Members:

1.Pangalangan
2.Labastida
3.Yap
4. Conte
5. Tumampos
6. Leprozo
7. Saromines
8. Quilaquil
9.Maquilan
10. Adolfo
11. Libago
12.Roma
13.Ocampos
14. Bajuyo
15.Guzman
VI. Warehouse receipts law
PNB v Judge Benito Se
PNB v Sayo
Country Bankers Insurance Corp. v Lagman
Roman v Asia Banking Corp.
VII. Guaranty and Suretyship
5. Agro Conglomerates Inc. v CA
6. Fiman General Assurance Corp. v Salik
7.PNB v CA
8.Towers Assurance Corp. v Ororama Supermart
9. Magdalena Estates, Inc. v Rodriguez
10. Dino v CA
11. Baylon v CA
VIII. Pledge
12. PNB v Banalao
13. Manila Banking Corp. v Teodoro Jr.
14. Citybank, N.A. v Sabeniano
15. Ong v Roban Lending Corp.
IX. real Mortgage
16.Planters Dev. Bank v Ramos
17.Municipal Rural Bank of Libmanan v, Camarines Sur v. Virginia Ordonez
18.Pablo Garcia v Yolanda Villar
19.Nicamora Bucton v Rural Bank of El Salvador
20. Homeowners Savings &Loan Bank v. Asuncion Felonia &Lydia de Guzman
21. Robles v CA
22. GSIS v Santiago
VI. WAREHOUSE RECEIPTS LAW
1.G.R. No. 119231. April 18, 1996.
*

PHILIPPINE NATIONAL BANK, petitioner, vs.HON. PRES. JUDGE BENITO C. SE, JR., RTC, BR. 45, MANILA;
NOAHS ARK SUGAR REFINERY; ALBERTO T. LOOYUKO, JIMMY T. GO and WILSON T. GO, respondents.

FACTS
In accordance with Act No. 2137, the Warehouse Receipts Law, Noahs Ark Sugar Refinery issued on
several dates, the following Warehouse Receipts (Quedans):
(a) March 1, 1989, Receipt No. 18062, covering sugar deposited by Rosa Sy;
(b) March 7, 1989, Receipt No. 18080, covering sugar deposited by RNS Merchandising (Rosa Ng Sy);
(c) March 21, 1989, Receipt No. 18081, covering sugar deposited by St. Therese Merchandising;
(d) March 31, 1989, Receipt No. 18086, covering sugar deposited by St. Therese Merchandising; and
(e) April 1, 1989, Receipt No. 18087, covering sugar deposited by RNS Merchandising.

Receipts substantially in the form, and contains the terms, prescribed for negotiable warehouse receipts
by Section 2 of the law.

Subsequently, Warehouse Receipts Nos. 18080 and 18081 were negotiated and endorsed to Luis T.
Ramos; and Receipts Nos. 18086, 18087 and 18062 were negotiated and endorsed to Cresencia K.
Zoleta.

Ramos and Zoleta then used the quedans as security for two loan agreements—one for P15.6 million
and the other for P23.5 million—obtained by them from the Philippine National Bank. The
aforementioned quedans were endorsed by them to the Philippine National Bank.

Luis T. Ramos and Cresencia K. Zoleta failed to pay their loans upon maturity.

Philippine National Bank demanded delivery of the sugar stocks covered by the quedans endorsed to it
by Zoleta and Ramos. Noahs Ark Sugar Refinery refused to comply with the demand alleging ownership
thereof.

Philippine National Bank filed with the Regional Trial Court of Manila a verified complaint for Specific
Performance with Damages and Application for Writ of Attachmentagainst Noahs Ark Sugar Refinery,
Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go, the last three being identified as the sole proprietor,
managing partner, and Executive Vice President of Noahs Ark, respectively.

Respondent Judge Benito C. Se, Jr., in whose sala the case was raffled, denied the Application for
Preliminary Attachment. Reconsideration therefor was likewise denied.

On January 31, 1991, the Philippine National Bank filed a Motion for Summary Judgment. Regional Trial
Court likewise denied.

Thereupon, the Philippine National Bank filed a Petition for Certiorari with the Court of Appeals

On December 13, 1991, the Court of Appeals nullified and set aside the orders of May 2 and July 4, 1990
of the Regional Trial Court and ordered the trial court to render summary judgment in favor of the PNB.

On June 18, 1992, the trial court rendered judgment dismissing plaintiffs complaint against private
respondents for lack of cause of action and likewise dismissed private respondentscounterclaim against
PNB and of the Third-Party Complaint and the Third-Party Defendants Counterclaim. Trial court denied
PNBs Motion for Reconsideration.
PNB filed an appeal from the RTC decision with the Supreme Court by way of a Petition for Review on
Certiorari under Rule 45.

Supreme Court reversed and set aside trial judges decision and a new one rendered conformably with
the final and executory decision of the Court of Appeals ordering the private respondents Noahs Ark
Sugar Refinery, Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go, jointly and severally to deliver to the
petitioner Philippine National Bank, the sugar stocks covered by the Warehouse Receipts/Quedans which
are now in the latters possession as holder for value and in due course.

MR, Supplemental/Second MR and Motion Seeking Clarification of the Decision by private respondents
denied.

Private respondents thereupon filed before the trial court an Omnibus Motion seeking among others the
deferment of the proceedings until private respondents are heard on their claim for warehousemans
lien.

On the other hand, on August 22, 1994, the Philippine National Bank filed a Motion for the Issuance of a
Writ of Execution and an Opposition to the Omnibus Motion filed by private respondents.

The trial court granted private respondentsOmnibus Motion on December 20, 1994 and set reception of
evidence on their claim for warehousemans lien. The resolution of the PNBs Motion for Execution was
ordered deferred until the determination of private respondentsclaim.

Hence this petition.

Contention of the parties

PNB: Private respondents have lost their right to recover warehousemans lien on the sugar stocks
covered by the five (5) Warehouse Receipts for the reason that they failed to set up said claim in their
Answer before the trial court and that private respondents did not appeal from the decision in this
regard, dated June 18, 1992.

Private Respondents: Maintained that they could not have claimed the right to a warehousemans lien in
their Answer to the complaint before the trial court as it would have been inconsistent with their stand
that they claim ownership of the stocks covered by the quedans since the checks issued for payment
thereof were dishonored. If they were still the owners, it would have been absurd for them to ask
payment for storage fees and preservation expenses.

ISSUE

Whether the Philippine National Bank should pay storage fees for sugar stocks covered by five (5)
Warehouse Receipts stored in the warehouse of private respondents in the face of the Court of
Appealsdecision (affirmed by the Supreme Court) declaring the Philippine National Bank as the owner of
the said sugar stocks and ordering their delivery to the said bank.

HELD

We find for private respondents on the foregoing issue and so the petition necessarily must fail.
We are not persuaded by the petitioners argument that our said resolution carried with it the denial of
the warehousemans lien over the sugar stocks covered by the subject Warehouse Receipts. We ruled
therein that the issuance of the Warehouse Receipts not being disputed by the private respondents, a
summary judgment in favor of PNB was proper. We in effect further affirmed the finding that Noahs Ark
is a warehouseman which was obliged to deliver the sugar stocks covered by the Warehouse Receipts
pledged by Cresencia K. Zoleta and Luis T. Ramos to the petitioner pursuant to the pertinent provisions
of Republic Act 2137.

Of considerable relevance is the pertinent stipulation in the subject Warehouse Receipts which provides
for respondent Noahs Arks right to impose and collect warehousemans lien: Storage of the refined sugar
quantities mentioned herein shall be free up to one (1) week from the date of the quedans covering said
sugar and thereafter, storage fees shall be charged in accordance with the Refining Contract under which
the refined sugar covered by this Quedan was produced.

It is not disputed, therefore, that, under the subject Warehouse Receipts provision, storage fees are
chargeable.

Petitioner PNB is legally bound to stand by the express terms and conditions on the face of the
Warehouse Receipts as to the payment of storage fees. Even in the absence of such a provision, law and
equity dictate the payment of the warehousemans lien pursuant to Sections 27 and 31 of the Warehouse
Receipts Law (R.A. 2137), to wit:

SECTION 27. What claims are included in the warehousemans lien.—Subject to the provisions of section
thirty, a warehouseman shall have lien on goods deposited or on the proceeds thereof in his hands, for
all lawful charges for storage and preservation of the goods; also for all lawful claims for money
advanced, interest, insurance, transportation, labor, weighing, coopering and other charges and
expenses in relation to such goods; also for all reasonable charges and expenses for notice, and
advertisement of sale, and for sale of the goods where default has been made in satisfying the
warehousemans lien.

xxx xxx xxx

SECTION 31. Warehouseman need not deliver until lien is satisfied.—A warehouseman having a lien valid
against the person demanding the goods may refuse to deliver the goods to him until the lien is satisfied.

After being declared not the owner, but the warehouseman, by the Court of Appeals, private
respondents cannot legally be deprived of their right to enforce their claim for warehousemans lien, for
reasonable storage fees and preservation expenses.

Considering that petitioner does not deny the existence, validity and genuineness of the Warehouse
Receipts on which it anchors its claim for payment against private respondents, it cannot disclaim liability
for the payment of the storage fees stipulated therein.

Petitioner is in estoppel in disclaiming liability for the payment of storage fees due the private
respondents as warehouseman while claiming to be entitled to the sugar stocks covered by the subject
Warehouse Receipts on the basis of which it anchors its claim for payment or delivery of the sugar
stocks. The unconditional presentment of the receipts by the petitioner for payment against private
respondents on the strength of the provisions of the Warehouse Receipts Law (R.A. 2137) carried with it
the admission of the existence and validity of the terms, conditions and stipulations written on the face
of the Warehouse Receipts, including the unqualified recognition of the payment of warehousemans lien
for storage fees and preservation expenses. Petitioner may not now retrieve the sugar stocks without
paying the lien due private respondents as warehouseman.

While the PNB is entitled to the stocks of sugar as the endorsee of the quedans, delivery to it shall be
effected only upon payment of the storage fees.

Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because, in
accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon
goods by surrendering possession thereof. In other words, the lien may be lost where the
warehouseman surrenders the possession of the goods without requiring payment of his lien, because a
warehousemans lien is possessory in nature.
2. PNB vs. Sayo Jr.
Facts: Noah's Ark Sugar Refinery issued Warehouse Receipts (Quedans) covering sugar deposited by Sy,
RNS Merchandising, and St. Therese Merchandising. These Warehouse Receipts were negotiated and
endorsed to Ramos and to Zoleta. Ramos and Zoleta then used the quedans as security for loan from the
PNB. The quedans were endorsed by them to PNB. Ramos and Zoleta failed to pay their loans upon
maturity. Hence, PNB wrote to Noah's Ark demanding delivery of the sugar stocks covered by the
quedans endorsed to it by Zoleta and Ramos. Noah's Ark Sugar Refinery refused to comply with the
demand alleging ownership thereof. SC held that private respondents may enforce their warehousemans
lien and that PNB is liable for storage fees.
Issues: 1. WON private respondents may enforce their warehousemans lien. YES.
2. WON PNB is liable for storage fees. YES.
RULING:
1. Under the Special Circumstances in This Case, Private Respondents May Enforce Their
Warehouseman's Lien.
The remedies available to a warehouseman, such as private respondents, to enforce his warehouseman's
lien are:
(1) To refuse to deliver the goods until his lien is satisfied, pursuant to Section 31 of the Warehouse
Receipt Law;
(2) To sell the goods and apply the proceeds thereof to the value of the lien pursuant to Sections 33 and
34 of the Warehouse Receipts Law; and
(3) By other means allowed by law to a creditor against his debtor, for the collection from the depositor
of all charges and advances which the depositor expressly or impliedly contracted with the
warehouseman to pay under Section 32 of the Warehouse Receipt Law; or such other remedies allowed
by law for the enforcement of a lien against personal property under Section 35 of said law. The third
remedy is sought judicially by suing for the unpaid charges.
CAB: Initially, private respondents availed of the first remedy. While the most appropriate remedy for
private respondents was an action for collection, SC already recognized their right to have such charges
and fees determined. The import of SCs holding was that private respondents were likewise entitled to a
judgment on their warehouse charges and fees, and the eventual satisfaction thereof, thereby avoiding
having to file another action to recover these charges and fees, which would only have further delayed
the resolution of the respective claims of the parties, and as a corollary thereto, the indefinite deferment
of the execution of the judgment. Thus we note that petitioner, in fact, already acquiesced to the
scheduled dates previously set for the hearing on private respondents' warehouseman's charges. But, it
would be premature to execute the order fixing the warehouseman's charges and fees.
2. Petitioner is Liable for Storage Fees.
Petitioner insisted that it was a mere pledgee as the quedans were used to secure two loans it granted.
The SC agreed with this and held that the indorsement and delivery of the receipts by Ramos and Zoleta
to PNB was not to convey title to or ownership of the goods but to secure the loans by way of pledge.
The indorsement of the receipts to perfect the pledge merely constituted a symbolical or constructive
delivery of the possession of the thing thus encumbered. The creditor, in a contract of real security, like
pledge, cannot appropriate without foreclosure the things given by way of pledge. Any stipulation to the
contrary is null and void for being pactum commissorio. The law requires foreclosure in order to allow a
transfer of title of the goods given by way of security from its pledgor, and before any such foreclosure,
the pledgor, not the pledgee, is theowner of the goods. However, the SC held that the warehouseman
nevertheless is entitled to his lien that attaches to the goods invokable against anyone who claims a right
of possession thereon.
The SC held that where a valid demand by the lawful holder of the receipts for the delivery of the goods
is refused by the warehouseman, despite the absence of a lawful excuse provided by the law itself, the
warehousemans lien is thereafter concomitantly lost. As to what the law deems a valid demand, Section
8 of the Warehouse Receipts Law enumerates what must accompany a demand; while as regards the
reasons which a warehouseman may invoke to legally refuse to effect delivery of the goods covered by
the quedans, these are:
(1) That the holder of the receipt does not satisfy the conditions prescribed in Section 8 of the Act. (See
Sec. 8, Act No. 2137)
(2) That the warehouseman has legal title in himself on the goods, such title or right being derived
directly or indirectly from a transfer made by the depositor at the time of or subsequent to the deposit
for storage, or from the warehouseman's lien. (Sec. 16, Act No. 2137)
(3) That the warehouseman has legally set up the title or right of third persons as lawful defense for non-
delivery of the goods
(4) That the warehouseman having a lien valid against the person demanding the goods refuses to
deliver the goods to him until the lien is satisfied. (Sec. 31 Act No. 2137)
(5) That the failure was not due to any fault on the part of the warehouseman, as by showing that, prior
to demand for delivery and refusal, the goods were stolen or destroyed by fire, flood, etc., without any
negligence on his part, unless he has contracted so as to be liable in such case, or that the goods have
been taken by the mistake of a third person without the knowledge or implied assent of the
warehouseman, or some other justifiable ground for non-delivery.
The SC explained that regrettably, the factual settings do not sufficiently indicate whether the demand to
obtain possession of the goods complied with Sec. 8. The presumption, nevertheless, would be that the
law was complied with. On the other hand, it would appear that the refusal of Noahs Ark to deliver the
goods was not anchored on a valid excuse, i.e., non-satisfaction of the lien over the goods, but on an
adverse claim of ownership. Under the circumstances, this hardly qualified as a valid, legal excuse. The
loss of the lien, however, does not necessarily mean the extinguishment of the obligation to pay the
warehousing fees and charges which continues to be a personal liability of the owners, i.e., the pledgors,
not the pledgee, in this case. But even as to the owners-pledgors, the warehouseman fees and charges
have ceased to accrue from the date of the rejection by Noah to heed the lawful demand by PNB for the
release of the goods. Hence, the time from which the fees and charges should be made payable is from
the time Noahs Ark refused to heed PNBs demand for delivery of the sugar stocks and in no event
beyond the value of the credit in favor of the pledgee since it is basic that, in foreclosures, the buyer
does not assume the obligations of the pledgor to his other creditors even while such buyer acquires
title over the goods less any existing preferred lien thereover.
3. Century Bankers Insurance Corp. vs. Lagman
FACTS:
Nelson Santos (Santos) applied for a license with the National Food Authority (NFA) to engage in the
business of storing not more than 30,000 sacks of palayvalued at P5,250,000.00 in his warehouse at
BarangayMalacampa, Camiling, Tarlac. Under Act No. 3893 or the General Bonded Warehouse Act, as
amended, the approval for said license was conditioned upon posting of a cash bond, a bond secured by
real estate, or a bond signed by a duly authorized bonding company, the amount of which shall be fixed
by the NFA Administrator at not less than thirty-three and one third percent (33 1/3%) of the market
value of the maximum quantity of rice to be received.

Accordingly, Country Bankers Insurance Corporation (Country Bankers) issued Warehouse Bond No.
03304 for P1,749,825.00 on 5 November 1989 and Warehouse Bond No. 02355 for P749,925.00 on 13
December 1989 (1989 Bonds) through its agent, Antonio Lagman (Lagman). Santos was the bond
principal, Lagman was the surety and the Republic of the Philippines, through the NFA was the obligee.
In consideration of these issuances, corresponding Indemnity Agreementswere executed by Santos, as
bond principal, together with Ban Lee Lim Santos (Ban Lee Lim), Rhosemelita Reguine (Reguine) and
Lagman, as co-signors. The latter bound themselves jointly and severally liable to Country Bankers for
any damages, prejudice, losses, costs, payments, advances and expenses of whatever kind and nature,
including attorneys fees and legal costs, which it may sustain as a consequence of the said bond; to
reimburse Country Bankers of whatever amount it may pay or cause to be paid or become liable to pay
thereunder; and to pay interest at the rate of 12% per annum computed and compounded monthly, as
well as to pay attorneys fees of 20% of the amount due it.

Santos then secured a loan using his warehouse receipts as collateral. When the loan matured, Santos
defaulted in his payment. The sacks of palaycovered by the warehouse receipts were no longer found in
the bonded warehouse. By virtue of the surety bonds, Country Bankers was compelled to pay
P1,166,750.37.

Consequently, Country Bankers filed a complaint for a sum of money docketed as Civil Case No. 95-73048
before the Regional Trial Court (RTC) of Manila. In his Answer, Lagman alleged that the 1989 Bonds were
valid only for 1 year from the date of their issuance, as evidenced by receipts; that the bonds were never
renewed and revived by payment of premiums; that on 5 November 1990, Country Bankers issued
Warehouse Bond No. 03515 (1990 Bond) which was also valid for one year and that no Indemnity
Agreement was executed for the purpose; and that the 1990 Bond supersedes, cancels, and renders no
force and effect the 1989 Bonds.

The bond principals, Santos and Ban Lee Lim, were not served with summons because they could no
longer be found. The case was eventually dismissed against them without prejudice. The other co-signor,
Reguine, was declared in default for failure to file her answer.

On 21 September 1998, the trial court rendered judgment declaring Reguine and Lagman jointly and
severally liable to pay Country Bankers the amount of P2,400,499.87. CA reversed the decision of RTC.

ISSUE:
Whether or not the 1989 bonds were effective only for one (1) year, as evidenced by the payment of
premiums

RULING: Negative.
The official receipts in question serve as proof of payment of the premium for one year on each surety
bond. It does not, however, automatically mean that the surety bond is effective for only one (1) year. In
fact, the effectivity of the bond is not wholly dependent on the payment of premium. Section 177 of the
Insurance Code expresses:

Sec. 177. The surety is entitled to payment of the premium as soon as the contract of suretyship
or bond is perfected and delivered to the obligor. No contract of suretyship or bonding shall be
valid and binding unless and until the premium therefor has been paid, except where the
obligee has accepted the bond, in which case the bond becomes valid and enforceable
irrespective of whether or not the premium has been paid by the obligor to the surety :
Provided, That if the contract of suretyship or bond is not accepted by, or filed with the obligee,
the surety shall collect only reasonable amount, not exceeding fifty per centum of the premium
due thereon as service fee plus the cost of stamps or other taxes imposed for the issuance of the
contract or bond: Provided, however,That if the non-acceptance of the bond be due to the fault
or negligence of the surety, no such service fee, stamps or taxes shall be collected. (Emphasis
supplied)

The 1989 Bonds have identical provisions and they state in very clear terms the effectivity of these
bonds, viz:

NOW, THEREFORE, if the above-bounded Principal shall well and truly deliver to the depositors
PALAY received by him for STORAGE at any time that demand therefore is made, or shall pay the
market value therefore in case he is unable to return the same, then this obligation shall be null
and void; otherwise it shall remain in full force and effect and may be enforced in the manner
provided by said Act No. 3893 as amended by Republic Act No. 247 and P.D. No. 4. This bond
shall remain in force until cancelled by the Administrator of National Food Authority.

This provision in the bonds is but in compliance with the second paragraph of Section 177 of the
Insurance Code, which specifies that a continuing bond, as in this case where there is no fixed expiration
date, may be cancelled only by the obligee, which is the NFA, by the Insurance Commissioner, and by the
court. Thus:

In case of a continuing bond, the obligor shall pay the subsequent annual premium as it falls due
until the contract of suretyship is cancelled by the obligee or by the Commissioner or by a court
of competent jurisdiction, as the case may be.

By law and by the specific contract involved in this case, the effectivity of the bond required for the
obtention of a license to engage in the business of receiving rice for storage is determined not alone by
the payment of premiums but principally by the Administrator of the NFA. From beginning to end, the
Administrators brief is the enabling or disabling document.

The clear import of these provisions is that the surety bonds in question cannot be unilaterally cancelled
by Lagman. The same conclusion was reached by the trial court and we quote:

As there appears no record of cancellation of the Warehouse Bonds No. 03304 and No. 02355
either by the administrator of the NFA or by the Insurance Commissioner or by the Court, the
Warehouse Bonds are valid and binding and cannot be unilaterally cancelled by defendant
Lagman as general agent of the plaintiff.
While the trial court did not directly rule on the existence and validity of the 1990 Bond, it upheld the
1989 Bonds as valid and binding, which could not be unilaterally cancelled by Lagman. The Court of
Appeals, on the other hand, acknowledged the 1990 Bond as having cancelled the two previous bonds
by novation. Both courts however failed to discuss their basis for rejecting or admitting the 1990 Bond,
which, as we indicated, is bone to pick in this case.

