MAKATI LEASING V WEAREVER TEXTILE
G.R. No. L-58469
FACTS:
 In order to obtain financial accommodations from herein petitioner Makati
Leasing and Finance Corporation
o Wearever Textile Mills, Inc., discounted and assigned several
receivables with the former under a Receivable Purchase
Agreement
 To secure the collection of the receivables assigned, private respondent
executed a Chattel Mortgage over certain raw materials inventory as well as
a machinery described as an Artos Aero Dryer Stentering Range.
Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure
of the properties mortgage to it.
 However, the Deputy Sheriff assigned to implement the foreclosure failed to
gain entry into private respondent's premises and was not able to effect the
seizure of the afore described machinery.
Petitioner thereafter filed a complaint for judicial foreclosure with CFI Rizal
 Acting on petitioner's application for replevin, the lower court issued a writ of
seizure, the enforcement of which was however subsequently restrained
upon private respondent's filing of a motion for reconsideration.
 Lower lifted the restraining order an ordered the enforcement of the writ
 The sheriff enforcing the seizure order, repaired to the premises of private
respondent and removed the main drive motor of the subject machinery.
CA, set aside the Orders of the lower court and ordered the return of the drive motor
seized by the sheriff pursuant to said Orders, after ruling that the machinery in suit
cannot be the subject of replevin, much less of a chattel mortgage, because it is a real
property pursuant to Article 415 of the new Civil Code
 The same being attached to the ground by means of bolts and the only way
to remove it from respondent's plant would be to drill out or destroy the
concrete floor, the reason why all that the sheriff could do to enforce the writ
was to take the main drive motor of said machinery.
ISSUE: WON the machinery in suit is personal property that can be subject of a
chattel mortgage
HELD:
YES
Citing the Tumalad case:
If a house of strong materials, like what was involved in the above Tumalad case, may
be considered as personal property for purposes of executing a chattel mortgage
thereon
as long as the parties to the contract so agree and no innocent third party will be
prejudiced thereby, there is absolutely no reason why a machinery, which is movable
in its nature and becomes immobilized only by destination or purpose, may not be
likewise treated as such.
 It must be pointed out that the characterization of the subject machinery as
chattel by the private respondent is indicative of intention and impresses upon
the property the character determined by the parties.
As stated in Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable
that the parties to a contract may by agreement treat as personal property that which by
nature would be real property, as long as no interest of third parties would be prejudiced
thereby.
Private respondent contends that estoppel cannot apply against it because it had never
represented nor agreed that the machinery in suit be considered as personal property
but was merely required and dictated on by herein petitioner to sign a printed form of
chattel mortgage which was in a blank form at the time of signing. – NO MERIT
 As aptly pointed out by petitioner and not denied by the respondent, the status
of the subject machinery as movable or immovable was never placed in issue
before the lower court and the Court of Appeals except in a supplemental
memorandum
Even granting that the charge is true, such fact alone does not render a contract void
ab initio, but can only be a ground for rendering said contract voidable, or annullable
pursuant to Article 1390 of the new Civil Code, by a proper action in court.
 There is nothing on record to show that the mortgage has been annulled.
Neither is it disclosed that steps were taken to nullify the same.
 Private respondent could not now therefore, be allowed to impugn the efficacy
of the chattel mortgage after it has benefited therefrom
From what has been said above, the error of the appellate court in ruling that the
questioned machinery is real, not personal property, becomes very apparent.
1
THE MANILA BANKING CORP V TEODORO
G.R. No. L-53955
FACTS:
 Sefendants, together with Anastacio Teodoro, Sr., jointly and severally,
executed in favor of Manila Banking a Promissory Note for the sum of
P10,420.00 payable in 120 days
o Defendants failed to pay the said amount inspire of repeated
demands
 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
o Father and Son made a partial payment on the May 3, 1966
promissory Note but none on the June 20, 1966 Promissory Note,
leaving still an unpaid balance of P8,934.74
o The three Promissory Notes stipulated that any interest due if not
paid at the end of every month shall be added to the total amount
then due, the whole amount to bear interest at the rate of 12% per
annum until fully paid
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
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
 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 obligation
For failure of defendants to pay the sums due on the Promissory Note, this action was
instituted
RTC, rendered its judgment adverse to defendants.
ISSUES:
(1) whether or not plaintiff claim is already considered paid by the Deed of Assign.
judgment of Receivables by the Son; and
(2) whether or not it is plaintiff who should directly sue the Philippine Fisheries
Commission for collection
HELD:
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
 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.
(1) 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
 The Deed of Assignment provided that it was as security for the payment.
 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
Definitely, the assignment of the receivables did not result from a sale transaction.
 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
 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
(2) As to whether or not appellee bank must have to exhaust all legal remedies against
the Philippine Fisheries Commission before it can proceed against appellants for
collection of loans under their promissory notes, must also be answered in the
negative.
 The obligation of appellants under the promissory notes not having been
released by the assignment of receivables, appellants remain as the principal
debtors of appellee bank rather than mere guarantors.
o 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.
2
In the instant case, appellants are both the principal debtors and the pledgors or
mortgagors. Resort to one is, therefore, resort to the other.
 Appellee bank did try to collect on the pledged receivables. As the Emergency
Employment Agency (EEA) which issued the receivables had been abolished,
the collection had to be coursed through the Office of the President which
disapproved the same

