FIRST DIVISION interests over the fishpond; and (5) the recovery of
damages, attorney's fees, and expenses of litigation.
G.R. No. 118342 January 5, 1998
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and LYDIA CUBA, respondents.
G.R. No. 118367 January 5, 1998
LYDIA P. CUBA, petitioner,
vs.
COURT OF APPEALS, DEVELOPMENT BANK OF THE
PHILIPPINES and AGRIPINA P. CAPERAL, respondents.
DAVIDE, JR., J.:
These two consolidated cases stemmed from a
complaint1 filed against the Development Bank of the
Philippines (hereafter DBP) and Agripina Caperal filed
by Lydia Cuba (hereafter CUBA) on 21 May 1985 with
the Regional Trial Court of Pangasinan, Branch 54. The
said complaint sought (1) the declaration of nullity of
DBP's appropriation of CUBA's rights, title, and
interests over a 44-hectares fishpond located in
Bolinao, Pangasinan, for being violative of Article 2088
of the Civil Code; (2) the annulment of the Deed of
Conditional Sale executed in her favor by DBP; (3) the
annulment of DBP's sale of the subject fishpond to
Caperal; (4) the restoration of her rights, title, and
After the joinder of issues following the filing by the
parties of their respective pleadings, the trial court
conducted a pre-trial where CUBA and DBP agreed on
the following facts, which were embodied in the pre-
trial order:2
1. Plaintiff Lydia P. Cuba is a grantee of a
Fishpond Lease Agreement No. 2083
(new) dated May 13, 1974 from the
Government;
2. Plaintiff Lydia P. Cuba obtained loans
from the Development Bank of the
Philippines in the amounts of P109,000.00;
P109,000.00; and P98,700.00 under the
terms stated in the Promissory Notes
dated September 6, 1974; August 11, 1975;
and April 4, 1977;
3. As security for said loans, plaintiff Lydia
P. Cuba executed two Deeds of
Assignment of her Leasehold Rights;
4. Plaintiff failed to pay her loan on the
scheduled dates thereof in accordance
with the terms of the Promissory Notes;
5. Without foreclosure proceedings,
whether judicial or extra-judicial,
defendant DBP appropriated the
Leasehold Rights of plaintiff Lydia Cuba
over the fishpond in question;
6. After defendant DBP has appropriated
the Leasehold Rights of plaintiff Lydia
Cuba over the fishpond in question,
defendant DBP, in turn, executed a Deed
of Conditional Sale of the Leasehold
Rights in favor of plaintiff Lydia Cuba over
the same fishpond in question;
7. In the negotiation for repurchase,
plaintiff Lydia Cuba addressed two letters
to the Manager DBP, Dagupan City dated
November 6, 1979 and December 20, 1979.
DBP thereafter accepted the offer to
repurchase in a letter addressed to
plaintiff dated February 1, 1982;
8. After the Deed of Conditional Sale was
executed in favor of plaintiff Lydia Cuba, a
new Fishpond Lease Agreement No. 2083-
A dated March 24, 1980 was issued by the
Ministry of Agriculture and Food in favor
of plaintiff Lydia Cuba only, excluding her
husband;
9. Plaintiff Lydia Cuba failed to pay the
amortizations stipulated in the Deed of
Conditional Sale;
10. After plaintiff Lydia Cuba failed to pay
the amortization as stated in Deed of
Conditional Sale, she entered with the
DBP a temporary arrangement whereby in
consideration for the deferment of the
Notarial Rescission of Deed of Conditional
Sale, plaintiff Lydia Cuba promised to
make certain payments as stated in
temporary Arrangement dated February
23, 1982;
11. Defendant DBP thereafter sent a Notice
of Rescission thru Notarial Act dated
March 13, 1984, and which was received
by plaintiff Lydia Cuba;
12. After the Notice of Rescission,
defendant DBP took possession of the
Leasehold Rights of the fishpond in
question;
13. That after defendant DBP took
possession of the Leasehold Rights over
the fishpond in question, DBP advertised
in the SUNDAY PUNCH the public bidding
dated June 24, 1984, to dispose of the
property;
14. That the DBP thereafter executed a
Deed of Conditional Sale in favor of
defendant Agripina Caperal on August 16,
1984;
15. Thereafter, defendant Caperal was
awarded Fishpond Lease Agreement No.
2083-A on December 28, 1984 by the
Ministry of Agriculture and Food.
Defendant Caperal admitted only the facts stated in
paragraphs 14 and 15 of the pre-trial order.3
Trial was thereafter had on other matters.
The principal issue presented was whether the act of
DBP in appropriating to itself CUBA's leasehold rights
over the fishpond in question without foreclosure
proceedings was contrary to Article 2088 of the Civil
Code and, therefore, invalid. CUBA insisted on an
affirmative resolution. DBP stressed that it merely
exercised its contractual right under the Assignments
of Leasehold Rights, which was not a contract of
mortgage. Defendant Caperal sided with DBP.
The trial court resolved the issue in favor of CUBA by
declaring that DBP's taking possession and ownership
of the property without foreclosure was plainly violative
of Article 2088 of the Civil Code which provides as
follows:
Art. 2088. The creditor cannot appropriate
the things given by way of pledge or
mortgage, or dispose of them. Any
stipulation to the contrary is null and void.
It disagreed with DBP's stand that the Assignments of
Leasehold Rights were not contracts of mortgage
because (1) they were given as security for loans, (2)
although the "fishpond land" in question is still a public
land, CUBA's 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; hence,
upon CUBA's default, DBP's only right was to foreclose
the Assignment in accordance with law.
The trial court 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. It then concluded that since DBP never acquired
lawful ownership of CUBA's leasehold rights, all acts of
ownership and possession by the said bank were void.
Accordingly, the Deed of Conditional Sale in favor of
CUBA, the notarial rescission of such sale, and the
Deed of Conditional Sale in favor of defendant Caperal,
as well as the Assignment of Leasehold Rights
executed by Caperal in favor of DBP, were also void
and ineffective.
As to damages, the trial court found "ample evidence
on record" that in 1984 the representatives of DBP
ejected CUBA and her caretakers not only from the
fishpond area but also from the adjoining big house;
and that when CUBA's son and caretaker went there on
15 September 1985, they found the said house
unoccupied and destroyed and CUBA's personal
belongings, machineries, equipment, tools, and other
articles used in fishpond operation which were kept in
the house were missing. The missing items were
valued at about P550,000. It further found that when
CUBA and her men were ejected by DBP for the first
time in 1979, CUBA had stocked the fishpond with
250,000 pieces of bangus fish (milkfish), all of which
died because the DBP representatives prevented
CUBA's men from feeding the fish. At the conservative
price of P3.00 per fish, the gross value would have
been P690,000, and after deducting 25% of said value
as reasonable allowance for the cost of feeds, CUBA
suffered a loss of P517,500. It then set the aggregate of
the actual damages sustained by CUBA at P1,067,500.
The trial court further found that DBP was guilty of
gross bad faith in falsely representing to the Bureau of
Fisheries that it had foreclosed its mortgage on CUBA's
leasehold rights. Such representation induced the said
Bureau to terminate CUBA's leasehold rights and to
approve the Deed of Conditional Sale in favor of CUBA.
And considering that by reason of her unlawful
ejectment by DBP, CUBA "suffered moral shock,
degradation, social humiliation, and serious anxieties
for which she became sick and had to be hospitalized"
the trial court found her entitled to moral and
exemplary damages. The trial court also held that
CUBA was entitled to P100,000 attorney's fees in view
of the considerable expenses she incurred for lawyers'
fees and in view of the finding that she was entitled to
exemplary damages.
In its decision of 31 January 1990,4 the trial court
disposed as follows:
WHEREFORE, judgment is hereby
rendered in favor of plaintiff:
1. DECLARING null and void and
without any legal effect the act of
defendant Development Bank of the
Philippines in appropriating for its
own interest, without any judicial or
extra-judicial foreclosure, plaintiff's
leasehold rights and interest over the
fishpond land in question under her
Fishpond Lease Agreement No. 2083
(new);
2. DECLARING the Deed of
Conditional Sale dated February 21,
1980 by and between the defendant
Development Bank of the Philippines
and plaintiff (Exh. E and Exh. 1) and
the acts of notarial rescission of the
Development Bank of the Philippines
relative to said sale (Exhs. 16 and 26)
as void and ineffective;
3. DECLARING the Deed of
Conditional Sale dated August 16,
1984 by and between the
Development Bank of the Philippines
and defendant Agripina Caperal (Exh.
F and Exh. 21), the Fishpond Lease
Agreement No. 2083-A dated
December 28, 1984 of defendant
Agripina Caperal (Exh. 23) and the
Assignment of Leasehold Rights
dated February 12, 1985 executed by
defendant Agripina Caperal in favor
of the defendant Development Bank
of the Philippines (Exh. 24) as void ab
initio;
4. ORDERING defendant
Development Bank of the Philippines
and defendant Agripina Caperal,
jointly and severally, to restore to
plaintiff the latter's leasehold rights
and interests and right of possession (P100,000.00) PESOS, as
over the fishpond land in question, and for attorney's fees;
without prejudice to the right of
defendant Development Bank of the 6. And ORDERING defendant
Philippines to foreclose the Development Bank of the Philippines
securities given by plaintiff; to reimburse and pay to defendant
Agripina Caperal the sum of ONE
5. ORDERING defendant MILLION FIVE HUNDRED THIRTY-
Development Bank of the Philippines TWO THOUSAND SIX HUNDRED TEN
to pay to plaintiff the following PESOS AND SEVENTY-FIVE
amounts: CENTAVOS (P1,532,610.75)
representing the amounts paid by
a) The sum of ONE defendant Agripina Caperal to
MILLION SIXTY-SEVEN defendant Development Bank of the
THOUSAND FIVE Philippines under their Deed of
HUNDRED PESOS Conditional Sale.
(P1,067,500.00), as and
for actual damages; CUBA and DBP interposed separate appeals
from the decision to the Court of Appeals. The
b) The sum of ONE former sought an increase in the amount of
HUNDRED THOUSAND damages, while the latter questioned the findings
(P100,000.00) PESOS as of fact and law of the lower court.
moral damages;
In its decision5 of 25 May 1994, the Court of
c) The sum of FIFTY Appeals ruled that (1) the trial court erred in
THOUSAND (P50,000.00) declaring that the deed of assignment was null
PESOS, as and for and void and that defendant Caperal could not
exemplary damages; validly acquire the leasehold rights from DBP; (2)
contrary to the claim of DBP, the assignment was
d) And the sum of ONE not a cession under Article 1255 of the Civil Code
HUNDRED THOUSAND because DBP appeared to be the sole creditor to
CUBA — cession presupposes plurality of debts
and creditors; (3) the deeds of assignment
represented the voluntary act of CUBA in
assigning her property rights in payment of her
debts, which amounted to a novation of the
promissory notes executed by CUBA in favor of
DBP; (4) CUBA was estopped from questioning
the assignment of the leasehold rights, since she
agreed to repurchase the said rights under a
deed of conditional sale; and (5) condition no. 12
of the deed of assignment was an express
authority from CUBA for DBP to sell whatever
right she had over the fishpond. It also ruled that
CUBA was not entitled to loss of profits for lack
of evidence, but agreed with the trial court as to
the actual damages of P1,067,500. It, however,
deleted the amount of exemplary damages and
reduced the award of moral damages from
P100,000 to P50,000 and attorney's fees, from
P100,000 to P50,000.
The Court of Appeals thus declared as valid the
following: (1) the act of DBP in appropriating
Cuba's leasehold rights and interest under
Fishpond Lease Agreement No. 2083; (2) the
deeds of assignment executed by Cuba in favor
of DBP; (3) the deed of conditional sale between
CUBA and DBP; and (4) the deed of conditional
sale between DBP and Caperal, the Fishpond
Lease Agreement in favor of Caperal, and the
assignment of leasehold rights executed by
Caperal in favor of DBP. It then ordered DBP to
turn over possession of the property to Caperal
as lawful holder of the leasehold rights and to
pay CUBA the following amounts: (a) P1,067,500
as actual damages; P50,000 as moral damages;
and P50,000 as attorney's fees.
Since their motions for reconsideration were
denied,6 DBP and CUBA filed separate petitions
for review.
In its petition (G.R. No. 118342), DBP assails the
award of actual and moral damages and
attorney's fees in favor of CUBA.
Upon the other hand, in her petition (G.R. No.
118367), CUBA contends that the Court of
Appeals erred (1) in not holding that the
questioned deed of assignment was a pactum
commissorium contrary to Article 2088 of the
Civil Code; (b) in holding that the deed of
assignment effected a novation of the
promissory notes; (c) in holding that CUBA was
estopped from questioning the validity of the
deed of assignment when she agreed to
repurchase her leasehold rights under a deed of
conditional sale; and (d) in reducing the amounts
of moral damages and attorney's fees, in deleting
the award of exemplary damages, and in not
increasing the amount of damages.
