Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-19227 February 17, 1968
DIOSDADO YULIONGSIU, plaintiff-appellant,
vs.
PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.
Vicente Jaime, Regino Hermosisima & E. Lumontad, Sr. for plaintiff-appellant.
Tomas Besa, R. B. de los Reyes and C. E. Medina for defendant-appellee.
BENGZON, J.P., J.:
Plaintiff-appellant Diosdado Yuliongsiu 1 was the owner of two (2) vessels,
namely: The M/S Surigao, valued at P109,925.78 and the M/S Don Dino, valued
at P63,000.00, and operated the FS-203, valued at P210,672.24, which was
purchased by him from the Philippine Shipping Commission, by installment or
on account. As of January or February, 1943, plaintiff had paid to the Philippine
Shipping Commission only the sum of P76,500 and the balance of the purchase
price was payable at P50,000 a year, due on or before the end of the current
year. 2
On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant
Philippine National Bank, Cebu Branch. To guarantee its payment, plaintiff
pledged the M/S Surigao, M/S Don Dino and its equity in the FS-203 to the
defendant bank, as evidenced by the pledge contract, Exhibit "A" & "1-Bank",
executed on the same day and duly registered with the office of the Collector of
Customs for the Port of Cebu. 3
Subsequently, plaintiff effected partial payment of the loan in the sum of
P20,000. The remaining balance was renewed by the execution of two (2)
promissory notes in the bank's favor. The first note, dated December 18, 1947,
for P20,000, was due on April 16, 1948 while the second, dated February 26,
1948, for P10,000, was due on June 25, 1948. These two notes were never paid at
all by plaintiff on their respective due dates. 4
On April 6, 1948, the bank filed criminal charges against plaintiff and two
other accused for estafa thru falsification of commercial documents, because
plaintiff had, as last indorsee, deposited with defendant bank, from March 11 to
March 31, 1948, seven Bank of the Philippine Islands checks totalling P184,000.
The drawer thereof — one of the co-accused — had no funds in the drawee
bank. However, in connivance with one employee of defendant bank, plaintiff
was able to withdraw the amount credited to him before the discovery of the
defraudation on April 2, 1948. Plaintiff and his co-accused were convicted by
the trial court and sentenced to indemnify the defendant bank in the sum of
P184,000. On appeal, the conviction was affirmed by the Court of Appeals on
October 31, 1950. The corresponding writ of execution issued to implement the
order for indemnification was returned unsatisfied as plaintiff was totally
insolvent. 5
Meanwhile, together with the institution of the criminal action, defendant
bank took physical possession of three pledged vessels while they were at the
Port of Cebu, and on April 29, 1948, after the first note fell due and was not paid,
the Cebu Branch Manager of defendant bank, acting as attorney-in-fact of
plaintiff pursuant to the terms of the pledge contract, executed a document of
sale, Exhibit "4", transferring the two pledged vessels and plaintiff's equity in
FS-203, to defendant bank for P30,042.72. 6
The FS-203 was subsequently surrendered by the defendant bank to the
Philippine Shipping Commission which rescinded the sale to plaintiff on
September 8, 1948, for failure to pay the remaining installments on the
purchase price thereof. 7 The other two boats, the M/S Surigao and the M/S Don
Dino were sold by defendant bank to third parties on March 15, 1951.
On July 19, 1948, plaintiff commenced action in the Court of First Instance
of Cebu to recover the three vessels or their value and damages from defendant
bank. The latter filed its answer, with a counterclaim for P202,000 plus P5,000
damages. After issues were joined, a pretrial was held resulting in a partial
stipulation of facts dated October 2, 1958, reciting most of the facts above-
narrated. During the course of the trial, defendant amended its answer reducing
its claim from P202,000 to P8,846.01, 8 but increasing its alleged damages to
P35,000.
The lower court rendered its decision on February 13, 1960 ruling: (a) that
the bank's taking of physical possession of the vessels on April 6, 1948 was
justified by the pledge contract, Exhibit "A" & "1-Bank" and the law; (b) that the
private sale of the pledged vessels by defendant bank to itself without notice to
the plaintiff-pledgor as stipulated in the pledge contract was likewise valid; and
(c) that the defendant bank should pay to plaintiff the sums of P1,153.99 and
P8,000, as his remaining account balance, or set-off these sums against the
indemnity which plaintiff was ordered to pay to it in the criminal cases.
When his motion for reconsideration and new trial was denied, plaintiff
brought the appeal to Us, the amount involved being more than P200,000.00.
 In support of the first assignment of error, plaintiff-appellant would have
this Court hold that Exhibit "A" & "1-Bank" is a chattel mortgage contract so that
the creditor defendant could not take possession of the chattels object thereof
until after there has been default. The submission is without merit. The parties
stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract —
3. That a credit line of P50,000.00 was extended to the plaintiff by
the defendant Bank, and the plaintiff obtained and received from the
