga.
10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that the loan of Merlyn and Osmea Azarraga,
together with interest and penalties thereon, has not been paid. Since I had no available funds at that time, I offered to pay MB Lending by
delivering to them a parcel of land which I own. Mr. Banusing's secretary, however, refused my offer for the reason that they are not interested in
real estate.
11. In March 1992, I received a copy of the summons and of the complaint filed against me by MB Lending before the RTC-Iloilo. After learning
that a complaint was filed against me, I instructed Sheila Gatia to go to MB Lending and reiterate my first offer to pay the outstanding balance of
the principal obligation of Merlyn Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the outstanding balance of the principal obligation loan
(sic) of Merlyn and Osmea Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order to effectively discharge her from liability. There are a
number of circumstances which conjointly inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately demanding payment from petitioner. It was petitioner who initially requested that the
creditor try to collect from her principal first, and she offered to pay only in case the creditor fails to collect. The delay, if any, was occasioned by the fact that
respondent corporation merely acquiesced to the request of petitioner. At any rate, there was here no actual offer of payment to speak of but only a
commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she owned. Respondent corporation was acting well within its
rights when it refused to accept the offer. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same
value, or more valuable than that which is due.54 The obligee is entitled to demand fulfillment of the obligation or performance as stipulated. A change of the
object of the obligation would constitute novation requiring the express consent of the parties.55
3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding balance of the obligation in the amount of P30,000.00 but
the same was likewise rejected. Again, respondent corporation cannot be blamed for refusing the amount being offered because it fell way below the amount
it had computed, based on the stipulated interests and penalty charges, as owing and due from herein petitioner. A debt shall not be understood to have
been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be.56 In other words, the
prestation must be fulfilled completely. A person entering into a contract has a right to insist on its performance in all particulars.57
Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because the moment the latter accepts the performance,
knowing its incompleteness or irregularity, and without expressing any protest or objection, then the obligation shall be deemed fully complied
with.58 Precisely, this is what respondent corporation wanted to avoid when it continually refused to settle with petitioner at less than what was actually due
under their contract.
This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and attorney's fees equivalent to 25% of the total amount due
are highly inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already been paid even before the filing of the present
case. Article 1229 of the Civil Code provides that the court shall equitably reduce the penalty when the principal obligation has been partly or irregularly
complied with by the debtor. And, even if there has been no performance, the penalty may also be reduced if it is iniquitous or leonine.
In a case previously decided by this Court which likewise involved private respondent M.B. Lending Corporation, and which is substantially on all fours with
the one at bar, we decided to eliminate altogether the penalty interest for being excessive and unwarranted under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty interest of three percent (3 %)
per month on total amount due but unpaid should be equitably reduced. The purpose for which the penalty interest is intended that is, to
punish the obligor will have been sufficiently served by the effects of compounded interest. Under the exceptional circumstances in the case at
bar, e.g., the original amount loaned was only P15,000.00; partial payment of P8,600.00 was made on due date; and the heavy (albeit still lawful)
regular compensatory interest, the penalty interest stipulated in the parties' promissory note is iniquitous and unconscionable and may be
equitably reduced further by eliminating such penalty interest altogether.59
Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has previously ruled that even with an agreement thereon between the parties, the court may
nevertheless reduce such attorney's fees fixed in the contract when the amount thereof appears to be unconscionable or unreasonable.60 To that end, it is
not even necessary to show, as in other contracts, that it is contrary to morals or public policy.61 The grant of attorney's fees equivalent to 25% of the total
amount due is, in our opinion, unreasonable and immoderate, considering the minimal unpaid amount involved and the extent of the work involved in this
simple action for collection of a sum of money. We, therefore, hold that the amount of P10,000.00 as and for attorney's fee would be sufficient in this case.62
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the penalty interest of 3% per month is hereby deleted
and the award of attorney's fees is reduced to P10,000.00. SO ORDERED.

E. Zobel Inc. v CA, Solidbank, and Sps. Claveria

G.R. No. 113931, March 6, 1998
Topic: Distinction between guaranty and surety
Facts:
Respondents, Sps Claveria under Agro Brokers, applied for a loan with respondent, Solidbank
o 2.8M to purchase 2 barges and 1 tugboat for their molasses business
o Subject to the condition to execute a chattel mortgage over the 3 vessels and a Continuing Guaranty with Ayala Intl Philippines Inc.
(now E. Zobel Inc., petitioner)
Sps defaulted on maturity; Solidbank filed a complaint for sum of money against Sps and Petitioner
Petitioner moved to dismiss claiming that its liability as guarantor is extinguished pursuant to Art. 2080 of the Civil Code; Solidbank opposed
claiming that Art 2080 is not applicable because Petitioner is a surety
o Art. 2080: "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
RTC: E. Zobel signed as surety based on provisions of the document; Art 2080 will not apply
Petitioners MR with CA: Dismissed, no grave abuse of discretion
Hence this Petition for review on certiorari

Issue: WON Petitioner under the Continuing Guaranty obligated itself to Solidbank as guarantor or surety

Ruling: Surety; Art. 2080 does not apply

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.
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the debtor and thus binds himself to pay
if the principal is unable to pay while a surety is the insurer of the debt, and he obligates himself to pay if the principal does not pay.

The terms of the contract categorically obligates petitioner as "surety" to induce Solidbank to extend credit to respondent spouses.
undersigned is now obligated to you as surety and in order to induce you
the undersigned agrees to guarantee, and does hereby guarantee, the punctual payment, at maturity or upon demand, to you of any and all such
instruments, loans, advances, credits and/or other obligations herein before referred to, and also any and all other indebtedness of every kind which is
now or may hereafter become due or owing to you by the Borrower
The contract clearly disclose 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.
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 notice

The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty. Interpretation of the contract is not with the title
but with the content.
Even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel mortgage did not release petitioner from the
obligation because the Continuing Guaranty executed in favor of SOLIDBANK, petitioner bound itself to the contract irrespective of the
existence of any collateral.
the undersigned (petitioner) who hereby agrees to be and remain bound upon this guaranty, irrespective of the existence, value or condition of any
collateral
Held: Denied

25 International Finance Corp. vs. Imperial Textile Mills

November 15, 2005 GR No. 160324
Facts:
- On December 17, 1974 Philippine Polyamide Industrial Corporation (PPIC) made a loan agreement with International Finance Corporation (IFC) in the
amount of $7,000,000.00 payable in 16 semi-annual installments beginning June 1, 1977 to Dec 1, 1984 with an interest rate of 10% per annum
- On the same date, a Guarantee Agreement was executed with Imperial Textile Mills, Inc (ITM), Grand Textile Manufacturing Corp (Grandtex) and IFC
as parties thereto.
- ITM and Grandtex agreed to guarantee PPICs obligations under the loan agreement; PPIC paid the first instalments and asked for rescheduling of the
next instalments but despite the reschedule, PPIC defaulted
- On April 1, 1985, IFC served a written notice of default to PPIC demanding the latter to pay the outstanding principal and the accrued interests; despite
the notice, PPIC failed to pay
- IFC then applied for the extrajudicial foreclosure of the mortgages on the real estate, properties, etc. owned by PPIC located at Calamba, Laguna. The
sheriff then issued a notice of extrajudicial sale and IFC and DBP were the only bidders
 - IFCs bid was P99,269,100 which was equivalent to $5,250,000.00. The outstanding loan however amounting to $8,083,967 thus leaving a balance of
$2,833,967
- PPIC failed to pay the loan and remaining balance. Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding
balance but no payment was made
- On May 20, 1988, IFC filed a complaint against PPIC and ITM for the payment of the outstanding balance plus interests and attorneys fees.
- The trial court held PPIC liable for the payment of the outstanding loan plus interest but the trial court relieved ITM of its obligations as guarantors,
dismissing IFCs complaint against ITM
- The CA reversed the decision of the trial court insofar as the latter exonerated ITM from any obligation to IFC. According to CA, ITM bound itself under
the Guarantee Agreement to pay PPICs obligation upon default
- ITMs liability a guarantor would arise only if and when PPIC could not pay and since PPICs inability to comply with the obligation is not sufficiently
established, ITM could not be mad to assume the liability.
- CA denied the motion, hence the petition.

Issue: WON ITM and Grandtex are sureties and therefore, jointly and severally liable with PPIC, for the payment of the loan

Ruling:
- 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.
- 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.

- The aforementioned provisions refer to Articles 1207 to 1222 of the Civil Code on Joint and Solidary Obligations. Relevant to this case is Article
1216, which states:
The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to those which may subsequently be directed
against the others, so long as the debt has not been fully collected.

- Pursuant to this provision, petitioner (as creditor) was justified in taking action directly against respondent.

Escao v. Ortigas
GR 151953 June 29, 2007
Topic: Where principles of guaranty are applicable to suretyship
Facts
Ortigas, Scholey, Scholey, Escao, Silos, Silverio, Inductivo, Rodriguez, and Matti are stockholders or officers of Falcon, Inc. (Falcon)
Falcon obtained a {loan} (the loan) worth US$ 320,000 from Private Development Corporation of the Philippines (PDCP)
To secure this {loan}, several undertakings were made:
Ortigas, Scholey, and Scholey, in their individual capacity executed an {Assumption of Solidary Liability}
Escao executed a {Guaranty}
Silos, Silverio, Inductivo, and Rodriguez executed another {Guaranty}
A few years later, an agreement developed to cede control of Falcon to Escao, Silos and Matti, wherein:
Ortigas, Scholey and Inductivo, and the heirs of Scholey ( = Party A) {Assigned their shares of stock} to Escao, Silos, and Matti (= Party B), in return
Party B would relieve Party A of their liabilities from their joint, pervious and several undertakings, in particular:
In the express provisions of the 1982 Undertaking (the Undertaking):
Party A is identified as OBLIGORS, while Party B is identified as SURETIES.
Sec.3(c) provides that in the event that any one from Party A is made to pay any amount to PDCP, Party B shall reimburse Party A . . .
Eventually, Falcon defaulted in payment of the loan but there still remained a balance of P5,031,004.07 which Falcon did not satisfy despite demand
Consequently, PDCP filed a collection suit against: Falcon, Escao, Silos, Matti, Silverio, Inductivo, and Ortigas
Ortigas then filed a cross-claim against Falcon, Escao, and Silos
PDCP and some of the defendants to abovementioned suit, independent of each other, sought settlement.
In exchange for the renunciation of adverse claims against them:
Escao paid P1,000,000
Silos paid P500,000
Ortigas paid P1,300,000 (despite the Undertaking)
Ortigas then proceeded to pursue his claims against Escao, Silos and Matti (earlier named as Party B, in the Undertaking) on the basis of the
Undertaking and claimed they:
are liable to Ortigas
that the extent of their liability is Solidary

Issues
Are Escao, Silos and Matti liable to Ortigas by virtue of the Undertaking? -YES

If so, to what extent are they liable? Joint Liability, not Solidary Liability
Do the rights as established and granted to the guarantor by Arts. 2066 (right of indemnification) and 2067 (right of subrogation) apply to a Suretyship* -
Yes

Ruling
 Escao, Silos and Matti are liable to Ortigas by virtue of the Undertaking
Stated in clear terms in Sec.3(c) of the Undertaking
Escao, Silos and Matti are merely jointly liable to Ortigas, and not solidarily liable to Ortigas
Under Art. 1217 NCC, the absence of express stipulation characterizing an obligation as solidary makes the obligation joint.
It is of no moment that in the Undertaking the debtors are identified as SURITIES
Such, is not sufficient to establish a suretyship
Art. 2047 specifically calls for the application of the provisions on joint and solidary obligations to suretyship contracts
The Court discusses on the difference between a situation of solidary liability and a suretyship
As to credits remedy (same)
In both a solidary obligation and a surety, the Creditor may compel the debtor or the surety to answer for the full amount of the principal
debt; however
As to debtor or suretys remedy (different)
In a solidary obligation, the solidary debtor can only claim from his co-debtors only the share which corresponds to each with interest for
the payment already made and not the full amount
In a suretyship, a surety may claim the full amount, by virtue of his right to subrogation and his right to indemnity
The rights as established and granted to the guarantor by Arts. 2066 (right of indemnification) and 2067 (right of subrogation) apply to a Suretyship
If it should be otherwise , there would be no material difference betweena surety as defined under Art. 2047 and solidary debtors, for both classes of
obligors would be governed by exactly the same rules (Note: the Court implicitly is applying the StatCon principle that provisions of law must be given
life and effect; redundancies and surplasages are frowned upon by law, this is done by the Court arguing by analogy)

Ong v. Philippine Commercial International Bank

G.R. No. 160466; January 17, 2005
Topic: Where principles of Guaranty also applicable to Suretyship
Petitioners: Sps. Alfredo and Susana Ong
Respondent: Philippine Commercial International Bank
Facts:
Baliwag Mahogany Corporation (BMC) manufactures and exports finished wood products. Alfredo is the President and Susana is the Treasurer
Apr 20, 1992: PCIB (now Equitable-PCI Bank) filed a case for collection of a sum of money against petitioners
o spouses liable as sureties on 3 PNs they issued to secure some of BMCs loans (P5M total) for additional capital
o Under the terms of the PNs, it was stipulated that PCIB may consider debtor BMC in default and demand payment of the remaining
balance of the loan upon the levy, attachment or garnishment of any of its properties, or upon BMCs insolvency, or if it is declared
to be in a state of suspension of payments
Nov 22, 1991: BMC filed a petition for rehabilitation and suspension of payments with the Securities and Exchange Commission (SEC) after its
properties were attached by creditors. PCIB considered BMC in default of its obligations and sought to collect payment from petitioners as
sureties
Oct 13, 1992: a Memorandum of Agreement (MOA) was executed by BMC, the petitioners as President and Treasurer, and the consortium of
creditor banks of BMC (of which PCIB is included).
Thereafter, petitioners moved to dismiss the complaint
o SEC declared the principal debtor BMC in a state of suspension of payments
o under the MOA, the creditor banks agreed to temporarily suspend any pending civil action against BMC
o benefits of the MOA should be extended to petitioners (as BMCs sureties)
Art 2081 provides that: the guarantor may set up against the creditor all the defenses which pertain to the principal
debtor and are inherent in the debt xxx
o PCIB is barred from pursuing its collection case filed against them
compelling them to pay is contrary to Art 2063 (a compromise between the creditor and principal debtor benefits
the guarantor and should not prejudice the latter).
Trial Court and CA denied the motion to dismiss. Creditor can proceed against petitioners as surety independently of its right to proceed against
the principal debtor
Issue: WON the benefit of the MOA extends to them as debtors
Ruling: No, it doesnt. Petition DENIED.
Held:
Reliance of petitioners on Art 2063 and 2081 is misplaced
o these provisions refer to contracts of guaranty. They do NOT apply to suretyship contracts
o Petitioners are not guarantors but sureties of BMCs debts
Differences in the rights and liabilities of a guarantor and a surety
o GUARANTOR insures the solvency of the debtor
gives rise to a subsidiary obligation on the part of the guarantor.
EXCUSSION: only after the creditor has proceeded against the properties of the principal debtor and the debt remains
unsatisfied can a guarantor can be held liable to answer
o SURETY is an insurer of the debt itself
Gives rise to a principal/solidary obligation on the part of the surety
the benefit of excussion is not available to the surety as he is principally liable
1216: creditor can go directly against the surety although the principal debtor is solvent/able to pay or no demand is
made on him
surety is directly, equally and absolutely bound with the principal debtor for the payment of the debt and is deemed as
an original promissor and debtor from the beginning
The provisions of the MOA regarding the suspension of payments by BMC and the non-filing of collection suits by the creditor banks pertain
only to the property of the principal debtor BMC
o in the rehabilitation receivership filed by BMC, only the properties of BMC were
o nothing in the MOA that involves the liabilities of the sureties
o MOA was approved by the SEC, whose jurisdiction is limited only to corporations and corporate assets

27 MANILA SURETY vs. BATU digest

FACTS:
Batu Construction Company requested Manila Surety to place a surety bond in favor of the Republic of the Philippines for a construction project
of Bacarra Bridge.
 One of the conditions was that it would indemnify the defendant company would indemnify Manila surety for any damage, loss, costs, or charges,
or expenses of whatever kind in nature.
Because of unsatisfactory work on the said construction project, the government annulled the said work and notified plaintiff company that the
government would hold it liable for any amount incurred by the government in building said bridge.
Fernandez et. al. brought an action against Batu, the individual partners and herein plaintiff for collection of unpaid wages amounting to P5960.
Plaintiff in turn files a writ of attachment against Batus properties and that after the hearing, that the defendants deliver to them their respective
securities that they availed of.

ISSUE: Whether or not the last paragraph of Article 2071 may be availed of by a Surety?

HELD: Case is remanded to the lower court.

The Supreme Court held that the plaintiffs cause of action does not fall within paragraph 2 and other subsequent paragraphs of the said article
for there is no proof of the defendants insolvency. The fact that the contract was annulled because of lack of progress in the construction of the
bridge is no proof of insolvency. The defendants have also not bounded themselves to relieve the plaintiff from the guaranty within a specified
period which has already expired because the surety bond does not fic any period of time and the indemnity agreement stipulates one year
extendible or renewable until the bond be completely cancelled by the person or entity whose behalf the bond was executed by a court of
competent jurisdiction

ESCANO v. ORTIGAS SUPRA

G.R. No. 89775 November 26, 1992

JACINTO UY DIO and NORBERTO UY, petitioners, vs. HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY, respondents.
DAVIDE, JR., J.:
Continuing Suretyship Agreements signed by the petitioners set off this present controversy.
Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No. 17724 1 which reversed the 2 December 1987 Decision of Branch 45 of the
Regional Trial Court (RTC) of Manila in a collection suit entitled "Metropolitan Bank and Trust Company vs. Uy Tiam, doing business under the name of "UY
TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto Uy Dio and Norberto Uy" and docketed as Civil Case No. 82-9303. They likewise challenge public
respondent's Resolution of 21 August 1989 2 denying their motion for the reconsideration of the former.
The impugned Decision of the Court summarizes the antecedent facts as follows:
It appears that in 1977, Uy Tiam Enterprises and Freight Services (hereinafter referred to as UTEFS), thru its representative Uy Tiam, applied for
and obtained credit accommodations (letter of credit and trust receipt accommodations) from the Metropolitan Bank and Trust Company
(hereinafter referred to as METROBANK) in the sum of P700,000.00 (Original Records, p. 333). To secure the aforementioned credit
accommodations Norberto Uy and Jacinto Uy Dio executed separate Continuing Suretyships (Exhibits "E" and "F" respectively), dated 25 February
1977, in favor of the latter. Under the aforesaid agreements, Norberto Uy agreed to pay METROBANK any indebtedness of UTEFS up to the
aggregate sum of P300,000.00 while Jacinto Uy Dio agreed to be bound up to the aggregate sum of P800,000.00.
Having paid the obligation under the above letter of credit in 1977, UTEFS, through Uy Tiam, obtained another credit accommodation from
METROBANK in 1978, which credit accommodation was fully settled before an irrevocable letter of credit was applied for and obtained by the
abovementioned business entity in 1979 (September 8, 1987, tsn, pp. 14-15).
The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum of P815, 600.00, covered UTEFS' purchase of "8,000 Bags
Planters Urea and 4,000 Bags Planters 21-0-0." It was applied for and obtain by UTEFS without the participation of Norberto Uy and Jacinto Uy Dio
as they did not sign the document denominated as "Commercial Letter of Credit and Application." Also, they were not asked to execute any
suretyship to guarantee its payment. Neither did METROBANK nor UTEFS inform them that the 1979 Letter of Credit has been opened and the
Continuing Suretyships separately executed in February, 1977 shall guarantee its payment (Appellees brief, pp. 2-3; rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid Planters Products the amount of P815,600.00 which payment was
covered by a Bill of Exchange (Exhibit "C"), dated 4 June 1979, in favor of (Original Records, p. 331).
Pursuant to the above commercial transaction, UTEFS executed and delivered to METROBANK and Trust Receipt (Exh. "D"), dated 4 June 1979,
whereby the former acknowledged receipt in trust from the latter of the aforementioned goods from Planters Products which amounted to P815,
600.00. Being the entrusted, the former agreed to deliver to METROBANK the entrusted goods in the event of non-sale or, if sold, the proceeds of
the sale thereof, on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt. As a consequence, METROBANK sent letters to the said
principal obligor and its sureties, Norberto Uy and Jacinto Uy Dio, demanding payment of the amount due. Informed of the amount due, UTEFS
made partial payments to the Bank which were accepted by the latter.
Answering one of the demand letters, Dio, thru counsel, denied his liability for the amount demanded and requested METROBANK to send
him copies of documents showing the source of his liability. In its reply, the bank informed him that the source of his liability is the Continuing
Suretyship which he executed on February 25, 1977.
As a rejoinder, Dio maintained that he cannot be held liable for the 1979 credit accommodation because it is a new obligation contracted
without his participation. Besides, the 1977 credit accommodation which he guaranteed has been fully paid.
Having sent the last demand letter to UTEFS, Dio and Uy and finding resort to extrajudicial remedies to be futile, METROBANK filed a
complaint for collection of a sum of money (P613,339.32, as of January 31, 1982, inclusive of interest, commission penalty and bank charges) with a
prayer for the issuance of a writ of preliminary attachment, against Uy Tiam, representative of UTEFS and impleaded Dio and Uy as parties-
defendants.
The court issued an order, dated 29 July 1983, granting the attachment writ, which writ was returned unserved and unsatisfied as defendant
Uy Tiam was nowhere to be found at his given address and his commercial enterprise was already non-operational (Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Dio (sureties-defendant herein) filed a motion to dismiss the complaint on the ground of lack of
cause of action. They maintained that the obligation which they guaranteed in 1977 has been extinguished since it has already been paid in the
same year. Accordingly, the Continuing Suretyships executed in 1977 cannot be availed of to secure Uy Tiam's Letter of Credit obtained in 1979
because a guaranty cannot exist without a valid obligation. It was further argued that they can not be held liable for the obligation contracted in
1979 because they are not privies thereto as it was contracted without their participation (Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to the motion to dismiss. Invoking the terms and conditions embodied in the
comprehensive suretyships separately executed by sureties-defendants, the bank argued that sureties-movants bound themselves as solidary
obligors of defendant Uy Tiam to both existing obligations and future ones. It relied on Article 2053 of the new Civil Code which provides: "A
guaranty may also be given as security for future debts, the amount of which is not yet known; . . . ." It was further asserted that the agreement was
in full force and effect at the time the letter of credit was obtained in 1979 as sureties-defendants did not exercise their right to revoke it by giving
notice to the bank. (Ibid., pp. 51-54).
Meanwhile, the resolution of the aforecited motion to dismiss was held in abeyance pending the introduction of evidence by the parties as per
order dated February 21, 1986 (Ibid., p. 71).
Having been granted a period of fifteen (15) days from receipt of the order dated March 7, 1986 within which to file the answer, sureties-
defendants filed their responsive pleading which merely rehashed the arguments in their motion to dismiss and maintained that they are entitled to
the benefit of excussion (Original Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the complaint against defendant Uy Tiam on the ground that it has no information as
to the heirs or legal representatives of the latter who died sometime in December, 1986, which motion was granted on the following day (Ibid., pp.
180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion of which reads:
The evidence and the pleadings, thus, pose the querry (sic):
Are the defendants Jacinto Uy Dioand Norberto Uy liable for the obligation contracted by Uy Tiam under the Letter of
Credit (Exh. B) issued on March 30, 1987 by virtue of the Continuing Suretyships they executed on February 25, 1977?
 Under the admitted proven facts, the Court finds that they are not.
a) When Uy and Dio executed the continuing suretyships, exhibits E and F, on February 25, 1977, Uy Tiam was obligated to
the plaintiff in the amount of P700,000.00 and this was the obligation which both obligation which both defendants
guaranteed to pay. Uy Tiam paid this 1977 obligation and such payment extinguished the obligation they assumed as
guarantors/sureties.
b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter of Credit which covered the 1977 account of Uy Tiam.
Thus, the obligation under either is apart and distinct from the obligation created in the other as evidenced by the fact
that Uy Tiam had to apply anew for the 1979 transaction (Exh. A). And Dio and Uy, being strangers thereto, cannot be
answerable thereunder.
c) The plaintiff did not serve notice to the defendants Dio and Uy when it extended to Credit at least to inform them that
the continuing suretyships they executed on February 25, 1977 will be considered by the plaintiff to secure the 1979
transaction of Uy Tiam.
d) There is no sufficient and credible showing that Dio and Uy were fully informed of the import of the Continuing
Suretyships when they affixed their signatures thereon that they are thereby securing all future obligations which Uy
Tiam may contract the plaintiff. On the contrary, Dio and Uy categorically testified that they signed the blank forms in the
office of Uy Tiam at 623 Asuncion Street, Binondo, Manila, in obedience to the instruction of Uy Tiam, their former
employer. They denied having gone to the office of the plaintiff to subscribe to the documents (October 1, 1987, tsn, pp. 5-
7, 14; October 15, 1987, tsn, pp. 3-8, 13-16). (Records, pp. 333-334). 3
xxx xxx xxx
In its Decision, the trial court decreed as follows:
PREMISES CONSIDERED, judgment is hereby rendered:
a) dismissing the COMPLAINT against JACINTO UY DIO and NORBERTO UY;
b) ordering the plaintiff to pay to Dio and Uy the amount of P6,000.00 as attorney's fees and expenses of litigation; and
c) denying all other claims of the parties for want of legal and/or factual basis.
SO ORDERED. (Records, p. 336) 4
From the said Decision, the private respondent appealed to the Court of Appeals. The case was docketed as CA-G.R. CV No. 17724. In support thereof, it
made the following assignment of errors in its Brief:
I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND HOLDING THAT DEFENDANTS-APPELLEES JACINTO UY DIO AND
NORBERTO UY ARE SOLIDARILY LIABLE TO PLAINTIFF-APPELLANT FOR THE OBLIGATION OF DEFENDANT UY TIAM UNDER THE
LETTER OF CREDIT ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE CONTINUING SURETYSHIPS THEY EXECUTED ON FEBRUARY 25,
1977.
II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT IS ANSWERABLE TO DEFENDANTS-APPELLEES JACINTO UY
DIO AND NORBERTO UY FOR ATTORNEY'S FEES AND EXPENSES OF LITIGATION. 5
On 22 June 1989, public respondent promulgated the assailed Decision the dispositive portion of which reads:
WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED AND SET, ASIDE. In lieu thereof, another one
is rendered:
1) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and severally, to appellant
METROBANK the amount of P2,397,883.68 which represents the amount due as of July 17, 1987 inclusive of
principal, interest and charges;
2) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and severally, appellant METROBANK
the accruing interest, fees and charges thereon from July 18, 1987 until the whole monetary obligation is paid; and
3) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and severally, to plaintiff P20,000.00 as
attorney's fees.
With costs against appellees.
SO ORDERED. 6
In ruling for the herein private respondent (hereinafter METROBANK), public respondent held that the Continuing Suretyship Agreements separately
executed by the petitioners in 1977 were intended to guarantee payment of Uy Tiam's outstanding as well as future obligations; each suretyship
arrangement was intended to remain in full force and effect until METROBANK would have been notified of its revocation. Since no such notice was given
by the petitioners, the suretyships are deemed outstanding and hence, cover even the 1979 letter of credit issued by METROBANK in favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing Decision. They questioned the public respondent's construction of the suretyship agreements and its
ruling with respect to the extent of their liability thereunder. They argued the even if the agreements were in full force and effect when METROBANK
granted Uy Tiam's application for a letter of credit in 1979, the public respondent nonetheless seriously erred in holding them liable for an amount over
and above their respective face values.
In its Resolution of 21 August 1989, public respondent denied the motion:
. . . considering that the issues raised were substantially the same grounds utilized by the lower court in rendering judgment for
defendants-appellees which We upon appeal found and resolved to be untenable, thereby reversing and setting aside said
judgment and rendering another in favor of plaintiff, and no new or fresh issues have been posited to justify reversal of Our
decision herein, . . . . 7
Hence, the instant petition which hinges on the issue of whether or not the petitioners may be held liable as sureties for the obligation contracted by Uy
Tiam with METROBANK on 30 May 1979 under and by virtue of the Continuing Suretyship Agreements signed on 25 February 1977.
Petitioners vehemently deny such liability on the ground that the Continuing Suretyship Agreements were automatically extinguished upon payment of the
principal obligation secured thereby, i.e., the letter of credit obtained by Uy Tiam in 1977. They further claim that they were not advised by either
METROBANK or Uy Tiam that the Continuing Suretyship Agreements would stand as security for the 1979 obligation. Moreover, it is posited that to extend
the application of such agreements to the 1979 obligation would amount to a violation of Article 2052 of the Civil Code which expressly provides that a
guaranty cannot exist without a valid obligation. Petitioners further argue that even granting, for the sake of argument, that the Continuing Suretyship
Agreements still subsisted and thereby also secured the 1979 obligations incurred by Uy Tiam, they cannot be held liable for more than what they
guaranteed to pay because it s axiomatic that the obligations of a surety cannot extend beyond what is stipulated in the agreement.
On 12 February 1990, this Court resolved to give due course to the petition after considering the allegations, issues and arguments adduced therein, the
Comment thereon by the private respondent and the Reply thereto by the petitioners; the parties were required to submit their respective Memoranda.
The issues presented for determination are quite simple:
1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to METROBANK by virtue of the Continuing
Suretyship Agreements they separately signed in 1977; and
2. On the assumption that they are, what is the extent of their liabilities for said 1979 obligations.
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not known at the time the guaranty is
executed. 8 This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing guaranty is one which is not limited to a single
transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is
prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a
succession of liabilities, for which, as they accrue, the guarantor becomes liable.9 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. 10 A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the
principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved.
Hence, where the contract of guaranty states that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a
continuing one. 11
In other jurisdictions, it has been held that the use of particular words and expressions such as payment of "any debt," "any indebtedness," "any
deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the principal debtor "at any time," or "on such time" that the
principal debtor may require, have been construed to indicate a continuing guaranty. 12
In the case at bar, the pertinent portion of paragraph I of the suretyship agreement executed by petitioner Uy provides thus:
I. For and in consideration of any existing indebtedness to the BANK of UY TIAM (hereinafter called the "Borrower"), for the payment of which the
SURETY is now obligated to the BANK, either as guarantor or otherwise, and/or in order to induce the BANK, in its discretion, at any time or from
time to time hereafter, to make loans or advances or to extend credit in any other manner to, or at the request, or for the account of the
Borrower, either with or without security, and/or to purchase or discount, or to make any loans or advances evidence or secured by any notes, bills,
receivables, drafts, acceptances, checks, or other instruments or evidences of indebtedness (all hereinafter called "instruments") upon which the
Borrower is or may become liable as maker, endorser, acceptor, or otherwise, the SURETY agrees to guarantee, and does hereby guarantee, the
punctual payment at maturity to the loans, advances credits and/or other obligations hereinbefore referred to, and also any and all other
indebtedness of every kind which is now or may hereafter become due or owing to the BANK by the Borrower, together with any and all expenses
which may be incurred by the BANK in collecting all or any such instruments or other indebtedness or obligations herein before referred to, and/or
in enforcing any rights hereunder, and the SURETY also agrees that the BANK may make or cause any and all such payments to be made strictly in
accordance with the terms and provisions of any agreement(s) express or implied, which has (have) been or may hereafter be made or entered into
by the Borrow in reference thereto, regardless of any law, regulation or decree, unless the same is mandatory and non-waivable in character, nor or
hereafter in effect, which might in any manner affect any of the terms or provisions of any such agreement(s) or the Bank's rights with respect
thereto as against the Borrower, or cause or permit to be invoked any alteration in the time, amount or manner of payment by the Borrower of any
such instruments, obligations or indebtedness; provided, however, that the liability of the SURETY hereunder shall not exceed at any one time the
aggregate principal sum of PESOS: THREE HUNDRED THOUSAND ONLY (P300,000.00) (irrespective of the currenc(ies) in which the obligations
hereby guaranteed are payable), and such interest as may accrue thereon either before or after any maturity(ies) thereof and such expenses as may
be incurred by the BANK as referred to above. 13
Paragraph I of the Continuing Suretyship Agreement executed by petitioner Dio contains identical provisions except with respect to the guaranteed
aggregate principal amount which is EIGHT THOUSAND PESOS (P800,000.00). 14
Paragraph IV of both agreements stipulate that:
VI. This is a continuing guaranty and shall remain in full force and effect until written notice shall have been received by the BANK that it has been
revoked by the SURETY, but any such notice shall not release the SURETY, from any liability as to any instruments, loans, advances or other
obligations hereby guaranteed, which may be held by the BANK, or in which the BANK may have any interest at the time of the receipt (sic) of such
notice. No act or omission of any kind on the BANK'S part in the premises shall in any event affect or impair this guaranty, nor shall same (sic) be
affected by any change which may arise by reason of the death of the SURETY, or of any partner(s) of the SURETY, or of the Borrower, or of the
accession to any such partnership of any one or more new partners. 15
The foregoing stipulations unequivocally reveal that the suretyship agreement in the case at bar are continuing in nature. Petitioners do not deny this; in
fact, they candidly admitted it. Neither have they denied the fact that they had not revoked the suretyship agreements. Accordingly, as correctly held by
the public respondent:
Undoubtedly, the purpose of the execution of the Continuing Suretyships was to induce appellant to grant any application for credit
accommodation (letter of credit/trust receipt) UTEFS may desire to obtain from appellant bank. By its terms, each suretyship is a continuing one
which shall remain in full force and effect until the bank is notified of its revocation.
xxx xxx xxx
When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from appellant bank, for the purpose of obtaining goods (covered by a trust
receipt) from Planters Products, the continuing suretyships were in full force and effect. Hence, even if sureties-appellees did not sign the
"Commercial Letter of Credit and Application, they are still liable as the credit accommodation (letter of credit/trust receipt) was covered by the said
suretyships. What makes them liable thereunder is the condition which provides that the Borrower "is or may become liable as maker, endorser,
acceptor or otherwise." And since UTEFS which (sic) was liable as principal obligor for having failed to fulfill the obligatory stipulations in the trust
receipt, they as insurers of its obligation, are liable thereunder. 16
Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made applicable to the 1979 obligation because the latter was not
yet in existence when the agreements were executed in 1977; under Article 2052 of the Civil Code, a guaranty "cannot exist without a valid obligation." We
cannot agree. First of all, the succeeding article provides that "[a] guaranty may also be given as security for future debts, the amount of which is not yet
known." Secondly, Article 2052 speaks about a valid obligation, as distinguished from a void obligation, and not an existing or current obligation. This
distinction is made clearer in the second paragraph of Article 2052 which reads:
Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also
guarantee a natural obligation.
As to the amount of their liability under the Continuing Suretyship Agreements, petitioners contend that the public respondent gravely erred in finding
them liable for more than the amount specified in their respective agreements, to wit: (a) P800,000.00 for petitioner Dio and (b) P300,000.00 for
petitioner Uy.
The limit of the petitioners respective liabilities must be determined from the suretyship agreement each had signed. It is undoubtedly true that the law
looks upon the contract of suretyship with a jealous eye, and the rule is settled that the obligation of the surety cannot be extended by implication beyond
its specified limits. To the extent, and in the manner, and under the circumstances pointed out in his obligation, he is bound, and no farther. 17
Indeed, the Continuing Suretyship Agreements signed by petitioner Dio and petitioner Uy fix the aggregate amount of their liability, at any given time, at
P800,000.00 and P300,000.00, respectively. The law is clear that a guarantor may bond himself for less, but not for more than the principal debtor, both as
regards the amount and the onerous nature of the conditions. 18 In the case at bar, both agreements provide for liability for interest and expenses, to wit:
. . . and such interest as may accrue thereon either before or after any maturity(ies) thereof and such expenses as may be incurred
by the BANK referred to above.19
They further provide that:
In the event of judicial proceedings being instituted by the BANK against the SURETY to enforce any of the terms and conditions of
this undertaking, the SURETY further agrees to pay the BANK a reasonable compensation for and as attorney's fees and costs of
collection, which shall not in any event be less than ten per cent (10%) of the amount due (the same to be due and payable
irrespective of whether the case is settled judicially or extrajudicially). 20
Thus, by express mandate of the Continuing Suretyship Agreements which they had signed, petitioners separately bound themselves to pay
interest, expenses, attorney's fees and costs. The last two items are pegged at not less than ten percent (10%) of the amount due.
Even without such stipulations, the petitioners would, nevertheless, be liable for the interest and judicial costs. Article 2055 of the Civil Code provides: 21
Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein.
If it be simple or indefinite, it shall comprise not only the principal obligation, but also all its accessories, including the judicial costs,
provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially
required to pay.
Interest and damages are included in the term accessories. However, such interest should run only from the date when the complaint was filed
in court. Even attorney's fees may be imposed whenever appropriate, pursuant to Article 2208 of the Civil Code. Thus, in Plaridel Surety &
Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., 22 this Court held:
Petitioner objects to the payment of interest and attorney's fees because: (1) they were not mentioned in the bond; and (2) the surety would
become liable for more than the amount stated in the contract of suretyship.
xxx xxx xxx
The objection has to be overruled, because as far back as the year 1922 this Court held in Tagawa vs. Aldanese, 43 Phil. 852, that creditors
suing on a suretyship bond may recover from the surety as part of their damages, interest at the legal rate even if the surety would thereby
become liable to pay more than the total amount stipulated in the bond. The theory is that interest is allowed only by way of damages for delay
upon the part of the sureties in making payment after they should have done so. In some states, the interest has been charged from the date
of the interest has been charged from the date of the judgment of the appellate court. In this jurisdiction, we rather prefer to follow the
general practice, which is to order that interest begin to run from the date when the complaint was filed in court, . . .
Such theory aligned with sec. 510 of the Code of Civil Procedure which was subsequently recognized in the Rules of Court (Rule 53, section 6)
and with Article 1108 of the Civil Code (now Art. 2209 of the New Civil Code).
In other words the surety is made to pay interest, not by reason of the contract, but by reason of its failure to pay when demanded and for
having compelled the plaintiff to resort to the courts to obtain payment. It should be observed that interest does not run from the time the
obligation became due, but from the filing of the complaint.
 As to attorney's fees. Before the enactment of the New Civil Code, successful litigants could not recover attorney's fees as part of the damages
they suffered by reason of the litigation. Even if the party paid thousands of pesos to his lawyers, he could not charge the amount to his
opponent (Tan Ti vs. Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of attorney's fees in eleven cases enumerated in Article 2208, among them, "where the court
deems it just and equitable that attorney's (sic) fees and expenses of litigation should be recovered" or "when the defendant acted in gross and
evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and demandable claim." This gives the courts discretion in apportioning
attorney's fees.
The records do not reveal the exact amount of the unpaid portion of the principal obligation of Uy Tiam to MERTOBANK under Irrevocable Letter of Credit
No. SN-Loc-309 dated 30 March 1979. In referring to the last demand letter to Mr. Uy Tiam and the complaint filed in Civil Case No. 82-9303, the public
respondent mentions the amount of "P613,339.32, as of January 31, 1982, inclusive of interest commission penalty and bank charges." 23This is the same
amount stated by METROBANK in its Memorandum. 24 However, in summarizing Uy Tiam's outstanding obligation as of 17 July 1987, public respondent
states:
Hence, they are jointly and severally liable to appellant METROBANK of UTEFS' outstanding obligation in the sum of P2,397,883.68
(as of July 17, 1987) P651,092.82 representing the principal amount, P825,133.54, for past due interest (5-31-82 to 7-17-87) and
P921,657.32, for penalty charges at 12%per annum (5-31-82 to 7-17-87) as shown in the Statement of Account (Exhibit I). 25
Since the complaint was filed on 18 May 1982, it is obvious that on that date, the outstanding principal obligation of Uy Tiam, secured by the
petitioners' Continuing Suretyship Agreements, was less than P613,339.32. Such amount may be fully covered by the Continuing Suretyship
Agreement executed by petitioner Dio which stipulates an aggregate principal sum of not exceeding P800,000.00, and partly covered by that
of petitioner Uy which pegs his maximum liability at P300,000.00.
Consequently, the judgment of the public respondent shall have to be modified to conform to the foregoing exposition, to which extent the instant petition
is impressed with partial merit.
WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged decision has to be modified with respect to the extend of petitioners'
liability. As modified, petitioners JACINTO UY DIO and NORBERTO UY are hereby declared liable for and are ordered to pay, up to the maximum limit only
of their respective Continuing Suretyship Agreement, the remaining unpaid balance of the principal obligation of UY TIAM or UY TIAM ENTERPRISES &
FREIGHT SERVICES under Irrevocable Letter of Credit No. SN-Loc-309, dated 30 March 1979, together with the interest due thereon at the legal rate
commencing from the date of the filing of the complaint in Civil Case No. 82-9303 with Branch 45 of the Regional Trial Court of Manila, as well as the
adjudged attorney's fees and costs.
All other dispositions in the dispositive portion of the challenged decision not inconsistent with the above are affirmed. SO ORDERED.