We agree with CUBA that the assignment of
leasehold rights was a mortgage contract.
It is undisputed that CUBA obtained from DBP
three separate loans totalling P335,000, each of
which was covered by a promissory note. In all
of these notes, there was a provision that: "In the
event of foreclosure of the mortgage securing
this notes, I/We further bind myself/ourselves,
jointly and severally, to pay the deficiency, if
any."7
Simultaneous with the execution of the notes
was the execution of "Assignments of Leasehold
Rights"8 where CUBA assigned her leasehold
rights and interest on a 44-hectare fishpond,
together with the improvements thereon. As
pointed out by CUBA, the deeds of assignment
constantly referred to the assignor (CUBA) as
"borrower"; the assigned rights, as mortgaged
properties; and the instrument itself, as
mortgage contract. Moreover, under condition
no. 22 of the deed, it was provided that "failure to
comply with the terms and condition of any of
the loans shall cause all other loans to become
due and demandable and all mortgages shall be
foreclosed." And, condition no. 33 provided that
if "foreclosure is actually accomplished, the
usual 10% attorney's fees and 10% liquidated
damages of the total obligation shall be
imposed." There is, therefore, no shred of doubt
that a mortgage was intended.
Besides, in their stipulation of facts the parties
admitted that the assignment was by way of
security for the payment of the loans; thus:
3. As security for said loans, plaintiff
Lydia P. Cuba executed two Deeds of
Assignment of her Leasehold Rights.
In People's Bank & Trust Co. vs. Odom,9 this
Court had the occasion to rule that an
assignment to guarantee an obligation is in
effect a mortgage.
We find no merit in DBP's contention that the
assignment novated the promissory notes in that
the obligation to pay a sum of money the loans
(under the promissory notes) was substituted by
the assignment of the rights over the fishpond
(under the deed of assignment). As correctly
pointed out by CUBA, the said assignment
merely complemented or supplemented the
notes; both could stand together. The former
was only an accessory to the latter. Contrary to
DBP's submission, the obligation to pay a sum of
money remained, and the assignment merely
served as security for the loans covered by the
promissory notes. Significantly, both the deeds
of assignment and the promissory notes were
executed on the same dates the loans were
granted. Also, the last paragraph of the
assignment stated: "The assignor
further reiterates and states all terms, covenants,
and conditions stipulated in the promissory note
or notes covering the proceeds of this loan,
making said promissory note or notes, to all
intent and purposes, an integral part hereof."
Neither did the assignment amount to payment
by cession under Article 1255 of the Civil Code
for the plain and simple reason that there was
only one creditor, the DBP. Article 1255
contemplates the existence of two or more
creditors and involves the assignment of all the
debtor's property.
Nor did the assignment constitute dation in
payment under Article 1245 of the civil Code,
which reads: "Dation in payment, whereby
property is alienated to the creditor in
satisfaction of a debt in money, shall be
governed by the law on sales." It bears stressing
that the assignment, being in its essence a
mortgage, was but a security and not a
satisfaction of indebtedness.10
We do not, however, buy CUBA's argument that
condition no. 12 of the deed of assignment
constituted pactum commissorium. Said
condition reads:
12. That effective upon the breach of
any condition of this assignment, the
Assignor hereby appoints the
Assignee his Attorney-in-fact with full
power and authority to take actual
possession of the property above-
described, together with all
improvements thereon, subject to the
approval of the Secretary of
Agriculture and Natural Resources,
to lease the same or any portion
thereof and collect rentals, to make
repairs or improvements thereon and
pay the same, to sell or otherwise
dispose of whatever rights the
Assignor has or might have over said
property and/or its improvements
and perform any other act which the
Assignee may deem convenient to
protect its interest. All expenses
advanced by the Assignee in
connection with purpose above
indicated which shall bear the same
rate of interest aforementioned are
also guaranteed by this Assignment.
Any amount received from rents,
administration, sale or disposal of
said property may be supplied by the
Assignee to the payment of repairs,
improvements, taxes, assessments
and other incidental expenses and
 obligations and the balance, if any, to
the payment of interest and then on
the capital of the indebtedness
secured hereby. If after disposal or
sale of said property and upon
application of total amounts received
there shall remain a deficiency, said
Assignor hereby binds himself to pay
the same to the Assignee upon
demand, together with all interest
thereon until fully paid. The power
herein granted shall not be revoked
as long as the Assignor is indebted
to the Assignee and all acts that may
be executed by the Assignee by
virtue of said power are hereby
ratified.
The elements of pactum commissorium are as
follows: (1) there should be a property
mortgaged by way of security for the payment of
the principal obligation, and (2) there should be a
stipulation for automatic appropriation by the
creditor of the thing mortgaged in case of non-
payment of the principal obligation within the
stipulated period.11
Condition no. 12 did not provide that the
ownership over the leasehold rights would
automatically pass to DBP upon CUBA's failure
to pay the loan on time. It merely provided for the
appointment of DBP as attorney-in-fact with
authority, among other things, to sell or
otherwise dispose of the said real rights, in case
of default by CUBA, and to apply the proceeds to
the payment of the loan. This provision is a
standard condition in mortgage contracts and is
in conformity with Article 2087 of the Civil Code,
which authorizes the mortgagee to foreclose the
mortgage and alienate the mortgaged property
for the payment of the principal obligation.
DBP, however, exceeded the authority vested by
condition no. 12 of the deed of assignment. As
admitted by it during the pre-trial, it had
"[w]ithout foreclosure proceedings, whether
judicial or extrajudicial, . . . appropriatedthe
[l]easehold [r]ights of plaintiff Lydia Cuba over
the fishpond in question." Its contention that it
limited itself to mere administration by posting
caretakers is further belied by the deed of
conditional sale it executed in favor of CUBA.
The deed stated:
WHEREAS, the Vendor [DBP] by
virtue of a deed of
assignment executed in its favor by
the herein vendees [Cuba spouses]
the former acquired all the right and
interest of the latter over the above-
described property;
 xxx xxx xxx
The title to the real estate property
[sic] and all improvements
thereon shall remain in the name of
the Vendor until after the purchase
price, advances and interest shall
have been fully paid. (Emphasis
supplied).
It is obvious from the above-quoted paragraphs
that DBP had appropriated and taken ownership
of CUBA's leasehold rights merely on the
strength of the deed of assignment.
DBP cannot take refuge in condition no. 12 of the
deed of assignment to justify its act of
appropriating the leasehold rights. As stated
earlier, condition no. 12 did not provide that
CUBA's default would operate to vest in DBP
ownership of the said rights. Besides, an
assignment to guarantee an obligation, as in the
present case, is virtually a mortgage and not an
absolute conveyance of title which confers
ownership on the assignee.12
At any rate, DBP's act of appropriating CUBA's
leasehold rights was violative of Article 2088 of
the Civil Code, which forbids a credit or from
appropriating, or disposing of, the thing given as
security for the payment of a debt.
The fact that CUBA offered and agreed to
repurchase her leasehold rights from DBP did
not estop her from questioning DBP's act of
appropriation. Estoppel is unavailing in this
case. As held by this Court in some
cases,13 estoppel cannot give validity to an act
that is prohibited by law or against public policy.
Hence, the appropriation of the leasehold rights,
being contrary to Article 2088 of the Civil Code
and to public policy, cannot be deemed validated
by estoppel.
Instead of taking ownership of the questioned
real rights upon default by CUBA, DBP should
have foreclosed the mortgage, as has been
stipulated in condition no. 22 of the deed of
assignment. But, as admitted by DBP, there was
no such foreclosure. Yet, in its letter dated 26
October 1979, addressed to the Minister of
Agriculture and Natural Resources and coursed
through the Director of the Bureau of Fisheries
and Aquatic Resources, DBP declared that it
"had foreclosed the mortgage and enforced the
assignment of leasehold rights on March 21,
1979 for failure of said spouses [Cuba spouces]
to pay their loan amortizations."14 This only goes
to show that DBP was aware of the necessity of
foreclosure proceedings.
In view of the false representation of DBP that it
had already foreclosed the mortgage, the Bureau
of Fisheries cancelled CUBA's original lease
permit, approved the deed of conditional sale,
and issued a new permit in favor of CUBA. Said
acts which were predicated on such false
representation, as well as the subsequent acts
emanating from DBP's appropriation of the
leasehold rights, should therefore be set aside.
To validate these acts would open the floodgates
to circumvention of Article 2088 of the Civil
Code.
Even in cases where foreclosure proceedings
were had, this Court had not hesitated to nullify
the consequent auction sale for failure to comply
with the requirements laid down by law, such as
Act No. 3135, as amended.15With more reason
that the sale of property given as security for the
payment of a debt be set aside if there was no
prior fore closure proceeding.
Hence, DBP should render an accounting of the
income derived from the operation of the
fishpond in question and apply the said income
in accordance with condition no. 12 of the deed
of assignment which provided: "Any amount
received from rents, administration, . . . may be
applied to the payment of repairs, improvements,
taxes, assessment, and other incidental
expenses and obligations and the balance, if any,
to the payment of interest and then on the capital
of the indebtedness. . ."
We shall now take up the issue of damages.
Article 2199 provides:
Except as provided by law or by
stipulation, one is entitled to an
adequate compensation only for
such pecuniary loss suffered by him
as he has duly proved. Such
compensation is referred to as actual
or compensatory damages.
Actual or compensatory damages cannot be
presumed, but must be proved with reasonable
degree of certainty.16 A court cannot rely on
speculations, conjectures, or guesswork as to
the fact and amount of damages, but must
depend upon competent proof that they have
been suffered by the injured party and on the
best obtainable evidence of the actual amount
thereof.17 It must point out specific facts which
could afford a basis for measuring whatever
compensatory or actual damages are borne.18
In the present case, the trial court awarded in
favor of CUBA P1,067,500 as actual damages
consisting of P550,000 which represented the
value of the alleged lost articles of CUBA and
P517,500 which represented the value of the
230,000 pieces of bangus allegedly stocked in
1979 when DBP first ejected CUBA from the
fishpond and the adjoining house. This award
was affirmed by the Court of Appeals.
We find that the alleged loss of personal
belongings and equipment was not proved by
clear evidence. Other than the testimony of
CUBA and her caretaker, there was no proof as
to the existence of those items before DBP took
over the fishpond in question. As pointed out by
DBP, there was not "inventory of the alleged lost
items before the loss which is normal in a project
which sometimes, if not most often, is left to the
care of other persons." Neither was a single
receipt or record of acquisition presented.
Curiously, in her complaint dated 17 May 1985,
CUBA included "losses of property" as among
the damages resulting from DBP's take-over of
the fishpond. Yet, it was only in September 1985
when her son and a caretaker went to the
fishpond and the adjoining house that she came
to know of the alleged loss of several articles.
Such claim for "losses of property," having been
made before knowledge of the alleged actual
loss, was therefore speculative. The alleged loss
could have been a mere afterthought or
subterfuge to justify her claim for actual
damages.
With regard to the award of P517,000
representing the value of the alleged 230,000
pieces of bangus which died when DBP took
possession of the fishpond in March 1979, the
same was not called for. Such loss was not duly
proved; besides, the claim therefor was delayed
unreasonably. From 1979 until after the filing of
her complaint in court in May 1985, CUBA did not
bring to the attention of DBP the alleged loss. In
fact, in her letter dated 24 October 1979,19 she
declared:
1. That from February to May 1978, I
was then seriously ill in Manila and
within the same period I neglected
the management and supervision of
the cultivation and harvest of the
produce of the aforesaid fishpond
thereby resulting to the irreparable
loss in the produce of the same in the
amount of about P500,000.00 to my
great damage and prejudice due to
fraudulent acts of some of my
fishpond workers.
Nowhere in the said letter, which was written
seven months after DBP took possession of the
fishpond, did CUBA intimate that upon DBP's
take-over there was a total of 230,000 pieces of
bangus, but all of which died because of DBP's
representatives prevented her men from feeding
the fish.
The award of actual damages should, therefore,
be struck down for lack of sufficient basis.
In view, however, of DBP's act of appropriating
CUBA's leasehold rights which was contrary to
law and public policy, as well as its false
representation to the then Ministry of Agriculture
and Natural Resources that it had "foreclosed the
mortgage," an award of moral damages in the
amount of P50,000 is in order conformably with
Article 2219(10), in relation to Article 21, of the
Civil Code. Exemplary or corrective damages in
the amount of P25,000 should likewise be
awarded by way of example or correction for the
public good.20 There being an award of exemplary
damages, attorney's fees are also recoverable.21
Development Bank of the Philippines is hereby
ordered to render an accounting of the income
derived from the operation of the fishpond in
question.
