CREDIT TRANSACTIONS

Course Outline
Mr. Mark Xavier D. Oyales

Credit Transactions - include all transactions involving the purchase or loan of goods, services, or
money in the present with a promise to pay or deliver in the future.

I. REVIEW OF CONTRACT LAW

(1) Elements – Art. 1305, 1318, CC.

Article 1305. A contract is a meeting of minds between two persons whereby one binds
himself, with respect to the other, to give something or to render some service.

Article 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.

(2) Characteristics of Contract – Art. 1306, 1308, 1311, 1315

Article 1306. The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.

Article 1308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them. (principle of mutuality of contracts)

Article 1311. Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is
not liable beyond the value of the property he received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may

demand its fulfillment provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person.

Article 1315. Contracts are perfected by mere consent, and from that moment the parties
are bound not only to the fulfillment of what has been expressly stipulated but
also to all the consequences which, according to their nature, may be in keeping
with good faith, usage and law.
 (3) Perfection – Art. 1315, 1316

Art. 1315 (see above)

Article 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected
until the delivery of the object of the obligation.

II. CONTRACT OF LOAN

(1) General Provisions – Art. 1933 and 1934

Article 1933. By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time and
return it, in which case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of the same kind and
quality shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in
simple loan, ownership passes to the borrower.

Article 1934. An accepted promise to deliver something by way of commodatum or

simple loan is binding upon parties, but the commodatum or simple loan itself shall not
be perfected until the delivery of the object of the contract. (n)

- Contract of Loan v. Contract to Loan

BPI Investment Corporation v. Court of Appeals, G.R. No. 133632, February 15, 2002)

Facts:
Frank Roa obtained a loan from Ayala Investment and Development Corporation (AIDC),
for the construction of his house, secured by a mortgage. Roa sold the properties to ALS and
Litonjua, the latter paid in cash and assumed the balance of Roa’s indebtedness wit AIDC. AIDC
was not willing to extend the old interest to private respondents and proposed a grant of new
loan of P500,000 with higher interest to be applied to Roa’s debt, secured by the same property.
Private respondents executed a mortgage deed containing the stipulation. The loan contract was
signed on 31 March 1981 and was perfected on 13 September 1982, when the full loan was
released to private respondents.

BPIIC, AIDC’s predecessor, released to private respondents P7,146.87, purporting to be

what was left of their loan after full payment of Roa’s loan. BPIIC filed for foreclosure
proceedings on the ground that private respondents failed to pay the mortgage indebtedness.
Private respondents maintained that they should not be made to pay amortization before the
actual release of the P500,000 loan. The suit was dismissed and affirmed by the CA.

Issue:
Whether or not a contract of loan is a consensual contract.

Doctrines: A loan contract is not a consensual contract but a real contract. It is perfected only
upon the delivery of the object of the contract.
A perfected consensual contract can give rise to an action for damages. However, said
contract does not constitute the real contract of loan which requires the delivery of the object of
the contract for its perfection and which gives rise to obligations only on the part of the
borrower.
A contract of loan involves a reciprocal obligation, wherein the obligation or promise of
each party is the consideration for that of the other.
It is a basic principle in reciprocal obligations that neither party incurs in delay, if the
other does not comply or is not ready to comply in a proper manner with what is incumbent
upon him.

Only when a party has performed his part of the contract can he demand that the other
party also fulfills his own obligation. If the latter fails, default sets in. Consequently, the creditor
could only demand for the payment of the monthly amortization after the release of the loan,
for it was only then when it complied with its obligation under the loan contract.

Contract of Loan – perfected contract already

Contract to Loan – no contract of loan at this point yet because loan is a real contract and is
perfected only upon delivery of the thing
*commodatum & mutuum are real contracts w/c require the delivery of the subj. matter for their
perfection

(2) Commodatum and Mutuum distinguished

Commodatum Mutuum

*addt’l Ordinarily involves Involves money or other consumable

something not consumable thing
(1936)
Refers only to personal property
May involve real/personal
property (1937)
Character Essentially gratuitous (1933) Naturally gratuitous
*May be gratuitous or onerous, i.e. with
 Purely personal (1939) stipulated interest
Not purely personal
Object Non-fungible thing (but may Money or fungible thing
be consumable)

Purpose Loan for use or temporary Loan for consumption

possession (1935)
Primary Return of the thing loaned Payment of equal quality and quantity
obligation (1933)
*(of the
borrower)
Risk of Loss Bailor (as owner) (1942, Borrower (as owner and as debtor of a
1174) generic thing)
*even if caused exclusively by a
fortuitous event and he is not,
therefore, discharged
from his duty to pay
Duration May be claimed before the May not be claimed until the term
end of the term if urgently expires or is forfeited
needed
* Bailor may demand the
return of the thing loaned
before the expiration of the
term in case of urgent need
(Art.1946)

Transfer of There is no transfer of Ownership of the thing loaned is

ownership ownership of the thing transferred to the borrower
loaned (1933)
Use of the fruits Bailee has no right to use the Borrower (as owner) may use the fruits
fruits, unless so stipulated.

(3) Commodatum – Art. 1935 - 1952

Article 1935. The bailee in commodatum acquires the use of the thing loaned but not its
fruits; if any compensation is to be paid by him who acquires the use, the contract
ceases to be a commodatum. (1941a)

Article 1936. Consumable goods may be the subject of commodatum if the purpose of
the contract is not the consumption of the object, as when it is merely for
exhibition. (n)
Article 1937. Movable or immovable property may be the object of commodatum. (n)


Article 1938. The bailor in commodatum need not be the owner of the thing loaned. (n)


Article 1939. Commodatum is purely personal in character. Consequently:

(1) The death of either the bailor or the bailee extinguishes the contract;
(2) The bailee can neither lend nor lease the object of the contract to a third
person. However, the members of the bailee's household may make use
of the thing loaned, unless there is a stipulation to the contrary, or unless
the nature of the thing forbids such use.

Article 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is
valid. (n)

SECTION 2
Obligations of the Bailee

Article 1941. The bailee is obliged to pay for the ordinary expenses for the use and
preservation of the thing loaned. (1743a)

Article 1942. The bailee is liable for the loss of the thing, even if it should be through a
fortuitous event:
(1) If he devotes the thing to any purpose different from that for which it has been
loaned;
(2) If he keeps it longer than the period stipulated, or after the accomplishment of the
use for which the commodatum has been constituted;
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of a fortuitous event;
(4) If he lends or leases the thing to a third person, who is not a member of his
household;
(5) If, being able to save either the thing borrowed or his own thing, he chose to save the
latter. (1744a and 1745)

Article 1943. The bailee does not answer for the deterioration of the thing loaned due
only to the use thereof and without his fault. (1746)

Article 1944. The bailee cannot retain the thing loaned on the ground that the bailor
owes him something, even though it may be by reason of expenses. However, the
bailee has a right of retention for damages mentioned in article 1951. (1747a)

Article 1945. When there are two or more bailees to whom a thing is loaned in the same
contract, they are liable solidarily. (1748a)
SECTION 3 Obligations of the Bailor

Article 1946. The bailor cannot demand the return of the thing loaned till after the
expiration of the period stipulated, or after the accomplishment of the use for
which the commodatum has been constituted. However, if in the meantime, he
should have urgent need of the thing, he may demand its return or temporary
use.
In case of temporary use by the bailor, the contract of commodatum is suspended while
the thing is in the possession of the bailor. (1749a)

Article 1947. The bailor may demand the thing at will, and the contractual relation is
called a precarium, in the following cases:
(1) If neither the duration of the contract nor the use to which the thing loaned should be
devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated by the owner. (1750a)

Article 1948. The bailor may demand the immediate return of the thing if the bailee
commits any act of ingratitude specified in article 765. (n)

Article 1949. The bailor shall refund the extraordinary expenses during the contract for
the preservation of the thing loaned, provided the bailee brings the same to the
knowledge of the bailor before incurring them, except when they are so urgent
that the reply to the notification cannot be awaited without danger.
If the extraordinary expenses arise on the occasion of the actual use of the thing by the
bailee, even though he acted without fault, they shall be borne equally by both
the bailor and the bailee, unless there is a stipulation to the contrary. (1751a)

Article 1950. If, for the purpose of making use of the thing, the bailee incurs expenses
other than those referred to in articles 1941 and 1949, he is not entitled to
reimbursement. (n)

Article 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the
bailee of the same, shall be liable to the latter for the damages which he may
suffer by reason thereof. (1752)

Article 1952. The bailor cannot exempt himself from the payment of expenses or
damages by abandoning the thing to the bailee. (n)

- Distinguish from usufruct and lease

Article 562. Usufruct gives a right to enjoy the property of another with the obligation of
preserving its form and substance, unless the title constituting it or the
law otherwise provides.
 “Usufruct is a right of superior degree to that which arises from a lease. It is a real right
and includes all the jus utendi and jus fruendi.” (Eleizegui v. The Manila
Lawn Tennis Club)
Lease – consensual contract; the object may anything, whether movable or immovable,
fungible or non-fungible, and even work or service; not gratuitous; owner does not lose
right of ownership

- Pactum de commodando or an accepted promise to deliver something by way of

commodatum

Republic v. Court of Appeals, G.R. No. L-46145, November 26, 1986

Facts:
The Heirs of Domingo Baloy, (private respondents), applied for a registration of title for
their land. The Director of Lands opposed the registration alleging that such land became public
land through the operation of Act 627 of the Philippine Commission. On Nov 26, 1902, pursuant
to the executive order of the President of U.S., the area was declared within the US Naval
Reservation. The CFI denied respondents' application for registration. CA, reversed the decision.

Issue: Whether or not private respondents' rights by virtue of their possessory information title
was lost by prescription.

Doctrine:
The possessory rights of Baloy or his heirs were merely suspended and not lost by
prescription. The occupancy of the US Navy was not in the concept of owner. It partakes of the
character of a commodatum. One’s ownership of a thing may be lost by prescription by reason
of another’s possession if such possession be under claim of ownership, not where the
possession is only intended to be transient, in which case the owner is not divested of his title,
although it cannot be exercised in the meantime.

Spouses Abella v. Spouses Abella, G.R. No. 195166, July 8, 2015

Facts:
Petitioners alleged that respondents obtained a loan from them in the amount of
P500,000.00. The loan was evidenced by an acknowledgment receipt dated March 22, 1999 and
was payable within one (1) year. Petitioners added that respondents were able to pay a total of
P200,000.00—P100,000.00 paid on two separate occasions—leaving an unpaid balance of
P300,000.00.
 In their Answer, respondents alleged that the amount involved did not pertain to a loan
they obtained from petitioners but was part of the capital for a joint venture involving the
lending of money.

Trial Court ruled in favor of petitioners. Ordering respondents to pay the petitioner the
sum of P300,000 with interest of 30% per annum.

The CA ruled that while respondents had indeed entered into a simple loan with
petitioners, respondents were no longer liable to pay the outstanding amount of P300,000.00.
CA noted that while the acknowledgement receipt showed that interest was to be charged, no
particular interest rate was specified. Thus, at the time respondents were making interest
payments of 2.5% per month, these interest payments were invalid for not being properly
stipulated by the parties. Since petitioners' charging of interest was invalid, the Court of Appeals
reasoned that all payments respondents made by way of interest should be deemed payments
for the principal amount of P500,000.00.aThe Court of Appeals further noted that respondents
made a total payment of P648,500.00, which, as against the principal amount of P500,000.00,
entailed an overpayment of P148,500.00. Applying the principle of solutio indebiti, the Court of
Appeals concluded that petitioners were liable to reimburse respondents for the overpaid
amount of P148,500.

Issue: WON the party entered into a simple loan or mutuum as agreement?

Doctrines:

Respondents entered into a simple loan or mutuum, rather than a joint venture, with
petitioners. "If the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control."

Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall be due unless
it has been expressly stipulated in writing.
On the matter of interest, the text of the acknowledgment receipt is simple, plain, and
unequivocal. It attests to the contracting parties’ intent to subject to interest the loan extended
by petitioners to respondents. The controversy, however, stems from the acknowledgment
receipt’s failure to state the exact rate of interest.
Jurisprudence is clear about the applicable interest rate if a written instrument fails to
specify a rate.
"In a loan or forbearance of money, according to the Civil Code, the interest due should be
that stipulated in writing, and in the absence thereof, the rate shall be 12% per annum." (CB
Circular 799 reduced it to 6% per annum).

Producers Bank of the Philippines v. Court of Appeals, G.R. No. 115324, February 19, 2003.

Facts:
 Vives was asked by his friend Sanchez to help Doronilla for the purpose of incorporating
his business, “Strela”. This “help” involved Vives issuing a check of P200,00 and depositing the
same into Strela’s newly-opened bank account. Later on, Vives learned that Strela was no longer
holding office in the address previously given to him. He later found out that the funds had
already been withdrawn leaving only a balance of P90,000. The Vives spouses tried to withdraw
the amount, but it was unable to since the balance had to answer for certain postdated checks
issued by Doronilla. Doronilla made various tenders of check in favor of Vives in order to pay his
debt. All of which were dishonored. Hence, Vives filed an action for recovery of sum against
Doronilla, Sanchez, Dumagpi and Producer’s Bank.
TC & CA: ruled in favor of Vives.

Issue: WON the transaction is commodatum or mutuum? Commodatum

Doctrines:
If the subject of the contract is a consumable thing, such as money, the contract would
be a mutuum. However, there are some instances where a commodatum may have for its
object a consumable thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is
not the consumption of the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the
intention of the parties is to lend consumable goods and to have the very same goods returned
at the end of the period agreed upon, the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial
consideration in determining the actual character of a contract. In case of doubt, the
contemporaneous and subsequent acts of the parties shall be considered in such determination.

(4) Mutuum – Art. 1953 – 1961.

CHAPTER 2 Simple Loan or Mutuum

Article 1953. A person who receives a loan of money or any other fungible thing acquires
the ownership thereof, and is bound to pay to the creditor an equal amount of
the same kind and quality. (1753a)

Article 1954. A contract whereby one person transfers the ownership of non-fungible
things to another with the obligation on the part of the latter to give things of the
same kind, quantity, and quality shall be considered a barter. (n)

Article 1955. The obligation of a person who borrows money shall be governed by the
provisions of articles 1249 and 1250 of this Code.
If what was loaned is a fungible thing other than money, the debtor owes another
thing of the same kind, quantity and quality, even if it should change in value. In
 case it is impossible to deliver the same kind, its value at the time of the
perfection of the loan shall be paid. (1754a)

Article 1956. No interest shall be due unless it has been expressly stipulated in writing.
(1755a)

Article 1957. Contracts and stipulations, under any cloak or device whatever, intended to
circumvent the laws against usury shall be void. The borrower may recover in
accordance with the laws on usury. (n)

Article 1958. In the determination of the interest, if it is payable in kind, its value shall be
appraised at the current price of the products or goods at the time and place of
payment. (n)

Article 1959. Without prejudice to the provisions of article 2212, interest due and unpaid
shall not earn interest. However, the contracting parties may by stipulation
capitalize the interest due and unpaid, which as added principal, shall earn new
interest. (n)

Article 1960. If the borrower pays interest when there has been no stipulation therefor,
the provisions of this Code concerning solutio indebiti, or natural obligations, shall
be applied, as the case may be. (n)

Article 1961. Usurious contracts shall be governed by the Usury Law and other special
laws, so far as they are not inconsistent with this Code. (n)

Art. 2209 – 2213

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. (1108)

Article 2210. Interest may, in the discretion of the court, be allowed upon damages
awarded for breach of contract.

Article 2211. In crimes and quasi-delicts, interest as a part of the damages may, in a
proper case, be adjudicated in the discretion of the court.

Article 2212. Interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point. (1109a)

Article 2213. Interest cannot be recovered upon unliquidated claims or damages, except
when the demand can be established with reasonable certainty.
 - Act No. 2655, as amended by Presidential Decree No. 116

The Usury Law

- Under Section 1-A (infra.) of the Usury Law, as amended by Presidential Decree
No. 116 (further amended by Pres. Decree No. 858 and 1684.), the Monetary
Board is “authorized to prescribe the maximum rate or rates of interest for the
loan or renewal thereof or the forbearance of any money, goods or credits and to
change such rate or rates whenever warranted by prevailing economic and social
conditions.’’

- CB. Circular No 905, Series of 1982

- abolished interest rate ceilings. With the promulgation of such circular, usury
has become “legally inexistent” as the parties can now legally agree on
any interest that may be charged on the loan.
- did not repeal nor amend the Usury law but only suspended its effectivity

- BSP Circular No. 799 dated June 21, 2013

- changed the rate of interest from 12% to 6% per annum

Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, [July 12, 1994]

Facts:
Two fiber drums were shipped owned by Eastern Shipping from Japan. The shipment as
insured with a marine policy. Upon arrival in Manila, one drum was said to be in bad order, one
drum was opened and without seal. Upon delivery to the consignee’s warehouse, one drum
contained spillages while the rest of the contents were revealed to be adulterated/fake. As
consequence of the loss, the insurance company paid the consignee, so that it became
subrogated to all the rights of action of the consignee against the defendants Eastern Shipping.
The insurance company filed before the trial court. The trial court ruled in favor of
plaintiff and ordered defendants to pay the former with present legal interest of 12% per annum
from the date of the filing of the complaint. On appeal by defendants, the appellate court denied
the same and affirmed in toto the decision of the trial court.

Issue: Whether the applicable rate of legal interest is 12% or 6%.

Ruling:
- Provided the Rules for Award of Interest in the Concept of Actual and Compensatory Damages:
(1) When the obligation breached 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 12% per annum (Now 6%)
to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Art.1169.
(2) 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) 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.
(3) 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 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.

Nacar v. Gallery Frames, G.R. No. 189871, [August 13, 2013], 716 PHIL 267-283)

Doctrines:
The old case of Eastern Shipping Lines vs CA is already modified by the promulgation of
the Bangko Sentral ng Pilipinas Monetary Board Resolution No. 796 which lowered the legal rate
of interest from 12% to 6%. Specifically, the rules on interest are now as follows:
1. Monetary Obligations ex. Loans:
a. If stipulated in writing:
a.1. shall run from date of judicial demand (filing of the case)
a.2. rate of interest shall be that amount stipulated
b. If not stipulated in writing
b.1. shall run from date of default (either failure to pay upon extra-judicial
demand or upon judicial demand whichever is appropriate and subject to the provisions
of Article 1169 of the Civil Code)
b.2. rate of interest shall be 6% per annum
2. Non-Monetary Obligations (such as the case at bar)
a. If already liquidated, rate of interest shall be 6% per annum, demandable from
date of judicial or extra-judicial demand (Art. 1169, Civil Code)
b. If unliquidated, no interest
 Except: When later on established with certainty. Interest shall still be 6% per
annum demandable from the date of judgment because such on such date, it is already
deemed that the amount of damages is already ascertained.
The 6% per annum rate of legal interest shall be applied prospectively:– Final and
executory judgments awarding damages prior to July 1, 2013 shall apply the 12% rate;– Final and
executory judgments awarding damages on or after July 1, 2013 shall apply the 12% rate for
unpaid obligations until June 30, 2013; unpaid obligations with respect to said judgments on or
after July 1, 2013 shall still incur the 6% rate.

Spouses Almeda v. Court of Appeals, G.R. No. 113412, [April 17, 1996], 326 PHIL 309-326

FACTS:
On various dates in 1981, the Philippine National Bank granted to herein petitioners, the
spouses Ponciano L. Almeda and Eufemia P. Almeda several loan/credit accommodations
totaling P18.0 Million pesos payable in a period of six years at an interest rate of 21% per annum.
To secure the loan, the spouses Almeda executed a Real Estate Mortgage Contract covering a
3,500 square meter parcel of land, together with the building erected thereon (the Marvin Plaza)
located at Pasong Tamo, Makati, Metro Manila. A credit agreement embodying the terms and
conditions of the loan was executed between the parties, one of which includes:
c) Interest and Charges
(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at
any time depending on whatever policy it may adopt in the future; provided, that the interest
rate on this/these accommodations shall be correspondingly decreased in the event that the
applicable maximum interest rate is reduced by law or by the Monetary Board. In either case,
the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease of the maximum interest rate.
Between 1981 and 1984, petitioners made several partial payments on the loan totaling.
P7,735,004.66, a substantial portion of which was applied to accrued interest.
On March 31, 1984, respondent bank, over petitioners' protestations, raised the interest rate to
28%, allegedly pursuant to Section III-c (1) of its credit agreement. Said interest rate thereupon
increased from an initial 21% to a high of 68% between March of 1984 to September, 1986.
Petitioner protested the increase in interest rates, to no avail.
Regional Trial Court of Makati
Issued a writ of preliminary injunction enjoining the Philippine National Bank from enforcing an
interest rate above the 21% stipulated in the credit agreement. By this time the spouses were
already in default of their loan obligations.
Invoking the law on Mandatory Foreclosure (Act 3135 and PD 385), PNB countered by ordering
the extrajudicial foreclosure of the Almedas’ mortgaged properties and scheduling an action
sale.
The RTC granted a supplemental writ of preliminary injunction, staying the public auction. The
RTC later dissolved the writ. PNB then set a new date for the sale.
Before the sale, the Almedas tendered to PNB P40,142,518, which covered the remaining
principal amount of the loan plus interest at 21%.
PNB refused to accept the tender of payment, thus the Almedas consigned the P40M with the
RTC. The RTC granted the Almedas’ prayer for a writ of preliminary injunction against the sale
anew.
PNB appealed to the CA, which set aside the trial court’s order granting the writs and upheld
PNB’s right to foreclosure pursuant to Act 3135 and PD 385.

ISSUE:
Was PNB was authorized to raise its interest rates from 21% to as high as 68% under the credit
agreement?

RULING: NO.
The binding effect of any agreement between parties to a contract is premised on two settled
principles: (1) that any obligation arising from contract has the force of law between the parties;
and (2) that there must be mutuality between the parties based on their essential equality.
Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to
an unconscionable result is void. Any stipulation regarding the validity or compliance of the
contract which is left solely to the will of one of the parties, is likewise, invalid.
PNB unilaterally altered the terms of its contract with the Almedas by increasing the interest
rates on the loan without prior assent of the latter, in violation of the mutuality principle of
contracts expressed in A1308, NCC.
While interest escalation clauses in credit agreements are perfectly valid and do not contravene
public policy, they are still subject to laws and provisions.
The stipulation in the credit agreement, which requires that the increase be within the limits
allowed by law refers to legislative enactments, not administration circulars, otherwise the credit
agreement would not have made the distinction between law and the Monetary Board in the
phrase “that the interest rate on this/these accommodations shall be correspondingly decreased
in the event that the applicable maximum interest rate is reduced by law or by the Monetary
Board.”
The increased interest rates, to which the Almedas never assented, thereby resulting to PNB’s
contravention of their credit agreement by implementing the same, are patently unconscionable
and excessive, unjustly disabling the Almedas from fulfilling their obligation due to the new
amount of the loan that is way above the original amount of the old interest rate.

Security Bank Corp. v. Spouses Mercado, G.R. Nos. 192934 & 197010, [June 27, 2018]

The (floating) interest rate provisions in the parties' agreement violate the principle of mutuality
of contracts.