PHIL BLOOMING MILLS v. CA SUPRA

30. Adriano v Pangilinan, GR 137471, 16 January 2002

Topic: MORTGAGE
Facts:
Petitioner Adriano is the registered owner of a parcel of land in Montalban, Rizal covered by TCT.
o Entrusted the original owners copy of TCT to Angelina Salvador, a distant relative, to secure a mortgage loan.
o Without the knowledge and consent Salvador mortgaged the property to the Respondent Romulo Pangilinan.
Adriano verified the status of his title with the Registry of Deeds of Marikina and was surprised to discover that TCT was already annotated a
first Real Estate Mortgage purportedly executed by him in favor of Pangilinan for consideration of 60K
o All denied by petitioner forged signature, no consideration
o Demand to reconvey title - ignored
Adriano filed criminal case for estafa thru falsification of public document against Pangilinan, as well as against Angelina Salvador, Romy de
Castro and Marilen Macanaya, in connection with the execution of the allegedly falsified deed of real estate mortgage in RTC Rizal.
DEFENSE:
Pangilinan a businessman engaged in the buying and selling as well as in the mortgage of real estate properties; co respondents and person
who introduced himself as Guillermo Adriano, came to his house inquiring on how they could secure a loan over a parcel of land; that he asked
them to submit the necessary documents, such as the owners duplicate of the transfer certificate of title to the property, the real estate tax
declaration, its vicinity location plan, a photograph of the property to be mortgaged, and the owners residence certificate; that when he
conducted an ocular inspection of the property to be mortgaged, he was there met by a person who had earlier introduced himself as
Guillermo Adriano, and the latter gave him all the original copies of the required documents to be submitted; that after he (defendant) had
verified from the Registry of Deeds of Marikina that the title to the property to be mortgaged was indeed genuine, he and that person
Guillermo Adriano executed the subject real estate mortgage, and then had it notarized and registered with the Registry of Deeds. After that,
the alleged owner, Guillermo Adriano, et al signed the promissory note of 60K - the appraised value of the mortgage property and gave them
the amount.
Respondent claimed that petitioner voluntarily entrusted his title to the subject property to Angelina Salvador for the purpose of securing a
loan, thereby creating a principal-agent relationship between the plaintiff and Angelina Salvador for the aforesaid purpose. Thus, according to
[respondent], the execution of the real estate mortgage was within the scope of the authority granted to Angelina Salvador; that in any event
TCT and the other relevant documents came into his possession in the regular course of business; and that since the said transfer certificate of
title has remained with petitioner, the latter has no cause of action for reconveyance against him.
RTC forgery/null mortgage
CA- reversed. Petitioner by entrusting the TCT to someone else must bear the loss, negligence.

Issue
1. Whether or not consent is an issue in determining who must bear the loss if a mortgage contract is sought to be declared a nullity? YES.
2. Was petitioner negligent in entrusting and delivering his TCT to a relative who was supposed to help him find a money lender? And if so, was
such negligence sufficient to deprive him of his property? NO

Ruling:
1st ISSUE
Article 2085 of the Civil Code enumerates the essential requisites of a mortgage, as follows:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally
authorized for that purpose.
Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property.
In the case at bar, not only was it proven in the trial court that the signature of the mortgagor had been forged, but also that somebody else --
an impostor -- had pretended to be the former when the mortgagee made an ocular inspection of the subject property.
It is clear that petitioner who is undisputedly the property owner -- did not mortgage the property himself. Neither did he authorize Salvador or
anyone else to do so

2nd ISSUE
It is crucial to determine whether respondent was an innocent mortgagee for value. After a careful review of the records and pleadings of the
case, we hold that he is not, because he failed to observe due diligence in the grant of the loan and in the execution of the real estate
mortgage.
Respondent testified that he was engaged in the real estate business, including the grant of loans secured by real property mortgages. Thus, he
is expected to ascertain the status and condition of the properties offered to him as collaterals, as well as to verify the identities of the persons
 he transacts business with. Specifically, he cannot simply rely on a hasty examination of the property offered to him as security and the
documents backing them up. He should also verify the identity of the person who claims to be the registered property owner.
o Since he knew that the property was being leased, respondent should have made inquiries about the rights of the actual
possessors. He could have easily verified from the lessees whether the claimed owner was, indeed, their lessor.
While it is true that a person dealing with registered lands need not go beyond the certificate of title, it is likewise a well-settled rule that a
purchaser or mortgagee cannot close his eyes to facts which should put a reasonable man on his guard, and then claim that he acted in good
faith under the belief that there was no defect in the title of the vendor or mortgagor.
Petitioners act of entrusting and delivering his TCT and Residence Certificate to Salvador was only for the purpose of helping him find a money
lender. Not having executed a power of attorney in her favor, he clearly did not authorize her to be his agent in procuring the mortgage. He only
asked her to look for possible money lenders.
Art. 1878. Special powers of attorney are necessary in the following cases: (7) To loan or borrow money, unless the latter act be urgent and
indispensable for the preservation of the things which are under administration; (12) To create or convey real rights over immovable property;
Assuming that both parties were negligent, the Court opines that respondent should bear the loss. His superior knowledge of the matter
should have made him more cautious before releasing the loan and accepting the identity of the mortgagor
To summarize, we hold that both law and equity favor petitioner. First, the relevant legal provision, Article 2085 of the Civil Code, requires that
the mortgagor be the absolute owner of the thing x x x mortgaged. Here, the mortgagor was an impostor who executed the contract without
the knowledge and consent of the owner. Second, equity dictates that a loss brought about by the concurrent negligence of two persons shall
be borne by one who was in the immediate, primary and overriding position to prevent it. Herein respondent who, we repeat, is engaged in the
business of lending money secured by real estate mortgages could have easily avoided the loss by simply exercising due diligence in ascertaining
the identity of the impostor who claimed to be the owner of the property being mortgaged. Finally, equity merely supplements, not supplants,
the law. The former cannot contravene or take the place of the latter.
In any event, respondent is not precluded from availing himself of proper remedies against Angelina Salvador and her cohorts.
GRANTED
32 [Cavite Development Bank. v. Lim]
[G.R. No. 131679][Feb. 1, 2000]
TOPIC: Pledge, Mortgage and Antichresis
PETITIONER: Cavite Development Bank (CDB) and Far East Bank and Trust Co. (FEB)
RESPONDENTS: Spouses Cyrus Lim and Lolita Lim and CA
PONENTE: Mendoza., J.
FACTS:
1983 - Rodolfo Guansing obtained a loan for P90,000.00 from CDB, which he secured with a mortgage on a parcel of land situated in Quezon City
covered by a TCT registered in his name.
Guansing defaulted in payment of his loan; as a result CDB foreclosed the mortgage. CBD was the highest bidder and transferred the title of the
land in its name.
A year later, private respondent Lolita Lim, offered to purchase the property from CDB, the written offer to purchase signed by Lim states in part:
o We hereby offer to purchase your property at #63 Calavite and Retiro Sts., La Loma, Quezon City for P300,000.00 under the following
terms and conditions:
o (1) 10% Option Money; (2) Balance payable in cash; (3) Provided that the property shall be cleared of illegal occupants or tenants.
Pursuant to the terms and conditions of the offer, Lim paid CDB P30,000 as Option Money, for which she was issued an Official Receipt dated
Jun 17, 1988 by CDB. However after some time following up the sale, Lim discovered that the subject property was originally registered in the
name of a certain Perfecto Guansing, father of mortgagor Rodolfo Guansing.
It appears that Rodolfo, in some way succeeded in having the property fraudulently registered in his name, and mortgaged it to CDB back in
1983, which resulted to the father instituting a civil case in RTC of Quezon City for the cancellation of his sons title back in March 1984 and won
the case, the decision of which has become final and executory.
Aggrieved by what she considered a serious misrepresentation by CDB and its mother company FEB, on their ability to sell the property,
respondent Lim, joined by her husband filed an action for specific performance and damages against petitioners in the RTC.
RTC and CA: decided in favor of Lim spouses, hence this petition.
FEB/CDB Contentions:
o No contract of sale was ever perfected between them and the Lims, because the letter-offer clearly states that the P30k was given
only as option money, not as earnest money, they thus conclude that the contract between Lim and CDB was merely an option
contract, not a contract of sale. They are therefore not liable to respondents.
ISSUE (S): WoN petitioner bank should be liable to respondents for the nullity of the contract of sale between them?
RULING:
1.) Yes, Petitioners are liable.
Contracts are not defined by the parries thereto but by principles of law. In determining the nature of a contract, the courts are not bound by the name or
title given to it by the contracting parties. In this case, the sum of P30,000.00, although denominated in the offer to purchase as "option money," is actually
in the nature of earnest money or down payment when considered with the other terms of the offer.
After the payment of the 10% option money, the Offer to Purchase provides for the payment only of the balance of the purchase price, implying that the
"option money" forms part of the purchase price. This is precisely the result of paying earnest money under Art. 1482 of the Civil Code. It is clear then that
the parties in this case actually entered into a contract of sale, partially consummated as to the payment of the price.
Given CDB's acceptance of Lim's offer to purchase, it appears that a contract of sale was perfected and, indeed, partially executed because of the partial
payment of the purchase price.
There is, however, a serious legal obstacle to such sale, rendering it impossible for CDB to perform its obligation as seller to deliver and transfer ownership
of the property due to: The sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo Guansing is deemed a nullity for CDB did not have a valid title to
the said property. CDB never acquired a valid title to the property because the foreclosure sale, by virtue of which, the property had been awarded to CDB
as highest bidder, is likewise void since the mortgagor (Rodolfo) was not the owner of the property foreclosed.
A foreclosure sale, though essentially a "forced sale," is still a sale in accordance with Art. 1458 of the Civil Code, under which the mortgagor in default, the
forced seller, becomes obliged to transfer the ownership of the thing sold to the highest bidder who, in turn, is obliged to pay therefor the bid price in money
or its equivalent. Being a sale, the rule that the seller must be the owner of the thing sold also applies in a foreclosure sale. This is the reason Art. 2085 of the
Civil Code, in providing for the essential requisites of the contract of mortgage and pledge, requires, among other things, that the mortgagor or pledgor be the
absolute owner of the thing pledged or mortgaged, in anticipation of a possible foreclosure sale should the mortgagor default in the payment of the loan.
Exception: Doctrine of mortgagee in good faith: if buyer/mortgagees are in good faith, the sale is given effect by reason of public policy. Based on the rule
that all persons dealing with property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on the
face of the title. If they relied upon it in good faith, the buyer/mortgagee is protected.
CDB cannot be considered a mortgagee in good faith. While petitioners are not expected to conduct an exhaustive investigation on the history of the
mortgagor's title, they cannot be excused from the duty of exercising the due diligence required of banking. It has been held that it is standard practice for
banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who are real owners thereof,
noting that banks are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands, for their
business is affected with public interest.
The sale by CDB to Lim being void, both the trial court and the appellate court found petitioners guilty of fraud, because on June 16, 1988, when Lim was
asked by CDB to pay the 10% option money, CDB already knew that it was no longer the owner of the said property, its title having been cancelled. We are
convinced of petitioners' negligence in approving the mortgage application of Rodolfo Guansing. They should pay damages and refund the P30,000,00 option
money paid by Lims with interest, the fault being caused by CDB.
The seller (CDB) has no right whatsoever to keep the money paid by virtue thereof and should refund it, with interest at the legal rate, computed from the
date of filing of the complaint until fully paid.
Dominador Dizon vs Lourdes Suntay
 G.R# L-30817 September 20 1972
Topic: Pledge of a movable property
Facts:
Respondent Suntay is the owner of a 3-carat diamond ring valued at P5,500. In 1962, she entered into a transaction with Clarita Sison, wherein
the aforementioned ring was delivered to the latter for sale on commission. (Suntay knows Clarita as the latter is her cousins close friend and
theyve met several times before. In fact, the parties already had a successful transaction in the past of the same nature)
However, after a considerable length of time and due to Claritas failure to give the ring back, Suntay started making demands. On the other
hand, Sison could not comply with the demands because without Suntays knowledge and in connivance with her niece, she pledged the ring
with Dominador Dizons pawnshop for P2,600.
After several demands, Sison finally delivered the pawnshop ticket which serves as the receipt of the pledge made.
When respondent found out about the transaction, she immediately filed an Estafa case against Sison .
After which, Suntay, through her lawyer, wrote a letter to Dizon demanding the same to return the ring pledged; however, Dizon refused.
Hence Suntay filed an action to recover said jewelry.
In an order, the trial court issued a Writ of Replevin, by virtue of which Suntay was able to take possession of the ring during the pendency of
the action.
RTC Decision: Ruled in favor of Suntay holding that she has a right to the possession of the ring.
Because of the adverse decision, Dizon went to the CA. CA Ruling: Affirmed the trial courts ruling.

Issue: W/N the CA erred in ruling that Lourdes has a right to possession of the ring
Ruling:
The SC reiterated the ruling in de Garcia v. CA, that the controlling provision is Art. 559 of the CC which states that the possession
ofmovable 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 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.

Lourdes, being unlawfully deprived of her ring thus she has a right to recover it from the current possessor. Dizon is engaged in a
business where presumably ordinary prudence would require him to inquire whether or not an individual who is offering the jewelry by pledge
is entitled to do so. The principle of estoppel cannot help him at all. Since there was no precaution availed of, perhaps because of the difficulty
of resisting opportunity for profit, he only has himself to blame and should be the last to complain if the right of the true owner of the jewelry
should be recognized.

DBP v CA and Lydia Cuba

G.R. No. 118342 January 5, 1998
Topic: Effect on Pledge or Mortgage
Facts:
Lydia Cuba, a grantee of a Fishpond Lease Agreement, obtained 3 loans from DBP (109k, 109k, and 98.7k) and executed 2 Deeds of Assignment
of her Leasehold Rights as security
She defaulted, and without foreclosure proceedings, DBP appropriated the Leasehold Rights (LR)
After appropriation, they had an agreement to repurchase. DBP then executed a Deed of Conditional Sale in favor of Cuba under the same
fishpond, and thereafter, a new Fishpond Lease Agreement was issued
Cuba failed to pay the amortizations on the Deed of Cond. Sale, and so entered with DBP a temporary arrangement to make certain payments
for the deferment of the Notarial Rescission in the Deed of Cond. Sale
Nevertheless, DBP sent a Notice of Rescission & took possession of the Leasehold Rights of the fishpond (again)
A public bidding took place and thereafter, DBP executed a Deed of Conditional Sale in favor of Caperal who was then awarded with a new
Fishpond Lease Agreement
Trial ensued WON DBPs appropriation of LR was proper/valid
RTC: In favor of Cuba, taking possession w/o foreclosure was violative of Art 2088
o 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.
o RTC disagreed with DBP. The Assignment of LR were contracts of mortgage (and DBPs only right was to foreclose the Assignment in
accordance with law) because:
(1) they were given as security for loans
(2) although the fishpond land in question is still a public land, CUBAs leasehold rights and interest thereon are alienable
rights which can be the proper subject of a mortgage; and
(3) the intention of the contracting parties to treat the Assignment of Leasehold Rights as a mortgage was obvious and
unmistakable
o RTC also declared invalid condition no. 12 of the Assignment of Leasehold Rights for being a clear case of pactum commissorium
expressly prohibited and declared null and void by Article 2088 of the Civil Code.
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, subject to the approval of the Secretary of Agriculture and Natural Resources,
to lease the same or any portion thereof and collect rentals, to make repairs or improvements thereon and pay the
same, to sell or otherwise dispose of whatever rights the Assignor has or might have over said property and/or its
improvements and perform any other act which the Assignee may deem convenient to protect its interest. All expenses
advanced by the Assignee in connection with purpose above indicated which shall bear the same rate of interest
aforementioned are also guaranteed by this Assignment. Any amount received from rents, administration, sale or
disposal of said property may be supplied by the Assignee to the payment of repairs, improvements, taxes,
assessments and other incidental expenses and obligations and the balance, if any, to the payment of interest and then
on the capital of the indebtedness secured hereby. If after disposal or sale of said property and upon application of
total amounts received there shall remain a deficiency, said Assignor hereby binds himself to pay the same to the
Assignee upon demand, together with all interest thereon until fully paid. The power herein granted shall not be
revoked as long as the Assignor is indebted to the Assignee and all acts that may be executed by the Assignee by virtue
of said power are hereby ratified.
o Since DBP never acquired lawful ownership of CUBAs leasehold rights, all acts of ownership and possession by the said bank were
void
CA: In favor of DBP; Caperal is lawful holder
o DBPs appropriation of LR was valid; the trial court erred in declaring that the deed of assignment was null and void and that
defendant Caperal could not validly acquire the leasehold rights from DBP
o Cubas Deeds of Assignment were valid; 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
o 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
o condition no. 12 of the deed of assignment was an express authority from CUBA for DBP to sell whatever right she had over the
fishpond.
Cuba contends that the Court of Appeals erred in not holding that the questioned deed of assignment was a pactum commissorium contrary to
Article 2088 of the Civil Code

Issue: WON the act of DBP in appropriating to itself CUBAs leasehold rights over the fishpond in question without foreclosure proceedings was contrary to
Article 2088 of the Civil Code and, therefore, invalid
Ruling: Yes, violative of Art. 2088
The assignment of leasehold rights was a mortgage contract
The deeds of assignment constantly referred to the assignor (Cuba) as borrower; the assigned rights, as mortgaged properties; and the
instrument itself, as mortgage contract. Moreover, under condition no. 22 of the deed, it was provided that failure to comply with the terms
and condition of any of the loans shall cause all other loans to become due and demandable and all mortgages shall be foreclosed. And,
condition no. 33 provided that if foreclosure is actually accomplished, the usual 10% 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.
In their stipulation of facts the parties admitted that the assignment was by way of security for the payment of the loans; this Court had the
occasion to rule that an assignment to guarantee an obligation is in effect a mortgage

Condition No. 12 of the deed of assignment is not pactum commissorium, HOWEVER DBPs act of appropriating Cubas leasehold rights was violative
of Art 2088
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.
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.
Instead of taking ownership of the questioned real rights upon default by Cuba, DBP should have foreclosed the mortgage, as has been
stipulated in condition no. 22 of the deed of assignment. But, as admitted by DBP, there was no such foreclosure.

Held: CA decision is REVERSED. RTC decision is modified (because Conditon No. 12 is not a pactum commissorium). Case is REMANDED for
determination of financial obligations.

(34) Bustamante v. Rosel

G.R. No. 126800 Date November 29, 1999
Topic: Provisions Common to Pledge, Mortgage, Antichresis (Pactum Commisorium - Pledge or Mortgage)
Facts:
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. 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.
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.
Bustamante tendered payment of the loan but Rosel refused to accept, insisting to buy the collateral lot.
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]
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?
Ruling:
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.

Held:
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.
 35 Ong v. Roban Lending Corporation
GR 172592 9 July 2008
Topic: Provisions common to pledge and mortgage
Facts:
1. Sps. Ong obtained several {loans} from Roban Lending Corporation (Roban) totaling P4,000,000
2. These loans were secured by {REMs} on Sps. Ongs lands X located in Tarlac secured by TCT
3. On 2001, Subsequently, Sps. Ong and Roban executed the ff on the same date
{Amendment to Amend REM} - Consolidating the loans inclusive of the charges thereon, totaling P5,916,117.50
{Dacion in Payment Agreement} Sps Ong assigned X to Roban
{Memorandum of Agreement} Sps. Ong to pay consolidated outstanding obligations within one year or else the Sps. Ong agree to
have their Dacion in payment agreement in favor of Roban
4. The following year, 2002, Sps. Ong filed a complaint against Roban
Alleging that {Dacion in Payment Agreement} and {Memorandum of Agreement} are void for being pactum commissorium

Issue: Does the Memorandum of Agreement and Dation in Payment constitute pactum commissorium prohibited under Art.2088 NCC?
Ruling: Yes.

Art. 2088 NCC provides that the creditor cannot approporiate the things given by pledge or mortgage or dispose of them. Any stipulations to the contrary is
null and void.

Pactum commisorrium
a) Effect enables the mortgagee to acquire ownership of the mortgaged property without the need of any foreclosure proceedings
b) Elements
a. There is property mortgaged by way of security for the payment of the principal obligation
b. There is 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

Both {Dacion in Payment Agreement} and {Memorandum of Agreement} contain no provisions for the foreclosure proceedings nor redemption. The
elements of pactum commissorium are present.

Respondent argues that the law recognizes dacion en pago as a special form of payment whereby the debotor alienates property to the creditor in
satisfaction of a monetary obligation.

Although, a true Dacion en pago essentially entails the assignment of property extinguishing monetary debt. In the present case, the alienation of x was by
way of security, and not by way of satisfying the monetary debt.

36 G.R. No. 77465 May 21, 1988

SPOUSES UY TONG & KHO PO GIOK v. CA
Facts:
Petitioners used to be owners of Apartment No. 307 of the Ligaya Bldg., together with the leasehold right for 99 years over the land on which the building
stands. The land is registered in the name of Ligaya Investments.
It appears that Ligaya Investments owned the building but sold Apt. 307 and leased a portion of the land to the petitioners.
Petitioners purchased from respondents (Bayanihan Automotive) 7 units of motor vehicles payable in 3 installments, evidenced by a written Agreement.
Should the checks be not honored on their respective maturity dates, the vendor will give the vendee another 60 days from maturity dates,
within which to pay or redeem the value of the checks.
if for any reason the vendee should fail to pay her aforementioned obligation, the vendor shall shall become automatically the owner of
the former's apartment
After making a downpayment, the petitioners failed to pay the balances, the respondents filed an action for specific performance against the respondents
with CFI Manila.
CFI Manila Ruling: In favor of the respondents
pay the respondents the sum of P40K + legal interest until full payment.
Failure to do so within 30 days from notice of judgment, the petitioners are ordered to execute a deed of absolute sale in favor of the
respondents and/or the assignment of leasehold rights over the defendants apartment (Apt. No. 307)
Petitioners executed a deed of assignment together with the leasehold right over the land on which the bldg. stands in favor of the respondents.
Despite the execution of the deed, the petitioners failed to surrender the possession of the premises to the respondents, which prompted the respondents
to file an ejectment case in the City Court of Manila. However, it was dismissed for not being the real party in interest.
Respondents then filed an action for recovery of possession with damages with CFI-Manila against the petitioners and impleading Ligaya Investments as
party-defendants. CFI ruled in favor of the respondents.
Petitioners appealed to CA, which affirmed the decision of the CFI.
Issues:
1. W/N deed of assignment is null and void because it is in the nature of a pactum commissorium and/or was borne out of the same.
2. W/N genuineness and due prosecution of the deed of assignment was not deemed admitted by petitioner.
3. W/N deed of assignment is unenforceable because the condition for its execution was not complied with.
4. W/N refusal of petitioners to vacate and surrender the premises in question to private respondent is justified and warranted by the circumstances obtaining
in the instant case.

Petitioners Argument:
(a) The deed of assingnment is in the nature of a pactum commissorium and, therefore, null and void.
(b) There was no full compliance by private respondent of the condition imposed in the deed of assignment.

Held:
1. Pactum Commissorium has 2 elements:
a) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal
obligation; and
b) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment
of the principal obligation within the stipulated period.
A perusal of the terms of the questioned agreement evinces no basis for the application of the pactum commissorium provision.
First, there is no indication of 'any contract of mortgage entered into by the parties. It is a fact that the parties agreed on the sale
and purchase of trucks.
 Second, there is no case of automatic appropriation of the property by BAYANIHAN. When the petitioners defaulted in their payments
of the second and third installments of the trucks they purchased, BAYANIHAN filed an action in court for specific performance. The
trial court rendered favorable judgment for BAYANIHAN and ordered the petitioners to pay the balance of their obligation and in
case of failure to do so, to execute a deed of assignment over the property involved in this case. The petitioners elected to execute
the deed of assignment pursuant to said judgment.
Clearly, there was no automatic vesting of title on BAYANIHAN because it took the intervention of the trial court to exact fulfillment of the
obligation, which, by its very nature is ". . anathema to the concept of pacto commissorio"
2. Facts reveal that the action in Civil Case No. 121532 was founded on the deed of assignment. However, the petitioners, in their answer to the complaint,
failed to deny under oath and specifically the genuineness and due execution of the said deed. Perforce, under Section 8, Rule 8 of the Revised Rules of
Court, the petitioners are deemed to have admitted the deed's genuineness and due execution.
3. Defendants 'contention that the P 3,535.00 required in the decision in Civil Case No. 80420 as a condition for the execution of the deed of assignment was
not paid by the plaintiff to the defendants is belied by the fact that the defendants acknowledged payment of P3,000.00, more or less, in a receipt. The
contention that there is still a difference of P535.00 is had to believe because the spouses Kho Po Giok and Uy Tong executed the deed of assignment without
first demanding from the plaintiff the payment of P535.00. The fact that petitioners executed the deed of assignment with the assistance of their counsel
leads to no other conclusion that private respondent itself had paid the full amount.
4. It is enough to state that the deed of assignment has vested in the private respondent the rights and interests of the petitioners over the apartment unit
in question including the leasehold rights over the land on which the building stands. BAYANIHAN is therefore entitled to the possession thereof. These are
the clear terms of the deed of assignment which cannot be superseded by bare allegations of fact that find no support in the record.

