PREFERENCE OF CREDITS

1. NCC 2241-2251 NCC 110, Labor Code

Carried Lumber v. ACCFA, April 22, 1975, 63 SCRA 411

Concurrence of credits; Credits with reference to specific immovable property; Article 2242 of
Civil Code provides for concurrence of credits; Materialman’s lien and mortgage lien; Case at bar.
—The trial court erred in holding that the lumber company ’s lien over the warehouse is superior
to the ACCFA’s mortgage lien. It was mistaken in assuming that the enumeration of ten claims,
mortgages and liens in article 2242 creates an order of preference. It is not correct to say that the
materialman’s (mechanic’s) lien or refectionary credit of the lumber company , being listed as No.
4 in article 2242, is superior to the ACCFA’ s mortgage credit which is listed as No. 5. The
enumeration in article 2242 is not an order of preference. That article lists the credits which may
concur with respect to specific real properties and which would be satisfied pro rata according to
article 2249.

Pro-rata satisfaction of credits; “Pro-rata” explained. —The term pro-rata in article 2249 means in
proportion or ratably, or a division according to share, interest or liability of each.

Consuelo Metal v Planters, 555 SCRA 465

If rehabilitation is no longer feasible and the assets of the corporation are finally liquidated,
secured creditors shall enjoy preference over unsecured creditors, subject only to the provisions
of the Civil Code on concurrence and preference of credits. —In Rizal Commercial Banking
Corporation v. Intermediate Appellate Court, 320 SCRA 279 (1999), we held that if rehabilitation is
no longer feasible and the assets of the corporation are finally liquidated, secured creditors shall
enjoy preference over unsecured creditors, subject only to the provisions of the Civil Code on
concurrence and preference of credits. Creditors of secured obligations may pursue their security
interest or lien, or they may choose to abandon the preference and prove their credits as ordinary
claims.

Those credits which enjoy preference in relation to, exclude all others to the extent of the value of
the immovable or real right to which the preference refers. —Section 2248 of the Civil Code
provides: Those credits which enjoy preference in relation to specific real property or real rights,
exclude all others to the extent of the value of the immovable or real right to which the preference
refers.

2. Insolvency Law, Act. No. 1956 as amended

Gateway Electronics v Asiabank, 574 SCRA 698

Insolvency Law; The issuance of an order declaring the petitioner insolvent after the insolvency
court finds the corresponding petition for insolvency to be meritorious shall stay all pending civil
actions against the petitioner’s property. —Gateway, having been declared insolvent, argues that
jurisdiction over all claims against all of its properties and assets properly pertains to the
insolvency court. Accordingly, Gateway adds, citing Sec. 60 of Act No. 1956, as amended, or the
Insolvency Law, any pending action against its properties and assets must be dismissed, the
claimant relegated to the insolvency proceedings for the claimant’s relief. The contention, as
formulated, is in a qualified sense meritorious. Under Sec. 18 of Act No. 1956, as couched, the
issuance of an order declaring the petitioner insolvent after the insolvency court finds the
corresponding petition for insolvency to be meritorious shall stay all pending civil actions against
the petitioner’s property.

Same; Sec. 18 and Sec. 60 of Act No. 1956 Harmonized; Once an order of insolvency
nevertheless issues, all civil proceedings against the petitioner’s property are, by statutory
command, automatically stayed. —Complementing Sec. 18 which appropriately comes into play
“upon the granting of [the] order” of insolvency is the succeeding Sec. 60 which properly applies
to the period “after the commencement of proceedings in insolvency.” The two provisions may be
harmonized as follows: Upon the filing of the petition for insolvency, pending civil actions against
the property of the petitioner are not ipso facto stayed, but the insolvent may apply with the court
in which the actions are pending for a stay of the actions against the insolvent’s property. If the
court grants such application, pending civil actions against the petitioner’s property shall be
stayed; otherwise, they shall continue. Once an order of insolvency nevertheless issues, all civil
proceedings against the petitioner’s property are, by statutory command, automatically stayed.

Republic Act No. 10142 (FRIA of 2010)

Aquino v. Pacific Plans, Inc., December 10, 2014.

Corporations; Rehabilitation Proceedings; Forum Shopping; In Majority Stockholders of Ruby

Industrial Corporation v. Lim, 650 SCRA 461 (2011), the Supreme Court (SC) reiterated that no
forum shopping exists when two (2) groups of oppositors in a rehabilitation case act
independently of each other, even when they have sought relief from the same appellate court.—
While it would appear that there is substantial identity of parties, since both petitioner and PEPCI
are creditors of respondent and both are questioning the Rehabilitation Court’s approval of the
MRP, the identity of cause of action is absent in the present case. An assiduous scrutiny of the
respondent’s Petition for Review with the CA and PEPCI’s Petition for Review dated September
3, 2008, also filed with the CA, will show that they raised different causes of action. In Majority
Stockholders of Ruby Industrial Corporation v. Lim, 650 SCRA 461 (2011), we have reiterated that
no forum shopping exists when two (2) groups of oppositors in a rehabilitation case act
independently of each other, even when they have sought relief from the same appellate court.

Cram-Down Power; The “cram-down” power of the Rehabilitation Court has long been
established and even codified under Section 23, Rule 4 of the Interim Rules.—The “cram-down”
power of the Rehabilitation Court has long been established and even codified under Section 23,
Rule 4 of the Interim Rules, to wit: Section 23. Approval of the Rehabilitation Plan.—The court
may approve a rehabilitation plan over the opposition of creditors, holding a majority of the total
liabilities of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the
opposition of the creditors is manifestly unreasonable. Such prerogative was carried over in the
Rehabilitation Rules, which maintains that the court may approve a rehabilitation plan over the
objection of the creditors if, in its judgment, the rehabilitation of the debtors is feasible and the
opposition of the creditors is manifestly unreasonable. The required number of creditors opposing
such plan under the Interim Rules (i.e., those holding the majority of the total liabilities of the
debtor) was, in fact, removed.

It is undeniable that there is a need to move to a regime of modern restructuring, cram-down and
court supervision in the matter of corporation rehabilitation in order to address the greater interest
of the public.—Petitioner’s outright censure of the concept of the cram-down power of the
rehabilitation court cannot be countenanced. To adhere to the reasoning of petitioner would be a
step backward — a futile attempt to address an outdated set of challenges. It is undeniable that
there is a need to move to a regime of modern restructuring, cram-down and court supervision in
the matter of corporation rehabilitation in order to address the greater interest of the public. This
is clearly manifested in Section 64 of Republic Act (R.A.) No. 10142, otherwise known as
Financial Rehabilitation and Insolvency Act of 2010 (FRIA), the latest law on corporate
rehabilitation and insolvency.

While the voice and participation of the creditors is crucial in the determination of the viability of
the rehabilitation plan, as they stand to benefit or suffer in the implementation thereof, the
interests of all stakeholders is the ultimate and prime consideration.—While the voice and
participation of the creditors is crucial in the determination of the viability of the rehabilitation plan,
as they stand to benefit or suffer in the implementation thereof, the interests of all stakeholders is
the ultimate and prime consideration. Thus, while we recognize the predisposition of the
planholders in vacillating on the enforcement of the MRP, since the terms and conditions stated
therein have been fundamentally changed from those stated in the Original and Amended
Rehabilitation Plan, the MRP cannot be considered an abrogation of rights to the
planholders/creditors.

CREDIT TRANSACTIONS

1. Common Provisions – NCC 1156, 1249, 1305, 1306, 1316, 1933 and 1934

2. Commodatum – NCC 1935-1952

Pajuyo v CA, 430 SCRA 492

An essential feature of commodatum is that it is gratuitous, while another feature is that the use
of the thing belonging to another is for a certain period; If the use of the thing is merely tolerated
by the bailor, he can demand the return of the thing at will, in which case the contractual relation
is called a precarium; Precarium is a kind of commodatum. —In a contract of commodatum, one
of the parties delivers to another something not consumable so that the latter may use the same
for a certain time and return it. An essential feature of commodatum is that it is gratuitous.
Another feature of commodatum is that the use of the thing belonging to another is for a certain
period. Thus, the bailor cannot demand the return of the thing loaned until after expiration of the
period stipulated, or after accomplishment of the use for which the commodatum is constituted. If
the bailor should have urgent need of the thing, he may demand its return for temporary use. If
the use of the thing is merely tolerated by the bailor, he can demand the return of the thing at will,
in which case the contractual relation is called a precarium. Under the Civil Code, precarium is a
kind of commodatum.

The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him
to maintain the property in good condition. The imposition of this obligation makesthe Kasunduan
a contract different from a commodatum. The effects of the Kasunduan are also different from
that of a commodatum. Case law on ejectment has treated relationship based on tolerance as
one that is akin to a landlord-tenant relationship where the withdrawal of permission would result
in the termination of the lease.The tenant’s withholding of the property would then be unlawful.
This is settled jurisprudence.

3. Simple Loan or Mutuum, NCC 1953-1955

Equitable v Ng Sheung Ngor, 541 SCRA 223

Escalation Clauses; Principle of Mutuality of Contracts; Escalation clauses are not void per se but
one “which grants the creditor an unbridled right to adjust the interest independently and
upwardly, completely depriving the debtor of the right to assent to an important modification in the
agreement” is void—clauses of that nature violate the principle of mutuality of contracts. —
Escalation clauses are not void per se. However, one “which grants the creditor an unbridled right
to adjust the interest independently and upwardly, completely depriving the debtor of the right to
assent to an important modification in the agreement” is void. Clauses of that nature violate the
principle of mutuality of contracts. Article 1308 of the Civil Code holds that a contract must bind
both contracting parties; its validity or compliance cannot be left to the will of one of them. For this
reason, we have consistently held that a valid escalation clause provides: 1. that the rate of
interest will only be increased if the applicable maximum rate of interest is increased by law or by
the Monetary Board; and 2. that the stipulated rate of interest will be reduced if the applicable
maximum rate of interest is reduced by law or by the Monetary Board (de-escalation clause).

Where the escalation clause is annulled, the principal amount of the loan is subject to the original
or stipulated rate of interest. —With regard to the proper rate of interest, in New Sampaguita
Builders v. Philippine National Bank, 435 SCRA 565 (2004), we held that, because the escalation
clause was annulled, the principal amount of the loan was subject to the original or stipulated rate
of interest. Upon maturity, the amount due was subject to legal interest at the rate of 12% per
annum.

“Extraordinary Inflation” and “Extraordinary Deflation,” Defined. —Extraordinary inflation exists

when there is an unusual decrease in the purchasing power of currency (that is, beyond the
common fluctuation in the value of currency) and such decrease could not be reasonably
foreseen or was manifestly beyond the contemplation of the parties at the time of the obligation.
Extraordinary deflation, on the other hand, involves an inverse situation.