FACTS:
On September 13, 1996, Security Bank granted spouses Mercado a revolving credit line in the
amount of P1,000,000. The terms and conditions of the revolving credit line agreement included
the following stipulations:
7. Interest on Availments – I hereby agree to pay Security Bank interest on outstanding
Availments at a per annum rate determined from time to time, by Security Bank and advised
through my Statement of Account every month. I hereby agree that the basis for the
determination of the interest rate by Security Bank on my outstanding Availments will be
Security Bank's prevailing lending rate at the date of availment. I understand that the interest on
each availment will be computed daily from date of availment until paid.
On the other hand, the addendum to the revolving credit line agreement further provided that:
I hereby agree to pay Security Bank Corporation (SBC) interest on outstanding availments based
on annual rate computed and billed monthly by SBC on the basis of its prevailing monthly rate. It
is understood that the annual rate shall in no case exceed the total monthly prevailing rate as
computed by SBC. I hereby give my continuing consent without need of additional confirmation
to the interests stipulated as computed by SBC. The interests shall be due on the first day of
every month after date of availment. x x x
Subsequently, the spouses Mercado defaulted in their payment under the revolving credit line
agreement. On November 8, 2000, the spouses Mercado filed a complaint for annulment of
foreclosure sale, damages, injunction, specific performance, and accounting with application for
temporary restraining order and/or preliminary injunction. They averred among others that the
interests and the penalties imposed by Security Bank on their obligations were iniquitous and
unconscionable.
The RTC held, among others, that the interest rates contained in the revolving credit line
agreement void for being potestative or solely based on the will of Security Bank. The CA also
concluded that the provisos giving Security Bank the sole discretion to determine the annual
interest rate is violative of the principle of mutuality of contracts because there is no reference
rate from which to peg the annual interest rate to be imposed.

ISSUE:
Whether the provisions on interest rate in the revolving credit line agreement and its addendum
are void for being violative of the principle of mutuality of contracts.

HELD:
I. Stipulations as to the payment of interest are subject to the principle of mutuality of contracts.
As a principal condition and an important component in contracts of loan, interest rates are only
allowed if agreed upon by express stipulation of the parties, and only when reduced into writing.
Any change to it must be mutually agreed upon, or it produces no binding effect.
In several cases, we declared void stipulations that allowed for the unilateral modification of
interest rates. The same treatment is given to stipulations that give one party the unbridled
discretion, without the conformity of the other, to increase the rate of interest notwithstanding
the inclusion of a similar discretion to decrease it. We held that the lack of written notice and
written consent of the borrowers made the interest proviso a one-sided imposition that does not
have the force of law between the parties.
Here, the spouses Mercado supposedly: (1) agreed to pay an annual interest based on a “floating
rate of interest;” (2) to be determined solely by Security Bank; (3) on the basis of Security Bank’s
own prevailing lending rate; (4) which shall not exceed the total monthly prevailing rate as
computed by Security Bank; and (5) without need of additional confirmation to the interests
stipulated as computed by Security Bank.
Notably, stipulations on floating rate of interest differ from escalation clauses. Escalation clauses
are stipulations which allow for the increase (as well as the mandatory decrease) of the original
fixed interest rate. Meanwhile, floating rates of interest refer to the variable interest rate stated
on a market- based reference rate agreed upon by the parties. The former refers to the method
by which fixed rates may be increased, while the latter pertains to the interest rate itself that is
not fixed. Nevertheless, both are contractual provisions that entail adjustment of interest rates
subject to the principle of mutuality of contracts. Thus, while the cited cases involve escalation
clauses, the principles they lay down on mutuality equally apply to floating interest rate clauses.
II. Security Bank argues that the subject provisions on the interest rate observed the principle of
mutuality of contracts. It claims that there is a ceiling on the maximum applicable rate, and it is
the market forces that dictate and establish the rate of interest.
 We disagree.
The RTC and CA were correct in holding that the interest provisions in the revolving credit line
agreement and its addendum violate the principle of mutuality of contracts.
First, the authority to change the interest rate was given to Security Bank alone as the lender,
without need of the written assent of the spouses Mercado. This unbridled discretion given to
Security Bank is evidenced by the clause "I hereby give my continuing consent without need of
additional confirmation to the interests stipulated as computed by [Security Bank]."93 The
lopsidedness of the imposition of interest rates is further highlighted by the lack of a breakdown
of the interest rates imposed by Security Bank in its statement of account94 accompanying its
demand letter.
Second, the interest rate to be imposed is determined solely by Security Bank for lack of a stated,
valid reference rate. The reference rate of "Security Bank's prevailing lending rate" is not pegged
on a market-based reference rate as required by the BSP. In this regard, we do not agree with
the CA that this case is similar with Polotan, Sr. v. Court of Appeals (Eleventh Division). There, we
declared that escalation clauses are not basically wrong or legally objectionable as long as they
are not solely potestative but based on reasonable and valid grounds. We held that the interest
rate based on the "prevailing market rate" is valid because it cannot be said to be dependent
solely on the will of the bank as it is also dependent on the prevailing market rates. The
fluctuation in the market rates is beyond the control of the bank. Here, however, the stipulated
interest rate based on "Security Bank's prevailing lending rate" is not synonymous with
"prevailing market rate." For one, Security Bank is still the one who determines its own prevailing
lending rate. More, the argument that Security Bank is guided by other facts (or external factors
such as Singapore Rate, London Rate, Inter-Bank Rate) in determining its prevailing monthly rate
fails because these reference rates are not contained in writing as required by law and the BSP.
Thus, we find that the interest stipulations here are akin to the ones invalidated in Silos and in
Philippine Savings Bank for being potestative.
In striking out these provisions, both in the original and the addendum, we note that there are
no other stipulations in writing from which we can base an imposition of interest. Unlike in cases
involving escalation clauses that allowed us to impose the original rate of interest, we cannot do
the same here as there is none. Nevertheless, while we find that no stipulated interest rate may
be imposed on the obligation, legal interest may still be imposed on the outstanding loan.
Eastern Shipping Lines, Inc. v. Court of Appeals and Nacar v. Gallery Frames provide that in the
absence of a stipulated interest. a loan obligation shall earn legal interest from the time of
default, i.e., from judicial or extrajudicial demand.

Spouses Silos v. Philippine National Bank, G.R. No. 181045, [July 2, 2014]

In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the
most important component. Thus, any modification thereof must be mutually agreed upon;
otherwise, it has no binding effect.
Moreover, the Court cannot consider a stipulation granting a party the option to prepay
the loan if said party is not agreeable to the arbitrary interest rates imposed. Premium may not
be placed upon a stipulation in a contract which grants one party the right to choose whether to
continue with or withdraw from the agreement if it discovers that what the other party has been
doing all along is improper or illegal.

FACTS:
Spouses Silos have been in business for about two decades of operating a department
store and buying and selling ready-to-wear apparel. Spouses Silos then secured a revolving credit
line with Philippine National Bank (PNB) through a real estate mortgage as a security. After two
years, their credit line increased. They then signed a Credit Agreement, which was also amended
2 years later, and several Promissory Notes (PN) as regards their Credit Agreements with PNB.
The said loan was initially subjected to a 19.5% interest rate per annum. In the Credit
Agreements, Spouses Silos bound themselves to the power of PNB to modify the interest rate
depending on whatever policy that PNB may adopt in the future without need of notice upon
them. Thus, the said interest rates played from 16% to as high as 32% per annum. Spouses Silos
acceded to the policy by pre-signing a total of 26 PNs leaving the individual applicable interest
rates at hand blank since it would be subject to modification by PNB. Spouses Silos regularly
renewed and made good on their PNs, religiously paid the interests without objection or fail.
However, during the 1997 Asian Financial Crisis, Spouses Silos faltered when the interest rates
soared. The 26th PN became past due and despite repeated demands by PNB, they failed to
make good on the note. Thus, PNB foreclosed and auctioned the involved security for the
mortgage. Spouses Silos instituted an action to annul the foreclosure sale on the ground that
the succeeding interest rates used in their loan agreements was left to the sole will of PNB, the
same fixed by the latter without their prior consent and thus, void. The RTC ruled that such
stipulation authorizing both the increase and decrease of interest rates as may be applicable is
valid. The CA affirmed the RTC decision.

ISSUE:
Whether or not PNB, on its own, modify the interest rate in a loan agreement without violating
the mutuality of contracts.

HELD:
NO. PNB cannot modify the interest rate in a loan agreement on its own. However,
contrary to the stubborn insistence of petitioner bank, the said law and circular did not authorize
either party to unilaterally raise the interest rate without the other's consent. It is basic that
there can be no contract in the true sense in the absence of the element of agreement, or of
mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his
act has no more efficacy than if it had been done under duress or by a person of unsound mind.

Similarly, contract changes must be made with the consent of the contracting parties.
The minds of all the parties must meet as to the proposed modification, especially when it
affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid
that the rate of interest is always a vital component, for it can make or break a capital venture.
Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect.

We cannot countenance petitioner bank's posturing that the escalation clause at bench
gives it unbridled right to unilaterally upwardly adjust the interest on private respondents' loan.
That would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts.

RATIO:
Article 1308 of the Civil Code:Art. 1308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.

De la Paz v. L & J Development Co., G.R. No. 183360, [September 8, 2014]

FACTS:
On December 27, 2000, Rolando De La Paz lent ₱350,000.00 without any security to L&J, a
property developer with Atty. Salonga as its President and General Manager. The loan, with no
specified maturity date, carried a 6% monthly interest, i.e., ₱21,000.00. From December 2000 to
August 2003, L&J paid Rolando a total of ₱576,000.00 representing interest charges. L&J failed
to pay despite repeated demands, Rolando filed a Complaint for Collection of Sum of Money with
Damages against L&J and Atty. Salonga in his personal capacity before the MeTC alleging that
L&J’s debt as of January 2005, inclusive of the monthly interest, stood at ₱772,000.00; that the
6% monthly interest was upon Atty. Salonga’s suggestion, who tricked him. The agreement to
pay interest was not reduced into writing.
L&J and Atty. Salonga denied Rolando’s allegations. They acknowledged the loan as a corporate
debt and claimed that the failure to pay the same was due to a fortuitous event, which is the
financial difficulty brought about by the economic crisis. That Rolando cannot enforce the 6%
monthly interest for being unconscionable and shocking to the morals. During trial, Rolando
testified that he had no communication with Atty. Salonga prior to the loan transaction but knew
him as a lawyer, a son of a former Senator, and the owner of L&J which developed Brentwood
Subdivision in Antipolo where his associate Nilo Velasco (Nilo) lives. When Nilo told him that
Atty. Salonga and L&J needed money to finish their projects, heagreed to lend them money. He
personally met with Atty. Salonga and their meeting was cordial. He narrated that when L&J was
in the process of borrowing the ₱350,000.00 from him, it was Arlene San Juan,the
secretary/treasurer of L&J, who negotiated the terms and conditions thereof. She said that the
money was to finance L&J’s housing project. Rolando claimed that it was not he who demanded
for the 6% monthly interest. It was L&J and Atty. Salonga, through Arlene, who insisted on paying
the said interest as they asserted that the loan was only a short-term one.

ISSUE: WON interest is due even if agreement to pay interest was not reduced into writing.

RULING: WHEREFORE, the Decision dated February 27, 2008 of the Court of Appeals in CA-G.R.
SP No. 100094 is hereby AFFIRMED with modification that petitioner Rolando C. De La Paz is
ordered to pay respondent L&J Development Company the amount of ,₱226,000.00, plus
interest of 6o/o per annum from the finality of this Decision until fully paid.

RATIO:
No. 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.
The Court, however, finds no deception on the partof L&J and Atty. Salonga. For one, despite the
lack of a document stipulating the payment of interest, L&J nevertheless devotedly paid interests
on the loan. It only stopped when it suffered from financial difficulties that prevented it from
continuously paying the 6% monthly rate. It may be raised that L&J is estopped from questioning
the interest rate considering that it has been paying Rolando interest at such ratefor more than
two and a half years. However, in Ching v. Nicdao,24 the daily payments of the debtor to the
lender were considered as payment of the principal amount of the loan because Article 1956
was not complied with. This was notwithstanding the debtor’s admission that the payments
made were for the interests due. The Court categorically stated therein that "[e]stoppel cannot
give validity to an act that is prohibited by law or one thatis against public policy." Even if the
payment of interest has been reduced in writing, a 6% monthly interest rate on a loan is
unconscionable, regardless of who between the parties proposed the rate.

(5) Truth in Lending Act

Bank of the Philippine Islands v. Spouses Yu, G.R. No. 184122, [January 20, 2010], 624 PHIL 408-
421
FACTS:
Spouses Yu, doing business as Tuanson Trading and Tuanson Builders Corporation
(hereafter Tuanson Builders) borrowed various sums totaling P 75 Million from Far East Bank and
Trust Company (FEBTC). For collateral, they executed real estate mortgages over several of their
properties including certain lands located in Legazpi City owned by Tuanson Trading.
Unable to pay their loans, the Sps Yu and Tuanson Builders requested a loan restructuring
, which the bank, now merged with Bank of the Philippines (BPI), granted. By this time, the Sps
Yu loan balance stood at P 33, 400,000.00. The restructured loan used the same collaterals with
the exception of TCT 40247 that secured a loan of P1, 600.000.
Despite the restructuring, however, the Sps Yu still had difficulties paying their loan. They
asked BPI to release some of the mortgaged lands since their total appraised
value far exceeded the amount of the remaining debt. When BPI ignored their request, Sps Yu
withheld payments on their amortizations. Thus, BPI extra judicially foreclosed the mortgaged
properties in Legazpi City and in Pili, Camarines Sur.
Sps Yu sought the annulment of the foreclosure sale by court action against BPI and the
winning bidder Magnacraft Development Corporation (hereafter Magnacraft).
In the course of the proceedings, however, Sps Yu and Magnacraft entered into a compromise
agreement that affirmed the latter’s ownership of 3 out of the 10 parcels of land that were
auctioned. By virtue of this agreement, the court dismissed the complaint against Magnacraft,
without prejudice to the Yus filing a new one against BPI.
On October 2003, the Sps Yu filed their new complaint before the RTC against BPI for recovery of
alleged excessive penalty charges, attorney’s fees, foreclosure expenses that the bank caused to
be incorporated in the price of the auctioned properties.
BPI essentially admitted the foreclosure of the mortgaged properties for P39, 055,254.95
corresponded only to Sps Yu debt as of date of filing of the petition. The notice of the auction
sale said that the total was inclusive of interest, penalty charges, attorney’s fee and expenses of
this foreclosure.
BPI further admitted that its bid of P45,090,566.41 for all the auctioned properties. BPI also
admitted that Magnacraft submitted the highest and winning bid of P45,500,000.00. The sheriff
turned over this amount to BPI. According to BPI, it in turn remitted to the Clerk of Court
the P409,433.59 difference between its bid price and that of Magnacrafts. Although the
proceeds of the sale exceeded the P39,055,254.95 stated in the notice of sale by P6,035,311.46,
the bid amount increased because it now included litigation expenses and attorney’s fees as well
as interests and penalties as recomputed.
BPI admitted that it also pushed through with the second auction for the sale of a lot in Pili,
Camarines Sur that secured a remaining debt of P5,562,000. BPI made the lone
bid of P1,701,934.09.
The Yus had three causes of action against BPI.
First. The bank imposed excessive penalty charges and interests: over P5 million in penalty
charges computed at 36% per annum compared to the 12% per annum that the Courtfixed in
cases. In addition, BPI collected a 14% yearly interest on the principal, bringing the combined
penalty charges and interest to 50% of the principal per annum.
Second. BPI also imposed a charge of P4,052,046.11 in attorney’s fees, the equivalent of 10% of
the principal, interest, and penalty charges.
Third. BPI did not provide documents to support its claim for foreclosure expenses
of P446,726.74 and cost of publication of P518,059.21.
As an alternative to their three causes of action, the Yus claimed that BPI was in estoppel to
claim more than the amount stated in its published notices. Consequently, it must turn over the
excess bid of P6,035,311.46.
RTC partially granted. It reduced the penalty charge of 36% per annum to 12% per annum
until the debt would have been fully paid but maintained the attorney’s fees as reasonable
considering that BPI already waived the amount that formed part of the attorney’s fee and
reduced the rate of attorney’s fee it collected from 25 % to 10% of the amount due. The RTC
ruled that facts necessary to resolve the issues on penalties and fees had been admitted by the
parties thus dispensing with the need to receive evidence. BPI appealed to CA which affirmed
RTC’s decision.
ISSUE:
Whether or not the reference to the penalty charges in the promissory note constitutes
substantial compliance with the disclosure requirement of the Truth in Lending Act.
HELD:
Yes. Both the RTC and CA decisions cited BPIs alleged violation of the Truth in Lending Act and
the ruling of the Court in New Sampaguita Builders Construction, Inc. v. Philippine National Bank
to justify their deletion of the penalty charges. Section 4 of the Truth in Lending Act states that:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the following
information:

(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in connection
with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation.

Penalty charge, which is liquidated damages resulting from a breach, falls under item (6) or
finance charge. A finance charge represents the amount to be paid by the debtor incident to the
extension of credit. The lender may provide for a penalty clause so long as the amount or rate of
the charge and the conditions under which it is to be paid are disclosed to the borrower before
he enters into the credit agreement.
In this case, although BPI failed to state the penalty charges in the disclosure statement, the
promissory note that the Yus signed, on the same date as the disclosure statement, contained a
penalty clause that said: I/We jointly and severally, promise to further pay a late payment charge
on any overdue amount herein at the rate of 3% per month. The promissory note is an
acknowledgment of a debt and commitment to repay it on the date and under the conditions
that the parties agreed on. It is a valid contract absent proof of acts which might have vitiated
consent.
The RTC and CA relied on the ruling in New Sampaguita as authority that the non-disclosure of
the penalty charge renders its imposition illegal. But New Sampaguita is not attended by the
same circumstances. What New Sampaguita disallowed, because it was not mentioned either in
the disclosure statement or in the promissory note, was the unilateral increase in the rates of
penalty charges that the creditor imposed on the borrower. Here, however, it is not shown that
BPI increased the rate of penalty charge that it collected from the Yus.
The ruling that is more in point is that laid down in The Consolidated Bank and Trust Corporation
v. Court of Appeals, a case cited in New Sampaguita. The Consolidated Bank ruling declared valid
the penalty charges that were stipulated in the promissory notes. What the Court disallowed in
that case was the collection of a handling charge that the promissory notes did not contain.
The Court has affirmed that financial charges are amply disclosed if stated in the promissory note
in the case of Development Bank of the Philippines v. Arcilla, Jr. The Court there said, Under
Circular 158 of the Central Bank, the lender is required to include the information required by
R.A. 3765 in the contract covering the credit transaction or any other document to be
acknowledged and signed by the borrower. In addition, the contract or document shall specify
additional charges, if any, which will be collected in case certain stipulations in the contract are
not met by the debtor. In this case, the promissory notes signed by the Yus contained data,
including penalty charges, required by the Truth in Lending Act. They cannot avoid liability based
on a rigid interpretation of the Truth in Lending Act that contravenes its goal.
Nonetheless, the courts have authority to reduce penalty charges when these are unreasonable
and iniquitous. Considering that BPI had already received over P2.7 million in interest and that it
seeks to impose the penalty charge of 3% per month or 36% per annum on the total amount due
principal plus interest, with interest not paid when due added to and becoming part of the
principal and also bearing interest at the same rate, the Court finds the ruling of the RTC in its
original decision reasonable and fair. Thus, the penalty charge of 12% per annum or 1% per
month is imposed.

Spouses Silos v. Philippine National Bank, G.R. No. 181045, [July 2, 2014], 738 PHIL 156-206)
(see case above)

III. DEPOSIT

(1) Characteristics

(a) Real contract

(b) Its purpose is safekeeping
(c) Naturally gratuitous
(d) Unilateral if gratuitous and bilateral if onerous
(e) Only movables may be the object of a deposit (cf. in judicial deposit or
receivership, real or personal property may be included).

(2) Kinds
 (a) Extrajudicial (Voluntary or Necessary) v. Judicial (Receivership or
Sequestration)
(b) Regular (the depositary cannot use the thing deposited) v. Irregular (the
depositary may use the thing deposited)

(3) Voluntary Deposit (Art. 1968 – 1971)

CHAPTER 2
Voluntary Deposit
SECTION 1
General Provisions

Article 1968. A voluntary deposit is that wherein the delivery is made by the will of the depositor.
A deposit may also be made by two or more persons each of whom believes himself
entitled to the thing deposited with a third person, who shall deliver it in a proper case to
the one to whom it belongs. (1763)

Article 1969. A contract of deposit may be entered into orally or in writing. (n)

Article 1970. If a person having capacity to contract accepts a deposit made by one who is
incapacitated, the former shall be subject to all the obligations of a depositary, and may
be compelled to return the thing by the guardian, or administrator, of the person who
made the deposit, or by the latter himself if he should acquire capacity. (1764)

Article 1971. If the deposit has been made by a capacitated person with another who is not, the
depositor shall only have an action to recover the thing deposited while it is still in the
possession of the depositary, or to compel the latter to pay him the amount by which he
may have enriched or benefited himself with the thing or its price. However, if a third
person who acquired the thing acted in bad faith, the depositor may bring an action
against him for its recovery. (1765a)

Triple-V Food Services, Inc. v. Filipino Merchants Insurance Company, Inc.

(G.R. No. 160544, February 21, 2005)

Facts:
Mary Jo-Anne De Asis (De Asis) dined at petitioner's Kamayan Restaurant. On said date,
De Asis availed of the valet parking service of petitioner and entrusted her car key to petitioner's
valet counter. A corresponding parking ticket was issued as receipt for the car. Petitioner’s valet
attendant, a certain Madridano, at the designated parking area, then parked the car. Few
minutes later, Madridano noticed that the car was not in its parking slot and its key no longer in
the box where valet attendants usually keep the keys of cars entrusted to them. The car was
never recovered. Thereafter, Crispa filed a claim against its insurer, herein respondent Filipino
Merchants Insurance Company, Inc. (FMICI). Having indemnified Crispa for the loss of the subject
vehicle, FMICI, as subrogee to Crispa's rights, filed with the RTC at Makati City an action for
damages against petitioner.

In its answer, petitioner claimed that it and its employees wasted no time in ascertaining
the loss of the car and in informing De Asis of the discovery of the loss. Petitioner further argued
that in accepting the complimentary valet parking service, De Asis received a parking ticket
where under it is so provided that "[Management and staff will not be responsible for any loss of
or damage incurred on the vehicle nor of valuables contained therein", a provision which, to
petitioner's mind, is an explicit waiver of any right to claim indemnity for the loss of the car; and
that De Asis knowingly assumed the risk of loss when she allowed petitioner to park her vehicle,
adding that its valet parking service did not include extending a contract of insurance or
warranty for the loss of the vehicle.

Issue:
1. Whether petitioner was the depositary of the subject vehicle.
2. Whether petitioner is liable for the loss of the subject vehicle.

Held:
1. YES
2. YES

Ruling:
In a contract of deposit, a person receives an object belonging to another with the
obligation of safely keeping it and returning the same. A deposit may be constituted even
without any consideration. It is not necessary that the depositary receives a fee before it
becomes obligated to keep the item entrusted for safekeeping and to return it later to the
depositor.

When De Asis entrusted the car in question to petitioners valet attendant while eating at
petitioner's Kamayan Restaurant, the former expected the car's safe return at the end of her
meal. Thus, petitioner was constituted as a depositary of the same car. Petitioner cannot evade
liability by arguing that neither a contract of deposit nor that of insurance, guaranty or surety for
the loss of the car was constituted when De Asis availed of its free valet parking service.