said Bank the sum of P50,000.00, and in order to guarantee the payment
of this loan, the pledge contract, Exhibit "A" & Exhibit "1-Bank", was
executed and duly registered with the Office of the Collector of Customs
for the Port of Cebu on the date appearing therein; (Emphasis
supplied)1äwphï1.ñët
Necessarily, this judicial admission binds the plaintiff. Without any
showing that this was made thru palpable mistake, no amount of rationalization
can offset it. 9
The defendant bank as pledgee was therefore entitled to the actual
possession of the vessels. While it is true that plaintiff continued operating the
vessels after the pledge contract was entered into, his possession was expressly
made "subject to the order of the pledgee." 10 The provision of Art. 2110 of the
present Civil Code 11 being new — cannot apply to the pledge contract here
which was entered into on June 30, 1947. On the other hand, there is an
authority supporting the proposition that the pledgee can temporarily entrust
the physical possession of the chattels pledged to the pledgor without
invalidating the pledge. In such a case, the pledgor is regarded as holding the
pledged property merely as trustee for the pledgee. 12
Plaintiff-appellant would also urge Us to rule that constructive delivery is
insufficient to make pledge effective. He points to Betita v. Ganzon, 49 Phil. 87
which ruled that there has to be actual delivery of the chattels pledged. But then
there is also Banco Español-Filipino v. Peterson, 7 Phil. 409 ruling that symbolic
delivery would suffice. An examination of the peculiar nature of the things
pledged in the two cases will readily dispel the apparent contradiction between
the two rulings. In Betita v. Ganzon, the objects pledged — carabaos — were
easily capable of actual, manual delivery unto the pledgee. In Banco Español-
Filipino v. Peterson, the objects pledged — goods contained in a warehouse —
were hardly capable of actual, manual delivery in the sense that it was
impractical as a whole for the particular transaction and would have been an
unreasonable requirement. Thus, for purposes of showing the transfer of
control to the pledgee, delivery to him of the keys to the warehouse sufficed. In
other words, the type of delivery will depend upon the nature and the peculiar
circumstances of each case. The parties here agreed that the vessels be
delivered by the "pledgor to the pledgor who shall hold said property subject to
the order of the pledgee." Considering the circumstances of this case and the
nature of the objects pledged, i.e., vessels used in maritime business, such
delivery is sufficient.
Since the defendant bank was, pursuant to the terms of pledge contract, in
full control of the vessels thru the plaintiff, the former could take actual
possession at any time during the life of the pledge to make more effective its
security. Its taking of the vessels therefore on April 6, 1948, was not unlawful.
Nor was it unjustified considering that plaintiff had just defrauded the
defendant bank in the huge sum of P184,000.
The stand We have taken is not without precedent. The Supreme Court of
Spain, in a similar case involving Art. 1863 of the old Civil Code, 13 has ruled: 14
Que si bien la naturaleza del contrato de prenda consiste en pasar
las cosas a poder del acreedor o de un tercero y no quedar en la del
deudor, como ha sucedido en el caso de autos, es lo cierto que todas las
partes interesadas, o sean acreedor, deudor y Sociedad, convinieron
que continuaran los coches en poder del deudor para no suspender el
trafico, y el derecho de no uso de la prenda pertenence al deudor, y el
de dejar la cosa bajo su responsabilidad al acreedor, y ambos
convinieron por creerlo util para las partes contratantes, y estas no
reclaman perjuicios no se infringio, entre otros este articulo.
In the second assignment of error imputed to the lower court plaintiff-
appellant attacks the validity of the private sale of the pledged vessels in favor
of the defendant bank itself. It is contended first, that the cases holding that the
statutory requirements as to public sales with prior notice in connection with
foreclosure proceedings are waivable, are no longer authoritative in view of the
passage of Act 3135, as amended; second, that the charter of defendant bank
does not allow it to buy the property object of foreclosure in case of private
sales; and third, that the price obtained at the sale is unconscionable.
There is no merit in the claims. The rulings in Philippine National Bank v.
De Poli, 44 Phil. 763 and El Hogar Filipino v. Paredes, 45 Phil. 178 are still
authoritative despite the passage of Act 3135. This law refers only, and is
limited, to foreclosure of real estate mortgages. 15 So, whatever formalities there
are in Act 3135 do not apply to pledge. Regarding the bank's authority to be the
purchaser in the foreclosure sale, Sec. 33 of Act 2612, as amended by Acts 2747
and 2938 only states that if the sale is public, the bank could purchase the whole
or part of the property sold " free from any right of redemption on the part of the
mortgagor or pledgor." This even argues against plaintiff's case since the import
thereof is this if the sale were private and the bank became the purchaser, the
mortgagor or pledgor could redeem the property. Hence, plaintiff could have
recovered the vessels by exercising this right of redemption. He is the only one
to blame for not doing so.