Having discounted the existence and/or validity of the 1990 Bond, there can be no novation to speak of.
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first, either by changing the object or principal
conditions, or by substituting another in place of the debtor, or by subrogating a third person in the
rights of the creditor. For novation to take place, the following requisites must concur: 1) There must be
a previous valid obligation; 2) The parties concerned must agree to a new contract; 3) The old contract
must be extinguished; and 4) There must be a valid new contract.

In this case, only the first element of novation exists. Indeed, there is a previous valid obligation, i.e., the
1989 Bonds. There is however neither a valid new contract nor a clear agreement between the parties to
a new contract since the very existence of the 1990 Bond has been rendered dubious. Without the new
contract, the old contract is not extinguished.

Implied novation necessitates a new obligation with which the old is in total incompatibility such that the
old obligation is completely superseded by the new one. Quite obviously, neither can there be implied
novation. In this case, there is no new obligation.4. Roman v. Asia Banking Corporation 46 Phil 705
FACTS:
U. de Poli, for value received, issued a quedancovering the 576 bultosof tobacco to the Asia
Banking Corporation (claimant &appellant). It was executed as a security for a loan. The aforesaid 576
butlos are part and parcel of the 2,777 bultospurchased by U. de Poli from Felisa Roman (claimant
&appellee).
The quedanwas marked as Exhibit D which is a warehouse receipt issued by the warehouse of U.
de Poli for 576 bultosof tobacco. In the left margin of the face of the receipt, U. de Poli certifies that he is
the sole owner of the merchandise therein described. The receipt is endorsed in blank; it is not marked
non-negotiableor not negotiable.
Since a sale was consummated between Roman and U. de Poli, Romans claim is a vendors lien.
The lower court ruled in favor of Roman on the theory that since the transfer to Asia Banking Corp.
(ASIA) was neither a pledge nor a mortgage, but a security for a loan, the vendors lien of Roman should
be accorded preference over it.
However, if the warehouse receipt issued was non-negotiable, the vendors lien of Roman cannot
prevail against the rights of ASIA as indorsee of the receipt.
ISSUE: WON the quedan issued by U. de Poli in favor of ASIA. is negotiable, despite failure to
mark it as not negotiable?
HELD:
YES, it is obvious that the deposit evidenced by the receipt in this case was intended to be made
subject to the order of the depositor and therefore negotiable.That the words "por orden"are used
instead of "a la orden"is very evidently merely a clerical or grammatical error."The phrase must be
construed to mean that U. de Poli was the person authorized to endorse and deliver the receipts; any
other interpretation would mean that no one had such power and the clause, as well as the entire
receipts, would be rendered nugatory.
 Moreover, the endorsement in blank of the receipt in controversy together with its delivery by U.
de Poli to the appellant bank took place on the very of the issuance of the warehouse receipt, thereby
immediately demonstrating the intention of U. de Poli and of the appellant bank, by the employment of
the phrase "por orden del Sr. U. de Poli"to make the receipt negotiable and subject to the very transfer
which he then and there made by such endorsement in blank and delivery of the receipt to the blank.
As hereinbefore stated, the receipt was not marked "non-negotiable."Under modern statutes
the negotiability of warehouse receipts has been enlarged, the statutes having the effect of making such
receipts negotiable unless marked "non-negotiable."(27 R. C. L., 967 and cases cited.)
Section 7 of the Uniform Warehouse Receipts Act, says:
A non-negotiable receipt shall have plainly placed upon its face by the warehouseman
issuing it 'non-negotiable,' or 'not negotiable.' In case of the warehouseman's failure so to do, a
holder of the receipt who purchased it for value supposing it to be negotiable may, at his option,
treat such receipt as imposing upon the warehouseman the same liabilities he would have
incurred had the receipt been negotiable.
This section shall not apply, however, to letters, memoranda, or written
acknowledgments of an informal character.
This section appears to give any warehouse receipt not marked "non-negotiable"or "not
negotiable"practically the same effect as a receipt which, by its terms, is negotiable provided the holder
of such unmarked receipt acquired it for value supposing it to be negotiable, circumstances which
admittedly exist in the present case.
VII. Guaranty and SuretyshipAGRO CONGLOMERATES, INC. vs.CA and REGENT SAVINGS and LOAN
BANK, INC.
FACTS
Agro Conglomerates Inc. (Vendor) sold 2 parcels of farmlands to Wonderland Food Industries (vendee),
wherein they executed a Memorandum of Agreement (MOA) where the vendee would pay P5 M as
follows: P1M cash, P2M in shares of stock of Vendee Corporation and P2M in installments + 18% interest
per annum.
Subsequently, the vendor, vendee and respondent Bank executed an Addendumto the previous MOA.
The new arrangement provided that the P1M cash payment and prepaid interest of P1.36M (18% of
P2M) would be incurred as debt from the BANK by the Vendor as authorized by the Vendee. Provided
however, that said loan shall be made for and in the name of the VENDOR. The VENDEE thereby agrees
to pay the full amount of P1.36M directly to the VENDOR. It is understood that while the loan will be
secured from and in the name of the VENDOR, the VENDEE will be the one liable to pay the entire
proceeds thereof including interest and other charges.
Petitioner-vendor issued PN payable to the Bank, but the former failed to pay such obligation so the
Bank filed 3 cases of collection. Thus the Bank endorsed the PN for collection.
The RTC ruled that Wonderland is not answerable. And since the loans obtained under the four
promissory notes have not been paid, despite opportunities given by plaintiff to defendants to make
payments, it stands to reason that defendants are liable to pay their obligations thereunder to plaintiff.
In fact, defendants failed to file a third-party complaint against Wonderland, which shows the weakness
of its stand that Wonderland is answerable to make said payments.
The Court of Appeals affirmed the decision of the trial court.

ISSUE
1. W/N Petitioner-vendors is solidarily liable with Wonderland (vendee) to pay the bank (creditor).
2. W/N the Addendum signed by the Bank, the Vendor and Vendee constitutes a novation of the
contract by substitution of debtor, which exempts petitioners-vendor from any liability to pay the PN
they issued to the Bank.

HELD
1. NO.
A subsidiary contract of suretyship had taken effect since petitioner-vendors signed the PN as maker and
accommodation party for the benefit of Wonderland (vendee). Petitioners became liable as
accommodation party. An accommodation party is a person who has signed the instrument as maker,
acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some
other person and is liable on the instrument to a holder for value, notwithstanding such holder at the
time of taking the instrument knew (the signatory) to be an accommodation party. He has the right, after
paying the holder, to obtain reimbursement from the party accommodated, since the relation between
them has in effect become one of principal and surety, the accommodation party being the surety.
Suretyship is defined as the relation which exists where one person has undertaken an obligation and
another person is also under the obligation or other duty to the obligee, who is entitled to but one
performance, and as between the two who are bound, one rather than the other should perform.
The suretys liability to the creditor of the principal is said to be direct, primary and absolute; in other
words, he is directly and equally bound with the principal. And the creditor may proceed against any one
of the solidary debtors.[i]
2. NO. The addendum did not effect to a novation of the obligation of petitioner-vendor to pay the PN
by substitutionof a new debtor, Wonderland (vendee).
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first, either by changing the object or principal
conditions, or by substituting another in place of the debtor,or by subrogating a third person in the rights
of the creditor. In order that a novation can take place, the concurrence of the following requisitesis
indispensable:
1) There must be a previous valid obligation;
2) There must be an agreement of the parties concerned to a new contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.
6. FINMAN GENERAL ASSURANCE CORP. VS SALIK, 188 SCRA 740
FACTS:
Private respondents, Abdulgani Salik et al., allegedly applied with Pan Pacific Overseas Recruiting
Services, Inc. (Pan Pacific) and were assured employment abroad by a certain Mrs. Normita Egil. In
consideration thereof, they allegedly paid fees totalling P30,000.00. But despite numerous assurances of
employment abroad given by Celia Arandia and Mrs. Egil, they were not employed.
They then filed a joint complaint with the Philippine Overseas Employment Administration (POEA)
against Pan Pacific for Violation of Articles 32 and 34(a) of the Labor Code, as amended, with claims for
refund of a total amount of P30,000.00
The POEA motu proprio impleaded and summoned herein petitioner surety Finman General Assurance
Corporation (Finman), as Pan Pacific's bonding company. Summons were served upon both Pan Pacific
and Finman, but they failed to answer.
A hearing then was called, but only the private respondents appeared. Despite being deemed in default
for failing to answer, both Finman and Pan Pacific were still notified of the scheduled hearing. Again they
failed to appear. Thus, ex-parte proceedings ensued.
During the hearing, private respondents reiterated the allegations in their complaint that they first paid
P20,000.00 thru Hadji Usop Kabagani for which a receipt was issued signed by Engineer Arandia and
countersigned by Mrs. Egil and a certain Imelda who are allegedly employed by Pan Pacific; that they
paid another P10,000.00 to Engr. Arandia who did not issue any receipt therefor; that the total payment
of P30,000.00 allegedly represents payments for herein private respondents in the amount of P5,000.00
each, and Abdulnasser Ali, who did not file any complaint against Pan Pacific
Herein petitioner, Finman, in an answer which was not timely filed, alleged, among others, that herein
private respondents do not have a valid cause of action against it; that Finman is not privy to any
transaction undertaken by Pan Pacific with herein private respondents; that herein private respondents'
claims are barred by the statute of frauds and by the fact that they executed a waiver; that the receipts
presented by herein private respondents are mere scraps of paper; that it is not liable for the acts of
Mrs. Egil; that Finman has a cashbond of P75,000.00 only which is less than the required amount of
P100,000.00; and that herein private respondents should proceed directly against the cash bond of Pan
Pacific or against Mrs. Egil
Honorable Franklin M. Drilon, then the Secretary of Labor and Employment, upon the recommendation
of the POEA hearing officer ruled in favor of respondents.
A motion for reconsideration having been denied ,herein petitioner instituted the instant petition.
ISSUE: Whether or not petitioner is jointly and severally liable together with Pan Pacific on the basis of
suretyship agreement between Finman, Pan Pacific and POEA