Despite the devaluation of the peso, the Bangko Sentral ng Pilipinas (BSP) never declared a
situation of extraordinary inflation. Moreover, although the obligation in this instance arose out of
a contract, the parties did not agree to recognize the effects of extraordinary inflation (or
deflation). —For extraordinary inflation (or deflation) to affect an obligation, the following
requisites must be proven: 1. that there was an official declaration of extraordinary inflation or
deflation from the Bangko Sentral ng Pilipinas (BSP); 2. that the obligation was contractual in
nature; and 3. that the parties expressly agreed to consider the effects of the extraordinary
inflation or deflation. Despite the devaluation of the peso, the BSP never declared a situation of
extraordinary inflation. Moreover, although the obligation in this instance arose out of a contract,
the parties did not agree to recognize the effects of extraordinary inflation (or deflation). The RTC
never mentioned that there was a such stipulation either in the promissory note or loan
agreement. Therefore, respondents should pay their dollar-denominated loans at the exchange
rate fixed by the BSP on the date of maturity. [Equitable PCI Bank vs. Ng Sheung Ngor, 541
SCRA 223(2007)]

Almeda v Bathala Marketing, 542 SCRA 470

Obligations and Contracts; Extraordinary Inflation or Deflation; Words and Phrases; Inflation,
Defined; Extraordinary Inflation, Defined. —Inflation has been defined as the sharp increase of
money or credit, or both, without a corresponding increase in business transaction. There is
inflation when there is an increase in the volume of money and credit relative to available goods,
resulting in a substantial and continuing rise in the general price level. In a number of cases, this
Court had provided a discourse on what constitutes extraordinary inflation, thus: Extraordinary
inflation exists when there is a decrease or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common fluctuation in the value of said currency, and
such increase or decrease could not have been reasonably foreseen or was manifestly beyond
the contemplation of the parties at the time of the establishment of the obligation.

The erosion of the value of the Philippine peso in the past three or four decades, starting in the
mid sixties, is characteristic of most currencies—while the Supreme Court may take judicial
notice of the decline in the purchasing power of the Philippine currency in that span of time, such
downward trend of the peso cannot be considered as the extraordinary phenomenon
contemplated by Article 1250 of the Civil Code; Absent an official pronouncement or declaration
by competent authorities of the existence of extraordinary inflation during a given period, the
effects of extraordinary inflation are not to be applied. —The factual circumstances obtaining in
the present case do not make out a case of extraordinary inflation or devaluation as would justify
the application of Article 1250 of the Civil Code. We would like to stress that the erosion of the
value of the Philippine peso in the past three or four decades, starting in the mid-sixties, is
characteristic of most currencies. And while the Court may take judicial notice of the decline in the
purchasing power of the Philippine currency in that span of time, such downward trend of the
peso cannot be considered as the extraordinary phenomenon contemplated by Article 1250 of the
Civil Code. Furthermore, absent an official pronouncement or declaration by competent
authorities of the existence of extraordinary inflation during a given period, the effects of
extraordinary inflation are not to be applied.

MetroBank v Rosales et al, G.R. No. 183204, Jan 13 2014

Bank deposits, which are in the nature of a simple loan or mutuum, must be paid upon demand
by the depositor.

PNB v. Tajonera, G.R. No. 195889, September 24, 2014

The agreement between PNB and the respondents was one of a loan. Under the law, a loan
requires the delivery of money or any other consumable object by one party to another who
acquires ownership thereof, on the condition that the same amount or quality shall be paid. Loan
is a reciprocal obligation, as it arises from the same cause where one party is the creditor, and
the other the debtor. The obligation of one party in a reciprocal obligation is dependent upon the
obligation of the other, and the performance should ideally be simultaneous. This means that in a
loan, the creditor should release the full loan amount and the debtor repays it when it becomes
due and demandable.

PNB, not having released the balance of the last loan proceeds in accordance with the Third
Amendment had no right to demand from the respondents compliance with their own obligation
under the loan. Indeed, if a party in a reciprocal contract like a loan does not perform its
obligation, the other party cannot be obliged to perform what is expected of them while the other's
obligation remains unfulfilled.

Being a banking institution, PNB owes it to the respondents to observe the high standards of
integrity and performance in all its transactions because its business is imbued with public
interest. The high standards are also necessary to ensure public confidence in the banking
system, for, according to Philippine National Bank v. Pike, "[t]he stability of banks largely depends
on the confidence of the people in the honesty and efficiency of banks." Thus, PNB was duty
bound to comply with the terms and stipulations under its credit agreements with the
respondents, specifically the release of the amount of the additional loan in its entirety, lest it
erodes public confidence. Yet, PNB failed in this regard.

4. Interest, NCC 1956-1961, 2209, 2212-2213

Nacar v. Gallery Frames, August 13, 2013, G.R. No. 189871

Interest Rates; In the absence of an express stipulation as to the rate of interest that would
govern the parties, the rate of legal interest for loans or forbearance of any money, goods or
credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum —
as reflected in the case of Eastern Shipping Lines vs. Court of Appeals, 234 SCRA 78 (1994),
and Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3
and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its
amendment by BSP-MB Circular No. 799 — but will now be six percent (6%) per annum effective
July 1, 2013. —In the absence of an express stipulation as to the rate of interest that would
govern the parties, the rate of legal interest for loans or forbearance of any money, goods or
credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum —
as reflected in the case of Eastern Shipping Lines, Inc. v. Court of Appeals, 234 SCRA 78 (1994)
and Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3
and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its
amendment by BSP-MB Circular No. 799 — but will now be six percent (6%) per annum effective
July 1, 2013. It should be noted, nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, the twelve percent (12%) per annum legal
interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%)
per annum shall be the prevailing rate of interest when applicable.

The Bangko Sentral ng Pilipinas-Monetary Board may prescribe the maximum rate or rates of
interest for all loans or renewals thereof or the forbearance of any money, goods or credits,
including those for loans of low priority such as consumer loans, as well as such loans made by
pawnshops, finance companies and similar credit institutions – In the recent case of Advocates
for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral Monetary Board (2013), this
Court affirmed the authority of the BSP-MB to set interest rates and to issue and enforce
Circulars when it ruled that “the BSP-MB may prescribe the maximum rate or rates of interest for
all loans or renewals thereof or the forbearance of any money, goods or credits, including those
for loans of low priority such as consumer loans, as well as such loans made by pawnshops,
finance companies and similar credit institutions. It even authorizes the BSP-MB to prescribe
different maximum rate or rates for different types of borrowings, including deposits and deposit
substitutes, or loans of financial intermediaries.”

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing;
In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code. —When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from
the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject
to the provisions of Article 1169 of the Civil Code.

When an obligation, not constituting a loan or forbearance of money, is breached, an interest on

the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum. —When an obligation, not constituting a loan or forbearance of money, is breached,
an interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages, except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall begin to
run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when
such certainty cannot be so reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, shall be 6% per annum from such finality until its satisfaction. —When the
judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

Benavidez v. Salvador, G.R. No. 173331, December 11, 2013.

Civil Law; Interest Rates; In line with the ruling in the recent case of Nacar v. Gallery Frames, 703
SCRA 439 (2013), the legal interest of 6% per annum must be imposed in lieu of the excessive
interest stipulated in the agreement. —This Court is not unmindful of the fact that parties to a loan
contract have wide latitude to stipulate on any interest rate in view of the Central Bank Circular
No. 905 s. 1982 which suspended the Usury Law ceiling on interest effective January 1, 1983. It
is, however, worth stressing that interest rates whenever unconscionable may still be declared
illegal. There is nothing in said circular which grants lenders carte blanche authority to raise
interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets. In Menchavez v. Bermudez, 684 SCRA 168 (2012), the interest rate of 5% per month,
which when summed up would reach 60% per annum, is null and void for being excessive,
iniquitous, unconscionable and exorbitant, contrary to morals, and the law. Accordingly, in this
case, the Court considers the compounded interest rate of 5% per month as iniquitous and
unconscionable and void and inexistent from the beginning. The debt is to be considered without
the stipulation of the iniquitous and unconscionable interest rate. In line with the ruling in the
recent case of Nacar v. Gallery Frames, 703 SCRA 439 (2013), the legal interest of 6% per
annum must be imposed in lieu of the excessive interest stipulated in the agreement.

First United v. Bayanihan, G.R. No. 164985, January 15, 2014.

The Supreme Court deems it necessary to modify the interest rate imposed by the trial and
appellate courts; The legal interest rate to be imposed from February 11, 1993, the time of the
extrajudicial demand by respondent, should be 6% per annum in the absence of any stipulation in
writing in accordance with Article 2209 of the Civil Code. —We deem it necessary to modify the
interest rate imposed by the trial and appellate courts. The legal interest rate to be imposed from
February 11, 1993, the time of the extrajudicial demand by respondent, should be 6% per annum
in the absence of any stipulation in writing in accordance with Article 2209 of the Civil Code,
which provides: Article 2209. If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall
be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest,
which is six per cent per annum. [First United Construction Corporation vs. Bayanihan Automotive
Corporation, 713 SCRA 354(2014)]

Lumantas v. Calapiz, G.R. No. 163753. January 15, 2014.

Same; Same; Interest Rates; Interest of 6% per annum should then be imposed on the award as
a sincere means of adjusting the value of the award to a level that is not only reasonable but just
and commensurate; For that purpose, the reckoning of interest should be from the filing of the
criminal information. —Many years have gone by since Hanz suffered the injury. Interest of 6%
per annum should then be imposed on the award as a sincere means of adjusting the value of the
award to a level that is not only reasonable but just and commensurate. Unless we make the
adjustment in the permissible manner by prescribing legal interest on the award, his sufferings
would be unduly compounded. For that purpose, the reckoning of interest should be from the
filing of the criminal information on April 17, 1997, the making of the judicial demand for the
liability of the petitioner.

De la Paz v L&J Development Company, GR 183360, Sept. 8, 2014

The lack of a written stipulation to pay interest on the loaned amount disallows a creditor from
charging monetary interest.

Under Article 1956 of the Civil Code, no interest shall be due unless it has been expressly
stipulated in writing. Jurisprudence on the matter also holds that for interest to be due and
payable, two conditions must concur: a) express stipulation for the payment of interest; and b) the
agreement to pay interest is reduced in writing.

Here, it is undisputed that the parties did not put down in writing their agreement. Thus, no
interest is due. The collection of interest without any stipulation in writing is prohibited by law.

Federal Builders v Foundation Specialists, GR 194507, Sept. 8, 2014

Forbearance of money, goods or credits, therefore, refers to arrangements other than loan
agreements, where a person acquiesces to the temporary use of his money, goods or credits
pending the happening of certain events or fulfilment of certain conditions. Consequently, if those
conditions are breached, said person is entitled not only to the return of the principal amount paid,
but also to compensation for the use of his money which would be the same rate of legal interest
applicable to a loan since the use or deprivation of funds therein is similar to a loan.

This case, however, does not involve an acquiescence to the temporary use of a party’s money
but a performance of a particular service, specifically the construction of the diaphragm wall,
capping beam, and guide walls of the Trafalgar Plaza.

A review of similar jurisprudence would tell us that this Court had repeatedly recognized this
distinction and awarded interest at a rate of 6% on actual or compensatory damages arising from
a breach not only of construction contracts, such as the one subject of this case, but also of
contracts wherein one of the parties reneged on its obligation to perform messengerial services,
deliver certain quantities of molasses, undertake the reforestation of a denuded forest land, as
well as breaches of contracts of carriage, and trucking agreements. We have explained therein
that the reason behind such is that said contracts do not partake of loans or forbearance of
money but are more in the nature of contracts of service.

Thus, in the absence of any stipulation as to interest in the agreement between the parties herein,
the matter of interest award arising from the dispute in this case would actually fall under the
second paragraph of the above-quoted guidelines in the landmark case of E astern Shipping
Lines, which necessitates the imposition of interest at the rate of 6%, instead of the 12% imposed
by the courts below.

The 6% interest rate shall further be imposed from the finality of the judgment herein until
satisfaction thereof, in light of our Nacar v. Gallery Frames.