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his
capacity as statutory receiver of Island Savings Bank, petitioners, vs. THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void the decision of the Court of Appeals, in C.A.-G.R. No. 52253-R dated February 11,
1977, modifying the decision dated February 15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent Sulpicio M.
Tolentino for injunction, specific performance or rescission, and damages with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department, approved the loan application for P80,000.00 of Sulpicio
M. Tolentino, who, as a security for the loan, executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las Nieves,
Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title the next day. The approved loan application called for a lump
sum P80,000.00 loan, repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino
shall use the loan proceeds solely as an additional capital to develop his other property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino
signed a promissory note for P17,000.00 at 12% annual interest, payable within 3 years from the date of execution of the contract at semi-annual
installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering a 6-month period amounting to P4,800.00 was deducted from
the partial release of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the Bank
that there was no fund yet available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and treasurer, promised
repeatedly the release of the P63,000.00 balance (p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was suffering liquidity problems, issued Resolution No.
1049, which provides:
In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities, the Board, by unanimous vote, decided as
follows:
1) To prohibit the bank from making new loans and investments [except investments in government securities] excluding extensions or
renewals of already approved loans, provided that such extensions or renewals shall be subject to review by the Superintendent of Banks, who
may impose such limitations as may be necessary to insure correction of the bank's deficiency as soon as possible;
xxx xxx xxx
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the required capital to restore its solvency, issued Resolution
No. 967 which prohibited Island Savings Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to take charge of
the assets of Island Savings Bank (pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the promissory note, filed an application for the extra-
judicial foreclosure of the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for January
22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for injunction, specific performance or rescission and
damages with preliminary injunction, alleging that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled
to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per annum from April 28, 1965, and if said balance
cannot be delivered, to rescind the real estate mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary restraining order enjoining the Island Savings Bank from
continuing with the foreclosure of the mortgage (pp. 86-87, rec.).
On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the petition of Sulpicio M. Tolentino and the setting
aside of the restraining order, filed by the Central Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).
On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding unmeritorious the petition of Sulpicio M. Tolentino, ordering
him to pay Island Savings Bank the amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining order so that the
sheriff may proceed with the foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First Instance decision by affirming the dismissal of
Sulpicio M. Tolentino's petition for specific performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor collect the
P17,000.00 loan pp. 30-:31. rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage be foreclosed to satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal obligations.
In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de
Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready and willing to perform his part of the contract, the other party who
has not performed or is not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the
consideration for the obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April
28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan
accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the
Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it
legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over
insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not
in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island Savings Bank in complying with its obligation of releasing
the P63,000.00 balance because said resolution merely prohibited the Bank from making new loans and investments, and nowhere did it prohibit island
Savings Bank from releasing the balance of loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill an engagement does not
discharge the obligation of the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and Afzelius,
39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a
breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to P4,800.00 for the supposed P80,000.00
loan covering a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in asking the
advance interest for 6 months on the supposed P80,000.00 loan, was improper considering that only P17,000.00 out of the P80,000.00 loan was released.
A person cannot be legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was an exercise
of his right to it, which right exist independently of his right to demand the completion of the P80,000.00 loan. The exercise of one right does not affect,
much less neutralize, the exercise of the other.
The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it from complying with its reciprocal obligation to
furnish the entire P80,000.00 loan. 'This Court previously ruled that bank officials and employees are expected to exercise caution and prudence in the
discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the bank's officials and employees that
before they approve the loan application of their customers, they must investigate the existence and evaluation of the properties being offered as a loan
security. The recent rush of events where collaterals for bank loans turn out to be non-existent or grossly over-valued underscore the importance of this
responsibility. The mere reliance by bank officials and employees on their customer's representation regarding the loan collateral being offered as loan
security is a patent non-performance of this responsibility. If ever bank officials and employees totally reIy on the representation of their customers as to
the valuation of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued. The representation made by the customer
is immaterial to the bank's responsibility to conduct its own investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had
enjoined petitioners from presenting proof on the alleged over-valuation because of their failure to raise the same in their pleadings (pp. 198-199, t.s.n.
Sept. 15. 1971). The lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same issue before the Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement, Sulpicio M. Tolentino, under Article 1191 of the
Civil Code, may choose between specific performance or rescission with damages in either case. But since Island Savings Bank is now prohibited from doing
further business by Monetary Board Resolution No. 967, WE cannot grant specific performance in favor of Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance of the P80,000.00 loan, because the
bank is in default only insofar as such amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the partial release of
P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note to cover it, the bank was deemed to have complied with its reciprocal
obligation to furnish a P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it
falls due. His failure to pay the overdue amortizations under the promissory note made him a party in default, hence not entitled to rescission (Article 1191
of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If Tolentino had not
signed a promissory note setting the date for payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan because he
cannot possibly be in default as there was no date for him to perform his reciprocal obligation to pay.
Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island Savings Bank failed to comply with its
obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated,
they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the liability of the first infractor
shall be equitably tempered by the courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the
liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his overdue P17,000.00 debt. The liability of Sulpicio
M. Tolentino for interest on his PI 7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some
benefit for his use of the P17,000.00, it is just that he should account for the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443
[1979]). For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate mortgage, the
consideration of the debtor in furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the
Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was then in existence, as there was no debt yet because
Island Savings Bank had not made any release on the loan, does not make the real estate mortgage void for lack of consideration. It is not necessary that
any consideration should pass at the time of the execution of the contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a
prior or subsequent matter. But when the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is
created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is
partial failure of consideration, the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol.
59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than the sum named in the mortgage, the mortgage
cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage,
Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became
unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of
78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is more than
sufficient to secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt may be divided among the successors in interest of the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate extinguishment of the pledge or
mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the mortgage, to the prejudice
of other heirs who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or creditor which does not
obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12%
INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM
AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL
INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF
SULPICIO M. TOLENTINO.
NO COSTS. SO ORDERED.

037 Guanzon vs. Argel

G.R. No. L-27706 June 16, 1970
Topic: Mortgage
Facts:
Dumaraog , private respondents filed an action against Guanzon , herein petitioner for redemption of parcel of rice land in Barrio Inabasan
Antique.
Dumaraogs mother Ines Flores mortgaged to Guanzon said land. They prayed in the lower court that the transaction be declared a mortgage
and not one of pacto de retro.
They also prayed that Guanzon be ordered to reconvey land after payment of PHP1500 by Dumaraog as payment for the loan.
Guanzon alleged that the document executed by Flores is a pacto de retro and her title as vendee had been consolidated.
 Judge Argel, respondent Judge ordered Guanzon to execute a document of reconveyance in favour of Dumaraog as the document involved is
one of mortgage. Execution shall be done within 20 days after payment of PHP1500 of Dumaraog from finality of decision. If 20 days has
lapsed, execution may still be issued by the Sheriff with costs against Dumaraog.
Lower court held that any additional amounts that were loaned to Ines Flores by GUanzon has been offset by the 30 canvans of palay the latter
received from 1949-1962.
When Dumaraog failed to pay after within 20days after finality of decision, GUanzon filed a motion for execution where she prayed that
Sheriiff be ordered to execute necessary conveyance in her favour and that she be in possession of said property.
Acting on the motion, lower court ordered Dumaraog to deposit PHP1500 with the clerk of court within 1o days and GUanzon shall execute a
deed of reconveyance upon receipt of the amount otherwise, the Sheriff shall execute the necessary conveyance in favour of Dumaraog and
Guanzon could withdraw the said amount.
Dumaraog filed a bill of costs with the lower court for approval which Guanzon opposed but respondent Judge approved the bill of costs in
favour of Dumaraog.
Dumaraog, in pursuant of the decision fled a notice of deposit of PHP1500
Guanzon filed a motion for reconsideration regarding the orders (approval of bill of costs, granting additional 10 days for Dumaraog) made by
respondent Judge but was denied.
Issue: W/N respondent Judge acted in excess of his jurisdiction and with grave abuse of discretion?
Held: Denied
No. The respondent Judge was correct in giving out said orders.
Guanzons argument- Decision has become final on Aug.31, 1966 and executor in Oct. 14, 1966 but it was only in Jan. 6, 1967 that Dumaraog
deposited the PHP1500. Guanzon said that more than 0 days has lapsed and it was error for the Judge to allow the deposit.
Lower court decision par. 2 states that:
2. Ordering the defendant Maria T. Guanzon to execute a reconveyance in favor of the plaintiffs herein upon payment by the said plaintiffs
of the amount of P1,500.00 within twenty (20) days from the finality of this decision otherwise execution may issue and that Provincial Sheriff
may execute the necessary conveyance, with costs against the defendants.
Here, it states that if Dumaraog will not be able to pay within a specified time, GUanzon shall be entitled to have execution issue to collect the
amount from properties of Dumaraog where deed of reconveyance shall be issued to Dumaraog. But should Dumaraog deposit the money and
GUanzon refuses to reconve, Sheriff shall make the reconveyance.
Sec. 10 Rule 39 of the Rules of Court states that:
SEC. 10. Judgment for specific acts; vesting title. If a judgment directs a party to execute a conveyance of land, or to deliver deeds or other
documents, or to perform any other specific act, and the party fails to comply within the time specified, the court may direct the act to be done
at the costs of the disobedient party by some other person appointed by the court and the act when so done shall have like effect as if done by
the party. If real or personal property is within the Philippines, the court in lieu of directing a conveyance thereof may enter judgment divesting
the title of any party and vesting it in others and such judgment shall have the force and effect of a conveyance executed in due form of law.
To apply that if Dumaraog failed to pay within the specified time, Sheriff would convey the land to Guanzon is wrong.
As the contract between the parties is a mortgage contract, the only right of mortgagee (Guanzon) in case of non-payment of debt is to foreclose
the mortgage and have the encumbered property sold to satisfy the indebtedness. The mortgagors (Dumaraog) default does not mean that the
ownership will be transferred to mortgagee (Guanzon) as this is against public policy.
It was correct for Judge Argel to refuse in ordering Sheriff to convey property to Guanzon as she prayed for and instead ordered Guanzon to
reconvey property to Dumaraog after receiving PHP1500.

[G.R. No. 115033. July 11, 1997]

PONCIANO T. MATANGUIHAN, and EUSTAQUIA M. MATANGUIHAN, petitioners, vs. COURT OF APPEALS, HERMINIO PARAN substituted by REYNALDO, JOSEPH,
RONNIE, all surnamed PARAN; ERLINDA PARAN-GONZALES, FLORA PARAN-LESCANO, represented by REYNALDO PARAN, respondents.
DECISION
DAVIDE, JR., J.:
Their motion for reconsideration having been denied, petitioners brought this appeal under Rule 45 of the Rules of Court to set aside the decision of
26 March 1993 of respondent Court of Appeals[1] in CA-G.R. CV No. 34158, which reversed the decision of the Regional Trial Court (RTC) of Lipa City, Branch
12, of 17 May 1991[2] in Civil Case No. 3004 in favor of petitioners.
Civil Case No. 3004 was an action for recovery of possession of a house and lot and damages with a prayer for a writ of preliminary mandatory
injunction filed by petitioners Ponciano T. Matanguihan and Eustaquia A. Matanguihan against Herminio Paran. Their cause of action in their complaint[3] was
primarily based on the failure of defendant Herminio Paran, as vendor-a-retro-under a Kasulatan ng Bilihang Lupang Mabibili Muli (hereafter, KASULATAN),
to repurchase the property within the period stipulated therein.
In his answer with counterclaim,[4] Herminio Paran admitted the execution of the KASULATAN, but set up the following special and affirmative
defenses:
1. The complaint states no cause of action;
2. The ... Kasulatan ng Bilihang Lupang Mabibiling Muli is not a sale in pacto de retro but an equitable mortgage to guarantee the payment of
the principal loan of P100,000.00 and its interest for three months of P18,000.00;
3. The monthly interest of P6,000.00 is highly unconscionable, oppressive and immoral;
4. He never intended to sell the property; as a matter of fact the house and lot is the place where he and his family reside and part of the
proceeds of the loan he had obtained from plaintiffs were utilized for the further construction of the house; and
5. The consideration appearing in the deed of sale is unusually and grossly inadequate, the allowance of various extensions of the period of
redemption, and the added fact that the plaintiffs did not ever attempt to consolidate their title after the lapse of the period of redemption
is more in keeping with the intention of the parties that the deed of sale be treated as an equitable mortgage.
As summarized by the trial court and adopted by respondent Court of Appeals, the following are the antecedents of this case:
This is a complaint filed on February 5, 1987 by spouses Ponciano T. Matanguihan and Eustaquia Matanguihan against Herminio Paran to recover
possession of a residential house and lot located at Poblacion Mataas na Kahoy with an area of 1,130 square meters covered by Tax Declaration No. 0473.
The defendant Herminio Paran died on December 11, 1987 during the pendency of the case. The complaint was amended to substitute the heirs of
Herminio Paran, namely Reynaldo Paran, Erlinda Paran-Gonzales, Flora Paran-Lescano, Joseph Paran and Ronnie Paran. Reynaldo Paran was named the
representative of the heirs for the purpose of this suit.
It is not disputed that on October 13, 1983, spouses Ponciano Matanguihan and Eustaquia Matanguihan and spouses Herminio and Fortunata Paran
entered into an agreement denominated as Kasulatan ng Bilihang Lupang Mabibiling Muli (Pacto de Retro) covering a residential house and lot owned by
spouses Herminio and Fortunata Paran located at poblacion Mataas na Kahoy for the sum of P118,000.00 paid by spouses Ponciano and Eustaquia
Matanguihan. Said agreement is a public document having been notarized by Notary Public, Calixto P. Luna. The aforesaid agreement contains a stipulation
which reads:
Na ang kasulatang ito ay tatagal lamang ng hanggang TATLONG (3) buwan na magkakasunod upang ito ay mabiling muli namin sa mag-asawang Ponciano
Matanguihan at kung dumating ang takdang panahon at ito ay hindi namin matubos sa nasabing mag-asawang Ponciano Matanguihan at Eustaquia
Matanguihan ay ang kasulatang ito ay magiging ganap, lubos at bilihang lampasan.
The three-month period stipulated in the agreement lapsed without the defendant being able to repurchase the property. Plaintiffs, upon requests of
defendant, granted the latter, not only one but several extensions. Defendants still failed to repurchase the property. Thereafter, plaintiffs demanded from
defendant possession of the property which the latter refused. The plaintiff caused the transfer of the Tax Declaration No. 0473 (Exh. B and B-1). The
plaintiffs also caused the registration of the said property in the primary entry of the Register of Deeds of Batangas on June 3, 1985. On June 9, 1986,
plaintiffs brought the case before the Barangay pursuant to PD No. 1508. There being no amicable settlement reached at the Barangay, the plaintiff filed
the case before this court on February 5, 1987.
Plaintiffs now seek to enforce the aforesaid agreement.
The defendant, substituted by his heirs, opposes the complaint and claims that the subject agreement entitled Kasulatan ng Bilihang Mabibiling Muli (Pacto
de Retro) is intended by the parties to be an equitable mortgage.( Decision, Records, pp. 149-150 ).[5]
After due proceedings the trial court rendered on 17 May 1991 its decision in favor of petitioners and decreed as follows:
WHEREFORE, judgment is hereby rendered ordering the defendants, the heirs of Herminio Paran, namely Reynaldo Paran, Erlinda Paran-Gonzales; Flora
Paran Lescano, Joseph Paran to vacate and deliver possession of subject property (house and lot) to plaintiffs Ponciano Matanguihan and Eustaquia
Matanguihan, and to pay plaintiffs damages by way of unearned rentals on subject property from June 3, 1985 (when they registered the property with the
Register of Deeds of Batangas) until the defendants shall have vacated the premises. In this connection a monthly rental of P1,000.00 is deemed
reasonable.
The defendants are likewise ordered to pay the plaintiffs the amount of P25,000.00 as moral damages; P10,000.00 as attorney's fees, and to pay the costs
of suit.
SO ORDERED.[6]
The trial court anchored its judgment on the following findings:
The contract entered into by the parties is clear, definite and precise as to its nature and character.
It is entitled "Kasulatan ng Bilihang Lupang Mabibiling Muli (Pacto de Retro)" and it contains the provision that in case the vendor a retro fails to repurchase
the property, the sale shall be considered an absolute sale. There is no ambiguity in the contract which can create an occasion for interpretation. The
agreement is written in Pilipino language spoken by the parties. Further, Reynaldo Paran, one of the substituted defendants admitted during the trial that
he fully understood the agreement to be Pacto de Retro; that he had misgivings about the contract but nonetheless he allowed his parents to sign the
agreement. Reynaldo Paran is a law graduate and a real estate broker (TSN pp. 7-8, May 25, 1990; TSN pp. 6-9, Aug. 2, 1990).
The contract having been reduced into writing, the terms of which are clear and unequivocal, it is to be considered as containing all such terms and there
can be, between the parties and their successors in interest, no evidence of the terms of the agreement other than the contents of the writing. (Rule 130,
Sec. 7, Rules of Court). The circumstances attendant to defendants in this case, which are adverted to in the preceding paragraph, do not allow us to
consider the exceptions provided in said Rule 130.[7]
Before the Court of Appeals, private respondents alleged that the trial court erred:
1. ...IN NOT APPLYING THE EXCEPTIONS TO THE PAROL EVIDENCE RULE IN RESOLVING THE ISSUES RAISED IN THE PLEADINGS;
2. ... IN NOT APPLYING THE PROVISIONS OF ARTICLE 1602 OF THE CIVIL CODE OF THE PHILIPPINES;
3. ...IN NOT DECLARING THE KASULATAN NG BILIHANG LUPANG MABIBILING MULI AS AN EQUITABLE MORTGAGE. [8]
On 26 March 1993, respondent Court of Appeals rendered its challenged decision[9] reversing the decision of the trial court, and disposing as follows:
WHEREFORE, the decision of the court a quo is hereby REVERSED and a new one entered declaring the sale with right to repurchase between the parties as
an EQUITABLE MORTGAGE and declaring appellants entitled to redeem the mortgaged property which shall be effected upon payment of their mortgage
debt to appellees in the amount of P100,000.00 (one hundred thousand pesos) with legal rate of interest from January 7, 1984, the time the loan matured
until it is fully paid.
SO ORDERED.[10]
The appellate courts reversal was based on the following findings:
The only issue involved herein is whether the contract denominated as Kasulatan ng Bilihang Lupang Mabibiling Muli (Exh. A, Records, p. 110) is an
equitable mortgage or a pacto de retro sale.
The reason behind the execution of Exhibit A was testified to by appellant Reynaldo Paran that he needed, the amount of P30,000.00 for my subdivision
and I owed Mr. Mariano Gutierrez the amount of P20,000.00 and the remaining amount I used in the renovation of my house, sir. (TSN, May 25, 1990,
p.5). Appellee Ponciano Matanguihan himself admitted on cross-examination that appellant used the money for the latters subdivision (TSN, August 24,
1989, p. 10). While it is true that appellant Reynaldo Paran informed his parents that the document was a pacto de retro sale while their intention was
merely to mortgage their property (TSN, August 2, 1990, p. 7) and yet his parents signed the document knowing that said document did not express their
real intention, they did so due to the urgent necessity of obtaining the funds....
xxx xxx xxx
There are, however, other circumstances which will support the presumption that the transaction between the parties herein was one of equitable
mortgage.
Appellees admitted that from the time of the execution of the questioned contract up to the time that appellee Ponciano Matanguihan testified,
defendant Herminio Paran and his family and appellant Reynaldo Paran and his family were in possession of the subject property (TSN, June 22, 1989, p. 5;
TSN, August 24, 1989, p. 10 and TSN, February 6, 1990, pp. 3-4). The second paragraph of Article 1602 of the New Civil Code provides that when the
vendor remains in possession as lessee or otherwise, the contract shall be construed as an equitable mortgage (Labasan vs. Lacuesta, 86 SCRA 16;
Bundalian vs. Court of Appeals, supra). Said presumption is bolstered by the fact that appellee Ponciano Matanguihan testified that he has not
entered/inspected the house he allegedly bought under a pacto de retro sale (TSN, August 24, 1989, p. 11 and February 6, 1990, p. 3 ).
Appellees did not, after entering into the agreement on October 7, 1983 pay the taxes thereon. It was only on May 7, 1986 or nearly three (3) years
thereafter that they started paying the real property tax (See De Bayquen vs. Balaoro, 143 SCRA 412). The fifth paragraph of Article 1602 provides that
when the vendor (appellants herein) pays the taxes on the thing sold, the presumption is that the transaction is an equitable mortgage.
We need not dwell on the fact that appellees granted appellants several extensions of the period of redemption which were merely verbal although the
third paragraph of Article 1602 requires that it be in another instrument... or built in the same instrument... because the preceding disquisition suffices to
sustain Our finding that the transaction is an equitable mortgage and not a pacto de retro sale as it purports to be.
In its resolution of 13 April 1994,[11] respondent Court of Appeals denied petitioners' motion for reconsideration of the decision.
Petitioners then filed this petition for review with a lone assignment of error:
THE RESPONDENT COURT ERRED IN RULING THAT THE KASULATAN NG BILIHANG MULI (PACTO DE RETRO) IS AN EQUITABLE MORTGAGE.
Petitioners insist that the transaction in question is a contract of sale with right of repurchase as clearly shown in the KASULATAN. In stark contrast,
private respondents assert in their comment that the contract is, in reality, an equitable mortgage.
The pivotal issue then is whether the parties intended the KASULATAN as a bona fide pacto de retro sale or merely an equitable mortgage. Our law
on contracts provides inter aliathat in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally
considered.[12] Accordingly, there are instances where the form and stipulations of a contract must give way to reflect the true intention of the parties.
This is best illustrated in the instances where contracts of sale, whether absolute, or one where the vendor reserves the right to repurchase the thing
sold or a sale pacto de retro,are presumed to be an equitable mortgage. These instances are governed by Articles 1602, 1603 and 1604 of the Civil Code,
which provide as follows:
ART. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:
1. When the price of the sale with right to repurchase is unusually inadequate;
2. When the vendor remains in possession as lessee or otherwise;
3. When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new
period is executed;
4. When the purchaser retains for himself a part of the purchase price;
5. When the vendor binds himself to pay the taxes on the thing sold;
6. In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a
debt or the performance of any other obligation.
In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which
shall be subject to the usury laws.
ART. 1603. In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage.
ART. 1604. The provisions of Article 1602 shall also apply to a contract purporting to be an absolute sale.
The contract referred to in Article 1602 is a contract of sale with right of repurchase where the conventional redemption provided for in Article 1601 shall
take place.
An equitable mortgage is defined as one which although lacking in some formality, or form or words, or other requisites demanded by a statute,
nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law.[13] Its
essential requisites are:
1. That the parties entered into a contract denominated as a contract of sale; and
2. That their intention was to secure an existing debt by way of a mortgage.
 The foregoing Articles 1602, 1603 and 1604 were designed to prevents circumvention of the laws on usury and the prohibition against the creditor
appropriating the mortgaged property. Courts have taken judicial notice of the well-known fact that contracts of sale with right of repurchase have been
frequently used to conceal the true nature of a contract, that is a loan secured by a mortgage.[14] The wisdom of the provisions cannot be ignored nor doubted
considering that in many cases unlettered persons or even those of average intelligence invariably find themselves in no position whatsoever to bargain with
the creditor.[15] Besides, it is a fact that in times of grave financial distress which render persons hard-pressed to meet even their basic needs or answer an
emergency, such persons would have no choice but to sign a deed of absolute sale of property or a sale thereof with pacto de retro if only to obtain a much-
needed loan from unscrupulous money lenders.
Under the wise, just and equitable presumption in Article 1602, a document which appears on its face to be a sale - absolute or with pacto de retro -
may be proven by the vendor or vendor-a-retro to be one of a loan with mortgage. In this case, parol evidence becomes competent and admissible to prove
that the instrument was in truth and in fact given merely as a security for the payment of a loan. And upon proof of the truth of such allegations, the court
will enforce the agreement or understanding in consonance with the true intent of the parties at the time of the execution of the contract.[16] Sales with a
right to repurchase are not favored. As before, instruments shall not be construed to be sales with a right to repurchase, with the stringent and onerous
effects which follow, unless the terms of the document and the surrounding circumstances so require. Whenever, under the terms of the writing, any other
construction can be fairly and reasonably inferred, such construction will be adopted and the contract construed as a mere loan unless the court sees that,
if enforced according to its terms, it is not an unconscionable pact.[17]
The facts and evidence here show that the true intention of the parties was decidedly to secure the payment of the loan, and not to convey ownership
over the property. The transaction was replete with verifiable badges of an equitable mortgage, catalogued as follows:
First. Sometime in October 1983, Reynaldo Paran, son of the deceased Herminio Paran, was strapped for cash, needing the amount of P100,000.00 to
answer for the following: P30,000.00 to be used for his subdivision; P20,000.00 to repay an indebtedness; and P50,000.00 for the renovation of his house
erected on his fathers lot covered by Tax Declaration No. 0391. He was advised by his late father to mortgage the lot in order to secure the needed
amount. Thus, petitioners extended to Herminio Paran the loan of P100,000.00 payable within three months. Thereafter, on 7 October 1983, a deed of
sale covering the lot and residential house erected thereon was executed. The consideration appearing in the deed amounted to P118,000.00 representing
the principal of P100,000.00 and the interest of P18,000.00 at the rate of 6% per month. Due to his pressing need to obtain funds, Reynaldo allowed his
parents to sign the deed knowing fully well that it did not reflect the real intention of the parties. [18]
Second. It is undisputed that the alleged vendors and their successors-in-interest remained in actual physical possession of the disputed property as if they
were still the absolute owners thereof, without an agreement for maintenance expenses, much less, rental payments.
Third. Petitioners declared the property in their names for taxation purposes only on 13 November 1985, as evidenced by Tax Declaration No. 0473,[19] and
paid the taxes thereon as evidenced by Realty Tax Receipt No. 157998,[20] only on 7 May 1986.
Fourth. Petitioners allowed various extensions of the redemption period. These extensions of the redemption period are indicative of an equitable
mortgage, as expressly enumerated in Article 1602(3) of the Civil Code.[21]
Fifth. Petitioners failed to consolidate their title over the disputed property that was allegedly sold even after the expiration of the period to redeem. This
further eroded their claim of title over the disputed property.[22]
Sixth. A judicious scrutiny of the circumstances attendant to the execution of the deed of sale readily reveals that respondents predecessors-in-interest had
no intention to sell and that petitioners themselves had no intention to buy. Most revealing of the want of intention to sell is the fact that the money
proceeds of the alleged sale was partly used for the construction of the very house purportedly sold. On the other hand, petitioner Ponciano Matanguihans
declaration that he never entered the premises of the disputed property in order to inspect it, unequivocally revealed an absence of intent to buy.A buyer
of sound mind would not purchase anything without first inspecting the thing to be bought.
The Court of Appeals then committed no reversible error in its challenged decision.
WHEREFORE, the instant petition is hereby DENIED and the challenged decision of 26 March 1993 of the Court of Appeals in CA-G.R. CV No. 34158 is
AFFIRMED. Costs against petitioners. SO ORDERED.

AURORA P. CAPULONG, BENJAMIN P. CAPULONG, CESAR P. CAPULONG, DOLORES P. CAPULONG, ESTER P. CAPULONG, FERNANDO P. CAPULONG, FELICITAS P.
CAPULONG, IRMA P. CAPULONG, JAIME P. CAPULONG, FRUTO P. CAPULONG, and LOURDES P. CAPULONG, as substituted heirs of JOVITA PONCE VDA. DE
CAPULONG, petitioners, vs. THE COURT OF APPEALS, DELFIN G. TOLENTINO, PILAR DE JOYA, and DOROTEO TOLENTINO, AVELINO TOLENTINO, DELFIN
TOLENTINO, ANGELA TOLENTINO, SEVERINO TOLENTINO, FRANCISCO TOLENTINO, EMILIO TOLENTINO, ZENAIDA BAUTISTA, PILAR DE JOYA as substituted
heirs of RICARDO G. TOLENTINO, respondents. G.R. No. L-61337 June 29, 1984
GUTIERREZ, JR., J.:p
This is a petition for review of the decision of the respondent Court of Appeals, now Intermediate Appellate Court, affirming a judgment of the Court of
First Instance of Bulacan dismissing the complaint for annulment of usurious contracts, declaration of the deed of sale as equitable mortgage,
reconveyance, and damages filed by Jovita Ponce Vda. de Capulong and ordering her to pay respondents the sum of P2,000.00 as attomey's fees and to
pay the costs of the suit.
The background facts which led to the filing of this petition are summarized by the respondent Court of Appeals as follows:
Between November 19, 1964 and May 28, 1965, plaintiff-appellant Jovita Ponce Vda. de Capulong obtained a series of loans in varied amounts from
defendant-appellee Dr. Delfin Tolentino (Exhibits A to J) the aggregate of which amounted to P16,250.00 (Exh. J) The loans were secured by a
continuing mortgage on plaintiff's 950.3 square meter titled property in barrio Concepcion, municipality of Baliuag, Bulacan province.
Capulong failed to liquidate the mortgage upon maturity. Dr. Tolentino accepted her proposal to sell to him the mortgaged property. On February
18, 1967, the notarial document of absolute sale (Exh. K) now assailed as an equitable mortgage, was executed by Capulong whereby title to the
property in question was transferred to Dr. Tolentino for P21,300.00, which amount was P1,000.00 more than Capulong's mortgage indebtedness.
In another document (Exh. L) Capulong was given an option to purchase the property on or before November 20, 1967, for the same price of
P21,300.00, Capulong failed to exercise the option in due time. Her efforts to secure an extension of time proved futile. On January 28, 1968, Dr.
Tolentino sold (Exh. O) the land in question to defendants spouses Ricardo G. Tolentino and Pilar de Joya in whose names it is now titled (Exh. 14).
On February 1, 1968, Jovita Ponce Vda. de Capulong, predecessor-in-interest of the petitioners, filed the complaint for annulment of usurious contracts,
declaration of the deed of sale as an equitable mortgage, reconveyance, and damages with the Court of First Instance of Bulacan against respondent Delfin
G. Tolentino. The case was docketed as Civil Case No. 3617-M.
On February 6, 1968, Mrs. Capulong filed an amended complaint alleging inter alia that the subject property was sold by Delfin Tolentino to the spouses
Ricardo G. Tolentino and Pilar de Joya under a fictitious deed of sale. She also impleaded said spouses as additional defendants.
On September 9, 1968, the private respondents filed their answer alleging inter alia that the transactions adverted to are not usurious and that the deed of
absolute sale between them and Jovita Capulong is a true and valid sale representing the real intention of the parties.
On March 20, 1975, the trial court dismissed the complaint on the ground that Jovita Capulong was not able to present concrete evidence to prove her
claim of usury and that the testimonies of the defendant Delfin Tolentino and his witness Fermin Samson were more credible and weighty than those of
the plaintiff and her witness. The dispositive portion of the decision reads:
WHEREFORE, premises considered, the complaint is hereby dismissed for total lack of merit, and the plaintiff is hereby ordered to
pay the defendant the sum of P2,000.00 by way of attorney's fees, and to pay the cost of this suit.
Jovita Ponce Vda. de Capulong appealed to the then Court of Appeals. On May 9, 1978 while the appeal was pending, the appellant died, and on motion of
her counsel, she was properly substituted by her children and heirs, the petitioners herein.
On January 27, 1981, the respondent court affirmed in toto the decision of the trial court.
On March 10, 1981, the petitioners filed a motion for reconsideration of said decision but this was denied in a resolution dated July 16, 1982.
For the grant of this petition, petitioners assign the following errors:
A. THE FORMULA USED BY THE COURT OF APPEALS IN COMPUTING THE 25% INTEREST ON THE PRINCIPAL OF THE VARIOUS LOANS IN QUESTION IS NOT
SUPPORTED BY THE EVIDENCE NOR ADMITTED BY THE PARTIES.
B. IN GIVING WEIGHT TO THE FINDING OF THE TRIAL COURT ON THE CREDIBILITY OF THE WITNESSES FOR PRIVATE RESPONDENTS, THE COURT OF APPEALS
MISAPPLIED THE RULE ON THE WEIGHT AND SUFFICIENCY OF EVIDENCE.
C. IN CONCLUDING THAT THE 'OPTION TO REPURCHASE IN THIS CASE IS NOT A SOUND BASIS TO FIND THE DEED OF SALE IN QUESTION AS AN EQUITABLE
MORTGAGE THE COURT OF APPEALS ERRONEOUSLY APPLIED THE RULING IN THE CASE OF VILLARICA V. COURT OF APPEALS.
The main point for consideration in this petition is whether or not the "Pagbibilihang Tuluyan Ng Bakuran" should be treated as an equitable mortgage and
not the absolute sale it purports to be.
Petitioners submit that the questioned deed of sale is not what it appears to be but that it is an equitable mortgage because the facts and evidence show it
was merely resorted to by the parties in circumvention of the usury law. Private respondents on the other hand allege that Exhibits 11 and 12 do not
embody a sale with repurchase agreement, or "sale con pacto de retro." They state that Exhibit 11 is a deed of absolute sale while Exhibit 12, in essence,
simply grants the appellant an "option to buy."
We find the stand of the private respondents to be without merit, and accordingly reverse the decision elevated to us for review. Articles 1602 and 1604 of
the Civil Code state:
ART. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:
(1) Wen the price of a sale with right to repurchase is unusually inadequate;
(2) When the vender remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or
granting a new period is executed;
(4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the
payment of a debt or the performance of any other obligation
In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be
considered as interest which shall be subject to the usury laws. (Emphasis supplied)
xxx xxx xxx
ART. 1604. The provisions of article 1602 shall also apply to a contract purporting to be an absolute sale.
Where any of the above circumstances defined in Article 1602 is present, a contract of sale with right to repurchase is presumed to be an equitable
mortgage. As stated by the Code Commission which drafted the new Civil Code, in practically all of the so-called contracts of sale with right of repurchase,
the real intention of the parties is that the pretended purchase price is money loaned and in order to secure the payment of the loan, a contract purporting
to be a sale with pacto de retro is drawn up. (Report of the Code Commission, p. 63)
The respondent court allowed itself to be misled by our ruling in Villarica v. Court of Appeals, (26 SCRA 189), that:
The right of repurchase is not a right granted the vendor by the vendee in a subsequent instrument, but is a right reserved by the
vendor in the same instrument of sale as one of the stipulations of the contract. Once the instrument of absolute sale is executed,
the vendor can no longer reserve the right to repurchase, and any right thereafter granted the vendor by the vendee in a separate
instrument cannot be a right of repurchase but some other right like the option to buy in the instant case. ...
In Villarica, the deed of absolute sale was executed on May 19, 1951. The consideration was P35,000.00. It was registered on May 25, 1951. On that same
day, May 25, 1951, the vendees therein executed another public instrument where they granted the vendors an option to buy the same property within a
period of one year for the price of P37,750.00. The ruling was based on a particular set of facts.
There is one important factor that differentiates the Villarica case from the instant petition. The document granting the vendors therein an option to buy
back the property was executed six (6) days after the execution of the deed of sale whereas in the instant case the option to buy was embodied in a
document executed at the same time that the questioned deed of sale was executed. The option to buy in the Villarica case was interpreted to be only an
afterthought. On the other hand, the intent of the parties to circumvent the provision discouraging pacto de retro is very apparent in the instant case. The
two contracts, the deed of sale and the document embodying the option to repurchase were prepared, signed, and notarized on the same day. The
respondent court should have seen through a transparent effort to make it appear that the two transactions were not intimately related but distinct and
separate as in the Villarica case. This should have put the court on guard considering the other circumstances of the case from which no other conclusion
could be derived except that the deed of absolute sale and the document giving the right to repurchase were, in fact, only one transaction of sale pacto de
retro which must be construed as an equitable mortgage. Another factor which the respondent court failed to note is the sale of the property to the
vendee a retro's brother, thus interposing a supposed innocent third party between the parties to the contract. This second sale was squarely raised in the
amended complaint. The records show that this sale and the issuance of a new Transfer Certificate of Title on the same date as the sale cannot be deemed
to be bona fide.
Looking into the reason for the inclusion of Article 1602 in the New Civil Code, this Court held in Santos v. Duata (14 SCRA 1041) that:
Article 1602 is a new provision in the Civil Code designed primarily to curtail the evils brought about by contracts of sale with right
of repurchase, such as the circumvention of the usury law and pactum commission it particularly envisions contracts of sale with
right to repurchase where the real intention of the parties is that the pretended purchase price is money loaned, and in order to
secure the payment of the loan a contract purporting to be a sale with pacto de retro is drawn up. (See report of the Code
Commission, pp. 61-63.)
The records show that over a six-month period, the mother of the petitioners borrowed money on no less than ten separate occasions from Delfin G.
Tolentino. The evidence presented by Mrs. Jovita Ponce Vda. de Capulong alleges that when her total borrowing. 9 of P13,000.00 were added to what she
claims were usurious interests amounting to P3,250.00, the kited total of P16,250.00 was made to appear at the P21,300.00 purchase price for the lot
when actually no money outside of the ten earlier loan transactions was exchanged between the parties.
The added fact that Jovita Capulong remained in actual physical possession of the land and enjoyed the fruits thereof confirms the real intention of the
parties to secure the payment of the loans with the land as security. The records show that the private respondents waited for the period of redemption to
expire before taking possession of the land. Had the petitioners' mother really executed an absolute sale in favor of respondent Delfin Tolentino, the land
which is the object of the transaction should have been delivered to Tolentino and he would have assumed immediate possession after the execution of
the questioned deed of sale.
The deed of sale taken together with the companion "right to redeem" contract is only an equitable mortgage. Therefore, private respondent Delfin G.
Tolentino could not validly sell the land to his brother Ricardo Tolentino and the latter's wife, Pilar de Joya.
Apart from failing to appreciate the fact that the vendee a retro used two separate documents of sale and option to repurchase to formalize what was
basically only one transaction of sale pacto de retro, thus simulating a Villarica v. Court of Appeals situation, the respondent court also relied too much on
the trial court's failure to find usurious transactions.
The petitioners' mother summarized the loan transactions as follows:

Date Obtained Actual Loan 25% interest

Nov. 20, 1964 P5,000.00 P1,250.00

(Exh. "A")

Dec. 5, 1964 600.00 150.00

(Exh. "B")

Dec. 21, 1964 1,000.00 250.00

(Exh. "C")
 Jan. 6, 1965 1,500.00 375.00

(Exh. "D")

Jan.19, 1965 1,500.00 375.00

(Exh. "E")

Feb.18, 1965 1,000.00 250.00

(Exh. "F")

April 17, 1965 600.00 150.00

(Exh. "G")

April 19, 1965 800.00 200.00

(Exh. "H")

May 21, 1965 50.00 125.00

(Exit. "I")

May 28, 1965 500.00 125.00

(Exh. J) _____________ _____________

Total P13,000.00 P3,250.00

According to Mrs. Capulong, she actually borrowed only P13,000.00 but the contracts evidencing the transaction make the total appear as P16,250.00.
When the last contract, the one now sought to be set aside, was executed, the loans and interests were allegedly made to appear as a P21,300.00
purchase price, including a P1,000.00 amount given to her on February 18, 1967, when actually no additional money was given when the deed of sale was
granted.
The respondent court sustained the trial court's conclusions and reasoned out:
There is no merit in this appeal. Appellant's theory, that the purchase of her land in the amount of P21,300.00 is the sum total of her principal
loan allegedly amounting to only P13,000.00 and the usurious interest thereon at 25% per annum, minus the sum of Pl,500.00 which she paid to Dr.
Tolentino on November 20, 1965, in concept of interest Vide p. 10, appellant's brief), does not find support from a mathematical computation
based on said theory. Thus from November 20, 1964 until February 18, 1967, when the controverted sale was consummated, a period of 2 years
and 3 months, the interest due on P13,000.00 amounted to P7,412.49. This added to the principal of P13,000.00 would give a result of P20,412.49.
The balance after deducting therefrom the sum of P1,500.00 would be P8,912.49 only, or P2,387.51 less the sum of P21,300.00.
The petitioners now allege that the Court of Appeals adopted a computation formula in consonance with the respondents' theory which is not supported
by the evidence in the records but which is only a theory. The petitioners offer their own theory, thus:
Upon the other hand, in adopting the formula now being questioned, the respondent Court of Appeals disregarded a basic rule followed in the
computation of interest charges. It also disregarded what petitioners offered was a formula of computation used by the parties in accounting for
the consideration of the sale of P21,300.00. In the formula adopted by the respondent Court, the 12% per annum was computed on the principal
loan on a straight basis without taking into account the fact that the said amount of loan was obtained on different dates.
Anent petitioners' suggested formula which was disregarded by respondent Court of Appeals, the same consisted in the following: The actual
loan received by Jovita Ponce Vda. de Capulong from Delfin Tolentino of P13,000.00 would command an interest of P6,500.00 computed at the rate
of 25% per annum for 2 years disregarding the 3 months from November 20, 1965 to February 18, 1967. The loan of P16,250.00 which is the total
of the face value of the various loan contracts would command an interest of P3,250.00 computed at the stipulated rate of 12% per Annum for 2
years and 3 months. The said amounts of interest totalling P9,750.00 added to the actual amount of loan received of P13,000.00 less the payment
of P1,500.00 on November 20, 1965 in the concept of interest, yields a total of P21,250.00 or P50.00 less than the consideration of P21,300.00
stated in the deed of absolute sale. The result using this formula compared to that in the formula adopted by respondent Court of Appeals suggests
that it was error to have disregarded this formula in favor of the other.
Actually, the determination of whether or not there were usurious transactions in this case depends on whom to believe the borrowers or the lenders?
We see no need to disturb the trial court's findings on the credibility of the witnesses. Even if no usury was involved, and this is by no means certain or
established to our satisfaction, there is enough evidence in the records to prove that a contract of loan with mortgage was made to appear in paper as an
absolute sale with a companion option to buy.
WHEREFORE, the judgment of the respondent court is hereby REVERSED and SET ASIDE. The deed of sale executed by Jovita Ponce de Capulong in favor of
Dr. Delfin G. Tolentino is declared as an equitable mortgage. The petitioners are ordered to pay their mortgage indebtedness in the amount of P21,300.00
to the private respondents with legal rate of interest from the time of the expiration of the redemption period on November 20, 1967 until it is fully paid.
The deed of sale executed by Delfin Tolentino in favor of Ricardo Tolentino and Pilar de Joya, being null and void, is also CANCELLED. SO ORDERED.

UNION BANK OF THE PHILIPPINES, vs. ALAIN* JUNIAT, WINWOOD APPAREL, INC., WINGYAN APPAREL, INC., NONWOVEN FABRIC PHILIPPINES,Respondents.
G.R. No. 171569 August 1, 2011
DEL CASTILLO, J.:
To have a binding effect on third parties, a contract of pledge must appear in a public instrument. 1
This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the June 23, 2005 Decision3 and the February 9, 2006 Resolution4 of the
Court of Appeals (CA) in CA-G.R. CV No. 66392.
Factual Antecedents
Petitioner Union Bank of the Philippines (Union Bank) is a universal
banking corporation organized and existing under Philippine laws. 5
Respondents Winwood Apparel, Inc. (Winwood) and Wingyan Apparel, Inc. (Wingyan) are domestic corporations engaged in the business of apparel
manufacturing.6 Both respondent corporations are owned and operated by respondent Alain Juniat (Juniat), a French national based in
Hongkong.7 Respondent Nonwoven Fabric Philippines, Inc. (Nonwoven) is a Philippine corporation engaged in the manufacture and sale of various types of
nonwoven fabrics.8
On September 3, 1992, petitioner filed with the Regional Trial Court (RTC) of Makati, Branch 57, a Complaint 9 with prayer for the issuance of ex-parte writs
of preliminary attachment and replevin against Juniat, Winwood, Wingyan, and the person in possession of the mortgaged motorized sewing machines and
equipment.10 Petitioner alleged that Juniat, acting for and in behalf of Winwood and Wingyan, executed a promissory note 11 dated April 11, 1992 and a
Chattel Mortgage12 dated March 27, 1992 over several motorized sewing machines and other allied equipment to secure their obligation arising from
export bills transactions to petitioner in the amount of 1,131,134.35; 13 that as additional security for the obligation, Juniat executed a Continuing Surety
Agreement14dated April 11, 1992 in favor of petitioner;15 that the loan remains unpaid;16 and that the mortgaged motorized sewing machines are
insufficient to answer for the obligation.17
On September 10, 1992, the RTC issued writs of preliminary attachment and replevin in favor of petitioner. 18 The writs were served by the Sheriff upon
Nonwoven as it was in possession of the motorized sewing machines and equipment.19 Although Nonwoven was not impleaded in the complaint filed by
petitioner, the RTC likewise served summons upon Nonwoven since it was in possession of the motorized sewing machines and equipment.20
On September 28, 1992, Nonwoven filed an Answer,21 contending that the unnotarized Chattel Mortgage executed in favor of petitioner has no binding
effect on Nonwoven and that it has a better title over the motorized sewing machines and equipment because these were assigned to it by Juniat pursuant
to their Agreement22 dated May 9, 1992.23 Juniat, Winwood, and Wingyan, on the other hand, were declared in default for failure to file an answer within
the reglementary period.24
On November 23, 1992, petitioner filed a Motion to Sell Chattels Seized by Replevin,25 praying that the motorized sewing machines and equipment be sold
to avoid depreciation and deterioration.26 However, on May 18, 1993, before the RTC could act on the motion, petitioner sold the attached properties for
the amount of 1,350,000.00.27
Nonwowen moved to cite the officers of petitioner in contempt for selling the attached properties, but the RTC denied the same on the ground that Union
Bank acted in good faith.28
Ruling of the Regional Trial Court
On May 20, 1999, the RTC of Makati, Branch 145,29 rendered a Decision30 in favor of petitioner. The RTC ruled that both the Chattel Mortgage dated March
27, 1992 in favor of petitioner and the Agreement dated May 9, 1992 in favor of Nonwoven have no obligatory effect on third persons because these
documents were not notarized.31However, since the Chattel Mortgage in favor of petitioner was executed earlier, petitioner has a better right over the
motorized sewing machines and equipment under the doctrine of "first in time, stronger in right" (prius tempore, potior jure).32 Thus, the RTC disposed of
the case in this wise:
WHEREFORE, above premises considered, judgment is hereby rendered as follows:
1.] Declaring the [petitioner] UNION BANK OF THE PHILIPPINES, as having the better right to the goods and/or machineries subject of the Writs of
Preliminary Attachment and Replevin issued by this Court on September 10, 1992.
2.] Declaring the [petitioner] as entitled to the proceeds of the sale of the subject machineries in the amount of 1,350,000.00;
3.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan Apparel, Inc. to be jointly and severally liable to the [petitioner], for
the deficiency between the proceeds of the sale of the machineries subject of this suit [1,350,000.00] and original claim of the plaintiff
[1,919,907.03], in the amount of 569,907.03, with legal interest at the rate of 12% per annum from date of this judgment until fully paid; and
4.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan Apparel, Inc. to be jointly and severally liable to the [petitioner] for
the amount of 50,000.00 as reasonable attorneys fees; and
5.] Cost of this suit against the [respondents].
SO ORDERED.33
Nonwoven moved for reconsideration34 but the RTC denied the same in its
Order35 dated July 14, 1999.
Ruling of the Court of Appeals
On appeal, the CA reversed the ruling of the RTC. The CA ruled that the contract of pledge entered into between Juniat and Nonwoven is valid and binding,
and that the motorized sewing machines and equipment were ceded to Nonwoven by Juniat by virtue of a dacion en pago.36 Thus, the CA declared
Nonwoven entitled to the proceeds of the sale of the attached properties.37 The fallo reads:
WHEREFORE, premises considered, the assailed decision is hereby REVERSED and SET ASIDE. [Petitioner] Union Bank of the Philippines is hereby DIRECTED
to pay Nonwoven Fabric Philippines, Inc. 1,350,000.00, the amount it holds in escrow, realized from the May 18, 1993 sale of the machineries to avoid
deterioration during pendency of suit. No pronouncement as to costs.
SO ORDERED.38
Petitioner sought reconsideration39 which was denied by the CA in a Resolution40 dated February 9, 2006.

Issues
Hence, the present recourse where petitioner interposes the following issues:
1. Whether x x x the Court of Appeals committed serious reversible error in setting aside the Decision of the trial court holding that Union Bank
of the Philippines had a better right over the machineries seized/levied upon in the proceedings before the trial court and/or the proceeds of
the sale thereof;
2. Whether x x x the Court of Appeals seriously erred in holding that [Nonwoven] has a valid claim over the subject sewing machines.41
Petitioners Arguments
Echoing the reasoning of the RTC, petitioner insists that it has a better title to the proceeds of the sale. 42 Although the Chattel Mortgage executed in its
favor was not notarized, petitioner insists that it is nevertheless valid, and thus, has preference over a subsequent unnotarized agreement.43 Petitioner
further claims that except for the said agreement, no other evidence was presented by Nonwoven to show that the motorized sewing machines and
equipment were indeed transferred to them by Juniat/Winwood/Wingyan.44
Respondent Nonwovens Arguments
Nonwoven, on the other hand, claims ownership over the proceeds of the sale under Article 154445 of the Civil Code on double sale, which it claims can be
applied by analogy in the instant case.46 Nonwoven contends that since its prior possession over the motorized sewing machines and equipment was in
good faith, it has a better title over the proceeds of the sale.47 Nonwoven likewise maintains that petitioner has no right over the proceeds of the sale
because the Chattel Mortgage executed in its favor was unnotarized, unregistered, and without an affidavit of good faith.48

Our Ruling
The petition has merit.
Nonwoven lays claim to the attached motorized sewing machines and equipment pursuant to the Agreement it entered into with Juniat, to wit:
Hong Kong, 9th May, 1992
With reference to talks held this morning at the Holiday Inn Golden Mile Coffee Shop, among the following parties:
a. Redflower Garments Inc. Mrs. Maglipon
b. Nonwoven Fabrics Phils. Inc. Mr. J. Tan
c. Winwood Apparel Inc./Wing Yan Apparel, Inc. Mr. A. Juniat, Mrs. S. Juniat
IT WAS AGREED THAT:
a. Settlement of the accounts between Nonwoven Fabrics Phils. Inc. and Winwood Apparel Inc./Wing Yan Apparel, Inc. should be effected as agreed
through partial payment by L/C with the balance to be settled at a later date for which Winwood Apparel, Inc. agrees to consign 94 sewing machines, 3
snap machines and 2 boilers, presently in the care of Redflower Garments Inc., to the care of Nonwoven Fabrics Phils., Inc. as guarantee. Meanwhile,
Nonwoven will resume delivery to Winwood/Win Yang as usual.
x x x x49 (Emphasis supplied.)
It insists that since the attached properties were assigned or ceded to it by Juniat, it has a better right over the proceeds of the sale of the attached
properties than petitioner, whose claim is based on an unnotarized Chattel Mortgage.
We do not agree.
Indeed, the unnotarized Chattel Mortgage executed by Juniat, for and in behalf of Wingyan and Winwood, in favor of petitioner does not bind
Nonwoven.50 However, it must be pointed out that petitioners primary cause of action is for a sum of money with prayer for the issuance of ex-parte writs
of attachment and replevin against Juniat, Winwood, Wingyan, and the person in possession of the motorized sewing machines and equipment.51 Thus, the
fact that the Chattel Mortgage executed in favor of petitioner was not notarized does not affect petitioners cause of action. Petitioner only needed to
show that the loan of Juniat, Wingyan and Winwood remains unpaid and that it is entitled to the issuance of the writs prayed for. Considering that writs of
attachment and replevin were issued by the RTC,52Nonwoven had to prove that it has a better right of possession or ownership over the attached
properties.1avvphil This it failed to do.
A perusal of the Agreement dated May 9, 1992 clearly shows that the sewing machines, snap machines and boilers were pledged to Nonwoven by Juniat to
guarantee his obligation. However, under Article 2096 of the Civil Code, "[a] pledge shall not take effect against third persons if a description of the thing
pledged and the date of the pledge do not appear in a public instrument." Hence, just like the chattel mortgage executed in favor of petitioner, the pledge
executed by Juniat in favor of Nonwoven cannot bind petitioner.
Neither can we sustain the finding of the CA that: "The machineries were ceded to THIRD PARTY NONWOVEN by way of dacion en pago, a contract later
entered into by WINWOOD/WINGYAN and THIRD PARTY NONWOVEN."53As aptly pointed out by petitioner, no evidence was presented by Nonwoven to
show that the attached properties were subsequently sold to it by way of a dacion en pago. Also, there is nothing in the Agreement dated May 9, 1992 to
indicate that the motorized sewing machines, snap machines and boilers were ceded to Nonwoven as payment for the Wingyans and Winwoods
obligation. It bears stressing that there can be no transfer of ownership if the delivery of the property to the creditor is by way of security.54 In fact, in case
of doubt as to whether a transaction is one of pledge or dacion en pago, the presumption is that it is a pledge as this involves a lesser transmission of rights
and interests.55
In view of the foregoing, we are constrained to reverse the ruling of the CA. Nonwoven is not entitled to the proceeds of the sale of the attached
properties because it failed to show that it has a better title over the same.
WHEREFORE, the petition is hereby GRANTED. The assailed June 23, 2005 Decision and the February 9, 2006 Resolution of the Court of Appeals in CA-G.R.
CV No. 66392 are hereby REVERSED and SET ASIDE. The May 20, 1999 Decision of the Regional Trial Court of Makati, Branch 145, is hereby REINSTATED
and AFFIRMED. SO ORDERED.

Yuliongsiu vs. PNB

G.R. No. L-19227 17 February, 1968
FACTS:
Yuliongsiu owned two vessels namely the M/S Surigao (P109,925.78), and the M/S Don Dino (P63,000) and he likewise operated the FS-203
(P210,672.24). The vessels were purchased by him from the Philippine Shipping Commission.
He had paid only the sum of P76,500 and the balance of the purchase price was payable at P50,000 a year due on or before the end of the
current year.
Plaintiff then obtained a loan from PNB for the amount of P50,000 and he used the vessels as security for said loan. He effected said payments
of P20,000.
The remaining balance was paid instead by Yuliongsiu in the manner of the issuance of two promissory notes with the amounts of P10,000 and
P20,000 pesos each. The two notes were never paid by the plaintiff.
PNB filed a criminal case against the plaintiff for estafa through falsification of commercial documents in which the plaintiff and two other accused
were convicted by the trial court. Together with the institution of the criminal action, the PNB took possession of the vessels used as collateral
for the said unpaid loan.
Plaintiff commenced a civil action against PNB to recover such vessels. They contended that the nature of the security agreement was that of a
chattel mortgage ergo the PNB could not take said vessels until plaintiff was held in default of his obligation to pay the loan.
CFI ruled that PNB was justified in taking the vessels, hence this case.

ISSUE: W/N the nature of the agreement was that of a pledge or a chattel mortgage?

HELD:
The Supreme Court held in this case that the contention of Yuliongsiu that the agreement was a chattel mortgage could not be sustained because
it was expressly given in their written agreement that plaintiff entered into a pledge contract with the PNB for the loan security agreement.
Plaintiff contends also that actual delivery is essential to make the pledge agreement effective as they cited Betita vs. Ganzon.
o The Supreme Court once more states that constructive delivery should suffice in pledge agreements and they cited Banco Espanol-
Filipino vs. Peterson as a counter to the plaintiffs contention.
Plaintiff likewise contends that the provisions on Pledge under the Civil Code could not be effected because the agreement was entered in 1947
wherein the New Civil Code was not yet in effect.
o The Supreme Court frowns at this contention for they stated that there is an authority supporting that the pledgee can temporarily
entrust the physical possession of the chattels pledged to the pledgor without invalidating the pledge. He is called merely as a trustee
for pledge.

G.R. No. L-53955 January 13, 1989

THE MANILA BANKING CORPORATION, plaintiff-appellee, vs. ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO, defendants-appellants.
BIDIN, J.:
This is an appeal from the decision* of the Court of First Instance of Manila, Branch XVII in Civil Case No. 78178 for collection of sum of money based on
promissory notes executed by the defendants-appellants in favor of plaintiff-appellee bank. The dispositive portion of the appealed decision (Record on
Appeal, p. 33) reads as follows:
WHEREFORE judgment is hereby rendered (a) sentencing defendants, Anastacio Teodoro, Jr. and Grace Anna Teodoro jointly and severally, to pay
plaintiff the sum of P15,037.11 plus 12% interest per annum from September 30, 1969 until fully paid, in payment of Promissory Notes No. 11487,
plus the sum of P1,000.00 as attorney's fees; and (b) sentencing defendant Anastacio Teodoro, Jr. to pay plaintiff the sum of P8,934.74, plus interest
at 12% per annum from September 30, 1969 until fully paid, in payment of Promissory Notes Nos. 11515 and 11699, plus the sum of P500.00 an
attorney's fees.
With Costs against defendants.
The facts of the case as found by the trial court are as follows:
On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and severally, executed in favor of plaintiff a Promissory Note (No.
11487) for the sum of P10,420.00 payable in 120 days, or on August 25, 1966, at 12% interest per annum. Defendants failed to pay the said
amount inspire of repeated demands and the obligation as of September 30, 1969 stood at P 15,137.11 including accrued interest and service
charge.
On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father) and Anastacio Teodoro, Jr. (Son) executed in favor of plaintiff two
Promissory Notes (Nos. 11515 and 11699) for P8,000.00 and P1,000.00 respectively, payable in 120 days at 12% interest per annum. Father and
Son made a partial payment on the May 3, 1966 promissory Note but none on the June 20, 1966 Promissory Note, leaving still an unpaid balance
of P8,934.74 as of September 30, 1969 including accrued interest and service charge.
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; and in case of collection through an attorney-at-law, the makers
shall, jointly and severally, pay 10% of the amount over-due as attorney's fees, which in no case shall be leas than P200.00.
It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed of Assignment of Receivables from the Emergency Employment
Administration in the sum of P44,635.00. 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.
 (1) 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 ;
xxx xxx xxx
(6) The Assignor guarantees the existence and legality of said accounts receivable, and the due and punctual payment thereof unto the
assignee, ... on demand, ... and further, that Assignor warrants the solvency and credit worthiness of each and every account.
(7) The Assignor does hereby guarantee the payment when due on all sums payable under the contracts giving rise to the accounts
receivable ... including reasonable attorney's fees in enforcing any rights against the debtors of the assigned accounts receivable and will
pay upon demand, the entire unpaid balance of said contract in the event of non-payment by the said debtors of any monthly sum at its
due date or of any other default by said debtors;
xxx xxx xxx
(9) ... This Assignment shall also stand as a continuing guarantee for any and all whatsoever there is or in the future there will be justly
owing from the Assignor to the Assignee ...
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.
For failure of defendants to pay the sums due on the Promissory Note, this action was instituted on November 13, 1969, originally against the Father,
Son, and the latter's wife. Because the Father died, however, during the pendency of the suit, the case as against him was dismiss under the provisions
of Section 21, Rule 3 of the Rules of Court. The action, then is against defendants Son and his wife for the collection of the sum of P 15,037.11 on
Promissory Note No. 14487; and against defendant Son for the recovery of P 8,394.7.4 on Promissory Notes Nos. 11515 and 11699, plus interest on
both amounts at 12% per annum from September 30, 1969 until fully paid, and 10% of the amounts due as attorney's fees.
Neither of the parties presented any testimonial evidence and submitted the case for decision based on their Stipulations of Fact and on then,
documentary evidence.
The issues, as defined by the parties are: (1) whether or not plaintiff claim is already considered paid by the Deed of Assign. judgment of Receivables
by the Son; and (2) whether or not it is plaintiff who should directly sue the Philippine Fisheries Commission for collection.' (Record on Appeal, p. 29-
32).
On April 17, 1972, the trial court rendered its judgment adverse to defendants. On June 8, 1972, defendants filed a motion for reconsideration (Record on
Appeal, p. 33) which was denied by the trial court in its order of June 14, 1972 (Record on Appeal, p. 37). On June 23, 1972, defendants filed with the lower
court their notice of appeal together with the appeal bond (Record on Appeal, p. 38). The record of appeal was forwarded to the Court of Appeals on
August 22, 1972 (Record on Appeal, p. 42).
In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single assignment of error, that is
THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL REMAKING OF THE CONTRACT BETWEEN THE PARTIES, IN VIOLATION
OF LAW; HENCE, TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION.
As the appeal involves a pure question of law, the Court of Appeals, in its resolution promulgated on March 6, 1980, certified the case to this Court (Rollo,
p. 24). The record on Appeal was forwarded to this Court on March 31, 1980 (Rollo, p. 1).
In the resolution of May 30, 1980, the First Division of this Court ordered that the case be docketed and declared submitted for decision (Rollo, p. 33).
On March 7, 1988, considering the length of time that the case has been pending with the Court and to determine whether supervening events may have
rendered the case moot and academic, the Court resolved (1) to require the parties to MOVE IN THE PREMISES within thirty days from notice, and in case
they fail to make the proper manifestation within the required period, (2) to consider the case terminated and closed with the entry of judgment
accordingly made thereon (Rollo, p. 40).
On April 27, 1988, appellee moved for a resolution of the appeal review interposed by defendants-appellants (Rollo, p. 41).
The major issues raised in this case are as follows: (1) whether or not the assignment of receivables has the effect of payment of all the loans contracted by
appellants from appellee bank; and (2) whether or not appellee bank must first exhaust all legal remedies against the Philippine Fisheries Commission
before it can proceed against appellants for collections of loan under the promissory notes which are plaintiffs bases in the action for collection in Civil
Case No. 78178.
Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dation in payment,
exchange or donation, and without the need of the consent of the debtor, transfers his credit and its accessory rights to another, known as the assignee,
who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor. ... It may be in the form of a sale, but at
times it may constitute a dation in payment, such as when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has against
a third person, or it may constitute a donation as when it is by gratuitous title; or it may even be merely by way of guaranty, as when the creditor gives as a
collateral, to secure his own debt in favor of the assignee, without transmitting ownership. The character that it may assume determines its requisites and
effects. its regulation, and the capacity of the parties to execute it; and in every case, the obligations between assignor and assignee will depend upon the
judicial relation which is the basis of the assignment: (Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. 5, pp. 165-166).
There is no question as to the validity of the assignment of receivables executed by appellants in favor of appellee bank.
The issue is with regard to its legal effects.
I
It is evident that the assignment of receivables executed by appellants on January 24, 1964 did not transfer the ownership of the receivables to appellee
bank and release appellants from their loans with the bank incurred under promissory notes Nos. 11487,11515 and 11699.
The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts, and their credit accommodations in the sum of
P10,000.00 extended to appellants by appellee bank, and 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). It was further
stipulated that the assignment will also stand as a continuing guaranty for future loans of appellants to appellee bank and correspondingly the 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 position of appellants, however, is that the deed of assignment is a quitclaim in consideration of their indebtedness to appellee bank, not mere
guaranty, in view of the following provisions of the deed of assignment:
... the Assignor do hereby remise, release and quit-claim unto said assignee all its rights, title and interest in the accounts receivable described
hereunder. (Emphasis supplied by appellants, first par., Deed of Assignment).
... that the title and right of possession to said account receivable is to remain in said assignee and it shall have the right to collect directly from
the debtor, and whatever the Assignor does in connection with the collection of said accounts, it agrees to do so as agent and representative of
the Assignee and it trust for said Assignee ...(Ibid. par. 2 of Deed of Assignment).' (Record on Appeal, p. 27)
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 (68 2d, Secured Transaction, Section 50) 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]).
Definitely, the assignment of the receivables did not result from a sale transaction. It cannot be said to have been constituted by virtue of a dation in
payment for appellants' loans with the bank evidenced by promissory note Nos. 11487, 11515 and 11699 which are the subject of the suit for collection in
Civil Case No. 78178. At the time the deed of assignment was executed, said loans were non-existent yet. The deed of assignment was executed on January
24, 1964 (Exh. "G"), while promissory note No. 11487 is dated April 25, 1966 (Exh. 'A), promissory note 11515, dated May 3, 1966 (Exh. 'B'), promissory
note 11699, on June 20, 1966 (Exh. "C"). At most, it was a dation in payment for P10,000.00, the amount of credit from appellee bank indicated in the deed
of assignment. At the time the assignment was executed, there was no obligation to be extinguished except the amount of P10,000.00. Moreover, 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 obligations be on every point incompatible with each other (Article 1292, New Civil Code).
Obviously, 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).
In one case, the assignments of rights, title and interest of the defendant in the contracts of lease of two buildings as well as her rights, title and interest in
the land on which the buildings were constructed to secure an overdraft from a bank amounting to P110,000.00 which was increased to P150,000.00, then
to P165,000.00 was considered by the Court to be documents of mortgage contracts inasmuch as they were executed to guarantee the principal
obligations of the defendant consisting of the overdrafts or the indebtedness resulting therefrom. The Court ruled that an assignment to guarantee an
obligation is in effect a mortgage and not an absolute conveyance of title which confers ownership on the assignee (People's Bank & Trust Co. v. Odom, 64
Phil. 126 [1937]).
II
As to whether or not appellee bank must have to exhaust all legal remedies against the Philippine Fisheries Commission before it can proceed against
appellants for collection of loans under their promissory notes, must also be answered in the negative.
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.
Appellee bank did try to collect on the pledged receivables. As the Emergency Employment Agency (EEA) which issued the receivables had been abolished,
the collection had to be coursed through the Office of the President which disapproved the same (Record on Appeal, p. 16). The receivable became
virtually worthless leaving appellants' loans from appellee bank unsecured. It is but proper that after their repeated demands made on appellants for the
settlement of their obligations, appellee bank should proceed against appellants. It would be an exercise in futility to proceed against a defunct office for
the collection of the receivables pledged.
WHEREFORE, the appeal is Dismissed for lack of merit and the appealed decision of the trial court is affirmed in toto. SO ORDERED.

Separate Opinions
FELICIANO, J., concurring:
I quite agree with the general reasoning of and the results reached by my distinguished brother Bidin in respect of both of the principal issues he addressed
in his opinion.
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.' This statement is basically not exceptionable, so far as it goes. It might, however,
be borne in mind that the intent of the parties to the transaction is to be determined in the first instance, by the very language which they use. The deed of
assignment contains language which suggest that the parties intended to effect a complete alienation of title to and rights over the receivables which are
the subject of the assignment. This language is comprised of works like "remise," "release and quitclaim" and clauses like "the title and right of possession
to said accounts receivable is to remain in said assignee" who "shall have the right to collect directly from the debtor." The same intent is also suggested by
the use of the words "agent and representative of the assignee" in reffering to the assignor.
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. In other words, in such hypothetical case, 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.

Separate Opinions
FELICIANO, J., concurring:
I quite agree with the general reasoning of and the results reached by my distinguished brother Bidin in respect of both of the principal issues he addressed
in his opinion.
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.' This statement is basically not exceptionable, so far as it goes. It might, however,
be borne in mind that the intent of the parties to the transaction is to be determined in the first instance, by the very language which they use. The deed of
assignment contains language which suggest that the parties intended to effect a complete alienation of title to and rights over the receivables which are
the subject of the assignment. This language is comprised of works like "remise," "release and quitclaim" and clauses like "the title and right of possession
to said accounts receivable is to remain in said assignee" who "shall have the right to collect directly from the debtor." The same intent is also suggested by
the use of the words "agent and representative of the assignee" in reffering to the assignor.
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. In other words, in such hypothetical case, 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.