3
YAU CHU V CA
G.R. No. L-78519
FACTS:
 Victoria Yau Chu, had been purchasing cement on credit from CAMS Trading
Enterprises
o To guaranty payment for her cement withdrawals, she executed in
favor of Cams Trading deeds of assignment of her time deposits in
the total sum of P320,000 in the Family Savings Bank
Except for the serial numbers and the dates of the time deposit certificates, the deeds
of assignment, which were prepared by her own lawyer, uniformly provided —
In this case, the security for the debt is also money deposited in a bank, the amount of
which is even less than the debt, it was not illegal for the creditor to encash the time
deposit certificates to pay the debtors' overdue obligation, with the latter's consent.
As to whether the debt has already been paid
 Since the petitioner signed on July 18, 1980 a letter admitting her
indebtedness to be in the sum of P404,500, and there is no proof of payment
made by her thereafter to reduce or extinguish her debt, the application of her
time deposits, which she had assigned to the creditor to secure the payment
of her debt, was proper

That the assignment serves as a collateral or guarantee for the payment of my obligation
with the said CAMS TRADING ENTERPRISES, INC. on account of my cement
withdrawal from said company, per separate contract executed between us.

 Cams Trading notified the Bank that Mrs. Chu had an unpaid account with it
in the sum of P314,639.75
o It asked that it be allowed to encash the time deposit certificates
which had been assigned to it by Mrs. Chu
 It submitted to the Bank a letter dated July 18, 1980 of Mrs. Chu admitting
that her outstanding account with Cams Trading was P404,500 and after
verbally advising Mrs. Chu.
o The Bank agreed to encash the certificates. It delivered to Cams
Trading the sum of P283,737.75 only, as one time deposit
certificate lacked the proper signatures

Upon being informed of the encashment, Mrs. Chu demanded from the Bank and Cams
Trading that her time deposit be restored.

She filed a complaint to recover the sum of P283,737.75 from them.

RTC, dismissed the complaint for lack of merit.

CA, affirmed the dismissal of her complaint

ISSUES: WON the encashment of her time deposit certificates as a pactum

commissorium and WON the secured debt has already been paid

HELD:

The encashment of the deposit certificates was not a pacto commissorio which is
prohibited under Art. 2088 of the Civil Code.
 The prohibition against a pacto commissorio is intended to protect the obligor,
pledgor, or mortgagor against being overreached by his creditor who holds a
pledge or mortgage over property whose value is much more than the debt.

