SIMPLE LOAN OR MUTUUM
G.R. No. L-20240
December 31, 1965
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
JOSE GRIJALDO, defendant-appellant.
FACTS:
In the year 1943 appellant Jose Grijaldo obtained five loans
from the branch office of the Bank of Taiwan, Ltd. in Bacolod
City, in the total sum of P1,281.97 with interest at the rate of
6% per annum, compounded quarterly. These loans are
evidenced by five promissory notes executed by the appellant
in favor of the Bank of Taiwan, Ltd., as follows: On June 1,
1943, P600.00; on June 3, 1943, P159.11; on June 18, 1943,
P22.86; on August 9, 1943,P300.00; on August 13, 1943,
P200.00, all notes without due dates, but because the loans
were due one year after they were incurred. To secure the
payment of the loans the appellant executed a chattel
mortgage on the standing crops on his land, Lot No. 1494
known as Hacienda Campugas in Hinigiran, Negros
Occidental.
By virtue of Vesting Order No. P-4, dated January 21, 1946,
and under the authority provided for in the Trading with the
Enemy Act, as amended, the assets in the Philippines of the
Bank of Taiwan, Ltd. were vested in the Government of the
United States. Pursuant to the Philippine Property Act of 1946
of the United States, these assets, including the loans in
question, were subsequently transferred to the Republic of
the Philippines by the Government of the United States under
Transfer Agreement dated July 20, 1954. These assets were
among the properties that were placed under the
administration of the Board of Liquidators created under
Executive Order No. 372, dated November 24, 1950, and in
accordance with Republic Acts Nos. 8 and 477 and other
pertinent laws.
On September 29, 1954 the appellee, Republic of the
Philippines, represented by the Chairman of the Board of
Liquidators, made a written extrajudicial demand upon the
appellant for the payment of the account in question. The
record shows that the appellant had actually received the
written demand for payment, but he failed to pay.
On January 17, 1961 the appellee filed a complaint in the
Justice of the Peace Court of Hinigaran, Negros Occidental, to
collect from the appellant the unpaid account in question.
The Justice of the Peace Of Hinigaran, after hearing,
dismissed the case on the ground that the action had
prescribed. The appellee appealed to the Court of First
Instance of Negros Occidental and on March 26, 1962 the
court a quo rendered a decision ordering the appellant to pay
the appellee the sum of P2,377.23 as of December 31, 1959,
plus interest at the rate of 6% per annum compounded
quarterly from the date of the filing of the complaint until full
payment was made. The appellant was also ordered to pay
the sum equivalent to 10% of the amount due as attorney's
fees and costs.
The appellant appealed directly to this Court. During the
pendency of this appeal the appellant Jose Grijaldo died.
Upon motion by the Solicitor General this Court, in a
resolution of May 13, 1963, required Manuel Lagtapon,
Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who
are the legal heirs of Jose Grijaldo to appear and be
substituted as appellants in accordance with Section 17 of
Rule 3 of the Rules of Court.
ISSUE:
Whether or not the obligation to pay is extinguished.
The appellant likewise maintains, in support of his contention
that the appellee has no cause of action, that because the
loans were secured by a chattel mortgage on the standing
crops on a land owned by him and these crops were lost or
destroyed through enemy action his obligation to pay the
loans was thereby extinguished.
HELD:
This argument is untenable. The terms of the promissory
notes and the chattel mortgage that the appellant executed
in favor of the Bank of Taiwan, Ltd. do not support the claim
of appellant. The obligation of the appellant under the five
promissory notes was not to deliver a determinate thing
namely, the crops to be harvested from his land, or the value
of the crops that would be harvested from his land. Rather,
his obligation was to pay a generic thing — the amount of
money representing the total sum of the five loans, with
interest. The transaction between the appellant and the Bank
of Taiwan, Ltd. was a series of five contracts of simple loan of
sums of money. "By a contract of (simple) loan, one of the
parties delivers to another ... money or other consumable
thing upon the condition that the same amount of the same
kind and quality shall be paid." (Article 1933, Civil Code) The
obligation of the appellant under the five promissory notes
evidencing the loans in questions is to pay the value thereof;
that is, to deliver a sum of money — a clear case of an
obligation to deliver, a generic thing. Article 1263 of the Civil
Code provides:
In an obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not
extinguish the obligation.