Regarding the third contention, on the assumption that the purchase price
was unconscionable, plaintiff's remedy was to have set aside the sale. He did not
avail of this. Moreover, as pointed out by the lower court, plaintiff had at the
time an obligation to return the P184,000 fraudulently taken by him from
defendant bank.

The last assignment of error has to do with the damages allegedly suffered
by plaintiff-appellant by virtue of the taking of the vessels. But in view of the
results reached above, there is no more need to discuss the same.

On the whole, We cannot say the lower court erred in disposing of the case
as it did. Plaintiff-appellant was not all-too-innocent as he would have Us
believe. He did defraud the defendant bank first. If the latter countered with the
seizure and sale of the pledged vessels pursuant to the pledge contract, it was
only to protect its interests after plaintiff had defaulted in the payment of the
first promissory note. Plaintiff-appellant did not come to court with clean hands.

WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs

against plaintiff-appellant. So ordered.
Republic of the Philippines (i) The LESSEE fails to fully pay on time any rental, utility and service
SUPREME COURT charge or other financial obligation of the LESSEE under this Contract;
Manila
xxx
FIRST DIVISION
20.2 Without prejudice to any of the rights of the LESSOR under this
G.R. No. 158997 October 6, 2008 Contract, in case of default of the LESSEE, the lessor shall have the right
to:
FORT BONIFACIO DEVELOPMENT CORPORATION petitioner,
vs. (i) Terminate this Contract immediately upon written notice to the
YLLAS LENDING CORPORATION and JOSE S. LAURAYA, in his official LESSEE, without need of any judicial action or declaration;
capacity as President, respondents.
xxx
DECISION
Section 22, on the other hand, reads:
CARPIO, J.:
Section 22. Lien on the Properties of the Lessee
The Case
Upon the termination of this Contract or the expiration of the Lease
This is a petition for review on certiorari1 of the Orders issued on 7 March Period without the rentals, charges and/or damages, if any, being fully
20032 and 3 July 20033 by Branch 59 of the Regional Trial Court of Makati City paid or settled, the LESSOR shall have the right to retain possession of
(trial court) in Civil Case No. 01-1452. The trial court's orders dismissed Fort the properties of the LESSEE used or situated in the Leased Premises
Bonifacio Development Corporation's (FBDC) third party claim and denied and the LESSEE hereby authorizes the LESSOR to offset the prevailing
FBDC's Motion to Intervene and Admit Complaint in Intervention. value thereof as appraised by the LESSOR against any unpaid rentals,
charges and/or damages. If the LESSOR does not want to use said
The Facts properties, it may instead sell the same to third parties and apply the
proceeds thereof against any unpaid rentals, charges and/or damages.
On 24 April 1998, FBDC executed a lease contract in favor of Tirreno, Inc.
(Tirreno) over a unit at the Entertainment Center - Phase 1 of the Bonifacio Tirreno began to default in its lease payments in 1999. By July 2000, Tirreno
Global City in Taguig, Metro Manila. The parties had the lease contract notarized was already in arrears by P5,027,337.91. FBDC and Tirreno entered into a
on the day of its execution. Tirreno used the leased premises for Savoia settlement agreement on 8 August 2000. Despite the execution of the settlement
Ristorante and La Strega Bar. agreement, FBDC found need to send Tirreno a written notice of termination
dated 19 September 2000 due to Tirreno's alleged failure to settle its
Two provisions in the lease contract are pertinent to the present case: Section outstanding obligations. On 29 September 2000, FBDC entered and occupied the
20, which is about the consequences in case of default of the lessee, and Section leased premises. FBDC also appropriated the equipment and properties left by
22, which is about the lien on the properties of the lease. The pertinent portion Tirreno pursuant to Section 22 of their Contract of Lease as partial payment for
of Section 20 reads: Tirreno's outstanding obligations. Tirreno filed an action for forcible entry
against FBDC before the Municipal Trial Court of Taguig. Tirreno also filed a
complaint for specific performance with a prayer for the issuance of a
Section 20. Default of the Lessee temporary restraining order and/or a writ of preliminary injunction against
FBDC before the Regional Trial Court (RTC) of Pasig City. The RTC of Pasig City
20.1 The LESSEE shall be deemed to be in default within the meaning of dismissed Tirreno's complaint for forum-shopping.
this Contract in case:
On 4 March 2002, Yllas Lending Corporation and Jose S. Lauraya, in his official
capacity as President, (respondents) caused the sheriff of Branch 59 of the trial
court to serve an alias writ of seizure against FBDC. On the same day, FBDC
served on the sheriff an affidavit of title and third party claim. FBDC found out
that on 27 September 2001, respondents filed a complaint for Foreclosure of
Chattel Mortgage with Replevin, docketed as Civil Case No. 01-1452, against
Tirreno, Eloisa Poblete Todaro (Eloisa), and Antonio D. Todaro (Antonio), in
their personal and individual capacities, and in Eloisa's official capacity as
President. In their complaint, respondents alleged that they lent a total of P1.5
million to Tirreno, Eloisa, and Antonio. On 9 November 2000, Tirreno, Eloisa
and Antonio executed a Deed of Chattel Mortgage in favor of respondents as
security for the loan. The following properties are covered by the Chattel
Mortgage:
a. Furniture, Fixtures and Equipment of Savoia Ristorante and La Strega
Bar, a restaurant owned and managed by [Tirreno], inclusive of the
leasehold right of [Tirreno] over its rented building where [the] same is
presently located.
b. Goodwill over the aforesaid restaurant, including its business name,
business sign, logo, and any and all interest therein.
c. Eighteen (18) items of paintings made by Florentine Master, Gino Tili,
which are fixtures in the above-named restaurant.
The details and descriptions of the above items are specified in Annex
"A" which is hereto attached and forms as an integral part of this
Chattel Mortgage instrument.4
In the Deed of Chattel Mortgage, Tirreno, Eloisa, and Antonio made the
following warranties to respondents:
1. WARRANTIES: The MORTGAGOR hereby declares and warrants that:
a. The MORTGAGOR is the absolute owner of the above named
properties subject of this mortgage, free from all liens and
encumbrances.
b. There exist no transaction or documents affecting the same
previously presented for, and/or pending transaction.5
Despite FBDC's service upon him of an affidavit of title and third party claim, the
sheriff proceeded with the seizure of certain items from FBDC's premises. The
sheriff's partial return indicated the seizure of the following items from FBDC:
A. FIXTURES
(2) - Smaller Murano Chandeliers
(1) - Main Murano Chandelier
B. EQUIPMENT
(13) - Uni-Air Split Type 2HP Air Cond.
(2) - Uni-Air Split Type 1HP Air Cond.
(3) - Uni-Air Window Type 2HP Air Cond.
(56) - Chairs
(1) - Table
(2) - boxes - Kitchen equipments [sic]6
The sheriff delivered the seized properties to respondents. FBDC questioned the
propriety of the seizure and delivery of the properties to respondents without
an indemnity bond before the trial court. FBDC argued that when respondents
and Tirreno entered into the chattel mortgage agreement on 9 November 2000,
Tirreno no longer owned the mortgaged properties as FBDC already enforced
its lien on 29 September 2000.
In ruling on FBDC's motion for leave to intervene and to admit complaint in
intervention, the trial court stated the facts as follows:
Before this Court are two pending incidents, to wit: 1) [FBDC's] Third-
Party Claim over the properties of [Tirreno] which were seized and
delivered by the sheriff of this Court to [respondents]; and 2) FBDC's
Motion to Intervene and to Admit Complaint in Intervention.
Third party claimant, FBDC, anchors its claim over the subject