(a) Requisites

i. Capacity of the Parties

▪ Where the depositor is capable and the depositary incapable

▪ Where the depositor is incapable and the depositary capable

 ii. Object: must be corporeal and movable in extrajudicial deposit
iii. Delivery

(b) Obligations of the depositary

i. To preserve the thing

ii. To return the thing

(c) Obligations of the depositor

(4) Necessary Deposit

Durban Apartments Corporations v. Pioneer Insurance and Surety Corporation

G.R. No. 179419, January 12, 2011.

FACTS:
July 22, 2003, Pioneer Insurance and Surety Corp, by right of subrogation, filed with the
RTC of Makati a Complaint for Recovery of Damages against Durban Apartments Corp. (or City
Garden Hotel) and defendant before the RTC, Vicente Justimbaste. Respondent averred that it is
the insurer for loss and damage of Jeffrey S. See’s 2001 Suzuki Grand Vitara in the amount of
P1,175,000.00. On April 30, 2002, See arrived and checked in at the City Garden Hotel before
midnight, and its parking attendant, Justimbaste got the key to said Vitara from See to park it. On
May 1, 2002, at about 1:00 am, See received a phone call where the Hotel Chief Security Officer
informed him that his Vitara was carnapped while it was parked unattended at the parking area
of Equitable PCI Bank. See went to see the Security Officer, thereafter reported the incident to
the Operations Division of the Makati City Police Anti-Carnapping Unit, and a flash alarm was
issued. The police investigated Hotel Security Officer, Ernesto T. Horlador, Jr. and Justimbaste.
See gave his Sinumpaang Salaysay to the police investigator, and filed a Complaint Sheet with the
PNP Traffic Management Group in Camp Crame. it paid the P1,163,250.00 money claim of See
and mortgagee ABN AMRO Savings Bank, Inc. as indemnity for the loss of the Vitara.

The Vitara was lost due to the negligence of Durban Apartments and Justimbaste
because it was discovered during the investigation that this was the second time that a similar
incident of carnapping happened in the valet parking service and no necessary precautions were
taken to prevent its repetition. Durban Apartments was wanting in due diligence in the selection
and supervision of its employees particularly defendant Justimbaste. Both failed and refused to
pay its valid, just, and lawful claim despite written demands.

ISSUE: Is petitioner liable for the loss of See’s vehicle?

RULING: Yes.
 Article 1962, in relation to Article 1998, of the Civil Code defines a contract of deposit
and a necessary deposit made by persons in hotels or inns:

Art. 1962. A deposit is constituted from the moment a person receives a thing belonging
to another, with the obligation of safely keeping it and returning the same. If the
safekeeping of the thing delivered is not the principal purpose of the contract, there is no
deposit but some other contract.

Art. 1998. The deposit of effects made by travelers in hotels or inns shall also be regarded
as necessary. The keepers of hotels or inns shall be responsible for them as
depositaries, provided that notice was given to them, or to their employees, of
the effects brought by the guests and that, on the part of the latter, they take the
precautions which said hotel-keepers or their substitutes advised relative to the
care and vigilance of their effects.

Plainly, from the facts found by the lower courts, the insured See deposited his vehicle
for safekeeping with petitioner, through the latter’s employee, Justimbaste. In turn, Justimbaste
issued a claim stub to See. Thus, the contract of deposit was perfected from See’s delivery, when
he handed over to Justimbaste the keys to his vehicle, which Justimbaste received with the
obligation of safely keeping and returning it. Ultimately, petitioner is liable for the loss of See’s
vehicle.

YHT Realty Corporation et al., v. Court of Appeals, G.R. No. 126780, February 17, 2005.

FACTS:
Private respondent McLoughlin, used to stay at Sheraton Hotel during his trips to the
Philippines until Tan convinced him to transfer from Sheraton Hotel to Tropicana where Lainez,
Payam and Danilo Lopez were employed. Lopez served as manager of the hotel while Lainez and
Payam had custody of the keys for the safety deposit boxes of Tropicana. Tan took care of
McLoughlin's booking at the Tropicana where he started staying during his trips to the
Philippines. McLoughlin arrived from Australia and registered with Tropicana.
He rented a safety deposit box as it was his practice to rent a safety deposit box every
time he registered at Tropicana in previous trips. The safety deposit box could only be opened
through the use of two keys, one of which is given to the registered guest, and the other
remaining in the possession of the management of the hotel. When a registered guest wished to
open his safety deposit box, he alone could personally request the management who then
would assign one of its employees to accompany the guest and assist him in opening the safety
deposit box with the two keys.
Before leaving for a brief trip to Hongkong, McLoughlin opened his safety deposit box
with his key and with the key of the management and took some of his deposited items and left
the other items in the box as he did not check out of his room at the Tropicana during his short
visit to Hongkong. After returning to Manila, he checked out of Tropicana and left for Australia.
When he arrived in Australia, he discovered that some items were missing. He also noticed that
the jewelry which he bought in Hongkong and stored in the safety deposit box upon his return to
Tropicana was likewise missing, except for a diamond bracelet.
When McLoughlin came back to the Philippines, he asked if some money and/or jewelry
which he had lost were found and returned to her or to the management, but Lainez told him
that no one in the hotel found such things and none were turned over to the management. He
again registered at Tropicana and rented a safety deposit box. Later on, McLoughlin requested
Lainez and Payam to open his safety deposit box. He noticed that more items were missing.
When McLoughlin discovered the loss, he immediately confronted Lainez and Payam who
admitted that Tan opened the safety deposit box with the key assigned to him.
McLoughlin confronted Tan and the latter confessed that she had stolen McLoughlin's
key and was able to open the safety deposit box with the assistance of Lopez, Payam and Lainez.
McLoughlin requested for an investigation of the incident. Lopez got in touch with Tan and
arranged for a meeting with the police and McLoughlin. When the police did not arrive, Lopez
and Tan went to the room of McLoughlin at Tropicana and thereat, Lopez wrote on a piece of
paper a promissory note dated 21 April 1988. The promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and US$2,000.00
or its equivalent in Philippine currency on or before May 5, 1988.
Despite the execution of promissory note by Tan, McLoughlin insisted that it must be the
hotel who must assume responsibility for the loss he suffered. However, Lopez refused to accept
the responsibility relying on the conditions for renting the safety deposit box entitled
"Undertaking For the Use Of Safety Deposit Box," specifically paragraphs (2) and (4) thereof, to
wit:
2. To release and hold free and blameless TROPICANA APARTMENT HOTEL from any liability
arising from any loss in the contents and/or use of the said deposit box for any cause
whatsoever, including but not limited to the presentation or use thereof by any other person
should the key be lost;
...
4. To return the key and execute the RELEASE in favor of TROPICANA APARTMENT HOTEL upon
giving up the use of the box.
McLoughlin went back to Australia and he consulted his lawyers as to the validity of the
abovementioned stipulations. They opined that the stipulations are void for being violative of
universal hotel practices and customs.

ISSUE:
Whether a hotel may evade liability for the loss of items left with it for safekeeping by its guests,
by having these guests execute written waivers holding the establishment or its employees free
from blame for such loss in light of Article 2003 of the Civil Code which voids such waivers.

HELD:
NO.
According to Art. 2003 of the NCC:
Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the
effect that he is not liable for the articles brought by the guest. Any stipulation between the
hotel-keeper and the guest whereby the responsibility of the former as set forth in Articles 1998
to 2001 is suppressed or diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely to
apply to situations such as that presented in this case. The hotel business like the common
carrier's business is imbued with public interest. Catering to the public, hotelkeepers are bound
to provide not only lodging for hotel guests and security to their persons and belongings. The
twin duty constitutes the essence of the business. The law in turn does not allow such duty to
the public to be negated or diluted by any contrary stipulation in so-called "undertakings" that
ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature.
Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of the
New Civil Code for they allow Tropicana to be released from liability arising from any loss in the
contents and/or use of the safety deposit box for any cause whatsoever. Evidently, the
undertaking was intended to bar any claim against Tropicana for any loss of the contents of the
safety deposit box whether or not negligence was incurred by Tropicana or its employees. The
New Civil Code is explicit that the responsibility of the hotel-keeper shall extend to loss of, or
injury to, the personal property of the guests even if caused by servants or employees of the
keepers of hotels or inns as well as by strangers, except as it may proceed from any force
majeure.
It is the loss through force majeure that may spare the hotel-keeper from liability. In the
case at bar, there is no showing that the act of the thief or robber was done with the use of arms
or through an irresistible force to qualify the same as force majeure.

IV. LETTERS OF CREDIT

(1) Purpose

Applicable Rules: Philippine Code of Commerce, Art. 567-572

Title XIII Letters of Credit

ART. 567. Letters of Credit are those issued by one merchant to another, or for
the purpose of attending to a commercial transaction.

ART. 568. The essential conditions of letters of credit shall be :

1. To be issued in favor of a determined person and not to order.

2. To be limited to a fixed and specified amount, or to one or more

indeterminate amounts, but all within a maximum sum the limit of which must
exactly stated.

Letters of credit which do not have one of these conditions shall be considered
simply as letters of recommendation.
 ART. 569. One who issues a letter of credit shall be liable to the person on whom
it was issued for the amount paid by virtue of the same within the maximum fixed
therein.

Letters of credit cannot be protested, even when not paid, nor can the
holder thereof acquire any right of action for said non-payment against the
person who issue it.

The payor shall have a right to demand the proof of identity of the person
in whose favor the letter of credit was issued.

ART. 570. The drawer of a letter of credit may annul it, informing the bearer and
the person to whom it is addressed of said revocation.

ART. 571. The holder of a letter of credit shall pay the drawer the amount
received without delay.

Should he not do so, an action including attachment may be brought to

recover the said amount with the legal interest and the current exchange in the
place where the payment was made on the place where it was repaid.

ART. 572. If the holder of a letter of credit does not make use thereof within the
period agreed upon with the drawer of the same, or, in the absence of a fixed
period, within six months from its date in any point of the Philippines, and within
twelve months outside thereof, it shall be void in fact and in law.

See also The Hongkong & Shanghai Banking Corp. Limited v. National Steel Corp.,
G.R. No. 183486, February 24, 2016.

HSBC v. NSC
Facts:
Respondent National Steel Corporation (NSC) entered into an Export Sales Contract (sale of
prime cold rolled coils) with Klockner East Asia Limited (Klockner). In accordance with the
requirements in the Contract, Klockner applied for an irrevocable letter of credit with HSBC in
favor of NSC. HSBC issued an irrevocable and onsight letter of credit in favor of NSC. The Letter
of Credit stated that it is governed by the International Chamber of Commerce Uniform Customs
and Practice for Documentary Credits, Publication No. 400 (UCP 400). Under UCP 400, HSBC as
the issuing bank has the obligation to immediately pay NSC upon presentment of the documents
listed in the Letter of Credit. NSC delivered the goods to Klockner. NSC coursed the collection of
its payment from Klockner through City Trust Banking Corporation (City Trust). City Trust sent a
collection order to HSBC respecting the collection of payment from Klockner. The Collection
Order states the collection is subject to Uniform Rules for the Collection of Commercial Paper
Publication No. 322 (URC 32). Under URC 32 HSBC merely facilitates collection. Klockner refuse
to pay.

Klockner persisted in its refusal to pay. Thus, HSBC returned the documents to CityTrust. In a
letter accompanying the returned documents, HSBC stated that it considered itself discharged of
its duty under the transaction. City Trust insisted that HSBC should pay it in accordance with the
terms of the Letter of Credit which it issued. Unable to collect from HSBC, NSC filed a complaint
against it for collection of sum of money.

The RTC found that HSBC is not liable to pay NSC the amount stated in the Letter of Credit. It
ruled that the applicable law is URC 322 as it was the law which CityTrust intended to apply to
the transaction. Under URC 322, HSBC has no liability to pay when Klockner refused payment. On
appeal, the CA reversed RTC’s decision. The CA found that it is UCP 400 and not URC 322 which
governs the transaction. According to the CA, the terms of the Letter of Credit clearly stated that
UCP 400 shall apply.

Issue: On whether or not HSBC is liable to pay NSC under the letters of credit?

Held:
A letter of credit is a commercial instrument developed to address the unique needs of certain
commercial transactions. It is recognized in our jurisdiction and is sanctioned under Article 567
of the Code of Commerce and in numerous jurisprudence defining a letter of credit, the
principles relating to it, and the obligations of parties arising from it. In Bank of America, NT & SA
v. Court of Appeals, this Court defined a letter of credit as "...a financial device developed by
merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is
paid, and a buyer, who wants to have control of the goods before paying." Through a letter of
credit, a buyer obtains the credit of a third party, usually a bank, to provide assurance of
payment. This, in turn, convinces a seller to part with his or her goods even before he or she is
paid, as he or she is insured by the third party that he or she will be paid as soon as he or she
presents the documents agreed upon.
A letter of credit generally arises out of a separate contract requiring the assurance of payment
of a third party. In a transaction involving a letter of credit, there are usually three transactions
and three parties. The first transaction, which constitutes the underlying transaction in a letter of
credit, is a contract of sale between the buyer and the seller. The contract may require that the
buyer obtain a letter of credit from a third party acceptable to the seller. The obligations of the
parties under this contract are governed by our law on sales. The second transaction is the
issuance of a letter of credit between the buyer and the issuing bank. The buyer requests the
issuing bank to issue a letter of credit naming the seller as the beneficiary. In this transaction, the
issuing bank undertakes to pay the seller upon presentation of the documents identified in the
letter of credit. The buyer, on the other hand, obliges himself or herself to reimburse the issuing
bank for the payment made. In addition, this transaction may also include a fee for the issuing
bank's services. This transaction constitutes an obligation on the part of the issuing bank to
perform a service in consideration of the buyer's payment. The obligations of the parties and
their remedies in cases of breach are governed by the letter of credit itself and by our general
law on obligations, as our civil law finds suppletory application in commercial documents.
The third transaction takes place between the seller and the issuing bank. The issuing bank issues
the letter of credit for the benefit of the seller. The seller may agree to ship the goods to the
buyer even before actual payment provided that the issuing bank informs him or her that a letter
of credit has been issued for his or her benefit. This means that the seller can draw drafts from
the issuing bank upon presentation of certain documents identified in the letter of credit. The
relationship between the issuing bank and the seller is not strictly contractual since there is no
privity of contract nor meeting of the minds between them. It also does not constitute a
stipulation pour autrui in favor of the seller since the issuing bank must honor the drafts drawn
against the letter of credit regardless of any defect in the underlying contract. Neither can it be
considered as an assignment by the buyer to the seller-beneficiary as the buyer himself cannot
draw on the letter. From its inception, only the seller can demand payment under the letter of
credit. It is also not a contract of suretyship or guaranty since it involves primary liability in the
event of default. Nevertheless, while the relationship between the seller-beneficiary and the
issuing bank is not strictly contractual, strict payment under the terms of a letter of credit is an
enforceable right. This enforceable right finds two legal underpinnings. First, letters of credit, as
will be further explained, are governed by recognized international norms which dictate strict
compliance with its terms. Second, the issuing bank has an existing agreement with the buyer to
pay the seller upon proper presentation of documents. Thus, as the law on obligations applies
even in commercial documents, the issuing bank has a duty to the buyer to honor in good faith
its obligation under their agreement. As will be seen in the succeeding discussion, this
transaction is also governed by international customs which this Court has recognized in this
jurisdiction.
In simpler terms, the various transactions that give rise to a letter of credit proceed as follows:
Once the seller ships the goods, he or she obtains the documents required under the letter of
credit. He or she shall then present these documents to the issuing bank which must then pay
the amount identified under the letter of credit after it ascertains that the documents are
complete. The issuing bank then holds on to these documents which the buyer needs in order to
claim the goods shipped. The buyer reimburses the issuing bank for its payment at which point
the issuing bank releases the documents to the buyer. The buyer is then able to present these
documents in order to claim the goods. At this point, all the transactions are completed. The
seller received payment for his or her performance of his obligation to deliver the goods. The
issuing bank is reimbursed for the payment it made to the seller. The buyer received the goods
purchased.
From the moment that HSBC agreed to the terms of the Letter of Credit - which states that UCP
400 applies - its actions in connection with the transaction automatically became bound by the
rules set in UCP 400. Even assuming that URC 322 is an international custom that has been
recognized in commerce, this does not change the fact that HSBC, as the issuing bank of a letter
of credit, undertook certain obligations dictated by the terms of the Letter of Credit itself and by
UCP 400. In Feati, this Court applied UCP 400 even when there is no express stipulation in the
letter of credit that it governs the transaction. On the strength of our ruling in Feati, we have the
legal duty to apply UCP 400 in this case independent of the parties' agreement to be bound by it.
UCP 400 states that an irrevocable credit payable on sight, such as the Letter of Credit in this
case, constitutes a definite undertaking of the issuing bank to pay, provided that the stipulated
documents are presented and that the terms and conditions of the credit are complied with.
Further, UCP 400 provides that an issuing bank has the obligation to examine the documents
with reasonable care. Thus, when City Trust forwarded the Letter of Credit with the attached
documents to LISBC, it had the duty to make a determination of whether its obligation to pay
arose by properly examining the documents.

(2) Kinds of Letters of Credit

(a) Commercial Credit

(b) Standby Letter of Credit

Transfield Philippines Inc. v. Luzon Hydro Corporation, November 22, 2004

The independent nature of the letter of credit may be: (a) independence in toto where the credit
is independent from the justification aspect and is a separate obligation from the underlying
agreement like for instance a typical standby; or (b) independence may be only as to the
justification aspect like in a commercial letter of credit or repayment standby, which is identical
with the same obligations under the underlying agreement. In both cases the payment may be
enjoined if in the light of the purpose of the credit the payment of the credit would constitute
fraudulent abuse of the credit.

Facts:
Transfield Philippines (Transfield) entered into a turn-key contract with Luzon Hydro Corp.
(LHC).Under the contract, Transfield were to construct a hydro-electric plants in Benguet and
Ilocos. Transfield was given the sole responsibility for the design, construction, commissioning,
testing and completion of the Project. The contract provides for a period for which the project is
to be completed and also allows for the extension of the period provided that the extension is
based on justifiable grounds such as fortuitous event. In order to guarantee performance by
Transfield, two stand-by letters of credit were required to be opened. During the construction of
the plant, Transfield requested for extension of time citing typhoon and various disputes
delaying the construction. LHC did not give due course to the extension of the period prayed for
but referred the matter to arbitration committee. Because of the delay in the construction of the
plant, LHC called on the stand-by letters of credit because of default. However, the demand was
objected by Transfield on the ground that there is still pending arbitration on their request for
extension of time.

Issue: Whether or not LHC can collect from the letters of credit despite the pending arbitration
case
Held:
Transfield’s argument that any dispute must first be resolved by the parties, whether through
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in
essence would convert the letter of credit into a mere guarantee.
The independent nature of the letter of credit may be: (a) independence in toto where the credit
is independent from the justification aspect and is a separate obligation from the underlying
agreement like for instance a typical standby; or (b) independence may be only as to the
justification aspect like in a commercial letter of credit or repayment standby, which is identical
with the same obligations under the underlying agreement. In both cases the payment may be
enjoined if in the light of the purpose of the credit the payment of the credit would constitute
fraudulent abuse of the credit.

Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that
the settlement of a dispute between the parties is not a pre-requisite for the release of funds
under a letter of credit. In other words, the argument is incompatible with the very nature of the
letter of credit. If a letter of credit is drawable only after settlement of the dispute on the
contract entered into by the applicant and the beneficiary, there would be no practical and
beneficial use for letters of credit in commercial transactions.

The engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft
and the required documents are presented to it. The so-called “independence principle” assures
the seller or the beneficiary of prompt payment independent of any breach of the main contract
and precludes the issuing bank from determining whether the main contract is actually
accomplished or not. Under this principle, banks assume no liability or responsibility for the
form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the
general and/or particular conditions stipulated in the documents or superimposed thereon, nor
do they assume any liability or responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods represented by any documents, or
for the good faith or acts and/or omissions, solvency, performance or standing of the consignor,
the carriers, or the insurers of the goods, or any other person whomsoever.

(3) Parties

(4) Strict Compliance

Feati Bank and Trust Co. v. Court of Appeals, G.R. No. 94209, April 30, 1991

In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or
transmit to the beneficiary the existence of the letter of credit.
A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft
under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before
negotiation, it has no liability with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and the seller.
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller
and its liability is a primary one as if the correspondent bank itself had issued the letter of credit.

Facts:
Bernardo Villaluz entered into a contract of sale with Axel Christiansen in which Villaluz agreed to
deliver to Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. On the
arrangements made and upon the instructions of consignee, Hanmi Trade Development, Ltd.,
the Security Pacific National Bank of Los Angeles, California issued an irrevocable letter of credit
available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase price of the
lauan logs.
The letter of credit was mailed to the Feati Bank and Trust Company with the instruction to the
latter that it “forward the enclosed letter of credit to the beneficiary.” The letter of credit also
provided that the draft to be drawn is on Security Pacific National Bank and that it be
accompanied by certain documents. The logs were thereafter loaded on a vessel but
Christiansen refused to issue the certification required in paragraph 4 of the letter of credit,
despite repeated requests by the private respondent. The logs however were still shipped and
received by consignee, to whom Christiansen sold the logs. Because of the absence of the
certification by Christiansen, the Feati Bank and Trust company refused to advance the payment
on the letter of credit until such credit lapsed. Since the demands by Villaluz for Christiansen to
execute the certification proved futile, he filed an action for mandamus and specific
performance against Christiansen and Feati Bank and Trust Company before the Court of First
Instance of Rizal. Christiansen however left the Philippines and Villaluz filed an amended
complaint making Feati Bank and Trust Company.

Issue:
Whether or not Feati Bank is liable for Releasing the funds to Christiansen

Held:
In commercial transactions involving letters of credit, the functions assumed by a correspondent
bank are classified according to the obligations taken up by it. The correspondent bank may be
called a notifying bank, a negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or
transmit to the beneficiary the existence of the letter of credit.
A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft
under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before
negotiation, it has no liability with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and the seller.
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the
seller and its liability is a primary one as if the correspondent bank itself had issued the letter of
credit.
In this case, the letter merely provided that the petitioner “forward the enclosed original credit
to the beneficiary.” (Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner
by the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only
a notifying bank and not a confirming bank as ruled by the courts below.
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its
relationship is only with that of the issuing bank and not with the beneficiary to whom he
assumes no liability. It follows therefore that when the petitioner refused to negotiate with the
private respondent, the latter has no cause of action against the petitioner for the enforcement
of his rights under the letter.
Since the Feati was only a notifying bank, its responsibility was solely to notify and/or transmit
the documentary of credit to the private respondent and its obligation ends there.
At the most, when the petitioner extended the loan to the private respondent, it assumed the
character of a negotiating bank. Even then, the petitioner will still not be liable, for a negotiating
bank before negotiation has no contractual relationship with the seller. Whether therefore the
petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any definitive
proof that it has confirmed the letter of credit or has actually negotiated with Feati, the refusal
by the petitioner to accept the tender of the private respondent is justified.