SECTRANS 2010/ ATTY. AGUINALDO
1
The chattel mortgage on the crops growing on appellant's
land simply stood as a security for the fulfillment of
appellant's obligation covered by the five promissory notes,
and the loss of the crops did not extinguish his obligation to
pay, because the account could still be paid from other
sources aside from the mortgaged crops.

CA ruled that the P2 million downpayment shall include
interest computed at the time the disputed amount was
considered a loan. Thus, this petition.
Issue:
Whether or not the interest should be limited to the 1st six
months as contained in the MOA?
Frias vs San Diego-Sison
G.R. No. 155223 April 4, 2007
Facts
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Ruling:
No. SC ruled in favour of Respondent.
Petitioner is the owner of a house and lot in Ayala
Alabang.
Petitioner and Dra. Flora San Diego-Sison (Respondent)
entered into a Memorandum of Agreement (MOA) over
the cited property with the following terms:
1. The land is to be sold for P 6.4 million.
2. Petitioner will receive P3 million from
respondent as downpayment.
3. In light of the downpayment, respondent had 6
months (1st) to notify the Petitioner of her
intention to purchase the land. However, the
balance is to be paid within another 6 months.
4. Prior to the first six months, the Petitioner may
still offer the cited land to other persons
provided that the P3 million downpayment shall
be returned to the Respondent including
interest based on prevailing compounded bank
interest.
5. Nevertheless, in case there are no other buyers
within the first 6 months, no interest shall be
charged on the P3 million.
6. However, in the event that on the 6th month
the Respondent does not purchase the land, the
Petitioner has a period of another 6 months
(2nd) within which to pay the sum of P3 million
with interest for the last six months only. The
downpayment shall be treated as loan granted
by the Respondent.

Petitioner received from Respondent P2 million in cash
and P1 million in a post-dated check which was
subsequently considered as stale. Therefore, only P2
million was received as downpayment.
Before the check became stale, Petitioner gave
Respondent the TCT and the Deed of Absolute Sale of the
land.
Subsequently, Respondent decided not to purchase the
property and notified Petitioner of this reminding the
latter that the amount of P2 million should be considered
as a loan payable within six months as stipulated in the
MOA with interest computed from such notification.
Petitioner subsequently failed to return the P2 million
pesos.
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The SC opined that if the terms of an agreement are clear
and leave no doubt as to the intention of the contracting
parties, the literal meaning of its stipulations shall
prevail.
It is further required that the various stipulations of a
contract shall be interpreted together.
In this case, the phrase "for the last six months only"
should be taken in the context of the entire agreement.
The MOA speaks of 2 periods of six months each.
o The 1st six-months was given to Respondent to
make up her mind whether or not to purchase
Petitioner's property.
o The 2nd six-months was given to Petitioner to
pay the P2 million loan (downpayment) in the
event that Respondent decided not to buy the
property in which case interest will be charged
"for the last six months only", referring to the
2nd six-month period.
o This means that no interest will be charged for
the 1st six-months while Respondent
contemplating on whether to buy the property,
but only for the 2nd six-months after Respondent
had decided not to buy the property. This is the
meaning of the phrase "for the last six months
only".
o Certainly, there is nothing in their agreement
that suggests that interest will be charged for 6
months only even if it takes defendant-appellant
an eternity to pay the loan
This does NOT mean that interest will no longer be
charged after the 2nd six-month period since such
stipulation was made on the logical and reasonable
expectation that such amount would be paid within the
date stipulated. Therefore, the monetary interest for the
last 6 months continued to accrue until actual payment
of the loaned amount.
It has been held that for a debtor to continue in
possession of the principal of the loan and to continue to
use the same after maturity of the loan without payment
of the monetary interest, would constitute unjust
enrichment on the part of the debtor at the expense of
the creditor.
SECTRANS 2010/ ATTY. AGUINALDO
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Art. 1956. No interest shall be due when not expressly
stipulated in writing.
ARWOOD INDUSTRIES, INC. vs. D.M. Consunji, Inc.