Let this case be REMANDED to the trial court for
the reception of the income statement of DBP, as
well as the statement of the account of Lydia P.
Cuba, and for the determination of each party's
financial obligation to one another.
SO ORDERED.

WHEREFORE, the 25 May 1994 Decision of the

Court of Appeals in CA-G.R. CV No. 26535 is
hereby REVERSED, except as to the award of
P50,000 as moral damages, which is hereby Lessons Applicable: Certainty (Torts and
sustained. The 31 January 1990 Decision of the Damages)
Regional Trial Court of Pangasinan, Branch 54, in Laws Applicable: Article 1245, Article
Civil Case No. A-1574 is MODIFIED setting aside
the finding that condition no. 12 of the deed of 1255, Article 2087, Art. 2088 of the
assignment constituted pactum Civil Code
commissorium and the award of actual damages;
and by reducing the amounts of moral damages
from P100,000 to P50,000; the exemplary
damages, from P50,000 to P25,000; and the FACTS:
attorney's fees, from P100,000 to P20,000. The
 Lydia P. Cuba is a grantee of a Fishpond Lease
Agreement from the Government
 Cuba obtained loans from DBP stated
under promissory notes dated September 6,
1974; August 11, 1975; and April 4,
1977 executing 2 Deeds of Assignment of her
Leasehold Rights as security
 Upon failure to pay, without foreclosure
proceedings it was appropriated and DBP
executed in turn a Deed of Conditional
Sale of the Leasehold Rights in her favor
 Her offer to repurchase was accepted and a
new Fishpond Lease Agreement was issued by
the Ministry of Agriculture and Food in her
favor alone excluding her husband
 Failing to pay her amortizations, she entered
into a temporary agreement with DBP
 Soon, she was sent a Notice of Rescission and
DBP took possession of the Leasehold Rights of the
fishpond
 After the public bidding, DBP executed a Deed of
Conditional Sale in favor of defendant Agripina Caperal
 Cuba filed against DBP since no foreclosure
proceedings was done thus, contrary to Article
2088 of the Civil Code
 RTC: favored Cuba, it being a pactum
commissorium
 return leasehold rights to Cuba
 entitling P1,067,500 actual
damages, P100,000 moral
and P50,000 exemplary damages and P100,000
attorney’s fees
 CA: leasehold rights to Caperal as valid
but same damages
ISSUE: W/N Cuba should be awarded with
actual and compensatory damages
HELD: NO. CA reversed except the P50,000
as moral damages. REMANDED to the
trial court for the reception of the
income statement of DBP, as well as the
statement of the account of Lydia P.
Cuba, and for the determination of each
party’s financial obligation to one  dated 17 May 1985, CUBA included “losses of
another property” as among the damages resulting
from DBP’s take-over of the fishpond. Yet, it
 assignment of leasehold rights was a mortgage contract
was only in September 1985 when her son
(Article 2087)
and a caretaker went to the fishpond and the
 not novated, cession (Article 1255 of the Civil
adjoining house that she came to know of the
Code), dation in payment (Article 1245 of the
alleged loss of several articles
civil Code), pactum commissorium
 bangus which died also not duly proved nor was it
 condition no. 12 did not provide that CUBA’s default
expressed in her later 7 months after DBP
would operate to vest in DBP ownership of the said rights
took over
 The fact that CUBA offered and agreed to repurchase her
 The award of actual damages should, therefore, be struck
leasehold rights from DBP did not estop her from
down for lack of sufficient basis
questioning DBP’s act of appropriation.
 Exemplary or corrective damages in the amount of
 estoppel cannot give validity to an act that is prohibited by
P25,000 should likewise be awarded by way of example
law or against public policy
or correction for the public good. There being an
 alleged loss of personal belongings and equipment was
award of exemplary damages, attorney’s fees
not proved by clear evidence. Other than the
are also recoverable
testimony of CUBA and her caretaker, there
was no proof as to the existence of those
items before DBP took over the fishpond in
question. Neither was a single receipt or record FIRST DIVISION

of acquisition presented.
G.R. No. 126800 November 29, 1999
NATALIA P. BUSTAMANTE, petitioner,
vs.
SPOUSES RODITO F. ROSEL and NORMA A.
ROSEL, respondents.
RESOLUTION
PARDO, J.:
The case before the Court is a petition for review
on certiorari 1 to annul the decision of the Court of
Appeals, 2 reversing and setting aside the decision of
the Regional Trial Court, 3 Quezon City, Branch 84,
in an action for specific performance with
consignation.
On March 8, 1987, at Quezon City, Norma Rosel
entered into a loan agreement with petitioner 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. 4
When the loan was about to mature on March 1,
1989, respondents proposed to buy at the pre-set
price of P200,000.00, the seventy (70) square
meters parcel of land covered by TCT No. 80667,
given as collateral to guarantee payment of the loan.
Petitioner, however, refused to sell and requested for
extension of time to pay the loan and offered to sell
to respondents another residential lot located at
Road 20, Project 8, Quezon City, with the principal
loan plus interest to be used as down payment.
Respondents refused to extend the payment of the
loan and to accept the lot in Road 20 as it was
occupied by squatters and petitioner and her
husband were not the owners thereof but were mere
land developers entitled to subdivision shares or
commission if and when they developed at least one
half of the subdivision area. 5
Hence, on March 1, 1989, petitioner tendered
payment of the loan to respondents which the latter
refused to accept, insisting on petitioner's signing a
prepared deed of absolute sale of the collateral.
On February 28, 1990, respondents filed with the
Regional Trial Court, Quezon City, Branch 84, a
complaint for specific performance with consignation
against petitioner and her spouse. 6
Nevertheless, on March 4, 1990, respondents sent a
demand letter asking petitioner to sell the collateral
pursuant to the option to buy embodied in the loan
agreement.
On the other hand, on March 5, 1990, petitioner filed
in the Regional Trial Court, Quezon City a petition for
consignation, and deposited the amount of
P153,000.00 with the City Treasurer of Quezon City
on August 10, 1990. 7
When petitioner refused to sell the collateral and
barangay conciliation failed, respondents consigned
the amount of P47,500.00 with the trial court. 8 In
arriving at the amount deposited, respondents
considered the principal loan of P100,000.00 and
18% interest per annum thereon, which amounted to
P52,500.00. 9 The principal loan and the interest
taken together amounted to P152,500.00, leaving a
balance of P 47,500.00. 10
After due trial, on November 10, 1992, the trial court
rendered decision holding:
WHEREFORE, premises considered,
judgment is hereby rendered as follows:
1. Denying the plaintiff's prayer for the
defendants' execution of the Deed of
Sale to Convey the collateral in plaintiffs'
favor;
2. Ordering the defendants to pay the
loan of P100,000.00 with interest
thereon at 18% per annumcommencing
on March 2, 1989, up to and until
 August 10, 1990, when defendants
deposited the amount with the Office of
the City Treasurer under Official Receipt
No. 0116548 (Exhibit "2"); and
3. To pay Attorney's Fees in the amount
of P5,000.00, plus costs of suit.
SO ORDERED.
Quezon City, Philippines, November 10,
1992.
TEODORO P. REGINO
Judge 11
On November 16, 1992, respondents appealed from
the decision to the Court of Appeals. 12 On July 8,
1996, the Court of Appeals rendered decision
reversing the ruling of the Regional Trial Court. The
dispositive portion of the Court of Appeals' decision
reads:
IN VIEW OF THE FOREGOING, the
judgment appeal (sic) from
is REVERSED and SET ASIDE and a
new one entered in favor of the plaintiffs
ordering the defendants to accept the
amount of P47,000.00 deposited with
the Clerk of Court of Regional Trial
Court of Quezon City under Official
Receipt No. 0719847, and for
defendants to execute the necessary
Deed of Sale in favor of the plaintiffs
over the 70 SQUARE METER portion
and the apartment standing thereon
being occupied by the plaintiffs and
covered by TCT No. 80667 within fifteen
(15) days from finality hereof.
Defendants, in turn, are allowed to
withdraw the amount of P153,000.00
deposited by them under Official
Receipt No. 0116548 of the City
Treasurer's Office of Quezon City. All
other claims and counterclaims
are DISMISSED, for lack of sufficient
basis. No costs.
SO ORDERED. 13
Hence, this petition. 14
On January 20, 1997, we required respondents to
comment on the petition within ten (10) days from
notice. 15 On February 27, 1997, respondents filed
their comment. 16
On February 9, 1998, we resolved to deny the
petition on the ground that there was no reversible
error on the part of respondent court in ordering the
execution of the necessary deed of sale in
conformity the with the parties' stipulated agreement.
The contract is the law between the parties thereof
(Syjuco v. Court of Appeals, 172 SCRA 111 118,
citing Phil.American General Insurance v. Mutuc, 61
SCRA 22; Herrera v. Petrophil Corporation, 146
SCRA 360). 17
On March 17, 1998, petitioner filed with this Court a
motion for reconsideration of the denial alleging that
the real intention of the parties to the loan was to put
up the collateral as guarantee similar to an equitable
mortgage according to Article 1602 of the Civil
Code. 18
On April 21, 1998, respondents filed an opposition to
petitioner's motion for reconsideration. They contend
that the agreement between the parties was not a
sale with right of re-purchase, but a loan with interest
at 18% per annum for a period of two years and if
petitioner fails to pay, the respondent was given the
right to purchase the property or apartment for
P200,000.00, which is not contrary to law, morals,
good customs, public order or public policy. 19
Upon due consideration of petitioner's motion, we
now resolve to grant the motion for reconsideration.
The questions presented are whether petitioner
failed to pay the loan at its maturity date and whether
the stipulation in the loan contract was valid and
enforceable.
We rule that petitioner did not fail to pay the loan.
The loan was due for payment on March 1, 1989. On
said date, 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.
We note the eagerness of respondents to acquire
the property given as collateral to guarantee the
loan. 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.
Respondents argue that contracts have the force of
law between the contracting parties and must be
complied with in good faith. 21 There are, however,
certain exceptions to the rule, specifically Article
1306 of the Civil Code, which provides:
 Art. 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. 22
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. 23
In Nakpil vs. Intermediate Appellate Court, 24 we said:
The arrangement entered into between
the parties, whereby Pulong
Maulap was to be "considered sold to
him (respondent) . . . in case petitioner
fails to reimburse Valdes, must then be
construed as tantamount topactum
commissorium which is expressly
prohibited by Art. 2088 of the Civil Code.
For, there was to be automatic
appropriation of the property by Valdes
in the event of failure of petitioner to pay
the value of the advances. Thus,
contrary to respondent's manifestation,
all the elements of a pactum
commissorium were present: there was
a creditor-debtor relationship between
the parties; the property was used as
security for the loan; and there was
automatic appropriation by respondent
of Pulong Maulap in case of default of
petitioner.
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. 25
All persons in need of money are liable to enter into
contractual relationships whatever the condition if
only to alleviate their financial burden albeit
temporarily. Hence, courts are duty bound to
 exercise caution in the interpretation and resolution
of contracts lest the lenders devour the borrowers
like vultures do with their prey.
WHEREFORE, we GRANT petitioner's motion for
reconsideration and SET ASIDE the Court's
resolution of February 9, 1998. We REVERSE the
decision of the Court of Appeals in CA-G.R. CV No.
40193. In lieu thereof, we hereby DISMISS the
complaint in Civil Case No. Q-90-4813.
No costs.
SO ORDERED.
Facts:
 March 8, 1987. Norma Rosel entered in a loan agreement with
Natalia Bustamante with the 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 the respondent proposed to buy the
land for P200,000 but the petitioner refused and offered another
residential lot at road. 20 project 8, quezon city. Respondent
accepted the lot. The Respondents were not the owner but entitled
as Land developers
 March 1, 1989. Petitioner tendered payment for the loan but the
respondent refused insisting that the former sign the document as
deed of absolute sale of the collateral
 Respondent filed a complaint and sent a letter asking the petitioner
to sell the collateral pursuant to the loan agreement
 March 5, 1990. Petitioner filed a petition for consignation and
deposited the amount of P153,000 with the City Treasurer of Quezon
City. Petitioner refused the sell the collateral and the respondent
cosigned the amount of P47,500 with the trial court. In arriving at the
amount deposited, respondents considered the principal loan of
P100,000.00 and 18% interest per annum thereon, which amounted
 to P52,500.00. The principal loan and the interest taken together
No, The SC said that the stipulation is void. the intent of the creditor
amounted to P152,500.00, leaving a balance of P47,500.00 appears to be evident,for the debtor is obliged to dispose of the
collateral at the preagreed consideration amounting to practically the
 The trial court ruled in favor of the petitioner and denied the prayer
same amount
of the respondents in the execution of the deed of sale 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
 Court of Appeals reversed the decision of the trial court
commissorium. Such stipulation is void.