(5) Independence Principle

Transfield Philippines Inc. v. Luzon Hydro Corporation, November 22, 2004

(see case above)

V. TRUST RECEIPTS LAW

(1) Applicable law: Presidential Decree No. 115

(2) Parties (Entruster and Entrustee)

(3) Cases

Colinares v. Court of Appeals, G.R. No. 90828, September 5, 2000

Facts:
In 1979 Melvin Colinares and Lordino Veloso, petitioners, were contracted for a consideration
of P40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate the latters convent at
Camaman-an, Cagayan de Oro City.
On 30 October 1979, petitioners obtained 5,376 SF Solatone acoustical board 2x4x, 300 SF
tanguile wood tiles 12x12, 260 SF Marcelo economy tiles and 2 gallons UMYLIN cement adhesive
from CM Builders Centre for the construction project.
The following day, 31 October 1979, Petitioners applied for a commercial letter of credit with the
Philippine Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of CM
Builders Centre.
a. PBC approved the letter of credit for P22,389.80 to cover the full invoice value of the goods.
b. Petitioners signed a pro-forma trust receipt as security.
c. The loan was due on 29 January 1980.
On 31 October 1979, PBC debited P6,720 from Petitioners marginal deposit as partial payment
of the loan.
On 7 May 1980, PBC wrote to Petitioners demanding that the amount be paid within seven days
from notice.
Instead of complying with PBCs demand, Veloso confessed that they lost P19,195.83 in the
Carmelite Monastery Project and requested for a grace period of until 15 June 1980 to settle the
account.
PBC sent a new demand letterto Petitioners on 16 October 1980 and informed them that their
outstanding balance as of 17 November 1979 was P20,824.40 exclusive of attorneys fees of 25%.
On 2 December 1980, Petitioners proposed that the terms of payment of the loan be modified
as follows: P2,000 on or before 3 December 1980, and P1,000 per month starting 31 January
1980 until the account is fully paid.
a. Pending approval of the proposal, Petitioners paid P1,000 to PBC on 4 December 1980, and
thereafter P500 on 11 February 1981, 16 March 1981, and 20 April 1981.
b. Concurrently with the separate demand for attorneys fees by PBCs legal counsel, PBC
continued to demand payment of the balance.
On 14 January 1983, Petitioners were charged with the violation of P.D. No. 115 (Trust Receipts
Law) in relation to Article 315 of the Revised Penal Code in an Information which was filed with
the Regional Trial Court of Cagayan de Oro City.
a. The case was docketed as Criminal Case No. 1390.
During trial, petitioner Veloso insisted that the transaction was a clean loan as per verbal
guarantee of Cayo Garcia Tuiza, PBCs former manager.
a. He and petitioner Colinares signed the documents without reading the fine print, only
learning of the trust receipt implication much later.
b. When he brought this to the attention of PBC, Mr. Tuiza assured him that the trust receipt
was a mere formality.
TC: decision convicting Petitioners of estafa for violating P.D. No. 115 in relation to Article 315 of
the Revised Penal Code and sentencing each of them to suffer imprisonment of two years and
one day of prision correccional as minimum to six years and one day of prision mayor as
maximum, and to solidarily indemnify PBC the amount of P20,824.44, with legal interest from 29
January 1980, 12 % penalty charge per annum, 25% of the sums due as attorneys fees, and costs.
a. considered the transaction between PBC and Petitioners as a trust receipt transaction under
Section 4, P.D. No. 115.
b. Petitioners use of the goods in their Carmelite monastery project an act of disposing as
contemplated under Section 13, P.D. No. 115, and treated the charge invoice for goods issued by
CM Builders Centre as a document within the meaning of Section 3 thereof.
c. failure of Petitioners to turn over the amount they owed to PBC constituted estafa.
Petitioners appealed from the judgment to the Court of Appeals.
a. Petitioners asserted therein that the trial court erred in ruling that they violated the Trust
Receipt Law, and in holding them criminally liable therefor.
b. In the alternative, they contend that at most they can only be made civilly liable for payment
of the loan.
CA: modified the judgment of the trial court by increasing the penalty to six years and one day
of prision mayor as minimum to fourteen years eight months and one day of reclusion
temporal as maximum.
a. It held that the documentary evidence of the prosecution prevails over Velosos testimony,
discredited Petitioners claim that the documents they signed were in blank, and disbelieved that
they were coerced into signing them.
Petitioners filed a Motion for New Trial/Reconsideration alleging that the Disclosure Statement
on Loan/Credit Transaction signed by them and Tuiza was suppressed by PBC during the trial.
a. that document would have proved that the transaction was indeed a loan as it bears a 14%
interest as opposed to the trust receipt which does not at all bear any interest.
b. Petitioners further maintained that when PBC allowed them to pay in installment, the
agreement was novated and a creditor-debtor relationship was created.
CA: denied the Motion for New Trial/Reconsideration because the alleged newly discovered
evidence was actually forgotten evidence already in existence during the trial, and would not
alter the result of the case.

Issue: Whether or not the transaction of Colinares falls within the ambit of the Law on Trust
Receipt
Held:
Colinares received the merchandise from CM Builders Centre on 30 October 1979. On
that day, ownership over the merchandise was already transferred to Petitioners who were to
use the materials for their construction project. It was only a day later, 31 October 1979, that
they went to the bank to apply for a loan to pay for the merchandise. This situation belies what
normally obtains in a pure trust receipt transaction where goods are owned by the bank and only
released to the importer in trust subsequent to the grant of the loan.
The bank acquires a “security interest” in the goods as holder of a security title for the
advances it had made to the entrustee. The ownership of the merchandise continues to be
vested in the person who had advanced payment until he has been paid in full, or if the
merchandise has already been sold, the proceeds of the sale should be turned over to him by the
importer or by his representative or successor in interest. To secure that the bank shall be paid,
it takes full title to the goods at the very beginning and continues to hold that title as his
indispensable security until the goods are sold and the vendee is called upon to pay for them;
hence, the importer has never owned the goods and is not able to deliver possession. In a
certain manner, trust receipts partake of the nature of a conditional sale where the importer
becomes absolute owner of the imported merchandise as soon as he has paid its price. There are
two possible situations in a trust receipt transaction. The first is covered by the provision which
refers to money received under the obligation involving the duty to deliver it (entregarla) to the
owner of the merchandise sold. The second is covered by the provision which refers to
merchandise received under the obligation to “return” it (devolvera) to the owner. Failure of the
entrustee to turn over the proceeds of the sale of the goods, covered by the trust receipt to the
entruster or to return said goods if they were not disposed of in accordance with the terms of
the trust receipt shall be punishable as estafa under Article 315 (1) of the Revised Penal Code,
without need of proving intent to defraud.
Metropolitan Bank & Trust Co., v. Gonzales, G.R. No. 180165, April 7, 2009

FACTS:
In order to finance the importation of materials necessary for the operations of its sister
company, Titan Ikeda Construction and Development Corporation (TICDC), private respondents,
on behalf of Visaland, applied with petitioner for 24 letters of credit, the aggregate amount of
which reached the sum of P68,749,487.96. Simultaneous with the issuance of the letters of
credit, private respondents signed trust receipts in favor of petitioner. Private respondents
bound themselves to sell the goods covered by the letters of credit and to remit the proceeds to
petitioner, if sold, or to return the goods, if not sold, on or before their agreed maturity dates.
When the trust receipts matured, private respondents failed to return the goods to petitioner, or
to return their value amounting to P68,749,487.96 despite demand. Thus, petitioner filed a
criminal complaint for estafa against Visaland and private respondents with the Office of the City
Prosecutor of Manila. Private respondents denied having entered into a trust receipt agreement
but a Contract of Loan with petitioner. Finding no probable cause, the information was dismissed
for lack of probable cause and lack of evidence that prior demand was made by petitioner. . The
City Prosecutor underscored that for a charge of estafa with grave abuse of confidence to
prosper, previous demand is an indispensable requisite. This was reversed after a motion for
reconsideration was filed hence it was filed in court. However, in the interim, private
respondents appealed the resolution of the prosecutor before to the Secretary of Justice who
ruled that there was no probable cause to prosecute private respondents for estafa n relation to
Presidential Decree No 115 and directed the withdrawal of the information. The directive was
complied with. The Court of Appeals upheld the Secretary of Justice’s Resolution.

ISSUE:
Is there probable cause to hold private respondents liable for estafa in relation to violation of the
Trust Receipts Law?

HELD:
As found in the Complaint-Affidavit of petitioner, private respondents were charged with failing
to account for or turn over to petitioner the merchandise or goods covered by the trust receipts
or the proceeds of the sale thereof in payment of their obligations thereunder. The following
pieces of evidence adduced from the affidavits and documents submitted before the City
Prosecutor are sufficient to establish the existence of probable cause, to wit:
First, the trust receipts bearing the genuine signatures of private respondents;
second, the demand letter of petitioner addressed to respondents;
and third, the initial admission by private respondents of the receipt of the imported goods from
petitioner.
There is ample evidence on record to warrant a finding that there is a probable cause to warrant
the prosecution of private respondents for estafa. Probable cause does not require an inquiry
into whether there is sufficient evidence to procure a conviction. It is enough that it is believed
that the act or omission complained of constitutes the offense charged.
That private respondents did not sell the goods under the trust receipt but allowed it to be used
by their sister company is of no moment. The offense punished under Presidential Decree No.
115 is in the nature of malum prohibitum. A mere failure to deliver the proceeds of the sale or
the goods, if not sold, constitutes a criminal offense that causes prejudice not only to another,
but more to the public interest. Even more incredible is the contention of private respondents
that they did not give much significance to the documents they signed, considering the
enormous value of the transaction involved. Thus, it is highly improbable to mistake trust receipt
documents for a contract of loan when the heading thereon printed in bold and legible letters
reads: Trust Receipts. Without prejudice, by merely glancing at the documents submitted by
petitioner entitled Trust Receipts and the arguments advanced by private respondents, the court
is convinced that there is probable cause to file the case and to hold them for trial.

Allied Banking Corporation v. Ordonez, G.R. No. 82495, December 10, 1990

FACTS:
Philippine Blooming Mills thru its duly authorized officer, private respondent Alfredo Ching,
applied for the issuance of commercial letters of credit with petitioner's Makati branch to
finance the purchase of 500 M/T Magtar Branch Dolomites and one (1) Lot High Fired Refractory
Sliding Nozzle Bricks.
Petitioner issued an irrevocable letter of credit in favor of Nikko Industry Co., Ltd. (Nikko) by
virtue of which the latter drew four (4) drafts which were accepted by PBM and duly honored
and paid by the petitioner bank.:
To secure payment of the amount covered by the drafts, and in consideration of the transfer by
petitioner of the possession of the goods to PBM, the latter as entrustee, thru private
respondent, executed four (4) Trust Receipt Agreements with maturity dates on 19 May, 3 and
24 June 1981 acknowledging petitioner's ownership of the goods and its (PBM'S) obligation to
turn over the proceeds of the sale of the goods, if sold, or to return the same, if unsold within
the stated period.
Out of the said obligation resulted an overdue amount of P1,475,274.09. Despite repeated
demands, PBM failed and refused to either turn over the proceeds of the sale of the goods or to
return the same.
On 7 September 1984, petitioner filed a criminal complaint against private respondent for
violation of PD 115 before the office of the Provincial Fiscal of Rizal. After preliminary
investigation wherein private respondent failed to appear or submit a counter-affidavit and even
refused to receive the subpoena, the Fiscal found a prima facie case for violation of PD 115 on
four (4) counts and filed the corresponding information in court.

ISSUE:
Does the penal provision of PD 115 (Trust Receipts Law) apply when the goods covered by a
Trust Receipt do not form part of the finished products which are ultimately sold but are instead,
utilized/used up in the operation of the equipment and machineries of the entrustee-
manufacturer?

RULING:
The answer must be in the affirmative, Section 4 of said PD 115 says in part:
"Sec. 4. What constitutes a trust receipt transaction. — A trust receipt transaction, within the
meaning of this Decree, is any transaction by and between a person referred to in this Decree as
the entrustee, and another person referred to in this Decree as the entrustee, whereby the
entruster, who owns or holds absolute title or security interests over certain specified goods,
documents or instruments, releases the same to the possession of the entrustee upon the
latter's execution and delivery to the entruster of a signed document called a 'trust receipt'
wherein the entrustee binds himself to hold the designated goods, documents or instruments in
trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments
with the obligation to turn over to the entruster the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the trust receipt or the goods, documents or
instruments themselves, if they are unsold or not otherwise disposed of, in accordance with the
terms and conditions specified in the trust receipt, . . ."
Respondent Ching contends that PBM is not in the business of selling Magtar Branch Dolomites
or High Fired Refractory Sliding Nozzle Bricks, it is a manufacturer of steel and steel products. But
PBM, as entrustee under the trust receipts has, under Sec. 9 of PD 115, the following obligations,
inter alia: (a) receive the proceeds of sale, in trust for the entruster and turn over the same to
the entruster to the extent of the amount owing to him or as appears on the trust receipt; (b)
keep said goods or proceeds thereof whether in money or whatever form, separate and capable
of identification as property of the entruster; (c) return the goods, documents or instruments in
the event of non-sale, or upon demand of the entruster; and (d) observe all other terms and
conditions of the trust receipt not contrary to the provisions of said Decree.
The trust receipts, there is an obligation to repay the entruster. Their terms are to be interpreted
in accordance with the general rules on contracts, the law being alert in all cases to prevent
fraud on the part of either party to the transaction. 9 The entrustee binds himself to sell or
otherwise dispose of the entrusted goods with the obligation to turn over to the entruster the
proceeds if sold, or return the goods if unsold or not otherwise disposed of, in accordance with
the terms and conditions specified in the trust receipt. A violation of this undertaking constitutes
estafa under Sec. 13, PD 115.
And even assuming the absence of a clear provision in the trust receipt agreement, Lee v. Rodil
10 and Sia v. CA 11 have held: Acts involving the violation of trust receipt agreements occurring
after 29 January 1973 (when PD 115 was issued) would render the accused criminally liable for
estafa under par. 1(b), Art. 315 of the Revised Penal Code, pursuant to the explicit provision in
Sec. 13 of PD 115. 12 The act punishable is malum prohibitum. Respondent Secretary's
prognostication of the Supreme Court's supposed inclination to treat trust receipts as mere
security documents for loan transactions, thereby obliterating criminal liability, appears to be a
misjudgment.

Development Bank of the Philippines v. Prudential Bank, November 22, 2005

Facts:
Lirag Textile Mills, Inc. opened an irrevocable commercial letter of credit with Prudential Bank for
US$498,000, in connection with its importation of 5,000 spindles for spinning machinery. These
were released to Litex under covering “trust receipts” it executed in favor of Prudential Bank.
Litex installed and used the items in its textile mill located in Montalban, Rizal. DBP granted a
foreign currency loan in the amount of US$4,807,551 to Litex. To secure the loan, Litex executed
real estate and chattel mortgages on its plant site in Montalban, Rizal. Among the machineries
and equipments mortgaged in favor of DBP were the articles covered by the “trust receipts.”
During the rehabilitation of Litex, Prudential Bank notified DBP of its claim over the items
covered by the trust receipt. It informed DBP that it was the absolute and juridical owner of the
said items and they were thus not part of the mortgaged assets that could be legally ceded to
DBP.
For the failure of Litex to pay its obligation, DBP extra-judicially foreclosed on the real estate and
chattel mortgages, including the articles claimed by Prudential Bank. During the foreclosure sale,
DBP acquired the foreclosed properties as the highest bidder. Despite negotiations between
Prudential and DBP, DBP sold the Litex textile mill to Lyon Textile Mills Inc.
Prudential Bank filed a complaint for a sum of money with damages against DBP. The trial court
decided in favor of Prudential Bank. It ruled that DBP held no better right than Litex and is thus
bound to turn over whatever amount was due to Prudential Bank. DBP is a mere trustee of
Prudential Bank and an agent of Litex. The CA affirmed. It applied the provisions of PD 115 and
held that ownership over the contested articles belonged to Prudential Bank as entrustor, not to
Litex. Consequently, even if Litex mortgaged the items to DBP and the latter foreclosed on such
mortgage, DBP was duty-bound to turn over the proceeds to Prudential Bank, being the party
that advanced the payment for them.

Issue: WON the transaction was a trust receipt transaction

Held: Yes
Ratio: The various agreements between Prudential Bank and Litex commonly denominated as
“trust receipts” were valid. As the CA ruled, their provisions did not contravene the law, morals,
good customs, public order or public policy. The articles were owned by Prudential Bank and
they were only held by Litex in trust. While it was allowed to sell the items, Litex had no authority
to dispose of them or any part thereof or their proceeds through conditional sale, pledge or any
other means.
Article 2085 (2) CC requires that, in a contract of pledge or mortgage, it is essential that the
pledgor or mortgagor should be the absolute owner of the thing pledged or mortgaged. Article
2085 (3) further mandates that the person constituting the pledge or mortgage must have the
free disposal of his property, and in the absence thereof, that he be legally authorized for the
purpose.
Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the
articles. Litex could not have subjected them to a chattel mortgage. Their inclusion in the
mortgage was void and had no legal effect. There being no valid mortgage, there could also be
no valid foreclosure or valid auction sale. Thus, DBP could not be considered either as a
mortgagee or as a purchaser in good faith. No one can transfer a right to another greater than
what he himself has. Nemo dat quod non habet. Hence, Litex could not transfer a right that it
did not have over the disputed items. Corollarily, DBP could not acquire a right greater than what
its predecessor-in-interest had. The spring cannot rise higher than its source. DBP merely
stepped into the shoes of Litex as trustee of the imported articles with an obligation to pay their
value or to return them on Prudential Bank’s demand. By its failure to pay or return them
despite Prudential Bank’s repeated demands and by selling them to Lyon without Prudential
Bank’s knowledge and conformity, DBP became a trustee ex maleficio.
On the matter of actual damages adjudged by the trial court and affirmed by the Court of
Appeals, DBP wants this Court to review the evidence presented during the trial and to reverse
the factual findings of the trial court. With regard to the imposition of exemplary damages, the
appellate court agreed with the trial court that the requirements for the award thereof had been
sufficiently established. Prudential Bank’s entitlement to compensatory damages was likewise
amply proven. It was also shown that DBP was aware of Prudential Bank’s claim as early as July,
1982. However, it ignored the latter’s demand, included the disputed articles in the mortgage
foreclosure and caused their sale in a public auction held on April 19, 1983 where it was declared
as the highest bidder. It smacked of bad faith, if not deceit. Thus, the award of exemplary
damages was in order. Due to the award of exemplary damages, the grant of attorney’s fees was
proper.
DBP’s assertion that both the trial and appellate courts failed to address the issue of prescription
is of no moment. Its claim that, under Article 1146 (1) CC, Prudential Bank’s cause of action had
prescribed as it should be reckoned from the day the mortgage was registered, is not correct.
The written extra-judicial demand by the creditor interrupted the prescription of action. Hence,
the four-year prescriptive period which DBP insists should be counted from the registration of
the mortgage was interrupted when Prudential Bank wrote the extra-judicial demands for the
turn over of the articles or their value. Thus, contrary to DBP’s claim, Prudential Bank’s right to
enforce its action had not yet prescribed when it filed the complaint on May 24, 1988.

Ng v. People, G.R. No. 173905, April 23, 2010

DOCTRINE: A trust receipt transaction is one where the entrustee has the obligation to deliver to
the entruster the price of the sale, or if the merchandise is not sold, to return the merchandise
to the entruster. There are, therefore, two obligations in a trust receipt transaction: the first
refers to money received under the obligation involving the duty to turn it over (entregarla) to
the owner of the merchandise sold, while the second refers to the merchandise received under
the obligation to return it (devolvera) to the owner. The true nature of a trust receipt transaction
can be found in the whereas clause of PD 115 which states that a trust receipt is to be utilized as
a convenient business device to assist importers and merchants solve their financing problems.
Obviously, the State, in enacting the law, sought to find a way to assist importers and merchants
in their financing in order to encourage commerce in the Philippines.

FACTS:
Anthony Ng, then engaged in the business of building and fabricating telecommunication towers
under the trade name Capitol Blacksmith and Builders, applied for a credit line of PhP 3,000,000
with Asiatrust Development Bank, Inc. (Asiatrust). In support of Asiatrusts credit investigation,
petitioner voluntarily submitted the following documents: (1) the contracts he had with Islacom,
Smart, and Infocom; (2) the list of projects wherein he was commissioned by the said
telecommunication companies to build several steel towers; and (3) the collectible amounts he
has with the said companies. Asiatrust approved Ng’s loan application. Ng was then required to
sign several documents, among which are the Credit Line Agreement, Application and
Agreement for Irrevocable L/C, Trust Receipt Agreements, and Promissory Notes. Though the
Promissory Notes matured on September 18, 1997, the two (2) aforementioned Trust Receipt
Agreements did not bear any maturity dates as they were left unfilled or in blank by Asiatrust.

Ng failed to pay his loan to Asiatrust. Asiatrust then conducted a surprise ocular inspection of
Ng’s business through Villarva S. Linga, Asiatrusts representative appraiser. Asiatrust then
endorsed petitioners account to its Account Management Division for the possible restructuring
of his loan. The parties thereafter held a series of conferences to work out the problem and to
determine a way for petitioner to pay his debts. However, efforts towards a settlement failed to
be reached. An Information for Estafa, as defined and penalized under Art. 315, par. 1(b) of the
RPC in relation to Sec. 3, PD 115 or the Trust Receipts Law, was filed with the RTC. RTC found Ng
guilty of the crime of Estafa. It reasoned that petitioner is presumed to have read and
understood and is, therefore, bound by the provisions of the Letters of Credit and Trust Receipts.
It said that it was clear that Asiatrust had furnished petitioner with a Statement of Account
enumerating therein the precise figures of the outstanding balance, which he failed to pay along
with the computation of other fees and charges; thus, Asiatrust did not violate Republic Act No.
3765 (Truth in Lending Act). Finally, the trial court declared that petitioner, being the entrustee
stated in the Trust Receipts issued by Asiatrust, is thus obliged to hold the goods in trust for the
entruster and shall dispose of them strictly in accordance with the terms and conditions of the
trust receipts; otherwise, he is obliged to return the goods in the event of non-sale or upon
demand of the entruster, failing thus, he evidently violated the Trust Receipts Law.

ISSUE: Is the transaction between Anthony l. Ng and Asia Trust Bank in the nature of a trust
receipt or a simple loan?- Simple Loan

HELD: A thorough examination of the facts obtaining in the instant case, however, reveals that
the transaction between petitioner and Asiatrust is not a trust receipt transaction but one of
simple loan.
It must be remembered that petitioner was transparent to Asiatrust from the very beginning
that the subject goods were not being held for sale but were to be used for the fabrication of
steel communication towers in accordance with his contracts with Islacom, Smart, and Infocom.
In these contracts, he was commissioned to build, out of the materials received, steel
communication towers, not to sell them.
As stressed in Samo v. People, a trust receipt is considered a security transaction intended to aid
in financing importers and retail dealers who do not have sufficient funds or resources to finance
the importation or purchase of merchandise, and who may not be able to acquire credit except
through utilization, as collateral, of the merchandise imported or purchased. Similarly, American
Jurisprudence demonstrates that trust receipt transactions always refer to a method of financing
importations or financing sales. The principle is of course not limited in its application to
financing importations, since the principle is equally applicable to domestic transactions.
Regardless of whether the transaction is foreign or domestic, it is important to note that the
transactions discussed in relation to trust receipts mainly involved sales.
Following the precept of the law, such transactions affect situations wherein the entruster, who
owns or holds absolute title or security interests over specified goods, documents or
instruments, releases the subject goods to the possession of the entrustee. The release of such
goods to the entrustee is conditioned upon his execution and delivery to the entruster of a trust
receipt wherein the former binds himself to hold the specific goods, documents or instruments
in trust for the entruster and to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster the proceeds to the extent of the
amount owing to the entruster or the goods, documents or instruments themselves if they are
unsold. Similarly, we held in State Investment House v. CA, et al. that the entruster is entitled
only to the proceeds derived from the sale of goods released under a trust receipt to the
entrustee.
Considering that the goods in this case were never intended for sale but for use in the
fabrication of steel communication towers, the trial court erred in ruling that the agreement is a
trust receipt transaction. Having established the inapplicability of PD 115, this Court finds that
petitioners liability is only limited to the satisfaction of his obligation from the loan. The real
intent of the parties was simply to enter into a simple loan agreement.