FACTS: Petitioner and respondent, as owner and contractor,
respectively entered into an Agreement for the construction
of petitioner’s condominium. Despite the completion of the
project, petitioner was not able to pay respondent the full
amount and left a balance. Repeated demands were left
unheeded prompting respondent to file a civil case against
petitioner, with a prayer among others that the full amount
be paid with interest of 2% per month, from Nov. 1990 up to
the time of payment. RTC ruled in favor of respondent.
Petitioner appealed to the CA, particularly opposing the
imposition of the 2% interest. The CA ruled in favor of the 2%
interest.
Petitioner’s contention- The imposition of the interest is
without basis because (1) although it was written in the
Agreement, it was not mentioned by the RTC in the
dispositive portion and (2) the interest does not apply to the
respondent’s claim but to the “monthly progress billing”.
ISSUE: WON the RTC and Ca is correct in imposing a 2% per
month interest on the monetary award or the balance of the
contract price.
HELD: Yes. The Agreement between the parties is the formal
expression of the parties’ rights, duties and obligations. It is
the best evidence of the intention of the parties.
Consequently, upon the fulfillment by respondent of its
obligation to complete the construction project, petitioner
had the correlative duty to pay for respondent’s services.
However, petitioner refused to pay the balance of the
contract price. From the moment respondent completed the
construction of the condominium project and petitioner
refused to pay in full, there was delay on the part of
petitioner.
Delay in the performance of an obligation is looked upon with
disfavor because, when a party to a contract incurs delay, the
other party who performs his part of the contract suffers
damages thereby. Obviously, respondent suffered damages
brought about by the failure of petitioner to comply with its
obligation on time. And, sans elaboration of the matter at
hand, damages take the form of interest. Accordingly, the
appropriate measure of damages in this case is the payment
of interest at the rate agreed upon, which is 2% interest for
every month of delay.
It must be noted that the Agreement provided the contractor,
respondent in this case, two options in case of delay in
monthly payments, to wit: a) suspend work on the project
until payment is remitted by the owner or b) continue the
work but the owner shall be required to pay interest at a rate
of two percent (2%) per month or a fraction thereof.
Evidently, respondent chose the latter option, as the
condominium project was in fact already completed. The
payment of the 2% monthly interest, therefore, cannot be
jettisoned overboard.
Since the Agreement stands as the law between the parties,
this Court cannot ignore the existence of such provision
providing for a penalty for every month’s delay. Facta legem
facunt inter partes. Neither can petitioner impugn the
Agreement to which it willingly gave its consent. From the
moment petitioner gave its consent, it was bound not only to
fulfill what was expressly stipulated in the Agreement but
also all the consequences which, according to their nature,
may be in keeping with good faith, usage and law.
Petitioner’s attempt to mitigate its liability to respondent
should thus fail.
As a last-ditch effort to evade liability, petitioner argues that
the amount of P962,434.78 claimed by respondent and later
awarded by the lower courts does not refer to “monthly
progress billings,” the delayed payment of which would earn
interest at 2% per month.
Petitioner appears confused by a semantics problem.
“Monthly progress billings” certainly form part of the
contract price. If the amount claimed by respondent is not
the “monthly progress billings” provided in the contract, what
then does such amount represent? Petitioner has not in point
of fact convincingly supplied an answer to this query. Neither
has petitioner shown any effort to clarify the meaning of
“monthly progress billings” to support its position. This
leaves us no choice but to agree with respondent that the
phrase “monthly progress billings” refers to a portion of the
contract price payable by the owner (petitioner) of the
project to the contractor (respondent) based on the
percentage of completion of the project or on work
accomplished at a particular stage. It refers to that portion of
the contract price still to be paid as work progresses, after
the downpayment is made.”
This definition is, indeed, not without basis. Articles 6.02 and
6.03 of the Agreement, which respectively provides that the
“(b)alance shall be paid in monthly progress payments based
on actual value of the work accomplished” and that “the
progress payments shall be reduced by a portion of the
downpayment made by the OWNER corresponding to the
value of the work completed” give sense to respondent’s
interpretation of “monthly progress billings.”
SONCUYA V. AZARRAGA
ROYAL SHIRT FACTORY, INC. v CO
FACTS:
SECTRANS 2010/ ATTY. AGUINALDO
3
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The parties entered into a contract wherein it is
stipulated that 350 pairs of ballet shoes will be sold
by Co and that Co had 9 days from delivery of the
shoes to make his choice of 2 alternatives: a)
consider the sale for the shoes closed at a flat rate,
or b) return the remaining unsold ones to Royal.