properties on Sections 20.2(i) and 22 of the Contract of Lease executed
by [FBDC] with Tirreno. Pursuant to said Contract of Lease, FBDC took
possession of the leased premises and proceeded to sell to third parties
the properties found therein and appropriated the proceeds thereof to
pay the unpaid lease rentals of [Tirreno].
FBDC, likewise filed a Motion to Admit its Complaint-in-Intervention.
 In Opposition to the third-party claim and the motion to intervene,
[respondents] posit that the basis of [FBDC's] third party claim being
anchored on the aforesaid Contract [of] Lease is baseless.
[Respondents] contend that the stipulation of the contract of lease
partakes of a pledge which is void under Article 2088 of the Civil Code
for being pactum commissorium.
xxx
By reason of the failure of [Tirreno] to pay its lease rental and fees due
in the amount of P5,027,337.91, after having notified [Tirreno] of the
termination of the lease, x x x FBDC took possession of [Tirreno.'s]
properties found in the premises and sold those which were not of use
to it. Meanwhile, [respondents], as mortgagee of said properties, filed
an action for foreclosure of the chattel mortgage with replevin and
caused the seizure of the same properties which [FBDC] took and
appropriated in payment of [Tirreno's] unpaid lease rentals.7
The Ruling of the Trial Court
In its order dated 7 March 2003, the trial court stated that the present case
raises the questions of who has a better right over the properties of Tirreno and
whether FBDC has a right to intervene in respondents' complaint for
foreclosure of chattel mortgage.
In deciding against FBDC, the trial court declared that Section 22 of the lease
contract between FBDC and Tirreno is void under Article 2088 of the Civil
Code.8 The trial court stated that Section 22 of the lease contract pledges the
properties found in the leased premises as security for the payment of the
unpaid rentals. Moreover, Section 22 provides for the automatic appropriation
of the properties owned by Tirreno in the event of its default in the payment of
monthly rentals to FBDC. Since Section 22 is void, it cannot vest title of
ownership over the seized properties. Therefore, FBDC cannot assert that its
right is superior to respondents, who are the mortgagees of the disputed
properties.
The trial court quoted from Bayer Phils. v. Agana9 to justify its ruling that FBDC
should have filed a separate complaint against respondents instead of filing a
motion to intervene. The trial court quoted from Bayer as follows:
In other words, construing Section 17 of Rule 39 of the Revised Rules of
Court (now Section 16 of the 1997 Rules on Civil Procedure), the rights
of third-party claimants over certain properties levied upon by the
sheriff to satisfy the judgment may not be taken up in the case where
such claims are presented but in a separate and independent action
instituted by the claimants.10
The dispositive portion of the trial court's decision reads:
WHEREFORE, premises considered, [FBDC's] Third Party Claim is
hereby DISMISSED. Likewise, the Motion to Intervene and Admit
Complaint in Intervention is DENIED.11
FBDC filed a motion for reconsideration on 9 May 2003. The trial court denied
FBDC's motion for reconsideration in an order dated 3 July 2003. FBDC filed the
present petition before this Court to review pure questions of law.
The Issues
FBDC alleges that the trial court erred in the following:
1. Dismissing FBDC's third party claim upon the trial court's erroneous
interpretation that FBDC has no right of ownership over the subject
properties because Section 22 of the contract of lease is void for being a
pledge and a pactum commissorium;
2. Denying FBDC intervention on the ground that its proper remedy as
third party claimant over the subject properties is to file a separate
action; and
3. Depriving FBDC of its properties without due process of law when
the trial court erroneously dismissed FBDC's third party claim, denied
FBDC's intervention, and did not require the posting of an indemnity
bond for FBDC's protection.12
The Ruling of the Court
The petition has merit.
Taking of Lessee's Properties
without Judicial Intervention
We reproduce Section 22 of the Lease Contract below for easy reference:
Section 22. Lien on the Properties of the Lessee
 Upon the termination of this Contract or the expiration of the Lease
Period without the rentals, charges and/or damages, if any, being fully
paid or settled, the LESSOR shall have the right to retain possession of
the properties of the LESSEE used or situated in the Leased Premises
and the LESSEE hereby authorizes the LESSOR to offset the prevailing
value thereof as appraised by the LESSOR against any unpaid rentals,
charges and/or damages. If the LESSOR does not want to use said
properties, it may instead sell the same to third parties and apply the
proceeds thereof against any unpaid rentals, charges and/or damages.
Respondents, as well as the trial court, contend that Section 22 constitutes
a pactum commissorium, a void stipulation in a pledge contract. FBDC, on the
other hand, states that Section 22 is merely a dacion en pago.
Articles 2085 and 2093 of the Civil Code enumerate the requisites essential to a
contract of pledge: (1) the pledge is constituted to secure the fulfillment of a
principal obligation; (2) the pledgor is the absolute owner of the thing pledged;
(3) the persons constituting the pledge have the free disposal of their property
or have legal authorization for the purpose; and (4) the thing pledged is placed
in the possession of the creditor, or of a third person by common agreement.
Article 2088 of the Civil Code prohibits the creditor from appropriating or
disposing the things pledged, and any contrary stipulation is void.
On the other hand, Article 1245 of the Civil Code defines dacion en pago, or
dation in payment, as the alienation of property to the creditor in satisfaction of
a debt in money. Dacion en pago is governed by the law on sales. Philippine
National Bank v. Pineda13 held that dation in payment requires delivery and
transmission of ownership of a thing owned by the debtor to the creditor as an
accepted equivalent of the performance of the obligation. There is no dation in
payment when there is no transfer of ownership in the creditor's favor, as when
the possession of the thing is merely given to the creditor by way of security.
Section 22, as worded, gives FBDC a means to collect payment from Tirreno in
case of termination of the lease contract or the expiration of the lease period
and there are unpaid rentals, charges, or damages. The existence of a contract of
pledge, however, does not arise just because FBDC has means of collecting past
due rent from Tirreno other than direct payment. The trial court concluded that
Section 22 constitutes a pledge because of the presence of the first three
requisites of a pledge: Tirreno's properties in the leased premises secure
Tirreno's lease payments; Tirreno is the absolute owner of the said properties;
and the persons representing Tirreno have legal authority to constitute the
pledge. However, the fourth requisite, that the thing pledged is placed in
the possession of the creditor, is absent. There is non-compliance with the
fourth requisite even if Tirreno's personal properties are found in FBDC's real
property. Tirreno's personal properties are in FBDC's real property because of
the Contract of Lease, which gives Tirreno possession of the personal
properties. Since Section 22 is not a contract of pledge, there is no pactum
commissorium.
FBDC admits that it took Tirreno's properties from the leased premises without
judicial intervention after terminating the Contract of Lease in accordance with
Section 20.2. FBDC further justifies its action by stating that Section 22 is a
forfeiture clause in the Contract of Lease and that Section 22 gives FBDC a
remedy against Tirreno's failure to comply with its obligations. FBDC claims
that Section 22 authorizes FBDC to take whatever properties that Tirreno left to
pay off Tirreno's obligations.
We agree with FBDC.