Additional:
Credit Q & A:

What is a Letter of Credit (LC)?

It is any arrangement, however named or described, whereby a bank (issuing bank), acting at
the request and on the instructions of a customer (applicant) or on its own behalf, binds itself to:
1. Pay to the order of, or accept and pay drafts drawn by a third party (Beneficiary), or
2. Authorize another bank to pay or to accept and pay such drafts, or
3. Authorizes another bank to negotiate, against stipulated document(s),
Provided, the terms and conditions of the credit are complied with (Art. 2, Uniform Customs &
Practice for Documentary Credits.)
Note: They are in effect absolute undertakings to pay the money advanced or for the amount for
which the credit is given on the faith of the instrument.

In case the buyer was not able to pay its obligation under the letter of credit, can the bank take
possession over the goods covered by the said letter of credit?
No. The opening of a Letter of Credit did not vest ownership of the goods in the bank in the
absence of a trust receipt agreement. A letter of credit is a mere financial device developed by
merchants as a convenient and relatively safe mode of dealing with the sales of goods to satisfy
the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is
paid, and a buyer, who wants to have control of the goods before paying. (Transfield Philippines,
Inc. v. Luzon Hydro Corporation, G.R. No. 146717, Nov. 22, 2004)
Can a court order the release to the applicant the proceeds of an irrevocable letter of credit
without the consent of the beneficiary?
No, such order violates the irrevocable nature of the letter of credit. The terms of an irrevocable
letter of credit cannot be changed without the consent of the parties, particularly the beneficiary
thereof. (Phil. Virginia Tobacco Administration v. De Los Angeles, G.R. No. L-­­27829, Aug. 19,
1988)

Is irrevocable letter of credit and confirmed letter of credit synonymous?

An irrevocable letter of credit is not synonymous with a confirmed letter of credit. In an
irrevocable letter of credit, the issuing bank may not, without the consent of the beneficiary and
the applicant, revoke its undertaking under the letter, whereas, in a confirmed letter of credit,
the correspondent bank gives an absolute assurance to the beneficiary that it will undertake the
issuing bank’s obligation as its own according to the terms and condition of the credit.
(Prudential Bank and Trust Company v. IAC, G.R. No. 74886, Dec. 8, 1992)

What is the doctrine of strict compliance?

The documents tendered by the seller/beneficiary must strictly conform to the terms of the
letter of credit. The tender of documents must include all documents required by the letter.
Thus, a correspondent bank which departs from what has been stipulated under the LC acts on
its own risk and may not thereafter be able to recover from the buyer or the issuing bank, as the
case may be, the money thus paid to the beneficiary. (Feati Bank and Trust Company v. CA, G.R.
No. 940209, Apr. 30, 1991)

What is the independence principle?

The relationship of the buyer and the bank is separate and distinct from the relationship of the
buyer and seller in the main contract; the bank is not required to investigate if the contract
underlying the LC has been fulfilled or not because in transactions involving LC, banks deal only
with documents and not goods (BPI v. De Reny Fabric Industries, Inc., L-­­2481, Oct. 16, 1970). In
effect, the buyer has no course of action against the issuing bank.

What is the exception to the independence principle?

The “Fraud exception rule.” It provides that the untruthfulness of a certificate accompanying a
demand for payment under a standby letter of credit may qualify as fraud sufficient to support
an injunction against payment. (Transfield v. Luzon Hydro, G.R. No. 146717, Nov. 22, 2004)

What is the effect of the buyer’s failure to procure a Letter of Credit to the main contract?
The Letter of Credit is independent from the contract of sale. Failure of the buyer to open the
Letter of Credit does not prevent the birth of the Sales Contract. (Reliance Commodities, Inc. v.
Daewoo Industrial Co. Ltd., G.R. No. 100831, Dec. 17, 1993) The opening of the Letter of Credit is
only a mode of payment. The LC is not an essential requisite to the contract of sale.

What is a trust receipt transaction?

It is any transaction between the entruster and entrustee:
1. Whereby the entruster who owns or holds absolute title or security interests over certain
specified goods, documents or instrument, releases the same to the possession of entrustee
upon the latter’s execution of a TR agreement.
2. Wherein the entrustee binds himself to hold the designated goods in trust for the entruster
and, in case of default, to sell such goods, documents or instrument with the obligation to turn
over to the entruster the proceeds to the extent of the amount owing to it or to turn over the
goods, documents or instrument itself if not sold. (Sec. 4, P.D. 115)

What is a trust receipt (TR)?

It is the written or printed document signed by the entrustee in favor of the entruster containing
terms and conditions substantially complying with the provisions of PD 115.

What is the loan and security feature of the trust receipt transaction?
A trust receipt arrangement is endowed with its own distinctive features and characteristics.
Under that set-up, a bank extends a loan covered by the Letter of Credit, with the trust receipt as
a security for the loan. In other words, the transaction involves a loan feature represented by the
letter of credit, and a security feature which is in the covering trust receipt. A trust receipt,
therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the
goods. It secures an indebtedness and there can be no such thing as security interest that
secures no obligation. (Sps. Vintola vs. Insular Bank of Asia and America, G.R. No. 73271, May 29,
1987)

Who is the owner of the articles subject of the TR?

The entrustee. A trust receipt has two features, the loan and security features. The loan is
brought about by the fact that the entruster financed the importation or purchase of the goods
under TR. Until and unless this loan is paid, the obligation to pay subsists. If the entrustee is
made to appear as the owner, it was but an artificial expedient, more of legal fiction than fact,
for if it were really so, it could dispose of the goods in any manner that it wants, which it cannot
do. To consider the entrustee as the true owner from the inception of the transaction would be
to disregard the loan feature thereof. (Rosario Textile Mills Corp. v. Home Bankers Savings and
Trust Company, G.R. No. 137232. June 29, 2005)

What is the penal sanction if offender is a corporation?

The Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment on
a corporation. Hence, if the entrustee is a corporation, the law makes the officers or employees
or other persons responsible for the offense liable to suffer the penalty of imprisonment. The
reason is obvious, corporations, partnerships, associations and other juridical entities cannot be
put to jail. Hence, the criminal liability falls on the human agent responsible for the violation of
the Trust Receipts Law. (Ong vs. CA, G.R. No. 119858, April 29, 2003)

In the event of default by the entrustee on his obligation under the trust receipt agreement, is it
absolutely necessary for the entruster to cancel the trust and take possession of the goods to be
able to enforce his right thereunder?
The law uses the word "may" in granting to the entruster the right to cancel the trust and take
possession of the goods. Consequently, the entrustee has the discretion to avail of such right or
seek any alternative action, such as a third party claim or a separate civil action which it deems
best to protect its right, at any time upon default or failure of the entrustee to comply with any
of the terms and conditions of the trust agreement. (South City Homes, Inc. v. BA Finance
Corporation, G.R. No. 135462, Dec. 7, 2001)

What is the effect of novation of a trust agreement?

Where the entruster and entrustee entered into an agreement which provides for conditions
incompatible with the trust receipt agreement, the obligation under the trust receipt is
extinguished. Hence, the breach in the subsequent agreement does not give rise to a criminal
liability under P.D. 115 but only civil liability. (Philippine Bank v. Ong, G.R. No. 133176, Aug. 8,
2002)

Can deposits in a savings account opened by the buyer subsequent to the TR transaction be
applied to outstanding obligations under the TR account?
No, the receipt of the bank of a sum of money without reference to the trust receipt obligation
does not obligate the bank to apply the money received against the trust receipt obligation.
Neither does compensation arise because compensation is not proper when one of the debts
consists in civil liability arising from criminal. (Metropolitan Bank and Trust Co. v. Tonda, G.R. No.
134436, Aug. 16, 2000).

============ MIDTERMS ============

I. SURETY AND GUARANTY

II. REAL ESTATE MORTGAGE

(1) Characteristics

(a) Constituted to secure fulfillment of a principal obligation

(b) Constituted by the absolute owner

Dadis v. Spouses De Guzman, G.R. No. 206008, June 7, 2017

Facts:
Petitioner Delfin Domingo Dadis (Delfin) filed a Complaint for reconveyance and damages
against respondents Spouses De Guzman(Magtanggol). Delfin alleged, among others, that: he
and his deceased wife, Corazon Pajarillaga Dadis (Corazon), were the registered owners of a
parcel of land; their daughter, Marissa P. Dadis (Marissa), entered into a contract of real estate
mortgage (REM) over the subject property in favor of Magtanggol to secure a loan obligation; 7
the Spouses De Guzman made it appear that Marissa was authorized by the Spouses Dadis by
virtue of a Special Power of Attorney (SPA); the SPA was a forged document because it was never
issued by him or Corazon as the signatures contained therein are not theirs, especially so since
he was in the United States of America (USA) at the time.
In their Answer with Motion to Dismiss, the Spouses De Guzman stated that: they have
no knowledge as regards the supposed falsity of the SPA presented by Marissa and Corazon at
the time the latter pleaded to accommodate them into entering a mortgage contract; they have
no knowledge that Delfin was not in the Philippines at the time of the execution of the SPA,
which, as a duly-notarized document, was presumed to have been done regularly; and they were
in good faith from the time the property was mortgaged until it was foreclosed and they were
able to help Delfin’s family, who was financially distressed at the time.
After trial, the RTC established that Delfin was not in the Philippines, thus, he could not
have signed the SPA authorizing Marissa to mortgage the property. Without his written consent,
the mortgage is void since such act is not merely an act of administration but of ownership or
dominion on the part of Corazon. The CA reversed and set aside the RTC Decision. It conceded
that, as found by the RTC and undisputed by the parties, the SPA had been forged. As to the
issue of whether Magtanggol is a mortgagee in good faith and for value, it resolved in the
affirmative and noted that the purported SPA bears the signatures of both Corazon Pajarillaga-
Dadis and the plaintiff-appellee Delfin Domingo Dadis, the registered owners of the property
subject of the real estate mortgage and that it was duly notarized.

Issue:
W/N Magtanggol is a mortgagee in good faith.

Ruling:
 No. Cavite Development Bank v. Spouses Lim explained the doctrine of mortgagee in
good faith in this wise:
There is, however, 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 all persons dealing with the property
covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required to go beyond
what appears on the face of the title. The public interest in upholding the indefeasibility of a
certificate of title, as evidence of lawful ownership of the land or of any encumbrance thereon,
protects a buyer or mortgagee who, in good faith, relied upon what appears on the face of the
certificate of title.
The doctrine of mortgagee in good faith presupposes that the mortgagor, who is not the
rightful owner of the property, has already succeeded in obtaining a Torrens title over the
property in his or her name and that, after obtaining the said title, he or she succeeds in
mortgaging the property to another who relies on what appears on the said title.
The protection accorded by law to mortgagees in good faith cannot be extended to
mortgagees of properties that are not yet registered with the RD or registered but not under the
mortgagor's name.
When the mortgagee does not directly deal with the registered owner of the real
property, like an attorney-in-fact of the owner, it is incumbent upon the mortgagee to exercise
greater care and a higher degree of prudence in dealing with such mortgagor.
In sum, all things being equal, a person dealing with a seller who has possession and title
to the property but whose capacity to sell is restricted, qualifies as a buyer in good faith if he
proves that he inquired into the title of the seller as well as into the latters capacity to sell.
The protection accorded by law to mortgagees in good faith cannot be extended to
mortgagees of properties that are not yet registered with the RD or registered but not under the
mortgagor's name.
When the mortgagee does not directly deal with the registered owner of the real
property, like an attorney-in-fact of the owner, it is incumbent upon the mortgagee to exercise
greater care and a higher degree of prudence in dealing with such mortgagor.
In sum, all things being equal, a person dealing with a seller who has possession and title
to the property but whose capacity to sell is restricted, qualifies as a buyer in good faith if he
proves that he inquired into the title of the seller as well as into the latters capacity to sell.

Land Bank of the Philippines v. Musni, G.R. No. 206343, February 22, 2017

Facts:
Respondent Lorenzo Musni was the compulsory heir of Jovita Musni (Jovita),who was the
owner of a lot in Comillas, La Paz, Tarlac. Musni filed before the RTC of Tarlac City a complaint for
reconveyance of land and cancellation ofTCT against Spouses Nenita Sonza Santos and Ireneo
Santos, Eduardo Sonza,and Land Bank of the Philippines. Musni alleged that Nenita falsified a
Deedof Sale, and caused the transfer of title of the lot in her and her brotherEduardo's name.
Then the spouses Santos and Eduardo mortgaged the lot to Land Bank as security for their loan.
Musni said that he was dispossessed of the lot when Land Bank foreclosed the property upon
Nenita andEduardo's failure to pay their loan. Later, the titles of the lot and anotherforeclosed
land were consolidated in another TCT, under the name of LandBank. Musni also claimed that
Nenita and Eduardo was convicted for falsification of a public document which he filed against
them before theMTC of Tarlac. Land Bank filed its Amended Answer to the RTC with
Counterclaim andCrossclaim. It asserted that the transfer of the title in its name was becauseof a
decision rendered by the Department of Agrarian Reform AdjudicationBoard, Region III. It
countered that its transaction with the Spouses Santosand Eduardo was legitimate, and that it
verified the authenticity of the title with the Register of Deeds. Further, the bank loan was
secured by another lot owned by the Spouses Santos, and not solely by the lot being claimed by
Musni. Land Bank prayed that it be paid the value of the property and theexpenses it incurred,
should the trial court order the reconveyance of theproperty to Musni.On June 2008, the RTC
ruled in favor of Musni, relying on the fact that Nenitawas convicted of falsification of the Deed
of Sale. The RTC found that Musnidid not agree to sell the property to the Spouses Santos and
Eduardo. Inaddition, the amount of Musni's indebtedness was an insufficientconsideration for
the market value of the property. Lastly, the sale wasexecuted before the loan's maturity. The
RTC also found that Land Bank was not an innocent purchaser for value. The institution of the
criminal case against Nenita should have alerted the bank to ascertain the ownership of the lot
before it foreclosed the same. Land Bank and Nenita separately moved for reconsideration,
which were both denied by the RTC. Land Bank and Spouses Santos separately appealed to the
CA. In its appeal, Land Bank reiterated that "it has demonstrated, by a preponderance of
evidence, that it is a mortgagee in good faith and a subsequent innocent purchaser for value; as
such, its rights as the new owner of the subject property must be respected and protected by
the courts. However, the CA ruled in favor of Musni. Land Bank moved for reconsideration, but
the same was denied.

Issue:
W/N LBP is a mortgagee in good faith and an innocent purchaser for value; and is entitled
to damages.

Held:
No. Petitioner is neither a mortgagee in good faith nor an innocent purchaser for value.
Petitioner's defense that it could not have known the criminal action since it was not a party to
the case and that there was no notice of lis pendens filed by respondent Musni, is unavailing.
Had petitioner exercised the degree of diligence required of banks, it would have ascertained the
ownership of one of the properties mortgaged to it. Where "the findings of fact of the trial
courts are affirmed by the Court of Appeals, the same are accorded the highest degree of
respect and, generally, will notbe disturbed on appeal. Such findings are binding and conclusive
on this Court."
Accordingly, this Court finds no reason to disturb the findings of the Court of Appeals,
which affirmed the findings of the trial court, that petitioner is neither a mortgagee in good faith
nor an innocent purchaser for value. Likewise, the petitioner is not entitled to the award of
damages. In its Decision, the trial court ordered respondents Nenita and Eduardo to pay
petitioner damages in the amount equivalent to the appraised value of the property being
claimed by respondent Musni. The Court of Appeals deleted the award. It considered the grant
of award as a partial extinguishment of the real estate mortgage, which is not allowed. Since the
mortgage is indivisible, the Court of Appeals nullified the real estate mortgage involving the two
properties, and deleted the award. Although the Court of Appeals' basis for deleting the award is
erroneous, this Court affirms the removal on a different ground since petitioner did not seek
relief from the Court with clean hands. Petitioner may have incurred losses when it entered into
the mortgage transaction with respondents Spouses Santos and Eduardo, and the corresponding
foreclosure sale. However, the losses could have been avoided if only petitioner exercised the
required due diligence.
Primarily, it bears noting that the doctrine of "mortgagee in good faith" is based on the
rule that all persons dealing with property covered by a Torrens Certificate of Title are not
required to go beyond what appears on the face of the title.
In the case of banks and other financial institutions, however, greater care and due
diligence are required since they are imbued with public interest, failing which renders the
mortgagees in bad faith.
Primarily, it bears noting that the doctrine of "mortgagee in good faith" is based on the
rule that all persons dealing with property covered by a Torrens Certificate of Title are not
required to go beyond what appears on the face of the title.
In the case of banks and other financial institutions, however, greater care and due
diligence are required since they are imbued with public interest, failing which renders the
mortgagees in bad faith.

Prudential Bank v. Rapanot, G.R. No. 191636, January 16, 2017

Facts:
Golden Dragon Real Estate Corporation (Golden Dragon) is the developer of Wack-Wack
Twin Towers Condominium in Mandaluyong City. Ronald Rapanot (Ronald) bought Unit 2308-
B2, on May 9, 1995. On September 13, 1995, the Bank of the Philippine Islands, formerly known
as Prudential Bank (Bank), extended a loan to Golden Dragon in the amount of P50,000,000.00
to be utilized by the latter as additional working capital. To secure the loan, Golden Dragon
executed a mortgage Agreement in favor of the Bank, which had the effect of constituting a real
estate mortgage over several condominium units owned and registered under Golden Dragon’s
name. Unit 2308-B2 is among said units subject of said mortgage agreement.
Ronald made several verbal demands for the delivery of Unit 2308-B2, being its lawful
owner, but to no avail. Hence he filed a complaint before the Expanded National Capital Region
Field Office of the Housing and Land Use Regulatory Board (HLURB). No settlement was arrived
at before the said Office. The Arbiter rendered a decision on July 3, 2002, in favor of Ronald,
directing Golden Dragon and the Bank to deliver to Ronald the title of the condominium unit and
to pay damages and costs.
On January 16, 2003, the Bank filed a Petition for Review with the HLURB Board
Commissioner, who, in turn affirmed the decision of the HLURB. Thereafter the Bank went to
the Office of the President, which denied its appeal declaring that the Bank was given due
process, and adopted the ruling of the HLURB. Again, the Bank appealed to the Court of
Appeals, who in turn affirmed the decision of the HLURB.

Issues:
1. W/N the Court of Appeals erred when it affirmed the resolution of the Office of the President
finding that the Bank had been afforded due process before the HLURB; and
2. W/N the Court of Appeals erred when it affirmed the resolution of the Office of the President
that the Bank cannot be considered a mortgagee in good faith.

Held:
NO. The Bank was not deprived of due process before the HLURB. The Bank was able to
set out its position by participating in the preliminary hearing and the scheduled conferences
before the Arbiter and even assert its special and affirmative defenses in its Answer to Ronald’s
claim.
It was a clear fact that the Arbiter merely acted in accordance with the 1996 Rules of
Procedure of the HLURB when it rendered its decision on the basis of the pleadings and records
submitted by the parties.
The mortgage agreement is null and void against Ronald, and thus cannot be enforced
against him. The Bank failed to take note of Section 18 of Presidential Decree No. 957 which
states: no mortgage on any unit or lot shall be made by the owner or developer without prior
approval of the Authority. The mortgage entered into by and between the Bank and Golden
Dragon violates the said provision. Ronald, who was the buyer of the subject condominium unit,
was not notified of the mortgage before the release of the loan proceeds by the Bank. It was an
act executed against the provisions of mandatory prohibitory laws, hence, void because of the
Bank’s failure to comply with PD 957.
While a mortgagee is not under obligation to look beyond the certificate of title, the
nature of petitioner's business requires it to take further steps to assure that there are no
encumbrances or liens on the mortgaged property, especially since it knew that it was dealing
with a condominium developer.
It cannot feign lack of knowledge of the sales activities of Golden Dragon since, as an
extender of credit, it is aware of the practices, both good or bad, of condominium developers.
Since petitioner was negligent in its duty to investigate the status of the properties offered to it
as collateral, it cannot claim that it was a mortgagee in good faith.

(c) Constituted by one who has free disposal of the property or should be legally
authorized for the purpose

(d) Things mortgaged may be alienated at the instance of the creditor for payment of
the principal obligation (Article 2087).

- Pactum Commissorium: (i) there is a mortgage wherein property is mortgaged

by way of security for the payment of principal obligation, and (b) there
 should be a stipulation for an automatic appropriation by the creditor of the
thing mortgaged in the event of non-payment of the principal obligation

Spouses Pen v. Spouses Julian, G.R. No. 160408, January 11, 2016

Facts:
The appellees (the Julians) obtained two (2) loans from appellant Adelaida Pen. Two (2)
promissory notes were executed by the appellees in favor of Adelaida to evidence the foregoing
loans. Both Joans were charged interest at 6% per month. As security, on May 23, 1986, the
Julians executed a Real Estate Mortgage over their real property registered under the name of
Santos Julian, which was delivered to Adelaida.When the loans became due and demandable,
they failed to pay. Hence, Adelaida decided institute foreclosure proceedings. However,
she was prevailed upon by Linda not to foreclose the property and instead offered their
mortgaged property as payment in kind. The Julians executed a Deed of Sale. Title to the
property was transferred to Adelaida. Linda offered twice to repurchase the property payable in
cash but failed to repurchase the same. Linda offered to pay P100,000.00 in cash as sign of
good faith. The offer was rejected by appellant Adelaida. However, Adelaida held the money only
for safekeeping upon the pleading of appellee Linda. Upon the agreement of the parties, the
amount of P100,000.00 was deducted from the balance of the appellees' indebtedness,
however, allege that instead of paying their balance, the Julians instituted a civil complaint and
filed an adverse claim and lis pendens.
On the other hand, the Julians aver that at that time the mortgage was executed, they
were likewise required by Adelaida to sign a one (1) page document purportedly an "Absolute
Deed of Sale". Said document did not contain any consideration, and was "undated,
unfilled and unnotarized". Linda Julian offered to pay appellant Adelaida the amount of
P150,000.00. The latter refused to accept the offer and demanded that she be paid the amount
of P250,000.00. Unable to meet the demand, Linda desisted from the offer and requested that
she be shown the land title which she conveyed to Adelaida, but the latter refused. Upon
verification with the Registry of Deeds of Quezon City, she was informed that the title to the
mortgaged property had already been registered in the name of Adelaida. Linda filed an
Affidavit of Adverse Claim and formally demanded the reconveyance of the title and/or
the property to them, but the appellants refused. Linda also discovered that Adelaida have
obtained several Declarations of Real Property, and a Deed of Sale which indicates a
consideration of P70,000.00 for the lot, and was made to appear as having been executed on
October 22, 1986. The Julians filed a suit for the
Cancellation of Sale, Cancellation of Title issued to the appellants; Recovery of Possession;
Damages with Prayer for Preliminary Injunction. The complaint alleged that appellant Adelaida,
through obvious bad faith, maliciously typed, unilaterally filled up, and caused to be notarized
the Deed of Sale earlier signed by Julians and used this spurious deed of sale as the vehicle for
her fraudulent transfer unto herself the parcel of land. The RTC ruled in favor of the respondents
that the parties had not agreed on the consideration for the sale at the time they signed the
deed of sale; that in the absence of the consideration, the sale lacked one of the essential
requisites of a valid contract. The CA pronounced the deed of sale as void but not because of the
supposed lack of consideration as the R TC had indicated, but because of the deed of sale having
been executed at the same time as the real estate mortgage, which rendered the sale
as a prohibited pactum commissorium in light of the fact that the deed of sale was blank as to
the consideration and the date, which details would be filled out upon the default by the
respondents.