 The SC found no error in the decision of the trial court, petitioner
asked for a reconsideration. Respondent filed an opposition against
petitioner’s motion for reconsideration. They contend that the
agreement between the parties was not a sale with right of re-
purchase, but a loan with interest at 18% per annum for a period of
two years and if petitioner fails to pay, the respondent was given the
right to purchase the property or apartment for P200,000.00, which is
not contrary to law, morals, good customs, public order or public SECOND DIVISION
policy.
G.R. No. 172592 July 9, 2008
Issue: W/ON the petitioner failed to pay the loan at its maturity and is
the stipulation in the loan contract valid SPOUSES WILFREDO N. ONG and EDNA SHEILA
PAGUIO-ONG, Petitioners,
Held: No. The respondents refused to accept payment, petitioner vs.
consigned the amount with the trial court. We note the eagerness of
ROBAN LENDING CORPORATION, Respondent.
respondents to acquire the property given as collateral to guarantee
the loan. The sale of the collateral is an obligation with a suspensive
AUSTRIA-MARTINEZ,*
condition. 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
DECISION
petitioner’s obligation, especially where the same would not only be
disadvantageous to petitioner but would also unjustly enrich CARPIO MORALES, J.:
respondents considering the inadequate consideration
(P200,000.00) for a 70 square meter property situated at On different dates from July 14, 1999 to March 20,
Congressional Avenue, Quezon City. 2000, petitioner-spouses Wilfredo N. Ong and Edna
Sheila Paguio-Ong obtained several loans from
Roban Lending Corporation (respondent) in the total
amount of ₱4,000,000.00. These loans were secured
by a real estate mortgage on petitioners’ parcels of
land located in Binauganan, Tarlac City and covered
by TCT No. 297840.1
On February 12, 2001, petitioners and respondent
executed an Amendment to Amended Real Estate
Mortgage2consolidating their loans inclusive of
charges thereon which totaled ₱5,916,117.50. On
even date, the parties executed a Dacion in Payment
Agreement3 wherein petitioners assigned the
properties covered by TCT No. 297840 to
respondent in settlement of their total obligation, and
a Memorandum of Agreement4 reading:
That the FIRST PARTY [Roban Lending
Corporation] and the SECOND PARTY [the
petitioners] agreed to consolidate and restructure all
aforementioned loans, which have been all past due
and delinquent since April 19, 2000, and outstanding
obligations totaling P5,916,117.50. The SECOND
PARTY hereby sign [sic] another promissory note in
the amount of P5,916,117.50 (a copy of which is
hereto attached and forms xxx an integral part of this
document), with a promise to pay the FIRST PARTY
in full within one year from the date of the
consolidation and restructuring, otherwise the
SECOND PARTY agree to have their "DACION IN
PAYMENT" agreement, which they have executed
and signed today in favor of the FIRST PARTY be
enforced[.]5
In April 2002 (the day is illegible), petitioners filed a
Complaint,6 docketed as Civil Case No. 9322, before
the Regional Trial Court (RTC) of Tarlac City, for
declaration of mortgage contract as abandoned,
annulment of deeds, illegal exaction, unjust
enrichment, accounting, and damages, alleging that
the Memorandum of Agreement and the Dacion in
Payment executed are void for being pactum
commissorium.7
Petitioners alleged that the loans extended to them
from July 14, 1999 to March 20, 2000 were founded
on several uniform promissory notes, which provided
for 3.5% monthly interest rates, 5% penalty per
month on the total amount due and demandable, and
a further sum of 25% attorney’s fees thereon,8 and in
addition, respondent exacted certain sums
denominated as "EVAT/AR."9 Petitioners decried
these additional charges as "illegal, iniquitous,
unconscionable, and revolting to the conscience as
they hardly allow any borrower any chance of
survival in case of default."10
Petitioners further alleged that they had previously
made payments on their loan accounts, but because
of the illegal exactions thereon, the total balance
appears not to have moved at all, hence, accounting
was in order.11
Petitioners thus prayed for judgment:
a) Declaring the Real Estate Mortgage
Contract and its amendments x x x as null and
void and without legal force and effect for
having been renounced, abandoned, and
given up;
b) Declaring the "Memorandum of Agreement"
xxx and "Dacion in Payment" x x x as null and
void for being pactum commissorium;
c) Declaring the interests, penalties, Evat [sic]
and attorney’s fees assessed and loaded into
the loan accounts of the plaintiffs with
defendant as unjust, iniquitous,
unconscionable and illegal and therefore,
stricken out or set aside;
d) Ordering an accounting on plaintiffs’ loan
accounts to determine the true and correct
balances on their obligation against legal
charges only; and
e) Ordering defendant to [pay] to the plaintiffs:
--
e.1 Moral damages in an amount not
less than P100,000.00 and exemplary
damages of P50,000.00;
e.2 Attorney’s fees in the amount of
P50,000.00 plus P1,000.00 appearance
fee per hearing; and
e.3 The cost of suit.12
as well as other just and equitable reliefs.
In its Answer with Counterclaim,13 respondent
maintained the legality of its transactions with
petitioners, alleging that:
xxxx
If the voluntary execution of the Memorandum of
Agreement and Dacion in Payment Agreement
novated the Real Estate Mortgage then the
allegation of Pactum Commissorium has no more
legal leg to stand on;
The Dacion in Payment Agreement is lawful and
valid as it is recognized x x x under Art. 1245 of the
Civil Code as a special form of payment whereby the
debtor-Plaintiffs alienates their property to the
creditor-Defendant in satisfaction of their monetary
obligation;
The accumulated interest and other charges which
were computed for more than two (2) years would
stand reasonable and valid taking into consideration
[that] the principal loan is ₱4,000,000 and if indeed it
became beyond the Plaintiffs’ capacity to pay then
the fault is attributed to them and not the
Defendant[.]14
After pre-trial, the initial hearing of the case,
originally set on December 11, 2002, was reset
several times due to, among other things, the parties’
efforts to settle the case amicably.15
1avv phi 1
During the scheduled initial hearing of May 7, 2003,
the RTC issued the following order:
Considering that the plaintiff Wilfredo Ong is not
around on the ground that he is in Manila and he is
attending to a very sick relative, without objection on
the part of the defendant’s counsel, the initial hearing
of this case is reset to June 18, 2003 at 10:00 o’clock
in the morning.
Just in case [plaintiff’s counsel] Atty. Concepcion
cannot present his witness in the person of Mr.
Wilfredo Ong in the next scheduled hearing, the
counsel manifested that he will submit the case for
summary judgment.16 (Underscoring supplied)
It appears that the June 18, 2003 setting was
eventually rescheduled to February 11, 2004 at
which both counsels were present17 and the RTC
issued the following order:
The counsel[s] agreed to reset this case on April 14,
2004, at 10:00 o’clock in the morning. However, the
counsels are directed to be ready with their
memorand[a] together with all the exhibits or
evidence needed to support their respective
positions which should be the basis for the judgment
on the pleadings if the parties fail to settle the case in
the next scheduled setting.
x x x x18 (Underscoring supplied)
At the scheduled April 14, 2004 hearing, both
counsels appeared but only the counsel of
respondent filed a memorandum.19
By Decision of April 21, 2004, Branch 64 of the
Tarlac City RTC, finding on the basis of the
pleadings that there was nopactum commissorium,
dismissed the complaint.20
On appeal,21 the Court of Appeals22 noted that
x x x [W]hile the trial court in its decision stated that it
was rendering judgment on the pleadings, x x x what
it actually rendered was a summary judgment. A
judgment on the pleadings is proper when the
answer fails to tender an issue, or otherwise admits
the material allegations of the adverse party’s
pleading. However, a judgment on the pleadings
would not have been proper in this case as the
answer tendered an issue, i.e. the validity of the
MOA and DPA. On the other hand, a summary
judgment may be rendered by the court if the
pleadings, supporting affidavits, and other
documents show that, except as to the amount of
damages, there is no genuine issue as to any
material fact.23
Nevertheless, finding the error in nomenclature "to
be mere semantics with no bearing on the merits of
the case",24 the Court of Appeals upheld the RTC
decision that there was no pactum commissorium.25
Their Motion for Reconsideration26 having been
denied,27 petitioners filed the instant Petition for
Review on Certiorari,28faulting the Court of Appeals
for having committed a clear and reversible error
I. . . . WHEN IT FAILED AND REFUSED TO
APPLY PROCEDURAL REQUISITES WHICH
WOULD WARRANT THE SETTING ASIDE
OF THE SUMMARY JUDGMENT IN
VIOLATION OF APPELLANTS’ RIGHT TO
DUE PROCESS;
II. . . . WHEN IT FAILED TO CONSIDER
THAT TRIAL IN THIS CASE IS NECESSARY
BECAUSE THE FACTS ARE VERY MUCH IN
DISPUTE;
III. . . . WHEN IT FAILED AND REFUSED TO
HOLD THAT THE MEMORANDUM OF
AGREEMENT (MOA) AND THE DACION EN
PAGO AGREEMENT (DPA) WERE
DESIGNED TO CIRCUMVENT THE LAW
AGAINSTPACTUM COMMISSORIUM; and
IV. . . . WHEN IT FAILED TO CONSIDER
THAT THE MEMORANDUM OF
AGREEMENT (MOA) AND THE DACION EN
PAGO (DPA) ARE NULL AND VOID FOR
BEING CONTRARY TO LAW AND PUBLIC
POLICY.29
The petition is meritorious.
Both parties admit the execution and contents of the
Memorandum of Agreement and Dacion in Payment.
They differ, however, on whether both contracts
constitute pactum commissorium or dacion en pago.
This Court finds that the Memorandum of Agreement
and Dacion in Payment constitute pactum
commissorium, which is prohibited under Article
2088 of the Civil Code which provides:
The creditor cannot appropriate the things given by
way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void."
The elements of pactum commissorium, which
enables the mortgagee to acquire ownership of the
mortgaged property without the need of any
foreclosure proceedings,30 are: (1) there should be a
property mortgaged by way of security for the
payment of the principal obligation, and (2) there
should be a stipulation for automatic appropriation by
the creditor of the thing mortgaged in case of non-
payment of the principal obligation within the
stipulated period.31
In the case at bar, the Memorandum of Agreement
and the Dacion in Payment contain no provisions for
foreclosure proceedings nor redemption. Under the
Memorandum of Agreement, the failure by the
petitioners to pay their debt within the one-year
period gives respondent the right to enforce the
Dacion in Payment transferring to it ownership of the
properties covered by TCT No. 297840. Respondent,
in effect, automatically acquires ownership of the
properties upon petitioners’ failure to pay their debt
within the stipulated period.
Respondent argues that the law recognizes dacion
en pago as a special form of payment whereby the
debtor alienates property to the creditor in
satisfaction of a monetary obligation.32 This does not
persuade. In a true dacion en pago, the assignment
of the property extinguishes the monetary debt.33 In
the case at bar, the alienation of the properties was
by way of security, and not by way of satisfying the
debt.34 The Dacion in Payment did not extinguish
petitioners’ obligation to respondent. On the contrary,
under the Memorandum of Agreement executed on
the same day as the Dacion in Payment, petitioners
had to execute a promissory note for ₱5,916,117.50
which they were to pay within one year.35
Respondent cites Solid Homes, Inc. v. Court of
Appeals36 where this Court upheld a Memorandum of
Agreement/Dacion en Pago.37 That case did not
involve the issue of pactum commissorium.38
That the questioned contracts were freely and
voluntarily executed by petitioners and respondent is
of no moment, pactum commissorium being void for
being prohibited by law.39
Respecting the charges on the loans, courts may
reduce interest rates, penalty charges, and
attorney’s fees if they are iniquitous or
unconscionable.40
This Court, based on existing jurisprudence,41 finds
the monthly interest rate of 3.5%, or 42% per annum
unconscionable and thus reduces it to 12% per
annum. This Court finds too the penalty fee at the
monthly rate of 5% (60% per annum) of the total
amount due and demandable – principal plus
interest, with interest not paid when due added to
and becoming part of the principal and likewise
bearing interest at the same rate, compounded
monthly42 – unconscionable and reduces it to a
yearly rate of 12% of the amount due, to be
computed from the time of demand.43 This Court
finds the attorney’s fees of 25% of the principal,
interests and interests thereon, and the penalty fees
unconscionable, and thus reduces the attorney’s
fees to 25% of the principal amount only.44
The prayer for accounting in petitioners’ complaint
requires presentation of evidence, they claiming to
have made partial payments on their loans, vis a vis
respondent’s denial thereof.45 A remand of the case
is thus in order.