RULING:
Yes. In the case at bar, it remains uncontroverted that herein petitioner and Pan Pacific entered into a
suretyship agreement, with the former agreeing that the bond is conditioned upon the true and faithful
performance and observance of the bonded principal (Pan Pacific) of its duties and obligations. It was
also understood that under the suretyship agreement, herein petitioner undertook itself to be jointly
and severally liable for all claims arising from recruitment violation of Pan Pacific (Ibid., p. 23), in keeping
with Section 4, Rule V, Book I of the Implementing Rules of the Labor Code, which provides:
"Section 4. Upon approval of the application, the applicant shall pay to the Ministry (now Department) a
license fee of P6,000.00, post a cash bond of P50,000.00 or negotiable bonds of equivalent amount
convertible to cash issued by banking or financial institution duly endorsed to the Ministry (now
Department) as well as a surety bond of P150,000.00 from an accredited bonding company
toanswerforvalidandlegalclaimsarisingfromviolationsoftheconditionsofthelicenseorthecontractsofemploy
mentandguaranteecompliancewiththeprovisionsoftheCode,
itsimplementingrulesandregulationsandappropriateissuancesoftheMinistry(nowDepartment)."
Accordingly, the nature of Finman's obligation under the suretyship agreement makes it privy to the
proceedings against its principal (Pan Pacific). As such Finman is bound, in the absence of collusion, by a
judgment against its principal even though it was not a party to the proceedings (Leyson v. Rizal Surety
and Insurance Co., 16 SCRA 551 (1966). Furthermore, in Government of the Philippines v. Tizon (20 SCRA
1182 [1967]), this Court ruled that where the surety bound itself solidarily with the principal obligor, the
former is so dependent on the principal debtor "that the surety is considered in law as being the same
party as the debtor in relation to whatever is adjudged touching the obligation of the latter."Applying the
foregoing principles to the case at bar, it can be very well said that even if herein Finman was not
impleaded in the instant case, still it (petitioner) can be held jointly and severally liable for all claims
arising from recruitment violation of Pan Pacific. Moreover, as correctly stated by the Solicitor General,
private respondents have a legal claim against Pan Pacific and its insurer for the placement and
processing fees they paid, so much so that in order to provide a complete relief to private respondents,
petitioner had to be impleaded in the case (Rollo, p. 87).
Furthermore, Finman contends that herein respondent Secretary of Labor cannot validly assume
jurisdiction over the case at bar; otherwise, proceedings will be railroaded resulting in the deprivation of
the former of any remedial measures under the law.
The records of the case reveal that herein Finman filed a motion for reconsideration of the adverse
decision dated March 18, 1988 of respondent Secretary of Labor. In the said motion for reconsideration,
no jurisdictional challenge was made (ibid., p. 22). It was only when it filed this petition that it assailed
the jurisdiction of the respondent Secretary of Labor, and that of the POEA. But then, it was too late.
Estoppel had barred herein petitioner from raising the issue, regardless of its merits (Akay Printing Press
v. Minister of Labor and Employment, 140 SCRA 381 (1985)).
Hence, Finman's contention that POEA's and respondent Secretary's actions in impleading and directing
herein petitioner to pay jointly and severally with Pan Pacific the claims of private respondents constitute
a grave abuse of discretion amounting to lack of jurisdiction has no basis.
7. PNB v. CA
Facts:

Estanislao Depusoy, and the Republic of the Philippines, represented by the Director of Public Works,
entered into a building contract, for the construction of the GSIS building at Arroceros Street, Manila,
Depusoy to furnish all materials, labor, plans, and supplies needed in the construction. Depusoy applied
for credit accommodation with the plaintiff. This was approved by the Board of Directors in various
resolutions subject to the conditions that he would assign all payments to be received from the Bureau
of Public Works of the GSIS to the bank, furnish a surety bond, and the surety to deposit P10,000.00 to
the plaintiff. The total accommodation granted to Depusoy was P100,000.00. This was later extended by
another P10,000.00 and P25,000.00, but in no case should the loan exceed P100,000.00. In compliance
with these conditions, Depusoy executed a Deed of Assignment of all money to be received by him from
the GSIS to PNB.

Depusoy defaulted in his building contract with the Bureau of Public Works, and sometime in September,
1957, the Bureau of Public Works rescinded its contract with Depusoy. No further amounts were
thereafter paid by the GSIS to plaintiff bank. The amount of the loan of Depusoy which remains unpaid,
including interest, is over P100,000.00. Demands for payment were made upon Depusoy and Luzon, and
as no payment was made, therefore herein petitioner filed with the trial court a complaint against
Estanislao Depusoy and private respondent Luzon Surety Co. Inc. (LSCI).

Issue: What is the obligation of Luzon under the surety bonds, or, stated otherwise, what obligation had
been guaranteed by Luzon under the terms of the surety bonds?

Held:

The bonds executed by private respondent LSCI were to guarantee the faithful performance of Depusoy
of his obligation under the Deed of Assignment and not to guarantee payment of the loans or the debt
of Depusoy to petitioner to the extent of P100,000.00. Besides, even if there had been any doubt on the
terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety. As
concretely put in Article 2055 of the Civil Code, "A guaranty is not presumed, it must be ex-pressed and
cannot extend to more than what is stipulated therein."LSCI is liable to the full extent thereof, such
liability is strictly limited to that assumed by its terms."
8. TOWERS ASSURANCE Corp vs. ORORAMA SUPERMART, its owner-proprietor, SEE HONG
Facts: This case is about the liability of a surety in a counterbond for the lifting of a writ of preliminary
attachment.
On February 17, 1976 See Hong, See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City,
sued the spouses Ernesto Ong and Conching Ong in the CFI Misamis Oriental for the collection of the
sum of P 58,400. See Hong asked for a writ of preliminary attachment to which the lower court granted
thus attaching the properties of the Ong spouses.
To lift the attachment, the Ong spouses filed on March 1976 a counterbond in the amount of P58,400
with Towers Assurance Corp as surety. In that undertaking, both the Ong spouses and Towers Assurance
Corp. Bound themselves to pay solidarily to See Hong the sum of P58,400.
For non-appearance at the pre-trial, the Ong spouses were declared in default.
On Oct 1976, the lower court ordered the Ong spouses and their surety Towers Assurance to pay
solidarily to See Hong the sum of P58,400 and the Ong spouses alone to pay P10,000 for litigation
expenses and attorneys fees.
Ernesto Ong manifested that he did not want to appeal. Upon motion for execution by Ororama Super
mart filed a motion for execution to which the lower court granted, a writ of execution was issued
against the judgment debtors and their surety.
On March 29, 1977, Towers Assurance Corporation filed the instant petition for certiorari assailing the
decision and writ of execution alleging that the court acted with grave abuse of discretion in issuing a
writ of execution against the surety without first giving it an opportunity to be heard as required in Rule
57 of Rules of Court.
Issue: WON the lower court acted with grave abuse of discretion in issuing a writ of execution against
the surety without first giving it an opportunity to be heard.
Held: Under section 17, in order that the judgment creditor might recover from the surety on the
counterbond, it is necessary (1) that execution be first issued against the principal debtor and that such
execution was returned unsatisfied in whole or in part; (2) that the creditor made a demand upon the
surety for the satisfaction of the judgment, and (3) that the surety be given notice and a summary
hearing in the same action as to his liability for the judgment under his counterbond.
The first requisite mentioned above is not applicable to this case because Towers Assurance Corporation
assumed a solidary liability for the satisfaction of the judgment. A surety is not entitled to the exhaustion
of the properties of the principal debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs. Sia, L-26449,
May 15, 1969, 28 SCRA 58, 63).
But certainly, the surety is entitled to be heard before an execution can be issued against him since he is
not a party in the case involving his principal. Notice and hearing constitute the essence of procedural
due process.