Issue:
Whether or not the deed of sale is valid.

Held:
The Deed of Sale is void. Article 2088 of the Civil Code prohibits the creditor from
appropriating the things given by way of pledge or mortgage, or from disposing of them;
any stipulation to the contrary is null and void.
`The elements for pactum commissorium to exist are as follows, to wit:
(a) that there should be a pledge or mortgage wherein property is pledged or mortgaged by
way of security for the payment of the principal obligation; and
(b) that there should be a stipulation for an automatic appropriation by the creditor
of the thing pledged or mortgaged in the event of non- payment of the principal
obligation within the stipulated period.
The first element was present considering that the property of the respondents was
mortgaged by Linda in favor of Adelaida as security for the farmer's indebtedness. As to the
second, the authorization for Adelaida to appropriate the property subject of the mortgage upon
Linda's default was implied from Linda's having signed the blank deed of sale simultaneously
with her signing of the real estate mortgage. The haste with which the transfer of property was
made upon the default by Linda on her obligation, and the eventual transfer of the property in a
manner not in the form of a valid dacion en pago ultimately confirmed the nature of the
transaction as a pactum commissorium.
It is notable that in reaching its conclusion that Linda's deed of sale had been executed
simultaneously with the real estate mortgage, the CA first compared the unfilled deed of sale
presented by Linda with the notarized deed of sale adduced by Adelaida. The CA justly deduced
that the completion and execution of the deed of sale had been conditioned on the non-
payment of the debt by Linda, and reasonably pronounced that such circumstances rendered the
transaction pactum commissorium.
The Court should not disturb or undo the CA's conclusion in the absence of the clear
showing of abuse, arbitrariness or capriciousness on the part of the CA. The petitioners have
theorized that their transaction with the respondents was a valid dacion en pago by highlighting
that it was Linda who had offered to sell her property upon her default. Their theory cannot
stand scrutiny. Dacion en pago is in the nature of a sale because property is alienated in favor of
the creditor in satisfaction of a debt in money. For a valid dacion en pago to transpire, however,
the attendance of the following elements must be established, namely:
(a) the existence of a money obligation;
(b) the alienation to the creditor of a property by the debtor with the consent of the former; and
(c) the satisfaction of the money obligation of the debtor.
 To have a valid dacion en pago, therefore, the alienation of the property must fully
extinguish the debt. Yet, the debt of the respondents subsisted despite the transfer of the
property in favor of Adelaida. The petitioners insist that the parties agreed that the deed of sale
would not yet contain the date and the consideration because they had still to agree on the
price. Their insistence is not supported by the established circumstances. It appears that two
days after the loan fell due on October 15, 1986, Linda offered to sell the mortgaged property;
hence, the parties made the ocular inspection of the premises on October 18, 1986. By that
time, Adelaida had already become aware that the appraiser had valued the
property at P70,000.00. If that was so, there was no plausible reason for still leaving the
consideration on the deed of sale blank if the deed was drafted by Adelaida on October 20,
1986, especially considering that they could have conveniently communicated with each other in
the meanwhile on this significant aspect of their transaction. It was also improbable for Adelaida
to still hand the unfilled deed of sale to Linda as her copy if, after all, the deed of sale would be
eventually notarized on October 22, 1986. According to Article 1318 of the Civil Code, the
requisites for any contract to be valid are, namely: (a) the consent of the contracting
parties; (b) the object; and (c) the consideration. There is a perfection of a contract when there
is a meeting of the minds of the parties on each of these requisites.
Xxx In a sale, the contract is perfected at the moment when the seller obligates herself to deliver
and to transfer ownership of a thing or right to the buyer for a price certain, as to which the
latter agrees. The absence of the consideration from Linda's copy of the deed of sale was
credible proof of the lack of an essential requisite for the sale. In other words, the meeting of the
minds of the parties so vital in the perfection of the contract of sale did not transpire. And, even
assuming that Linda's leaving the consideration blank implied the authority of Adelaida to fill in
that essential detail in the deed of sale upon Linda's default on the loan, the conclusion of the CA
that the deed of sale was a pactum commisorium still holds, for, as earlier mentioned, all the
elements of pactum commisorium were present.
WHEREFORE, the Court AFFIRMS the decision of the CA.

Home Guaranty Corp. v. La Savoie Development Corp., G.R. No. 168616, January 28, 2015

FACTS:
Home Guaranty prays that certain properties supposedly conveyed by La Savoie Development
Corporation (LSDC) to petitioner be excluded from rehabilitation plan of LSDC should its Petition
for Corporate Rehabilitation be given course. La Savioe is a domestic corporation engaged in real
estate development, subdivision and brokering.
With the onset of the Asian financial crisis in 1997, low demand for real estate properties, lack of
working capital etc. La Savioe found itself unable to pay its obligations to its creditors. La Savoie
filed a petition for the declaration of state of suspension of payments with approval of proposed
rehabilitation plan.”
The RTC finding the petition of the respondent to be sufficient in form and substance issued a
Stay Order staying the enforcement of all claims against La Savoie.
As a consequence of the Stay Order, petitioner is prohibited from selling, encumbering,
transferring, or disposing in any manner of its properties except in the ordinary course of
business. It is also prohibited from making any payment of its liabilities outstanding as of April
23, 2003.
Home Guaranty Corp. noted that through the La Savoie Asset Pool Formation and Trust
Agreement, La Savioe obtained financing for some of its projects through asset securization
process in which a nominal issuer (Planters Dev’t Bank) issue 150M pesos in asset participation
certificates dubbed as the LSDC certificated to be sold to investors.
LSDC certificates were covered by a guaranty extended by Home Guaranty Corp.
Home Guaranty Corp. argued that it and investors on the LSDC certificates had “preferential
rights” over the properties making up the Asset Pool as these “were conveyed as security or
collaterals for the redemption of the LSDC certificates. Thus, they should be executed from the
coverage of La Savoie’s Petition for Rehabilitation.
In the meantime, Home Guaranty Corporation approved and processed call on the guaranty for
the redemption of the LSDC certificates. Thus, Home Guaranty Corp., through Planters
Development Bank, paid a total of P128.5M as redemption value to certificate holders.
Acting on this, Planters Dev’t Bank executed a Deed of Assignment and Conveyance in favour of
Home Guaranty Corp, Planters Dev’t Bank “absolutely conveyed and assigned to Home Guaranty
Corp the ownership and possession of the entire assets that formed part of the La Savoie Asset
Pool.”
Home Guaranty argued that all of the properties comprising the Asset Pool should be excluded
from the rehabilitation proceedings in view of the Deed of Assignment and Conveyance executed
in its favour by Planters Dev’t Bank.

ISSUE:
Whether or not the transfer made to Home Guaranty on the strength of the Deed of Conveyance
was valid.

RULING:
NO. The Court found that its execution violates the prohibition against pactum commissorium.
Hence it is void and ineffectual and does not serve to vest ownership in Home Guaranty.
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 non-payment of the principal obligation within the stipulated
period.
This case, Sections 13.1 and 13.2 of the Contract of Guaranty call for the "prompt assignment
and conveyance to [Home Guaranty Corporation] of all the corresponding properties in the Asset
Pool" that are held as security in favor of the guarantor.
Moreover, Sections 13.1 and 13.2 dispense with the need of conducting foreclosure
proceedings, judicial or otherwise.
Albeit requiring the intervention of the trustee of the Asset Pool, Sections 13.1 and 13.2 spell out
what is, for all intents and purposes, the automatic appropriation by the paying guarantor of the
properties held as security.
This is thus a clear case of pactum commissorium. It is null and void. Accordingly, whatever
conveyance was made by Planters Development Bank to Home Guaranty Corporation in view of
this illicit stipulation is ineffectual. It did not vest ownership in Home Guaranty Corporation.

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

Facts:
Lourdes V. Galas (Galas) was the original owner of a piece of property (subject property), which
she mortgaged to Yolanda Valdez Villar (Villar) as security for a loan.
Galas subsequently mortgaged the same subject property to Pablo P. Garcia (Garcia) to secure
another loan. Both mortgages were annotated on the subject property’s TCT.
Galas thereafter sold the subject property to Villar. The Deed of Sale was registered and,
consequently, a new TCT was issued in the name of Villar. Both Villar’s and Garcia’s mortgages
were carried over and annotated on Villar’s new TCT.
Garcia filed a Petition for Mandamus with Damages against Villar before the RTC. Garcia
subsequently amended his petition to a Complaint for Foreclosure of Real Estate Mortgage with
Damages and alleged that when Villar purchased the subject property, she acted in bad faith as
she knowingly and willfully disregarded the laws on judicial and extrajudicial foreclosure of
mortgaged property.
The RTC ruled in favor of Garcia and ordered Villar to pay the former the sum of P1.8M (the
amount of the loan secured by the mortgage) plus legal interest. The RTC declared that the
direct sale of the subject property to Villar, the first mortgagee, could not operate to deprive
Garcia of his right as a second mortgagee. The RTC further explained that upon Galas’s failure to
pay her obligation, Villar should have foreclosed the subject property to provide junior
mortgagees like Garcia the opportunity to satisfy their claims from the residue, if any, of the
foreclosure sale proceeds.
Villar appealed and contended that the second mortgage is a void and inexistent contract. The
Court of Appeals reversed the RTC’s decision and declared that Galas was free to mortgage the
subject property even without Villar’s consent as the restriction that the mortgagees consent
was necessary in case of a subsequent encumbrance was absent in the Deed
of Real Estate Mortgage. However, the Court of Appeals held that the sale of the subject
property to Villar was valid as it found nothing in the records that would show that Galas violated
the Deed of Real Estate Mortgage prior to the sale.
Garcia appealed to the Supreme Court, with the same arguments he posited before the lower
courts, but added that the Deed of Real Estate Mortgage contained a stipulation, which is
violative of the prohibition on pactum commissorium.

Issue:
Whether or not the sale of the subject property to Villar was in violation of the
prohibition on pactum commissorium

Ruling:
No. The sale of the subject property does not violate the prohibition on pactum commissorium.
Garcia claims that the stipulation appointing Villar, the mortgagee, as the mortgagor’s attorney-
in-fact, to sell the property in case of default in the payment of the loan, is in violation of the
prohibition on pactum commissorium, as stated under Article 2088 of the Civil Code.
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 non-payment of the principal obligation within the stipulated period.
Villar’s purchase of the subject property did not violate the prohibition on pactum
commissorium. The power of attorney provision above did not provide that the ownership over
the subject property would automatically pass to Villar upon Galas’s failure to pay the loan on
time. What it granted was the mere appointment of Villar as attorney-infact,
with authority to sell or otherwise dispose of the subject property, and to apply the proceeds to
the payment of the loan. This provision is customary in mortgage contracts, and is in conformity
with Article 2087 of the Civil Code, which reads:

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

Galas’s decision to eventually sell the subject property to Villar was well within the scope of her
rights as the owner of the subject property. The subject property was transferred to Villar by
virtue of another and separate contract, which is the Deed of Sale. Garcia never alleged that the
transfer of the subject property to Villar was automatic upon Galas’s failure to discharge her
debt, or that the sale was simulated to cover up such automatic transfer.

Yau Chu v. Court of Appeals, 177 SCRA 793 [1989]

Short Version: Victoria bought cement from CAMS and secured her payments with deeds of
assignment over her time deposits in Family Savings Bank. She assigned about P320K worth but
her obligations to CAMS came up to about P404K. CAMS requested the bank to encash the time
deposit certificates, which the bank did only after calling up and obtaining Victoria’s consent.
Victoria then sued the bank and CAMS for alleged pactum commissorium. The Court ruled
against her, as the prohibition on pactum commissorium was enacted in order to protect
debtors from creditors who automatically appropriate pledged or mortgaged property which
might have a higher value than the debt. Where the security for the debt is also money
deposited in a bank, the amount of which is even less than the debt, it is not illegal for the
creditor to encash the time deposit certificates to pay the debtors’ overdue obligation, with the
latter’s consent.

FACTS:
Since 1980, Victoria Yau Chu had been purchasing cement on credit from CAMS. To
guaranty payment for her cement withdrawals, she executed in favor of CAMS deeds of
assignment of her time deposits in Family Savings Bank. The total amount came up to P320K.
Except for serial numbers and the dates of the time deposit certificates, the deeds of assignment
prepared by Victoria’s lawyer uniformly read:
... That the assignment serves as a collateral or guarantee for the payment of my obligation with
the said CAMS TRADING ENTERPRISES, INC. on account of my cement withdrawal from said
company, per separate contract executed between us.

In July 1980, CAMS notified the bank that Victoria had an unpaid account with it in the
sum of about P314K and requested the encashment of the time deposit certificates assigned to it
by Victoria. As proof, it submitted to the bank a letter from Victoria admitting her outstanding
account with CAMS reaching P404.5K. The bank verbally advised Victoria of CAMS’ request and
after she verbally agreed, the bank encashed the certificates and delivered about P283K because
one time deposit lacked the proper signatures. Victoria then turned around and demanded that
the bank and CAMS restore her time deposit. When both refused, she filed a complaint to
recover the sum from them before the RTC of Makati. The RTC dismissed the complaint for lack
of merit. Court of Appeals affirmed. Before the Supreme Court she argued that the encashment
of her time deposit certificates was pactum commissorium.

ISSUE: W/N the encashment of Victoria’s time deposit certificates amounted to pactum
commissorium.

RULING:
NO. Since the collateral in this case was also money, there was no need to sell the thing
pledged at public auction in order to satisfy the pledgor’s obligation. All that had to be done to
convert the pledgor's time deposit certificates into cash was to present them to the bank for
encashment after due notice to the debtor. The encashment of the deposit certificates was not a
pactum commissorium as prohibited under Article 2088 of the Civil Code. A pactum
commissorium is a provision for the automatic appropriation of the pledged or mortgaged
property by the creditor in payment of the loan upon its maturity. This prohibition is intended to
protect the obligor, pledgor, or mortgagor against being overreached by his creditor who holds a
pledge or mortgage over property whose value is much more than the debt. Where, as in this
case, the security for the debt is also money deposited in a bank, the amount of which is even
less than the debt, it is not illegal for the creditor to encash the time deposit certificates to pay
the debtors’ overdue obligation, with the latter’s consent.

(e) Mortgage is indivisible

(i) Partial payment does not

(2) Object: (i) Immovables and (2) Alienable real rights

(3) Consideration: As to the pledgee, the consideration of the principal credit supports
the pledge
 (4) Form: Section 112 of the Land Registration Decree; Article 2125 of the Civil Code

Coca-Cola Bottlers Phils., Inc. v. Spouses Soriano, G.R. No. 211232, April 11, 2018

FACTS:
Spouses Soriano are engaged in selling Coca-cola products in Tuguegarao City, Cagayan.
Sometime in 1999, Coke’s manager, Cipriano, told the spouses that Coke, as supplier, needs
security for the continuation of their business. Thus, the spouses signed a document which
appeared to be a real estate mortgage deed and they surrendered two titles to Cipriano. The
latter told them that it is just for formality and the deed will not be notarized. After sometime,
the spouses told Cipriano that they will not be continuing their business anymore due to
advanced age. They demanded for the return of the titles, but to no avail. When the spouses
were contemplating to file for issuance of new titles, they learned that the subject lands were
already foreclosed by Coke. The spouses filed for annulment of sheriff’s sale alleging that they
did not sign any mortgage deed and they were not notified of the sale. Claiming there was fraud
on the part of Cipriano in obtaining their signatures in the deed, they pray that the deed be
nullified. The RTC granted the complaint. It nullified the real estate mortgage deed and the
foreclosure proceedings. On appeal, the CA upheld the invalidity of the deed for failure to satisfy
the required form. Thus, Coke elevated the present controversy to the high court.

ISSUE:
1. W/N Cipriano employ fraud in the obtaining the signatures of the spouses in the real estate
mortgage deed.
2. W/N the REM undertaken by the respondents is valid.

RULING:
1. NO. Under Art. 1344 of the New Civil Code, fraud, as a ground for annulment of a contract,
should be serious and should not have been employed by both parties. Meanwhile, Art. 1338
provides that there is fraud when through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract, without them, he would not
have agreed to. Here, there was no allegation of forgery in the signatures. The spouses readily
admitted that they signed the deed, only that Cipriano made them to believe that the same will
not be notarized. Coupled by the fact of the surrender of the two titles, the claim of fraud is not
convincing. Other than bare allegations, the spouses’ claim of fraud is not supported by
preponderance of evidence. Likewise, the failure to comply with the formalities of law does not
render the deed invalid. The formal requisites are necessary in its registrability. Without such
registration, it cannot bind third persons. Nevertheless, the deed is with force and effect as
between the parties.

2. Art. 1358(1) The following must appear in public documents:

1.) Acts and contracts which have for their object the creation, transmission,
modification, or extinguishment of real rights over immovable property or of an interest therein
are governed by Art. 1403[2], and 1405.
 The respondents argue that the REM agreement is not a public document because it was
notarized by a Clerk of Court of the RTC, who is not allowed by law to notarize public documents
not related to the functions as the clerk of court.
Nonetheless, the defective notarization of the REM agreement merely strips it of its
public character and reduces it to a private document. The failure to observe such form, as
provided by Art. 1358, does not render the transaction invalid. The necessity of a public
document for the said contracts is only for the convenience; it is not essential for its validity or
enforceability. Consequently, when there is a defect in the notarization of a document, the clear
and convincing evidentiary standard originally attached to a duly-notarized document is
dispensed with, and the measure to test the validity of such document is preponderance of
evidence. In light of the foregoing, We find merit in petitioner's argument that the due execution
and genuineness of the REM deed was impliedly admitted by the respondents when they
admitted signing the same.

(5) Effect:

(a) A real right is created (Article 2126)

(b) Extension to Accessions and Accessories (Article 2127)

Luzon Lumber and Hardware Company, Inc. v. Quiambao, G.R. No. L-5638. March 30, 1954.

FACTS:
Manuel Quiambao and his wife Virginia Santiago, owners of three lots in the province of
Tarlac covered by Certificates of Title Nos. 22607, 4217 and 4218, mortgaged the said lots on
July 20, 1948, in favor of the Rehabilitation Finance Corporation (RFC) to secure the payment of
a loan in the amount of P37,000 which sum was to be spent for the construction of two
buildings, one for a hotel and the other for residence. The mortgage was registered on
September 13th of the same year. The two buildings were subsequently constructed on the lot
covered by Certificate of Title No. 22607. Upon violation of the terms of the mortgage, the RFC
foreclosed the same and, in the auction sale, said RFC, as highest bidder, was awarded the
mortgaged properties for the total sum of P31,000 followed by the issuance of the
corresponding Transfer Certificates of Title. The hotel and residence buildings were valued at
P18,000 and P4,000, respectively.
In the edification of the two buildings, the spouses bought on credit construction
materials valued at about P7,000 from the plaintiff Luzon Lumber & Hardware Co. Said building
materials were furnished by the lumber company between October 1948 and March 1949. Only
P3,500 of this amount was paid, leaving an unpaid balance of P3,456.50. To recover this balance
including interests and attorney's fees the lumber company filed this suit against the spouses,
the complaint being later amended so as to include the RFC as party defendant. According to the
RFC said amendment was made about a week after the auction sale of the foreclosed properties.
After hearing, the Court of First Instance of Tarlac rendered judgment ordering the
defendant spouses Manuel and Virginia to pay to the plaintiff lumber company the sum of
P3,456.49 with legal interests and in default of such payment by them, the RFC was ordered to
pay to plaintiff out of the proceeds of the sale of the hotel and the house, the said sum of
P3,456.49 together with the corresponding legal interests thereon. The RFC is appealing from
that decision.

ISSUE:
W/N a registered mortgage is preferred over a refectionary credit on construction
materials.

HELD:
Yes. Reversed. Art. 2242 (claims, mortgages & liens that constitute encumbrance over
specific immovable property) and 2253 (effectivity of law & non-impairment of vested rights
clause) of the New Civil Code may not be applied in the instant case for the reason that the
credit of the plaintiff is not a new right or one declared for the first time, a condition required by
Article 2253 of the new Civil Code for its enforcement and application, because said right was
already provided for by article 1923 of the old Civil Code particularly paragraphs 3 and 5. The
question now to be decided is whether the furnishing of lumber and building materials by the
plaintiff for the construction of the two buildings of the spouses falls under refection credit
mentioned in paragraphs 3 and 5.
Refectionary credit is primarily an indebtedness incurred in the repair or reconstruction
of something and does not ordinarily include an entirely new work, but that Spanish
jurisprudence appears to have sanctioned in certain cases this broader view to include a new
work or construction. The word "refaccionario" from which come the English translation of
"refectionary" is derived from the Latin verb "refacio", "refacere", meaning "rehacer" which
implies the idea of reconstruction or repair for reason of destruction or deterioration. As already
said, that was the original idea of the word "refectionary". The liberal interpretation of the
refectionary credit to include new construction is upheld in the ENCICLOPEDIA JURIDICA
ESPAÑOLA. And this view is shared by our Code Commission which prepared the new Civil Code.
In its Report on the proposed Civil Code of the Philippines (now our new Civil Code) which went
into effect in 1950, referring to article 2242 of the new Code, it said that the new encumbrances
in said article are Nos. 2, 3, 6, 7 and 9, meaning to say that paragraph 4 referring to claims of
furnishers of materials used in the construction, reconstruction or repair of building which as
invoked by the plaintiff and applied by the trial court is not a new provision, clearly implying that
it was already provided for in article 1923, paragraphs 3 and 5 under refectionary credits. This
liberal view and interpretation of refectionary credit is in consonance with principles of justice
and fairness, for there seems to be no valid reason why one furnishing material for purposes of
repair or reconstruction should be given preference while another furnishing material on new
construction is not given the same consideration.
With respect to the holding of the trial court that in point of time the credit of the
plaintiff enjoys priority over that of the RFC for the reason that according to said court the lien of
the plaintiff vested when the materials were furnished while the mortgage credit of the RFC
vested only when the buildings were constructed, we must not forget that according to the facts
of the case the loan of P37,000 was given to the spouses to construct the two buildings, and that
under the terms of the deed of mortgage, not only the lots but also all the improvements now
existing or which may hereafter be constructed on the mortgaged property are included. In
other words, the mortgage in favor of the defendant RFC not only enjoyed the presumption
provided by law that a mortgage includes all improvements on the land mortgaged when the
obligation falls due, but there was an express stipulation to include all buildings and
improvements thereafter to be constructed on the mortgaged premises. This lien on all
improvements vested on the day and hour the mortgage was registered - about one month
before plaintiff began furnishing materials for construction. One of the purposes of the creation
of the RFC was to finance the construction and reconstruction of buildings for purposes of
rehabilitation. We may even take judicial notice of the fact that the security of the loans from
the RFC is based mainly on the buildings and constructions themselves, and that to assure that
the loans are spent for the said construction, the money is sometimes given on the installment
basis, that is, so much money is released by the RFC as the construction progresses. This is to
show the intimate relation between an RFC loan and the construction financed by it, for
purposes of security.
In the discussion of this case among the members of this Tribunal, there was a
suggestion, even a contention that the credit of the plaintiff herein might be made to fall under
article 1922 of the old Civil Code (preferred encumbrances over personal property). But we
believe that the two buildings in question constructed partly with building materials furnished by
the plaintiff may not be considered as personal property under article 1922. Once said building
materials were used in the construction and had become part of the building, they lost their
classification as personal property and become real property. It is true that in the case of Unson
vs. Orquije, et al., 50 Phil., 160, this Tribunal applied the provision of article 1922, paragraph 1,
referring to the purchase price of personal property in the possession of the debtor (machinery
and grinder sold to the Capiz Central and installed in its building), the reason being that said
machinery and grinder did not lose their form and substance and they preserved their identity.
Besides, they could easily be removed from the building of the Central.
May the same thing be said in the present case as regards the building materials which
went into the construction of the hotel and the house? The answer can be given only in the
negative. Said materials had already become part of the two buildings either as posts, frames,
floor, partition, roof, etc. They have lost their form and identity and had become part of the
buildings which are real property. There is another circumstance in this case which greatly
weakens plaintiff's claim. While as already stated, appellant RFC's mortgage which included the
two buildings in question was recorded in September 1948, thus serving as notice to third
parties including the plaintiff, the latter began furnishing building materials for the construction
of the two buildings only in October 1948, that is the month following, and what is more, the
evidence fails to show that it was ever recorded in the Registry of Deeds, so that said refection
credit comes not under paragraph 3 of article 1923 of the old Civil Code, as does the RFC
mortgage, but under paragraph 5 of the same article under unregistered and unrecorded
refection credits.