Prescinding from the above disquisition, the trial
court and the Court of Appeals erred in holding that a
summary judgment is proper. A summary judgment
is permitted only if there is no genuine issue as to
any material fact and a moving party is entitled to a
judgment as a matter of law.46 A summary judgment
is proper if, while the pleadings on their face appear
to raise issues, the affidavits, depositions, and
admissions presented by the moving party show that
such issues are not genuine.47 A genuine issue, as
opposed to a fictitious or contrived one, is an issue of
fact that requires the presentation of evidence.48 As
mentioned above, petitioners’ prayer for accounting
requires the presentation of evidence on the issue of
partial payment.
But neither is a judgment on the pleadings proper. A
judgment on the pleadings may be rendered only
when an answer fails to tender an issue or otherwise
admits the material allegations of the adverse party’s
pleadings.49 In the case at bar, respondent’s Answer
with Counterclaim disputed petitioners’ claims that
the Memorandum of Agreement and Dation in
Payment are illegal and that the extra charges on the
loans are unconscionable.50 Respondent disputed
too petitioners’ allegation of bad faith.51
WHEREFORE, the challenged Court of Appeals
Decision is REVERSED and SET ASIDE. The
Memorandum of Agreement and the Dacion in
Payment executed by petitioner- spouses Wilfredo
N. Ong and Edna Sheila Paguio-Ong and
respondent Roban Lending Corporation on February
12, 2001 are declared NULL AND VOID for
being pactum commissorium.
In line with the foregoing findings, the following terms
of the loan contracts between the parties are
MODIFIED as follows:
1. The monthly interest rate of 3.5%, or
42% per annum, is reduced to 12% per
annum;
2. The monthly penalty fee of 5% of the total
amount due and demandable is reduced to
12% per annum, to be computed from the time
of demand; and
3. The attorney’s fees are reduced to 25% of
the principal amount only.
Civil Case No. 9322 is REMANDED to the court of
origin only for the purpose of receiving evidence on
petitioners’ prayer for accounting.
SO ORDERED.
SPOUSES WILFREDO N. ONG
AND EDNA SHEILA PAGUIO-ONG v.
ROBAN LENDING CORPORATION
557 SCRA 516 (2008)
In a true dacion en pago, the assignment of
the property extinguishes the monetarydebt.
On various dates, petitioner Spouses Wilfredo
N. Ong and Edna Sheila Paguio-Ong obtained
several loans from respondent Roban Lending
Corporation in the total amount of P4,
000,000. These loans were secured by real
estate mortgage on Spouses Ong‘s parcel of
lands.
Later Spouses Ong and Roban executed
several agreements – an amendment to the
amended Real Estate Mortgage which
consolidated their loans amounting to P5,
916,117.50; dacion in payment wherein
spouses Ong assigned their mortgaged
properties to Roban to settle their
total obligation and Memorandum of
Agreement (MOA) in which the dacion in
payment agreement will be automatically
enforced in case spouses Ong fail to pay
within one year from the execution of the
agreement.
Spouses Ong filed a complaint
before Regional Trial Court of Tarlac City to
declare the mortgage contract, dacion in
payment agreement, and MOA void. Spouses
Ong allege that the dacion in payment
agreement is pactum commissorium, and
therefore void. In its Answer with
counterclaim, Roban alleged that the dacion
in payment agreement is valid because it is a
special form of payment recognized under
Article 1245 of the Civil Code. RTC ruled in
favor of Roban, finding that there was no
pactum commissorium. The Court of Appeals
upheld the RTC decision.
ISSUE:
Whether or not the dacion in payment
agreement entered into by Spouses Ong and
Roban constitutes pactum commissorium
HELD:
The Court finds that the Memorandum of
Agreement and Dacion in Payment constitute
pactum commissorium, which is prohibited
under Article 2088 of the Civil Code which
provides that the creditor cannot appropriate
the things given by way of pledge
or mortgage, or dispose of them. Any
stipulation to the contrary is null and void
The elements of pactum commissorium,
which enables the mortgagee to acquire
ownership of the mortgaged property without
the need of any foreclosureproceedings, are:
(1) there should be a property mortgaged by
way of security for the payment of the
principal obligation, and (2) there should be a
stipulation for automatic appropriation by
the creditor of the thing mortgaged in case of
non-payment of the
principal obligation within the stipulated
period.
Here, Memorandum of Agreement and the
Dacion in Payment contain no provisions
for foreclosure proceedings nor redemption.
Under the Memorandum of Agreement, the
failure by the
petitioners to pay their debt within the one-
year period gives respondent the right
to enforce the Dacion in Payment transferring
to it ownership of the properties covered by
TCT No. 297840. Respondent, in effect,
automatically acquiresownership of the
properties upon Spouses Ong’s failure to pay
their debt within the stipulated period.
In a true dacion en pago, the assignment of
the property extinguishes the monetarydebt.
Here, the alienation of the properties was by
way of security, and not by way of satisfying
the debt. The Dacion in Payment did not
extinguish Spouses Ong’sobligation to Roban.
On the contrary, under the Memorandum of
Agreement executed on the same day as the
Dacion in Payment, petitioners had to execute
a promissory note for P5, 916, 117.50 which
they were to pay within one year
FIRST DIVISION
G.R. No. L-49120 June 30, 1988
ESTATE OF GEORGE LITTON, petitioner,
vs.
CIRIACO B. MENDOZA and COURT OF
APPEALS, respondents.
Ruben G. Bala for respondent Mendoza.
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 4in 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 administrator15 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. 18Hence, 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 executory. No motion for extension of time to file a
then Court of First Instance of Manila in Civil Case motion for reconsideration will be granted.
No. 56850 (in relation to Civil Case No. Q-8303)
where C.B.M. Products is one of the defendants and SO ORDERED.
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. THIRD DIVISION
Petitioner pointed out at the same time that private
G.R. No. L-53955 January 13, 1989
respondent together with his counsel were served
with a copy of the deed of assignment which
THE MANILA BANKING CORPORATION, plaintiff-
allegation remains uncontroverted. Having such
appellee,
knowledge thereof, private respondent is estopped
vs.
from entering into a compromise agreement
ANASTACIO TEODORO, JR. and GRACE ANNA
involving the same litigated credit without notice to
TEODORO, defendants-appellants.
and consent of the assignee, petitioner herein. More
so, in the light of the fact that no reimbursement has Formoso & Quimbo Law Office for plaintiff-appellee.
ever been made in favor of the assignee as required
under Article 1634. Private respondent acted in bad Serafin P. Rivera for defendants-appellants.
faith and in connivance with assignor Tan so as to
defraud the petitioner in entering into the
compromise agreement.
BIDIN, J.:
WHEREFORE, the petition is GRANTED. The
assailed resolution of the respondent court dated This is an appeal from the decision* of the Court of
August 30,1977 is hereby SET ASIDE, the said First Instance of Manila, Branch XVII in Civil Case
compromise agreement being null and void, and a No. 78178 for collection of sum of money based on
new one is hereby rendered reinstating its decision promissory notes executed by the defendants-
dated January 27, 1977, affirming in toto the decision appellants in favor of plaintiff-appellee bank. The
of the lower court. This decision is immediately
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- representative of the
due as attorney's fees, which in no case Assignee and in trust for
shall be leas than P200.00. said Assignee ;

It appears that on January 24, 1964, the xxx xxx xxx

Son executed in favor of plaintiff a Deed
of Assignment of Receivables from the (6) The Assignor
Emergency Employment Administration guarantees the existence
in the sum of P44,635.00. The Deed of and legality of said
Assignment provided that it was for and accounts receivable, and
in consideration of certain credits, loans, the due and punctual
overdrafts and other credit payment thereof unto the
accommodations extended to assignee, ... on demand, ...
defendants as security for the payment and further, that Assignor
of said sum and the interest thereon, warrants the solvency and
and that defendants do hereby remise, credit worthiness of each
release and quitclaim all its rights, title, and every account.
and interest in and to the accounts
receivables. Further. (7) The Assignor does
hereby guarantee the
(1) The title and right of payment when due on all
possession to said sums payable under the
accounts receivable is to contracts giving rise to the
remain in the assignee, and accounts receivable ...
it shall have the right to including reasonable
collect the same from the attorney's fees in enforcing
debtor, and whatsoever the any rights against the
Assignor does in debtors of the assigned
connection with the accounts receivable and will
collection of said accounts, pay upon demand, the
it agrees to do as agent and 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
— appellants (Rollo, p. 41).
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-
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.
FACTS:
On April 25, 1966, Anastacio Jr. & Grace Anna, togetherwith
Anastacio Teodoro, Sr., jointly and severally,executed in favor of
Manila Banking Copr. (MB) aPromissory Note (No. 11487) for the
sum of P10,420.00payable in 120 days, or on August 25, 1966, at
12%interest per annum. Teodoros failed to pay the saidamount
inspire of repeated demands and the obligationas of September 30,
1969 stood at P 15,137.11 includingaccrued interest and service
charge.On May 3, 1966 and June 20, 1966, Anastacio Sr.(Father)
and Anastacio, Jr. (Son) executed in favor of MBtwo Promissory
Notes (Nos. 11515 and 11699) forP8,000.00 an P1,000.00
respectively, payable in 120days at 12% interest per annum. They
made a partialpayment on the May 3, 1966 promissory Note but
noneon the June 20, 1966 Promissory Note, leaving still anunpaid
balance of P8,934.74 as of September 30, 1969including accrued
interest and service charge.
The three Promissory Notes stipulated that any interestdue if not
paid at the end of every month shall be addedto the total amount
then due, the whole amount to bearinterest at the rate of 12% per
annum until fully paid. Itappears that on January 24, 1964, the Son
executed infavor of plaintiff a Deed of Assignment of
Receivablesfrom the Emergency Employment Administration in
thesum of P44,635.00. The Deed of Assignment providedthat it was
for and in consideration of certain credits,loans, overdrafts and other
credit accommodationsextended to Teodoros as security for the
payment of saidsum and the interest thereon, and that they do
herebyremise, release and quitclaim all its rights, title, andinterest in
and to the accounts receivables.
In their stipulations of Fact, it is admitted by the partiesthat MB
extended loans to Teodoros on the basis and byreason of certain
contracts entered into by the defunctEmergency Employment
Administration (EEA) withTeodoros for the fabrication of fishing
boats, and that thePhilippine Fisheries Commission succeeded the
EEAafter its abolition; that non-payment of the notes was dueto the
failure of the Commission to pay Teodoros after thelatter had
complied with their contractual obligations.
Issues: W/N the assignment of receivables has the
effect of payment of all the loans contracted by the
spouses
Held: No
Ratio: Assignment of credit: An agreement by virtue
of which the owner of a credit(assignor) by a legal
cause (e.g. 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(assignee) who acquires the power to - -
enforce it to the same extent as the assignor could
have enforced it against the debtor; May be in form
of: o Sale o Dation in payment - when a debtor, in
order to obtain a release from his debt, assigns to his
creditor a credit he has against a third person; o
Donation – when it is by gratuitous title; o Guaranty –
creditor gives as a collateral, to secure his own debt
in favour of the assignee, without transmitting
ownership; Obligations between the parties will
depend upon the juridical relation which is the basis
of the assignment; What is the legal effect of the
Assignment (since its validity is not in question): 1.
Assignment of receivables in 1964 did not transfer
the ownership of the receivables to MBC and release
the spouses from their loans; Consideration was for
certain credits, loans, overdrafts and credit
accommodations worth 10k extended by MBC to
spouses and as security for the payment of said sum
and interest thereon; also quitclaim of rights to MBC
of their interest in the receivables; Stipulated also
that it was a continuing guaranty for future loans and
correspondingly, the assignment shall extend to all
accounts receivable; Contention of spouses: not
mere guaranty since it was stipulated: That the
assignor release and quitclaim to assignee all its
rights, title and interest in the accounts receivable;
That title and right of possession to account
receivable is to remain in assignee and it shall have
right to collect directly from the debtor; that whatever
the assignor does in connection with collection of
such, it does so as agent and representative and in
trust of assignee; SC: character of transaction is not
determined by the language in document but by
intention of the parties;; If it was intended to secure
the payment of money, it must be construed as a
pledge. 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; Assignment of
receivables did not result from sale or by virtue of a
dation in payment; At time the deed was executed,
the loans were non-existent yet; At most, it was a
dation for 10k, the amount of credit with MBC
indicated in the deed; at the time of execution, there
was no obligation to be extinguished except for the
10k; 1292: 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; Title moves
from assignor to assignee but that title is defeasible
being designed to collateralize the principal
obligation: Operationally: means assignee is
burdened to collateralize the principal obligation;
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 nature of absolute conveyance, the
assignee would have to foreclose the properties; he
would have to comply with documentation and
registration requirements of a pledge or chattel
mortgage); 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; The foregoing is
applicable where the deed of assignment of
receivables combines elements of both a complete
alienation of the credits and a security arrangement
to assure payment of a principal obligation; Where
the 2nd element is absent, the assignment would
constitute essentially a mode of payment or dacion
en pago; 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; 2. Deed of
assignment intended as collateral security for the
loans, as a continuing guaranty for whatever sums
that would be owing by spouses; 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
FIRST DIVISION
G.R. No. L-78519 September 26, 1989
VICTORIA YAU CHU, assisted by her husband
MICHAEL CHU, petitioners,
vs.