9. Magdalena Estate v. Rodriguez

G.R. No. L-18411, 17 December 1966FACTS:Spouses Rodriguez bought form the petitioner a parcel of
land in Quezon City. There was an unpaid balance of P5,000.00 on account of the price of the lot which
was covered by the promissory note issued by respondents. On the same date, Respondents and Luzon
Surety Co., Inc. executed a bond in favor of petitioner, the latter being the surety of the respondents.
When the promissory note becomes due and demandable, Luzon Surety Com., Inc. paid the amount to
petitioner. Subsequently, petitioner demanded payment from respondents herein on the alleged
accumulated interests on the principal amount. Respondents refuse to pay.Respondents alleged that
petitioner waived or condoned the interests due upon its unqualified acceptance of the principal
payment knowing its incompleteness and without exercising its rights to apply a portion thereof to the
interest as provided in the Articles 1235 and 1253 of the Civil Code. They claimed that there was a
novation and/or modification of the obligation of the appellants in favor of the appellee because the
appellee accepted without reservation the subsequent agreement set forth in the surety bond despite
its failure to provide that it also guaranteed payment of accruing interest. ISSUE:Whether or not there
was a waiver, novation and/or modification of the obligation?RULING:No.It is very clear in the
promissory note that the principal obligation is the balance of the purchased price of the parcel of land,
which is the sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc. undertook to pay the
amount of P5,000.00 representing balance of the purchase price of a parcel of land. Petitioner did not
protest nor object when it accepted the payment of P5,000.00 because it knew that that was the
complete amount undertaken by the surety as appearing in the contract. The liability of a surety is not
extended, by implication, beyond the terms of his contract. It is for the same reason that the petitioner
cannot apply a part of the P5,000.00 as payment for the accrued interest.Appellants are relying on
Article 1253 of the Civil Code which states that If the debt produces interest, payment of the principal
shall not be deemed to have been made until the interests have been recovered.This law cannot be
made applicable to a person whose obligation as a mere surety is both contingent and singular; his
liability is confined to such obligation, and he is entitled to have all payments made applied exclusively to
said application and to no other. It is merely directory, and not mandatory. Inasmuch as the appellee
cannot protest for non-payment of the interest when it accepted the amount of P5,000.00 from the
Luzon Surety Co., Inc., nor apply a part of that amount as payment for the interest, we cannot now say
that there was a waiver or condonation on the interest due.The rule is settled that novation by
presumption has never been favored. To be sustained, it needs to be established that the old and new
contracts are incompatible in all points, or that the will to novate appears by express agreement of the
parties or in acts of similar import. The mere fact that the creditor receives a guaranty or accepts
payments from a third person who has agreed to assume the obligation, when there is no agreement
that the first debtor shall be released from responsibility does not constitute a novation, and the creditor
can still enforce the obligation against the original debtor.WHEREFORE, the judgment appealed from
should be, as it is hereby, affirmed, with costs against the appellants.
10. Dino V CA
Dio vs. Court of Appeals (1992)
Facts:In 1977, Uy Tiam Enterprises and Freight Services (UTEFS), thru its representative Uy Tiam, applied
for and obtained credit accommodations from Metrobank in the sum of Php700,000.
This was secured by Continuing Suretyships separately executed by petitioners Norberto Uy (who agreed
to pay Php300,000) and Jacinto Dio (who bound himself liable up to Php800,000). Uy Tiam paid the
obligation under this letter of credit in 1977.
UTEFS obtained another credit accommodation in 1978, which was likewise settled before he applied
and obtained another in 1979 in the sum of Php815,600. This sum covered UTEFS purchase of fertilizers
from Planters Producst.
Uy and Dio did not sign the application for this credit and were not asked to execute suretyship or
guarantee. UTEFS executed a trust receipt whereby it agreed to deliver to Metrobank the goods in the
event of non-sale, and if sold, the proceeds will be delivered to Metrobank.
However, UTEFS did not comply with its obligation.
As a result, Metrobank demanded payment from UTEFS and the sureties, Uy &Dio. The sureties refused
to pay on the ground that the obligation for which they executed the continuing suretyship agreement
has been paid.
RTC ruled in favor of the petitioners, CA affirmed.
Issue: WON petitioners are liable for payment of the 1979 transaction under the continuing suretyship
agreement they executed in 1977. Assuming that they are, what is the extent of their liability?
Ruled: Yes.
The Supreme Court held that Uy &Dio are liable. The agreement they executed in 1977 is a continuing
suretyship, one which is not limited to a single transaction but which contemplates a succession of
liabilities, for which, as they accrue, the guarantor becomes liable.
The agreement that petitioners signed expressly provided that it is a continuing guaranty and shall be in
full force and effect until written notice to the bank that it has been revoked by the surety.
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may
not be known at the time the guaranty is executed.This is the basis for contracts denominated as a
continuing guaranty or suretyship.
A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future
course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is
prospective in its operation and is generally intended to provide security with respect to future
transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue,
the guarantor becomes liable.
Otherwise stated, a continuing guaranty is one which covers all transactions, including those arising in
the future, which are within the description or contemplation of the contract of guaranty, until the
expiration or termination thereof.
A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to
give a standing credit to the principal debtor to be used from time to time either indefinitely or until a
certain period, especially if the right to recall the guaranty is expressly reserved. Hence, where the
contract of guaranty states that the same is to secure advances to be made "from time to time"the
guaranty will be construed to be a continuing one.
In the case at bar, the pertinent portion of paragraph I of the suretyship agreement executed by
petitioner Uy provides: "I. For and in consideration of any existing indebtedness to the BANK of UY TIAM
(hereinafter called the 'Borrower'), for the payment of which the SURETY is now obligated to the BANK,
either as guarantor or otherwise, and/or in order to induce the BANK, in its discretion, at any time or
from time to time hereafter,"
The foregoing stipulations unequivocally reveal that the suretyship agreements in the case at bar are
continuing in nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they
denied the fact that they had not revoked the suretyship agreements.As to the 2ndissue, petitioners are
only liable up to the maximum limit fixed in the continuing suretyship agreements (Php800,000 for Dio
and Php300,000 for Uy). The law is clear that a guarantor may bind himself for less, but not for more
than the principal debtor, both as regards the amount and the onerous nature of the conditions (Art.
2054). CA decision ordering petitioners to pay P2,397,883.68 which represents the amount due inclusive
of interest and charges, is modified.Paragraph I of the Continuing Suretyship Agreement executed by
petitioner Diño contains identical provisions except with respect to the guaranteed aggregate principal
amount which is EIGHT HUNDRED THOUSAND PESOS (P800,000.00).The limit of the petitioners'
respective liabilities must be determined from the suretyship agreement each had signed. It is
undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and the rule is
settled that the obligation of the surety cannot be extended by implication beyond its specified limits. To
the extent, and in the manner, and under the circumstances pointed out in his obligation, he is bound,
and no farther.Indeed, the Continuing Suretyship Agreements signed by petitioner Diño and petitioner
Uy fix the aggregate amount of their liability, at any given time, at P800,000.00 and P300,000.00,
respectively. The law is clear that a guarantor may bind himself for less, but not for more than the
principal debtor, both as regards the amount and the onerous nature of the conditions.
11. Baylon v CA
Facts:
- In 1986, petitioner Baylon introduced private respondent Tomacruz to Luanzon in order for the
respondent to grant a loan to said Luanzon. Luanzon, who is the co-manager of the petitioner's husband
in PLDT, is engaged in the business of as a contractor and the amount loaned was to become part of said
venture.
- Subsequently, Luanzon issued a promissory note in favor of the private respondent for said loan.
Additionally, petitioner signed said note as a guarantor. Other checks were also issued by Luanzon
pertaining to said debt.
- Afterwards, respondent demanded for the payment but said demands were left unheeded. Thus
constrained, private respondent filed a case for the collection of a sum of money in RTC Quezon City
Luanzon, petitioner and the latter's husband although summons were not served upon Luanzon.
- [PETITIONER'S DEFENSE] - The money given by private respondent to Luanzon is not a loan but an
investment on the latter's business.
- Petitioner alleged that she did not guaranteed the payment of said promissory note and even if she did,
private respondent has not exhausted the property of Luanzon as the principal debtor. Likewise, there
was an extension of the maturity date without her consent, thereby releasing her from said obligation.
- The RTC ruled in favor of the private respondent. The trial court stated that the record clearly indicate
that the money given by private respondent was a loan and not an investment. Furthermore, the trial
court held that petitioner's assurances that the promissory note will be paid binds said party.
- The Court of Appeals affirmed said ruling.
Issue: Whether or not the petitioner is liable for the payment of the promissory note in the instant case.
Held: No, the petitioner is liable for the payment of the promissory note in the instant case.
Article 2058 of the Civil Code provides: 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.
It is axiomatic that the liability of the guarantor is only subsidiary. All the properties of the
principal debtor must first be exhausted before his own is levied upon. Thus, the creditor may hold the
guarantor liable only after judgment has been obtained against the principal debtor and the latter is
unable to pay, for obviously the exhaustion of the principals property - the benefit of which the
guarantor claims - cannot even begin to take place before judgment has been obtained.
In the present case, there is no judgement yet on the part of Luanzon, the principal debtor.
Although the principal debtor Luanzon was impleaded as defendant, there is nothing in the records to
show that summons was served upon her. Thus, the trial court never even acquired jurisdiction over the
principal debtor. The Supreme Court held that private respondent must first obtain a judgment against
the principal debtor before assuming to run after the alleged guarantor.
VIII.Pledge
12. PNB v Banalao
Facts:
Banatao, et al., filed an action for recovery of a real property, against Carag. The property is an
accretion that Carag was occupying and Banatao is claiming. During the pendency of the case, Carag was
able to secure a homestead patent over the property and was given an OCT.
Subsequently, while the case was still pending, he applied for a loan from PNB and secured it
using the property (mortgage ba). PNB approved the application, relying on the OCT, which had no
notice of lis pendens. Carag was not able to pay the loan so the property was extrajudicially foreclosed
by PNB and consolidated ownership in its name.
However, Banatao and Carag entered into a compromise agreement stating that Banatao would
own the northern half while Carag would own the Southern half. PNB was not made a party of the
compromise agreement however, Carag acknowledged their indebtedness to petitioner PNB and bound
themselves to pay their respective obligations to the bank, including the interests accruing thereon.
Trial Court approved the compromise agreement in which the PNB disagreed on the ground that the
bank is not an indispensable party to the compromise agreement and the bank claims good faith on the
position that the OCTs presented to it were all clean on their faces at the time the mortgages were
applied for; that there were no notices of lis pendens. Hence this petition.
Issue: WHETHER THE COMPROMISE AGREEMENT ENTERED INTO BY AND BETWEEN THE HEREIN
PLAINTIFFS-RESPONDENTS AND DEFENDANTS-RESPONDENTS AND APPROVED BY THE TRIAL COURT
LEGALLY BINDS PETITIONER PNB WHICH IS NOT A PARTY THERETO AND CONSTITUTES SUFFICIENT LEGAL
BASIS TO NULLIFY PNB'S MORTGAGE LIEN ON THE REALTY IN QUESTION.

Ruling: Affirmative
The defendants-respondents (Carag), not being the absolute owners and not having been authorized to
mortgage the subject real property, could not validly mortgage the said real property with [petitioner
PNB]. However, we are not unmindful of the [defendants-respondents'] liability to [the bank]. But such
issue could be dealt with in a separate and distinct action.
It is basic in law that a compromise agreement, as a contract, is binding only upon the parties to the
compromise, and not upon non-parties. This is the doctrine of relativity of contracts. Consistent with this
principle, a judgment based entirely on a compromise agreement is binding only on the parties to the
compromise the court approved, and not upon the parties who did not take part in the compromise
agreement and in the proceedings leading to its submission and approval by the court. Otherwise stated,
a court judgment made solely on the basis of a compromise agreement binds only the parties to the
compromise, and cannot bind a party litigant who did not take part in the compromise agreement.
In the case of Castaeda v. Heirs of Maramba,[16] we held that: Judgment based on a compromise
affects only participating litigants. A partial decision, stemming from an amicable settlement among two
of several parties to an action, binds only the parties so participating in the settlement. This decision
never becomes final with respect to the parties who did not take part in the settlement confirmed by the
partial decision aforesaid.
Following Castaeda,the judgment on compromise rendered by the trial court in this case, and later
affirmed by the appellate court, is final with respect only to the plaintiffs-respondents and defendants-
respondents, but not with respect to the PNB. Hence, the trial court's judgment on compromise which
settles the issue of ownership over the properties in question is but a partial decision that does not
completely decide the case and cannot bind the PNB.
Our conclusion on the nullity of mortgage issue renders it unnecessary to decide the question of
whether the compromise agreement between the plaintiffs-respondents and the defendants-
respondents should be set aside for its effect on the bank. With the mortgages invalidated, the PNB no
longer has any interest that the compromise agreement can affect. In the absence of any other reason to
impugn the lower court decisions approving the compromise agreement, we affirm the approval of the
compromise agreement and the disposition of the case on the basis of compromise. Given our ruling on
the invalidity of the mortgages, a remand of this issue is no longer necessary. The parties liabilities to
PNB on the loans they obtained are not issues before us for disposition, and are for the parties to act
upon as matters outside the coverage of this case.

13. Manila Banking Corporation vs. Teodoro

FACTS:
On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and severally, executed in
favor of plaintiff a Promissory Note (No. 11487) for P10,420.00, at 12% interest per annum. 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.

It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed of Assignment of
Receivables from the Emergency Employment Administration in the sum of P44,635.00. The Deed of
Assignment provided that it was for and in consideration of certain credits, loans, overdrafts and other
credit accommodations extended to defendants as security for the payment of said sum and the interest
thereon, and that defendants `do hereby remise, release and quitclaim all its rights, title, and interest in
and to the accounts receivables.' Further:

(1) the title and right of possession to said accounts receivable is to remain in the assignee, x x x;

(9) x x x 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 x x x.

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 Notes, this action was instituted.

The Trial Court rendered its judgment adverse to defendants. Upon appeal, the Court of Appeals,
certified the case to the Supreme Court.

ISSUES:(1) W/N the assignment of receivables has the effect of payment of all the loans contracted by
appellants from appellee bank; and (2) W/N 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

RULING:
Negative; Negative; 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. x x x 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.

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.

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 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 . 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.

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:

"x x x the Assignor do hereby remise, releaseand quit-claimunto said assignee all its rights, title
and interest in the accounts receivable described hereunder."

"x x x that the title and right of possession to said account receivable is to remain in said
assignee, x x x.

The character of the transactions between the parties is not, however, determined by the language used
in the document but by their intention.

The character 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. It has been said that a transfer of property
by the debtor to a creditor, even if sufficient on its face 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 importing 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.

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, while promissory note No. 11487 is dated
April 25, 1966, promissory note 11515, dated May 3, 1966, and promissory note 11699, on June 20,
1966. At most, it was a dation in payment for 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. 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

The second issue 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.

14.CITIBANK AND INVESTORS FINANCE CORPORATION VS MODESTA SABENIANO

G.R. NO. 156132
OCTOBER 16, 2006
FACTS: Modesta Sabeniano is a client of Citibank and FNCB Finance. On February 1978, Sabeniano
obtained a loan of Php 200,000 from Citibank. This loan was followed with several other loans – some
were paid, while some were not. Those that were not paid upon maturity were rolled over, reflecting a
total unpaid loan of Php 1,069,847.40 as of September 1979.

These loans were secured by Sabenianos money market placements with FNCB Finance through a Deed
of Assignment plus a Declaration of Pledge which states that all present and future fiduciary placements
held in her personal and/or joint name with Citibank Switzerland, will secure all claims that Citibank may
have or, in the future, acquire against her.

The Deeds of Assignment were duly notarized, while the Declaration of Pledge was not notarized and
Citibanks copy was undated, while that of Sabeniano bore the date, September 24, 1979.