CITIBANK, N.A. (Formerly First National City Bank) and INVESTORS' FINANCE CORPORATION, doing business under the name and style of FNCB
Finance, petitioners, vs. MODESTA R. SABENIANO, respondent. G.R. No. 156132 October 12, 2006
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari,1 under Rule 45 of the Revised Rules of Court, of the Decision2 of the Court of Appeals in CA-G.R. CV
No. 51930, dated 26 March 2002, and the Resolution,3 dated 20 November 2002, of the same court which, although modifying its earlier Decision, still
denied for the most part the Motion for Reconsideration of herein petitioners.
Petitioner Citibank, N.A. (formerly known as the First National City Bank) is a banking corporation duly authorized and existing under the laws of the United
States of America and licensed to do commercial banking activities and perform trust functions in the Philippines.
Petitioner Investor's Finance Corporation, which did business under the name and style of FNCB Finance, was an affiliate company of petitioner Citibank,
specifically handling money market placements for its clients. It is now, by virtue of a merger, doing business as part of its successor-in-interest, BPI Card
Finance Corporation. However, so as to consistently establish its identity in the Petition at bar, the said petitioner shall still be referred to herein as FNCB
Finance.4
Respondent Modesta R. Sabeniano was a client of both petitioners Citibank and FNCB Finance. Regrettably, the business relations among the parties
subsequently went awry.
On 8 August 1985, respondent filed a Complaint5 against petitioners, docketed as Civil Case No. 11336, before the Regional Trial Court (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. 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 Civil Case No. 11336 against petitioners for "Accounting, Sum of Money and Damages." Respondent
eventually filed an Amended Complaint6 on 9 October 1985 to include additional claims to deposits and money market placements inadvertently left out
from her original Complaint.
In their joint Answer7 and Answer to Amended Complaint,8 filed on 12 September 1985 and 6 November 1985, respectively, 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. Petitioner Citibank supposedly informed respondent Sabeniano of the foregoing compensation
through letters, dated 28 September 1979 and 31 October 1979. Petitioners were therefore surprised when six years later, in 1985, 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.
When the parties failed to reach a compromise during the pre-trial hearing,9 trial proper ensued and the parties proceeded with the presentation of their
respective evidence. Ten years after the filing of the Complaint on 8 August 1985, a Decision 10 was finally rendered in Civil Case No. 11336 on 24 August
1995 by the fourth Judge11 who handled the said case, Judge Manuel D. Victorio, the dispositive portion of which reads
WHEREFORE, in view of all the foregoing, decision is hereby rendered as follows:
(1) Declaring as illegal, null and void the setoff effected by the defendant Bank [petitioner Citibank] of plaintiff's [respondent
Sabeniano] dollar deposit with Citibank, Switzerland, in the amount of US$149,632.99, and ordering the said defendant [petitioner
Citibank] to refund the said amount to the plaintiff with legal interest at the rate of twelve percent (12%) per annum, compounded
yearly, from 31 October 1979 until fully paid, or its peso equivalent at the time of payment;
(2) Declaring the plaintiff [respondent Sabeniano] indebted to the defendant Bank [petitioner Citibank] in the amount of
1,069,847.40 as of 5 September 1979 and ordering the plaintiff [respondent Sabeniano] to pay said amount, however, there shall
be no interest and penalty charges from the time the illegal setoff was effected on 31 October 1979;
(3) Dismissing all other claims and counterclaims interposed by the parties against each other.
Costs against the defendant Bank.
All the parties appealed the foregoing Decision of the RTC to the Court of Appeals, docketed as CA-G.R. CV No. 51930. Respondent questioned the findings
of the RTC that she was still indebted to petitioner Citibank, as well as the failure of the RTC to order petitioners to render an accounting of respondent's
deposits and money market placements with them. On the other hand, petitioners argued that petitioner Citibank validly compensated respondent's
outstanding loans with her dollar accounts with Citibank-Geneva, in accordance with the Declaration of Pledge she executed in its favor. Petitioners also
alleged that the RTC erred in not declaring respondent liable for damages and interest.
On 26 March 2002, the Court of Appeals rendered its Decision12 affirming with modification the RTC Decision in Civil Case No. 11336, dated 24 August
1995, and ruling entirely in favor of respondent in this wise
Wherefore, premises considered, the assailed 24 August 1995 Decision of the court a quo is hereby AFFIRMED with MODIFICATION, as follows:
1. Declaring as illegal, null and void the set-off effected by the defendant-appellant Bank of the plaintiff-appellant's dollar deposit
with Citibank, Switzerland, in the amount of US$149,632.99, and ordering defendant-appellant Citibank to refund the said amount
to the plaintiff-appellant with legal interest at the rate of twelve percent (12%) per annum, compounded yearly, from 31 October
1979 until fully paid, or its peso equivalent at the time of payment;
2. As defendant-appellant Citibank failed to establish by competent evidence the alleged indebtedness of plaintiff-appellant, the
set-off of 1,069,847.40 in the account of Ms. Sabeniano is hereby declared as without legal and factual basis;
3. As defendants-appellants failed to account the following plaintiff-appellant's money market placements, savings account and
current accounts, the former is hereby ordered to return the same, in accordance with the terms and conditions agreed upon by
the contending parties as evidenced by the certificates of investments, to wit:
(i) Citibank NNPN Serial No. 023356 (Cancels and Supersedes NNPN No. 22526) issued on 17 March 1977,
318,897.34 with 14.50% interest p.a.;
(ii) Citibank NNPN Serial No. 23357 (Cancels and Supersedes NNPN No. 22528) issued on 17 March 1977,
203,150.00 with 14.50 interest p.a.;
(iii) FNCB NNPN Serial No. 05757 (Cancels and Supersedes NNPN No. 04952), issued on 02 June 1977,
500,000.00 with 17% interest p.a.;
(iv) FNCB NNPN Serial No. 05758 (Cancels and Supersedes NNPN No. 04962), issued on 02 June 1977,
500,000.00 with 17% interest per annum;
(v) The Two Million (2,000,000.00) money market placements of Ms. Sabeniano with the Ayala
Investment & Development Corporation (AIDC) with legal interest at the rate of twelve percent (12%) per
annum compounded yearly, from 30 September 1976 until fully paid;
4. Ordering defendants-appellants to jointly and severally pay the plaintiff-appellant the sum of FIVE HUNDRED THOUSAND PESOS
(500,000.00) by way of moral damages, FIVE HUNDRED THOUSAND PESOS (500,000.00) as exemplary damages, and ONE
HUNDRED THOUSAND PESOS (100,000.00) as attorney's fees.
Apparently, the parties to the case, namely, the respondent, on one hand, and the petitioners, on the other, made separate attempts to bring the
aforementioned Decision of the Court of Appeals, dated 26 March 2002, before this Court for review.
G.R. No. 152985
Respondent no longer sought a reconsideration of the Decision of the Court of Appeals in CA-G.R. CV No. 51930, dated 26 March 2002, and instead, filed
immediately with this Court on 3 May 2002 a Motion for Extension of Time to File a Petition for Review, 13 which, after payment of the docket and other
lawful fees, was assigned the docket number G.R. No. 152985. In the said Motion, respondent alleged that she received a copy of the assailed Court of
Appeals Decision on 18 April 2002 and, thus, had 15 days therefrom or until 3 May 2002 within which to file her Petition for Review. Since she informed her
counsel of her desire to pursue an appeal of the Court of Appeals Decision only on 29 April 2002, her counsel neither had enough time to file a motion for
reconsideration of the said Decision with the Court of Appeals, nor a Petition for Certiorari with this Court. Yet, the Motion failed to state the exact
extension period respondent was requesting for.
Since this Court did not act upon respondent's Motion for Extension of Time to file her Petition for Review, then the period for appeal continued to run and
still expired on 3 May 2002.14 Respondent failed to file any Petition for Review within the prescribed period for appeal and, hence, this Court issued a
Resolution,15 dated 13 November 2002, in which it pronounced that
G.R. No. 152985 (Modesta R. Sabeniano vs. Court of Appeals, et al.). It appearing that petitioner failed to file the intended petition for review
on certiorari within the period which expired on May 3, 2002, the Court Resolves to DECLARE THIS CASE TERMINATED and DIRECT the Division
Clerk of Court to INFORM the parties that the judgment sought to be reviewed has become final and executory.
The said Resolution was duly recorded in the Book of Entries of Judgments on 3 January 2003.
G.R. No. 156132
Meanwhile, petitioners filed with the Court of Appeals a Motion for Reconsideration of its Decision in CA-G.R. CV No. 51930, dated 26 March 2002. Acting
upon the said Motion, the Court of Appeals issued the Resolution,16 dated 20 November 2002, modifying its Decision of 26 March 2002, as follows
WHEREFORE, premises considered, the instant Motion for Reconsideration is PARTIALLY GRANTED as Sub-paragraph (V) paragraph 3 of the
assailed Decision's dispositive portion is hereby ordered DELETED.
The challenged 26 March 2002 Decision of the Court is AFFIRMED with MODIFICATION.
Assailing the Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 51930, dated 26 March 2002 and 20 November 2002, respectively,
petitioners filed the present Petition, docketed as G.R. No. 156132. The Petition was initially denied 17 by this Court for failure of the petitioners to attach
thereto a Certification against Forum Shopping. However, upon petitioners' Motion and compliance with the requirements, this Court resolved18 to
reinstate the Petition.
The Petition presented fourteen (14) assignments of errors allegedly committed by the Court of Appeals in its Decision, dated 26 March 2002, involving
both questions of fact and questions of law which this Court, for the sake of expediency, discusses jointly, whenever possible, in the succeeding
paragraphs.
I
The Resolution of this Court, dated 13 November 2002, in G.R. No. 152985, declaring the Decision of the Court of Appeals, dated 26 March 2002, final and
executory, pertains to respondent Sabeniano alone.
Before proceeding to a discussion of the merits of the instant Petition, this Court wishes to address first the argument, persistently advanced by
respondent in her pleadings on record, as well as her numerous personal and unofficial letters to this Court which were no longer made part of the record,
that the Decision of the Court of Appeals in CA-G.R. CV No. 51930, dated 26 March 2002, had already become final and executory by virtue of the
Resolution of this Court in G.R. No. 152985, dated 13 November 2002.
G.R. No. 152985 was the docket number assigned by this Court to respondent's Motion for Extension of Time to File a Petition for Review. Respondent,
though, did not file her supposed Petition. Thus, after the lapse of the prescribed period for the filing of the Petition, this Court issued the Resolution,
dated 13 November 2002, declaring the Decision of the Court of Appeals, dated 26 March 2002, final and executory. It should be pointed out, however,
that the Resolution, dated 13 November 2002, referred only to G.R. No. 152985, respondent's appeal, which she failed to perfect through the filing of a
Petition for Review within the prescribed period. The declaration of this Court in the same Resolution would bind respondent solely, and not petitioners
which filed their own separate appeal before this Court, docketed as G.R. No. 156132, the Petition at bar. This would mean that respondent, on her part,
should be bound by the findings of fact and law of the Court of Appeals, including the monetary amounts consequently awarded to her by the appellate
court in its Decision, dated 26 March 2002; and she can no longer refute or assail any part thereof. 19
This Court already explained the matter to respondent when it issued a Resolution 20 in G.R. No. 156132, dated 2 February 2004, which addressed her
Urgent Motion for the Release of the Decision with the Implementation of the Entry of Judgment in the following manner
[A]cting on Citibank's and FNCB Finance's Motion for Reconsideration, we resolved to grant the motion, reinstate the petition and require
Sabeniano to file a comment thereto in our Resolution of June 23, 2003. Sabeniano filed a Comment dated July 17, 2003 to which Citibank and FNCB
Finance filed a Reply dated August 20, 2003.
From the foregoing, it is clear that Sabeniano had knowledge of, and in fact participated in, the proceedings in G.R. No. 156132. She cannot
feign ignorance of the proceedings therein and claim that the Decision of the Court of Appeals has become final and executory. More precisely,
the Decision became final and executory only with regard to Sabeniano in view of her failure to file a petition for review within the extended period
granted by the Court, and not to Citibank and FNCB Finance whose Petition for Review was duly reinstated and is now submitted for decision.
Accordingly, the instant Urgent Motion is hereby DENIED. (Emphasis supplied.)
To sustain the argument of respondent would result in an unjust and incongruous situation wherein one party may frustrate the efforts of the opposing
party to appeal the case by merely filing with this Court a Motion for Extension of Time to File a Petition for Review, ahead of the opposing party, then not
actually filing the intended Petition.21 The party who fails to file its intended Petition within the reglementary or extended period should solely bear the
consequences of such failure.

Respondent Sabeniano did not commit forum shopping.

Another issue that does not directly involve the merits of the present Petition, but raised by petitioners, is whether respondent should be held liable for
forum shopping.
Petitioners contend that respondent committed forum shopping on the basis of the following facts:
While petitioners' Motion for Reconsideration of the Decision in CA-G.R. CV No. 51930, dated 26 March 2002, was still pending before the Court of
Appeals, respondent already filed with this Court on 3 May 2002 her Motion for Extension of Time to File a Petition for Review of the same Court of
Appeals Decision, docketed as G.R. No. 152985. Thereafter, respondent continued to participate in the proceedings before the Court of Appeals in CA-G.R.
CV No. 51930 by filing her Comment, dated 17 July 2002, to petitioners' Motion for Reconsideration; and a Rejoinder, dated 23 September 2002, to
petitioners' Reply. Thus, petitioners argue that by seeking relief concurrently from this Court and the Court of Appeals, respondent is undeniably guilty of
forum shopping, if not indirect contempt.
This Court, however, finds no sufficient basis to hold respondent liable for forum shopping.
Forum shopping has been defined as the filing of two or more suits involving the same parties for the same cause of action, either simultaneously or
successively, for the purpose of obtaining a favorable judgment.22 The test for determining forum shopping is whether in the two (or more) cases pending,
there is an identity of parties, rights or causes of action, and relief sought.23 To guard against this deplorable practice, Rule 7, Section 5 of the revised Rules
of Court imposes the following requirement
SEC. 5. Certification against forum shopping. The plaintiff or principal party shall certify under oath in the complaint or other initiatory pleading
asserting a claim for relief, or in a sworn certification annexed thereto and simultaneously filed therewith: (a) that he has not theretofore
commenced any action or filed any claim involving the same issues in any court, tribunal or quasi-judicial agency and, to the best of his knowledge,
no such other action or claim is pending therein; (b) if there is such other pending action or claim, a complete statement of the present status
thereof; and (c) if he should thereafter learn that the same or similar action or claim has been filed or is pending, he shall report that fact within five
(5) days therefrom to the court wherein his aforesaid complaint or initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be curable by mere amendment of the complaint or other initiatory pleading but shall
be cause for the dismissal of the case without prejudice, unless otherwise provided, upon motion and after hearing. The submission of a false
certification or non-compliance with any of the undertakings therein shall constitute indirect contempt of court, without prejudice to the
corresponding administrative and criminal actions. If the acts of the party or his counsel clearly constitute willful and deliberate forum shopping, the
same shall be ground for summary dismissal with prejudice and shall constitute direct contempt, as well as cause for administrative sanctions.
Although it may seem at first glance that respondent was simultaneously seeking recourse from the Court of Appeals and this Court, a careful and closer
scrutiny of the details of the case at bar would reveal otherwise.
It should be recalled that respondent did nothing more in G.R. No. 152985 than to file with this Court a Motion for Extension of Time within which to file
her Petition for Review. For unexplained reasons, respondent failed to submit to this Court her intended Petition within the reglementary period.
Consequently, this Court was prompted to issue a Resolution, dated 13 November 2002, declaring G.R. No. 152985 terminated, and the therein assailed
Court of Appeals Decision final and executory. G.R. No. 152985, therefore, did not progress and respondent's appeal was unperfected.
The Petition for Review would constitute the initiatory pleading before this Court, upon the timely filing of which, the case before this Court commences;
much in the same way a case is initiated by the filing of a Complaint before the trial court. The Petition for Review establishes the identity of parties, rights
or causes of action, and relief sought from this Court, and without such a Petition, there is technically no case before this Court. The Motion filed by
respondent seeking extension of time within which to file her Petition for Review does not serve the same purpose as the Petition for Review itself. Such a
Motion merely presents the important dates and the justification for the additional time requested for, but it does not go into the details of the appealed
case.
Without any particular idea as to the assignments of error or the relief respondent intended to seek from this Court, in light of her failure to file her
Petition for Review, there is actually no second case involving the same parties, rights or causes of action, and relief sought, as that in CA-G.R. CV No.
51930.
It should also be noted that the Certification against Forum Shopping is required to be attached to the initiatory pleading, which, in G.R. No. 152985,
should have been respondent's Petition for Review. It is in that Certification wherein respondent certifies, under oath, that: (a) she has not commenced
any action or filed any claim involving the same issues in any court, tribunal or quasi-judicial agency and, to the best of her knowledge, no such other action
or claim is pending therein; (b) if there is such other pending action or claim, that she is presenting a complete statement of the present status thereof;
and (c) if she should thereafter learn that the same or similar action or claim has been filed or is pending, she shall report that fact within five days
therefrom to this Court. Without her Petition for Review, respondent had no obligation to execute and submit the foregoing Certification against Forum
Shopping. Thus, respondent did not violate Rule 7, Section 5 of the Revised Rules of Court; neither did she mislead this Court as to the pendency of another
similar case.
Lastly, the fact alone that the Decision of the Court of Appeals, dated 26 March 2002, essentially ruled in favor of respondent, does not necessarily
preclude her from appealing the same. Granted that such a move is ostensibly irrational, nonetheless, it does not amount to malice, bad faith or abuse of
the court processes in the absence of further proof. Again, it should be noted that the respondent did not file her intended Petition for Review. The
Petition for Review would have presented before this Court the grounds for respondent's appeal and her arguments in support thereof. Without said
Petition, any reason attributed to the respondent for appealing the 26 March 2002 Decision would be grounded on mere speculations, to which this Court
cannot give credence.
II
As an exception to the general rule, this Court takes cognizance of questions of fact raised in the Petition at bar.
It is already a well-settled rule that the jurisdiction of this Court in cases brought before it from the Court of Appeals by virtue of Rule 45 of the Revised
Rules of Court is limited to reviewing errors of law. Findings of fact of the Court of Appeals are conclusive upon this Court. There are, however, recognized
exceptions to the foregoing rule, namely: (1) when the findings are grounded entirely on speculation, surmises, or conjectures; (2) when the interference
made is manifestly mistaken, absurd, or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of
facts; (5) when the findings of fact are conflicting; (6) when in making its findings, the Court of Appeals went beyond the issues of the case, or its findings
are contrary to the admissions of both the appellant and the appellee; (7) when the findings are contrary to those of the trial court; (8) when the findings
are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioner's main
and reply briefs are not disputed by the respondent; and (10) when the findings of fact are premised on the supposed absence of evidence and
contradicted by the evidence on record.24
Several of the enumerated exceptions pertain to the Petition at bar.
It is indubitable that the Court of Appeals made factual findings that are contrary to those of the RTC, 25 thus, resulting in its substantial modification of the
trial court's Decision, and a ruling entirely in favor of the respondent. In addition, petitioners invoked in the instant Petition for Review several exceptions
that would justify this Court's review of the factual findings of the Court of Appeals, i.e., the Court of Appeals made conflicting findings of fact; findings of
fact which went beyond the issues raised on appeal before it; as well as findings of fact premised on the supposed absence of evidence and contradicted
by the evidence on record.
On the basis of the foregoing, this Court shall proceed to reviewing and re-evaluating the evidence on record in order to settle questions of fact raised in
the Petition at bar.
The fact that the trial judge who rendered the RTC Decision in Civil Case No. 11336, dated 24 August 1995, was not the same judge who heard and tried the
case, does not, by itself, render the said Decision erroneous.
The Decision in Civil Case No. 11336 was rendered more than 10 years from the institution of the said case. In the course of its trial, the case was presided
over by four (4) different RTC judges.26 It was Judge Victorio, the fourth judge assigned to the case, who wrote the RTC Decision, dated 24 August 1995. In
his Decision,27 Judge Victorio made the following findings
After carefully evaluating the mass of evidence adduced by the parties, this Court is not inclined to believe the plaintiff's assertion that the
promissory notes as well as the deeds of assignments of her FNCB Finance money market placements were simulated. The evidence is
overwhelming that the plaintiff received the proceeds of the loans evidenced by the various promissory notes she had signed. What is more,
there was not an iota of proof save the plaintiff's bare testimony that she had indeed applied for loan with the Development Bank of the
Philippines.
More importantly, the two deeds of assignment were notarized, hence they partake the nature of a public document. It makes more than
preponderant proof to overturn the effect of a notarial attestation. Copies of the deeds of assignments were actually filed with the Records
Management and Archives Office.
Finally, there were sufficient evidence wherein the plaintiff had admitted the existence of her loans with the defendant Bank in the total
amount of 1,920,000.00 exclusive of interests and penalty charges (Exhibits "28", "31", "32", and "33").
In fine, this Court hereby finds that the defendants had established the genuineness and due execution of the various promissory notes
heretofore identified as well as the two deeds of assignments of the plaintiff's money market placements with defendant FNCB Finance, on the
strength of which the said money market placements were applied to partially pay the plaintiff's past due obligation with the defendant Bank.
Thus, the total sum of 1,053,995.80 of the plaintiff's past due obligation was partially offset by the said money market placement leaving a
balance of 1,069,847.40 as of 5 September 1979 (Exhibit "34").
Disagreeing in the foregoing findings, the Court of Appeals stressed, in its Decision in CA-G.R. CV No. 51930, dated 26 March 2002, "that the ponente of the
herein assailed Decision is not the Presiding Judge who heard and tried the case."28 This brings us to the question of whether the fact alone that the RTC
Decision was rendered by a judge other than the judge who actually heard and tried the case is sufficient justification for the appellate court to disregard
or set aside the findings in the Decision of the court a quo?
This Court rules in the negative.
What deserves stressing is that, in this jurisdiction, there exists a disputable presumption that the RTC Decision was rendered by the judge in the regular
performance of his official duties. While the said presumption is only disputable, it is satisfactory unless contradicted or overcame by other
evidence.29 Encompassed in this presumption of regularity is the presumption that the RTC judge, in resolving the case and drafting his Decision, reviewed,
evaluated, and weighed all the evidence on record. That the said RTC judge is not the same judge who heard the case and received the evidence is of little
consequence when the records and transcripts of stenographic notes (TSNs) are complete and available for consideration by the former.
In People v. Gazmen,30 this Court already elucidated its position on such an issue
Accused-appellant makes an issue of the fact that the judge who penned the decision was not the judge who heard and tried the case and
concludes therefrom that the findings of the former are erroneous. Accused-appellant's argument does not merit a lengthy discussion. It is
well-settled that the decision of a judge who did not try the case is not by that reason alone erroneous.
It is true that the judge who ultimately decided the case had not heard the controversy at all, the trial having been conducted by then Judge
Emilio L. Polig, who was indefinitely suspended by this Court. Nonetheless, the transcripts of stenographic notes taken during the trial were
complete and were presumably examined and studied by Judge Baguilat before he rendered his decision. It is not unusual for a judge who did
not try a case to decide it on the basis of the record. The fact that he did not have the opportunity to observe the demeanor of the witnesses
during the trial but merely relied on the transcript of their testimonies does not for that reason alone render the judgment erroneous.
(People vs. Jaymalin, 214 SCRA 685, 692 [1992])
Although it is true that the judge who heard the witnesses testify is in a better position to observe the witnesses on the stand and determine
by their demeanor whether they are telling the truth or mouthing falsehood, it does not necessarily follow that a judge who was not present
during the trial cannot render a valid decision since he can rely on the transcript of stenographic notes taken during the trial as basis of his
decision.
 Accused-appellant's contention that the trial judge did not have the opportunity to observe the conduct and demeanor of the witnesses since
he was not the same judge who conducted the hearing is also untenable. While it is true that the trial judge who conducted the hearing would
be in a better position to ascertain the truth and falsity of the testimonies of the witnesses, it does not necessarily follow that a judge who was
not present during the trial cannot render a valid and just decision since the latter can also rely on the transcribed stenographic notes taken
during the trial as the basis of his decision.
(People vs. De Paz, 212 SCRA 56, 63 [1992])
At any rate, the test to determine the value of the testimony of the witness is whether or not such is in conformity with knowledge and
consistent with the experience of mankind (People vs. Morre, 217 SCRA 219 [1993]). Further, the credibility of witnesses can also be assessed
on the basis of the substance of their testimony and the surrounding circumstances (People v. Gonzales, 210 SCRA 44 [1992]). A critical
evaluation of the testimony of the prosecution witnesses reveals that their testimony accords with the aforementioned tests, and carries with
it the ring of truth end perforce, must be given full weight and credit.
Irrefragably, by reason alone that the judge who penned the RTC Decision was not the same judge who heard the case and received the evidence therein
would not render the findings in the said Decision erroneous and unreliable. While the conduct and demeanor of witnesses may sway a trial court judge in
deciding a case, it is not, and should not be, his only consideration. Even more vital for the trial court judge's decision are the contents and substance of
the witnesses' testimonies, as borne out by the TSNs, as well as the object and documentary evidence submitted and made part of the records of the case.
This Court proceeds to making its own findings of fact.
Since the Decision of the Court of Appeals in CA-G.R. CV No. 51930, dated 26 March 2002, has become final and executory as to the respondent, due to
her failure to interpose an appeal therefrom within the reglementary period, she is already bound by the factual findings in the said Decision. Likewise,
respondent's failure to file, within the reglementary period, a Motion for Reconsideration or an appeal of the Resolution of the Court of Appeals in the
same case, dated 20 November 2002, which modified its earlier Decision by deleting paragraph 3(v) of its dispositive portion, ordering petitioners to return
to respondent the proceeds of her money market placement with AIDC, shall already bar her from questioning such modification before this Court. Thus,
what is for review before this Court is the Decision of the Court of Appeals, dated 26 March 2002, as modified by the Resolution of the same court, dated
20 November 2002.
Respondent alleged that she had several deposits and money market placements with petitioners. These deposits and money market placements, as
determined by the Court of Appeals in its Decision, dated 26 March 2002, and as modified by its Resolution, dated 20 November 2002, are as follows

Deposit/Placement Amount

Dollar deposit with Citibank-Geneva $ 149,632.99

Money market placement with Citibank, evidenced by Promissory Note (PN) No. 23356 (which cancels and supersedes PN No. 22526), earning 14.5% interest per 318,897.34
annum (p.a.)

Money market placement with Citibank, evidenced by PN No. 23357 (which cancels and supersedes PN No. 22528), earning 14.5% interest p.a. 203,150.00

Money market placement with FNCB Finance, evidenced by PN No. 5757 (which cancels and supersedes PN No. 4952), earning 17% interest p.a. 500,000.00

Money market placement with FNCB Finance, evidenced by PN No. 5758 (which cancels and supersedes PN No. 2962), earning 17% interest p.a. 500,000.00

This Court is tasked to determine whether petitioners are indeed liable to return the foregoing amounts, together with the appropriate interests and
penalties, to respondent. It shall trace respondent's transactions with petitioners, from her money market placements with petitioner Citibank and
petitioner FNCB Finance, to her savings and current accounts with petitioner Citibank, and to her dollar accounts with Citibank-Geneva.
Money market placements with petitioner Citibank
The history of respondent's money market placements with petitioner Citibank began on 6 December 1976, when she made a placement of 500,000.00
as principal amount, which was supposed to earn an interest of 16% p.a. and for which PN No. 20773 was issued. Respondent did not yet claim the
proceeds of her placement and, instead, rolled-over or re-invested the principal and proceeds several times in the succeeding years for which new PNs
were issued by petitioner Citibank to replace the ones which matured. Petitioner Citibank accounted for respondent's original placement and the
subsequent roll-overs thereof, as follows