A lease contract may be terminated without judicial intervention. Consing v.
Jamandre upheld the validity of a contractually-stipulated termination clause:
This stipulation is in the nature of a resolutory condition, for upon the
exercise by the [lessor] of his right to take possession of the leased
property, the contract is deemed terminated. This kind of contractual
stipulation is not illegal, there being nothing in the law proscribing such
kind of agreement.
xxx
Judicial permission to cancel the agreement was not, therefore
necessary because of the express stipulation in the contract of [lease]
that the [lessor], in case of failure of the [lessee] to comply with the
terms and conditions thereof, can take-over the possession of the
leased premises, thereby cancelling the contract of sub-lease. Resort to
judicial action is necessary only in the absence of a special provision
granting the power of cancellation.14
A lease contract may contain a forfeiture clause. Country Bankers Insurance
Corp. v. Court of Appeals upheld the validity of a forfeiture clause as follows:
A provision which calls for the forfeiture of the remaining deposit still
in the possession of the lessor, without prejudice to any other
obligation still owing, in the event of the termination or cancellation of
the agreement by reason of the lessee's violation of any of the terms
and conditions of the agreement is a penal clause that may be validly
entered into. A penal clause is an accessory obligation which the parties
attach to a principal obligation for the purpose of insuring the
performance thereof by imposing on the debtor a special prestation
 (generally consisting in the payment of a sum of money) in case the
obligation is not fulfilled or is irregularly or inadequately fulfilled.15
In Country Bankers, we allowed the forfeiture of the lessee's advance deposit of
lease payment. Such a deposit may also be construed as a guarantee of payment,
and thus answerable for any unpaid rent or charges still outstanding at any
termination of the lease.
In the same manner, we allow FBDC's forfeiture of Tirreno's properties in the
leased premises. By agreement between FBDC and Tirreno, the properties are
answerable for any unpaid rent or charges at any termination of the lease. Such
agreement is not contrary to law, morals, good customs, or public policy.
Forfeiture of the properties is the only security that FBDC may apply in case of
Tirreno's default in its obligations.
Intervention versus Separate Action
Respondents posit that the right to intervene, although permissible, is not an
absolute right. Respondents agree with the trial court's ruling that FBDC's
proper remedy is not intervention but the filing of a separate action. Moreover,
respondents allege that FBDC was accorded by the trial court of the opportunity
to defend its claim of ownership in court through pleadings and hearings set for
the purpose. FBDC, on the other hand, insists that a third party claimant may
vindicate his rights over properties taken in an action for replevin by
intervening in the replevin action itself.
We agree with FBDC.
Both the trial court and respondents relied on our ruling in Bayer Phils. v.
Agana16 to justify their opposition to FBDC's intervention and to insist on
FBDC's filing of a separate action. In Bayer, we declared that the rights of third
party claimants over certain properties levied upon by the sheriff to satisfy the
judgment may not be taken up in the case where such claims are presented, but
in a separate and independent action instituted by the claimants. However, both
respondents and the trial court overlooked the circumstances behind the ruling
in Bayer, which makes the Bayer ruling inapplicable to the present case. The
third party in Bayer filed his claim during execution; in the present case, FBDC
filed for intervention during the trial.
The timing of the filing of the third party claim is important because the timing
determines the remedies that a third party is allowed to file. A third party
claimant under Section 16 of Rule 39 (Execution, Satisfaction and Effect of
Judgments)17 of the 1997 Rules of Civil Procedure may vindicate his claim to the
property in a separate action, because intervention is no longer allowed as
judgment has already been rendered. A third party claimant under Section 14 of
Rule 57 (Preliminary Attachment)18 of the 1997 Rules of Civil Procedure, on the
other hand, may vindicate his claim to the property by intervention because he
has a legal interest in the matter in litigation.19
We allow FBDC's intervention in the present case because FBDC satisfied the
requirements of Section 1, Rule 19 (Intervention) of the 1997 Rules of Civil
Procedure, which reads as follows:
Section 1. Who may intervene. - A person who has a legal interest in the
matter in litigation, or in the success of either of the parties, or an
interest against both, or is so situated as to be adversely affected by a
distribution or other disposition of property in the custody of the court
or of an officer thereof may, with leave of court, be allowed to intervene
in the action. The court shall consider whether or not the intervention
will unduly delay or prejudice the adjudication of the rights of the
original parties, and whether or not the intervenor's rights may be fully
protected in a separate proceeding.
Although intervention is not mandatory, nothing in the Rules proscribes
intervention. The trial court's objection against FBDC's intervention has been
set aside by our ruling that Section 22 of the lease contract is not pactum
commissorium.
Indeed, contrary to respondents' contentions, we ruled in BA Finance
Corporation v. Court of Appeals that where the mortgagee's right to the
possession of the specific property is evident, the action need only be
maintained against the possessor of the property. However, where the
mortgagee's right to possession is put to great doubt, as when a contending
party might contest the legal bases for mortgagee's cause of action or an
adverse and independent claim of ownership or right of possession is raised by
the contending party, it could become essential to have other persons involved
and accordingly impleaded for a complete determination and resolution of the
controversy. Thus:
A chattel mortgagee, unlike a pledgee, need not be in, nor entitled to,
the possession of the property, unless and until the mortgagor defaults
and the mortgagee thereupon seeks to foreclose thereon. Since the
mortgagee's right of possession is conditioned upon the actual default
which itself may be controverted, the inclusion of other parties, like the
debtor or the mortgagor himself, may be required in order to allow a
full and conclusive determination of the case. When the mortgagee
seeks a replevin in order to effect the eventual foreclosure of the
mortgage, it is not only the existence of, but also the mortgagor's
default on, the chattel mortgage that, among other things, can properly
 uphold the right to replevy the property. The burden to establish a We REINSTATE Fort Bonifacio Development Corporation's Third Party Claim
valid justification for that action lies with the plaintiff [-mortgagee]. An and GRANT its Motion to Intervene and Admit Complaint in Intervention. Fort
adverse possessor, who is not the mortgagor, cannot just be Bonifacio Development Corporation may hold the Sheriff liable for the seizure
deprived of his possession, let alone be bound by the terms of the and delivery of the properties subject of this case because of the lack of an
chattel mortgage contract, simply because the mortgagee brings indemnity bond.
up an action for replevin.20(Emphasis added)
SO ORDERED.
FBDC exercised its lien to Tirreno's properties even before respondents and
Tirreno executed their Deed of Chattel Mortgage. FBDC is adversely affected by
the disposition of the properties seized by the sheriff. Moreover, FBDC's
intervention in the present case will result in a complete adjudication of the
issues brought about by Tirreno's creation of multiple liens on the same
properties and subsequent default in its obligations.