HON. COURT OF APPEALS, FAMILY SAVINGS
BANK and/or CAMS TRADING ENTERPRISES,
INC., respondents.
Francisco A. Lara, Jr. for petitioner.
D. T. Ramos and Associates for respondent Family
Savings Bank.
Romulo T. Santos for respondent CAMS Trading.
GRINO-AQUINO, J.:
This is a petition for review on certiorari to annul and
set aside the Court of Appeals' decision dated
October 28, 1986 in CA-G.R. CV No. 03269 which
affirmed the decision of the trial court in favor of the
private respondents in an action to recover the
petitioners' time deposits in the respondent Family
Savings Bank.
Since 1980, the petitioner, Victoria Yau Chu, had
been purchasing cement on credit from CAMS
Trading Enterprises, Inc. (hereafter "CAMS Trading"
for brevity). To guaranty payment for her cement
withdrawals, she executed in favor of Cams Trading
deeds of assignment of her time deposits in the total
sum of P320,000 in the Family Savings Bank
(hereafter the Bank). Except for the serial numbers
and the dates of the time deposit certificates, the
deeds of assignment, which were prepared by her
own lawyer, uniformly provided —
... That the assignment serves as a
collateral or guarantee for the payment
of my obligation with the said CAMS
TRADING ENTERPRISES, INC. on
account of my cement withdrawal from
said company, per separate contract
executed between us.
On July 24,1980, Cams Trading notified the Bank
that Mrs. Chu had an unpaid account with it in the
sum of P314,639.75. It asked that it be allowed to
encash the time deposit certificates which had been
assigned to it by Mrs. Chu. It submitted to the Bank a
letter dated July 18, 1980 of Mrs. Chu admitting that
her outstanding account with Cams Trading was
P404,500. After verbally advising Mrs. Chu of the
assignee's request to encash her time deposit
certificates and obtaining her verbal conformity
thereto, the Bank agreed to encash the certificates.It
delivered to Cams Trading the sum of P283,737.75
only, as one time deposit certificate (No.
0048120954) lacked the proper signatures. Upon
being informed of the encashment, Mrs. Chu
demanded from the Bank and Cams Trading that her
time deposit be restored. When neither complied,
she filed a complaint to recover the sum of
P283,737.75 from them. The case was docketed in
the Regional Trial Court of Makati, Metro Manila
(then CFI of Rizal, Pasig Branch XIX), as Civil Case
No. 38861.
In a decision dated December 12, 1983, the trial
court dismissed the complaint for lack of merit.
Chu appealed to the Court of Appeals (CA-G.R. CV
No. 03269) which affirmed the dismissal of her
complaint.
In this petition for review, she alleges that the Court
of Appeals erred:
1. In not annulling the encashment of
her time deposit certificates as
a pactum commissorium; and
2. In not finding that the obligations
secured by her time deposits had
already been paid.
We find no merit in the petition for review.
The Court of Appeals found that the deeds of
assignment were contracts of pledge, but, as the
collateral was also money or an exchange of "peso
for peso," the provision in Article 2112 of the Civil
Code for the sale of the thing pledged at public
auction to convert it into money to satisfy the
pledgor's obligation, did not have to be followed. All
that had to be done to convert the pledgor's time
deposit certificates into cash was to present them to
the bank for encashment after due notice to the
debtor.
The encashment of the deposit certificates was not
a pacto commissorio which is prohibited under Art.
2088 of the Civil Code. A pacto commissorio is a
provision for the automatic appropriation of the
pledged or mortgaged property by the creditor in
payment of the loan upon its maturity. The
prohibition against a pacto commissorio is intended
to protect the obligor, pledgor, or mortgagor against
being overreached by his creditor who holds a
pledge or mortgage over property whose value is
much more than the debt. Where, as in this case, the
security for the debt is also money deposited in a
bank, the amount of which is even less than the
debt, it was not illegal for the creditor to encash the
time deposit certificates to pay the debtors' overdue
obligation, with the latter's consent.
Whether the debt had already been paid as now
alleged by the debtor, is a factual question which the
Court of Appeals found not to have been proven for
the evidence which the debtor sought to present on
appeal, were receipts for payments made prior to
July 18, 1980. Since the petitioner signed on July 18,
1980 a letter admitting her indebtedness to be in the
sum of P404,500, and there is no proof of payment
made by her thereafter to reduce or extinguish her
debt, the application of her time deposits, which she
had assigned to the creditor to secure the payment
of her debt, was proper. The Court of Appeals did
not commit a reversible error in holding that it was
so.
WHEREFORE, the petition for review is denied.
Costs against the appellant.
SO ORDERED.
Facts:
Victoria bought cement from CAMS and secured her
payments with deeds of assignment over her time
deposits in Family Savings Bank. She assigned
about P320K worth but her obligations to CAMS
came up to about P404K. CAMS requested the bank
to encash the time deposit certificates, which the
bank did only after calling up and obtaining
Victoria’s consent. Victoria then sued the bank
and CAMS for alleged pactum commissorium. The
Court ruled against her, as the prohibition on pactum
commissorium was enacted in order to protect
debtors from creditors who automatically appropriate
pledged or mortgaged property which might have a
higher value than the debt. Where the security for
the debt is also money deposited in a bank, the
amount of which is even less than the debt, it is not property whose value is much more than the debt.
illegal for the creditor to encash the time deposit Where, as in this case, the security for the debt is
certificates to pay the debtors’ overdue obligation, also money deposited in a bank, the amount of
with the latter’s consent. which is even less than the debt, it is not illegal for
the creditor to encash the time deposit certificates to
pay the debtor’s overdue obligation, with the latter’s
Issue: Did the encashment of Victoria’s time consent.
deposit certificates amount to pactum
commissorium?

NO. Ruling: Petition denied. Ratio: Since the

collateral in this case was also money, there was no
need to sell the thing pledged at public auction in
order to satisfy the pledge’s obligation. All that had to
be done to convert the pledgor's time deposit
certificates into cash was to present them to the
bank for encashment after due notice to the debtor.
The encashment of the deposit certificates was not
a partum commissorium as prohibited under Article
2088 of the Civil Code. pactum commissorium is a
provision for the automatica appropriation of the
pledged or mortgaged property by the creditor in
payment of the loan upon its maturity. This THIRD DIVISION
prohibition is intended to protect the obligor, pledgor,
G.R. No. 156132 February 6, 2007
or mortgagor against being overreached by his
creditor who holds a pledge or mortgage over
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.
RESOLUTION
CHICO-NAZARIO, J.:
On 16 October 2006, this Court promulgated its
Decision1 in the above-entitled case, the dispositive
portion of which reads –
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 herebyAFFIRMED
WITH MODIFICATION, as follows –
1. PNs No. 23356 and 23357
are DECLARED subsisting and outstanding.
Petitioner Citibank is ORDERED to 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.
all of which had become due and demandable by
May 1979. Despite repeated demands by petitioner
Citibank, respondent failed to pay her outstanding
loans. Thus, petitioner Citibank used respondent’s
deposits and money market placements to off-set
and liquidate her outstanding obligations, as follows
–

Subsequent thereto, respondent Modesta R.

Sabeniano filed an Urgent Motion to Clarify and/or
Confirm Decision with Notice of Judgment on 20
October 2006; while, petitioners Citibank, N.A. and
FNCB Finance2 filed their Motion for Partial
Reconsideration of the foregoing Decision on 6
November 2006.

The facts of the case, as determined by this Court in

its Decision, may be summarized as follows.

Respondent was a client of petitioners. She had

several deposits and market placements with
petitioners, among which were her savings account
with the local branch of petitioner Citibank (Citibank-
Manila3 ); money market placements with petitioner
FNCB Finance; and dollar accounts with the Geneva
branch of petitioner Citibank (Citibank-Geneva). At
the same time, respondent had outstanding loans
with petitioner Citibank, incurred at Citibank-Manila,
the principal amounts aggregating to ₱1,920,000.00,
Respondent’s outstanding obligation (principal and
interest as of 26 October 1979) ₱2,156,940.58
Less: Proceeds from respondent’s money market
placements with petitioner FNCB Finance
(principal and interest as of 5 September 1979) (1,022,916.66)
Deposits in respondent’s bank accounts with
petitioner Citibank
(31,079.14)
Proceeds of respondent’s money market
placements and dollar accounts with Citibank-
Geneva (peso equivalent as of 26 October
1979) (1,102,944.78)
Balance of respondent’s obligation ₱ 0.00
Respondent, however, denied having any outstanding loans with
petitioner Citibank. She likewise denied that she was duly informed of
the off-setting or compensation thereof made by petitioner Citibank
using her deposits and money market placements with petitioners.
Hence, respondent sought to recover her deposits and money market
placements.
Respondent instituted a complaint for "Accounting, Sum of Money and
Damages" against petitioners, docketed as Civil Case No. 11336,
before the Regional Trial Court (RTC) of Makati City. After trial proper,
which lasted for a decade, the RTC rendered a Decision4 on 24 August
1995, 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 afore-mentioned RTC Decision to the Court
of Appeals, docketed as CA-G.R. CV No. 51930. On 26 March 2002,
the appellate court promulgated its Decision,5 ruling entirely in favor of
respondent, to wit –
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.
Acting on petitioners’ Motion for Partial Reconsideration, the Court of
Appeals issued a Resolution,6 dated 20 November 2002, modifying its
earlier Decision, thus –
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.
Since the Court of Appeals Decision, dated 26 March 2002, as modified
by the Resolution of the same court, dated 20 November 2002, was still
principally in favor of respondent, petitioners filed the instant Petition for
Review on Certiorariunder Rule 45 of the Revised Rules of Court. After
giving due course to the instant Petition, this Court promulgated on 16
October 2006 its Decision, now subject of petitioners’ Motion for Partial
Reconsideration. 1aw phi1.net
Among the numerous grounds raised by petitioners in their Motion for
Partial Reconsideration, this Court shall address and discuss herein
only particular points that had not been considered or discussed in its
Decision. Even in consideration of these points though, this Court
remains unconvinced that it should modify or reverse in any way its
disposition of the case in its earlier Decision.
As to the off-setting or compensation of respondent’s outstanding loan
balance with her dollar deposits in Citibank-Geneva
Petitioners’ take exception to the following findings made by this Court
in its Decision, dated 16 October 2006, disallowing the off-setting or
compensation of the balance of respondent’s outstanding loans using
her dollar deposits in Citibank-Geneva –
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.
Petitioners maintain that respondent’s Declaration of Pledge, by virtue
of which she supposedly assigned her dollar accounts with Citibank-
Geneva as security for her loans with petitioner Citibank, is authentic
and, thus, valid and binding upon respondent. Alternatively, petitioners
aver that even without said Declaration of Pledge, the off-setting or
compensation made by petitioner Citibank using respondent’s dollar
accounts with Citibank-Geneva to liquidate the balance of her
outstanding loans with Citibank-Manila was expressly authorized by
respondent herself in the promissory notes (PNs) she signed for her
loans, as well as sanctioned by Articles 1278 to 1290 of the Civil Code.
This alternative argument is anchored on the premise that all branches
of petitioner Citibank in the Philippines and abroad are part of a single
worldwide corporate entity and share the same juridical personality. In
connection therewith, petitioners deny that they ever admitted that
Citibank-Manila and Citibank-Geneva are distinct and separate entities.
Petitioners call the attention of this Court to the following provision
found in all of the PNs7 executed by respondent for her loans –
At or after the maturity of this note, or when same becomes due under
any of the provisions hereof, any money, stocks, bonds, or other
property of any kind whatsoever, on deposit or otherwise, to the credit
of the undersigned on the books of CITIBANK, N.A. in transit or in their
possession, may without notice be applied at the discretion of the said
bank to the full or partial payment of this note.
It is the petitioners’ contention that the term "Citibank, N.A." used
therein should be deemed to refer to all branches of petitioner Citibank
in the Philippines and abroad; thus, giving petitioner Citibank the
authority to apply as payment for the PNs even respondent’s dollar
accounts with Citibank-Geneva. Still proceeding from the premise that
all branches of petitioner Citibank should be considered as a single
entity, then it should not matter that the respondent obtained the loans
from Citibank-Manila and her deposits were with Citibank-Geneva.
Respondent should be considered the debtor (for the loans) and
creditor (for her deposits) of the same entity, petitioner Citibank. Since
petitioner Citibank and respondent were principal creditors of each
other, in compliance with the requirements under Article 1279 of the
Civil Code,8 then the former could have very well used off-setting or
compensation to extinguish the parties’ obligations to one another. And
even without the PNs, off-setting or compensation was still authorized
because according to Article 1286 of the Civil Code, "Compensation
takes place by operation of law, even though the debts may be payable
at different places, but there shall be an indemnity for expenses of
exchange or transportation to the place of payment."