Date Maturity Date Am

PN No. Cancels PN No.
(mm/dd/yyyy) (mm/dd/yyyy) (

12/06/1976 20773 None 01/13/1977

01/14/1977 21686 20773 02/08/1977

22526 21686 03/16/1977

02/09/1977
22528 21686 03/16/1977

23356 22526 04/20/1977

03/17/1977
23357 22528 04/20/1977

Petitioner Citibank alleged that it had already paid to respondent the principal amounts and proceeds of PNs No. 23356 and 23357, upon their
maturity. Petitioner Citibank further averred that respondent used the 500,000.00 from the payment of PNs No. 23356 and 23357, plus
600,000.00 sourced from her other funds, to open two time deposit (TD) accounts with petitioner Citibank, namely, TD Accounts No. 17783
and 17784.
Petitioner Citibank did not deny the existence nor questioned the authenticity of PNs No. 23356 and 23357 it issued in favor of respondent for
her money market placements. In fact, it admitted the genuineness and due execution of the said PNs, but qualified that they were no longer
outstanding.31 In Hibberd v. Rohde and McMillian,32 this Court delineated the consequences of such an admission
By the admission of the genuineness and due execution of an instrument, as provided in this section, is meant that the party whose
signature it bears admits that he signed it or that it was signed by another for him with his authority; that at the time it was signed
it was in words and figures exactly as set out in the pleading of the party relying upon it; that the document was delivered; and that
any formal requisites required by law, such as a seal, an acknowledgment, or revenue stamp, which it lacks, are waived by him.
Hence, such defenses as that the signature is a forgery (Puritan Mfg. Co. vs. Toti & Gradi, 14 N. M., 425; Cox vs. Northwestern Stage
Co., 1 Idaho, 376; Woollen vs. Whitacre, 73 Ind., 198; Smith vs. Ehnert, 47 Wis., 479; Faelnar vs. Escao, 11 Phil. Rep., 92); or that it
was unauthorized, as in the case of an agent signing for his principal, or one signing in behalf of a partnership (Country
Bank vs. Greenberg, 127 Cal., 26; Henshaw vs. Root, 60 Inc., 220; Naftzker vs. Lantz, 137 Mich., 441) or of a corporation
(Merchant vs. International Banking Corporation, 6 Phil Rep., 314; Wanita vs. Rollins, 75 Miss., 253; Barnes vs. Spencer & Barnes
Co., 162 Mich., 509); or that, in the case of the latter, that the corporation was authorized under its charter to sign the instrument
(Merchant vs. International Banking Corporation, supra); or that the party charged signed the instrument in some other capacity
than that alleged in the pleading setting it out (Payne vs. National Bank, 16 Kan., 147); or that it was never delivered (Hunt vs. Weir,
29 Ill., 83; Elbring vs. Mullen, 4 Idaho, 199; Thorp vs. Keokuk Coal Co., 48 N.Y., 253; Fire Association of Philadelphia vs. Ruby, 60
Neb., 216) are cut off by the admission of its genuineness and due execution.
The effect of the admission is such that in the case of a promissory note a prima facie case is made for the plaintiff which dispenses
with the necessity of evidence on his part and entitles him to a judgment on the pleadings unless a special defense of new matter,
such as payment, is interposed by the defendant (Papa vs. Martinez, 12 Phil. Rep., 613; Chinese Chamber of Commerce vs. Pua To
Ching, 14 Phil. Rep., 222; Banco Espaol-Filipino vs. McKay & Zoeller, 27 Phil. Rep., 183). x x x
Since the genuineness and due execution of PNs No. 23356 and 23357 are uncontested, respondent was able to establish prima facie that
petitioner Citibank is liable to her for the amounts stated therein. The assertion of petitioner Citibank of payment of the said PNs is an
affirmative allegation of a new matter, the burden of proof as to such resting on petitioner Citibank. Respondent having proved the existence
of the obligation, the burden of proof was upon petitioner Citibank to show that it had been discharged. 33 It has already been established by
this Court that
As a general rule, one who pleads payment has the burden of proving it. Even where the plaintiff must allege non-payment, the
general rule is that the burden rests on the defendant to prove payment, rather than on the plaintiff to prove non-payment. The
debtor has the burden of showing with legal certainty that the obligation has been discharged by payment.
When the existence of a debt is fully established by the evidence contained in the record, the burden of proving that it has been
extinguished by payment devolves upon the debtor who offers such defense to the claim of the creditor. Where the debtor
introduces some evidence of payment, the burden of going forward with the evidence as distinct from the general burden of
proof shifts to the creditor, who is then under the duty of producing some evidence of non-payment.34
Reviewing the evidence on record, this Court finds that petitioner Citibank failed to satisfactorily prove that PNs No. 23356 and 23357 had
already been paid, and that the amount so paid was actually used to open one of respondent's TD accounts with petitioner Citibank.
Petitioner Citibank presented the testimonies of two witnesses to support its contention of payment: (1) That of Mr. Herminio Pujeda,35 the
officer-in-charge of loans and placements at the time when the questioned transactions took place; and (2) that of Mr. Francisco Tan, 36 the
former Assistant Vice-President of Citibank, who directly dealt with respondent with regard to her deposits and loans.
The relevant portion37 of Mr. Pujeda's testimony as to PNs No. 23356 and 23357 (referred to therein as Exhibits No. "47" and "48,"
respectively) is reproduced below
Atty. Mabasa:
Okey [sic]. Now Mr. Witness, you were asked to testify in this case and this case is [sic] consist [sic] of several
documents involving transactions between the plaintiff and the defendant. Now, were you able to make your own
memorandum regarding all these transactions?
A Yes, based on my recollection of these facts, I did come up of [sic] the outline of the chronological sequence of events.
Court:
Are you trying to say that you have personal knowledge or participation to these transactions?
A Yes, your Honor, I was the officer-in charge of the unit that was processing these transactions. Some of the documents bear my
signature.
Court:
And this resume or summary that you have prepared is based on purely your recollection or documents?
A Based on documents, your Honor.
Court:
Are these documents still available now?
A Yes, your honor.
Court:
Better present the documents.
Atty. Mabasa:
Yes, your Honor, that is why your Honor.
Atty. Mabasa:
Q Now, basing on the notes that you prepared, Mr. Witness, and according to you basing also on your personal recollection about
all the transactions involved between Modesta Sabeniano and defendant City Bank [sic] in this case. Now, would you tell us what
happened to the money market placements of Modesta Sabeniano that you have earlier identified in Exhs. "47" and "48"?
A The transactions which I said earlier were terminated and booked to time deposits.
Q And you are saying time deposits with what bank?
A With First National Citibank.
Q Is it the same bank as Citibank, N.A.?
A Yes, sir.
Q And how much was the amount booked as time deposit with defendant Citibank?
A In the amount of 500,000.00.
Q And outside this 500,000.00 which you said was booked out of the proceeds of Exhs. "47" and "48", were there other time
deposits opened by Mrs. Modesta Sabeniano at that time.
A Yes, she also opened another time deposit for 600,000.00.
Q So all in all Mr. Witness, sometime in April of 1978 Mrs. Modesta Sabeneano [sic] had time deposit placements with Citibank in
the amount of 500,000.00 which is the proceeds of Exh. "47" and "48" and another 600,000.00, is it not?
A Yes, sir.
Q And would you know where did the other 600,000 placed by Mrs. Sabeneano [sic] in a time deposit with Citibank, N.A. came
[sic] from?
A She funded it directly.
Q What are you saying Mr. Witness is that the 600,000 is a [sic] fresh money coming from Mrs. Modesta Sabeneano [sic]?
A That is right.
In his deposition in Hong Kong, Mr. Tan recounted what happened to PNs No. 23356 and 23357 (referred to therein as Exhibits "E" and "F,"
respectively), as follows
Atty. Mabasa : Now from the Exhibits that you have identified Mr. Tan from Exhibits "A" to "F", which are Exhibits of the plaintiff.
Now, do I understand from you that the original amount is Five Hundred Thousand and thereafter renewed in the succeeding
exhibits?
Mr. Tan : Yes, Sir.
Atty. Mabasa : Alright, after these Exhibits "E" and "F" matured, what happened thereafter?
Mr. Tan : Split into two time deposits.
Atty. Mabasa : Exhibits "E" and "F"?
Before anything else, it should be noted that when Mr. Pujeda's testimony before the RTC was made on 12 March 1990 and Mr. Tan's
deposition in Hong Kong was conducted on 3 September 1990, more than a decade had passed from the time the transactions they were
testifying on took place. This Court had previously recognized the frailty and unreliability of human memory with regards to figures after the
lapse of five years.38 Taking into consideration the substantial length of time between the transactions and the witnesses' testimonies, as well
as the undeniable fact that bank officers deal with multiple clients and process numerous transactions during their tenure, this Court is
reluctant to give much weight to the testimonies of Mr. Pujeda and Mr. Tan regarding the payment of PNs No. 23356 and 23357 and the use by
respondent of the proceeds thereof for opening TD accounts. This Court finds it implausible that they should remember, after all these years,
this particular transaction with respondent involving her PNs No. 23356 and 23357 and TD accounts. Both witnesses did not give any reason as
to why, from among all the clients they had dealt with and all the transactions they had processed as officers of petitioner Citibank, they
specially remembered respondent and her PNs No. 23356 and 23357. Their testimonies likewise lacked details on the circumstances
surrounding the payment of the two PNs and the opening of the time deposit accounts by respondent, such as the date of payment of the two
PNs, mode of payment, and the manner and context by which respondent relayed her instructions to the officers of petitioner Citibank to use
the proceeds of her two PNs in opening the TD accounts.
Moreover, while there are documentary evidences to support and trace respondent's money market placements with petitioner Citibank, from
the original PN No. 20773, rolled-over several times to, finally, PNs No. 23356 and 23357, there is an evident absence of any documentary
 evidence on the payment of these last two PNs and the use of the proceeds thereof by respondent for opening TD accounts. The paper trail
seems to have ended with the copies of PNs No. 23356 and 23357. Although both Mr. Pujeda and Mr. Tan said that they based their
testimonies, not just on their memories but also on the documents on file, the supposed documents on which they based those portions of
their testimony on the payment of PNs No. 23356 and 23357 and the opening of the TD accounts from the proceeds thereof, were never
presented before the courts nor made part of the records of the case. Respondent's money market placements were of substantial amounts
consisting of the principal amount of 500,000.00, plus the interest it should have earned during the years of placement and it is difficult for
this Court to believe that petitioner Citibank would not have had documented the payment thereof.
When Mr. Pujeda testified before the RTC on 6 February 1990,39 petitioners' counsel attempted to present in evidence a document that would
supposedly support the claim of petitioner Citibank that the proceeds of PNs No. 23356 and 23357 were used by respondent to open one of
her two TD accounts in the amount of 500,000.00. Respondent's counsel objected to the presentation of the document since it was a mere
"xerox" copy, and was blurred and hardly readable. Petitioners' counsel then asked for a continuance of the hearing so that they can have time
to produce a better document, which was granted by the court. However, during the next hearing and continuance of Mr. Pujeda's testimony
on 12 March 1990, petitioners' counsel no longer referred to the said document.
As respondent had established a prima facie case that petitioner Citibank is obligated to her for the amounts stated in PNs No. 23356 and
23357, and as petitioner Citibank failed to present sufficient proof of payment of the said PNs and the use by the respondent of the proceeds
thereof to open her TD accounts, this Court finds that PNs No. 23356 and 23357 are still outstanding and petitioner Citibank is still liable to
respondent for the amounts stated therein.
The significance of this Court's declaration that PNs No. 23356 and 23357 are still outstanding becomes apparent in the light of petitioners'
next contentions that respondent used the proceeds of PNs No. 23356 and 23357, together with additional money, to open TD Accounts No.
17783 and 17784 with petitioner Citibank; and, subsequently, respondent pre-terminated these TD accounts and transferred the proceeds
thereof, amounting to 1,100,000.00, to petitioner FNCB Finance for money market placements. While respondent's money market
placements with petitioner FNCB Finance may be traced back with definiteness to TD Accounts No. 17783 and 17784, there is only flimsy and
unsubstantiated connection between the said TD accounts and the supposed proceeds paid from PNs No. 23356 and 23357. With PNs No.
23356 and 23357 still unpaid, then they represent an obligation of petitioner Citibank separate and distinct from the obligation of petitioner
FNCB Finance arising from respondent's money market placements with the latter.
Money market placements with petitioner FNCB Finance
According to petitioners, respondent's TD Accounts No. 17783 and 17784, in the total amount of 1,100,000.00, were supposed to mature on
15 March 1978. However, respondent, through a letter dated 28 April 1977,40 pre-terminated the said TD accounts and transferred all the
proceeds thereof to petitioner FNCB Finance for money market placement. Pursuant to her instructions, TD Accounts No. 17783 and 17784
were pre-terminated and petitioner Citibank (then still named First National City Bank) issued Manager's Checks (MC) No. 19925341 and
19925142 for the amounts of 500,000.00 and 600,00.00, respectively. Both MCs were payable to Citifinance (which, according to Mr.
Pujeda,43 was one with and the same as petitioner FNCB Finance), with the additional notation that "A/C MODESTA R. SABENIANO."
Typewritten on MC No. 199253 is the phrase "Ref. Proceeds of TD 17783," and on MC No. 199251 is a similar phrase, "Ref. Proceeds of TD
17784." These phrases purportedly established that the MCs were paid from the proceeds of respondent's pre-terminated TD accounts with
petitioner Citibank. Upon receipt of the MCs, petitioner FNCB Finance deposited the same to its account with Feati Bank and Trust Co., as
evidenced by the rubber stamp mark of the latter found at the back of both MCs. In exchange, petitioner FNCB Finance booked the amounts
received as money market placements, and accordingly issued PNs No. 4952 and 4962, for the amounts of 500,000.00 and 600,000.00,
respectively, payable to respondent's savings account with petitioner Citibank, S/A No. 25-13703-4, upon their maturity on 1 June 1977. Once
again, respondent rolled-over several times the principal amounts of her money market placements with petitioner FNCB Finance, as follows

Date Maturity Date Amount Interest

PN No. Cancels PN No.
(mm/dd/yyyy) (mm/dd/yyyy) () (p.a.)

4952 None 06/01/1977 500,000.00 17%

04/29/1977
4962 None 06/01/1977 600,000.00 17%

5757 4952 08/31/1977 500,000.00 17%

06/02/1977
5758 4962 08/31/1977 500,000.00 17%

8167 5757 08/25/1978 500,000.00 14%

08/31/1977
8169 5752 08/25/1978 500,000.00 14%

As presented by the petitioner FNCB Finance, respondent rolled-over only the principal amounts of her money market placements as she chose to receive
the interest income therefrom. Petitioner FNCB Finance also pointed out that when PN No. 4962, with principal amount of 600,000.00, matured on 1
June 1977, respondent received a partial payment of the principal which, together with the interest, amounted to 102,633.33;44 thus, only the amount of
500,000.00 from PN No. 4962 was rolled-over to PN No. 5758.
Based on the foregoing records, the principal amounts of PNs No. 5757 and 5758, upon their maturity, were rolled over to PNs No. 8167 and 8169,
respectively. PN No. 816745 expressly canceled and superseded PN No. 5757, while PN No. 816946 also explicitly canceled and superseded PN No. 5758.
Thus, it is patently erroneous for the Court of Appeals to still award to respondent the principal amounts and interests covered by PNs No. 5757 and 5758
when these were already canceled and superseded. It is now incumbent upon this Court to determine what subsequently happened to PNs No. 8167 and
8169.
Petitioner FNCB Finance presented four checks as proof of payment of the principal amounts and interests of PNs No. 8167 and 8169 upon their maturity.
All the checks were payable to respondent's savings account with petitioner Citibank, with the following details

Date of Issuance Check No. Amount Notation

(mm/dd/yyyy) ()

09/01/1978 76962 12,833.34 Interest payment on PN#08167

09/01/1978 76961 12,833.34 Interest payment on PN#08169

09/05/1978 77035 500,000.00 Full payment of principal on PN#08167 which is hereby cancelled

09/05/ 1978 77034 500,000.00 Full payment of principal on PN#08169 which is hereby cancelled

Then again, Checks No. 77035 and 77034 were later returned to petitioner FNCB Finance together with a memo, 47dated 6 September 1978, from Mr. Tan
of petitioner Citibank, to a Mr. Bobby Mendoza of petitioner FNCB Finance. According to the memo, the two checks, in the total amount of 1,000,000.00,
were to be returned to respondent's account with instructions to book the said amount in money market placements for one more year. Pursuant to the
said memo, Checks No. 77035 and 77034 were invested by petitioner FNCB Finance, on behalf of respondent, in money market placements for which it
issued PNs No. 20138 and 20139. The PNs each covered 500,000.00, to earn 11% interest per annum, and to mature on 3 September 1979.
On 3 September 1979, petitioner FNCB Finance issued Check No. 100168, pay to the order of "Citibank N.A. A/C Modesta Sabeniano," in the amount of
1,022,916.66, as full payment of the principal amounts and interests of both PNs No. 20138 and 20139 and, resultantly, canceling the said
PNs.48 Respondent actually admitted the issuance and existence of Check No. 100168, but with the qualification that the proceeds thereof were turned
over to petitioner Citibank.49 Respondent did not clarify the circumstances attending the supposed turn over, but on the basis of the allegations of
petitioner Citibank itself, the proceeds of PNs No. 20138 and 20139, amounting to 1,022,916.66, was used by it to liquidate respondent's outstanding
loans. Therefore, the determination of whether or not respondent is still entitled to the return of the proceeds of PNs No. 20138 and 20139 shall be
dependent on the resolution of the issues raised as to the existence of the loans and the authority of petitioner Citibank to use the proceeds of the said
PNs, together with respondent's other deposits and money market placements, to pay for the same.
Savings and current accounts with petitioner Citibank
Respondent presented and submitted before the RTC deposit slips and bank statements to prove deposits made to several of her accounts with petitioner
Citibank, particularly, Accounts No. 00484202, 59091, and 472-751, which would have amounted to a total of 3,812,712.32, had there been no
withdrawals or debits from the said accounts from the time the said deposits were made.
Although the RTC and the Court of Appeals did not make any definitive findings as to the status of respondent's savings and current accounts with
petitioner Citibank, the Decisions of both the trial and appellate courts effectively recognized only the 31,079.14 coming from respondent's savings
account which was used to off-set her alleged outstanding loans with petitioner Citibank.50
Since both the RTC and the Court of Appeals had consistently recognized only the 31,079.14 of respondent's savings account with petitioner Citibank, and
that respondent failed to move for reconsideration or to appeal this particular finding of fact by the trial and appellate courts, it is already binding upon this
Court. Respondent is already precluded from claiming any greater amount in her savings and current accounts with petitioner Citibank. Thus, this Court
shall limit itself to determining whether or not respondent is entitled to the return of the amount of 31,079.14 should the off-set thereof by petitioner
Citibank against her supposed loans be found invalid.
Dollar accounts with Citibank-Geneva
Respondent made an effort of preparing and presenting before the RTC her own computations of her money market placements and dollar accounts with
Citibank-Geneva, purportedly amounting to a total of United States (US) $343,220.98, as of 23 June 1985.51 In her Memorandum filed with the RTC, she
claimed a much bigger amount of deposits and money market placements with Citibank-Geneva, totaling US$1,336,638.65.52 However, respondent herself
also submitted as part of her formal offer of evidence the computation of her money market placements and dollar accounts with Citibank-Geneva as
determined by the latter.53 Citibank-Geneva accounted for respondent's money market placements and dollar accounts as follows

MODESTA SABENIANO &/OR

==================

US$ 30'000.-- Principal Fid. Placement

+ US$ 339.06 Interest at 3,875% p.a. from 12.07. 25.10.79

- US$ 95.-- Commission (minimum)

US$ 30'244.06 Total proceeds on 25.10.1979

US$ 114'000.-- Principal Fid. Placement

+ US$ 1'358.50 Interest at 4,125% p.a. from 12.07. 25.10.79

- US$ 41.17 Commission

US$ 115'317.33 Total proceeds on 25.10.1979

US$ 145'561.39 Total proceeds of both placements on 25.10.1979

+ US$ 11'381.31 total of both current accounts

US$ 156'942.70 Total funds available

- US$ 149'632.99 Transfer to Citibank Manila on 26.10.1979

(counter value of Pesos 1'102'944.78)

US$ 7'309.71 Balance in current accounts

- US$ 6'998.84 Transfer to Citibank Zuerich ac no. 121359 on March 13, 1980

US$ 310.87 various charges including closing charges

According to the foregoing computation, by 25 October 1979, respondent had a total of US$156,942.70, from which, US$149,632.99 was transferred by
Citibank-Geneva to petitioner Citibank in Manila, and was used by the latter to off-set respondent's outstanding loans. The balance of respondent's
accounts with Citibank-Geneva, after the remittance to petitioner Citibank in Manila, amounted to US$7,309.71, which was subsequently expended by a
transfer to another account with Citibank-Zuerich, in the amount of US$6,998.84, and by payment of various bank charges, including closing charges, in the
amount of US$310.87. Rightly so, both the RTC and the Court of Appeals gave more credence to the computation of Citibank-Geneva as to the status of
respondent's accounts with the said bank, rather than the one prepared by respondent herself, which was evidently self-serving. Once again, this Court
shall limit itself to determining whether or not respondent is entitled to the return of the amount of US$149,632.99 should the off-set thereof by petitioner
Citibank against her alleged outstanding loans be found invalid. Respondent cannot claim any greater amount since she did not perfect an appeal of the
Decision of the Court of Appeals, dated 26 March 2002, which found that she is entitled only to the return of the said amount, as far as her accounts with
Citibank-Geneva is concerned.
III
Petitioner Citibank was able to establish by preponderance of evidence the existence of respondent's loans.
Petitioners' version of events
In sum, the following amounts were used by petitioner Citibank to liquidate respondent's purported outstanding loans

Description Amount

Principal and interests of PNs No. 20138 and 20139

(money market placements with petitioner FNCB Finance) 1,022,916.66

Savings account with petitioner Citibank 31,079.14

Dollar remittance from Citibank-Geneva (peso equivalent of US$149,632.99) 1,102,944.78

Total 2,156,940.58

According to petitioner Citibank, respondent incurred her loans under the circumstances narrated below.
As early as 9 February 1978, respondent obtained her first loan from petitioner Citibank in the principal amount of 200,000.00, for which she executed PN
No. 31504.54 Petitioner Citibank extended to her several other loans in the succeeding months. Some of these loans were paid, while others were rolled-
 over or renewed. Significant to the Petition at bar are the loans which respondent obtained from July 1978 to January 1979, appropriately covered by PNs
(first set).55 The aggregate principal amount of these loans was 1,920,000.00, which could be broken down as follows

Date of Issuance Date of Maturity Principal Date of Release

PN No. MC No.
(mm/dd/yyyy) (mm/dd/yyyy) Amount (mm/dd/yyyy)

32935 07/20/1978 09/18/1978 400,000.00 07/20/1978 220701

33751 10/13/1978 12/12/1978 100,000.00 Unrecovered

33798 10/19/1978 11/03/1978 100,000.00 10/19/1978 226285

34025 11/15/1978 01/15/1979 150,000.00 11/16/1978 226439

34079 11/21/1978 01/19/1979 250,000.00 11/21/1978 226467

34192 12/04/1978 01/18/1979 100,000.00 12/05/1978 228057

34402 12/26/1978 02/23/1979 300,000.00 12/26/1978 228203

34534 01/09/1979 03/09/1979 150,000.00 01/09/1979 228270

34609 01/17/1979 03/19/1979 150,000.00 01/17/1979 228357

34740 01/30/1979 03/30/1979 220,000.00 01/30/1979 228400

Total 1,920,000.00

When respondent was unable to pay the first set of PNs upon their maturity, these were rolled-over or renewed several times, necessitating the execution
by respondent of new PNs in favor of petitioner Citibank. As of 5 April 1979, respondent had the following outstanding PNs (second set),56 the principal
amount of which remained at 1,920,000.00

Date of Issuance Date of Maturity

PN No. Pri
(mm/dd/yyyy) (mm/dd/yyyy)

34510 01/01/1979 03/02/1979

34509 01/02/1979 03/02/1979

34534 01/09/1979 03/09/1979

34612 01/19/1979 03/16/1979

34741 01/26/1979 03/12/1979

35689 02/23/1979 05/29/1979

35694 03/19/1979 05/29/1979

35695 03/19/1979 05/29/1979

356946 03/20/1979 05/29/1979

35697 03/30/1979 05/29/1979

Total

All the PNs stated that the purpose of the loans covered thereby is "To liquidate existing obligation," except for PN No. 34534, which stated for its purpose
"personal investment."
Respondent secured her foregoing loans with petitioner Citibank by executing Deeds of Assignment of her money market placements with petitioner FNCB
Finance. On 2 March 1978, respondent executed in favor of petitioner Citibank a Deed of Assignment 57 of PN No. 8169, which was issued by petitioner
FNCB Finance, to secure payment of the credit and banking facilities extended to her by petitioner Citibank, in the aggregate principal amount of
500,000.00. On 9 March 1978, respondent executed in favor of petitioner Citibank another Deed of Assignment, 58 this time, of PN No. 8167, also issued
by petitioner FNCB Finance, to secure payment of the credit and banking facilities extended to her by petitioner Citibank, in the aggregate amount of
500,000.00. When PNs No. 8167 and 8169, representing respondent's money market placements with petitioner FNCB Finance, matured and were
rolled-over to PNs No. 20138 and 20139, respondent executed new Deeds of Assignment,59 in favor of petitioner Citibank, on 25 August 1978. According to
the more recent Deeds, respondent assigned PNs No. 20138 and 20139, representing her rolled-over money market placements with petitioner FNCB
Finance, to petitioner Citibank as security for the banking and credit facilities it extended to her, in the aggregate principal amount of 500,000.00 per
Deed.
In addition to the Deeds of Assignment of her money market placements with petitioner FNCB Finance, respondent also executed a Declaration of
Pledge,60 in which she supposedly pledged "[a]ll present and future fiduciary placements held in my personal and/or joint name with Citibank, Switzerland,"
to secure all claims the petitioner Citibank may have or, in the future, acquire against respondent. The petitioners' copy of the Declaration of Pledge is
undated, while that of the respondent, a copy certified by a Citibank-Geneva officer, bore the date 24 September 1979.61
When respondent failed to pay the second set of PNs upon their maturity, an exchange of letters ensued between respondent and/or her representatives,
on one hand, and the representatives of petitioners, on the other.
The first letter62 was dated 5 April 1979, addressed to respondent and signed by Mr. Tan, as the manager of petitioner Citibank, which stated, in part, that

Despite our repeated requests and follow-up, we regret you have not granted us with any response or payment.
We, therefore, have no alternative but to call your loan of 1,920,000.00 plus interests and other charges due and demandable. If you still fail
to settle this obligation by 4/27/79, we shall have no other alternative but to refer your account to our lawyers for legal action to protect the
interest of the bank.
Respondent sent a reply letter63 dated 26 April 1979, printed on paper bearing the letterhead of respondent's company, MC Adore International Palace,
the body of which reads
This is in reply to your letter dated April 5, 1979 inviting my attention to my loan which has become due. Pursuant to our representation with
you over the telephone through Mr. F. A. Tan, you allow us to pay the interests due for the meantime.
 Please accept our Comtrust Check in the amount of 62,683.33.
Please bear with us for a little while, at most ninety days. As you know, we have a pending loan with the Development Bank of the Philippines
in the amount of 11-M. This loan has already been recommended for approval and would be submitted to the Board of Governors. In fact, to
further facilitate the early release of this loan, we have presented and furnished Gov. J. Tengco a xerox copy of your letter.
You will be doing our corporation a very viable service, should you grant us our request for a little more time.
A week later or on 3 May 1979, a certain C. N. Pugeda, designated as "Executive Secretary," sent a letter 64 to petitioner Citibank, on behalf of respondent.
The letter was again printed on paper bearing the letterhead of MC Adore International Palace. The pertinent paragraphs of the said letter are reproduced
below
Per instructions of Mrs. Modesta R. Sabeniano, we would like to request for a re-computation of the interest and penalty charges on her loan
in the aggregate amount of 1,920,000.00 with maturity date of all promissory notes at June 30, 1979. As she has personally discussed with
you yesterday, this date will more or less assure you of early settlement.
In this regard, please entrust to bearer, our Comtrust check for 62,683.33 to be replaced by another check with amount resulting from the
new computation. Also, to facilitate the processing of the same, may we request for another set of promissory notes for the signature of Mrs.
Sabeniano and to cancel the previous ones she has signed and forwarded to you.
This was followed by a telegram,65 dated 5 June 1979, and received by petitioner Citibank the following day. The telegram was sent by a Dewey G. Soriano,
Legal Counsel. The telegram acknowledged receipt of the telegram sent by petitioner Citibank regarding the "re-past due obligation" of McAdore
International Palace. However, it reported that respondent, the President and Chairman of MC Adore International Palace, was presently abroad
negotiating for a big loan. Thus, he was requesting for an extension of the due date of the obligation until respondent's arrival on or before 31 July 1979.
The next letter,66 dated 21 June 1979, was signed by respondent herself and addressed to Mr. Bobby Mendoza, a Manager of petitioner FNCB Finance.
Respondent wrote therein
Re: PN No. 20138 for 500,000.00 & PN No. 20139 for 500,000.00 totalling 1 Million, both PNs will mature on 9/3/1979.
This is to authorize you to release the accrued quarterly interests payment from my captioned placements and forward directly to Citibank,
Manila Attention: Mr. F. A. Tan, Manager, to apply to my interest payable on my outstanding loan with Citibank.
Please note that the captioned two placements are continuously pledged/hypothecated to Citibank, Manila to support my personal
outstanding loan. Therefore, please do not release the captioned placements upon maturity until you have received the instruction from
Citibank, Manila.
On even date, respondent sent another letter67 to Mr. Tan of petitioner Citibank, stating that
Re: S/A No. 25-225928
and C/A No. 484-946
This letter serves as an authority to debit whatever the outstanding balance from my captioned accounts and credit the amount to my loan
outstanding account with you.
Unlike respondent's earlier letters, both letters, dated 21 June 1979, are printed on plain paper, without the letterhead of her company, MC Adore
International Palace.
By 5 September 1979, respondent's outstanding and past due obligations to petitioner Citibank totaled 2,123,843.20, representing the principal amounts
plus interests. Relying on respondent's Deeds of Assignment, petitioner Citibank applied the proceeds of respondent's money market placements with
petitioner FNCB Finance, as well as her deposit account with petitioner Citibank, to partly liquidate respondent's outstanding loan balance,68as follows

Respondent's outstanding obligation (principal and interest) 2,123,843.20

Less: Proceeds from respondent's money market placements

with petitioner FNCB Finance (principal and interest) (1,022,916.66)

Deposits in respondent's bank accounts with petitioner

Citibank (31,079.14)