4
Paray and Espleta vs. Rodriguez
GR No. 132287
Facts:
 Respondents were the owners of shares of stock in Quirino, Leonor,
Rodriguez Realty Inc.
o In 1979 to 1980, respondents secured by way of pledge of some
of their shares of stock to petitioners Bonifacio and Faustina
Paray the payment of their loan obligations
 Respondents failed to pay their debts, the petitioners then attempted to
foreclose the pledges on account of respondents’ failure to pay their loans
o Respondents filed complaints with RTC Cebu – sought for
declaration of nullity of the pledge agreements – DISMISSED
o RTC, gave due course to the foreclosure and sale at public
auction of the various pledges – decision attained finality after it
was affirmed by the CA and SC
 Respondents then received Notices of Sale which indicated that the pledged
shares were to be sold at public auction
o HOWEVER, before the scheduled date of auction, all of
respondents caused the consignation with the RTC Clerk of Court
of various amounts
o Respondents attempted to tender payments to the Parays – but
was rejected
 Notwithstanding the consignations, the public auction took place as
scheduled
o Petitioner Espleta successfully bidding for all of the pledged
shares
 None of the respondents participated or appeared at
the auction
 Respondents instead filed a complaint with the RTC seeking the declaration
of nullity of the conducted public auction
 Respondents argued:
o That their tender of payment and subsequent consignation served
to extinguish their loan obligations and discharged the pledge
contracts
 Petitioners argued:
o That the auction sale was conducted pursuant to a final and
executory judgment and that the tender of payment and
consignations were made long after their obligations had fallen
due
o Pointed out that the amounts consigned could not extinguish the
principal loan obligations of respondents since they were not
sufficient to cover the interests due on the debt
o That the essential procedural requisites for the auction sale had
been satisfies
 RTC:
o Dismissed the complaint in favor of Paray
o Held that respondents had failed to tender or consign payments
within a reasonable period after default and that the proper
remedy of respondents was to have participated in the auction
sale
 CA – reversed RTC
o Ruled that the consignations extinguished the loan obligations
and the subject pledge contracts and the auction sale as null and
void
o CA chose to uphold the sufficiency of the consignations owing to
an imputed policy of the law that favored redemption and
mandated a liberal construction to redemption laws
o The attempts of the payment by respondents were characterized
as made in the exercise of right of redemption
o Likewise found fault with the auction sale, holding that there was
a need to individually sell the carious shares of stock as they had
belonged to different pledgers
Issues:
W/N Right of Redemption exists over personal properties, NO
W/N the Consignations made by respondents prior to the auction sale are sufficient to
extinguish the loan obligations and the subject pledges contracts, NO
W/N the act of respondents in consigning the payments should be deemed done in the
exercise of their right of redemption, NO
W/N a buyer at a public auction ipso facto become the owner of the pledges shared
pending the lapse of the 1year redemption period, YES
W/N there is a need to individually sell the various shares of stock as they had
belonged to different pledgers, NO
Ruling:
W/N Right of Redemption exists over personal properties, NO
No law or jurisprudence establishes or affirms such right. Indeed, no such right exists.
The right of redemption over a mortgaged real property sold extrajudicially is
established by Act No. 3135, as amended. The said law does not extend the same