Co failed to return the unsold pairs after 9 days and
actually began making partial payments on account
of the purchase price agreed upon.
Co then contended that there was merely a
consignment of the goods and he wanted to return
the unsold shoes. Royal refused contending that it
was an outright sale.
ISSUE: WoN the sale was an outright sale / WoN Co is bound
by the interest stipulated in the invoice.
Respondent Central Bank itself when it was then managing
the Overseas Bank of Manila (now Commercial Bank of
Manila) under a holding trust agreement, held the same
position in Idelfonso D. Yap vs. OBM wherein it argued that
"(I)n a suit against the receiver of a national bank for money
loaned to the Bank while it was a going concern, it was error
to permit plaintiff to recover interest on the loan after the
bank's suspension"
A significant development of the case, the Government
Service Insurance System (GSIS) has acquired ownership of
99.93% of the outstanding capital stock of COMBANK. The
Court's Resolution manifestly redounds to the benefit of
another government institution, the GSIS, and to the
preservation of the banking system.
LIRAG TEXTILE MILLS, INC. VS. SSS
SC: YES! / NO!
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OUTRIGHT SALE
o Co accepted the invoice of the ballet shoes
and he even noted down in his own
handwriting the partial payments that he
made.
o If the sale has been on consignment, a
stipulation as to the period of time for the
return of the unsold shoes should have
been made, however, this was not done
NOT BOUND BY THE INTEREST
o He did not sign the invoice slip the
stipulated interest was 20%, hence, not
binding
o However, he is bound by the legal interest
of 6%
Hence, Co was ordered to pay the balance of the
purchase price for the ballet shoes + legal interest
EMERITO M. RAMOS, et al., petitioners,
vs.
CENTRAL BANK OF THE PHILIPPINES, respondents;
COMMERCIAL BANK OF MANILA, intervenor.
Facts: This involves question as to applicability of Tapia ruling
wherein the Court held that "the obligation to pay interest on
the deposit ceases the moment the operation of the bank is
completely suspended by the duly constituted authority, the
Central Bank," to loans and advances by the Central Bank
Held: Respondents have failed to adduce any cogent
argument to persuade the Court to reconsider its Resolution
at bar that the Tapia ruling is fully applicable to the nonpayment of interest, during the period of the bank's forcible
closure, on loans and advances made by respondent Central
Bank.
153 SCRA 338
Facts:
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SSS (respondent) and Lirag Textile Mills (Petitioner)
entered into a Purchased Agreement which Respondent
agreed to purchase preferred stocks of Petitioner worth
P1 million subject to conditions:
o For Petitioner to repurchase the shares of
stocks at a regular interval of one year and
to pay dividends.
o Failure to redeem and pay the dividend, the
entire obligation shall become due and
demandable and it shall be liable for an
amount equivalent to 12% of the amount
then outstanding as liquidated damages.
Basilio Lirag (Basilio) as President of Lirag Textile Mills
signed the Agreement as a surety to guarantee the
redemption of the stocks, the payment of dividends and
other obligations.
Pursuant to the Agreement, Respondent paid Petitioner
P500,000 on two occasions and the latter issued 5,000
preferred stocks with a par value of P100 as evidenced by
Stock Certificate Nos. 128 and 139.
After sending Respondent sent demand letters,
Petitioner and Basilio still made no redemption nor made
dividend payments.
Respondent filed an action for specific performance and
damages against Petitioner:
Petitioner contends that there is no obligation on their
part to redeem the stock certificates since Respondent is
still a preferred stock holder of the company and such
redemption is dependent upon the financial ability of the
company.
On the part of Basilio, he contends that his liability only
arises only if the company is liable and does not perform
its obligations under the Agreement.
SECTRANS 2010/ ATTY. AGUINALDO
4
Issue:
1)
2)
3)
Whether or not the Purchase Agreement entered
into by the Parties is a debt instrument?
If so, Is Basilio liable as surety?
Whether or not Lirag is liable for the interest as
liquidated damages?
Facts:
Angel Warehousing sued Chelda for the
recovery of unpaid loans amounting to P20,880 because the
post dated checks issued by Chelda were dishonored. Chelda
said that Angel Warehousing charged usurious interests, thus
they have no cause of action against them & can’t recover the
remaining balance.