Balance of respondent's obligation 1,069,847.40

Mr. Tan of petitioner Citibank subsequently sent a letter,69 dated 28 September 1979, notifying respondent of the status of her loans and the foregoing
compensation which petitioner Citibank effected. In the letter, Mr. Tan informed respondent that she still had a remaining past-due obligation in the
amount of 1,069,847.40, as of 5 September 1979, and should respondent fail to pay the amount by 15 October 1979, then petitioner Citibank shall
proceed to off-set the unpaid amount with respondent's other collateral, particularly, a money market placement in Citibank-Hongkong.
On 5 October 1979, respondent wrote Mr. Tan of petitioner Citibank, on paper bearing the letterhead of MC Adore International Palace, as regards the
1,920,000.00 loan account supposedly of MC Adore Finance & Investment, Inc., and requested for a statement of account covering the principal and
interest of the loan as of 31 October 1979. She stated therein that the loan obligation shall be paid within 60 days from receipt of the statement of
account.
Almost three weeks later, or on 25 October 1979, a certain Atty. Moises Tolentino dropped by the office of petitioner Citibank, with a letter, dated 9
October 1979, and printed on paper with the letterhead of MC Adore International Palace, which authorized the bearer thereof to represent the
respondent in settling the overdue account, this time, purportedly, of MC Adore International Palace Hotel. The letter was signed by respondent as the
President and Chairman of the Board.
Eventually, Atty. Antonio Agcaoili of Agcaoili & Associates, as counsel of petitioner Citibank, sent a letter to respondent, dated 31 October 1979, informing
her that petitioner Citibank had effected an off-set using her account with Citibank-Geneva, in the amount of US$149,632.99, against her "outstanding,
overdue, demandable and unpaid obligation" to petitioner Citibank. Atty. Agcaoili claimed therein that the compensation or off-set was made pursuant to
and in accordance with the provisions of Articles 1278 through 1290 of the Civil Code. He further declared that respondent's obligation to petitioner
Citibank was now fully paid and liquidated.
Unfortunately, on 7 October 1987, a fire gutted the 7th floor of petitioner Citibank's building at Paseo de Roxas St., Makati, Metro Manila. Petitioners
submitted a Certification70 to this effect, dated 17 January 1991, issued by the Chief of the Arson Investigation Section, Fire District III, Makati Fire Station,
Metropolitan Police Force. The 7th floor of petitioner Citibank's building housed its Control Division, which was in charge of keeping the necessary
documents for cases in which it was involved. After compiling the documentary evidence for the present case, Atty. Renato J. Fernandez, internal legal
counsel of petitioner Citibank, forwarded them to the Control Division. The original copies of the MCs, which supposedly represent the proceeds of the first
set of PNs, as well as that of other documentary evidence related to the case, were among those burned in the said fire. 71
Respondent's version of events
Respondent disputed petitioners' narration of the circumstances surrounding her loans with petitioner Citibank and the alleged authority she gave for the
off-set or compensation of her money market placements and deposit accounts with petitioners against her loan obligation.
Respondent denied outright executing the first set of PNs, except for one (PN No. 34534 in particular). Although she admitted that she obtained several
loans from petitioner Citibank, these only amounted to 1,150,000.00, and she had already paid them. She secured from petitioner Citibank two loans of
500,000.00 each. She executed in favor of petitioner Citibank the corresponding PNs for the loans and the Deeds of Assignment of her money market
placements with petitioner FNCB Finance as security.72 To prove payment of these loans, respondent presented two provisional receipts of petitioner
Citibank No. 19471,73 dated 11 August 1978, and No. 12723,74 dated 10 November 1978 both signed by Mr. Tan, and acknowledging receipt from
respondent of several checks in the total amount of 500,744.00 and 500,000.00, respectively, for "liquidation of loan."
She borrowed another 150,000.00 from petitioner Citibank for personal investment, and for which she executed PN No. 34534, on 9 January 1979. Thus,
she admitted to receiving the proceeds of this loan via MC No. 228270. She invested the loan amount in another money market placement with petitioner
FNCB Finance. In turn, she used the very same money market placement with petitioner FNCB Finance as security for her 150,000.00 loan from petitioner
Citibank. When she failed to pay the loan when it became due, petitioner Citibank allegedly forfeited her money market placement with petitioner FNCB
Finance and, thus, the loan was already paid.75
Respondent likewise questioned the MCs presented by petitioners, except for one (MC No. 228270 in particular), as proof that she received the proceeds
of the loans covered by the first set of PNs. As recounted in the preceding paragraph, respondent admitted to obtaining a loan of 150,000.00, covered by
PN No. 34534, and receiving MC No. 228270 representing the proceeds thereof, but claimed that she already paid the same. She denied ever receiving
MCs No. 220701 (for the loan of 400,000.00, covered by PN No. 33935) and No. 226467 (for the loan of 250,000.00, covered by PN No. 34079), and
pointed out that the checks did not bear her indorsements. She did not deny receiving all other checks but she interposed that she received these checks,
not as proceeds of loans, but as payment of the principal amounts and/or interests from her money market placements with petitioner Citibank. She also
raised doubts as to the notation on each of the checks that reads "RE: Proceeds of PN#[corresponding PN No.]," saying that such notation did not appear
on the MCs when she originally received them and that the notation appears to have been written by a typewriter different from that used in writing all
other information on the checks (i.e., date, payee, and amount).76 She even testified that MCs were not supposed to bear notations indicating the purpose
for which they were issued.
As to the second set of PNs, respondent acknowledged having signed them all. However, she asserted that she only executed these PNs as part of the
simulated loans she and Mr. Tan of petitioner Citibank concocted. Respondent explained that she had a pending loan application for a big amount with the
Development Bank of the Philippines (DBP), and when Mr. Tan found out about this, he suggested that they could make it appear that the respondent had
outstanding loans with petitioner Citibank and the latter was already demanding payment thereof; this might persuade DBP to approve respondent's loan
application. Mr. Tan made the respondent sign the second set of PNs, so that he may have something to show the DBP investigator who might inquire with
petitioner Citibank as to respondent's loans with the latter. On her own copies of the said PNs, respondent wrote by hand the notation, "This isa (sic)
simulated non-negotiable note, signed copy given to Mr. Tan., (sic) per agreement to be shown to DBP representative. itwill (sic) be returned to me if the
11=M (sic) loan for MC Adore Palace Hotel is approved by DBP."77
Findings of this Court as to the existence of the loans
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 on 25 July 1979 (using respondent's savings
deposit with petitioner Citibank), 5 September 1979 (using the proceeds of respondent's money market placements with petitioner FNCB Finance) and 26
October 1979 (using respondent's dollar accounts remitted from Citibank-Geneva). 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.78
Respondent's outstanding obligation for 1,920,000.00 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.
It bears to emphasize that the proceeds of the loans were paid to respondent in MCs, with the respondent specifically named as payee. MCs checks are
drawn by the bank's manager upon the bank itself and regarded to be as good as the money it represents.79 Moreover, the MCs were crossed checks, with
the words "Payee's Account Only."
In general, a crossed check cannot be presented to the drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank
which, in turn, must present it for payment against the drawee bank in the course of normal banking hours. The crossed check cannot be presented for
payment, but it can only be deposited and the drawee bank may only pay to another bank in the payee's or indorser's account. 80 The effect of crossing a
check was described by this Court in Philippine Commercial International Bank v. Court of Appeals81
[T]he crossing of a check with the phrase "Payee's Account Only" is a warning that the check should be deposited in the account of the payee.
Thus, it is the duty of the collecting bank PCI Bank to ascertain that the check be deposited in payee's account only. It is bound to scrutinize the
check and to know its depositors before it can make the clearing indorsement "all prior indorsements and/or lack of indorsement guaranteed."
The crossed MCs presented by petitioner Bank were indeed deposited in several different bank accounts and cleared by the Clearing Office of the Central
Bank of the Philippines, as evidenced by the stamp marks and notations on the said checks. The crossed MCs are already in the possession of petitioner
Citibank, the drawee bank, which was ultimately responsible for the payment of the amount stated in the checks. Given that a check is more than just an
instrument of credit used in commercial transactions for it also serves as a receipt or evidence for the drawee bank of the cancellation of the said check
due to payment,82 then, the possession by petitioner Citibank of the said MCs, duly stamped "Paid" gives rise to the presumption that the said MCs were
already paid out to the intended payee, who was in this case, the respondent.
This Court finds applicable herein the presumptions that private transactions have been fair and regular, 83 and that the ordinary course of business has
been followed.84 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 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 MCs for deposit in respondent's accounts, submitting them for clearing, and their eventual payment and cancellation.
The afore-stated presumptions are disputable, meaning, they are satisfactory if uncontradicted, but may be contradicted and overcome by other
evidence.85 Respondent, however, was unable to present sufficient and credible evidence to dispute these presumptions.
It should be recalled that out of the nine MCs presented by petitioner Citibank, respondent admitted to receiving one as proceeds of a loan (MC No.
228270), denied receiving two (MCs No. 220701 and 226467), and admitted to receiving all the rest, but not as proceeds of her loans, but as return on the
principal amounts and interests from her money market placements.
Respondent admitted receiving MC No. 228270 representing the proceeds of her loan covered by PN No. 34534. Although the principal amount of the loan
is 150,000.00, respondent only received 146,312.50, because the interest and handling fee on the loan transaction were already deducted
therefrom.86 Stamps and notations at the back of MC No. 228270 reveal that it was deposited at the Bank of the Philippine Islands (BPI), Cubao Branch, in
Account No. 0123-0572-28.87 The check also bore the signature of respondent at the back.88 And, although respondent would later admit that she did sign
PN No. 34534 and received MC No. 228270 as proceeds of the loan extended to her by petitioner Citibank, she contradicted herself when, in an earlier
testimony, she claimed that PN No. 34534 was among the PNs she executed as simulated loans with petitioner Citibank.89
Respondent denied ever receiving MCs No. 220701 and 226467. However, considering that the said checks were crossed for payee's account only, and that
they were actually deposited, cleared, and paid, then the presumption would be that the said checks were properly deposited to the account of
respondent, who was clearly named the payee in the checks. Respondent's bare allegations that she did not receive the two checks fail to convince this
Court, for to sustain her, would be for this Court to conclude that an irregularity had occurred somewhere from the time of the issuance of the said checks,
to their deposit, clearance, and payment, and which would have involved not only petitioner Citibank, but also BPI, which accepted the checks for deposit,
and the Central Bank of the Philippines, which cleared the checks. It falls upon the respondent to overcome or dispute the presumption that the crossed
checks were issued, accepted for deposit, cleared, and paid for by the banks involved following the ordinary course of their business.
The mere fact that MCs No. 220701 and 226467 do not bear respondent's signature at the back does not negate deposit thereof in her account. The
liability for the lack of indorsement on the MCs no longer fall on petitioner Citibank, but on the bank who received the same for deposit, in this case, BPI
Cubao Branch. Once again, it must be noted that the MCs were crossed, for payee's account only, and the payee named in both checks was none other
than respondent. The crossing of the MCs was already a warning to BPI to receive said checks for deposit only in respondent's account. It was up to BPI to
verify whether it was receiving the crossed MCs in accordance with the instructions on the face thereof. If, indeed, the MCs were deposited in accounts
other than respondent's, then the respondent would have a cause of action against BPI. 90
BPI further stamped its guarantee on the back of the checks to the effect that, "All prior endorsement and/or Lack of endorsement guaranteed." Thus, BPI
became the indorser of the MCs, and assumed all the warranties of an indorser,91 specifically, that the checks were genuine and in all respects what they
purported to be; that it had a good title to the checks; that all prior parties had capacity to contract; and that the checks were, at the time of their
indorsement, valid and subsisting.92 So even if the MCs deposited by BPI's client, whether it be by respondent herself or some other person, lacked the
necessary indorsement, BPI, as the collecting bank, is bound by its warranties as an indorser and cannot set up the defense of lack of indorsement as
against petitioner Citibank, the drawee bank.93
Furthermore, respondent's bare and unsubstantiated denial of receipt of the MCs in question and their deposit in her account is rendered suspect when
MC No. 220701 was actually deposited in Account No. 0123-0572-28 of BPI Cubao Branch, the very same account in which MC No. 228270 (which
respondent admitted to receiving as proceeds of her loan from petitioner Citibank), and MCs No. 228203, 228357, and 228400 (which respondent
admitted to receiving as proceeds from her money market placements) were deposited. Likewise, MC No. 226467 was deposited in Account No. 0121-002-
43 of BPI Cubao Branch, to which MCs No. 226285 and 226439 (which respondent admitted to receiving as proceeds from her money market placements)
were deposited. It is an apparent contradiction for respondent to claim having received the proceeds of checks deposited in an account, and then deny
receiving the proceeds of another check deposited in the very same account.
Another inconsistency in respondent's denial of receipt of MC No. 226467 and her deposit of the same in her account, is her presentation of Exhibit "HHH,"
a provisional receipt which was supposed to prove that respondent turned over 500,000.00 to Mr. Tan of petitioner Citibank, that the said amount was
split into three money market placements, and that MC No. 226467 represented the return on her investment from one of these placements.94Because of
her Exhibit "HHH," respondent effectively admitted receipt of MC No. 226467, although for reasons other than as proceeds of a loan.
Neither can this Court give credence to respondent's contention that the notations on the MCs, stating that they were the proceeds of particular PNs, were
not there when she received the checks and that the notations appeared to be written by a typewriter different from that used to write the other
information on the checks. Once more, respondent's allegations were uncorroborated by any other evidence. Her and her counsel's observation that the
notations on the MCs appear to be written by a typewriter different from that used to write the other information on the checks hardly convinces this
Court considering that it constitutes a mere opinion on the appearance of the notation by a witness who does not possess the necessary expertise on the
matter. In addition, the notations on the MCs were written using both capital and small letters, while the other information on the checks were written
using capital letters only, such difference could easily confuse an untrained eye and lead to a hasty conclusion that they were written by different
typewriters.
Respondent's testimony, that based on her experience transacting with banks, the MCs were not supposed to include notations on the purpose for which
the checks were issued, also deserves scant consideration. While respondent may have extensive experience dealing with banks, it still does not qualify her
as a competent witness on banking procedures and practices. Her testimony on this matter is even belied by the fact that the other MCs issued by
petitioner Citibank (when it was still named First National City Bank) and by petitioner FNCB Finance, the existence and validity of which were not disputed
by respondent, also bear similar notations that state the reason for which they were issued.
Respondent presented several more pieces of evidence to substantiate her claim that she received MCs No. 226285, 226439, 226467, 226057, 228357,
and 228400, not as proceeds of her loans from petitioner Citibank, but as the return of the principal amounts and payment of interests from her money
market placements with petitioners. Part of respondent's exhibits were personal checks 95 drawn by respondent on her account with Feati Bank & Trust Co.,
which she allegedly invested in separate money market placements with both petitioners, the returns from which were paid to her via MCs No. 226285
and 228400. Yet, to this Court, the personal checks only managed to establish respondent's issuance thereof, but there was nothing on the face of the
checks that would reveal the purpose for which they were issued and that they were actually invested in money market placements as respondent
claimed.
Respondent further submitted handwritten notes that purportedly computed and presented the returns on her money market placements, corresponding
to the amount stated in the MCs she received from petitioner Citibank. Exhibit "HHH-1"96 was a handwritten note, which respondent attributed to Mr. Tan
of petitioner Citibank, showing the breakdown of her BPI Check for 500,000.00 into three different money market placements with petitioner Citibank.
This Court, however, noticed several factors which render the note highly suspect. One, it was written on the reversed side of Provisional Receipt No.
12724 of petitioner Citibank which bore the initials of Mr. Tan acknowledging receipt of respondent's BPI Check No. 120989 for 500,000.00; but the
initials on the handwritten note appeared to be that of Mr. Bobby Mendoza of petitioner FNCB Finance. 97 Second, according to Provisional Receipt No.
12724, BPI Check No. 120989 for 500,000.00 was supposed to be invested in three money market placements with petitioner Citibank for the period of
60 days. Since all these money market placements were made through one check deposited on the same day, 10 November 1978, it made no sense that
the handwritten note at the back of Provisional Receipt No. 12724 provided for different dates of maturity for each of the money market placements (i.e.,
16 November 1978, 17 January 1979, and 21 November 1978), and such dates did not correspond to the 60 day placement period stated on the face of
the provisional receipt. And third, the principal amounts of the money market placements as stated in the handwritten note 145,000.00, 145,000.00
and 242,000.00 totaled 532,000.00, and was obviously in excess of the 500,000.00 acknowledged on the face of Provisional Receipt No. 12724.
Exhibits "III" and "III-1," the front and bank pages of a handwritten note of Mr. Bobby Mendoza of petitioner FNCB Finance,98 also did not deserve much
evidentiary weight, and this Court cannot rely on the truth and accuracy of the computations presented therein. Mr. Mendoza was not presented as a
witness during the trial before the RTC, so that the document was not properly authenticated nor its contents sufficiently explained. No one was able to
competently identify whether the initials as appearing on the note were actually Mr. Mendoza's.
Also, going by the information on the front page of the note, this Court observes that payment of respondent's alleged money market placements with
petitioner FNCB Finance were made using Citytrust Checks; the MCs in question, including MC No. 228057, were issued by petitioner Citibank. Although
Citytrust (formerly Feati Bank & Trust Co.), petitioner FNCB Finance, and petitioner Citibank may be affiliates of one another, they each remained separate
and distinct corporations, each having its own financial system and records. Thus, this Court cannot simply assume that one corporation, such as petitioner
Citibank or Citytrust, can issue a check to discharge an obligation of petitioner FNCB Finance. It should be recalled that when petitioner FNCB Finance paid
for respondent's money market placements, covered by its PNs No. 8167 and 8169, as well as PNs No. 20138 and 20139, petitioner FNCB Finance issued its
own checks.
As a last point on this matter, if respondent truly had money market placements with petitioners, then these would have been evidenced by PNs issued by
either petitioner Citibank or petitioner FNCB Finance, acknowledging the principal amounts of the investments, and stating the applicable interest rates, as
well as the dates of their of issuance and maturity. After respondent had so meticulously reconstructed her other money market placements with
petitioners and consolidated the documentary evidence thereon, she came surprisingly short of offering similar details and substantiation for these
particular money market placements.
Since this Court is satisfied that respondent indeed received the proceeds of the first set of PNs, then it proceeds to analyze her evidence of payment
thereof.
In support of respondent's assertion that she had already paid whatever loans she may have had with petitioner Citibank, she presented as evidence
Provisional Receipts No. 19471, dated 11 August 1978, and No. 12723, dated 10 November 1978, both of petitioner Citibank and signed by Mr. Tan, for the
amounts of 500,744.00 and 500,000.00, respectively. While these provisional receipts did state that Mr. Tan, on behalf of petitioner Citibank, received
respondent's checks as payment for her loans, they failed to specifically identify which loans were actually paid. Petitioner Citibank was able to present
evidence that respondent had executed several PNs in the years 1978 and 1979 to cover the loans she secured from the said bank. 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.99 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 Philippine Airlines, Inc. v. Court of Appeals, 100 this Court elucidated that:
Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as
payment (Sec. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco, v. Santos, 9 Phil.
44; 21 R.C.L. 60, 61). A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is
not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation
under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized
(Art. 1249, Civil Code, par. 3).
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.
As for PN No. 34534, respondent asserted payment thereof at two separate instances by two different means. In her formal offer of exhibits, respondent
submitted a deposit slip of petitioner Citibank, dated 11 August 1978, evidencing the deposit of BPI Check No. 5785 for 150,000.00.101 In her Formal Offer
of Documentary Exhibits, dated 7 July 1989, respondent stated that the purpose for the presentation of the said deposit slip was to prove that she already
paid her loan covered by PN No. 34534.102 In her testimony before the RTC three years later, on 28 November 1991, she changed her story. This time she
narrated that the loan covered by PN No. 34534 was secured by her money market placement with petitioner FNCB Finance, and when she failed to pay
the said PN when it became due, the security was applied to the loan, therefore, the loan was considered paid. 103 Given the foregoing, respondent's
assertion of payment of PN No. 34534 is extremely dubious.
According to petitioner Citibank, the PNs in the second set, except for PN No. 34534, were mere renewals of the unpaid PNs in the first set, which was why
the PNs stated that they were for the purpose of liquidating existing obligations. PN No. 34534, however, which was part of the first set, was still valid and
subsisting and so it was included in the second set without need for its renewal, and it still being the original PN for that particular loan, its stated purpose
was for personal investment.104 Respondent essentially admitted executing the second set of PNs, but they were only meant to cover simulated loans. Mr.
Tan supposedly convinced her that her pending loan application with DBP would have a greater chance of being approved if they made it appear that
respondent urgently needed the money because petitioner Citibank was already demanding payment for her simulated loans.
Respondent's defense of simulated loans to escape liability for the second set of PNs is truly a novel one.1wphi1 It is regrettable, however, that she was
unable to substantiate the same. Yet again, respondent's version of events is totally based on her own uncorroborated testimony. The notations on the
second set of PNs, that they were non-negotiable simulated notes, were admittedly made by respondent herself and were, thus, self-serving. Equally self-
serving was respondent's letter, written on 7 October 1985, or more than six years after the execution of the second set of PNs, in which she demanded
return of the simulated or fictitious PNs, together with the letters relating thereto, which Mr. Tan purportedly asked her to execute. Respondent further
failed to present any proof of her alleged loan application with the DBP, and of any circumstance or correspondence wherein the simulated or fictitious
PNs were indeed used for their supposed purpose.
In contrast, petitioner Citibank, as supported by the testimonies of its officers and available documentation, consistently treated the said PNs as regular
loans accepted, approved, and paid in the ordinary course of its business.
The PNs executed by the respondent in favor of petitioner Citibank to cover her loans were duly-filled out and signed, including the disclosure statement
found at the back of the said PNs, in adherence to the Central Bank requirement to disclose the full finance charges to a loan granted to borrowers.
Mr. Tan, then an account officer with the Marketing Department of petitioner Citibank, testified that he dealt directly with respondent; he facilitated the
loans; and the PNs, at least in the second set, were signed by respondent in his presence.105
Mr. Pujeda, the officer who was previously in charge of loans and placements, confirmed that the signatures on the PNs were verified against respondent's
specimen signature with the bank.106
Ms. Cristina Dondoyano, who worked at petitioner Citibank as a loan processor, was responsible for booking respondent's loans. Booking the loans means
recording it in the General Ledger. She explained the procedure for booking loans, as follows: The account officer, in the Marketing Department, deals
directly with the clients who wish to borrow money from petitioner Citibank. The Marketing Department will forward a loan booking checklist, together
with the borrowing client's PNs and other supporting documents, to the loan pre-processor, who will check whether the details in the loan booking
checklist are the same as those in the PNs. The documents are then sent to Signature Control for verification of the client's signature in the PNs, after
which, they are returned to the loan pre-processor, to be forwarded finally to the loan processor. The loan processor shall book the loan in the General
Ledger, indicating therein the client name, loan amount, interest rate, maturity date, and the corresponding PN number. Since she booked respondent's
loans personally, Ms. Dondoyano testified that she saw the original PNs. In 1986, Atty. Fernandez of petitioner Citibank requested her to prepare an
accounting of respondent's loans, which she did, and which was presented as Exhibit "120" for the petitioners. The figures from the said exhibit were culled
from the bookings in the General Ledger, a fact which respondent's counsel was even willing to stipulate.107
Ms. Teresita Glorioso was an Investigation and Reconcilement Clerk at the Control Department of petitioner Citibank. She was presented by petitioner
Citibank to expound on the microfilming procedure at the bank, since most of the copies of the PNs were retrieved from microfilm. Microfilming of the
documents are actually done by people at the Operations Department. At the end of the day or during the day, the original copies of all bank documents,
not just those pertaining to loans, are microfilmed. She refuted the possibility that insertions could be made in the microfilm because the microfilm is
inserted in a cassette; the cassette is placed in the microfilm machine for use; at the end of the day, the cassette is taken out of the microfilm machine and
put in a safe vault; and the cassette is returned to the machine only the following day for use, until the spool is full. This is the microfilming procedure
followed everyday. When the microfilm spool is already full, the microfilm is developed, then sent to the Control Department, which double checks the
contents of the microfilms against the entries in the General Ledger. The Control Department also conducts a random comparison of the contents of the
microfilms with the original documents; a random review of the contents is done on every role of microfilm.108
Ms. Renee Rubio worked for petitioner Citibank for 20 years. She rose from the ranks, initially working as a secretary in the Personnel Group; then as a
secretary to the Personnel Group Head; a Service Assistant with the Marketing Group, in 1972 to 1974, dealing directly with corporate and individual
clients who, among other things, secured loans from petitioner Citibank; the Head of the Collection Group of the Foreign Department in 1974 to 1976; the
Head of the Money Transfer Unit in 1976 to 1978; the Head of the Loans and Placements Unit up to the early 1980s; and, thereafter, she established
operations training for petitioner Citibank in the Asia-Pacific Region responsible for the training of the officers of the bank. She testified on the standard
loan application process at petitioner Citibank. According to Ms. Rubio, the account officer or marketing person submits a proposal to grant a loan to an
individual or corporation. Petitioner Citibank has a worldwide policy that requires a credit committee, composed of a minimum of three people, which
would approve the loan and amount thereof. There can be no instance when only one officer has the power to approve the loan application. When the
loan is approved, the account officer in charge will obtain the corresponding PNs from the client. The PNs are sent to the signature verifier who would
validate the signatures therein against those appearing in the signature cards previously submitted by the client to the bank. The Operations Unit will check
and review the documents, including the PNs, if it is a clean loan, and securities and deposits, if it is collateralized. The loan is then recorded in the General
Ledger. The Loans and Placements Department will not book the loans without the PNs. When the PNs are liquidated, whether they are paid or rolled-over,
they are returned to the client.109 Ms. Rubio further explained that she was familiar with respondent's accounts since, while she was still the Head of the
Loan and Placements Unit, she was asked by Mr. Tan to prepare a list of respondent's outstanding obligations.110 She thus calculated respondent's
outstanding loans, which was sent as an attachment to Mr. Tan's letter to respondent, dated 28 September 1979, and presented before the RTC as Exhibits
"34-B" and "34-C."111
Lastly, the exchange of letters between petitioner Citibank and respondent, as well as the letters sent by other people working for respondent, had
consistently recognized that respondent owed petitioner Citibank money.
In consideration of the foregoing discussion, this Court finds that the preponderance of evidence supports the existence of the respondent's loans, in the
principal sum of 1,920,000.00, as of 5 September 1979. While it is well-settled that the term "preponderance of evidence" should not be wholly
dependent on the number of witnesses, there are certain instances when the number of witnesses become the determining factor
The preponderance of evidence may be determined, under certain conditions, by the number of witnesses testifying to a particular fact or
state of facts. For instance, one or two witnesses may testify to a given state of facts, and six or seven witnesses of equal candor, fairness,
intelligence, and truthfulness, and equally well corroborated by all the remaining evidence, who have no greater interest in the result of the
suit, testify against such state of facts. Then the preponderance of evidence is determined by the number of witnesses. (Wilcox vs. Hines, 100
Tenn. 524, 66 Am. St. Rep., 761.)112
Best evidence rule
This Court disagrees in the pronouncement made by the Court of Appeals summarily dismissing the documentary evidence submitted by petitioners based
on its broad and indiscriminate application of the best evidence rule.
In general, the best evidence rule requires that the highest available degree of proof must be produced. Accordingly, for documentary evidence, the
contents of a document are best proved by the production of the document itself, 113to the exclusion of any secondary or substitutionary evidence.114
The best evidence rule has been made part of the revised Rules of Court, Rule 130, Section 3, which reads
SEC. 3. Original document must be produced; exceptions. When the subject of inquiry is the contents of a document, no evidence shall be
admissible other than the original document itself, except in the following cases:
(a) When the original has been lost or destroyed, or cannot be produced in court, without bad faith on the part of the offeror;
(b) When the original is in the custody or under the control of the party against whom the evidence is offered, and the latter fails to
produce it after reasonable notice;
(c) When the original consists of numerous accounts or other documents which cannot be examined in court without great loss of
time and the fact sought to be established from them is only the general result of the whole; and
(d) When the original is a public record in the custody of a public officer or is recorded in a public office.
As the afore-quoted provision states, the best evidence rule applies only when the subject of the inquiry is the contents of the document. The scope of the
rule is more extensively explained thus
But even with respect to documentary evidence, the best evidence rule applies only when the content of such document is the subject of the
inquiry. Where the issue is only as to whether such document was actually executed, or exists, or on the circumstances relevant to or
surrounding its execution, the best evidence rule does not apply and testimonial evidence is admissible (5 Moran, op. cit., pp. 76-66; 4 Martin,
op. cit., p. 78). Any other substitutionary evidence is likewise admissible without need for accounting for the original.
Thus, when a document is presented to prove its existence or condition it is offered not as documentary, but as real, evidence. Parol evidence
of the fact of execution of the documents is allowed (Hernaez, et al. vs. McGrath, etc., et al., 91 Phil 565). x x x 115
In Estrada v. Desierto,116 this Court had occasion to rule that
It is true that the Court relied not upon the original but only copy of the Angara Diary as published in the Philippine Daily Inquirer on February
4-6, 2001. In doing so, the Court, did not, however, violate the best evidence rule. Wigmore, in his book on evidence, states that:
"Production of the original may be dispensed with, in the trial court's discretion, whenever in the case in hand the opponent does not bona fide
dispute the contents of the document and no other useful purpose will be served by requiring production.24
"x x x x
"In several Canadian provinces, the principle of unavailability has been abandoned, for certain documents in which ordinarily no real dispute
arised. This measure is a sensible and progressive one and deserves universal adoption (post, sec. 1233). Its essential feature is that a copy may
be used unconditionally, if the opponent has been given an opportunity to inspect it." (Emphasis supplied.)
This Court did not violate the best evidence rule when it considered and weighed in evidence the photocopies and microfilm copies of the PNs, MCs, and
letters submitted by the petitioners to establish the existence of respondent's loans. The terms or contents of these documents were never the point of
contention in the Petition at bar. It was respondent's position that the PNs in the first set (with the exception of PN No. 34534) never existed, while the PNs
in the second set (again, excluding PN No. 34534) were merely executed to cover simulated loan transactions. As for the MCs representing the proceeds of
the loans, the respondent either denied receipt of certain MCs or admitted receipt of the other MCs but for another purpose. Respondent further
admitted the letters she wrote personally or through her representatives to Mr. Tan of petitioner Citibank acknowledging the loans, except that she
claimed that these letters were just meant to keep up the ruse of the simulated loans. Thus, respondent questioned the documents as to their existence or
execution, or when the former is admitted, as to the purpose for which the documents were executed, matters which are, undoubtedly, external to the
documents, and which had nothing to do with the contents thereof.
Alternatively, even if it is granted that the best evidence rule should apply to the evidence presented by petitioners regarding the existence of respondent's
loans, it should be borne in mind that the rule admits of the following exceptions under Rule 130, Section 5 of the revised Rules of Court
SEC. 5. When the original document is unavailable. When the original document has been lost or destroyed, or cannot be produced in court,
the offeror, upon proof of its execution or existence and the cause of its unavailability without bad faith on his part, may prove its contents by a
copy, or by a recital of its contents in some authentic document, or by the testimony of witnesses in the order stated.
The execution or existence of the original copies of the documents was established through the testimonies of witnesses, such as Mr. Tan, before whom
most of the documents were personally executed by respondent. The original PNs also went through the whole loan booking system of petitioner Citibank
from the account officer in its Marketing Department, to the pre-processor, to the signature verifier, back to the pre-processor, then to the processor for
booking.117 The original PNs were seen by Ms. Dondoyano, the processor, who recorded them in the General Ledger. Mr. Pujeda personally saw the
original MCs, proving respondent's receipt of the proceeds of her loans from petitioner Citibank, when he helped Attys. Cleofe and Fernandez, the bank's
legal counsels, to reconstruct the records of respondent's loans. The original MCs were presented to Atty. Cleofe who used the same during the
preliminary investigation of the case, sometime in years 1986-1987. The original MCs were subsequently turned over to the Control and Investigation
Division of petitioner Citibank.118
It was only petitioner FNCB Finance who claimed that they lost the original copies of the PNs when it moved to a new office. Citibank did not make a similar
contention; instead, it explained that the original copies of the PNs were returned to the borrower upon liquidation of the loan, either through payment or
roll-over. Petitioner Citibank proffered the excuse that they were still looking for the documents in their storage or warehouse to explain the delay and
difficulty in the retrieval thereof, but not their absence or loss. The original documents in this case, such as the MCs and letters, were destroyed and, thus,
unavailable for presentation before the RTC only on 7 October 1987, when a fire broke out on the 7 th floor of the office building of petitioner Citibank.
There is no showing that the fire was intentionally set. The fire destroyed relevant documents, not just of the present case, but also of other cases, since
the 7th floor housed the Control and Investigation Division, in charge of keeping the necessary documents for cases in which petitioner Citibank was
involved.
The foregoing would have been sufficient to allow the presentation of photocopies or microfilm copies of the PNs, MCs, and letters by the petitioners as
secondary evidence to establish the existence of respondent's loans, as an exception to the best evidence rule.
The impact of the Decision of the Court of Appeals in the Dy case
In its assailed Decision, the Court of Appeals made the following pronouncement
Besides, We find the declaration and conclusions of this Court in CA-G.R. CV No. 15934 entitled Sps. Dr. Ricardo L. Dy and Rosalind O. Dy vs. City
Bank, N.A., et al, promulgated on 15 January 1990, as disturbingtaking into consideration the similarities of the fraud, machinations, and
deceits employed by the defendant-appellant Citibank and its Account Manager Francisco Tan.
Worthy of note is the fact that Our declarations and conclusions against Citibank and the person of Francisco Tan in CA-G.R. CV No. 15934 were
affirmed in toto by the Highest Magistrate in a Minute Resolution dated 22 August 1990 entitled Citibank, N.A., vs. Court of Appeals, G.R.
93350.
As the factual milieu of the present appeal created reasonable doubts as to whether the nine (9) Promissory Notes were indeed executed with
considerations, the doubts, coupled by the findings and conclusions of this Court in CA-G.R. CV No. 15934 and the Supreme Court in G.R. No.
93350. should be construed against herein defendants-appellants Citibank and FNCB Finance.
What this Court truly finds disturbing is the significance given by the Court of Appeals in its assailed Decision to the Decision 119 of its Third Division in CA-
G.R. CV No. 15934 (or the Dy case), when there is an absolute lack of legal basis for doing such.
Although petitioner Citibank and its officer, Mr. Tan, were also involved in the Dy case, that is about the only connection between the Dy case and the one
at bar. Not only did the Dy case tackle transactions between parties other than the parties presently before this Court, but the transactions are absolutely
independent and unrelated to those in the instant Petition.
In the Dy case, Severino Chua Caedo managed to obtain loans from herein petitioner Citibank amounting to 7,000,000.00, secured to the extent of
5,000,000.00 by a Third Party Real Estate Mortgage of the properties of Caedo's aunt, Rosalind Dy. It turned out that Rosalind Dy and her husband were
unaware of the said loans and the mortgage of their properties. The transactions were carried out exclusively between Caedo and Mr. Tan of petitioner
Citibank. The RTC found Mr. Tan guilty of fraud for his participation in the questionable transactions, essentially because he allowed Caedo to take out the
signature cards, when these should have been signed by the Dy spouses personally before him. Although the Dy spouses' signatures in the PNs and Third
Party Real Estate Mortgage were forged, they were approved by the signature verifier since the signature cards against which they were compared to were
also forged. Neither the RTC nor the Court of Appeals, however, categorically declared Mr. Tan personally responsible for the forgeries, which, in the
narration of the facts, were more likely committed by Caedo.
In the Petition at bar, respondent dealt with Mr. Tan directly, there was no third party involved who could have perpetrated any fraud or forgery in her
loan transactions. Although respondent attempted to raise suspicion as to the authenticity of her signatures on certain documents, these were nothing
more than naked allegations with no corroborating evidence; worse, even her own allegations were replete with inconsistencies. She could not even
establish in what manner or under what circumstances the fraud or forgery was committed, or how Mr. Tan could have been directly responsible for the
same.
While the Court of Appeals can take judicial notice of the Decision of its Third Division in the Dy case, it should not have given the said case much weight
when it rendered the assailed Decision, since the former does not constitute a precedent. The Court of Appeals, in the challenged Decision, did not apply
any legal argument or principle established in the Dy case but, rather, adopted the findings therein of wrongdoing or misconduct on the part of herein
petitioner Citibank and Mr. Tan. Any finding of wrongdoing or misconduct as against herein petitioners should be made based on the factual background
and pieces of evidence submitted in this case, not those in another case.
It is apparent that the Court of Appeals took judicial notice of the Dy case not as a legal precedent for the present case, but rather as evidence of similar
acts committed by petitioner Citibank and Mr. Tan. A basic rule of evidence,however, states that, "Evidence that one did or did not do a certain thing at
one time is not admissible to prove that he did or did not do the same or similar thing at another time; but it may be received to prove a specific intent or
knowledge, identity, plan, system, scheme, habit, custom or usage, and the like."120 The rationale for the rule is explained thus
The rule is founded upon reason, public policy, justice and judicial convenience. The fact that a person has committed the same or similar acts
at some prior time affords, as a general rule, no logical guaranty that he committed the act in question. This is so because, subjectively, a man's
mind and even his modes of life may change; and, objectively, the conditions under which he may find himself at a given time may likewise
change and thus induce him to act in a different way. Besides, if evidence of similar acts are to be invariably admitted, they will give rise to a
multiplicity of collateral issues and will subject the defendant to surprise as well as confuse the court and prolong the trial.121
The factual backgrounds of the two cases are so different and unrelated that the Dy case cannot be used to prove specific intent, knowledge, identity, plan,
system, scheme, habit, custom or usage on the part of petitioner Citibank or its officer, Mr. Tan, to defraud respondent in the present case.
IV
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.
Savings Account with petitioner Citibank
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.122 Both debts consist in sums of money. By June 1979, all of respondent's PNs in the second set
had matured and became demandable, while respondent's savings account was demandable anytime. Neither was there any retention or controversy over
the PNs and the deposit account commenced by a third person and communicated in due time to the debtor concerned. Compensation takes place by
operation of law,123 therefore, even in the absence of an expressed authority from respondent, petitioner Citibank had the right to effect, on 25 June 1979,
the partial compensation or off-set of respondent's outstanding loans with her deposit account, amounting to 31,079.14.
Money market placements with FNCB Finance
Things though are not as simple and as straightforward as regards to the money market placements and bank account used by petitioner Citibank to
complete the compensation or off-set of respondent's outstanding loans, which came from persons other than petitioner Citibank.
Respondent's money market placements were with petitioner FNCB Finance, and after several roll-overs, they were ultimately covered by PNs No. 20138
and 20139, which, by 3 September 1979, the date the check for the proceeds of the said PNs were issued, amounted to 1,022,916.66, inclusive of the
principal amounts and interests. As to these money market placements, respondent was the creditor and petitioner FNCB Finance the debtor; while, as to
the outstanding loans, petitioner Citibank was the creditor and respondent the debtor. Consequently, legal compensation, under Article 1278 of the Civil
Code, would not apply since the first requirement for a valid compensation, that each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other, was not met.
What 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 in its favor.
The Court of Appeals did not consider these Deeds of Assignment because of petitioners' failure to produce the original copies thereof in violation of the
best evidence rule. This Court again finds itself in disagreement in the application of the best evidence rule by the appellate court.
To recall, the best evidence rule, in so far as documentary evidence is concerned, requires the presentation of the original copy of the document only when
the context thereof is the subject of inquiry in the case. Respondent does not question the contents of the Deeds of Assignment. While she admitted the
existence and execution of the Deeds of Assignment, dated 2 March 1978 and 9 March 1978, covering PNs No. 8169 and 8167 issued by petitioner FNCB
Finance, she claimed, as defense, that the loans for which the said Deeds were executed as security, were already paid. She denied ever executing both
Deeds of Assignment, dated 25 August 1978, covering PNs No. 20138 and 20139. These are again issues collateral to the contents of the documents
involved, which could be proven by evidence other than the original copies of the said documents.
Moreover, the Deeds of Assignment of the money market placements with petitioner FNCB Finance were notarized documents, thus, admissible in
evidence. Rule 132, Section 30 of the Rules of Court provides that
SEC. 30. Proof of notarial documents. Every instrument duly acknowledged or proved and certified as provided by law, may be presented in
evidence without further proof, the certificate of acknowledgement being prima facie evidence of the execution of the instrument or
document involved.
Significant herein is this Court's elucidation in De Jesus v. Court of Appeals,124 which reads
On the evidentiary value of these documents, it should be recalled that the notarization of a private document converts it into a public one and
renders it admissible in court without further proof of its authenticity (Joson vs. Baltazar, 194 SCRA 114 [1991]). This is so because a public
document duly executed and entered in the proper registry is presumed to be valid and genuine until the contrary is shown by clear and
convincing proof (Asido vs. Guzman, 57 Phil. 652 [1918]; U.S. vs. Enriquez, 1 Phil 241 [1902]; Favor vs. Court of Appeals, 194 SCRA 308 [1991]).
As such, the party challenging the recital of the document must prove his claim with clear and convincing evidence (Diaz vs. Court of Appeals,
145 SCRA 346 [1986]).
The rule on the evidentiary weight that must be accorded a notarized document is clear and unambiguous. The certificate of acknowledgement in the
notarized Deeds of Assignment constituted prima facie evidence of the execution thereof. Thus, the burden of refuting this presumption fell on
respondent. She could have presented evidence of any defect or irregularity in the execution of the said documents 125 or raised questions as to the verity
of the notary public's acknowledgment and certificate in the Deeds.126 But again, respondent admitted executing the Deeds of Assignment, dated 2 March
1978 and 9 March 1978, although claiming that the loans for which they were executed as security were already paid. And, she assailed the Deeds of
Assignment, dated 25 August 1978, with nothing more than her bare denial of execution thereof, hardly the clear and convincing evidence required to
trounce the presumption of due execution of a notarized document.
Petitioners not only presented the notarized Deeds of Assignment, but even secured certified literal copies thereof from the National Archives. 127 Mr.
Renato Medua, an archivist, working at the Records Management and Archives Office of the National Library, testified that the copies of the Deeds
presented before the RTC were certified literal copies of those contained in the Notarial Registries of the notary publics concerned, which were already in
the possession of the National Archives. He also explained that he could not bring to the RTC the Notarial Registries containing the original copies of the
Deeds of Assignment, because the Department of Justice (DOJ) Circular No. 97, dated 8 November 1968, prohibits the bringing of original documents to
the courts to prevent the loss of irreplaceable and priceless documents.128
Accordingly, this Court gives the Deeds of Assignment grave importance in establishing the authority given by the respondent to petitioner Citibank to use
as security for her loans her money her market placements with petitioner FNCB Finance, represented by PNs No. 8167 and 8169, later to be rolled-over as
PNs No. 20138 and 20139. These Deeds of Assignment constitute the law between the parties, and the obligations arising therefrom shall have the force of
law between the parties and should be complied with in good faith.129 Standard clauses in all of the Deeds provide that
The ASSIGNOR and the ASSIGNEE hereby further agree as follows:
xxxx
2. In the event the OBLIGATIONS are not paid at maturity or upon demand, as the case may be, the ASSIGNEE is fully authorized
and empowered to collect and receive the PLACEMENT (or so much thereof as may be necessary) and apply the same in payment
of the OBLIGATIONS. Furthermore, the ASSIGNOR agrees that at any time, and from time to time, upon request by the ASSIGNEE,
the ASSIGNOR will promptly execute and deliver any and all such further instruments and documents as may be necessary to
effectuate this Assignment.
xxxx
5. This Assignment shall be considered as sufficient authority to FNCB Finance to pay and deliver the PLACEMENT or so much
thereof as may be necessary to liquidate the OBLIGATIONS, to the ASSIGNEE in accordance with terms and provisions hereof. 130
Petitioner Citibank was only acting upon the authority granted to it under the foregoing Deeds when it finally used the proceeds of PNs No. 20138 and
20139, paid by petitioner FNCB Finance, to partly pay for respondent's outstanding loans. Strictly speaking, it did not effect a legal compensation or off-set
under Article 1278 of the Civil Code, but rather, it partly extinguished respondent's obligations through the application of the security given by the
respondent for her loans. Although the pertinent documents were entitled Deeds of Assignment, they were, in reality, more of a pledge by respondent to
petitioner Citibank of her credit due from petitioner FNCB Finance by virtue of her money market placements with the latter. According to Article 2118 of
the Civil Code
ART. 2118. If a credit has been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall
apply the same to the payment of his claim, and deliver the surplus, should there be any, to the pledgor.
PNs No. 20138 and 20139 matured on 3 September 1979, without them being redeemed by respondent, so that petitioner Citibank collected from
petitioner FNCB Finance the proceeds thereof, which included the principal amounts and interests earned by the money market placements, amounting to
1,022,916.66, and applied the same against respondent's outstanding loans, leaving no surplus to be delivered to respondent.
Dollar accounts with Citibank-Geneva
Despite the legal compensation of respondent's savings account and the total application of the proceeds of PNs No. 20138 and 20139 to respondent's
outstanding loans, there still remained a balance of 1,069,847.40. Petitioner Citibank then proceeded to applying respondent's dollar accounts with
Citibank-Geneva against her remaining loan balance, pursuant to a Declaration of Pledge supposedly executed by respondent in its favor.
Certain principles of private international law should be considered herein because the property pledged was in the possession of an entity in a foreign
country, namely, Citibank-Geneva. In the absence of any allegation and evidence presented by petitioners of the specific rules and laws governing the
constitution of a pledge in Geneva, Switzerland, they will be presumed to be the same as Philippine local or domestic laws; this is known as processual
presumption.131
Upon closer scrutiny of the Declaration of Pledge, this Court finds the same exceedingly suspicious and irregular.
First of all, it escapes this Court why petitioner Citibank took care to have the Deeds of Assignment of the PNs notarized, yet left the Declaration of Pledge
unnotarized. This Court would think that petitioner Citibank would take greater cautionary measures with the preparation and execution of the Declaration
of Pledge because it involved respondent's "all present and future fiduciary placements" with a Citibank branch in another country, specifically, in Geneva,
Switzerland. While there is no express legal requirement that the Declaration of Pledge had to be notarized to be effective, even so, it could not enjoy the
same prima facie presumption of due execution that is extended to notarized documents, and petitioner Citibank must discharge the burden of proving
due execution and authenticity of the Declaration of Pledge.
Second, petitioner Citibank was unable to establish the date when the Declaration of Pledge was actually executed. The photocopy of the Declaration of
Pledge submitted by petitioner Citibank before the RTC was undated.132 It presented only a photocopy of the pledge because it already forwarded the
original copy thereof to Citibank-Geneva when it requested for the remittance of respondent's dollar accounts pursuant thereto. Respondent, on the other
hand, was able to secure a copy of the Declaration of Pledge, certified by an officer of Citibank-Geneva, which bore the date 24 September
1979.133 Respondent, however, presented her passport and plane tickets to prove that she was out of the country on the said date and could not have
signed the pledge. Petitioner Citibank insisted that the pledge was signed before 24 September 1979, but could not provide an explanation as to how and
why the said date was written on the pledge. Although Mr. Tan testified that the Declaration of Pledge was signed by respondent personally before him, he
could not give the exact date when the said signing took place. It is important to note that the copy of the Declaration of Pledge submitted by the
respondent to the RTC was certified by an officer of Citibank-Geneva, which had possession of the original copy of the pledge. It is dated 24 September
1979, and this Court shall abide by the presumption that the written document is truly dated.134 Since it is undeniable that respondent was out of the
country on 24 September 1979, then she could not have executed the pledge on the said date.
Third, the Declaration of Pledge was irregularly filled-out. The pledge was in a standard printed form. It was constituted in favor of Citibank, N.A., otherwise
referred to therein as the Bank. It should be noted, however, that in the space which should have named the pledgor, the name of petitioner Citibank was
typewritten, to wit
The pledge right herewith constituted shall secure all claims which the Bank now has or in the future acquires against Citibank, N.A.,
Manila (full name and address of the Debtor), regardless of the legal cause or the transaction (for example current account, securities
transactions, collections, credits, payments, documentary credits and collections) which gives rise thereto, and including principal, all
contractual and penalty interest, commissions, charges, and costs.
The pledge, therefore, made no sense, the pledgor and pledgee being the same entity. Was a mistake made by whoever filled-out the form? Yes, it could
be a possibility. Nonetheless, considering the value of such a document, the mistake as to a significant detail in the pledge could only be committed with
gross carelessness on the part of petitioner Citibank, and raised serious doubts as to the authenticity and due execution of the same. The Declaration of
Pledge had passed through the hands of several bank officers in the country and abroad, yet, surprisingly and implausibly, no one noticed such a glaring
mistake.
Lastly, respondent denied that it was her signature on the Declaration of Pledge. She claimed that the signature was a forgery. When a document is
assailed on the basis of forgery, the best evidence rule applies
Basic is the rule of evidence that when the subject of inquiry is the contents of a document, no evidence is admissible other than the original
document itself except in the instances mentioned in Section 3, Rule 130 of the Revised Rules of Court. Mere photocopies of documents are
inadmissible pursuant to the best evidence rule. This is especially true when the issue is that of forgery.
As a rule, forgery cannot be presumed and must be proved by clear, positive and convincing evidence and the burden of proof lies on the party
alleging forgery. The best evidence of a forged signature in an instrument is the instrument itself reflecting the alleged forged signature. The
fact of forgery can only be established by a comparison between the alleged forged signature and the authentic and genuine signature of the
person whose signature is theorized upon to have been forged. Without the original document containing the alleged forged signature, one
cannot make a definitive comparison which would establish forgery. A comparison based on a mere xerox copy or reproduction of the
document under controversy cannot produce reliable results.135
Respondent made several attempts to have the original copy of the pledge produced before the RTC so as to have it examined by experts. Yet, despite
several Orders by the RTC,136 petitioner Citibank failed to comply with the production of the original Declaration of Pledge. It is admitted that Citibank-
Geneva had possession of the original copy of the pledge. While petitioner Citibank in Manila and its branch in Geneva may be separate and distinct
entities, they are still incontestably related, and between petitioner Citibank and respondent, the former had more influence and resources to convince
Citibank-Geneva to return, albeit temporarily, the original Declaration of Pledge. Petitioner Citibank did not present any evidence to convince this Court
that it had exerted diligent efforts to secure the original copy of the pledge, nor did it proffer the reason why Citibank-Geneva obstinately refused to give it
back, when such document would have been very vital to the case of petitioner Citibank. There is thus no justification to allow the presentation of a mere
photocopy of the Declaration of Pledge in lieu of the original, and the photocopy of the pledge presented by petitioner Citibank has nil probative
value.137 In addition, even if this Court cannot make a categorical finding that respondent's signature on the original copy of the pledge was forged, it is
persuaded that petitioner Citibank willfully suppressed the presentation of the original document, and takes into consideration the presumption that the
evidence willfully suppressed would be adverse to petitioner Citibank if produced.138
Without the Declaration of Pledge, 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.
Therefore, this Court declares that the remittance of respondent's dollar accounts from Citibank-Geneva and the application thereof to her outstanding
loans with petitioner Citibank was illegal, and null and void. Resultantly, petitioner Citibank is obligated to return to respondent the amount of
US$149,632,99 from her Citibank-Geneva accounts, or its present equivalent value in Philippine currency; and, at the same time, respondent continues to
be obligated to petitioner Citibank for the balance of her outstanding loans which, as of 5 September 1979, amounted to 1,069,847.40.
V
The parties shall be liable for interests on their monetary obligations to each other, as determined herein.
In summary, petitioner Citibank is ordered by this Court to pay respondent the proceeds of her money market placements, represented by PNs No. 23356
and 23357, amounting to 318,897.34 and 203,150.00, respectively, earning an interest of 14.5% per annum as stipulated in the PNs,139 beginning 17
March 1977, the date of the placements.
Petitioner Citibank is also ordered to refund to respondent the amount of US$149,632.99, or its equivalent in Philippine currency, which had been remitted
from her Citibank-Geneva accounts. These dollar accounts, consisting of two fiduciary placements and current accounts with Citibank-Geneva shall
continue earning their respective stipulated interests from 26 October 1979, the date of their remittance by Citibank-Geneva to petitioner Citibank in
Manila and applied against respondent's outstanding loans.
As for respondent, she is ordered to pay petitioner Citibank the balance of her outstanding loans, which amounted to 1,069,847.40 as of 5 September
1979. These loans continue to earn interest, as stipulated in the corresponding PNs, from the time of their respective maturity dates, since the supposed
payment thereof using respondent's dollar accounts from Citibank-Geneva is deemed illegal, null and void, and, thus, ineffective.
VI
Petitioner Citibank shall be liable for damages to respondent.
Petitioners protest the award by the Court of Appeals of moral damages, exemplary damages, and attorney's fees in favor of respondent. They argued that
the RTC did not award any damages, and respondent, in her appeal before the Court of Appeals, did not raise in issue the absence of such.
While it is true that the general rule is that only errors which have been stated in the assignment of errors and properly argued in the brief shall be
considered, this Court has also recognized exceptions to the general rule, wherein it authorized the review of matters, even those not assigned as errors in
the appeal, if the consideration thereof is necessary in arriving at a just decision of the case, and there is a close inter-relation between the omitted
assignment of error and those actually assigned and discussed by the appellant.140 Thus, the Court of Appeals did not err in awarding the damages when it
already made findings that would justify and support the said award.
Although this Court appreciates the right of petitioner Citibank to effect legal compensation of respondent's local deposits, as well as its right to the
proceeds of PNs No. 20138 and 20139 by virtue of the notarized Deeds of Assignment, to partly extinguish respondent's outstanding loans, it finds that
petitioner Citibank did commit wrong when it failed to pay and properly account for the proceeds of respondent's money market placements, evidenced
by PNs No. 23356 and 23357, and when it sought the remittance of respondent's dollar accounts from Citibank-Geneva by virtue of a highly-suspect
Declaration of Pledge to be applied to the remaining balance of respondent's outstanding loans. It bears to emphasize that banking is impressed with
public interest and its fiduciary character requires high standards of integrity and performance.141 A bank is under the obligation to treat the accounts of its
depositors with meticulous care whether such accounts consist only of a few hundred pesos or of millions of pesos.142 The bank must record every single
transaction accurately, down to the last centavo, and as promptly as possible.143 Petitioner Citibank evidently failed to exercise the required degree of care
and transparency in its transactions with respondent, thus, resulting in the wrongful deprivation of her property.
Respondent had been deprived of substantial amounts of her investments and deposits for more than two decades. During this span of years, respondent
had found herself in desperate need of the amounts wrongfully withheld from her. In her testimony144 before the RTC, respondent narrated
Q By the way Mrs. Witness will you kindly tell us again, you said before that you are a businesswoman, will you tell us again what are the
businesses you are engaged into [sic]?
A I am engaged in real estate. I am the owner of the Modesta Village 1 and 2 in San Mateo, Rizal. I am also the President and Chairman of the
Board of Macador [sic] Co. and Business Inc. which operates the Macador [sic] International Palace Hotel. I am also the President of the
Macador [sic] International Palace Hotel, and also the Treasures Home Industries, Inc. which I am the Chairman and president of the Board and
also operating affiliated company in the name of Treasures Motor Sales engaged in car dealers [sic] like Delta Motors, we are the dealers of the
whole Northern Luzon and I am the president of the Disto Company, Ltd., based in Hongkong licensed in Honkong [sic] and now operating in
Los Angeles, California.
Q What is the business of that Disto Company Ltd.?
A Disto Company, Ltd., is engaged in real estate and construction.
Q Aside from those businesses are you a member of any national or community organization for social and civil activities?
A Yes sir.
Q What are those?
A I am the Vice-President of thes [sic] Subdivision Association of the Philippines in 1976, I am also an officer of the Chamber of Real Estate
Business Association; I am also an officer of the Chatholic [sic] Women's League and I am also a member of the CMLI, I forgot the definition.
Q How about any political affiliation or government position held if any?
A I was also a candidate for Mayo last January 30, 1980.
Q Where?
A In Dagupan City, Pangasinan.
Q What else?
A I also ran as an Assemblywoman last May, 1984, Independent party in Regional I, Pangasinan.
Q What happened to your businesses you mentioned as a result of your failure to recover you [sic] investments and bank deposits from the
defendants?
A They are not all operating, in short, I was hampered to push through the businesses that I have.
A [sic] Of all the businesses and enterprises that you mentioned what are those that are paralyzed and what remain inactive?
A Of all the company [sic] that I have, only the Disto Company that is now operating in California.
Q How about your candidacy as Mayor of Dagupan, [sic] City, and later as Assemblywoman of Region I, what happened to this?
A I won by voting but when election comes on [sic] the counting I lost and I protested this, it is still pending and because I don't have financial
resources I was not able to push through the case. I just have it pending in the Comelec.
Q Now, do these things also affect your social and civic activities?
A Yes sir, definitely.
Q How?
A I was embarrassed because being a businesswoman I would like to inform the Honorable Court that I was awarded as the most outstanding
businesswoman of the year in 1976 but when this money was not given back to me I was not able to comply with the commitments that I have
promised to these associations that I am engaged into [sic], sir.
For the mental anguish, serious anxiety, besmirched reputation, moral shock and social humiliation suffered by the respondent, the award of moral
damages is but proper. However, this Court reduces the amount thereof to 300,000.00, for the award of moral damages is meant to compensate for the
actual injury suffered by the respondent, not to enrich her.145
Having failed to exercise more care and prudence than a private individual in its dealings with respondent, petitioner Citibank should be liable for
exemplary damages, in the amount of 250,000.00, in accordance with Article 2229146and 2234147 of the Civil Code.
With the award of exemplary damages, then respondent shall also be entitled to an award of attorney's fees. 148Additionally, attorney's fees may be
awarded when a party is compelled to litigate or to incur expenses to protect his interest by reason of an unjustified act of the other party.149 In this case,
an award of 200,000.00 attorney's fees shall be satisfactory.
In contrast, this Court finds no sufficient basis to award damages to petitioners.1wphi1 Respondent was compelled to institute the present case in the
exercise of her rights and in the protection of her interests. In fact, although her Complaint before the RTC was not sustained in its entirety, it did raise
meritorious points and on which this Court rules in her favor. Any injury resulting from the exercise of one's rights is damnum absque injuria.150
IN VIEW OF THE FOREGOING, the instant Petition is PARTLY GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. No. 51930, dated 26 March
2002, as already modified by its Resolution, dated 20 November 2002, is hereby AFFIRMED WITH MODIFICATION, as follows
1. PNs No. 23356 and 23357 are DECLARED subsisting and outstanding. Petitioner Citibank is ORDEREDto return to respondent the principal
amounts of the said PNs, amounting to Three Hundred Eighteen Thousand Eight Hundred Ninety-Seven Pesos and Thirty-Four Centavos
(318,897.34) and Two Hundred Three Thousand One Hundred Fifty Pesos (203,150.00), respectively, plus the stipulated interest of Fourteen
and a half percent (14.5%) per annum, beginning 17 March 1977;
2. The remittance of One Hundred Forty-Nine Thousand Six Hundred Thirty Two US Dollars and Ninety-Nine Cents (US$149,632.99) from
respondent's Citibank-Geneva accounts to petitioner Citibank in Manila, and the application of the same against respondent's outstanding
loans with the latter, is DECLARED illegal, null and void. Petitioner Citibank is ORDERED to refund to respondent the said amount, or its
equivalent in Philippine currency using the exchange rate at the time of payment, plus the stipulated interest for each of the fiduciary
placements and current accounts involved, beginning 26 October 1979;
3. Petitioner Citibank is ORDERED to pay respondent moral damages in the amount of Three Hundred Thousand Pesos (300,000.00);
exemplary damages in the amount of Two Hundred Fifty Thousand Pesos (250,000.00); and attorney's fees in the amount of Two Hundred
Thousand Pesos (200,000.00); and
4. Respondent is ORDERED to pay petitioner Citibank the balance of her outstanding loans, which, from the respective dates of their maturity
to 5 September 1979, was computed to be in the sum of One Million Sixty-Nine Thousand Eight Hundred Forty-Seven Pesos and Forty Centavos
(1,069,847.40), inclusive of interest. These outstanding loans shall continue to earn interest, at the rates stipulated in the corresponding PNs,
from 5 September 1979 until payment thereof.
SO ORDERED.