Since Sabeniano failed to pay her obligations to Citibank, the latter sent demand letters to request
payment. Her total unpaid loan initially amounted to Php 2,123,843.20 (inclusive of interests).

Still failing to pay, Citibank executed the Deeds of Assignment and used the proceeds of Sabenianos
money market placement from FNCB Finance which totaled Php 1,022,916.66 and her deposits with
Citibank which totaled Php 31,079.14 to set-off her loan.

This reduced the unpaid balance to Php 1,069,847.40 as previously mentioned. Since the loan remains
unpaid, Citibank proceeded to execute the Declaration of Pledge and remitted a total of $149,632.99
from Sabenianos Citibank-Geneva accounts to off-set the loan.

Sabeniano then filed a complaint against Citibank for damages and specific performance (for proper
accounting and return of the remitted proceeds from her personal accounts). She also contended that
the proceeds of 2 promissory notes (PN) from her money market placements with Citibank were rolled
over or reinvested into the petitioner bank, and these should also be returned to her.
Regarding the execution of the pledge, the RTC declared this illegal, null and void. Citibank was ordered
to return the $149,632.99 to Sabenianos Citibank-Geneva account with a legal interest of 12% per
annum. The RTC also ordered Sabeniano to pay her outstanding loan to Citibank without interests and
penalty charges.

Both parties appealed to the CA which affirmed the RTCs decision, but further ruled entirely in favor of
Sabeniano – holding that Citibank failed to establish her indebtedness and that all the executed deeds
should be returned to her account. The case has now reached the Supreme Court.

ISSUE: Whether or not Citibanks execution of deeds and pledge to off-set Sabenianos loan was valid and
legal.

HELD: The Supreme Court reversed the CAs findings regarding Sabenianos Citibank loan as this was
properly documented and sufficient in evidence. Thus, the execution of deeds was valid, especially that
the agreement was duly notarized, signed and prepared in accordance with the law.

The court also ordered Citibank to return the amount of P318,897.34 and P203,150.00 plus 14.5% per
annum to Sabeniano. This is the total amount from the 2 PNs which were executed despite being
reinvested in said bank. The bank was also ordered to pay moral damages of P300,000, exemplary
damages for P250,000, attorneys fees of P200,000.

The SC however affirmed the RTCs decision regarding the pledge. Being a separate entity, Citibank
cannot exercise automatic remittance from Sabenianos Citibank Geneva account to off-set her
outstanding loan.

The court also noted that the pledge was filled out irregularly – it was not notarized and Citibanks copy
bore no date. The original copy was not also produced in court.

Regarding Sabenianos obligation, the Supreme Court affirmed RTCs decision and ordered her to pay the
remaining balance of her loan which amounts to P1,069,847.40 as of 5 September 1979. These loans
continue to earn interest based on the maturity date that were agreed and stipulated upon by the
parties.

15. SPS. ONG VS. ROBAN LENDING CORP.

FACTS:
Petitioner-spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong obtained several loans from Roban
Lending Corporation (respondent) in the total amount of P4,000,000.00. These loans were secured by a
real estate mortgage on petitioners parcels of land located in Binauganan, Tarlac City.
Petitioners and respondent executed an Amendment to Amended Real Estate Mortgage consolidating
their loans inclusive of charges which totaled P5,916,117.50.
The parties executed a Dacion in Payment Agreement wherein petitioners assigned the properties to
respondent in settlement of their total obligation, and a Memorandum of Agreement that the Roban
Lending Corp and the petitioners agreed to consolidate and restructure all loans, which have been all
past due and delinquent since April 19, 2000, and outstanding obligations totaling P5,916,117.50. The
petitioners sign another promissory note in the amount of P5,916,117.50 with a promise to pay the
respondent in full within one year from the date of the consolidation and restructuring, otherwise the
petitioners agree to have their DACION IN PAYMENT agreement, which they have executed and signed
today in favor of the respondent.
Petitioners filed a Complaint 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.
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% attorneys fees thereon and
in addition, respondent exacted certain sums denominated as EVAT/AR.
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. 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.
Respondent maintained the legality of its transactions with petitioners, alleging that the Dacion in
Payment Agreement is lawful and valid as it is recognized 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.
By Decision of April 21, 2004, Branch 64 of the Tarlac City RTC, finding on the basis of the pleadings that
there was no pactum commissorium, dismissed the complaint.
On appeal, the Court of Appeals noted that what the RTC actually rendered was a summary judgment
and upheld the RTC decision that there was no pactum commissorium. Their Motion for Reconsideration
having been denied.
ISSUE:Whether or not the dacion in payment agreement entered into by Spouses Ong and Roban
constitutes pactum commissorium.
HELD:
Yes. The questioned contracts were freely and voluntarily executed by petitioners and respondent is
pactum commissorium being void for being prohibited by law.
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 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.
The MOA and the Dacion in Payment contain no provisions for foreclosure proceedings nor redemption.
Under the MOA, 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.
Which the 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. This does notpersuade.
In a true dacion en pago, the assignment of the property extinguishes the monetary debt. In the case at
bar, 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 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 P5,916,117.50 which they were to pay within one year.

IX. Real Mortgage16. G.R. No. 228617. September 20, 2017.PLANTERS DEVELOPMENT BANK,
petitioner, vs. SPOUSES VICTORIANO and MELANIE RAMOS, respondents.FACTSIn July 2012, Spouses
Victoriano and Melanie Ramos (Spouses Ramos) applied for several credit lines with Planters
Development Bank (PDB) for the construction of a warehouse in Barangay Santo Tomas, Nueva Ecija. The
said application was approved for P40,000,000.00, secured by Real Estate Mortgage over properties
owned by the spouses.Subsequently, Spouses Ramos requested for additional loan and PDB allegedly
promised to extend them a further loan of P140,000,000.00, the amount they supposed was necessary
for the completion of the construction of the warehouse with a capacity of 250,000 cavans of palay.
Despite the assurances, only P25,000,000.00 in additional loan was approved and released by PDB,
which was secured by a Real Estate Mortgage over four (4) other real properties.Spouses Ramos was not
able to pay obligations. They appealed to PDB for the deferment of debt servicing and requested for a
restructuring scheme but the parties failed to reach an agreement.PDB filed a Petition for Extra-judicial
Foreclosure of Real Estate Mortgage under Act 3135, as amended, before the Regional Trial Court of San
Jose City, Nueva Ecija. A Notice to Parties of Sheriffs Public Auction Sale was thereafter issued.Spouses
Ramos filed a Complaint for Annulment of Real Estate Mortgages and Promissory Notes, Accounting and
Application of Payments, Injunction with Preliminary Injunction and Temporary Restraining Order against
PDB and its officers also before the RTC of San Jose City, Nueva Ecija by which PDB, instead of filing
answer, filed a motion to dismiss complaint alleging that the venue of the action was improperly laid
considering that the real estate mortgages signed by the parties contained a stipulation that any suit
arising therefrom shall be filed in Makati City only and that complaint failed to state a cause of action
and must therefore be dismissed.RTC Ruling: Denied the Urgent Motion to Dismiss. Venue can be
waived. (2) Allegations in the Complaint are sufficient to constitute a cause of action.PDB filed MR
instead of filing an answer to the complaint. This prompted Spouses Ramos to file a motion to declare
PDB in default. Subsequently, RTC denied both motions. RTC declared that after the Court denied the
Motion to Dismiss, the defendants filed Motion for Reconsideration which is not precluded by the rules.
Only after this Court shall have denied it would the defendants become bound to file the Answer to the
Complaint. It is only if the defendants failed to file Answer after the period given by the foregoing rules
would the plaintiff be entitled to have the defendants be declared in default.PDB filed petition for
certiorari with the CA for grave abuse of discretion of RTC. CA denied the petition.Hence this present
petition for certiorari under Rule 45.ISSUEWhether or not venue is improperly laidHELDThe petition is
meritorious.Rule 4 of the Rules of Civil Procedure provides the rules on venue in filing an action, to
wit:RULE 4Venue of ActionsSection 1. Venue of real actions.—Actions affectingtitle to or possession of
real property, or interest therein, shall be commenced and tried in the proper court which has
jurisdiction over the area wherein the real property involved, or a portion thereof, is situated.Forcible
entry and detainer actions shall be commenced and tried in the municipal trial court of the municipality
or city wherein the real property involved, or a portion thereof, is situated.Section 2. Venue of
personal actions.—All other actions may be commenced and tried where the plaintiff or any of the
principal plaintiffs resides, or where the defendant or any of the principal defendants resides, or in the
case of a non-resident defendant where he may be found, at the election of the plaintiff.x x x xSection 
4. When Rule not applicable.—This Rule shall not apply:(a) In those cases where a specific rule or law
provides otherwise; or(b) Where the parties have validly agreed in writing before the filing of the
action on the exclusive venue thereof.The general rules on venue admit of exceptions in Section 4
thereof, i.e., where a specific rule or law provides otherwise, or when the parties agreed in writing
before the filing of the action on the exclusive venue thereof.Stipulations on venue, however, may either
be permissive or restrictive. Written stipulations as to venue may be restrictive in the sense that the suit
may be filed only in the place agreed upon, or merely permissive in that the parties may file their suit
not only in the place agreed upon but also in the places fixed by law. As in any other agreement, what is
essential is the ascertainment of the intention of the parties respecting the matter.In view of the
predilection to view a stipulation on venue as merely permissive, the parties must therefore employ
words in the contract that would clearly evince a contrary intention. The parties must be able to show
that such stipulation is exclusive. In the absence of qualifying or restrictive words, the stipulation should
be deemed as merely an agreement on an additional forum, not as limiting venue to the specified place.
(Spouses Lantin v. Judge Lantion).The RTC should have granted the Urgent Motion to Dismiss filed by PDB
on the ground that the venue was improperly laid. The complaint being one for annulment of real estate
mortgages and promissory notes is in the nature of a personal action, the venue of which may be fixed
by the parties to the contract. In this case, it was agreed that any suit or action that may arise from the
mortgage contracts or the promissory notes must be filed and tried in Makati only. Not being contrary to
law or public policy, the stipulation on venue, which PDB and Spouses Ramos freely and willingly agreed
upon, has the force of law between them, and thus, should be complied with in good faith.In the present
case, Spouses Ramos had validly waived their right to choose the venue for any suit or action arising
from the mortgages or promissory notes when they agreed to limit the same to Makati City only and
nowhere else. True enough, the stipulation on the venue was couched in a language showing the
intention of the parties to restrict the filing of any suit or action to the designated place only. It is crystal
clear that the intention was not just to make the said place an additional forum or venue but the only
jurisdiction where any suit or action pertaining to the mortgage contracts may be filed. There being no
showing that such waiver was invalid or that the stipulation on venue was against public policy, the
agreement of the parties should be upheld.Moreover, Spouses Ramos never really assailed the validity of
the mortgage contracts and promissory notes. Apparently, what they were only claiming was that the
said contracts contain stipulations which are illegal, immoral and otherwise contrary to customs or public
policy. For instance, they alleged that the interest was pegged at an excessive rate of 8% which the bank
unilaterally increased to 9%. They likewise claimed that the penalty interest rate of 3% was
unconscionable. Further, they claimed that the escalation clause provided in the mortgage contracts was
violative of Presidential Decree No. 1684. These matters, however, do not affect the validity of the
mortgage contracts. Thus, with all the more reason that the stipulation on venue should have been
upheld pursuant to the ruling of the Court in Briones v. Court of Appeals, viz.: In cases where the
complaint assails only the terms, conditions, and/or coverage of a written instrument and not its validity,
the exclusive venue stipulation contained therein shall still be binding on the parties, and thus, the
complaint may be properly dismissed on the ground of improper venue. Conversely, therefore, a
complaint directly assailing the validity of the written instrument itself should not be bound by the
exclusive venue stipulation contained therein and should be filed in accordance with the general rules on
venue. To be sure, it would be inherently consistent for a complaint of this nature to recognize the
exclusive venue stipulation when it, in fact, precisely assails the validity of the instrument in which such
stipulation is contained.