Sun Life v. Tan Kit, G.R. No. 183272, October 15, 2014

The Court finds, however, that T io Khe Chio is not applicable here as it deals with payment of
interest on the insurance proceeds in which the claim therefor was either unreasonably denied or
withheld or the insurer incurred delay in the payment thereof. In this case, what is involved is an
order for petitioner to refund to respondents the insurance premium paid by Norberto as a
consequence of the rescission of the insurance contract on account of the latter’s concealment of
material information in his insurance application. Moreover, petitioner did not unreasonably deny
or withhold the insurance proceeds as it was satisfactorily established that Norberto was guilty of
concealment.

In this case, it is undisputed that simultaneous to its giving of notice to respondents that it was
rescinding the policy due to concealment, petitioner tendered the refund of premium by attaching
to the said notice a check representing the amount of refund. However, respondents refused to
accept the same since they were seeking for the release of the proceeds of the policy. Because
of this discord, petitioner filed for judicial rescission of the contract. Petitioner, after receiving an
adverse judgment from the RTC, appealed to the CA. And as may be recalled, the appellate court
found Norberto guilty of concealment and thus upheld the rescission of the insurance contract
and consequently decreed the obligation of petitioner to return to respondents the premium paid
by Norberto. Moreover, we find that petitioner did not incur delay or unjustifiably deny the claim.

Based on the foregoing, we find that petitioner properly complied with its obligation under the law
and contract. Hence, it should not be made liable to pay compensatory interest.

Considering the prevailing circumstances of the case, we hereby direct petitioner to reimburse the
premium paid within 15 days from date of finality of this Decision. If petitioner fails to pay within
the said period, then the amount shall be deemed equivalent to a forbearance of credit. In such a
case, the rate of interest shall be 6% per annum

5. Chattel Mortgage, NCC 2140-2141, Act 1508

PNB v. Manila Investment, April 29, 1971, 38 SCRA 462

Chattel Mortgage Law; Parties may agree that personal properties covered by chattel mortgage
be sold at a private sale. —It is true that the decision rendered in Civil Case 33074 of the Court of
First Instance of Manila provided for the sale at public auction of the personal properties covered
by the chattel mortgage executed in favor of the Bank, but it is likewise true that said personal
properties were sold at a private sale by agreement between the parties. There is nothing illegal,
immoral or against public order in such agreement entered into freely and voluntarily. As held in
Philippine National Bank vs. De Poli, under Article 1255 of the Civil Code (Art. 1306, New Civil
Code), the contracting parties may stipulate that in case of violation of the conditions of the
mortgage contract, the creditor may sell, at public sale and without previous advertisement or
notice, the whole or part of the good mortgaged for the purpose of applying the proceeds thereof
on the payment of the debt. Said stipulation is not contrary to law or public order, and therefore it
is valid.

Private sale by agreement cannot be questioned except on the ground of fraud or duress.—A s
the disposition of the mortgaged personalities in a private sale was by agreement between the
parties, it is clear that appellants are now in estoppel to question it except on the ground of fraud
or duress—pleas that they do not invoke. They do not even claim that private sale agreed upon
had caused them substantial prejudice.

Pameca Wood v CA, 310 SCRA 281

Chattel Mortgage; Pledge; Whereas, in pledge, the sale of the thing pledged extinguishes the
entire principal obligation, such that the pledgor may no longer recover proceeds of the sale in
excess of the amount of the principal obligation, Section 14 of the Chattel Mortgage Law
expressly entitles the mortgagor to the balance of the proceeds, upon satisfaction of the principal
obligation and costs. —It is clear from the above provision that the effects of foreclosure under
the Chattel Mortgage Law run inconsistent with those of pledge under Article 2115. Whereas, in
pledge, the sale of the thing pledged extinguishes the entire principal obligation, such that the
pledgor may no longer recover proceeds of the sale in excess of the amount of the principal
obligation, Section 14 of the Chattel Mortgage Law expressly entitles the mortgagor to the
balance of the proceeds, upon satisfaction of the principal obligation and costs. Since the Chattel
Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds there
is a corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a
reduction in the price at public auction.

6. Real Estate Mortgage, Act 3135 as amended

Isaguirre v de Lara, 332 SCRA 803

A mortgage is a contract entered into in order to secure the fulfillment of a principal obligation,
and constituted by recording the document in which it appears with the proper Registry of
Property, although, even if it is not recorded, the mortgage is nevertheless binding between the
parties; As a general rule, a mortgagor retains possession of the mortgaged property since a
mortgage is merely a lien and title to the property does not pass to the mortgagee. —A mortgage
is a contract entered into in order to secure the fulfillment of a principal obligation. It is constituted
by recording the document in which it appears with the proper Registry of Property, although,
even if it is not recorded, the mortgage is nevertheless binding between the parties. Thus, the
only right granted by law in favor of the mortgagee is to demand the execution and the recording
of the document in which the mortgage is formalized. As a general rule, the mortgagor retains
possession of the mortgaged property since a mortgage is merely a lien and title to the property
does not pass to the mortgagee. However, even though a mortgagee does not have possession
of the property, there is no impairment of his security since 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. If the debtor is unable to pay his debt, the
mortgage creditor may institute an action to foreclose the mortgage, whether judicially or
extrajudicially, whereby the mortgaged property will then be sold at a public auction and the
proceeds therefrom given to the creditor to the extent necessary to discharge the mortgage loan.
Apparently, petitioner’s contention that “[t]o require [him] . . . to deliver possession of the Property
to respondent prior to the full payment of the latter’s mortgage loan would be equivalent to the
cancellation of the mortgage” is without basis. Regardless of its possessor, the mortgaged
property may still be sold, with the prescribed formalities, in the event of the debtor’s default in the
payment of his loan obligation.

A simple mortgage does not give the mortgagee a right to the possession of the property unless
the mortgage should contain some special provision to that effect. —In Alvano v. Batoon, this
Court held that “[a] simple mortgage does not give the mortgagee a right to the possession of the
property unless the mortgage should contain some special provision to that effect.” Regrettably
for petitioner, he has not presented any evidence, other than his own gratuitous statements, to
prove that the real intention of the parties was to allow him to enjoy possession of the mortgaged
property until full payment of the loan.

Possession is an essential attribute of ownership—it would be redundant for the mortgagor to go

back to court simply to establish her right to possess the property; A judgment is not confined to
what appears upon the face of the decision, but also those necessarily included therein or
necessary thereto. —We hold that the trial court correctly issued the writ of possession in favor of
respondent. Such writ was but a necessary consequence of this Court’s ruling in G.R. No.
120832 affirming the validity of the original certificate of title (OCT No. P-13038) in the name of
respondent Felicitas de Lara, while at the same time nullifying the original certificate of title (OCT
No. P-11566) in the name of petitioner Cornelio Isaguirre. Possession is an essential attribute of
ownership; thus, it would be redundant for respondent to go back to court simply to establish her
right to possess subject property. Contrary to petitioner’s claims, the issuance of the writ of
possession by the trial court did not constitute an unwarranted modification of our decision in
G.R. No. 120832, but rather, was a necessary complement thereto. It bears stressing that a
judgment is not confined to what appears upon the face of the decision, but also those
necessarily included therein or necessary thereto.

Garcia v. Villar, G.R. No. 158891, June 27, 2012

Elements of Pactum Commissorium. —The following are the elements of pactum commissorium:
(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 nonpayment of the principal obligation within the stipulated period.

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 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. —
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 propertywhich said
third person possesses, in terms and with the formalities which the law establishes. [Garcia vs.
Villar, 675 SCRA 80(2012)]

Land Bank v Poblete, GR No. 196577, Feb 25 2013

There is indeed a situation where, 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 therefrom are given effect by reason of public policy. This is the doctrine of “the
mortgagee in good faith” based on the rule that buyers or mortgagees dealing with property
covered by a Torrens Certificate of Title are not required to go beyond what appears on the face
of the title. However, it has been consistently held that this rule does not apply to banks, which
are required to observe a higher standard of diligence.―There is indeed a situation where,
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 therefrom are given effect by
reason of public policy. This is the doctrine of “the mortgagee in good faith” based on the rule that
buyers or mortgagees dealing with property covered by a Torrens Certificate of Title are not
required to go beyond what appears on the face of the title. However, it has been consistently
held that this rule does not apply to banks, which are required to observe a higher standard of
diligence.

A bank whose business is impressed with public interest is expected to exercise more care and
prudence in its dealings than a private individual, even in cases involving registered lands. A bank
cannot assume that, simply because the title offered as security is on its face free of any
encumbrances or lien, it is relieved of the responsibility of taking further steps to verify the title
and inspect the properties to be mortgaged.

A person who deliberately ignores a significant fact that could create suspicion in an otherwise
reasonable person is not an innocent purchaser for value. ―Good faith, or the lack of it, is a
question of intention. In ascertaining intention, courts are necessarily controlled by the evidence
as to the conduct and outward acts by which alone the inward motive may, with safety, be
determined. Based on the evidence, Land Bank processed Maniego’s loan application upon his
presentation of OCT No. P-12026, which was still under the name of Poblete. Land Bank even
ignored the fact that Kapantay previously used Poblete’s title as collateral in its loan account with
Land Bank. In Bank of Commerce v. San Pablo, Jr., 522 SCRA 713 (2007), we held that when
“the person applying for the loan is other than the registered owner of the real property being
mortgaged, [such fact] should have already raised a red flag and which should have induced the
Bank x x x to make inquiries into and confirm x x x [the] authority to mortgage x x x. A person who
deliberately ignores a significant fact that could create suspicion in an otherwise reasonable
person is not an innocent purchaser for value.”

Royal Savings Bank v Asia, GR No. 183658, April 10, 2013

The obligation of a court to issue a writ of possession in favor of the purchaser in an extrajudicial
foreclosure sale ceases to be ministerial, once it appears that there is a third party who is in
possession of the property and is claiming a right adverse to that of the debtor/mortgagor. —In
the eyes of this Court, the RTC did not err in issuing the herein assailed Orders on the basis of its
initial finding that respondents are third parties who are actually holding the property adversely
vis-à-vis the judgment debtor. The RTC did not err in applying the doctrine laid down in Barican v.
Intermediate Appellate Court, 162 SCRA 358 (1988), in which we ruled that the obligation of a
court to issue a writ of possession in favor of the purchaser in an extrajudicial foreclosure sale
ceases to be ministerial, once it appears that there is a third party who is in possession of the
property and is claiming a right adverse to that of the debtor/mortgagor.

No court has the power to interfere by injunction in the issuance or enforcement of a writ of
possession issued by another court of concurrent jurisdiction having the power to issue that writ.
—No court has the power to interfere by injunction in the issuance or enforcement of a writ of
possession issued by another court of concurrent jurisdiction having the power to issue that writ.
However, as correctly pointed out by respondents in their Comment, it was the same trial court
and “not another court or co-equal court body that quashed the subject writ of possession.” The
pairing judge, who issued the Order quashing the Writ of Possession, issued it in her capacity as
the judge of Branch 222 of Quezon City―the same branch, albeit then under a different judge,
that issued the Writ of Possession.