ESTATE OF GEORGE LITTON, petitioner, vs. CIRIACO B. MENDOZA and COURT OF APPEALS, respondents. G.R. No. L-49120 June 30, 1988
GANCAYCO, J.:
This petition for review presents two (2) main issues, to wit: (1) Can a plaintiff in a case, who had previously assigned in favor of his creditor his litigated
credit in said case, by a deed of assignment which was duly submitted to the court, validly enter into a compromise agreement thereafter releasing the
defendant therein from his claim without notice to his assignee? and (2) 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?
The present case stemmed from Civil Case No. Q-8303 1 entitled "Alfonso Tan vs. Ciriaco B. Mendoza," an action for the collection of a sum of money
representing the value of two (2) checks which plaintiff Tan claims to have been delivered to him by defendant Mendoza, private respondent herein, by
way of guaranty with a commission.
The record discloses that the Bernal spouses2 are engaged in the manufacture of embroidery, garments and cotton materials. Sometime in September
1963, C.B.M. Products, 3 with Mendoza as president, offered to sell to the Bernals textile cotton materials and, for this purpose, Mendoza introduced the
Bernals to Alfonso Tan. Thus, the Bernals purchased on credit from Tan some cotton materials worth P 80,796.62, payment of which was guaranteed by
Mendoza. Thereupon, Tan delivered the said cotton materials to the Bernals. In view of the said arrangement, on November 1963, C.B.M. Products,
through Mendoza, asked and received from the Bernals PBTC Check No. 626405 for P 80,796.62 dated February 20, 1964 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. Meanwhile, the said check matured without having been cashed and Mendoza demanded the issuance of another
check 4 in the same amount without a date.
On the other hand, on February 28, 1964, defendant Mendoza issued two (2) PNB checks5 in favor of Tan in the total amount of P 80,796.62. He informed
the Bernals of the same and told them that they are indebted to him and asked the latter to sign an instrument whereby Mendoza assigned the said
amount to Insular Products Inc. 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.
Hence, as adverted to above, Tan brought an action against Mendoza docketed as Civil Case No. Q-8303 6 while the Bernals brought an action for
interpleader docketed as Civil Case No. 56850 7 for not knowing whom to pay. While both actions were pending resolution by the trial court, on March 20,
1966, Tan assigned in favor of George Litton, Sr. his litigatious credit * in Civil Case No. 56850 against Mendoza, duly submitted to the court, with notice to
the parties. 8 The deed of assignment was framed in the following tenor:
DEED OF ASSIGNMENT
I, ALFONSO TAN, of age, Chinese, married to UY CHAY UA, residing at No. 6 Kanlaon, Quezon City, doing business under the name and style ALTA
COMMERCIAL by way of securing or guaranteeing my obligation to Mr. GEORGE LITTON, SR., do by these presents CEDE, ASSIGN, TRANSFER AND
CONVEY unto the said Mr. GEORGE LITTON, SR., my claim against C.B.M. Products, Inc., personally guaranteed by Mr. Ciriaco B. Mendoza, in the
amount of Eighty-Thousand Seven Hundred Ninety Six Pesos and Sixty-two centavos (P 80,796.62) the balance of which, in principal, and excluding,
interests, costs, damages and attorney's fees now stands at P 76,000.00, P 4,796.62, having already been received by the assignor on December 23,
1965, pursuant to the order of the court in Civil Case No. 56850, C.F.I., Manila, authorizing Alfonso Tan to withdraw the amount of P 4,796.62 then
on deposit with the court. All rights, and interests in said net amount, plus interests and costs, and less attorney's fees, in case the amount allowed
therefor be less than the amounts claimed in the relief in Civil Case 56850 (C.F.I., Manila) and Q-8503 (C.F.I., Quezon City) are by these presents
covered by this assignment.
I further undertake to hold in trust any and all amounts which may hereafter be realized from the aforementioned cases for the ASSIGNEE, Mr.
GEORGE LITTON, SR., and to turn over to him such amounts in application to my liability to him, as his interest may then show, and I further
undertake to cooperate towards the successful prosecution of the aforementioned cases making available myself, as witness or otherwise, as well
as any and all documents thereto appertaining. ...9
After due trial, the lower court ruled that the said PNB checks were issued by Mendoza in favor of Tan for a commission in the sum of P 4,847.79 and held
Mendoza liable as a drawer whose liability is primary and not merely as an indorser 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
Mendoza seasonably filed an appeal with the Court of Appeals, dockted as C.A. G.R. No. 41900-R, arguing in the main that his liability is one of an
accommodation party and not as a drawer.
On January 27, 1977, the Court of Appeals rendered a decision affirming in toto the decision of the lower court. 11
Meanwhile, on February 2, 1971, pending the resolution of the said appeal, 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
On February 25, 1977, Mendoza filed a motion for reconsideration praying that the decision of January 27, 1977 be set aside, principally anchored upon
the ground that a compromise agreement was entered into between him and Tan which in effect released Mendoza from liability. Tan filed an opposition
to this motion claiming that the compromise agreement is null and void as he was not properly represented by his counsel of record Atty. Quiogue, and
was instead represented by a certain Atty. Laberinto, and principally because of the deed of assignment that he executed in favor of George Litton, Sr.
alleging that with such, he has no more right to alienate said credit.
While the case was still pending reconsideration by the respondent court, Tan, the assignor, died leaving no properties whatever to satisfy the claim of the
estate of the late George Litton, Sr.
In its Resolution dated August 30, 1977, 13 the respondent court set aside its decision and approved the compromise agreement.
As to the first ground invoked by Tan, now deceased, the respondent court ruled that the non-intervention of Tan's counsel of record in the compromise
agreement does not affect the validity of the settlement on the ground that the client had an undoubted right to compromise a suit without the
intervention of his lawyer, citing Aro vs. Nanawa.14
As to the second ground, respondent court ruled as follows:
... it is relevant to note that Paragraph 1of the deed of assignment states that the cession,assignment, transfer, bond conveyance
by Alfonso Tan was only by way of securing, or guaranteeing his obligation to GEORGE LITTON, SR.
Hence, Alfonso Tan retained possession and dominion of the credit (Par. 2, Art. 2085, Civil Code).
"Even considered as a litigations credit," which indeed characterized the claims herein of Alfonso Tan, such credit may be validly
alienated by Tan (Art. 1634. Civil Code).
Such alienation is subject to the remedies of Litton under Article 6 of the Civil Code, whereby the waiver, release, or quit-claim
made by plaintiff-appellee Alfonso Tan in favor of defendant-appellant Ciriaco B. Mendoza, if proven prejudicial to George Litton,
Sr. as assignee under the deed of assignment, may entitle Litton to pursue his remedies against Tan.
The alienation of a litigatious credit is further subject to the debtor's right of redemption under Article 1634 of the Civil Code.
As mentioned earlier, the assignor Tan died pending resolution of the motion for reconsideration. The estate of George Litton, Sr., petitioner herein, as
represented by James Litton, son of George Litton, Sr. and administrator 15 of the former's estate, is now appealing the said resolution to this Court as
assignee of the amount sued in Civil Case No. Q-8303, in relation to Civil Case No. 56850.
Before resolving the main issues aforementioned, the question of legal personality of herein petitioner to bring the instant petition for review, must be
resolved.
As a rule, the parties in an appeal through a review on certiorari are the same original parties to the case. 16 If after the rendition of judgment the original
party dies, he should be substituted by his successor-in-interest. In this case, it is not disputed that no proper substitution of parties was done. This
notwithstanding, the Court so holds that the same cannot and will not materially affect the legal right of herein petitioner in instituting the instant petition
in view of the tenor of the deed of assignment, particularly paragraph two thereof 17 wherein the assignor, Tan, assumed the responsibility to prosecute
the case and to turn over to the assignee whatever amounts may be realized in the prosecution of the suit.
We note that private respondent moved for the dismissal of the appeal without notifying the estate of George Litton, Sr. whereas the former was fully
aware of the fact that the said estate is an assignee of Tan's right in the case litigated. 18 Hence, if herein petitioner failed to observe the proper
substitution of parties when Alfonso Tan died during the pendency of private respondent's motion for reconsideration, no one is to blame but private
respondent himself. Moreover, the right of the petitioner to bring the present petition is well within the concept of a real party-in-interest in the subject
matter of the action. Well-settled is the rule that a real party-in-interest is a party entitled to the avails of the suit or the party who would be injured by the
judgment. 19 We see the petitioner well within the latter category.
Hence, as the assignee and successor-in-interest of Tan, petitioner has the personality to bring this petition in substitution of Tan.
Now, the resolution of the main issues.
The purpose of a compromise being to replace and terminate controverted claims, 20 courts encourage the same. 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 or forgery. 21
In this case, petitioner seeks to set aside the said compromise on the ground that previous thereto, Tan executed a deed of assignment in favor of George
Litton, Sr. involving the same litigated credit.
We rule for the petitioner. 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. Our examination of the deed of assignment shows that it fulfills the requisites of a valid pledge or mortgage. 22 Although it is true that
Tan may validly alienate the litigatious credit as ruled by the appellate court, citing Article 1634 of the Civil Code, said provision should not be taken to
mean as a grant of an absolute right on the part of the assignor Tan to indiscriminately dispose of the thing or the right given as security. The Court rules
that the said provision should be read in consonance with Article 2097 of the same code. 23 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.
Moreover, under Article 1634, 24 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.
Indeed, a painstaking review of the record of the case reveals that private respondent has, from the very beginning, been fully aware of the deed of
assignment executed by Tan in favor of Litton, Sr. as said deed was duly submitted to Branch XI of the then Court of First Instance of Manila in Civil Case
No. 56850 (in relation to Civil Case No. Q-8303) where C.B.M. Products is one of the defendants and the parties were notified through their counsel. 25 As
earlier mentioned, private respondent herein is the president of C.B.M. Products, hence, his contention that he is not aware of the said deed of assignment
deserves scant consideration from the Court. Petitioner pointed out at the same time that private respondent together with his counsel were served with a
copy of the deed of assignment which allegation remains uncontroverted. Having such knowledge thereof, private respondent is estopped from entering
into a compromise agreement involving the same litigated credit without notice to and consent of the assignee, petitioner herein. More so, in the light of
the fact that no reimbursement has ever been made in favor of the assignee as required under Article 1634. Private respondent acted in bad faith and in
connivance with assignor Tan so as to defraud the petitioner in entering into the compromise agreement.
WHEREFORE, the petition is GRANTED. The assailed resolution of the respondent court dated August 30,1977 is hereby SET ASIDE, the said compromise
agreement being null and void, and a new one is hereby rendered reinstating its decision dated January 27, 1977, affirming in toto the decision of the
lower court. This decision is immediately executory. No motion for extension of time to file a motion for reconsideration will be granted.
SO ORDERED.

Paray & Espeleta v. Rodriguez

G.R. No. 132287 January 24, 2006
Topic: Provisions applicable to pledge only
Facts:
Respondents (Rodriguez & co.) were owners of shares of stocks in Quirino-Leonor-Rodriguez Realty, Inc.
1979-80: Respondents secured loans using their shares of stocks to petitioners (Bonifacio and Faustina Paray)
o They failed to pay, so the petitioners tried to foreclose
o Respondents went to court to nullify the pledges, but the RTC ruled against them (foreclosed)
o RTC ruling became final after going through CA and SC (entry of judgment: Aug 14, 91)
Respondents received notices of sale, indicating that the auction would be on Nov 4, 91
o Before the auction, respondents consigned various amounts with the RTC (attempt to tender payment)
Nov 13, 91: Respondents went to court again to nullify the concluded public auction, using tender of payment and consignation as a basis for
the extinguishment of the loan obligations and discharge of the pledges
o Petitioners countered that the payment was made long after obligation fell due and that the auction was valid, being an execution
of the earlier judgment
o RTC dismissed the case
CA reversed RTC
o consignations sufficient due to an imputed policy of the law that favored redemption and mandated a liberal construction to
redemption laws
o consignations made by respondents should be construed in light of the rules of redemption
act of consigning the payments with the RTC done in the exercise of their right of redemption
buyer at public auction does not ipso facto become the owner of the pledged shares pending the lapse of the 1 year
redemptive period
collective sale of the shares of stock belonging to several individual owners without specification of the apportionment
in the applications of payment deprives the individual owners of the opportunity to know of the price they would have
to pay for exercising the right of redemption
Petitioners:
o Refusal of tender was proper as they held the auction sale pursuant to the earlier final decision
o Court ruling did not authorize the payment of the principal obligation by respondents
o amounts consigned were insufficient to cover the interests due on the debt
o essential procedural requisites for the auction sale had been satisfied
Issue: WON right of redemption is involved here
Ruling: NO. CA decision REVERSED and SET ASIDE.
dwelling on the right of redemption is utterly off-tangent
o RIGHT OF REDEMPTION involves payments made by debtors after the foreclosure of their properties
NOT those made or attempted to be made, as in this case, before the foreclosure sale
o right of redemption (Rule 39, RoC) applies only to execution sales specifically, execution sales of realty
o does NOT exist over personal property
right of redemption over mortgaged real property sold extrajudicially is established by Act 3135, as amended.
Act 3135 does NOT extend the same benefit to personal property
Sec 39, 1997 Rules of CivPro states that this right applies to real properties sold on execution
since there is no right to redeem personal property, the rights of ownership vested unto the purchaser at the foreclosure sale are NOT
entangled in any suspensive condition that is implicit in a redemptive period
focus shouldve been on whether the consignations acquitted respondents of their principal obligations
o PLEDGE contract is an accessory contract
discharged if the principal obligation is extinguished
Art 2098, CC: right of the creditor to retain possession of the pledged item exists only until the debt is paid.
Art 2105, CC: debtor CANNOT ask for the return of the thing pledged against the creditors will
UNLESS he has paid the debt and its interest
CC provides the right of the pledgee to foreclose the pledge
When the credit has not been timely satisfied, creditor may proceed with the auction
o sale of pledged shares was an extrajudicial sale, specifically a notarial sale, as distinguished from a judicial sale as typified by an
execution sale
FORECLOSURE OF A PLEDGE occurs extrajudicially, without intervention by the courts
o creditor needs to proceed before a Notary Public to the sale of the thing pledged
if the credit has not been satisfied in due time
o petitioners attempted as early as 1980 to extrajudicially sell the pledged shares by public auction
However, extrajudicial sale was stayed with the filing of the 1st case
o phrase of the 1st decision giving due course to the foreclosure and sale at public auction may give rise to the impression that such
sale is judicial in character
BUT sale so authorized is actually extrajudicial in character
final 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
decision to proceed with the sale by public auction is in the sole discretion of the Parays
under the Civil Code, it is the pledgee, and NOT the pledgor, who is given the right to choose which of the items should be sold if two or more
things are pledged
o No similar option is given to pledgors under the Civil Code
Consignation did NOT discharge them from the loan
o 5% per month or 60% per annum cannot be deemed usurious since there is no longer any limit
 o time to challenge the validity of the 5% monthly interest rate had long passed
respondents may have saved themselves much trouble if they simply participated in the auction sale, as they are permitted to bid themselves
on their pledged properties
o Now, all respondents can recover is the amounts they had consigned