Pertinent provisions of Republic Act No. 8791, otherwise known as the
General Banking Law of 2000, governing bank branches are
reproduced below –
SEC. 20. Bank Branches. – Universal or commercial banks may open
branches or other offices within or outside the Philippines upon prior
approval of the Bangko Sentral.
Branching by all other banks shall be governed by pertinent laws.
A bank may, subject to prior approval of the Monetary Board, use any
or all of its branches as outlets for the presentation and/or sale of the
financial products of its allied undertaking or its investment house units.
A bank authorized to establish branches or other offices shall be
responsible for all business conducted in such branches and offices to
the same extent and in the same manner as though such business had
all been conducted in the head office. A bank and its branches and
offices shall be treated as one unit.
xxxx
SEC. 72. Transacting Business in the Philippines. – The entry of foreign
banks in the Philippines through the establishment of branches shall be
governed by the provisions of the Foreign Banks Liberalization Act.
The conduct of offshore banking business in the Philippines shall be
governed by the provisions of Presidential Decree No. 1034, otherwise
known as the "Offshore Banking System Decree."
xxxx
SEC. 74. Local Branches of Foreign Banks. – In case of a foreign bank
which has more than one (1) branch in the Philippines, all such
branches shall be treated as one (1) unit for the purpose of this Act, and
all references to the Philippine branches of foreign banks shall be held
to refer to such units.
SEC. 75. Head Office Guarantee. – In order to provide effective
protection of the interests of the depositors and other creditors of
Philippine branches of a foreign bank, the head office of such branches
shall fully guarantee the prompt payment of all liabilities of its Philippine
branch.
Residents and citizens of the Philippines who are creditors of a branch
in the Philippines of a foreign bank shall have preferential rights to the
assets of such branch in accordance with existing laws.
Republic Act No. 7721, otherwise known as the Foreign Banks
Liberalization Law, lays down the policies and regulations specifically
concerning the establishment and operation of local branches of foreign
banks. Relevant provisions of the said statute read –
Sec. 2. Modes of Entry. - The Monetary Board may authorize foreign
banks to operate in the Philippine banking system through any of the
following modes of entry: (i) by acquiring, purchasing or owning up to
sixty percent (60%) of the voting stock of an existing bank; (ii) by
investing in up to sixty percent (60%) of the voting stock of a new
banking subsidiary incorporated under the laws of the Philippines; or
(iii) by establishing branches with full banking authority: Provided, That
a foreign bank may avail itself of only one (1) mode of entry: Provided,
further, That a foreign bank or a Philippine corporation may own up to a
sixty percent (60%) of the voting stock of only one (1) domestic bank or
new banking subsidiary.
Sec. 5. Head Office Guarantee. - The head office of foreign bank
branches shall guarantee prompt payment of all liabilities of its
Philippine branches.
It is true that the afore-quoted Section 20 of the General Banking Law
of 2000 expressly states that the bank and its branches shall be treated
as one unit. It should be pointed out, however, that the said provision
applies to a universal9 or commercial bank,10 duly established and
organized as a Philippine corporation in accordance with Section 8 of
the same statute,11 and authorized to establish branches within or
outside the Philippines.
The General Banking Law of 2000, however, does not make the same
categorical statement as regards to foreign banks and their branches in
the Philippines. What Section 74 of the said law provides is that in case
of a foreign bank with several branches in the country, all such
branches shall be treated as one unit. As to the relations between the
local branches of a foreign bank and its head office, Section 75 of the
General Banking Law of 2000 and Section 5 of the Foreign Banks
Liberalization Law provide for a "Home Office Guarantee," in which the
head office of the foreign bank shall guarantee prompt payment of all
liabilities of its Philippine branches. While the Home Office Guarantee is
in accord with the principle that these local branches, together with its
head office, constitute but one legal entity, it does not necessarily
support the view that said principle is true and applicable in all
circumstances.
The Home Office Guarantee is included in Philippine statutes clearly for
the protection of the interests of the depositors and other creditors of
the local branches of a foreign bank.12 Since the head office of the bank
is located in another country or state, such a guarantee is necessary so
as to bring the head office within Philippine jurisdiction, and to hold the
same answerable for the liabilities of its Philippine branches. Hence, the
principle of the singular identity of that the local branches and the head
office of a foreign bank are more often invoked by the clients in order to
establish the accountability of the head office for the liabilities of its local
branches. It is under such attendant circumstances in which the
American authorities and jurisprudence presented by petitioners in their
Motion for Partial Reconsideration were rendered.
Now the question that remains to be answered is whether the foreign
bank can use the principle for a reverse purpose, in order to extend the
liability of a client to the foreign bank’s Philippine branch to its head
office, as well as to its branches in other countries. Thus, if a client
obtains a loan from the foreign bank’s Philippine branch, does it
absolutely and automatically make the client a debtor, not just of the
Philippine branch, but also of the head office and all other branches of
the foreign bank around the world? This Court rules in the negative.
There being a dearth of Philippine authorities and jurisprudence on the
matter, this Court, just as what petitioners have done, turns to American
authorities and jurisprudence. American authorities and jurisprudence
are significant herein considering that the head office of petitioner
Citibank is located in New York, United States of America (U.S.A.).
Unlike Philippine statutes, the American legislation explicitly defines the
relations among foreign branches of an American bank. Section 25 of
the United States Federal Reserve Act13 states that –
Every national banking association operating foreign branches shall
conduct the accounts of each foreign branch independently of the
accounts of other foreign branches established by it and of its home
office, and shall at the end of each fiscal period transfer to its general
ledger the profit or loss accrued at each branch as a separate item.
Contrary to petitioners’ assertion that the accounts of Citibank-Manila
and Citibank-Geneva should be deemed as a single account under its
head office, the foregoing provision mandates that the accounts of
foreign branches of an American bank shall be conducted
independently of each other. Since the head office of petitioner Citibank
is in the U.S.A., then it is bound to treat its foreign branches in
accordance with the said provision. It is only at the end of its fiscal
period that the bank is required to transfer to its general ledger the profit
or loss accrued at each branch, but still reporting it as a separate item.
It is by virtue of this provision that the Circuit Court of Appeals of New
York declared in Pan-American Bank and Trust Co. v. National City
Bank of New York14 that a branch is not merely a teller’s window; it is a
separate business entity.
The circumstances in the case of McGrath v. Agency of Chartered Bank
of India, Australia & China15 are closest to the one at bar. In said case,
the Chartered Bank had branches in several countries, including one in
Hamburg, Germany and another in New York, U.S.A., and yet another
in London, United Kingdom. The New York branch entered in its books
credit in favor of four German firms. Said credit represents collections
made from bills of exchange delivered by the four German firms. The
same four German firms subsequently became indebted to the
Hamburg branch. The London branch then requested for the transfer of
the credit in the name of the German firms from the New York branch
so as to be applied or setoff against the indebtedness of the same firms
to the Hamburg branch. One of the question brought before the U.S.
District Court of New York was "whether or not the debts and the
alleged setoffs thereto are mutual," which could be answered by
determining first whether the New York and Hamburg branches of
Chartered Bank are individual business entities or are one and the
same entity. In denying the right of the Hamburg branch to setoff, the
U.S. District Court ratiocinated that –
The structure of international banking houses such as Chartered bank
defies one rigorous description. Suffice it to say for present
analysis, branches or agencies of an international bank have been
held to be independent entities for a variety of purposes (a)
deposits payable only at branch where made; Mutaugh v. Yokohama
Specie Bank, Ltd., 1933, 149 Misc. 693, 269 N.Y.S. 65; Bluebird
Undergarment Corp. v. Gomez, 1931, 139 Misc. 742, 249 N.Y.S. 319;
(b) checks need be honored only when drawn on branch where
deposited; Chrzanowska v. Corn Exchange Bank, 1916, 173 App. Div.
285, 159 N.Y.S. 385, affirmed 1919, 225 N.Y. 728, 122 N.E. 877;
subpoena duces tecum on foreign bank’s record barred;In re Harris,
D.C.S.D.N.Y. 1939, 27 F. Supp. 480; (d) a foreign branch separate for
collection of forwarded paper; Pan-American Bank and Trust Company
v. National City Bank of New York, 2 Cir., 1925, 6 F. 2d 762, certiorari
denied 1925, 269 U.S. 554, 46 S. Ct. 18, 70 L. Ed. 408. Thus in law
there is nothing innately unitary about the organization of
international banking institutions.
Defendant, upon its oral argument and in its brief, relies heavily
on Sokoloff v. National City Bank of New York, 1928, 250 N.Y. 69, 164
N.E. 745, as authority for the proposition that Chartered Bank, not the
Hamburg or New York Agency, is ultimately responsible for the
amounts owing its German customers and, conversely, it is to
Chartered Bank that the German firms owe their obligations.
The Sokoloff case, aside from its violently different fact situation, is
centered on the legal problem of default of payment and consequent
breach of contract by a branch bank. It does not stand for the
principle that in every instance an international bank with
branches is but one legal entity for all purposes. The defendant
concedes in its brief (p. 15) that there are purposes for which the
various agencies and branches of Chartered Bank may be treated in
law as separate entities. I fail to see the applicability of Sokoloff either
as a guide to or authority for the resolution of this problem. The facts
before me and the cases catalogued supra lend weight to the view that
we are dealing here with Agencies independent of one another.
xxxx
I hold that for instant purposes the Hamburg Agency and defendant
were independent business entities, and the attempted setoff may not
be utilized by defendant against its debt to the German firms obligated
to the Hamburg Agency.
Going back to the instant Petition, although this Court concedes that all
the Philippine branches of petitioner Citibank should be treated as one
unit with its head office, it cannot be persuaded to declare that these
Philippine branches are likewise a single unit with the Geneva branch. It
would be stretching the principle way beyond its intended purpose.
Therefore, this Court maintains its original position in the Decision that
the off-setting or compensation of respondent’s loans with Citibank-
Manila using her dollar accounts with Citibank-Geneva cannot be
effected. The parties cannot be considered principal creditor of the
other. As for the dollar accounts, respondent was the creditor and
Citibank-Geneva was the debtor; and as for the outstanding loans,
petitioner Citibank, particularly Citibank-Manila, was the creditor and
respondent was the debtor. Since legal compensation was not possible,
petitioner Citibank could only use respondent’s dollar accounts with
Citibank-Geneva to liquidate her loans if she had expressly authorized it
to do so by contract.
Respondent cannot be deemed to have authorized the use of her dollar
deposits with Citibank-Geneva to liquidate her loans with petitioner
Citibank when she signed the PNs16 for her loans which all contained
the provision that –
At or after the maturity of this note, or when same becomes due under
any of the provisions hereof, any money, stocks, bonds, or other
property of any kind whatsoever, on deposit or otherwise, to the credit
of the undersigned on the books of CITIBANK, N.A. in transit or in their
possession, may without notice be applied at the discretion of the said
bank to the full or partial payment of this note.
As has been established in the preceding discussion, "Citibank, N.A."
can only refer to the local branches of petitioner Citibank together with
its head office. Unless there is any showing that respondent understood
and expressly agreed to a more far-reaching interpretation, the
reference to Citibank, N.A. cannot be extended to all other branches of
petitioner Citibank all over the world. Although theoretically, books of
the branches form part of the books of the head office, operationally
and practically, each branch maintains its own books which shall only
be later integrated and balanced with the books of the head office.
Thus, it is very possible to identify and segregate the books of the
Philippine branches of petitioner Citibank from those of Citibank-
Geneva, and to limit the authority granted for application as payment of
the PNs to respondent’s deposits in the books of the former.
Moreover, the PNs can be considered a contract of adhesion, the PNs
being in standard printed form prepared by petitioner Citibank.
Generally, stipulations in a contract come about after deliberate drafting
by the parties thereto, there are certain contracts almost all the
provisions of which have been drafted only by one party, usually a
corporation. Such contracts are called contracts of adhesion, because
the only participation of the party is the affixing of his signature or his
"adhesion" thereto. This being the case, the terms of such contract are
to be construed strictly against the party which prepared it.17
As for the supposed Declaration of Pledge of respondent’s dollar
accounts with Citibank-Geneva as security for the loans, this Court
stands firm on its ruling that the non-production thereof is fatal to
petitioners’ cause in light of respondent’s claim that her signature on
such document was a forgery. It bears to note that the original of the
Declaration of Pledge is with Citibank-Geneva, a branch of petitioner
Citibank. As between respondent and petitioner Citibank, the latter has
better access to the document. The constant excuse forwarded by
petitioner Citibank that Citibank-Geneva refused to return possession of
the original Declaration of Pledge to Citibank-Manila only supports this
Court’s finding in the preceding paragraphs that the two branches are
actually operating separately and independently of each other.