Sheriff's Indemnity Bond

FBDC laments the failure of the trial court to require respondents to file an
indemnity bond for FBDC's protection. The trial court, on the other hand, did
not mention the indemnity bond in its Orders dated 7 March 2003 and 3 July
2003.

Pursuant to Section 14 of Rule 57, the sheriff is not obligated to turn over to
respondents the properties subject of this case in view of respondents' failure to
file a bond. The bond in Section 14 of Rule 57 (proceedings where property is
claimed by third person) is different from the bond in Section 3 of the same rule
(affidavit and bond). Under Section 14 of Rule 57, the purpose of the bond is to
indemnify the sheriff against any claim by the intervenor to the property seized
or for damages arising from such seizure, which the sheriff was making and for
which the sheriff was directly responsible to the third party. Section 3, Rule 57,
on the other hand, refers to the attachment bond to assure the return of
defendant's personal property or the payment of damages to the defendant if
the plaintiff's action to recover possession of the same property fails, in order to
protect the plaintiff's right of possession of said property, or prevent the
defendant from destroying the same during the pendency of the suit.

Because of the absence of the indemnity bond in the present case, FBDC may
also hold the sheriff for damages for the taking or keeping of the properties
seized from FBDC.

WHEREFORE, we GRANT the petition. We SET ASIDE the Orders dated 7

March 2003 and 3 July 2003 of Branch 59 of the Regional Trial Court of Makati
City in Civil Case No. 01-1452 dismissing Fort Bonifacio Development
Corporation's Third Party Claim and denying Fort Bonifacio Development
Corporation's Motion to Intervene and Admit Complaint in Intervention.
G.R. No. 132287 January 24, 2006 No. 025, 059 & 099;

SPOUSES BONIFACIO and FAUSTINA PARAY, and VIDAL
ESPELETA, Petitioners,
vs.
DRA. ABDULIA C. RODRIGUEZ, MIGUELA R. JARIOL assisted by her husband
ANTOLIN JARIOL, SR., LEONORA NOLASCO assisted by her husband
FELICIANO NOLASCO, DOLORES SOBERANO assisted by her husband JOSE
SOBERANO, JR., JULIA R. GENEROSO, TERESITA R. NATIVIDAD and
GENOVEVA R. SORONIO assisted by her husband ALFONSO
SORONIO, Respondents.
DECISION
TINGA, J.:
The assailed decision of the Court of Appeals took off on the premise that
pledged shares of stock auctioned off in a notarial sale could still be redeemed
by their owners. This notion is wrong, and we thus reverse.
The facts, as culled from the record, follow.
Respondents were the owners, in their respective personal capacities, of shares
of stock in a corporation known as the Quirino-Leonor-Rodriguez Realty
Inc.1 Sometime during the years 1979 to 1980, respondents secured by way of
pledge of some of their shares of stock to petitioners Bonifacio and Faustina
Paray ("Parays") the payment of certain loan obligations. The shares pledged
are listed below:
Miguel Rodriguez Jariol ….1,000 shares covered by Stock Certifi-
Dolores R. Soberano…. 699 shares covered by Stock Certificates
No. 021, 053, 022 & 097;
Julia Generoso ….. 1,100 shares covered by Stock Certificates
No. 085, 051, 086 & 084;
Teresita Natividad….. 440 shares covered by Stock Certificates
Nos. 054 & 0552
When the Parays attempted to foreclose the pledges on account of respondents’
failure to pay their loans, respondents filed complaints with the Regional Trial
Court (RTC) of Cebu City. The actions, which were consolidated and tried before
RTC Branch 14, Cebu City, sought the declaration of nullity of the pledge
agreements, among others. However the RTC, in its decision3 dated 14 October
1988, dismissed the complaint and gave "due course to the foreclosure and sale
at public auction of the various pledges subject of these two cases."4 This
decision attained finality after it was affirmed by the Court of Appeals and the
Supreme Court. The Entry of Judgment was issued on 14 August 1991.
Respondents then received Notices of Sale which indicated that the pledged
shares were to be sold at public auction on 4 November 1991. However, before
the scheduled date of auction, all of respondents caused the consignation with
the RTC Clerk of Court of various amounts. It was claimed that respondents had
attempted to tender these payments to the Parays, but had been rebuffed. The
deposited amounts were as follows:

cates No. 011, 060, 061 & 062; Abdulia C. Rodriguez.. P 120,066.66 .. 14 Oct. 1991

Abdulia C. Rodriguez …. 300 shares covered by Stock Certificates Leonora R. Nolasco …. 277,381.82 .. 14 Oct. 1991

No. 023 & 093; Genoveva R. Soronio … 425,353.50 .. 14 Oct. 1991

Leonora R. Nolasco ….. 407 shares covered by Stock Certificates 38,385.44 .. 14 Oct. 1991