Maglasang v Manila Banking Corporation, G.R. No. 171206, SEP 23 2013

The secured creditor has three remedies/options that he may alternatively adopt for the
satisfaction of his indebtedness. In particular, he may choose to: (a) waive the mortgage and
claim the entire debt from the estate of the mortgagor as an ordinary claim; (b) foreclose the
mortgage judicially and prove the deficiency as an ordinary claim; and (c) rely on the mortgage
exclusively, or other security and foreclose the same before it is barred by prescription, without
the right to file a claim for any deficiency.―Jurisprudence breaks down the rule under Section 7,
Rule 86 and explains that the secured creditor has three remedies/options that he may
alternatively adopt for the satisfaction of his indebtedness. In particular, he may choose to: (a)
waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary
claim; (b) foreclose the mortgage judicially and prove the deficiency as an ordinary claim; and (c)
rely on the mortgage exclusively, or other security and foreclose the same before it is barred by
prescription, without the right to file a claim for any deficiency. It must, however, be emphasized
that these remedies are distinct, independent and mutually exclusive from each other; thus, the
election of one effectively bars the exercise of the others. With respect to real properties, the
Court in Bank of America v. American Realty Corporation, 321 SCRA 659 (1999), pronounced: In
our jurisdiction, the remedies available to the mortgage creditor are deemed alternative and not
cumulative. Notably, an election of one remedy operates as a waiver of the other. For this
purpose, a remedy is deemed chosen upon the filing of the suit for collection or upon the filing of
the complaint in an action for foreclosure of mortgage, pursuant to the provision of Rule 68 of the
1997 Rules of Civil Procedure. As to extrajudicial foreclosure, such remedy is deemed elected by
the mortgage creditor upon filing of the petition not with any court of justice but with the Office of
the Sheriff of the province where the sale is to be made, in accordance with the provisions of Act
No. 3135, as amended by Act No. 4118.

Ramirez v. ManilaBank, G.R. No. 198800, December 11, 2013.

Foreclosure of Mortgage; Notice of Sale; Unless the parties stipulate, personal notice to the
mortgagor in extrajudicial foreclosure proceedings is not necessary because Section 3 of Act No.
3135 only requires the posting of the notice of sale in three public places and the publication of
that notice in a newspaper of general circulation. —In Carlos Lim, et al. v. Development Bank of
the Philippines, 700 SCRA 210 (2013), we held that unless the parties stipulate, personal notice
to the mortgagor in extrajudicial foreclosure proceedings is not necessary because Section 3 of
Act No. 3135 only requires the posting of the notice of sale in three public places and the
publication of that notice in a newspaper of general circulation. In this case, the parties stipulated
in paragraph N of the real estate mortgage that all correspondence relative to the mortgage
including notifications of extrajudicial actions shall be sent to mortgagor Ramirez at his given
address. Respondent had no choice but to comply with this contractual provision it has entered
into with Ramirez. The contract is the law between them. Hence, we cannot agree with the bank
that paragraph N of the real estate mortgage does not impose an additional obligation upon it to
provide personal notice of the extrajudicial foreclosure sale to the mortgagor Ramirez.

Act No. 3135 only requires (1) the posting of notices of sale in three public places, and (2) the
publication of the same in a newspaper of general circulation. Personal notice to the mortgagor is
not necessary. —As we explained in Metropolitan Bank v. Wong, 359 SCRA 608 (2001), the
bank’s violation of paragraph N of the real estate mortgage is sufficient to invalidate the
extrajudicial foreclosure sale: [A] contract is the law between the parties and ... absent any
showing that its provisions are wholly or in part contrary to law, morals, good customs, public
order, or public policy, it shall be enforced to the letter by the courts. Section 3, Act No. 3135
reads: “Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in
at least three public places of the municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice shall also be published once a week
for at least three consecutive weeks in a newspaper of general circulation in the municipality and
city.” The Act only requires (1) the posting of notices of sale in three public places, and (2) the
publication of the same in a newspaper of general circulation. Personal notice to the mortgagor is
not necessary. Nevertheless, the parties to the mortgage contract are not precluded from
exacting additional requirements. In this case, petitioner and respondent in entering into a
contract of real estate mortgage, agreed inter alia: “all correspondence relative to this mortgage,
including demand letters, summonses, subpoenas, or notifications of any judicial or extrajudicial
action shall be sent to the MORTGAGOR....” Precisely, the purpose of the foregoing stipulation is
to apprise respondent of any action which petitioner might take on the subject property, thus
according him the opportunity to safeguard his rights. When petitioner failed to send the notice of
foreclosure sale to respondent, he committed a contractual breach sufficient to render the
foreclosure sale on November 23, 1981 null and void.

PBCOM v. Mary Ann O. Yeung, G.R. No. 179691, December 4, 2013.

In the absence of any evidence showing that the mortgage also covers the other obligations of
the mortgagor, the proceeds from the sale should not be applied to them. —The petitioner
contends that there was no excess or surplus that needs to be returned to the respondent
because her other outstanding obligations and those of her attorney-in-fact were paid out of the
proceeds. The relevant provision, Section 4 of Rule 68 of the Rules of Civil Procedure, mandates
that: Section 4. Disposition of proceeds of sale.—The amount realized from the foreclosure sale
of the mortgaged property shall, after deducting the costs of the sale, be paid to the person
foreclosing the mortgage, and when there shall be any balance or residue, after paying off the
mortgage debt due, the same shall be paid to junior encumbrancers in the order of their priority,
to be ascertained by the court, or if there be no such encumbrancers or there be a balance or
residue after payment to them, then to the mortgagor or his duly authorized agent, or to the
person entitled to it. Thus, in the absence of any evidence showing that the mortgage also covers
the other obligations of the mortgagor, the proceeds from the sale should not be applied to them.

UCPB v. Lumbo, G .R. No. 162757, December 11, 2013.

The application for a writ of possession by the purchaser in a foreclosure sale conducted under
Act No. 3135 is ex parte and summary in nature, brought for the benefit of one party only and
without notice being sent by the court to any person adverse in interest. The relief is granted
even without giving an opportunity to be heard to the person against whom the relief is sought. —
With particular reference to an extrajudicial foreclosure of a real estate mortgage under Act No.
3135, as amended by Act No. 4118, the purchaser at the foreclosure sale may apply ex parte with
the RTC of the province or place where the property or any part of it is situated, to give the
purchaser possession thereof during the redemption period, furnishing bond in an amount
equivalent to the use of the property for a period of twelve months, to indemnify the debtor should
it be shown that the sale was made without violating the mortgage or without complying with the
requirements of Act No. 3135; and the RTC, upon approval of the bond, order that a writ of
possession be issued, addressed to the sheriff of the province in which the property is situated,
who shall then execute said order immediately. We underscore that the application for a writ of
possession by the purchaser in a foreclosure sale conducted under Act No. 3135 is ex parte and
summary in nature, brought for the benefit of one party only and without notice being sent by the
court to any person adverse in interest. The relief is granted even without giving an opportunity to
be heard to the person against whom the relief is sought. Its nature as an ex parte petition under
Act No. 3135, as amended, renders the application for the issuance of a writ of possession a non-
litigious proceeding. Indeed, the grant of the writ of possession is but a ministerial act on the part
of the issuing court, because its issuance is a matter of right on the part of the purchaser. The
judge issuing the order for the granting of the writ of possession pursuant to the express
provisions of Act No. 3135 cannot be charged with having acted without jurisdiction or with grave
abuse of discretion.

The reckoning of the period of redemption by the mortgagor or his successor-in-interest starts
from the registration of the sale in the Register of Deeds. —The reckoning of the period of
redemption by the mortgagor or his successor-in-interest starts from the registration of the sale in
the Register of Deeds. Although Section 6 of Act No. 3135, as amended, specifies that the period
of redemption starts from and after the date of the sale, jurisprudence has since settled that such
period is more appropriately reckoned from the date of registration.

If the redemption period expires without the mortgagor or his successor-in-interest redeeming the
foreclosed property within one year from the registration of the sale with the Register of Deeds,
the title over the property consolidates in the purchaser; The issuance of a writ of possession to
the purchaser becomes a matter of right upon the consolidation of title in his name, while the
mortgagor, by failing to redeem, loses all interest in the property. —If the redemption period
expires without the mortgagor or his successor-in-interest redeeming the foreclosed property
within one year from the registration of the sale with the Register of Deeds, the title over the
property consolidates in the purchaser. The consolidation confirms the purchaser as the owner
entitled to the possession of the property without any need for him to file the bond required under
Section 7 of Act No. 3135. The issuance of a writ of possession to the purchaser becomes a
matter of right upon the consolidation of title in his name, while the mortgagor, by failing to
redeem, loses all interest in the property.

Marquez v - Alindog, G.R. No. 184045, Jan 22 2014

Extrajudicial Foreclosure of Mortgage; It is an established rule that the purchaser in an extra-

judicial foreclosure sale is entitled to the possession of the property and can demand that he be
placed in possession of the same either during (with bond) or after the expiration (without bond)
of the redemption period therefor. —It is an established rule that the purchaser in an extrajudicial
foreclosure sale is entitled to the possession of the property and can demand that he be placed in
possession of the same either during (with bond) or after the expiration (without bond) of the
redemption period therefor. To this end, the Court, in China Banking Corp. v. Sps. Lozada (China
Banking Corp.), 557 SCRA 177 (2008), citing several cases on the matter, explained that a writ of
possession duly applied for by said purchaser s hould issue as a matter of course, and thus,
merely constitutes a ministerial duty on the part of the court.

The issuance of a writ of possession to a purchaser in a public auction is a ministerial act. After
the consolidation of title in the buyer’s name for failure of the mortgagor to redeem the property,
the writ of possession becomes a matter of right. —In the case of Spouses Espiridion v. Court of
Appeals, 490 SCRA 273 (2006), the Court expounded on the ministerial nature of the foregoing
issuance as follows: The issuance of a writ of possession to a purchaser in a public auction is a
ministerial act. After the consolidation of title in the buyer’s name for failure of the
mortgagor to redeem the property, the writ of possession becomes a matter of right. Its
issuance to a purchaser in an extrajudicial foreclsure is merely a ministerial function. The
trial court has no discretion on this matter.

Extrajudicial Foreclosure of Mortgage; The possession of the mortgaged property may be

awarded to a purchaser in an extrajudicial foreclosure unless a third party is actually holding the
property by adverse title or right. —The ministerial issuance of a writ of possession in favor of the
purchaser in an extrajudicial foreclosure sale, however, admits of an exception. Section 33, Rule
39 of the Rules of Court (Rules) pertinently provides that the possession of the mortgaged
property may be awarded to a purchaser in an extrajudicial foreclosure unless a third party is
actually holding the property by adverse title or right. In the recent case of Rural Bank of Sta.
Barbara (Iloilo), Inc. v. Centeno (2013), citing the case of China Banking Corp., the Court
illumined that “the phrase ‘a third party who is actually holding the property adversely to the
judgment obligor’ c ontemplates a situation in which a third party holds the property by adverse
title or right, such as that of a co-owner, tenant or usufructuary. The co-owner, agricultural tenant,
and usufructuary possess the property in their own right, and they are not merely the successor
or transferee of the right of possession of another co-owner or the owner of the property. Notably,
t he property should not only be possessed by a third party, but also held by the third party
adversely to the judgment obligor.” In other words, as mentioned in Villanueva v. Cherdan
Lending Investors Corporation (2010), the third person must therefore claim a right superior to
that of the original mortgagor.

DBP v. Guariña Agricultural, G.R. No. 160758. January 15, 2014

By its nature, a mortgage remains an accessory contract dependent on the principal obligation,
such that enforcement of the mortgage contract will depend on whether or not there has been a
violation of the principal obligation. —DBP’s actuations were legally unfounded. It is true that
loans are often secured by a mortgage constituted on real or personal property to protect the
creditor’s interest in case of the default of the debtor. By its nature, however, a mortgage remains
an accessory contract dependent on the principal obligation, such that enforcement of the
mortgage contract will depend on whether or not there has been a violation of the principal
obligation. While a creditor and a debtor could regulate the order in which they should comply
with their reciprocal obligations, it is presupposed that in a loan the lender should perform its
obligation — the release of the full loan amount — before it could demand that the borrower
repay the loaned amount. In other words, Guariña Corporation would not incur in delay before
DBP fully performed its reciprocal obligation.