benefit to personal property. In fact, there is no law in our statute books which vests
the right of redemption over personal property. Act No. 1508 or the Chattel Mortgage
Law, ostensibly could have served as the vehicle for any legislative intent to bestow a
right of redemption over personal property, since that law governs the extrajudicial
sale of mortgaged personal property, but the statute is definitely silent on the point.
The right of redemption affirmed under Rule 39 ROC applies only to execution sales,
more precisely execution sales of real property.
It must be clarified that the subject sale of pledges shares was an extrajudicial sale,
specifically a notarial sale, as distinguished from a judicial sale as typified by an
5
execution sale. Under the Civil Code, the foreclosure of a pledge occurs
extrajudicially, without intervention by the courts. All the creditor needs to do, if the
credit has not been satisfied in due time, is to proceed before a Notary Public to the
sale of the thing pledged.
In this case, petitioners attempted to proceed extrajudicially with the sale of the
pledged shares by public auction. Howeve, extrajudicial sale was stayed with the filing
of Civil Cases which sought to annul the pledge contracts. The final and executory
judgment in those cases affirmed the pledge contracts and disposed them. Said
judgment did not direct the sale by public auction of the pledged shares, but instead
upheld the right of the Parays to conduct sale at their own volition.
W/N the Consignations made by respondents prior to the auction sale are
sufficient to extinguish the loan obligations and the subject pledges contracts,
NO
There is no doubt that if the principal obligation is satisfied, the pledges should be
terminated as well. Article 2098 of the CC provides that the right of the creditor to
retain possession of the pledges items exist only until the debt is paid. Article 2105 of
the CC further clarifies that the debtor cannot ask for the return of the thing pledged
against the will of the creditor, unless and until he has paid the debt and its interest. At
the same time, the right of the pledgee to foreclose the pledge is also established
under the Civil Code. When the credit had not been satisfied in due time, the creditor
may proceed with the sale by public auction under the procedure provided under
Article 2112 of the CC
W/N there is a need to individually sell the various shares of stock as they had
belonged to different pledgers, NO
This concern is obviously render a non-issue by the facts that there can be no right to
redemption in the first place. Rule 39 of the ROCE does provide for instances when
properties foreclosed at the same time must be sold separately, such as in the case of
lot sales for real property under Section 19. However, these instances again pertain to
execution sales and not extrajudicial sales. No provision in the ROC or in any law
requires that pledged properties sold at auction be sold separately.
On the other hand, under the Civil Code, it is the pledgee, and not the pledger, who is
given the right to choose which of the items should be sold if tow or more things are
pledged. No similar option is given to pledgers under the Civil Code. Moreover, there
is nothing in the Civil Code provisions governing the extrajudicial sale of pledged
properties on a single occasion, or from the buyer at the auction sale in purchasing all
the pledged properties with a single purchase price. The relative insignificance pf
ascertaining the definite apportionments of the sale price to the individual shares lies
in the fact that once a pledged item is sold at auction, neither the pledgee nor the
pledger can recover whatever deficiency or excess there may be between the
purchase price and the amount of the principal obligation.