No. 091 & 092; Julia R. Generoso …….. 638,385.00 .. 25 Oct. 1991

Genoveva Soronio…. 699 shares covered by Stock Certificates Teresita R. Natividad …. 264,375.00 .. 11 Nov. 1991
Dolores R. Soberano ….. 12,031.61.. 25 Oct. 1991
520,216.39 ..11 Nov. 1991
Miguela Jariol …. 490,000.00.. 18 Oct. 1991
88,000.00 ..18 Oct. 19915
Notwithstanding the consignations, the public auction took place as scheduled,
with petitioner Vidal Espeleta successfully bidding the amount of P6,200,000.00
for all of the pledged shares. None of respondents participated or appeared at
the auction of 4 November 1991.
Respondents instead filed on 13 November 1991 a complaint seeking the
declaration of nullity of the concluded public auction. The complaint, docketed
as Civil Case No. CEB-10926, was assigned to Branch 16 of the Cebu City RTC.
Respondents argued that their tender of payment and subsequent consignations
served to extinguish their loan obligations and discharged the pledge contracts.
Petitioners countered that the auction sale was conducted pursuant to the final
and executory judgment in Civil Cases Nos. R-20120 and 20131, and that the
tender of payment and consignations were made long after their obligations had
fallen due.
The Cebu City RTC dismissed the complaint, expressing agreement with the
position of the Parays.6 It held, among others that respondents had failed to
tender or consign payments within a reasonable period after default and that
the proper remedy of respondents was to have participated in the auction
sale.7 The Court of Appeals Eighth Division however reversed the RTC on
appeal, ruling that the consignations extinguished the loan obligations and the
subject pledge contracts; and the auction sale of 4 November 1991 as null and
void.8 Most crucially, the appellate court chose to uphold the sufficiency of the
consignations owing to an imputed policy of the law that favored redemption
and mandated a liberal construction to redemption laws. The attempts at
payment by respondents were characterized as made in the exercise of the right
of redemption.
The Court of Appeals likewise found fault with the auction sale, holding that
there was a need to individually sell the various shares of stock as they had
belonged to different pledgors. Thus, it was observed that the minutes of the
auction sale should have specified in detail the bids submitted for each of the
shares of the pledgors for the purpose of knowing the price to be paid by the
different pledgors upon redemption of the auctioned sales of stock.
Petitioners now argue before this Court that they were authorized to refuse as
they did the tender of payment since they were undertaking the auction sale
pursuant to the final and executory decision in Civil Cases Nos. R-20120 and
20131, which did not authorize the payment of the principal obligation by
respondents. They point out that the amounts consigned could not extinguish
the principal loan obligations of respondents since they were not sufficient to
cover the interests due on the debt. They likewise argue that the essential
procedural requisites for the auction sale had been satisfied.
We rule in favor of petitioners.
The fundamental premise from which the appellate court proceeded was that
the consignations made by respondents should be construed in light of the rules
of redemption, as if respondents were exercising such right. In that perspective,
the Court of Appeals made three crucial conclusions favorable to respondents:
that their act of consigning the payments with the RTC should be deemed done
in the exercise of their right of redemption; that the buyer at public auction does
not ipso facto become the owner of the pledged shares pending the lapse of the
one-year redemptive period; and that the collective sale of the shares of stock
belonging to several individual owners without specification of the
apportionment in the applications of payment deprives the individual owners of
the opportunity to know of the price they would have to pay for the purpose of
exercising the right of redemption.
The appellate court’s dwelling on the right of redemption is utterly off-tangent.
The right of redemption involves payments made by debtors after the
foreclosure of their properties, and not those made or attempted to be made, as
in this case, before the foreclosure sale. The proper focus of the Court of Appeals
should have been whether the consignations made by respondents sufficiently
acquitted them of their principal obligations. A pledge contract is an accessory
contract, and is necessarily discharged if the principal obligation is
extinguished.
Nonetheless, the Court is now confronted with this rather new fangled theory,
as propounded by the Court of Appeals, involving the right of redemption over
pledged properties. We have no hesitation in pronouncing such theory as
discreditable.
Preliminarily, it must be clarified that the subject sale of pledged shares was an
extrajudicial sale, specifically a notarial sale, as distinguished from a judicial
sale as typified by an execution sale. Under the Civil Code, the foreclosure of a
pledge occurs extrajudicially, without intervention by the courts. All the
creditor needs to do, if the credit has not been satisfied in due time, is to
proceed before a Notary Public to the sale of the thing pledged.9
In this case, petitioners attempted as early as 1980 to proceed extrajudicially
with the sale of the pledged shares by public auction. However, extrajudicial
sale was stayed with the filing of Civil Cases No. R-20120 and 20131, which
sought to annul the pledge contracts. The final and executory judgment in those
cases affirmed the pledge contracts and disposed them in the following fashion:
WHEREFORE, premises considered, judgment is hereby rendered dismissing
the complaints at bar, and –
(1) Declaring the various pledges covered in Civil Cases Nos. R-20120
and R-20131 valid and effective; and
(2) Giving due course to the foreclosure and sale at public auction of
the various pledges subject of these two cases.
Costs against the plaintiffs.
SO ORDERED.10
The phrase "giving due course to the foreclosure and sale at public auction of
the various pledges subject of these two cases" may give rise to the impression
that such sale is judicial in character. While the decision did authorize the sale
by public auction, such declaration could not detract from the fact that the sale
so authorized is actually extrajudicial in character. Note that the final judgment
in said cases expressly did not direct the sale by public auction of the pledged
shares, but instead upheld the right of the Parays to conduct such sale at their
own volition.
Indeed, as affirmed by the Civil Code,11 the decision to proceed with the sale by
public auction remains in the sole discretion of the Parays, who could very well
choose not to hold the sale without violating the final judgments in the
aforementioned civil cases. If the sale were truly in compliance with a final
judgment or order, the Parays would have no choice but to stage the sale for
then the order directing the sale arises from judicial compulsion. But nothing in
the dispositive portion directed the sale at public auction as a mandatory
recourse, and properly so since the sale of pledged property in public auction is,
by virtue of the Civil Code, extrajudicial in character.
The right of redemption as affirmed under Rule 39 of the Rules of Court applies
only to execution sales, more precisely execution sales of real property.
The Court of Appeals expressly asserted the notion that pledged property,
necessarily personal in character, may be redeemed by the creditor after being
sold at public auction. Yet, as a fundamental matter, does the right of
redemption exist over personal property? No law or jurisprudence establishes
or affirms such right. Indeed, no such right exists.
The right to redeem property sold as security for the satisfaction of an unpaid
obligation does not exist preternaturally. Neither is it predicated on proprietary
right, which, after the sale of property on execution, leaves the judgment debtor
and vests in the purchaser. Instead, it is a bare statutory privilege to be
exercised only by the persons named in the statute.12
The right of redemption over mortgaged real property sold extrajudicially is
established by Act No. 3135, as amended. The said law does not extend the same
benefit to personal property. In fact, there is no law in our statute books which
vests the right of redemption over personal property. Act No. 1508, or the
Chattel Mortgage Law, ostensibly could have served as the vehicle for any
legislative intent to bestow a right of redemption over personal property, since
that law governs the extrajudicial sale of mortgaged personal property, but the
statute is definitely silent on the point. And Section 39 of the 1997 Rules of Civil
Procedure, extensively relied upon by the Court of Appeals, starkly utters that
the right of redemption applies to real properties, not personal properties, sold
on execution.