Issue:
W/N illegal terms as to payment of interest
likewise renders a nullity the legal terms as to the payment of
the principal debt?
Held:
1) YES, the Purchase Agreement is a debt instrument. The
terms and conditions of the Agreement show that parties
intended the repurchase of preferred shares on the
respective scheduled dates to be an absolute obligation,
which does not depend on the financial ability of the
corporation.
o This absolute obligation on the part of the Petitioner
corporation is made manifest by the fact that a
surety was required to see to it that the obligation is
fulfilled in the event the principal debtor’s inability
to do so.
o It cannot be said that SSS is a preferred stockholder.
The rights given by the Purchase Agreement to SSS
are not rights enjoyed by ordinary stockholders.
Since there was a condition that failure to
repurchase the stocks on the scheduled dates
renders the entire obligation due and demandable
with interest. These features clearly show that
intent of the parties to be bound therein as debtor
and creditor and not as a corporation and
stockholder.
2) YES, Basilio is liable as surety. Thus it follows that he
cannot deny liability for Lirag’s default. As surety, he is
bound immediately to pay SSS the amount then
outstanding.
3) The award of liquidated damages represented by 12% of
the amount then outstanding is correct, considering that
the petitioners in the stipulation of facts admitted having
failed to fulfill their obligations under the Agreement.
The grant of liquidated damages is expressly provided for
the Purchase Agreement in case of contractual breach.
Since Lirag did not deny its failure to redeem the
preferred shares and the non-payment of dividends
which are overdue, they are bound to earn legal interest
from the time of demand, in this case, judicial i.e. the
time of filing the action.
Ruling: No. The contract of loan with usurious interest
consists of principal and accessory stipulations and the two
stipulations are divisible in the sense that the principal debt
can stand without the usurious interest (accessory). These are
divisible contracts. In divisible contracts, if the illegal terms
can be separated from legal ones, the latter may be enforced.
Illegality lies only as to the prestation to pay interest, being
separable, thus should be rendered void. If the principal will
be forfeited this would unjustly enrich the borrower at the
expense of the lender.
CU-UNJIENG V. MABALACAT
Facts: Cu Unjieng e Hijos loaned Mabalacat 163 k, for
security,
Mabalacat
mortgaged
its
property.
Mabalacat failed to pay, but Cu Unjieng extended the
payment. Cu Unjieng filed a case against Mabalacat for
foreclosure of property and payment of attorney's fees. It
also claims interest over interest. Mabalacat insisted that the
agreement for the extension of the time of payment had the
effect of abrogating the stipulation of the original contract
with respect to the acceleration of the maturity of the debt
by non-compliance with the terms of the mortgage. The issue
related on this case is the interest over interest.
Issue: WoN Cu-Unjieng is entitled to interest over interest.
Ruling: It is well settled that, under article 1109 of the Civil
Code, as well as under section 5 of the Usury Law (Act No.
2655), the parties may stipulate that interest shall be
compounded; and rests for the computation of compound
interest can certainly be made monthly, as well as quarterly,
semiannually, or annually. But in the absence of express
stipulation for the accumulation of compound interest, no
interest can be collected upon interest until the debt is
judicially claimed, and then the rate at which interest upon
accrued interest must be computed is fixed at 6 per cent per
annum. In this case, there was no compound interest in the
agreement.
DAVID vs. CA
G.R.No. 115821, October 13, 1999
ANGEL WAREHOUSING vs CHELDA
Facts:
SECTRANS 2010/ ATTY. AGUINALDO
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A writ of attachment over the real properties owned
by Valentin Afable, Jr.. RTC ordered Afable, Jr. To pay David
P66,500 plus interest from July 24, 1974, until fully paid. RTC
amended its decison and ruled that legal rate of interest
should be computed from January 4, 1966, instead of from
July 24, 1974.
Afable appealed to the Court of Appeals and then to
the Supreme Court. In both instances, the decision of the
lower court was affirmed. Entries of judgment were made
and the record of the case was remanded to Branch 27 for
the final execution.