Homeowners v Felonia et al, G.R. No. 189477, FEB 26, 2014Sa me; Mortgages; That the
mortgagor be the absolute owner of the thing mortgaged is an essential requisite of a contract of
mortgage; A mortgage of real property executed by one who is not an owner thereof at the time of
the execution of the mortgage is without legal existence. —That the mortgagor be the absolute
owner of the thing mortgaged is an essential requisite of a contract of mortgage. Article 2085 (2)
of the Civil Code specifically says so: Art. 2085. The following requisites are essential to the
contracts of pledge and mortgage: x x x x (2) That the pledgor or mortgagor be the absolute
owner of the thing pledged or mortgaged. Succinctly, for a valid mortgage to exist, ownership of
the property is an essential requisite. Reyes v. De Leon, 20 SCRA 369 (1967), cited the case of
Philippine National Bank v. Rocha where it was pronounced that “a mortgage of real property
executed by one who is not an owner thereof at the time of the execution of the mortgage is
without legal existence.” Such that, according to DBP v. Prudential Bank, 475 SCRA 623 (2005),
there being no valid mortgage, there could also be no valid foreclosure or valid auction sale.

Arguelles v. Malarayat Rural Bank, Inc., G.R. No. 200468, March 19, 2014.

The ascertainment of good faith or the lack thereof, and the determination of negligence are
factual matters which lay outside the scope of a petition for review on certiorari. However, a
recognized exception to this rule is when the Regional Trial Court (RTC) and the Court of Appeals
(CA) have divergent findings of fact. —At the outset, we note that the issue of whether a
mortgagee is in good faith generally cannot be entertained in a petition filed under Rule 45 of the
1997 Rules of Civil Procedure, as amended. This is because the ascertainment of good faith or
the lack thereof, and the determination of negligence are factual matters which lay outside the
scope of a petition for review on certiorari. However, a recognized exception to this rule is when
the RTC and the CA have divergent findings of fact as in the case at bar. We find that the
respondent Malarayat Rural Bank is not a mortgagee in good faith. Therefore, the spouses
Arguelles as the vendees to the unregistered sale have a superior right to the mortgaged land.

Where the mortgagor is not the registered owner of the property but is merely an attorney-in-fact
of the same, it is incumbent upon the mortgagee to exercise greater care and a higher degree of
prudence in dealing with such mortgagor. —Where the mortgagor is not the registered owner of
the property but is merely an attorney-in-fact of the same, it is incumbent upon the mortgagee to
exercise greater care and a higher degree of prudence in dealing with such mortgagor. Recently,
in Land Bank of the Philippines v. Poblete (2013), we affirmed Bank of Commerce v. Spouses
San Pablo, Jr. (2007): Based on the evidence, Land Bank processed Maniego’s loan application
upon his presentation of OCT No. P-12026, which was still under the name of Poblete. Land
Bank even ignored the fact that Kapantay previously used Poblete’s title as collateral in its loan
account with Land Bank. In Bank of Commerce v. San Pablo, Jr. (2007), we held that when “the
person applying for the loan is other than the registered owner of the real property being
mortgaged, [such fact] should have already raised a red flag and which should have induced the
Bank x x x to make inquiries into and confirm x x x [the] authority to mortgage x x x. A person who
deliberately ignores a significant fact that could create suspicion in an otherwise reasonable
person is not an innocent purchaser for value.”

Okabe v Saturnino, G.R. No. 196040, August 26, 2014 [en banc]

Here, petitioner does not fall under the circumstances of the aforecited case and the provisions of
Section 7 of Act No. 3135, as amended, since she bought the property long after the expiration of
the redemption period. Thus, it is PNB, if it was the purchaser in the foreclosure sale, or the
purchaser during the foreclosure sale, who can file the ex-parte petition for the issuance of writ of
possession during the redemption period, but it will only issue upon compliance with the
provisions of Section 7 of Act No. 3135.

Upon the expiration of the right of redemption, the purchaser or redemptioner shall be substituted
to and acquire all the rights, title, interest and claim of the judgment obligor to the property as of
the time of the levy. The possession of the property shall be given to the purchaser or last
redemptioner by the same officer unless a third party is actually holding the property adversely to
the judgment obligor.

From the foregoing, upon the expiration of the right of redemption, the purchaser or redemptioner
shall be substituted to and acquire all the rights, title, interest and claim of the judgment debtor to
the property, and its possession shall be given to the purchaser or last redemptioner unless a
third party is actually holding the property adversely to the judgment debtor. In which case, the
issuance of the writ of possession ceases to be ex-parte and non-adversarial. Thus, where the
property levied upon on execution is occupied by a party other than a judgment debtor, the
procedure is for the court to conduct a hearing to determine the nature of said possession, i.e.,
whether or not he is in possession of the subject property under a claim adverse to that of the
judgment debtor.

Okabe v. Saturnino, August 26, 2014.

In essence, the issue is whether or not, in the case at bar, an ex-parte petition for the issuance of
a writ of possession was the proper remedy of the petitioner in obtaining possession of the
subject property.

Section 7 of Act No. 3135, as amended by Act No. 4118, states:

Section 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First
Instance of the province or place where the property or any part thereof is situated, to give him possession
thereof during the redemption period, furnishing bond in an amount equivalent to the use of the property for a
period of twelve months, to indemnify the debtor in case it be shown that the sale was made without violating
the mortgage or without complying with the requirements of this Act. Such petition shall be made under oath
 and filed in the form of an ex partemotion x x x and the court shall, upon approval of the bond, order that a writ
of possession issue, addressed to the sheriff of the province in which the property is situated, who shall execute
said order immediately.

Under the provision cited above, the purchaser or the mortgagee who is also the purchaser in the
foreclosure sale may apply for a writ of possession during the redemption period, upon an ex-
partemotion and after furnishing a bond.

Here, petitioner does not fall under the circumstances of the aforequoted case and the provisions
of Section 7 of Act No. 3135, as amended, since she bought the property long after the expiration
of the redemption period. Thus, it is PNB, if it was the purchaser in the foreclosure sale, or the
purchaser during the foreclosure sale, who can file the ex-parte petition for the issuance of writ of
possession during the redemption period, but it will only issue upon compliance with the
provisions of Section 7 of Act No. 3135.

Nevertheless, the purchaser is not left without any remedy. Section 6 of Act No. 3135, as
amended by Act No. 4118, provides:

SEC. 6. In all cases in which anextrajudicial sale is made under the special power hereinbefore referred to, the
debtor, his successor-ininterest or any judicial creditor or judgment creditor of said debtor, or any person having
a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may
redeem the same at any time within the term of one year from and after the date of the sale; and such
redemption shall be governed by the provisions of sections four hundred and sixty-six, inclusive, of the Code of
Civil Procedure, in so far as these are not inconsistent with the provisions of this Act.

Consequently, the provision of Section 33, Rule 39 of the Rules of Court relative to an execution
sale ismade applicable to extrajudicial foreclosure of real estate mortgages by virtue of Section 6
of Act No. 3135, as amended.

Section 33, Rule 39 of the Rules of Court provides:

SEC. 33. Deed and possession to be given at expiration of redemption period; by whom executed or given. – If
no redemption be made within one (1) year from the dateof registration of the certificate of sale, the purchaser
is entitled toa conveyance and possession of the property; or, if so redeemed whenever sixty (60) days have
elapsed and no other redemption has been made, and notice thereof given, and the time for redemption has
expired, the lastredemptioner is entitled to the conveyance and possession; but in all cases the judgment
obligor shall have the entire period of one (1) year from the date of registration of the sale to redeem the
property. The deed shall be executed by the officer making the sale or his successor in office,and in the latter
case shall have the same validity as though the officermaking the sale had continued in office and executed it.

Upon the expiration of the right of redemption, the purchaser or redemptioner shall be substituted to and
acquire all the rights, title, interest and claim of the judgment obligor to the property as of the time of the levy.
The possession of the property shall be given to the purchaser or last redemptioner by the same officer unless
a third party is actually holding the property adversely to the judgment obligor.

From the foregoing, upon the expiration of the right of redemption, the purchaser or redemptioner
shall be substituted to and acquire all the rights, title, interest and claim of the judgment debtor to
the property, and its possession shall be given to the purchaser or last redemptioner unless a
third party is actually holding the property adversely to the judgment debtor. In which case, the
issuance of the writ of possession ceases to be ex-parte and non- adversarial. Thus, where the
property levied upon on execution is occupied by a party other than a judgment debtor, the
procedure is for the court to conduct a hearing to determine the nature of said possession, i.e.,
whether or not he is in possession of the subject property under a claim adverse to that of the
judgment debtor.

Gatuslao v. Yanson, January 21, 2015.

Until the foreclosure sale of the property in question is annulled by a court of competent
jurisdiction, the issuance of a writ of possession remains the ministerial duty of the trial court. The
same is true with its implementation; otherwise, the writ will be a useless paper judgment – a
result inimical to the mandate of Act No. 3135 to vest possession in the purchaser immediately.

It is thus settled that the buyer in a foreclosure sale becomes the absolute owner of the property
purchased if it is not redeemed during the period of one year after the registration of the sale. As
such, he is entitled to the possession of the said property and can demand it at any time following
the consolidation of ownership in his name and the issuance to him of a new transfer certificate of
title. The buyer can in fact demand possession of the land even during the redemption
period except that he has to post a bond in accordance with Section 7 of Act No. 3135, as
amended. No such bond is required after the redemption period if the property is not
redeemed.

Upon the expiration of the period to redeem and no redemption was made, the purchaser, as
confirmed owner, has the absolute right to possess the land and the issuance of the writ of
possession becomes a ministerial duty of the court upon proper application and proof of title.

Nevertheless, where the extrajudicially foreclosed real property is in the possession of a third
party who is holding the same adversely to the judgment debtor or mortgagor, the RTC’s duty to
issue a writ of possession in favor of the purchaser of said real property ceases to be ministerial
and, as such, may no longer proceed ex parte. In such a case, the trial court must order a hearing
to determine the nature of the adverse possession. For this exception to apply, however, it is not
enough that the property is in the possession of a third party, the property must also be held by
the third party adversely to the judgment debtor or mortgagor, such as a co-owner, agricultural
tenant or usufructuary.

GE Money Bank v. Sps. Dizon, March 23, 2015.

In this case, considering that the creditor-mortgagee is a banking institution, the determination of
the redemption price is governed by Section 78 of Republic Act No. 337 or “The General Banking
Act,” as amended by Presidential Decree No. 1828.

Redemption within the period allowed by law is not a matter of intent but a question of payment or
valid tender of the full redemption price. It is irrelevant whether the mortgagor is diligent in
asserting his or her willingness to pay. What counts is that the full amount of the redemption price
must be actually paid; otherwise, the offer to redeem will be ineffectual and the purchaser may
justly refuse acceptance of any sum that is less than the entire amount.

The general rule in redemption is that it is not sufficient that a person offering to redeem
manifests his/her desire to do so. The statement of intention must be accompanied by an actual
and simultaneous tender of payment. This constitutes the exercise of the right torepurchase.
Bona fide redemption necessarily implies a reasonable and valid tender of the entire purchase
price, otherwise, the rule on the redemption period fixed by law can easily be circumvented.
There is no cogent reason for requiring the vendee to accept payment by installments from the
redemptioner, as it would ultimately result in an indefinite extension of the redemption period.

Bascara v. Pangilinan, June 17, 2015.