18. Garcia vs. Villar

FACTS:

Lourdes V. Galas was the original owner of a piece of property located at Malindang St., Quezon City, which she,
with her daughter, Ophelia G. Pingol, as co-maker, mortgaged to Yolanda Valdez Villar as security for a loan in the
amount of Two Million Two Hundred Thousand Pesos (P2,200,000.00), and again to Pablo P. Garcia to secure her
loan of One Million Eight Hundred Thousand Pesos (P1,800,000.00). Both mortgages were annotated at the back of
the TCT.

Galas thereafter sold the subject property to Villar for One Million Five Hundred Thousand Pesos (P1,500,000.00),
and declared in the Deed of Sale that such property was free and clear of all liens and encumbrances of any kind
whatsoever. The Deed of Sale was registered and, consequently, a new TCT was issued in the name of Villar. Both
Villars and Garcias mortgages were carried over and annotated at the back of Villars new TCT.

Garcia filed a Petition for Mandamus with Damages against Villar before the RTC. Garcia subsequently amended his
petition to a Complaint for Foreclosure of Real Estate Mortgage with Damages. Garcia alleged that when Villar
purchased the subject property, she acted in bad faith and with malice as she knowingly and willfully disregarded
the provisions on laws on judicial and extrajudicial foreclosure of mortgaged property.

The RTC rendered its Decision in favor of Garcia and declared that he direct sale of the subject property to Villar,
the first mortgagee, could not operate to deprive Garcia of his right as a second mortgagee. The RTC said that upon
Galass failure to pay her obligation, Villar should have foreclosed the subject property pursuant to Act No. 3135 as
amended, to provide junior mortgagees like Garcia, the opportunity to satisfy their claims from the residue, if any,
of the foreclosure sale proceeds. This, the RTC added, would have resulted in the extinguishment of the mortgages.

Villar appealed to the CA based on the arguments that Garcia had no valid cause of action against her; that he was
in bad faith when he entered into a contract of mortgage with Galas, in light of the restriction imposed by the first
mortgage; and that Garcia, as the one who gave the occasion for the commission of fraud, should suffer. Villar
further asseverated that the second mortgage is a void and inexistent contract considering that its cause or object
is contrary to law, moral, good customs, and public order or public policy, insofar as she was concerned.

The CA reversed the RTC and declared that Galas was free to mortgage the subject property even without Villars
consent as the restriction that the mortgagees consent was necessary in case of a subsequent encumbrance was
absent in the Deed of Real Estate Mortgage. In the same vein, the Court of Appeals said that the sale of the subject
property to Villar was valid as it found nothing in the records that would show that Galas violated the Deed of Real
Estate Mortgage prior to the sale.

ISSUES:

Whether or not the second mortgage to Garcia was valid;

Whether or not the sale of the subject property to Villar was valid;
Whether or not the sale of the subject property to Villar was in violation of the prohibition on pactum
commissorium;
Whether or not Garcias action for foreclosure of mortgage on the subject property can prosper.

RULING:

Affirmative.
Affirmative.

While it is true that the annotation of the first mortgage to Villar on Galass TCT contained a restriction on further
encumbrances without the mortgagees prior consent, this restriction was nowhere to be found in the Deed of Real
Estate Mortgage. As this Deed became the basis for the annotation on Galass title, its terms and conditions take
precedence over the standard, stamped annotation placed on her title. If it were the intention of the parties to
impose such restriction, they would have and should have stipulated such in the Deed of Real Estate Mortgage
itself.
Neither did this Deed proscribe the sale or alienation of the subject property during the life of the mortgages.
Garcias insistence that Villar should have judicially or extrajudicially foreclosed the mortgage to satisfy Galass debt
is misplaced. The Deed of Real Estate Mortgage merely provided for the options Villar may undertake in case Galas
or Pingol fail to pay their loan. Nowhere was it stated in the Deed that Galas could not opt to sell the subject
property to Villar, or to any other person. Such stipulation would have been void anyway, as it is not allowed under
Article 2130 of the Civil Code, to wit:

Art. 2130.A stipulation forbidding the owner from alienating the immovable mortgaged shall be void.

Negative.

The following are the elements of pactum commissorium:

There should be a property mortgaged by way of security for the payment of the principal obligation; and
There should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-
payment of the principal obligation within the stipulated period.

Villars purchase of the subject property did not violate the prohibition on pactum commissorium. The power of
attorney provision above did not provide that the ownership over the subject property would automatically pass to
Villar upon Galasfailure to pay the loan on time. What it granted was the mere appointment of Villar as attorney-in-
fact, with authority to sell or otherwise dispose of the subject property, and to apply the proceeds to the payment
of the loan. This provision is customary in mortgage contracts, and is in conformity with Article 2087 of the Civil
Code, which reads:

Art. 2087.It is also of the essence of these contracts that when the principal obligation becomes due, the
things in which the pledge or mortgage consists may be alienated for the payment to the creditor.

Galass decision to eventually sell the subject property to Villar for an additional P1,500,000.00 was well within the
scope of her rights as the owner of the subject property. The subject property was transferred to Villar by virtue of
another and separate contract, which is the Deed of Sale. Garcia never alleged that the transfer of the subject
property to Villar was automatic upon Galasfailure to discharge her debt, or that the sale was simulated to cover up
such automatic transfer.

Negative.

The real nature of a mortgage is described in Article 2126 of the Civil Code, to wit:

Art. 2126.The mortgage directly and immediately subjects the property upon which it is imposed,
whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted.

Simply put, a mortgage is a real right, which follows the property, even after subsequent transfers by the
mortgagor. A registered mortgage lien is considered inseparable from the property inasmuch as it is a right in rem.

The sale or transfer of the mortgaged property cannot affect or release the mortgage; thus the purchaser or
transferee is necessarily bound to acknowledge and respect the encumbrance. In fact, under Article 2129 of the
Civil Code, the mortgage on the property may still be foreclosed despite the transfer, viz:

Art. 2129.The creditor may claim from a third person in possession of the mortgaged property, the
payment of the part of the credit secured by the property which said third person possesses, in terms and
with the formalities which the law establishes.
While we agree with Garcia that since the second mortgage, of which he is the mortgagee, has not yet been
discharged, we find that said mortgage subsists and is still enforceable. However, Villar, in buying the subject
property with notice that it was mortgaged, only undertook to pay such mortgage or allow the subject property to
be sold upon failure of the mortgage creditor to obtain payment from the principal debtor once the debt matures.
Villar did not obligate herself to replace the debtor in the principal obligation, and could not do so in law without
the creditors consent. Article 1293 of the Civil Code provides:

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237.

Therefore, the obligation to pay the mortgage indebtedness remains with the original debtors Galas and Pingol.

Garcia has no cause of action against Villar in the absence of evidence to show that the second mortgage executed
in favor of Garcia has been violated by his debtors, Galas and Pingol, i.e., specifically that Garcia has made a
demand on said debtors for the payment of the obligation secured by the second mortgage and they have failed to
pay.
19. Nicamora Bucton v. Rural Bank of El Salvador (G.R. 179625)
FACTS: Petitioner is the owner of a parcel of land located in Cagayan de Oro. Concepcion borrowed the
title of the land on the pretext that she is going to show it to an interested buyer. Concepcion obtained a
loan from respondent bank and as a security for the loan, Concepcion mortgaged the property of
petitioner using a SPA which was allegedly executed in favor of Concepcion. When Concepcion failed to
pay the loan, the house and lot of petitioner were foreclosed. Petitioner insisted that she did not obtain
any loan from the bank and that her signature was forged by Concepcion that the loan was entered into
by the latter in her own personal capacity. The bank on the other hand maintains that it was not
negligent in inspecting the properties and relied on the presumption of regularity of the notarized
SPA.ISSUE:Whether or not the Real Estate Mortgage was entered into by Concepcion in her personal
capacityHELD: YES CIVIL LAW: For the principal to be bound by a deed executed by an agent, the deed
must be signed by the agent for and in behalf of his principal. As early as the case of Philippine Sugar
Estates Development Co. v. Poizat, we already ruled that in order to bind the principal by a deed
executed by an agent, the deed must upon its face purport to be made, signed and sealed in the name of
the principal. In other words, the mere fact that the agent was authorized to mortgage the property is
not sufficient to bind the principal, unless the deed was executed and signed by the agent for and on
behalf of his principal. In Philippine Sugar Estates Development Co., the wife authorized her husband to
obtain a loan and to secure it with mortgage on her property. Unfortunately, although the real estate
mortgage stated that it was executed by the husband in his capacity as attorney-in-fact of his wife, the
husband signed the contract in his own name without indicating that he also signed it as the attorney-in-
fact of his wife. In Rural Bank of Bombon, the agent contracted a loan from the bank and executed a
real estate mortgage. However, he did not indicate that he was acting on behalf of his principal.
Similarly, in this case, the authorized agent failed to indicate in the mortgage that she was acting for and
on behalf of her principal. The Real Estate Mortgage explicitly shows on its face that it was signed by
Concepcion in her own name and in her own personal capacity. In fact, there is nothing in the document
to show that she was acting or signing as an agent of petitioner. Thus, consistent with the law on agency
and established jurisprudence, petitioner cannot be bound by the acts of Concepcion. In light of the
foregoing, there is no need to delve on the issues of forgery of the SPA and the nullity of the foreclosure
sale. For even if the SPA was valid, the Real Estate Mortgage would still not bind petitioner as it was
signed by Concepcion in her personal capacity and not as an agent of petitioner. Simply put, the Real
Estate Mortgage is void and unenforceable against petitioner. Respondent bank has no one to blame
but itself. Not only did it act with undue haste when it granted and released the loan in less than three
days, it also acted negligently in preparing the Real Estate Mortgage as it failed to indicate that
Concepcion was signing it for and on behalf of petitioner. We need not belabor that the words as
attorney-in-fact of, as agent of, or for and on behalf of, are vital in order for the principal to be bound by
the acts of his agent. Without these words, any mortgage, although signed by the agent, cannot bind the
principal as it is considered to have been signed by the agent in his personal capacity.20.HOMEOWNERS
SAVINGS AND LOAN BANK v ASUNCION P. FELONIA and LYDIA C. DE GUZMAN