An Alias Writ of Execution was issued by virtue of
which respondent Sheriff Melchor P. Peña conducted a public
auction. Sheriff Peña informed the petitioner that the total
amount of the judgment is P270,940.52. The amount
included a computation of simple interest. Afable, however,
claimed that the judgment award should be P3,027,238.50,
because the amount due ought to be based on compounded
interest.
Although the auctioned properties were sold to the
petitioner, Sheriff Peña did not issue the Certificate of Sale
because there was an excess in the bid price in the amount of
P2,941,524.47, which the petitioner failed to pay despite
notice. David filed a Motion praying that respondent Judge
Cruz issue an order directing respondent Sheriff Peña to
prepare and execute a certificate of sale in his favor. His
reason is that compound interest, which is allowed by Article
2212 of the Civil Code, should apply in this case.
accepted by the David no interest was mentioned. That being
the case, the interest should only be subject to a simple
interest.
Topic: Simple Loan or Mutuum; Article 1960
Velez v. Balzarra
FACTS:
 Plaintiff Velez filed a complaint for the return of
parcels of land sold by Defendant to Plaintiff’s
husband. She further alleged that defendants had
remained in possession of said land under Contract
of Lease but for over 2 years defendants had not
paid the agreed rentals.
 Defendant alleged that the real agreement was a
loan secured by a mortgage of those lands.
 Trial court found that the payments made by
defendants were not made by way of interest but as
payments for the principal. Defendant overpaid
therefore Plaintiff should return excess.
ISSUE: Whether payments were intended to be applied to the
principal OR were considered as rents, interests?
HELD:
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David claim that in computing the interest due of the
P66,500.00, interest should be computed at 6% on the
principal sum of P66,500.00 pursuant to Article 2209 and
then “interest on the legal interest” should also be computed
in accordance with the language of Article 2212 of the Civil
Code.

Issue: Whether or not the amount due should be subject to a
simple interest or compounded interest.
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Ruling:
In cases where no interest stipulated, no compounded
interest could be further earned
The Court ruled that Article 2212 contemplates the
presence of stipulated or conventional interest which has
accrued when demand was judicially made. In cases where
no interest had been stipulated by the parties, as in the case
of Philippine American Accident Insurance, no accrued
conventional interest could further earn interest upon judicial
demand.
In this case, no interest was stipulated by the parties.
In the promissory note denominated “Compromise
Agreement” signed by the Afable, Jr. which was duly

Payments were NOT rents, interests
Neri took possession of land and collected fruits. The
creditor having enjoyed the beneficial use of the
lands delivered as security for the loan, it appears to
have been the intention of the parties that the
creditor should be compensated thereby.
Though receipts, payments are called rents, they
were prepared by Neri (P’s husband) and Plaintiff,
and defendants in their ignorance did not look into
the wording, being merely satisfied that they were
proofs of payment.
The liability of plaintiff to return the excess
payments is in keeping with Article 1895 (Old Civil
Code) which provides that, “when something is
received which there is no right to collect, and which
by mistake has been unduly delivered, the obligation
to restore it arises.”
The 2 requisites are present: 1) There is no right to
collect these excess sums; and 2) the amounts have
been paid through mistake by defendants. Such
mistake is shown by the fact that their contracts
never intended that either rents or interest should
be paid, and by the further fact that when these
payments were made, they were intended by
defendants to be applied to the principal, but they
overpaid the amounts loaned to them.
USURY LAW
SECTRANS 2010/ ATTY. AGUINALDO
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G.R. No. 128990
September 21, 2000
INVESTORS FINANCE CORPORATION, petitioner,
vs.
AUTOWORLD SALES CORPORATION, and PIO BARRETTO
REALTY DEVELOPMENT
CORPORATION,respondents.
(4) Lastly, to secure the payment of the receivables
under the Deed of Assignment, BARRETTO would
mortgage the property subject of the sale to FNCB.
On 17 November 1980 FNCB informed AUTOWORLD that its
Executive Committee approved the proposed "IPP"
transaction. The lawyers of FNCB then drafted the contracts
needed and furnished Anthony Que with copies thereof.
FACTS:
Petitioner Investors Finance Corporation, then known also as
FNCB Finance (now doing business under the name of
Citytrust Finance Corporation), is a financing company doing
business with private respondent Autoworld Sales
Corporation (AUTOWORLD) since 1975. Anthony Que,
president of AUTOWORLD, also held the same position at its
affiliate corporation, private respondent Pio Barretto Realty
Corporation (BARRETTO).