Further, petitioners keep playing up the fact that respondent, at the
beginning of the trial, refused to give her specimen signatures to help
establish whether her signature on the Declaration of Pledge was
indeed forged. Petitioners seem to forget that subsequently,
respondent, on advice of her new counsel, already offered to cooperate
in whatever manner so as to bring the original Declaration of Pledge
before the RTC for inspection. The exchange of the counsels for the
opposing sides during the hearing on 24 July 1991 before the RTC
reveals the apparent willingness of respondent’s counsel to undertake
whatever course of action necessary for the production of the contested
document, and the evasive, non-committal, and uncooperative attitude
of petitioners’ counsel.18
Lastly, this Court’s ruling striking down the Declaration of Pledge is not
entirely based on respondent’s allegation of forgery. In its Decision, this
Court already extensively discussed why it found the said Declaration of
Pledge highly suspicious and irregular, to wit –
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. 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. 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. 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 againstCitibank, 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.
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, 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. 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.
As far as the Declaration of Pledge is concerned, petitioners failed to
submit any new evidence or argument that was not already considered
by this Court when it rendered its Decision.
As to the value of the dollar deposits in Citibank-Geneva ordered
refunded to respondent
In case petitioners are still ordered to refund to respondent the amount
of her dollar accounts with Citibank-Geneva, petitioners beseech this
Court to adjust the nominal values of respondent’s dollar accounts
and/or her overdue peso loans by using the values of the currencies
stipulated at the time the obligations were established in 1979, to
address the alleged inequitable consequences resulting from the
extreme and extraordinary devaluation of the Philippine currency that
occurred in the course of the Asian crisis of 1997. Petitioners base their
request on Article 1250 of the Civil Code which reads, "In case an
extraordinary inflation or deflation of the currency stipulated should
supervene, the value of the currency at the time of the establishment of
the obligation shall be the basis of payment, unless there is an
agreement to the contrary."
It is well-settled that Article 1250 of the Civil Code becomes applicable
only when there is extraordinary inflation or deflation of the currency.
Inflation has been defined as the sharp increase of money or credit or
both without a corresponding increase in business transaction. There is
inflation when there is an increase in the volume of money and credit
relative to available goods resulting in a substantial and continuing rise
in the general price level.19 In Singson v. Caltex (Philippines), Inc.,20 this
Court already provided a discourse as to what constitutes as
extraordinary inflation or deflation of currency, thus –
We have held extraordinary inflation to exist when there is a decrease
or increase in the purchasing power of the Philippine currency which is
unusual or beyond the common fluctuation in the value of said
currency, and such increase or decrease could not have been
reasonably foreseen or was manifestly beyond the contemplation of the
parties at the time of the establishment of the obligation.
An example of extraordinary inflation, as cited by the Court in Filipino
Pipe and Foundry Corporation vs. NAWASA, supra, is that which
happened to the deutschmark in 1920. Thus:
"More recently, in the 1920s, Germany experienced a case of
hyperinflation. In early 1921, the value of the German mark was 4.2 to
the U.S. dollar. By May of the same year, it had stumbled to 62 to the
U.S. dollar. And as prices went up rapidly, so that by October 1923, it
had reached 4.2 trillion to the U.S. dollar!" (Bernardo M. Villegas &
Victor R. Abola, Economics, An Introduction [Third Edition]).
As reported, "prices were going up every week, then every day, then
every hour. Women were paid several times a day so that they could
rush out and exchange their money for something of value before what
little purchasing power was left dissolved in their hands. Some workers
tried to beat the constantly rising prices by throwing their money out of
the windows to their waiting wives, who would rush to unload the nearly
worthless paper. A postage stamp cost millions of marks and a loaf of
bread, billions." (Sidney Rutberg, "The Money Balloon", New York:
Simon and Schuster, 1975, p. 19, cited in "Economics, An
Introduction" by Villegas & Abola, 3rd ed.)
The supervening of extraordinary inflation is never assumed. The party
alleging it must lay down the factual basis for the application of Article
1250.
Thus, in the Filipino Pipe case, the Court acknowledged that the
voluminous records and statistics submitted by plaintiff-appellant
proved that there has been a decline in the purchasing power of the
Philippine peso, but this downward fall cannot be considered
"extraordinary" but was simply a universal trend that has not spared our
country. Similarly, inHuibonhoa vs. Court of Appeals, the Court
dismissed plaintiff-appellant's unsubstantiated allegation that the
Aquino assassination in 1983 caused building and construction costs to
double during the period July 1983 to February 1984. InSerra vs. Court
of Appeals, the Court again did not consider the decline in the peso's
purchasing power from 1983 to 1985 to be so great as to result in an
extraordinary inflation.
Like the Serra and Huibonhoa cases, the instant case also raises as
basis for the application of Article 1250 the Philippine economic crisis in
the early 1980s --- when, based on petitioner's evidence, the inflation
rate rose to 50.34% in 1984. We hold that there is no legal or factual
basis to support petitioner's allegation of the existence of extraordinary
inflation during this period, or, for that matter, the entire time frame of
1968 to 1983, to merit the adjustment of the rentals in the lease
contract dated July 16, 1968. Although by petitioner's evidence there
was a decided decline in the purchasing power of the Philippine peso
throughout this period, we are hard put to treat this as an "extraordinary
inflation" within the meaning and intent of Article 1250.
Rather, we adopt with approval the following observations of the Court
of Appeals on petitioner's evidence, especially the NEDA certification of
inflation rates based on consumer price index:
xxx (a) from the period 1966 to 1986, the official inflation rate never
exceeded 100% in any single year; (b) the highest official inflation rate
recorded was in 1984 which reached only 50.34%; (c) over a twenty
one (21) year period, the Philippines experienced a single-digit inflation
in ten (10) years (i.e., 1966, 1967, 1968, 1969, 1975, 1976, 1977, 1978,
1983 and 1986); (d) in other years (i.e., 1970, 1971, 1972, 1973, 1974,
1979, 1980, 1981, 1982, 1984 and 1989) when the Philippines
experienced double-digit inflation rates, the average of those rates was
only 20.88%; (e) while there was a decline in the purchasing power of
the Philippine currency from the period 1966 to 1986, such cannot be
considered as extraordinary; rather, it is a normal erosion of the value
of the Philippine peso which is a characteristic of most currencies.
"Erosion" is indeed an accurate description of the trend of decline in the
value of the peso in the past three to four decades. Unfortunate as this
trend may be, it is certainly distinct from the phenomenon contemplated
by Article 1250.
Moreover, this Court has held that the effects of extraordinary inflation
are not to be applied without an official declaration thereof by
competent authorities.
The burden of proving that there had been extraordinary inflation or
deflation of the currency is upon the party that alleges it. Such
circumstance must be proven by competent evidence, and it cannot be
merely assumed. In this case, petitioners presented no proof as to how
much, for instance, the price index of goods and services had risen
during the intervening period.21 All the information petitioners provided
was the drop of the U.S. dollar-Philippine peso exchange rate by 17
points from June 1997 to January 1998. While the said figure was
based on the statistics of the Bangko Sentral ng Pilipinas(BSP), it is
also significant to note that the BSP did not categorically declare that
the same constitute as an extraordinary inflation. The existence of
extraordinary inflation must be officially proclaimed by competent
authorities, and the only competent authority so far recognized by this
Court to make such an official proclamation is the BSP.22
Neither can this Court, by merely taking judicial notice of the Asian
currency crisis in 1997, already declare that there had been
extraordinary inflation. It should be recalled that the Philippines likewise
experienced economic crisis in the 1980s, yet this Court did not find
that extraordinary inflation took place during the said period so as to
warrant the application of Article 1250 of the Civil Code.
Furthermore, it is incontrovertible that Article 1250 of the Civil Code is
based on equitable considerations. Among the maxims of equity are (1)
he who seeks equity must do equity, and (2) he who comes into equity
must come with clean hands. The latter is a frequently stated maxim
which is also expressed in the principle that he who has done inequity
shall not have equity.23 Petitioner Citibank, hence, cannot invoke Article
1250 of the Civil Code because it does not come to court with clean
hands. The delay in the recovery24 by respondent of her dollar accounts
with Citibank-Geneva was due to the unlawful act of petitioner Citibank
in using the same to liquidate respondent’s loans. Petitioner Citibank
even attempted to justify the off-setting or compensation of
respondent’s loans using her dollar accounts with Citibank-Geneva by
the presentation of a highly suspicious and irregular, and even possibly
forged, Declaration of Pledge.
The damage caused to respondent of the deprivation of her dollar
accounts for more than two decades is unquestionably relatively more
extensive and devastating, as compared to whatever damage petitioner
Citibank, an international banking corporation with undoubtedly
substantial capital, may have suffered for respondent’s non-payment of
her loans. It must also be remembered that petitioner Citibank had
already considered respondent’s loans paid or liquidated by 26 October
1979 after it had fully effected compensation thereof using respondents
deposits and money market placements. All this time, respondent’s
dollar accounts are unlawfully in the possession of and are being used
by petitioner Citibank for its business transactions. In the meantime,
respondent’s businesses failed and her properties were foreclosed
because she was denied access to her funds when she needed them
most. Taking these into consideration, respondent’s dollar accounts
with Citibank-Geneva must be deemed to be subsisting and
continuously deposited with petitioner Citibank all this while, and will
only be presently withdrawn by respondent. Therefore, petitioner
Citibank should refund to respondent the U.S. $149,632.99 taken from
her Citibank-Geneva accounts, 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.
As to respondent’s Motion to Clarify and/or Confirm Decision with
Notice of Judgment
Respondent, in her Motion, is of the mistaken notion that the Court of
Appeals Decision, dated 26 March 2002, as modified by the Resolution
of the same court, dated 20 November 2002, would be implemented or
executed together with this Court’s Decision.
This Court clarifies that its affirmation of the Decision of the Court of
Appeals, as modified, is only to the extent that it recognizes that
petitioners had liabilities to the respondent. However, this Court’s
Decision modified that of the appellate court’s by making its own
determination of the specific liabilities of the petitioners to respondent
and the amounts thereof; as well as by recognizing that respondent
also had liabilities to petitioner Citibank and the amount thereof.
Thus, for purposes of execution, the parties need only refer to the
dispositive portion of this Court’s Decision, dated 16 October 2006,
should it already become final and executory, without any further
modifications.
As the last point, there is no merit in respondent’s Motion for this Court
to already declare its Decision, dated 16 October 2006, final and
executory. A judgment becomes final and executory by operation of law
and, accordingly, the finality of the judgment becomes a fact upon the
lapse of the reglementary period without an appeal or a motion for new
trial or reconsideration being filed.25 This Court cannot arbitrarily
disregard the reglementary period and declare a judgment final and
executory upon the mere motion of one party, for to do so will be a
culpable violation of the right of the other parties to due process.
IN VIEW OF THE FOREGOING, petitioners’ Motion for Partial
Reconsideration of this Court’s Decision, dated 16 October 2006, and
respondent’s Motion for this Court to declare the same Decision already
final and executory, are both DENIEDfor lack of merit.
SO ORDERED.
CITIBANK vs. SABENIANO
G.R.No. 156132, October 16, 2006
FACTS: Petitioner Citibank is a banking corporation duly authorized
under the laws of the USA to do commercial banking activities n the
Philippines. Sabeniano was a client of both Petitioners Citibank and
FNCB Finance. Respondent filed a complaint against petitioners
claiming to have substantial deposits, the proceeds of which were
supposedly deposited automatically and directly to respondent’s
account with the petitioner Citibank and that allegedly petitioner refused
to despite repeated demands. Petitioner alleged that respondent
obtained several loans from the former and in default, Citibank
exercised its right to set-off respondent’s outstanding loans with her
deposits and money. RTC declared the act illegal, null and void and
ordered the petitioner to refund the amount plus interest, ordering
Sabeniano, on the other hand to pay Citibank her indebtedness. CA
affirmed the decision entirely in favor of the respondent.
ISSUE: Whether petitioner may exercise its right to set-off respondent’s
loans with her deposits and money in Citibank-Geneva
RULING: Petition is partly granted with modification.
1. Citibank is ordered to return to respondent the principal amount of
P318,897.34 and P203,150.00 plus 14.5% per annum
2. The remittance of US $149,632.99 from respondent’s Citibank-
Geneva account is declared illegal, null and void, thus Citibank is
ordered to refund said amount in Philippine currency or its equivalent
using exchange rate at the time of payment.
3. Citibank to pay respondent moral damages of P300,000, exemplary
damages for P250,000, attorney’s fees of P200,000.
4. Respondent to pay petitioner the balance of her outstanding loans of
P1,069,847.40 inclusive off interest.