FACTS
Felonia and de Guzman are owners of a parcel of land. In 1990, they mortgaged it to Delgado. But
instead of executing a real estate mortgage, the parties executed a deed of absolute sale with a right to
repurchase.
In 1991, Felonia and de Guzman filed an action for reformation of contract which was subsequently
granted. However, in 1995, while the reformation case was still pending, Delgado filed a "Petition for
Consolidation of Ownership of Property Sold with an Option to Repurchase and Issuance of a New
Certificate of Title". Delgado's petition was granted thus the trial court issued a TCT in her name. This
allowed Delgado to mortgage such property to HSLB.
A few days later, Felonia and de Guzman learned of Delgado's mortgage, thus they made an annotation
in the title of the aforementioned property of the notice of lis pendens.
In 1997, HSLB foreclosed the property and eventually purchased it.
In 2000, the CA reversed the decision of the RTC regarding the consolidation case of Delgado and
declared Felonia and de Guzman as absolute owners of the said property. HSLB prayed that the
mortgage lien in their favor be annotated as entry and be carried over to the TCT-402 on the ground that
they are a mortgagee in good faith.
ISSUE
Whether or not HSLB is entitled to the annotation of their mortgage lien in TCT-402.
RULING
The Supreme Court ruled that HSLB is no longer entitled to have its mortgage lien annotated in TCT-402.
In Bank of Commerce v. San Pablo, Jr., the doctrine of mortgagee in good faith was explained - despite
the fact that the mortgagor is not the owner of the mortgaged property, his title being fraudulent, the
mortgage contract and any foreclosure sale arising there from are given effect by reason of public policy.
In the case at bar, since at the time the subject property was mortgaged, there was yet no annotated
Notice of Lis Pendens, it can be concluded that HSLB is a mortgagee in good faith.
However, the Supreme Court believes that the rights of the parties to the present case are defined not
by the determination of whether or not HSLB is a mortgagee in good faith, but of whether or not HSLB is
a purchaser in good faith. HSLB is not such a purchaser in good faith. According to the law, a purchaser in
good faith is defined as one who buys a property without notice that some other person has a right to,
or interest in, the property and pays full and fair price at the time of purchase or before he has notice of
the claim or interest of other persons in the property. In the case at bar, HSLB utterly failed to take the
necessary precautions. At the time HSLB purchased the subject property, the Notice of Lis Pendens was
already annotated on the title. Therefore, there is no doubt that at the time appellant purchased the
subject property, it was aware of the pending litigation concerning the same property and thus, the title
issued in its favor was subject to the outcome of said litigation.

ROBLES VS CA 328 SCRA 97

FACTS:
Petitioners, siblings Lucio, Emeteria, Aludia and Emilio, all surnamed Robles, as heirs of Silvino Robles,
commenced the instant suit with the filing of complaint against Spouses Virgilio and Ruth Santos, as well
as the Rural Bank of Cardona, Inc.
Leon Robles primitively owned the disputed land. He occupied the same openly and adversely. He also
declared the same in his name for taxation purposes as early as 1916 and paid the corresponding taxes
thereon. When Leon Robles died, his son Silvino Robles inherited the land, took possession of the land,
declared it in his name for taxation purposes and paid the taxes thereon.
Upon the death of Silvino Robles, his widow Maria de la Cruz and his children inherited the property.
They took adverse possession of said property and paid taxes thereon. The task of cultivating the land
was assigned to plaintiff Lucio Robles while the payment of the land taxes to their co-heir and half-
brother, Hilario Robles.
In 1962, for unknown reasons, the tax declaration of the parcel of land in the name of Silvino Robles was
canceled and transferred to one Exequiel Ballena, father of Andrea Robles who is the wife of defendant
Hilario Robles. Thereafter, Exequiel Ballena secured a loan from the Antipolo Rural Bank, using the tax
declaration as security. Somehow, the tax declaration was transferred to the name of Antipolo Rural
Bank and later on, was transferred [to] the name of defendant Hilario Robles and his wife.
In 1996, Andrea Robles secured a loan from the Cardona Rural Bank, Inc., using the tax declaration as
security. They then failed to pay and the property was foreclosed. The spouses Hilario Robles failed to
redeem the property and so the tax declaration was transferred in the name of defendant Rural Bank.
On September 25, 1987, defendant Rural Bank sold the same to the Spouses Vergel Santos and Ruth
Santos.
In September 1987, plaintiff discovered the mortgage and attempted to redeem the property, but was
unsuccessful. On May 10,1988, defendant spouses Santos took possession of the property in question
and was able to secure Free Patent No. IV-1-010021 in their names.
The petitioners then filed a case for quieting of title before the Regional Trial Court.
RTC – in favor of petitioners
CA – reversed and set aside decision of RTC
ISSUE: Whether or not the real estate mortgage is valid
RULING: Yes but only as to the share of Hilario
In a real estate mortgage contract, it is essential that the mortgagor be the absolute ownerof the
property to be mortgaged; otherwise, the mortgage is void. In the present case, it is apparent that
Hilario Robles was not the absolute owner of the entire subject property; and that the Rural Bank of
Cardona, Inc., in not fully ascertaining his title thereto, failed to observe due diligence and, as such, was
a mortgagee in bad faith.
First, the bank was utterly remiss in its duty to establish who the true owners and possessors of the
subject property were. It acted with precipitate haste in approving the Robles spouses loan application,
as well as the real estate mortgage covering the disputed parcel of land.Had it been more circumspect
and assiduous, it would have discovered that the said property was in fact being occupied by the
petitioners, who were tending and cultivating it.
Second, the bank should not have relied solely on the Deed of Sale purportedly showing that the
ownership of the disputed property had been transferred from Exequiel Ballena to the Robles spouses,
or that it had subsequently been declared in the name of Hilario. Because it was dealing with
unregisteredland, and the circumstances surrounding the transaction between Hilario and his father-in-
lawExequiel were suspicious, the bank should have exerted more effort to fully determine the title of the
Robleses. Rural Bank of Compostela v. Court of Appealsinvalidated a real estate mortgage after a finding
that the bank had not been in good faith. The Court explained: "The rule that persons dealing with
registered lands can rely solely on the certificate of title does not apply to banks."In Tomas v. Tomas, the
Court held:Sc-slx
"x x x. Banks, indeed, should exercise more care and prudence in dealing even with registered lands,
than private individuals, for their business is one affected with public interest, keeping in trust money
belonging to their depositors, which they should guard against loss by not committing any act of
negligence which amounts to lack of good faith by which they would be denied the protective mantle of
land registration statute, Act 496, extended only to purchasers for value and in good faith, as well as to
mortgagees of the same character and description. x x x."
Lastly, the Court likewise finds it unusual that, notwithstanding the banks insistence that it had become
the owner of the subject property and had paid the land taxes thereon, the petitioners continued
occupying it and harvesting the fruits therefrom.
Considering that Hilario can be deemed to have mortgaged the disputed property not as absolute
ownerbut only as a co-owner,he can be adjudged to have disposed to the Rural Bank of Cardona, Inc.,
only his undivided sharetherein. The said bank, being the immediate predecessor of the Santos spouses,
was a mortgagee in bad faith. Thus, justice and equity mandate the entitlement of the Santos spouses,
who merely stepped into the shoes of the bank, only to what legally pertains to the latter -- Hilarios
share in the disputed property.

22.GSIS v. Santiago
Facts:
- Deceased spouses Zulueta and Ramos obtained various loans from present petitioner GSIS. Said loans
was secured by real estate mortgages over parcels of land covered by TCT Nos. 26105, 37177 and 50365.
- Due to the spouses failure to pay said loans, GSIS moved to foreclose said mortgages and the same
were sold in public auction. 78 lots were expressly excluded because the sold lots were enough to cover
for the debt.
- However, an Affidavit of Consolidation of Ownership was executed by GSIS which includes the lots that
were supposedly excluded from the foreclosure. GSIS tried to sell said properties to Yorktown
Corporation but the same was disapproved by the Office of the President. Subsequently, the foreclosed
properties were slowly disposed by GSIS including the lots supposedly excluded by said foreclosure.
- On April 7, 1990, Zulueta transferred all his rights and interest over the excluded lots to present
respondent Santiago. Subsequently, Zulueta, as represented by Santiago filed a complaint for
reconveyance of real estate against the GSIS. - Subsequently, Zulueta was substituted by Santiago as the
plaintiff in the complaint a quo. Upon the death of Santiago on March 6, 1996, he was substituted by his
widow. (Petitioner's Defense) - Petitioner argued that prescription has already set in and the complaint
stated no cause if action.
- Both the RTC and CA ruled in favor if present respondent Santiago.

Issues 1. Whether or not GSIS is guilty of bad faith with regards to the excluded lots in question; 2.
Whether or not respondent's cause of action has already prescribed. 3. Whether or not GSIS is legally
obligated to return said lots to the respondent.

Held 1. Yes, GSIS is guilty of bad faith with regards to the excluded lots in question; It is settled that a
government financial institution and, like banks, is expected to exercise greater care and prudence in its
dealings, including those involving registered lands.
The Court held in Rural Bank of Compostela v. CA that a bank must exercise more care in dealing
with registered lands, than private individuals and the same must not commit any act of negligence
which amounts to lack of good faith. In the present case, the Court held that the acts of defendant-
appellant GSIS in concealing from the Zuluetas, the existence of these lots, in failing to notify or apprise
the spouses Zulueta about the excluded lots from the time it consolidated its titles on their foreclosed
properties in 1975, in failing to inform them when it entered into a contract of sale of the foreclosed
properties to Yorkstown Development Corporation in 1980 as well as when the said sale was revoked by
then President Ferdinand E. Marcos during the same year demonstrated a clear effort on its part to
defraud the spouses Zulueta and appropriate for itself the subject properties. The execution of the
affidavit of ownership over the excluded lots is an act of gross and evident bad faith. It cannot feign
ignorance of the fact that the subject lots were excluded from the sale at public auction. At the least, its
act constituted gross negligence amounting to bad faith. Even if titles over the lots had been issued in
the name of the defendant-appellant, still it could not legally claim ownership and absolute dominion
over them because indefeasibility of title under the Torrens system does not attach to titles secured by
fraud or misrepresentation.

2. No, respondent's cause of action has not prescribed. On the issue of prescription, generally, an action
for reconveyance of real property based on fraud prescribes in four years from the discovery of fraud;
such discovery is deemed to have taken place upon the issuance of the certificate of title over the
property. On the other hand, an action for reconveyance based on implied or constructive trust
prescribes in ten years from the alleged fraudulent registration or date of issuance of the certificate of
title over the property. In the present case, GSIS claims that the present action has prescribed as more
than 10 years has elapsed since the registration of the lots in question and the same constitutes as
constructive notice to all persons. However, the Court stated that prescription only began to run upon
actual discovery of the fraud (Samonte v. CA). That the Torrens System does not furnish a shield for fraud
and the constructive notice rule shall not be applied in such cases. In the present case, the complaint for
reconveyance was filed barely a year from the discovery of the fraud.

3.Yes, GSIS is legally obligated to return said lots to the respondent. Article 22 of the Civil Code explicitly
provides that every person who, through an act of performance by another, or any other means,
acquires or comes into possession of something at the expense of the latter without just or legal ground,
shall return the same to him. In the present case, GSIS claimed that it has no obligation to return the
properties in question as the mortgage contract does not provide for such. However, such argument is
untenable as the Civil Code calls for the return of such property acquired without just or legal ground
and it has already been established that GSIS is guilty of bad faith in the present case.