Sometime in August 1980 Anthony Que, in behalf of
AUTOWORLD, applied for a direct loan with FNCB. However,
since the Usury Law imposed an interest rate ceiling at that
time, FNCB informed Anthony Que that it was not engaged in
direct lending; consequently, AUTOWORLD's request for loan
was denied.
But sometime thereafter, FNCB's Assistant Vice President,
Mr. Leoncio Araullo, informed Anthony Que that although it
could not grant direct loans it could extend funds to
AUTOWORLD by purchasing any of its outstanding receivables
at a discount. After a series of negotiations the parties agreed
to execute an Installment Paper Purchase ("IPP") transaction
to enable AUTOWORLD to acquire the additional capital it
needed. The mechanics of the proposed "IPP" transaction
was —
(1) First, Pio Barretto (BARRETTO) would execute a
Contract to Sell a parcel of land in favor of
AUTOWORLD for P12,999,999.60 payable in sixty
(60) equal monthly installments of P216,666.66.
Consequently,
BARRETTO
would
acquire
P12,999,999.60 worth of receivables from
AUTOWORLD;
(2) FNCB would then purchase the receivables worth
P12,999,999.60 from BARRETTO at a discounted
value of P6,980,000.00 subject to the condition that
such amount would be "flowed back" to
AUTOWORLD;
(3) BARRETTO, would in turn, execute a Deed of
Assignment (in favor of FNCB) obliging AUTOWORLD
to pay the installments of the P12,999,999.60
purchase price directly to FNCB; and
On 9 February 1981 the parties signed three (3) contracts to
implement the "IPP" transaction:
(1) Contract to Sell whereby BARRETTO sold a parcel
of land to AUTOWORLD, situated in San Miguel,
Manila, together with the improvements thereon,
covered by TCT No. 129763 for the price of
P12,999,999.60 payable in sixty (60) consecutive and
equal monthly installments of P216,666.66.
(2) Deed of Assignment whereby BARRETTO assigned
and sold in favor of FNCB all its rights, title and
interest to all the money and other receivables due
from AUTOWORLD under the Contract to Sell,
subject to the condition that the assignee (FNCB) has
the right of recourse against the assignor
(BARRETTO) in the event that the payor
(AUTOWORLD) defaulted in the payment of its
obligations.
(3) Real Estate Mortgage whereby BARRETTO, as
assignor, mortgaged the property subject of the
Contract to Sell to FNCB as security for payment of
its obligation under the Deed of Assignment.
After the three (3) contracts were concluded AUTOWORLD
started paying the monthly installments to FNCB.
On 18 June 1982 AUTOWORLD transacted with FNCB for the
second time obtaining a loan of P3,000,000.00 with an
effective interest rate of 28% per annum. AUTOWORLD and
BARRETTO, as co-makers, then signed a promissory note in
favor of FNCB worth P5,604,480.00 payable in sixty (60)
consecutive monthly installments of P93,408.00. To secure
the promissory note, AUTOWORLD mortgaged a parcel of
land located in Sampaloc, Manila, to FNCB. Thereafter,
AUTOWORLD began paying the installments.
In December 1982, after paying nineteen (19) monthly
installments of P216,666.66 on the first transaction ("IPP"
worth P6,980,000.00) and three (3) monthly installments of
P93,408.00 on the second transaction (loan worth
P3,000,000.00), AUTOWORLD advised FNCB that it intended
to preterminate the two (2) transactions by paying their
outstanding balances in full. It then requested FNCB to
provide a computation of the remaining balances. FNCB sent
AUTOWORLD its computation requiring it to pay a total
SECTRANS 2010/ ATTY. AGUINALDO
7
amount of P10,026,736.78, where P6,784,551.24 was the
amount to settle the first transaction while P3,242,165.54
was the amount to settle the second transaction.
On 20 December 1982 AUTOWORLD wrote FNCB that it
disagreed with the latter's computation of its outstanding
balances. On 27 December 1982 FNCB replied that it would
only be willing to reconcile its accounting records with
AUTOWORLD
upon
payment
of
the
amounts
demanded. Thus, despite its objections, AUTOWORLD
reluctantly paid FNCB P10,026,736.78 through its UCPB
account.