In order that the consignation could have the effect of extinguishing the pledge
contracts, such amounts should cover not just the principal loans, but also the
monthly interests thereon.

In the case at bar, while the amounts consigned by respondents could answer for their
principal loan obligations, they were not sufficient to cover the interests due on
these loans, which were pegged at the rate of 5% per month or 60% per annum.

W/N the act of respondents in consigning the payments should be deemed done
in the exercise of their right of redemption, NO

The pledged shares in this case are not subject to redemption. Thus, the consigned
payments should not be treated with liberality, or somehow construed as having been
made in the exercise of the right of redemption

W/N a buyer at a public auction ipso facto become the owner of the pledges
shared pending the lapse of the 1year redemption period, YES

Obviously, since there is no right to redeem personal property, the rights of ownership
vested unto the purchaser at the foreclosure sale are not entangled in any suspensive
condition that is implicit in a redemptive period.

6
PCI Leasing & Finance vs. Trojan Metal Industries et al.
GR No. 176381
Facts:
 This is a case wherein Trojan came to PCI to seek a loan
o Instead PCI offered to buy various equipment TMI owned, in
exchange of 2.8M
o Deeds of Sale were executed
 Subsequently, PCI and TMI then entered into a lease agreement:
o Lease the equipment it previously owned
o Issued post dated checks for 24monthly installments
o Guaranty deposit of 1.3M – security for timely performance of
TMIs obligations under the lease agreement, to be automatically
forfeited should TMI return the leased equipment before
expiration of the lease agreement
o Spouses Dizon, President and VP of TMI executed in favor of PCI
a continuing guaranty of lease obligations, in case TMI failed to
pay the lease terms
 TMI, in obtaining a loan from another company – used the leased
equipment as collateral
 PCI then considered the 2nd mortgage a violation of lease agreement
o Sent a demand letter for payment of the latter’s outstanding
obligation – unheeded
o Filed before the RTC a complaint against TMI and Spouses
Dizon for recovery of sum of money and personal property, with
prayer for the issuance of a Writ of Replevin
 RTC – issued the Writ of Replevin
o PCI sold the leased equipment and collected the proceeds
amounting to 1.025M
 Respondent claimed that the sale with lease agreement was a mere
scheme to facilitate the financial lease between PCI and TMI, and that the
true agreement between them was a loan secured by a chattel mortgage
 RTC, held that it was a lease agreement, favored PCI
 CA, set aside RTC decision
o That the sale with lease was a loan secured by chattel mortgage
o Directed PCI to refund 1.1M to TMI
Issue: W/N the sale with lease agreement the parties entered into was a financial
lease or of a loan secured by chattel mortgage
W/N TMI has the right to refund, YES
Ruling:
In the present case, since the transaction between PCILF and TMI involved equipment
already owned by TMI, it cannot be considered as one of financial leasing, as defined
by law, but simply a loan secured by the various equipment owned by TMI.
Articles 1359 and 1362 of the Civil Code provide:
Art. 1359. When, there having been a meeting of the minds of the parties to a
contract, their true intention is not expressed in the instrument purporting to embody
the agreement, by reason of mistake, fraud, inequitable conduct, or accident, one of
the parties may ask for the reformation of the instrument to the end that such true
intention may be expressed.
Art. 1362. If one party was mistaken and the other acted fraudulently or inequitably in
such a way that the instrument does not show their true intention, the former may ask
for the reformation of the instrument.
Hence, had the true transaction between the parties been expressed in a proper
instrument, it would have been a simple loan secured by a chattel mortgage, instead
of a simulated financial leasing. Thus, upon TMIs default, PCILF was entitled to seize
the mortgaged equipment, not as owner but as creditor-mortgagee for the purpose of
foreclosing the chattel mortgage. PCILFs sale to a third party of the mortgaged
equipment and collection of the proceeds of the sale can be deemed in the exercise of
its right to foreclose the chattel mortgage as creditor-mortgagee.
The Court of Appeals correctly ruled that the transaction between the parties was
simply a loan secured by a chattel mortgage. However, in reckoning the amount of the
principal obligation, the Court of Appeals should have taken into account the proceeds
of the sale to PCILF less the guaranty deposit paid by TMI. After deducting payments
made by TMI to PCILF, the balance plus applicable interest should then be applied
against the aggregate cash already in PCILFs hands.
Right to Refund
Records show that PCILF paid TMI P2,865,070.00 as consideration for acquiring the
mortgaged equipment. In turn, TMI gave PCILF a guaranty deposit
of P1,030,350.00.Thus, the amount of the principal loan was P1,834,720.00,
which was the net amount actually received by TMI (proceeds of the sale of the
equipment to PCILF minus the guaranty deposit). Against the principal loan
of P1,834,720.00 plus the applicable interest should be deducted loan payments,
totaling P1,717,091.00. Since PCILF sold the mortgaged equipment to a third party
for P1,025,000.00, the proceeds of the said sale should be applied to offset the
remaining balance on the principal loan plus applicable interest.
However, the exact date of the sale of the mortgaged equipment, which is needed to
compute the interest on the remaining balance of the principal loan, cannot be
gleaned from the facts on record. We thus remand the case to the RTC for the
computation of the total amount due from the date of demand on 8 December 1998
until the date of sale of the mortgaged equipment to a third party, which amount due
shall be offset against the proceeds of the sale.
In the absence of stipulation, the applicable interest due on the remaining balance of
the loan is the legal rate of 12% per annum, computed from the date PCILF sent a
demand letter to TMI on 8 December 1998. No interest can be charged prior to this
date because TMI was not yet in default prior to 8 December 1998. The interest due
shall also earn legal interest from the time it is judicially demanded, pursuant to Article
2212 of the Civil Code
7
From the computed total amount should be deducted P1,025,000.00 representing the
proceeds of the sale already in PCILFs hands. The difference represents overpayment
by TMI, which the law requires PCILF to refund to TMI.