In extrajudicial foreclosures of real estate mortgages, the issuance of a writ of possession is

governed by Section 7 of Act No. 3135. Although the above provision clearly pertains to a writ of
possession availed of and issued within the redemption period of the foreclosure sale, the same
procedure also applies to a situation where a purchaser is seeking possession of the foreclosed
property bought at the public auction sale after the redemption period has expired without
redemption having been made. The only difference is that in the latter case, no bond is required
therefor.

Upon the expiration of the period to redeem and no redemption was made, the purchaser, as
confirmed owner, has the absolute right to possess the land and the issuance of the writ of
possession becomes a ministerial duty of the court upon proper application and proof of title.
There is, however, an exception to the rule. Under Section 33, Rule 39 of the Rules ofCourt, the
possession of the property shall be given to the purchaser or last redemptioner unless a third
party is actually holding the property in a capacity adverse to the judgment obligor.

In this case, while it is undisputed that petitioner was in possession of the subject property, it
cannot be said that his right to possess the same is by virtue of being a co-owner, agricultural
tenant or usufructuary; nor is the claim to his right of possession analogous to the foregoing
situations. What is clear is that he allegedly acquired the property from Pardo by reason of a
donation mortis causa. He is, therefore, a transferee or successor-in-interest who merely stepped
into the shoes of his aunt. He cannot assert that his right of possession is adverse to that of
Pardo as he has no independent right of possession. Consequently, under legal contemplation,
he cannot be considered as a "third party who is actually holding the property adversely to the
judgment obligor."

AQA Global Construction v. Planters Development Bank, August 12, 2015.

The general rule is that after the lapse of the redemption period, the purchaser in a foreclosure
sale becomes the absolute owner of the property purchased who is entitled to the possession of
the said property. Upon ex parte petition, it is ministerial upon the trial court to issue the writ of
possession in his favor. The exception, however, is provided under Section 33, Rule 39 of the
Rules, which applies suppletorily to extrajudicial foreclosures of real estate mortgages. Under the
said provision of law, the possession of the mortgaged property may be awarded to a purchaser
in the extrajudicial foreclosure unless a third party is actually holding the property adversely to the
judgment debtor.

Consequently, Je-An and AQA cannot be considered third parties holding the subject properties
adversely to KTC, the defaulting debtor mortgagor. Resultantly, the general rule, and not the
exception, applies to the instant petitions, rendering it the mandatory and ministerial duty of the
RTC to issue the writ of possession in favor of Plantersbank as the confirmed owner, and of the
Sheriff to implement the said writ.

Claudio v. Spouses Saraza, August 26, 2015.

Issue: Whether or not the Sps Saraza were mortgagees in GF?

The Court finds it unusual that Florentino did not indicate the TCT number in the mortgage
contract, if indeed, one had already been issued in his favor. The TCT number is essential to
identify the title covering the mortgaged land. Notwithstanding the said omission, Spouses Saraza
still allowed the loan and entered into a mortgage agreement with Florentino. Considering the
substantial loan involved in the agreement, Spouses Saraza should have undertaken the
necessary steps to ascertain any flaw in the title of Florentino or to check his capacity to transfer
any interest in the mortgaged land. Instead, Spouses Saraza closed their eyes on a fact which
should put a reasonable man on guard as to the ownership of the property being presented as
security for a loan. A person who deliberately ignores a significant fact that would create suspicion
in an otherwise reasonable person is not an innocent purchaser (mortgagee) for value.

7. Pledge, NCC 2093-2123

Ong v Roban Lending, 557 SCRA 516

Pactum Commissorium; Court finds that the Memorandum of Agreement and Dation in Payment
constitute pactum commissorium, which is prohibited under Article 2088 of the Civil Code. —This
Court finds that the Memorandum of Agreement and Dation in Payment constitute pactum
commissorium, which is prohibited under Article 2088 of the Civil Code which provides: The
creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them.
Any stipulation to the contrary is null and void.

Elements of Pactum Commissorium. —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.

8. Guaranty and Suretyship, NCC 2157-2081

Phil-Am v. Ramos, February 28, 1966, 16 SCRA 298

Actions; Pleadings; Sufficiency of cause of action. —The complaint alleges that the parties
concerned executed agreements of surety, indemnity and counter-guaranty with real estate
mortgage, that the principal obligation consisting in the promissory note was not paid upon
maturity; and that plaintiff as surety had paid the obligation thereunder. Defendants filed a motion
to dismiss, asserting that the complaint stated no cause of action, for under the agreement of
counter-guaranty with real estate mortgage, the defendants were mere guarantors so that plaintiff
must first exhaust the properties of the principal debtor before proceeding against them. Held:
The complaint sufficiently states a cause of action against defendants, for under the indemnity
agreement, their obligation was joint and several. And under Article 1216 of the New Civil Code,
the creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The indemnity agreement could not have been modified by the counter-guaranty
agreement, since the former was executed one day after the latter.

Guaranty; No exhaustion of debtor’s properties if special security has been given. —Even under
the counter-guaranty agreement, the defendants as counter-guarantors are not entitled to
demand exhaustion of the properties of the principal debtor. For the guarantors have no right to
demand exhaustion of the properties of the principal debtor, under Article 2058 of the New Civil
Code, where a pledge or mortgage has been given as a special security (Saavedra vs. Price, 68
Phil. 688; Southern Motors vs. Barbosa, 99 Phil. 253).

Toh v Solid Bank, 408 SCRA 544

An extension of the period for enforcing the indebtedness does not by itself bring about the
discharge of the sureties. —Stated otherwise, an extension of the period for enforcing the
indebtedness does not by itself bring about the discharge of the sureties unless the extra time is
not permitted within the terms of the waiver, i.e., where there is no payment or there is deficient
settlement of the marginal deposit and the twenty-five percent (25%) consideration, in which case
the illicit extension releases the sureties. Under Art. 2055 of the Civil Code, the liability of a surety
is measured by the terms of his contract, and while he is liable to the full extent thereof, his
accountability is strictly limited to that assumed by its terms.

An extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. —Evidently, they constitute illicit extensions prohibited under Art. 2079
of the Civil Code, “[a]n extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty.” This act of the Bank is not mere failure or delay on its part
to demand payment after the debt has become due, as was the case in unpaid five (5) letters of
credit which the Bank did not extend, defer or put off, but comprises conscious, separate and
binding agreements to extend the due date, as was admitted by the Bank itself.

Any release or impairment of the security as a primary source for the payment of a debt, will
discharge the surety to the extent of the value of the property or lien released. —If the creditor x x
x has acquired a lien upon the property of a principal, the creditor at once becomes charged with
the duty of retaining such security, or maintaining such lien in the interest of the surety, and any
release or impairment of this security as a primary resource for the payment of a debt, will
discharge the surety to the extent of the value of the property or lien released x x x x [for] there
immediately arises a trust relation between the parties, and the creditor as trustee is bound to
account to the surety for the value of the security in his hands.

Autocorp Group v Intra Strata, 556 SCRA 250

Obligations and Contracts; Subrogation; The benefit of subrogation, an extinctive subjective

novation by a change of creditor, which “transfers to the person subrogated, the credit and all the
rights thereto appertaining, either against the debtor or against third persons,” is granted by
Article 2067 of the Civil Code only to the “guarantor (or surety) who pays.” —The Court, however,
deems it essential to qualify that ISAC’s right to seek indemnity from petitioners does not
constitute subrogation under the Civil Code, considering that there has been no payment yet by
ISAC to the BOC. There are indeed cases in the aforementioned Article 2071 of the Civil Code
wherein the guarantor or surety, even before having paid, may proceed against the principal
debtor, but in all these cases, Article 2071 of the Civil Code merely grants the guarantor or surety
an action “to obtain release from the guaranty, or to demand a security that shall protect him from
any proceedings by the creditor and from the danger of insolvency of the debtor.” The benefit of
subrogation, an extinctive subjective novation by a change of creditor, which “transfers to the
person subrogated, the credit and all the rights thereto appertaining, either against the debtor or
against third persons,” is granted by the Article 2067 of the Civil Code only to the “guarantor (or
surety) who pays.”

Guaranty; Suretyship; The provisions of the Civil Code on Guarantee, other than the benefit of
excussion, are applicable and available to the surety. —The Court of Appeals concluded that
since petitioner Rodriguez was a surety, Article 2079 of the Civil Code does not apply. The
appellate court further noted that both petitioners authorized ISAC to consent to the granting of an
extension of the subject bonds. The Court of Appeals committed a slight error on this point. The
provisions of the Civil Code on Guarantee, other than the benefit of excussion, are applicable and
available to the surety. The Court finds no reason why the provisions of Article 2079 would not
apply to a surety.

An agreement whereby the sureties bound themselves to be liable in case of an extension or

renewal of the bond, without the necessity of executing another indemnity agreement for the
purpose and without the necessity of being notified of such extension or renewal, is valid, and
that there is nothing in it that militates against the law, good customs, good morals, public order
or public policy. —In Philippine American General Insurance Co., Inc. v. Mutuc, 61 SCRA 22
(1974), the Court held that an agreement whereby the sureties bound themselves to be liable in
case of an extension or renewal of the bond, without the necessity of executing another indemnity
agreement for the purpose and without the necessity of being notified of such extension or
renewal, is valid; and that there is nothing in it that militates against the law, good customs, good
morals, public order or public policy. [

Gateway Electronics v Asianbank, 574 SCRA 698

A surety of the distressed corporation can be sued separately to enforce its liability as such,
notwithstanding a Securities and Exchange Commission (SEC) order declaring the former under
a state of suspension of payment. —As Asianbank aptly points out, a suit against the surety,
insofar as the surety’s solidary liability is concerned, is not affected by an insolvency proceeding
instituted by or against the principal debtor. The same principle holds true with respect to the
surety of a corporation in distress which is subject of a rehabilitation proceeding before the
Securities and Exchange Commission (SEC). As we held in Commercial Banking Corporation v.
CA, 178 SCRA 739 (1989), a surety of the distressed corporation can be sued separately to
enforce his liability as such, notwithstanding an SEC order declaring the former under a state of
suspension of payment.

Continuing Suretyship; Court defined and upheld the validity of a continuing suretyship in Fortune
Motors (Phils.) vs. Court of Appeals, 267 SCRA 653 (1997). —Geronimo’s thesis that the deed in
question cannot be accorded prospective application is erroneous. To be sure, the provisions of
the subject deed of suretyship indicate a continuing suretyship. In Fortune Motors (Phils.) v. Court
of Appeals, 267 SCRA 653 (1997), the Court, citing cases, defined and upheld the validity of a
continuing suretyship in this wise: “Of course, a surety is not bound under any particular principal
obligation until that principal obligation is born. But there is no theoretical or doctrinal difficulty
inherent in saying that the suretyship agreement itself is valid and binding even before the
principal obligation intended to be secured thereby is born, any more than there would be in
saying that obligations which are subject to a condition precedent are valid and binding before the
occurrence of the condition precedent. Comprehensive or continuing surety agreements are in
fact quite commonplace in present day financial and commercial practice. A bank or financing
company, which anticipates entering into a series of credit transactions with a particular company,
commonly requires the projected principal debtor to execute a continuing surety agreement along
with its sureties. By executing such an agreement, the principal places itself in a position to enter
into the projected series of transactions with its creditor; with such suretyship agreement, there
would be no need to execute a separate surety contract or bond for each financing or credit
accommodation extended to the principal debtor.”

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. —In Diño v. Court of Appeals, (1992), we again had occasion to discourse
on continuing guaranty/suretyship thus: “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.