Ramos v. Philippine National Bank, G.R. No. 178218, December 14, 2011.

Ratio: As a general rule, a mortgage liability is usually limited to the amount mentioned in the
contract. However, the amounts named as consideration in a contract of mortgage do not limit
the amount for which the mortgage may stand as security if, from the four corners of the
instrument, the intent to secure future and other indebtedness can be gathered. This stipulation
is valid and binding between the parties and is known as the "blanket mortgage clause" also
known as the "dragnet clause.”

FACTS:
In 1973, Luis Ramos obtained a credit line under an agricultural loan account from the
Philippine National Bank (PNB) for P83,000.00. To secure the loan, the parties executed a Real
Estate Mortgage on October 23, 1973, the relevant provisions of which stated:
That for and in consideration of certain loans, overdrafts and other credit
accommodations obtained from the Mortgagee, which is hereby fixed at P83,000.00 Philippine
Currency and to secure the payment of the same and those others that the Mortgagee may
extend to the Mortgagor, x x x.
Luis Ramos would renew the loan every year after paying the amounts falling due
therein.
On March 31, 1989, Luis Ramos and PNB entered into a Credit Line Agreement in the amount of
P50,000,000.00 under the bank’s sugar quedan financing program. The agreement pertinently
provided thus:
For and in consideration of the Bank agreeing to extend to the Borrower a Revolving
Credit Line (the “Line”) in an amount not to exceed PESOS: FIFTY MILLION ONLY
(P50,000,000.00), under the Bank’s Sugar Quedan Financing Program for Crop Year 88/89.
Meanwhile, on August 7, 1989, the spouses Luis Ramos and Ramona Ramos (spouses
Ramos) also obtained an agricultural loan of P160,000.00 from PNB. Said loan was evidenced by
a promissory note issued by the spouses on even date. The said loan was secured by the real
estate mortgage previously executed by the parties on October 23, 1973.
On November 2, 1990, the spouses Ramos fully settled the agricultural loan of
P160,000.00. They then demanded from PNB the release of the real estate mortgage. PNB,
however, refused to heed the spouses’ demand.
On February 28, 1996, the spouses Ramos filed a complaint for Specific Performance
against the PNB. The spouses claimed that the actions of PNB impaired their rights in the
properties included in the real estate mortgage. They alleged that they lost business
opportunities since they could not raise enough capital, which they could have acquired by
mortgaging or disposing of the said properties. The spouses Ramos prayed for the trial court to
order PNB to release the real estate mortgage on their properties and to return to the spouses
the TCTs of the properties subject of the mortgage. In its Answer, PNB countered that the
spouses Ramos had no cause of action against it since the latter knew that the real estate
mortgage secured not only their P160,000.00 agricultural loan but also the other loans the
spouses obtained from the bank. Specifically, PNB alleged that the spouses’ sugar quedan
financing loan of P15,600,000.00 remained unpaid as the quedans were dishonored by the
warehouseman Noah’s Ark. PNB averred that it filed a civil action for specific performance
against Noah’s Ark involving the quedans and the case was still pending at that time. As PNB was
still unable to collect on the quedans, it claimed that the spouses Ramos’ loan obligations were
yet to be fully satisfied. Thus, PNB argued that it could not release the real estate mortgage in
favor of the spouses.
ISSUE:
Should the general terms of the real estate mortgage executed by borrower Luis T. Ramos in
favor of lender PNB be understood to include in its coverage the borrower’s sugar quedan
financing loan that is different from his agricultural crop loan undisputedly agreed upon by the
parties to be covered by the collateral?

HELD:
There is no reason to overturn the assailed ruling of the Court of Appeals that the
contract of pledge between petitioners and PNB was not terminated by the Authorization letter
issued by Luis Ramos in favor of PNB. The status of PNB as a pledgee of the sugar quedans
involved in this case had long been confirmed by the Court in its Decision dated July 9, 1998 in
Philippine National Bank v. Sayo, Jr. and the same is neither disputed in the instant case. We
reiterate our ruling in Sayo that:
The creditor, in a contract of real security, like pledge, cannot appropriate without foreclosure
the things given by way of pledge. Any stipulation to the contrary, termed pactum commissorio,
is null and void. The law requires foreclosure in order to allow a transfer of title of the good
given by way of security from its pledgor, and before any such foreclosure, the pledgor, not the
pledgee, is the owner of the goods. x x x.
A close reading of the Authorization executed by Luis Ramos reveals that it was nothing more
than a letter that gave PNB the authority to dispose of and sell the sugar quedans after the
maturity date thereof. As held by the Court of Appeals, the said grant of authority on the part of
PNB is a standard condition in a contract of pledge, in accordance with the provisions of Article
2087 of the Civil Code that “it is also of the essence of these contracts that when the principal
obligation becomes due, the things in which the pledge or mortgage consists may be alienated
for the payment to the creditor.” More importantly, Article 2115 of the Civil Code expressly
provides that the sale of the thing pledged shall extinguish the principal obligation, whether or
not the proceeds of the sale are equal to the amount of the principal obligation, interest and
expenses in a proper case. As we adverted to in Sayo, it is the foreclosure of the thing pledged
that results in the satisfaction of the loan liabilities to the pledgee of the pledgors. Thus, prior to
the actual foreclosure of the thing pleged, the sugar quedan financing loan in this case is yet to
be settled.
As matters stand, with more reason that PNB cannot be compelled to release the real estate
mortgage and the titles involved therein since the issue of whether the sugar quedan financing
loan will be fully paid through the pledged sugar receipts remains the subject of pending
litigation.

Prudential Bank v. Alviar, G.R. No. 150197, July 28, 2005

Doctrine: The “dragnet clause” in the first security instrument constituted a continuing offer by
the borrower to secure further loans under the security of the first security instrument, and that
when the lender accepted a different security he did not accept the first offer.
FACTS:
Spouses Alviar are the registered owners of a parcel of land in San Juan, Metro Manila.
They executed a deed of real estate mortgage of the said property in favor of petitioner
Prudential Bank to secure the payment of a loan worth P250,000.00. (PN BD#75/C-252) was then
issued covering the said loan, which provides that the loan matured on 4 August 1976 at an
interest rate of 12% per annum with a 2% service charge, and that the note is secured by a real
estate mortgage as aforementioned with a “blanket mortgage clause” or the “dragnet clause”.
The spouses thereafter issued other promissory notes (PN): o PN BD#76/C-345 for
P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was secured by a “hold-out”
on the mortgagor’s foreign currency savings account with the bank under Account No. 129 o In
the name of Donalco Trading, Inc., PN BD#76/C-430 covering P545,000.000 to be secured by
“Clean-Phase out TOD CA 3923. Bank also mentioned in their approval letter that additional
securities for the loan were the deed of assignment on two PNs executed by Bancom Realty and
the chattel mortgage on various heavy and transportation equipment.
Spoused Alviar paid petitioner P2,000,000.00, to be applied to the obligations of G.B.
Alviar Realty and Development, Inc. and for the release of the real estate mortgage for the
P450,000.00 loan covering the two (2) lots in San Juan, Metro Manila. The payment was
acknowledged by petitioner who accordingly released the mortgage over the two properties.
Prudential Bank moved for the extrajudicial foreclosure of the mortgage on the property
since respondents had the total obligation of P1,608,256.68, covering the three (3) promissory
notes.
Respondents then filed a complaint for damages with a prayer for the issuance of a writ
of preliminary injunction with the RTC of Pasig,[11] claiming that they have paid their principal
loan secured by the mortgaged property, and thus the mortgage should not be foreclosed RTC,
on its final decision, favored respondents saying that the extrajudicial foreclosure was improper
for the mortgage only covers the first loan of P250,000 CA affirmed the decision of the RTC.

ISSUE:
WON real estate mortgage secures only the first loan of P250,000.

RULING:
Yes. While the existence and validity of the “dragnet clause” cannot be denied, there is a
need to respect the existence of the other securities given for the two other promissory notes.
The foreclosure of the mortgaged property should only then be for theP250,000.00 loan covered
by PN BD#75/C-252, and for any amount not covered by the security for the second promissory
note.
Petitioner and respondents intended the real estate mortgage to secure not only the
P250,000.00 loan from the petitioner, but also future credit facilities and advancements that
may be obtained by the respondents. However, the subsequent loans obtained by respondents
were secured by other securities.
When the mortgagor takes another loan for which another security was given it could not be
inferred that such loan was made in reliance solely on the original security with the “dragnet
clause,” but rather, on the new security given. This is the “reliance on the security test.”
If the parties intended that the “blanket mortgage clause” shall cover subsequent advancement
secured by separate securities, then the same should have been indicated in the mortgage
contract. This ambiguity shall be interpreted strictly against petitioner for having drafted the
same.
Petitioner, however, is not without recourse. Both the lower courts found that respondents have
not yet paid the P250,000.00. Thus, the mortgaged property could still be properly subjected to
foreclosure proceedings for the unpaid P250,000.00 loan, and as mentioned earlier, for any
deficiency after D/A SFDX#129, security for PN BD#76/C-345, has been exhausted, subject of
course to defenses which are available to respondents. Petition is DENIED. CA affirmed.

(c) Pactum de non alienado (Article 2130)

(6) Foreclosure

(a) Extrajudicial Foreclosure

Act No. 3135

Section 47, Republic Act No. 8791
Supreme Court Circular A.M. No. 99-10-05

(b) Judicial Foreclosure (Rule 68 of the Rules of Court)

(c) Cases:

Caltex Philippines, Inc. v. Intermediate Appellate Court, G.R. No. 74730, August 25, 1989

FACTS:
Private respondent Herbert Manzana purchased on credit petroleum products from petitioner
Caltex Philippines, Inc. He executed a Deed a First Mortgage in favor of CALTEX over a parcel of
land in Camarines Norte to secure his debts to the latter. On various occasions, CALTEX sent to
Manzana statements of account and later demanded payment of his entire debts. Because of
Manzana's failure and refusal to pay, CALTEX filed a complaint for the recovery of the whole
amount of P361,218.66.
On September 15, 1970, CALTEX foreclosed extra judicially the mortgaged property. On October
30, 1970, the mortgaged property was sold at auction to CALTEX, being the only bidder, for
P20,000.00 as shown by the Sheriff s Certificate of Sale. The foreclosure was allegedly known by
Manzana only on October 4, 1980 when such fact was manifested by CALTEX in its reply to the
opposition of Manzana to the motion for execution pending appeal.
On July 23, 1980, the trial court rendered judgment ordering Manzana to pay CALTEX the
amount of P353,218.66 after deducting P8,000.00 paid by Traders Insurance and Surety
Company on its surety bond, with interest thereon at 12% per annum from August 17, 1970, plus
20% thereof as attorney's fees.
It was the opinion of the respondent court that "a reading of the issues raised by the defendant-
appellant shows that the question that needs resolution is whether or not plaintiff-appellee can
still avail of the complaint for the recovery of the balance of indebtedness after having already
foreclosed the property securing the same. Nonetheless, CA affirmed.
On the basis of the first condition enumerated in the Deed of First Mortgage, CALTEX submits
that Manzana's indebtedness of P 361,218.66 was secured up to the extent of P120,000.00 only,
to wit (p. 50, Rollo):
This Mortgage is subject to the following terms and conditions:
l) The aforementioned indebtedness of THREE HUNDRED SIXTY-ONE THOUSAND TWO HUNDRED
EIGHTEEN & 66/100 (P361,218.66) of the MORTGAGOR shall be paid upon demand by the
MORTGAGEE; it being expressly understood that the limit or maximum amount secured by this
mortgage is ONE HUNDRED TWENTY THOUSAND PESOS (P120,000.00) only.
On the other hand, on the basis of the fourth paragraph of the deed and the fourth condition
therein, Manzana contends that the whole outstanding obligation of P361,218.66 was secured
by the mortgage, to wit (pp. 49-50,Rollo):
NOW, THEREFORE, for and in consideration of the said overdue, payable and demandable
indebtedness of the MORTGAGOR to the MORTGAGEE in the sum of THREE HUNDRED SIXTY-
ONE THOUSAND TWO HUNDRED EIGHTEEN PESOS & 66/100 (P361,218.66), Philippine Currency,
the foregoing premises and other x x x and valuable considerations, and to secure the faithful
performance by the MORTGAGOR of all the terms and conditions hereinafter set forth,
particularly the payment of the obligations hereby secured, the MORTGAGOR does hereby
convey BY WAY OF FIRST MORTGAGE. ... x x x.
4) This mortgage shall remain in force to cover the afore-mentioned mentioned outstanding
indebtedness of the MORTGAGOR to the MORTGAGEE in the amount of THREE HUNDRED SIDE
ONE THOUSAND TWO HUNDRED EIGHTEEN PESOS & 66/100 (P361,218.66).

ISSUE:
Whether or not the respondent court committed an error in giving due course to the question
whether CALTEX can avail at the same time of a personal action in court for collection of a sum
of money and the extrajudicial foreclosure of the deed of first mortgage, which was only raised
for the first time on appeal;

HELD:
Article 1374 of the Civil Code, regarding interpretation of contracts, provides:
ART. 1374. The various stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly.
The Deed of First Mortgage seems to contain provisions that contradict one another. However,
considering all the provisions together, the first condition cited by CALTEX is actually a specific
provision while the fourth paragraph and the fourth condition cited by Manzana are general
provisions. This interpretation is bolstered by the third WHEREAS clause and the penultimate
paragraph of the deed, to wit (pp. 49-50, Rollo):
WHEREAS, the MORTGAGOR has offered to execute, sign and deliver a First Mortgage over his
property ..., only as partial security for the aforementioned overdue, payable and demandable
indebtedness of the MORTGAGOR to the MORTGAGEE, which offer of the MORTGAGOR is
accepted by the MORTGAGEE. (emphasis supplied)
x x x.
The MORTGAGOR binds himself to complete the securities required by the MORTGAGEE and
shall permit any authorized representative of the MORTGAGEE to inspect the mortgaged
property and all the properties offered to be mortgaged to complete the required security.'
(emphasis supplied)
We therefore hold that Manzana's indebtedness of P 361,218.66 was secured up to the extent of
P120,000.00 only.
Thus, where a debt is secured by a mortgage and there is a default in payment on the part of the
mortgagor, the mortgagee has a choice of one (1) of two (2) remedies, but he cannot have both.
The mortgagee may:
1) foreclosure the mortgage; or
2) file an ordinary action to collect the debt.
When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces his lien
by the sale on foreclosure of the mortgaged property. The proceeds of the sale will be applied to
the satisfaction of the debt. With this remedy, he has a prior lien on the property. In case of a
deficiency, the mortgagee has the right to claim for the deficiency resulting from the price
obtained in the sale of the real property at public auction and the outstanding obligation at the
time of the foreclosure proceedings
On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby waives
his mortgage lien. He will have no more priority over the mortgaged property. If the judgment in
the action to collect is favorable to him, and it becomes final and executory, he can enforce said
judgment by execution. He can even levy execution on the same mortgaged property, but he will
not have priority over the latter and there may be other creditors who have better lien on the
properties of the mortgagor.
CALTEX submits that the principles enunciated in the Bachrach case are not applicable nor
determinative of the case at bar for the reason that the factual circumstances obtained in the
said case are totally different from the instant case. In the Bachrach case, the plaintiff instituted
an action to foreclose the mortgage after the money judgment in its favor remained unsatisfied
whereas in the present case, CALTEX initially filed a complaint for collection of the debt and
during the pendency thereof foreclosed extrajudicially the mortgage.
The mere act of filing a collection suit for the recovery of a debt secured by a mortgage
constitutes waiver of the other remedy of foreclosure. The rationale behind this was adequately
explained in theBachrach case, supra:
... a rule that would authorize the plaintiff to bring a personal action against the debtor and
simultaneously or successively another action against the mortgaged property, would result not
only in multiplicity of suits so offensive to justice (Soriano vs. Enriques, 24 Phil. 584) and
obnoxious to law and equity (Osorio vs. San Agustin, 25 Phil. 404), but also in subjecting the
defendant to the vexation of being sued in the place of his residence or of the residence of the
plaintiff, and then again in the place where the property lies.
In the present case, however, We shall not follow this rule to the letter but declare that it is the
collection suit which was waived and/or abandoned. This ruling is more in harmony with the
principles underlying our judicial system. It is of no moment that the collection suit was filed
ahead, what is determinative is the fact that the foreclosure proceedings ended even before the
decision in the collection suit was rendered. As a matter of fact, CALTEX informed the trial court
that it had already consolidated its ownership over the property, in its reply to the opposition of
Manzana to the motion for execution pending appeal filed by it.

Spouses Certeza, et al. v. Philippine Savings Bank, G.R. No. 190078, March 5, 2010

FACTS:
Petitioners obtained a loan from Philippine Savings Bank. Due to petitioners’ failure to pay their
obligation, an Extrajudicial Foreclosure of the Real Estate Mortgage was instituted. During the
auction sale, PS Bank emerged as the sole and highest bidder. A corresponding Certificate of Sale
was then issued in its favor and was later registered. A Writ of Possession was then subsequently
granted. On January 20, 2005, petitioners filed an Omnibus Motion for Leave to Intervene and to
Stay Issuance or Implementation of Writ of Possession. They further sought the nullification of
the extrajudicial foreclosure sale for allegedly having been conducted in contravention of the
procedural requirements prescribed in A.M. No. 99-10-05-0 (Re: Procedure in Extrajudicial
Foreclosure of Real Estate Mortgages).

ISSUE:
WON the auction sale conducted by virtue of the extrajudicial foreclosure of the mortgage
should be declared null and void for failure to comply with the two bidder rule.

RULING:
The law governing cases of extrajudicial foreclosure of mortgage is Act No. 3135. It is impractical
and burdensome to require the two-bidder rule considering that not all auction sales are
commercially attractive to prospective bidders. The
two-bidder rule is provided under P.D. No. 1594 with respect to contracts for government
infrastructure projects because of the public interest involved. In extrajudicial foreclosure of
mortgages however, the private interest is predominant.
Therefore, the requirement that there must be at least two bidders is not as exigent as in the
case of contracts for government infrastructure projects. Circular No. 7- 2002 Section 5(a)
further states that:
Sec. 5. Conduct of the extra-judicial foreclosure sale –
a. The bidding shall be made through sealed bids which must be submitted to
the Sheriff who shall conduct the sale between the hours of 9 a.m. and 4 p.m.
of the date of the auction (Act 3135, Sec. 4). xxx
The use of the word "bids" (in plural form) does not make it a mandatory requirement to have
more than one bidder for an auction sale to be valid.
Therefore, the extra-judicial foreclosure sale conducted in this case is regular and valid.
Consequently, the subsequent issuance of the writ of possession is likewise regular and valid.

Spouses Yap v. Spouses Dy, et al., G.R. No. 157867, December 15, 2009
G.R. No. 171991 and 171868 July 27 2011
FACTS:
The subject parcels of land designated as lot 1, 3, 4, 5, 6, 8 including Lot 846 are originally owned
by Spouses Tirambulos. They executed a REM over Lots 1,4, 5,6, and 8 in favour of the Rural
Bank of Dumaguete, predecessor of Dumaguete Rural Bank Inc. (DRBI). Later, Lots 3 and 8446
were also mortaged in favour of the same bank.
Subsequently, the Tirambulos sold all & mortgaged lots to spouse Dy without consent and
knowledge of DRBI. Tirambulos failed to pay their loans so DRBI foreclosed lots 1, 4, 5, 6, and 8
and sold at public auction. DRBI was the highest bidder. Later, DRBI sold lots 1, 3, and 6 to
spouses Yap.
Roughly a month before the one-year redemption period was set to expire, the Dys and the
Maxinos attempted to redeem Lots 1, 3 and 6. They tendered the amount of P40,000.00 to DRBI
and the Yaps. Spouses Yap refused arguing that one of the characteristics of a mortgage is its
indivisibility and that one cannot redeem only some of the lots foreclosed because all the parcels
were sold for a single price at the auction sale. Therefore, the Spouses Dy and Maximo went to
the Sheriff’s Office to deposit P40,000.00 for the principal plus P10,625.29 for interests and
Sheriff’s Commission to effect the redemption. The Spouses Yap were duly notified of this
redemption, yet they still refused to recognize the redemption.

Statement of the Case

On June 15, 1984, the Dys and the Maxinos filed a civil case with the Regional Trial Court of
Negros Oriental for accounting, injunction, declaration of nullity of the Deed of Sale with
Agreement to Mortgage, and damages against the Yaps and DRBI.
Yaps also filed a civil Case for consolidation of ownership, annulment of certificate of
redemption, and damages against the Dys, the Maxinos, the Provincial Sheriff of Negros Oriental
and DRBI.
The civil cases filed were tried jointly, and the RTC ruled in favor of Yaps. CA reversed the RTC’s
decision. Hence this petition

ISSUE:
WON persons to whom several mortgaged lands were transferred without the knowledge and
consent of the creditor can redeem only several parcels if all the lands were sold for a single
price at the foreclosure sale?

HELD:
Yes. As the SC held in the case of Philippine National Bank v. De los Reyes, The doctrine of
indivisibility of mortgage does not apply once the mortgage is extinguished by a complete
foreclosure thereof as in the instant case. The rule on the indivisibility of mortgage finds no
application to the case at bar. The particular provision of the Civil Code referred to provides:
Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the
successors in interest of the debtor or of the creditor. Therefore, the debtor's heir who has paid
a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as
long as the debt is not completely satisfied. Neither can the creditor's heir who received his
share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs
who have not been paid. The exception, like the case herein, arises when there are several things
given in mortgage or pledge, each one of these guarantees only a determinate portion of the
credit. The debtor, in this case, shall have a right to the extinguishment of the pledge or
mortgage as the portion of the debt for which each thing is especially answerable is satisfied.
The aggregate number of the lots in the case at bar which comprises the collaterals for the
mortgage had already been foreclosed and sold at public auction. There is no partial payment
nor partial extinguishment of the obligation to speak of. The aforesaid doctrine, which is actually
intended for the protection of the mortgagee, specifically refers to the release of the mortgage
which secures the satisfaction of the indebtedness and naturally presupposes that the mortgage
is existing. Once the mortgage is extinguished by a complete foreclosure thereof, said doctrine
of indivisibility ceases to apply since, with the full payment of the debt, there is nothing more to
secure.