Tellingly, this Court, as early as 1927, rejected the proposition that personal
property may be covered by the right of redemption. In Sibal 1.º v. Valdez,13 the
Court ruled that sugar cane crops are personal property, and thus, not subject to
the right of redemption.14 No countervailing statute has been enacted since then
that would accord the right of redemption over personal property, hence the
Court can affirm this decades-old ruling as effective to date.
Since the pledged shares in this case are not subject to redemption, the Court of
Appeals had no business invoking and applying the inexistent right of
redemption. We cannot thus agree that the consigned payments should be
treated with liberality, or somehow construed as having been made in the
exercise of the right of redemption. We also must reject the appellate court’s
declaration that the buyer of at the public auction is not "ipso facto" rendered
the owner of the auctioned shares, since the debtor enjoys the one-year
redemptive period to redeem the property. Obviously, since there is no right to
redeem personal property, the rights of ownership vested unto the purchaser at
the foreclosure sale are not entangled in any suspensive condition that is
implicit in a redemptive period.
The Court of Appeals also found fault with the apparent sale in bulk of the
pledged shares, notwithstanding the fact that these shares were owned by
several people, on the premise the pledgors would be denied the opportunity to
know exactly how much they would need to shoulder to exercise the right to
redemption. This concern is obviously rendered a non-issue by the fact that
there can be no right to redemption in the first place. Rule 39 of the Rules of
Court does provide for instances when properties foreclosed at the same time
must be sold separately, such as in the case of lot sales for real property under
Section 19. However, these instances again pertain to execution sales and not
extrajudicial sales. No provision in the Rules of Court or in any law requires that
pledged properties sold at auction be sold separately.
On the other hand, under the Civil Code, it is the pledgee, and not the pledgor,
who is given the right to choose which of the items should be sold if two or
more things are pledged.15 No similar option is given to pledgors under the Civil
Code. Moreover, there is nothing in the Civil Code provisions governing the
extrajudicial sale of pledged properties that prohibits the pledgee of several
different pledge contracts from auctioning all of the pledged properties on a
single occasion, or from the buyer at the auction sale in purchasing all the
pledged properties with a single purchase price. The relative insignificance of
ascertaining the definite apportionments of the sale price to the individual
shares lies in the fact that once a pledged item is sold at auction, neither the
pledgee nor the pledgor can recover whatever deficiency or excess there may be
between the purchase price and the amount of the principal obligation. 16
A different ruling though would obtain if at the auction, a bidder expressed the
desire to bid on a determinate number or portion of the pledged shares. In such
a case, there may lie the need to ascertain with particularity which of the shares
are covered by the bid price, since not all of the shares may be sold at the
auction and correspondingly not all of the pledge contracts extinguished. The
same situation also would lie if one or some of the owners of the pledged shares
participated in the auction, bidding only on their respective pledged shares.
However, in this case, none of the pledgors participated in the auction, and the
sole bidder cast his bid for all of the shares. There obviously is no longer any
practical reason to apportion the bid price to the respective shares, since no
matter how slight or significant the value of the purchase price for the
individual share is, the sale is completed, with the pledgor and the pledgee not
entitled to recover the excess or the deficiency, as the case may be. To invalidate
the subject auction solely on this point serves no cause other than to celebrate
formality for formality’s sake.
Clearly, the theory adopted by the Court of Appeals is in shambles, and cannot
be resurrected. The question though yet remains whether the consignations
made by respondents extinguished their respective pledge contracts in favor of
the Parays so as to enjoin the latter from auctioning the pledged shares.
There is no doubt that if the principal obligation is satisfied, the pledges should
be terminated as well. Article 2098 of the Civil Code provides that the right of
the creditor to retain possession of the pledged item exists only until the debt is
paid. Article 2105 of the Civil Code further clarifies that the debtor cannot ask
for the return of the thing pledged against the will of the creditor, unless and
until he has paid the debt and its interest. At the same time, the right of the
pledgee to foreclose the pledge is also established under the Civil Code. When
the credit has not been satisfied in due time, the creditor may proceed with the
sale by public auction under the procedure provided under Article 2112 of the
Code.
Respondents argue that their various consignations made prior to the auction
sale discharged them from the loan and the pledge agreements. They are
mistaken.
Petitioners point out that while the amounts consigned by respondents could
answer for their respective principal loan obligations, they were not sufficient
to cover the interests due on these loans, which were pegged at the rate of 5%
per month or 60% per annum. Before this Court, respondents, save for Dolores
Soberano, do not contest this interest rate as alleged by petitioners. Soberano,
on the other hand, challenges this interest rate as "usurious." 17
The particular pledge contracts did not form part of the records elevated to this
Court. However, the 5% monthly interest rate was noted in the statement of
facts in the 14 October 1988 RTC Decision which had since become final.
Moreover, the said decision pronounced that even assuming that the interest
rates of the various loans were 5% per month, "it is doubtful whether the
interests so charged were exorbitantly or excessively usurious. This is because
for sometime now, usury has become ‘legally inexistent.’" 18 The finality of this
1988 Decision is a settled fact, and thus the time to challenge the validity of the
5% monthly interest rate had long passed. With that in mind, there is no reason
for the Court to disagree with petitioners that in order that the consignation
could have the effect of extinguishing the pledge contracts, such amounts should
cover not just the principal loans, but also the 5% monthly interests thereon.
It bears noting that the Court of Appeals also ruled that respondents had
satisfied the requirements under Section 18, Rule 39, which provides that the
judgment obligor may prevent the sale by paying the amount required by the
execution and the costs that have been incurred therein.19 However, the
provision applies only to execution sales, and not extra-judicial sales, as
evidenced by the use of the phrases "sale of property on execution" and
"judgment obligor." The reference is inapropos, and even if it were applicable,
the failure of the payment to cover the interests due renders it insufficient to
stay the sale.
The effect of the finality of the judgments in Civil Cases Nos. R-20120 and R-
20131 should also not be discounted. Petitioners’ right to proceed with the
auction sale was affirmed not only by law, but also by a final court judgment.
Any subsequent court ruling that would enjoin the petitioners from exercising
such right would have the effect of superseding a final and executory judgment.

Finally, we cannot help but observe that respondents may have saved
themselves much trouble if they simply participated in the auction sale, as they
are permitted to bid themselves on their pledged properties. 20 Moreover, they
would have had a better right had they

matched the terms of the highest bidder.21 Under the circumstances, with the
high interest payments that accrued after several years, respondents were even
placed in a favorable position by the pledge agreements, since the creditor
would be unable to recover any deficiency from the debtors should the sale
price be insufficient to cover the principal amounts with interests. Certainly,
had respondents participated in the auction, there would have been a chance for
them to recover the shares at a price lower than the amount that was actually
due from them to the Parays. That respondents failed to avail of this beneficial
resort wholly accorded them by law is their loss. Now, all respondents can
recover is the amounts they had consigned.

WHEREFORE, the petition is GRANTED. The assailed decision of the Court of

Appeals is SET ASIDE and the decision of the Cebu City RTC, Branch 16, dated
18 November 1992 is REINSTATED. Costs against respondents.

SO ORDERED.

DANTE O. TINGA
Associate Justice