Aglibot v Santia, G.R. No. 185945, Dec. 5, 2012

The liability of the guarantor is only subsidiary, and all the properties of the principal debtor must
first be exhausted before the guarantor may be held answerable for the debt. 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. —It is settled that the liability of the guarantor is only subsidiary,
and all the properties of the principal debtor; the PLCC in this case, must first be exhausted
before the guarantor may be held answerable for the debt. 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 principal’s property’—the benefit of which
the guarantor claims—cannot even begin to take place before judgment has been obtained.” This
rule is contained in Article 2062 of the Civil Code, which provides that the action brought by the
creditor must be filed against the principal debtor alone, except in some instances mentioned in
Article 2059 when the action may be brought against both the guarantor and the principal debtor.
A guaranty agreement is a promise to answer for the debt or default of another, the law clearly
requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be
unenforceable unless ratified, although it does not have to appear in a public document. —
Concerning a guaranty agreement, which is a promise to answer for the debt or default of
another, the law clearly requires that it, or some note or memorandum thereof, be in writing.
Otherwise, it would be unenforceable unless ratified, although under Article 1358 of the Civil
Code, a contract of guaranty does not have to appear in a public document. Contracts are
generally obligatory in whatever form they may have been entered into, provided all the essential
requisites for their validity are present, and the Statute of Frauds simply provides the method by
which the contracts enumerated in Article 1403(2) may be proved, but it does not declare them
invalid just because they are not reduced to writing. Thus, the form required under the Statute is
for convenience or evidentiary purposes only.

Article 2055 of the Civil Code provides that a guaranty is not presumed, but must be express, and
cannot extend to more than what is stipulated therein. —Article 2055 of the Civil Code also
provides that a guaranty is not presumed, but must be express, and cannot extend to more than
what is stipulated therein. This is the obvious rationale why a contract of guarantee is
unenforceable unless made in writing or evidenced by some writing. For as pointed out by Santia,
Aglibot has not shown any proof, such as a contract, a secretary’s certificate or a board
resolution, nor even a note or memorandum thereof, whereby it was agreed that she would issue
her personal checks in behalf of the company to guarantee the payment of its debt to Santia.
Certainly, there is nothing shown in the Promissory Note signed by Aglibot herself remotely
containing an agreement between her and PLCC resembling her guaranteeing its debt to Santia.
And neither is there a showing that PLCC thereafter ratified her act of “guaranteeing” its
indebtedness by issuing her own checks to Santia.

Trade v. Asia, G.R. No. 187403. February 12, 2014.

Civil Law; Suretyship; Solidary Obligations; Although the contract of a surety is in essence
secondary only to a valid principal obligation, his liability to the creditor is direct, primary and
absolute; he becomes liable for the debt and duty of another although he possesses no direct or
personal interest over the obligations nor does he receive any benefit therefrom. The
fundamental reason therefor is that a contract of suretyship effectively binds the surety as a
solidary debtor. —A 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, and their liabilities are interwoven as
to be inseparable. Although the contract of a surety is in essence secondary only to a valid
principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable
for the debt and duty of another although he possesses no direct or personal interest over the
obligations nor does he receive any benefit therefrom. The fundamental reason therefor is that a
contract of suretyship effectively binds the surety as a solidary debtor. This is provided under
Article 2047 of the Civil Code which states: Article 2047. By guaranty a person, called the
guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so. If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the
contract is called a suretyship.

Since the surety is a solidary debtor, it is not necessary that the original debtor first failed to pay
before the surety could be made liable; it is enough that a demand for payment is made by the
creditor for the surety’s liability to attach. —Since the surety is a solidary debtor, it is not
necessary that the original debtor first failed to pay before the surety could be made liable; it is
enough that a demand for payment is made by the creditor for the surety’s liability to attach.
Article 1216 of the Civil Code provides that: Article 1216. The creditor may proceed against any
one of the solidary debtors or some or all of them simultaneously. The demand made against one
of them shall not be an obstacle to those which may subsequently be directed against the others,
so long as the debt has not been fully collected.
“Surety” and “Guarantor,” Distinguished. —Comparing a surety’s obligations with that of a
guarantor, the Court, in the case of Palmares v. CA, 288 SCRA 422 (1998), illumined that a surety
is responsible for the debt’s payment at once if the principal debtor makes default, whereas a
guarantor pays only if the principal debtor is unable to pay, viz.: A surety is an insurer of the debt,
whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is an undertaking
that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. Stated differently,
a surety promises to pay the principal’s debt if the principal will not pay, while a guarantor agrees
that the creditor, after proceeding against the principal, may proceed against the guarantor if the
principal is unable to pay. A surety binds himself to perform if the principal does not, without
regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal
will pay, but simply that he is able to do so. In other words, a surety undertakes directly for the
payment and is so responsible at once if the principal debtor makes default, while a guarantor
contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal
debtor.

Article 2079 of the Civil Code, which pertinently provides that “[a]n extension granted to the
debtor by the creditor without the consent of the guarantor extinguishes the guaranty,” equally
applies to both contracts of guaranty and suretyship. —The Court in Cochingyan, Jr. v. R&B
Surety & Insurance Co., Inc., 151 SCRA 339 (1987), and later in the case of Security Bank, held
that Article 2079 of the Civil Code, which pertinently provides that “[a]n extension granted to the
debtor by the creditor without the consent of the guarantor extinguishes the guaranty,” equally
applies to both contracts of guaranty and suretyship. The rationale therefor was explained by the
Court as follows: The theory behind Article 2079 is that an extension of time given to the principal
debtor by the creditor without the surety’s consent would deprive the surety of his right to pay the
creditor and to be immediately subrogated to the creditor’s remedies against the principal debtor
upon the maturity date. The surety is said to be entitled to protect himself against the contingency
of the principal debtor or the indemnitors becoming insolvent during the extended period.

Lim v Security Bank, GR 188539, March 12, 2014

A contract of suretyship is an agreement whereby a party, called the surety, guarantees the
performance by another party, called the principal or obligor, of an obligation or undertaking in
favor of another party, called the obligee. —The nature of a suretyship is elucidated in Philippine
Charter Insurance Corporation v. Petroleum Distributors & Service Corporation, 670 SCRA 166
(2012), in this wise: A contract of suretyship is an agreement whereby a party, called the surety,
guarantees the performance by another party, called the principal or obligor, of an obligation or
undertaking in favor of another party, called the obligee. Although the contract of a surety is
secondary only to a valid principal obligation, the surety becomes liable for the debt or duty of
another although it possesses no direct or personal interest over the obligations nor does it
receive any benefit therefrom. This was explained in the case of Stronghold Insurance Company,
Inc. v. Republic-Asahi Glass Corporation, 492 SCRA 179 (2006), where it was written: The
surety’s obligation is not an original and direct one for the performance of his own act, but merely
accessory or collateral to the obligation contracted by the principal. Nevertheless, although the
contract of a surety is in essence secondary only to a valid principal obligation, his liability to the
creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he
is directly and equally bound with the principal. x x x x Thus, suretyship arises upon the solidary
binding of a person deemed the surety with the principal debtor for the purpose of fulfilling an
obligation. A 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, and their liabilities are interwoven as to
be inseparable.

Continuing Surety Agreements; A bank or financing company, which anticipates entering into a
series of credit transactions with a particular company, normally requires the projected principal
debtor to execute a continuing surety agreement along with its sureties. —In this case, what
petitioner executed was a Continuing Suretyship, which the Court described in Saludo, Jr. v.
Security Bank Corporation, 633 SCRA 247 (2010), as follows: The essence of a continuing surety
has been highlighted in the case of Totanes v. China Banking Corporation, 576 SCRA 323 (2009),
in this wise: Comprehensive or continuing surety agreements are, in fact, quite commonplace in
present day financial and commercial practice. A bank or financing company, which anticipates
entering into a series of credit transactions with a particular company, normally requires the
projected principal debtor to execute a continuing surety agreement along with its sureties. By
executing such an agreement, the principal places itself in a position to enter into the projected
series of transactions with its creditor; with such suretyship agreement, there would be no need to
execute a separate surety contract or bond for each financing or credit accommodation extended
to the principal debtor.

Stronghold Insurance Company v. Sps. Rune, January 21, 2015.

A performance bond is a kind of suretyship agreement. A suretyship agreement is an agreement

"whereby a party, called the surety, guarantees the performance by another party, called the
principal or obligor, of an obligation or undertaking in favor of another party, called the obligee." In
the same vein, a performance bond is "designed to afford the project owner security that the
contractor, will faithfully comply with the requirements of the contract and make good [on the]
damages sustained by the project owner in case of the contractor’s failure to so perform."

It is settled that the surety’s solidary obligation for the performance of the principal debtor’s
obligation is indirect and merely secondary. Nevertheless, the surety’s liability tothe "creditor or
promisee of the principal is said to be direct, primary and absolute; in other words, he is directly
and equally bound with the principal."

Verily, "in enforcing a surety contract, the ‘complementary contracts-construed-together’ doctrine

finds application. According to this principle, an accessory contract must beread in its entirety and
together with the principal agreement."

In the case at bar, the performance bond was silent with regard to arbitration. On the other hand,
the construction contract was clear as to arbitration in the event of disputes. Applying the said
doctrine, we rule that the silence of the accessory contract in this case could only be construed as
acquiescence to the main contract. The construction contract breathes life into the performance
bond. We are not ready to assume that the performance bond contains reservations with regard
to some of the terms and conditions in the construction contract where in fact it is silent. On the
other hand, it is more reasonable to assume that the party who issued the performance bond
carefully and meticulously studied the construction contract that it guaranteed, and if it had
reservations, it would have and should have mentioned them in the surety contract.

CCC Insurance v. Kawasaki Steel, June 22, 2015.

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor.
A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the
debtor shall pay. Stated differently, a surety promises to pay the principal's debt if the principal will
not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may
proceed against the guarantor if the principal is unable to pay. A surety binds himself to perform if
the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does
not contract that the principal will pay, but simply that he is able to do so. In other words, a surety
undertakes directly for the payment and is so responsible at once if the principal debtor makes
default, while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be
made out of the principal debtor.

The theory behind Article 2079 is that an extension of time given to the principal debtor by
the creditor without the surety's consent would deprive the surety of his right to pay the
creditor and to be immediately subrogated to the creditor's remedies against the principal
debtor upon the maturity date. The surety is said to be entitled to protect himself against
the contingency of the principal debtor or the indemnitors becoming insolvent during the
extended period.

In the caset at bar, there are two sets of transactions in the present case covered by two different
contracts: the Consortium Agreement between Kawasaki and FFMCCI and the Construction
Contract between the Republic and the Kawasaki-FFMCCI Consortium. The Surety and
Performance Bonds guaranteed the performance of the obligations of FFMCCI to Kawasaki
under the Consortium Agreement. The Republic was not a party in either the Surety and
Performance Bonds or the Consortium Agreement. Under these circumstances, there was no
creditor-debtor relationship between the Republic and FFMCCI and Article 2079 of the Civil Code
did not apply. The extension granted by the Republic to Kawasaki modified the deadline for the
completion of the Project under the Construction Contract, but had no effect on the obligations of
FFMCCI to Kawasaki under the Consortium Agreement, much less, on the liabilities of CCCIC
under the Surety and Performance Bonds.

A surety is released from its obligation when there is a material alteration of the principal contract
in connection with which the bond is given, such as a change which imposes a new obligation on
the promising party, or which takes away some obligation already imposed, or one which changes
the legal effect of the original contract and not merely its form. However, a surety is not released
by a change in the contract, which does not have the effect of making its obligation more
onerous. In the instant case, the revision of the subcontract agreement did not in any way make
the obligations of both the principal and the surety more onerous. To be sure, petitioner never
assumed added obligations, nor were there any additional obligations imposed, due to the
modification of the terms of the contract. Failure to receive any notice of such change did not,
therefore, exonerate petitioner from its liabilities as surety.