Olizon v. Court of Appeals, G.R. No. 107075, September 1, 1994

DOCTRINE:
The publication of the notice of sale in the newspaper of general circulation alone is more than
sufficient compliance with the notice-posting requirement of the law. By such publication, a
reasonably wide publicity had been effected such that those interested might attend the public
sale, and the purpose of the law had been thereby subserved.

FACTS:
Sometime in 1967 Sps. Armando and Iluminda Olizon, petitioners obtained a loan amounting to
25,000 from Prudential Bank and as a security thereof, they executed a mortgage over a parcel
of land of 1,000 square meters covered by Transfer Certificate of Title No. 24604 of the Registry
of Deeds of Kalookan City. Apparently the petitioner failed to pay the loan when it fell due and
the respondent Prudential Bank foreclosed the property at an auction sale, the latter being the
highest bidder held on 24 March 1975 and in 05 June 1978 upon failure of Sps. Olizon to redeem
the property, Prudential Bank consolidated title in its name. On 27 November 1989, Prudential
Bank filed with the RTC a petition for a writ of possession of the property which was granted. On
08 March 1990, the petitioner by way of opposition filed a petition for the cancellation of the
writ of possession, declaring the foreclosure proceedings null and void for lack of compliance
with the notice of the auction sale and the lack of posting of the notice of the sale as required by
Section 3 of Act 3135, as amended. The RTC ruled in favor of the petitioners. The same decision
was reversed by the Court of Appeals, hence this instant petition.

ISSUE:
Whether the notice requirement as required in Section 3 of Act 3135 was complied with.

HELD:
Yes. We take judicial notice of the fact that newspaper publications have more far-reaching
effects than posting on bulletin boards in public places. There is a greater probability that an
announcement or notice published in a newspaper of general circulation, which is distributed
nationwide, shall have a readership of more people than that posted in a public bulletin board,
no matter how strategic its location may be, which caters only to a limited few. Hence, the
publication of the notice of sale in the newspaper of general circulation alone is more than
sufficient compliance with the notice-posting requirement of the law. By such publication, a
reasonably wide publicity had been effected such that those interested might attend the public
sale, and the purpose of the law had been thereby subserved. Moreover, herein petitioners
failed to discharge the burden of proving by convincing evidence their allegation that there was
actually no compliance with the posting requirement. The foreclosure proceeding has in its favor
the presumption of regularity, and the burden of evidence to rebut the same is on petitioners.
Where the allegation is an essential part of the cause of action or defense in a civil case, whether
posited in an affirmative or negative form, the burden of evidence thereon lies with the pleader.
Besides, the fact alone that there was no certificate of posting attached to the sheriff's records
of the extrajudicial foreclosure sale is not sufficient to prove the lack of posting, especially in this
case where the questioned act and the record thereof are already 16 years old. It is quite unfair
to now shift to respondent bank the burden of proving the fact of posting considering the length
of time that has elapsed, aside from the fact that the sheriff who conducted the public sale and
who was responsible for the posting of the notice of sale is already out of the country, with the
records being silent on his present whereabouts or the possibility of his returning here.

Global Holiday v. Metropolitan Bank, G.R. No. 184081, June 19, 2009

FACTS: Global Holiday Ownership Corporation obtained on various dates several loans from
Metrobank in the total principal amount of P5,700,000.00 secured by a real estate mortgage
over a condominium unit in Makati City. Upon default in the payment of the loan, Global
requested for a restructuring of its loan in the total principal amount of P6,375,000.00 as of
September 3, 200. (Metrobank) acceded to its request.
As Global defaulted anew in the payment of its loan, it requested for another restructuring which
was likewise granted by the bank. Hence, a Debt Settlement Agreement was executed by the
parties detailing a schedule of payment of the principal obligation. Global failed to comply with
the terms and conditions. Despite demands made, it still failed and refused to pay the loans
which are all past due. Metrobank requested the Clerk of
Court of the RTC of Makati City to cause the sale at public auction of CCT No. 29774 pursuant to
Act 3135 as amended.
Global filed for annulment of extrajudicial foreclosure proceedings, damages and injunction with
application for TRO and/or writ of preliminary injunction. Respondent judge granted Global's
application for TRO then also granted WPI.
Metrobank filed a petition for certiorari arguing that Global is not entitled to injunctive relief
because it has not shown that it had a legal right that must be protected as it was clearly
provided in the deed of real estate mortgage and in the Debt Settlement Agreement that the
mortgage can be foreclosed in case of default. (Metrobank) contends that Global's claim of not
having been notified of the foreclosure proceedings is debunked by the Certification issued by
the Makati Central Post Office stating that a copy of the notice of sheriff sale was sent to Global
and was received by it. Moreover, Metrobank's several demand letters to Global with a warning
that in case of failure to do, actions to protect the bank's interests will be initiated, more than
satisfies the requirement of notice. Additionally, (Metrobank) emphasizes that Sec. 14 of the real
estate mortgage was already superseded by Sec. 5 of the Debt Settlement Agreement whereby
Global waived its right to be personally notified in case of default. (Metrobank) argues that no
personal notice of the extrajudicial foreclosure is even required as said proceeding is an action in
rem where only notice by publication and posting is necessary to bind the interested parties. The
law itself, Act No. 3135, does not require personal notice to the mortgagor. Only notice by
publication and posting are required.
Global avers that after it defaulted in its quarterly payment under the Debt Settlement
Agreement, (Metrobank) informed it that its account is being considered for transfer to a Special
Purpose Vehicle under the SPV Act of 2002. Within the period given to signify its conformity to
the plan, Global wrote (Metrobank) on July 4, 2003 informing (Metrobank) that it is amenable to
its proposal. However, (Metrobank) decided to proceed with the
extrajudicial foreclosure of the mortgaged property. Global claimed that it has not waived its
right to be notified of the foreclosure when it executed the Debt Settlement Agreement. The
statement "without need of demand" in the debt settlement agreement refers to the payment
of the principal and interest, which is different from notice of extrajudicial foreclosure that is
required to be given to a mortgagor.

ISSUE:
W/n personal notice to the debtor-mortgagor of the extrajudicial foreclosure is not necessary
despite the parties' stipulation in their Real Estate Mortgage contract requiring personal notice
thereof

HELD:
No. Paragraph 14 of the real estate mortgage contract states that:
‘All correspondence relative to this mortgage, including demand letters, summonses, subpoenas
or notifications of any judicial or extra-judicial actions shall be sent to the Mortgagor at the
address hereinabove given or at the address that may hereafter be given in writing by the
Mortgagor to the Mortgagee, and the mere act of sending any correspondence by mail or by
personal delivery to the said address shall be valid and effective notice to the Mortgagor for all
legal purposes, and the fact that any communication is not actually received by the Mortgagor,
or that it has been returned unclaimed to the Mortgagee, or that no person was found at the
address given, or that the address is fictitious, or cannot be located, shall not excuse or relieve
the Mortgagor from the effect of such notice.”
This specific provision in the parties' real estate mortgage agreement is the same provision
involved in the case of Metropolitan Bank and Trust Company v. Wong:
“The fundamental principle that a contract is the law between the parties and, that 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 extra-judicial action shall be sent to the MORTGAGOR at 40-42
Aldeguer St., Iloilo City, or at the address that may hereafter be given in writing by the
MORTGAGOR to the MORTGAGEE."
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.”
In cases subsequent to Wong, we sustained the same principle: that personal notice to the
mortgagor in extrajudicial foreclosure proceedings is not necessary, unless stipulated.
Metrobank claims that Cortes v. Intermediate Appellate Court 16 should be applied in the
resolution of the present controversy. But what is stated in Cortes no longer applies in light of
the Court's rulings in Wong and all the subsequent cases, which have been consistent. Cortes has
never been cited in subsequent rulings of the Court, nor has the doctrine therein ever been
reiterated. Its doctrinal value has been diminished by the policy enunciated in Wong and the
subsequent cases; that is, that in addition to Section 3 of Act 3135, the parties may stipulate that
personal notice of foreclosure proceedings may be required. Act 3135 remains the controlling
law, but the parties may agree, in addition to posting and publication, to include personal notice
to the mortgagor, the non-observance of which renders the foreclosure proceedings null and
void, since the foreclosure proceedings become an illegal attempt by the mortgagee to
appropriate the property for itself.
Thus, we restate: the general rule is that personal notice to the mortgagor in extrajudicial
foreclosure proceedings is not necessary, and posting and publication will suffice. Sec. 3 of Act
3135 governing extra-judicial foreclosure of real estate mortgages, as amended by Act 4118,
requires only posting of the notice of sale in three public places and the publication of that
notice in a newspaper of general circulation. The exception is when the parties stipulate that
personal notice is additionally required to be given the mortgagor. Failure to abide by the
general rule, or its exception, renders the foreclosure proceedings null and void.

Ouno v. Court of Appeals, G.R. No. 129279, March 4, 2003

FACTS:
On June 8, 1977, respondent Julieta M. Ouano (Julieta), now deceased, obtained a loan from the
Philippine National Bank (PNB) in the amount of P104,280.00. As security for said loan, she
executed a real estate mortgage over two parcels of land located at Opao, Mandaue City.3 She
defaulted on her obligation. On September 29, 1980, PNB filed a petition for extrajudicial
foreclosure with the City Sheriff of Mandaue City.
On November 4, 1980, the sheriff prepared a notice of sale setting the date of public auction of
the two parcels of land on December 5, 1980 at 9:00 a.m. to 4:00 p.m.4 He caused the notice to
be published in the Cebu Daily Times, a newspaper of general circulation in Mandaue City, in its
issues of November 13, 20 and 27, 1980.5 He likewise posted copies thereof in public places in
Mandaue City and in the place where the properties are located.6
However, the sale as scheduled and published did not take place as the parties, on four separate
dates, executed Agreements to Postpone Sale (Agreements).7 These Agreements were
addressed to the sheriff, requesting the latter to defer the auction sale to another date at the
same time and place, "without any further republication of the Notice."
On December 3, 1980, two days prior to the date of the sale as published, the parties executed
and filed with the sheriff the Agreement to Postpone Sale moving the date of sale from
December 5, 1980 to February 5, 1981.8 On February 5, 1981, however, no sale occurred.
Eight days later, on February 13, 1981, the parties executed and filed for the second time a
similar agreement moving the date of sale to February 28, 1981.9 Again, on February 28, 1981,
no sale occurred.
Ten days later, on March 10, 1981, the parties executed and filed for the third time a similar
agreement moving the date of sale to March 30, 1981.10 No sale occurred on this date.
On March 30, 1981, the parties executed for the fourth time a similar agreement moving the
date of sale to May 29, 1981.11 This agreement was filed with the sheriff on April 30, 1981.
In all these postponements, no new notice of sale was issued, nor was there any republication or
reposting of notice for the rescheduled dates.
Finally, on May 29, 1981, the sheriff conducted the auction sale, awarding the two parcels of
land to PNB, the only bidder. He executed a Certificate of Sale certifying the sale for and in
consideration of P195, 510.50.12
As Julieta failed to redeem the properties within the one year period from registration of sale,
PNB consolidated its title on February 12, 1983.13 On February 23 of the same year, it conveyed
the properties to herein petitioner Alfredo Ouano, the brother of Julieta, under a Deed of
Promise to Sell payable in five years.14
On March 28, 1983, Julieta sent demand letters to PNB and petitioner, pointing out irregularities
in the foreclosure sale.15 On April 18, 1983, Julieta filed a complaint with the Regional Trial
Court (RTC) of Cebu for the nullification of the May 29, 1981 foreclosure sale.16 Petitioner filed a
motion for leave to intervene in said case, and filed his Answer in Intervention to protect his
rights over the properties.17
While the case was pending, on February 25, 1986, PNB executed a Deed of Sale in favor of
petitioner.18 The Register of Deeds of Mandaue City accordingly cancelled the TCTs in PNB's
name and issued in lieu thereof TCTs in the name of petitioner over the two parcels of land.19
On January 29, 1990, the Regional Trial Court of Cebu rendered a decision in favor of Julieta,
holding that the lack of republication rendered the foreclosure sale void.
Not satisfied, PNB and petitioner brought the case to the Court of Appeals.21 In its decision
dated February 17, 1997, said court affirmed the trial court's ruling on the same ground that
there was no compliance with the mandatory requirements of posting and publication of notice
of sale.22 Petitioner filed a motion for reconsideration, which was denied for lack of merit by the
same court on April 15, 1997.

ISSUE:
W/N the requirements of Act No. 3135 were complied with in the May 29, 1981 foreclosure sale.

RULING:
The governing law for extrajudicial foreclosures is Act No. 3135 as amended by Act No. 4118. The
provision relevant to this case is Section 3, which provides:
SEC. 3. Notice shall be given by posting notices of the sale for not less than twenty (20) 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 of city.
It is a well-settled rule that statutory provisions governing publication of notice of mortgage
foreclosure sales must be strictly complied with, and that even slight deviations therefrom will
invalidate the notice and render the sale at least voidable.26 In a number of cases, we have
consistently held that failure to advertise a mortgage foreclosure sale in compliance with
statutory requirements constitutes a jurisdictional defect invalidating the sale.27 Consequently,
such defect renders the sale absolutely void and no title passes.28
Petitioner, however, insists that there was substantial compliance with the publication
requirement, considering that prior publication and posting of the notice of the first date were
made.
In Tambunting v. Court of Appeals,29 we held that republication in the manner prescribed by Act
No. 3135 is necessary for the validity of a postponed extrajudicial foreclosure sale.
Publication, therefore, is required to give the foreclosure sale a reasonably wide publicity such
that those interested might attend the public sale.32 To allow the parties to waive this
jurisdictional requirement would result in converting into a private sale what ought to be a public
auction.
Moreover, assuming arguendo that the written waivers are valid, we find noticeable flaws that
would nevertheless invalidate the foreclosure proceedings. First, the Agreements, as worded,
only waived "further republication of the notice of sale." Nothing in the Agreements indicates
that the parties likewise dispensed with the reposting of the notices of sale. As there was no
reposting of notice of the May 29, 1981 sale, the foreclosure fell short of the requirements of
Act No. 3135. Second, we observe that the Agreements were executed and filed with the sheriff
several days after each rescheduled date. As stated in the facts, the first agreement was timely
filed, two days prior to the originally scheduled sale on December 5, 1980. The second
agreement, however, was executed and filed eight days after the rescheduled sale on February
5, 1981. The third agreement was executed and filed ten days after the rescheduled sale on
February 28, 1981. The fourth agreement was timely executed, but was filed with the sheriff one
month after the rescheduled sale on March 30, 1981. On the rescheduled dates, therefore, no
public sale occurred, nor was there any request to postpone filed with the sheriff, except for the
first one. In short, the Agreements are clearly defective for having been belatedly executed and
filed with the sheriff. The party who may be said to be at fault for this failure, and who should
bear the consequences, is no other than PNB, the mortgagee in the case at bar. It is the
mortgagee who causes the mortgaged property to be sold, and the date of sale is fixed upon his
instruction.33 We have held that the mortgagee's right to foreclose a mortgage must be
exercised according to the clear mandate of the law. Every requirement of the law must be
complied with, lest the valid exercise of the right would end.34 PNB's inaction on the scheduled
date of sale and belated filing of requests to postpone may be deemed as an abandonment of
the petition to foreclose it filed with the sheriff. Consequently, its right to foreclose the
mortgage based on said petition lapsed.

Metropolitan Bank v. Spouses Tan, G.R. No. 178449, October 17, 2008
(NO DIGEST)

Hi-Yield Realty v. Court of Appeals, G.R. No. 138978

FACTS:
Respondents entered into a loan contract amounting to PHP100,000 with Petitioner
thereby mortgaging a parcel of land located in Lumang Dayap, Cainta, Rizal. Upon respondent's
failure to pay the loan upon demand petitioner, thereafter moved for the extrajudicial
foreclosure of the said property and a new TCT was transferred in its name. Respondent claims
that he made an offer to pay twice during the redemption period but was refused by petitioner
hence, on the last day of redemption period he filed an action to the court. When all the interest
and other charges were fixed. The court asks respondent to pay the redemption price to
petitioner on a specified date (On or before April 8, 1994) but petitioner instead thereafter seeks
the extension of 45days for it has no sufficient money. At first the court denied the extension but
in another order contradicting its previous order it allowed respondent the extension to pay
within 45 days. Frustrated, petitioner seeks this court to review the decision of the trial court.

ISSUE:
Whether or not the extension of the redemptive period by the trial court was well within
private respondent’s preserved right to redeem?

RULING:
It was serious error to make the final redemption of the foreclosed property dependent
on the financial condition of private respondent. It may have been difficult for private
respondent to raise the money to redeem the property but financial hardship is not a ground to
extend the period of redemption. The opportunity to redeem the subject property was never
denied to private respondent. His timely formal offer through judicial action to redeem was
likewise recognized. But that is where it ends. The court cannot sanction and grant every
succeeding motion or petition — specially if frivolous or unreasonable — filed by him because
this would manifestly and unreasonably delay the final resolution of ownership of the subject
property.
As a result of the trial court’s grant of a 45-day extended period to redeem, almost nine
(9) years have elapsed with both parties’ claims over the property dangling in limbo, to the
serious impairment of petitioner’s rights. This court calls the trial court’s attention to the
prejudice it has wittingly or unwittingly caused the petitioner. It was really all too simple. The
trial court should have seen, as in fact it had already initially seen, that the 45-day extension
sought by private respondent on April 8, 1994 was just a play to cover up his lack of funds to
redeem the foreclosed property.
The right of redemption should be exercised within the specified time limit, which is one
year from the date of registration of the certificate of sale. Moreover, the redemptioner should
make an actual tender in good faith of the full amount of the purchase price as provided above,
which means the auction price of the property plus the creditor’s other legitimate expenses like
taxes, registration fees, etc.
Redemptioner’s option when the redemption period is about to expire and the
redemption cannot take place on account of disagreement over the redemption price: may
preserve his right of redemption through judicial action which in every case must be filed within
the one-year period of redemption. The filing of the court action to enforce redemption, being
equivalent to a formal offer to redeem, would have the effect of preserving his redemptive rights
and “freezing” the expiration of the one-year period provided the action is filed on time and in
good faith, the redemption price is finally determined and paid within a reasonable time, and the
rights of the parties are respected.
Three critical dimensions:
(1) timely redemption or redemption by expiration date (or, as what happened in this case, the
redemptioner was forced to resort to judicial action to “freeze” the expiration of the redemption
period);
(2) good faith as always, meaning, the filing of the private respondent’s action on August 13,
1993 must
have been for the sole purpose of determining the redemption price and not to stretch the
redemptive
period indefinitely; and
(3) once the redemption price is determined within a reasonable time, the redemptioner must
make prompt payment in full.

Spouses Castro v. Tan, G.R. No. 168940, November 24, 2009

FACTS:
Respondent Angelina de Leon Tan, and her husband Ruben Tan were the former registered
owners of a 240-square meter residential lot, situated at a barrio in Bulacan.
On February 17, 1994, they entered into an agreement with petitioners spouses Isagani and
Diosdada Castro denominated as Kasulatan ng Sanglaan ng Lupa at Bahay (Kasulatan) to secure a
loan of P30,000.00 they obtained from the latter. Under the Kasulatan, the spouses Tan
undertook to pay the mortgage debt within six months or until August 17, 1994, with an interest
rate of 5% per month, compounded monthly.
When her husband died on September 2, 1994, respondent Tan was left to pay the loan.
However, she failed to pay the same upon maturity. Thereafter, she offered to pay petitioners
the principal amount of P30,000.00 plus a portion of the interest but petitioners refused and
instead demanded payment of the total accumulated sum of P359,000.00.
February 5, 1999, petitioners caused the extrajudicial foreclosure and emerged as the only
bidder in the auction sale that ensued.
On September 26, 2000, respondent Tan, joined by respondents Sps. , Clemente, Sps. Carpio,
Sps. Soliman, and Julius Amiel Tan filed a Complaint for Nullification of Mortgage and
Foreclosure and/or Partial Rescission of Documents and Damages before the RTC. They alleged,
inter alia, that the interest rate imposed is unconscionable.
RTC- declared the foreclosure null and void.interest lowered to 12% a year from 5% a mo.
CA- affirmed
Sps Castro petitioned to SC

ISSUE:
WN the judgment nullifying the interest rate voluntarily agreed upon by the petitioners and
respondents and expressly stipulated in the contract was proper

RULING:
Yes. The Court of Appeals correctly found that the 5% monthly interest, compounded monthly, is
unconscionable and should be equitably reduced to the legal rate of 12% per annum.
The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust.
While we agree with petitioners that parties to a loan agreement 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 also worth stressing that interest
rates whenever unconscionable may still be declared illegal.
In this case, the 5% monthly interest rate, or 60% per annum, compounded monthly, stipulated
in the Kasulatan is even higher than the 3% monthly interest rate imposed in the Ruiz case. Thus,
the 5% monthly interest is excessive, iniquitous, unconscionable and exorbitant, contrary to
morals, and the law. It is therefore void ab initio for being violative of Article 1306 of the Civil
Code.
The Court of Appeals did not unilaterally change the terms and conditions of the Contract of
Mortgage entered into between the petitioners and the respondents.
Petitioners allege that the Kasulatan was entered into by the parties freely and voluntarily. They
maintain that there was already a meeting of the minds between the parties
Petitioners’ contentions deserve scant consideration. In Abe v. Foster Wheeler Corporation, we
held that the freedom of contract is not absolute. The same is understood to be subject to
reasonable legislative regulation aimed at the promotion of public health, morals, safety and
welfare. One such legislative regulation is found in Article 1306 of the Civil Code which allows the
contracting parties to “establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs, public order or
public policy.”
It is from jurisprudence that interest was reduced by the lower court. It was not an alteration of
terms.
The additional 1% per month penalty awarded as liquidated damages does not have any legal
basis.
In its June 11, 2002 Decision, the trial court granted an additional 1% per month penalty as
liquidated damages beginning February 17, 1994 up to June 21, 2000. Since respondents did not
file their appellees’ brief despite notice, the appellate court declared this to be not in issue. But
the SC ruled on it as an exercise of their appellate jurisdiction.
But for want of any stipulation on liquidated damages in the Kasulatan entered into by the
parties, we hold that the liquidated damages awarded by the trial court and affirmed by the
Court of Appeals to be without legal basis and must be deleted.
The foreclosure proceedings held on March 3, 1999 cannot be given effect.
It is undisputed that sometime after the maturity of the loan, respondent Tan attempted to pay
the mortgage debt of P30,000.00 as principal and some interest. Said offer was refused by
petitioners because they demanded payment of the total accumulated amount of P359,000.00.
Moreover, the trial court also mentioned an offer by respondent Tan of the amount of
P200,000.00 to petitioners in order for her to redeem or re-acquire the property in litis.
From these, it is evident that despite considerable effort on her part, respondent Tan failed to
redeem the mortgaged property because she was unable to raise the total amount of
P359,000.00, an amount grossly inflated by the excessive interest imposed. Thus, it is only
proper that respondents be given the opportunity to repay the real amount of their
indebtedness.
Basis
Case of Heirs of Zoilo Espiritu v. Landrito, which is on all fours with the instant case, we held that:
Since the Spouses Landrito, the debtors in this case, were not given an opportunity to settle their
debt, at the correct amount and without the iniquitous interest imposed, no foreclosure
proceedings may be instituted. As a result, the subsequent registration of the foreclosure sale
cannot transfer any rights over the mortgaged property to the Spouses Espiritu. The registration
of the foreclosure sale, herein declared invalid, cannot vest title over the mortgaged property.