Section 14 of Act No. 1508, otherwise known as the Chattel Mortgage Law, provides:
Section 14. Sale of property at public auction; officers return; fees; disposition of
proceeds. x x x The proceeds of such sale shall be applied to the payment, first, of the
costs and expenses of keeping and sale, and then to the payment of the demand or
obligation secured by such mortgage, and the residue shall be paid to persons holding
subsequent mortgages in their order, and the balance, after paying the mortgages,
shall be paid to the mortgagor or person holding under him on demand.

Section 14 of the Chattel Mortgage Law expressly entitles the debtor-mortgagor to the
balance of the proceeds, upon satisfaction of the principal loan and costs. Prevailing
jurisprudence also holds that the Chattel Mortgage Law bars the creditor-mortgagee
from retaining the excess of the sale proceeds.

TMIs right to the refund accrued from the time PCILF received the proceeds of the
sale of the mortgaged equipment. However, since TMI never made a counterclaim or
demand for refund due on the resulting overpayment after offsetting the proceeds of
the sale against the remaining balance on the principal loan plus applicable interest,
no interest applies on the amount of refund due. Nonetheless, in accord with
prevailing jurisprudence, the excess amount PCILF must refund to TMI is subject to
interest at 12% per annum from finality of this Decision until fully paid.

8
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 Sabeniano’s 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 Citibank’s 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 Sabeniano’s 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 Sabeniano’s 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 Sabeniano’s 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 RTC’s 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 Citibank’s execution of deeds and pledge to off-set
Sabeniano’s loan was valid and legal.
HELD: The Supreme Court reversed the CA’s findings regarding Sabeniano’s 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, attorney’s fees of
P200,000.
The SC however affirmed the RTC’s decision regarding the pledge. Being a separate
entity, Citibank cannot exercise automatic remittance from Sabeniano’s 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 Citibank’s copy bore no date. The original copy was not also produced in court.
Regarding Sabeniano’s obligation, the Supreme Court affirmed RTC’s 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.
Compensation is a recognized mode of extinguishing obligations. Relevant provisions
of the Civil Code provides:
Art. 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.
Art. 1279. In order that compensation may be proper, it is necessary;
(1) That each one of the obligors be bound principally, and that he be at the same time
a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.
There is little controversy when it comes to the right of petitioner Citibank to
compensate respondents outstanding loans with her deposit account. As already
found by this Court, petitioner Citibank was the creditor of respondent for her
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outstanding loans. At the same time, respondent was the creditor of petitioner
Citibank, as far as her deposit account was concerned, since bank deposits, whether
fixed, savings, or current, should be considered as simple loan or mutuum by the
depositor to the banking institution. Both debts consist in sums of money. By June
1979, all of respondents PNs in the second set had matured and became
demandable, while respondents savings account was demandable anytime. Neither
was there any retention or controversy over the PNs and the deposit account
commenced by a third person and communicated in due time to the debtor
concerned. Compensation takes place by operation of law, therefore, even in the
absence of an expressed authority from respondent, petitioner Citibank had the right
to effect, on 25 June 1979, the partial compensation or off-set of respondents
outstanding loans with her deposit account, amounting to P31,079.14.

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