CCCIC must first pay its liabilities to Kawasaki under the Surety and Performance Bonds before it
could be indemnified and subrogated to the rights of Kawasaki against FFMCCI. Articles 2066
and 2067 explicitly pertain to guarantors, and one might argue that the provisions should not
extend to sureties, especially in light of the qualifier in Article 2047 that the provisions on joint and
several obligations should apply to sureties. We reject that argument, and instead adopt Dr.
Tolentino's observation that "[t]he reference in the second paragraph of [Article 2047] to the
provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations, however,
does not mean that suretyship is withdrawn from the applicable provisions governing guaranty."
For if that were not the implication, there would be no material difference between the surety as
defined under Article 2047 and the joint and several debtors, for both classes of obligors would be
governed by exactly the same rules and limitations. Accordingly, the rights to indemnification and
subrogation as established and granted to the guarantor by Articles 2066 and 2067 extend as
well to sureties as defined under Article 2047. Pursuant to Articles 2066 and 2067, the rights of
CCCIC as surety to indemnification and subrogation will arise only after it has paid its obligations
to Kawasaki as the debtor-obligee.

Allied Banking Corporation v. Yujuico, June 29, 2015.

Although the first part of the continuing guaranties showed that Jesus as the signatory had
agreed to be bound "either as guarantor or otherwise,” the usage oftermguaranty or guarantee in
the caption of the documents, or of the word guarantor in the contents of the documents did not
conclusively characterize the nature of the obligations assumed therein. What properly
characterized and defined the undertakings were the contents of the documents and the intention
of the parties. In holding that the continuing guaranty executed in E. Zobel, Inc. v. Court of
Appeals was a surety instead of a guaranty, the Court accented the distinctions between them,
viz.:

A contract of surety is an accessory promise by which a person binds himself for another
already bound, and agrees with the creditor to satisfy the obligation if the debtor does
 not. A contract of guaranty, on the other hand, is a collateral undertaking to pay the debt
of another in case the latter does not pay the debt.

A surety is usually bound with his principal by the same instrument, executed at the same time,
and on the same consideration. He is an original promissor and debtor from the beginning, and is
held, ordinarily, to know every default of his principal. Usually, he will not be discharged, either
by the mere indulgence of the creditor to the principal, or by want of notice of the default
of the principal, no matter how much he may be injured thereby. On the other hand, the
contract of guaranty is the guarantor's own separate undertaking, in which the principal does not
join. It is usually entered into before or after that of the principal, and is often supported on a
separate consideration from that supporting the contract of the principal. The original contract of
his principal is not his contract, and he is not bound to take notice of its non-performance. He is
often discharged by the mere indulgence of the creditor to the principal, and is usually not liable
unless notified of the default of the principal.
Be that as it may, the continuing guaranties could not answer for the promissory notes amounting
to P6,020,184.90 that the petitioner sought to judicially recover from Jesus as surety.

The courts below found and declared that the continuing guaranties of February 8, 1966 and
February 22, 1967 were not renewed after the expiration of the credit line. The petitioner did not
establish that another suretyship by Jesus ensured the payment of the credit line issued on April
4, 1968 upon the expiration of the credit line for 1967. What was shown instead is that on
February 6, 1974, or about seven years after the expiration of the continuing guaranty of
February 22, 1967, it was Clarencio who executed a continuing guaranty for P5,000,000.00.
Since Genbank accepted the promissory note of P5,200,000.00 on April 30, 1975, the continuing
guaranty that Clarencio executed about two months earlier covered that amount.

9. Deposit, NCC 1962-1967

YHT Realty v CA, 451 SCRA 638

Hotels and Inns; Deposits; Safety Deposit Boxes; Mere close companionship and intimacy are
not enough to warrant the conclusion that a hotel guest and his companion are husband and wife
—it is no excuse for the hotel to have allowed the latter to open the safety deposit box of the
former.–The management contends, however, that McLoughlin, by his act, made its employees
believe that Tan was his spouse for she was always with him most of the time. The evidence on
record, however, is bereft of any showing that McLoughlin introduced Tan to the management as
his wife. Such an inference from the act of McLoughlin will not exculpate the petitioners from
liability in the absence of any showing that he made the management believe that Tan was his
wife or was duly authorized to have access to the safety deposit box. Mere close companionship
and intimacy are not enough to warrant such conclusion considering that what is involved in the
instant case is the very safety of McLoughlin’s deposit. If only petitioners exercised due diligence
in taking care of McLoughlin’s safety deposit box, they should have confronted him as to his
relationship with Tan considering that the latter had been observed opening McLoughlin’s safety
deposit box a number of times at the early hours of the morning. Tan’s acts should have prompted
the management to investigate her relationship with McLoughlin. Then, petitioners would have
exercised due diligence required of them. Failure to do so warrants the conclusion that the
management had been remiss in complying with the obligations imposed upon hotel-keepers
under the law.

10. Truth in Lending Act

UCPB v Beluso, 530 SCRA 567

Truth in Lending Act; Not disclosing the true finance charges in connection with the extensions of
credit is a form of deception which we cannot countenance. —The interest rate provisions in the
case at bar are illegal not only because of the provisions of the Civil Code on mutuality of
contracts, but also, as shall be discussed later, because they violate the Truth in Lending Act. Not
disclosing the true finance charges in connection with the extensions of credit is, furthermore, a
form of deception which we cannot countenance. It is against the policy of the State as stated in
the Truth in Lending Act: Sec. 2. Declaration of Policy.—It is hereby declared to be the policy of
the State to protect its citizens from a lack of awareness of the true cost of credit to the user by
assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to
the detriment of the national economy.

11. Solutio Indebiti, Arts. 2154-2163

MIAA v COA, G.R. No. 194710, Feb. 14. 2012

In this case, the MIAA employees who had no participation in the approval and release of the
disallowed benefit accepted the same on the assumption that Resolution No. 2003-067 was
issued in the valid exercise of the power vested in the Board of Directors under the MIAA charter.
As they were not privy as to reason and motivation of the Board of Directors, they can properly
rely on the presumption that the former acted regularly in the performance of their official duties in
accepting the subject benefit. Furthermore, t heir acceptance of the disallowed grant, in the
absence of any competent proof of bad faith on their part, will not suffice to render liable
for a refund.

The same is not true as far as the Board of Directors. Their authority under Section 8 of the MIAA
charter is not absolute as their exercise thereof is “subject to existing laws, rules and regulations”
and they cannot deny knowledge of SSS v. COA and the various issuances of the Executive
Department prohibiting the grant of the signing bonus. In fact, they are duty-bound to understand
and know the law that they are tasked to implement and their unexplained failure to do so barred
them from claiming that they were acting in good faith in the performance of their duty. The
presumptions of “good faith” or “regular performance of official duty” are disputable and may be
contradicted and overcome by other evidence.

Granting that the benefit in question is a CNA Incentive, MIAA’s Board of Directors has no
authority to include its members, the members of the Board Secretariat, ExeCom and other
employees not occupying rank-and-file positions in the grant. Indeed, this is an open and
contumacious violation of PSLMC Resolution No. 2 and A.O. No. 135, which were unequivocal in
stating that only rank-and-file employees are entitled to the CNA Incentive. Given their repeated
invocation of these rules to justify the disallowed benefit, they cannot feign ignorance of these
rules. That they deliberately ignored provisions of PSLMC Resolution No. 2 and A.O. No. 135 that
they failed to observe bolsters the finding of bad faith against them.

The same is true as far as the concerned officers of MIAA are concerned. They cannot approve
the release of funds and certify as to the legality of the subject disbursement knowing that it is a
signing bonus. Alternatively, if they acted on the belief that the benefit is a CNA Incentive, they
were in no position to approve its funding without assuring themselves that the conditions
imposed by PSLMC Resolution No. 2 are complied with. They were also not in the position to
release payment to the members of the Board of Directors, ExeCom and employees who do not
occupy rank-and-file positions considering the express language of PSLMC Resolution No. 2.

Simply put, these individuals cannot honestly claim that they have no knowledge of the illegality
of their acts. Thus, this Court finds that a refund of the amount of P30,000.00 received by each of
the responsible officers and members of MIAA’s Board of Directors is in order.

PNB v Chong, G.R. No. 170865, April 25, 2012

The indispensable requisites of the juridical relation known as solutio indebiti, are, (a) that he who
paid was not under obligation to do so; and (b) that the payment was made by reason of an
essential mistake of fact. —“The indispensable requisites of the juridical relation known as solutio
indebiti, are, (a) that he who paid was not under obligation to do so; and (b) that the payment was
made by reason of an essential mistake of fact. In the case at bench, PNB cannot recover the
proceeds of the check under the principle it invokes. In the first place, the gross negligence of
PNB, as earlier discussed, can never be equated with a mere mistake of fact, which must be
something excusable and which requires the exercise of prudence. No recovery is due if the
mistake done is one of gross negligence.

Asia Trust v Tuble, G.R. No. 183987, July 25, 2012

The trial court was not correct when it ordered, under the principle of solutio indebiti, the refund of
the amounts charged in excess of the correct redemption price.

Metropolitan Bank v Absolute, G.R. No. 170498, Jan. 9, 2013

The term “implied contracts,” as used in our remedial law, originated from the common law where
obligations derived from quasi-contracts and from law are both considered as implied contracts.
Thus, the term quasi-contract is included in the concept “implied contracts” as used in the Rules
of Court.—In Maclan v. Garcia, 97 Phil. 119 (1955), Gabriel Maclan filed a civil case to recover
from Ruben Garcia the necessary expenses he spent as possessor of a piece of land. Garcia
acquired the land as an heir of its previous owner. He set up the defense that this claim should
have been filed in the special proceedings to settle the estate of his predecessor. Maclan, on the
other hand, contended that his claim arises from law and not from contract, express or implied.
Thus, it need not be filed in the settlement of the estate of Garcia’s predecessor, as mandated by
Section 5, Rule 87 of the Rules of Court (now Section 5, Rule 86). The Court held under these
facts that a claim for necessary expenses spent as previous possessor of the land is a kind of
quasi-contract. Citing Leung Ben v. O’Brien, 38 Phil. 182 (1918), it explained that the term
“implied contracts,” as used in our remedial law, originated from the common law where
obligations derived from quasi-contracts and from law are both considered as implied contracts.
Thus, the term quasi-contract is included in the concept “implied contracts” as used in the Rules
of Court. Accordingly, liabilities of the deceased arising from quasi-contracts should be filed as
claims in the settlement of his estate, as provided in Section 5, Rule 86 of the Rules of Court.

A quasi-contract involves a juridical relation that the law creates on the basis of certain voluntary,
unilateral and lawful acts of a person, to avoid unjust enrichment. —A quasi-contract involves a
juridical relation that the law creates on the basis of certain voluntary, unilateral and lawful acts of
a person, to avoid unjust enrichment. The Civil Code provides an enumeration of quasi-contracts,
but the list is not exhaustive and merely provides examples. According to the CA, Metrobank’s
fourth-party complaint falls under the quasi-contracts enunciated in Article 2154 of the Civil Code.
Article 2154 embodies the concept “solutio indebiti” which arises when something is delivered
through mistake to a person who has no right to demand it. It obligates the latter to return what
has been received through mistake. Solutio indebiti, as defined in Article 2154 of the Civil Code,
has two indispensable requisites: first, that something has been unduly delivered through
mistake; and second, that something was received when there was no right to demand it.