On 5 January 1983 AUTOWORLD asked FNCB for a refund of
its
overpayments
in
the
total
amount
of
P3,082,021.84. According to AUTOWORLD, it overpaid
P2,586,035.44 to settle the first transaction and P418,262.00
to settle the second transaction.
The parties attempted to reconcile their accounting figures
but the subsequent negotiations broke down prompting
AUTOWORLD to file an action before the Regional Trial Court
of Makati to annul the Contract to Sell, the Deed of
Assignment and the Real Estate Mortgage all dated 9
February 1981. It likewise prayed for the nullification of
thePromissory Note dated 18 June 1982 and the Real Estate
Mortgage dated 24 June 1982.
In its complaint, AUTOWORLD alleged that the
aforementioned contracts were only perfected to facilitate a
usurious loan and therefore should be annulled
FNCB argued that the contracts dated 9 February 1981 were
not executed to hide a usurious loan. Instead, the parties
entered into a legitimate Installment Paper Purchase ("IPP")
transaction, or purchase of receivables at a discount, which
FNCB could legally engage in as a financing company. With
regard to the second transaction, the existence of a usurious
interest rate had no bearing on the P3,000,000.00 loan since
at the time it was perfected on 18 January 1982 Central Bank
Circular No. 871 dated 21 July 1981 had effectively lifted the
ceiling rates for loans having a period of more than three
hundred sixty-five (365) days.
On 11 July 1988 the Regional Trial Court of Makati ruled in
favor of FNCB declaring that the parties voluntarily and
knowingly executed a legitimate "IPP" transaction or the
discounting of receivables. AUTOWORLD was not entitled to
any reimbursement since it was unable to prove the
existence of a usurious loan.
The Court of Appeals modified the decision of the trial court
and concluded that the "IPP" transaction, comprising of the
three (3) contracts perfected on 9 February 1981, was merely
a scheme employed by the parties to disguise a usurious loan.
It ordered the annulment of the contracts and required FNCB
to reimburse AUTOWORLD P2,586,035.44 as excess interest
payments over the 12% ceiling rate. However, with regard to
the second transaction, the appellate court ruled that at the
time it was executed the ceiling rates imposed by the Usury
Law had already been lifted thus allowing the parties to
stipulate any rate of interest.
ISSUE:
We stress at the outset that this petition concerns itself only
with the first transaction involving the alleged' "IPP" worth
P6,980,000.00, which was implemented through the three (3)
contracts of 9 February 1981. As to the second transaction,
which involves the P3,000,000.00 loan, we agree with the
appellate court that it was executed when the ceiling rates of
interest had already been removed, hence the parties were
free to fix any interest rate.
The pivotal issue therefore is whether the three (3) contracts
all dated 9 February 1981 were executed to implement a
legitimate Installment Paper Purchase ("IPP") transaction or
merely to conceal a usurious loan.
HELD:
The three (3) contracts were executed to conceal a usurious
loan.
Generally, the courts only need to rely on the face of written
contracts to determine the intention of the parties.
"However, the law will not permit a usurious loan to hide
itself behind a legal form. Parol evidence is admissible to
show that a written document though legal in form was in
fact a device to cover usury. If from a construction of the
whole transaction it becomes apparent that there exists a
corrupt intention to violate the Usury Law, the courts should
and will permit no scheme, however ingenious, to becloud
the crime of usury." The following circumstances show that
such scheme was indeed employed:
First, petitioner claims that it was never a party to
the Contract to Sell between AUTOWORLD and BARRETTO. As
far as it was concerned, it merely purchased receivables at a
discount from BARRETTO as evidenced by the Deed of
Assignment dated 9 February 1981. Whether the Contract to
Sell was fictitious or not would have no effect on its right to
claim the receivables of BARRETTO from AUTOWORLD since
the two contracts were entirely separate and distinct from
each other.
Curiously however, petitioner admitted that its lawyers were
the ones who drafted all the three (3) contracts
involved which were executed on the same day. Also,
petitioner was the one who procured the services of the
Asian Appraisal Company to determine the fair market value
of the land to be sold way back in September of 1980 or six
SECTRANS 2010/ ATTY. AGUINALDO
8
(6) months prior to the sale. If it were true that petitioner was
never privy to the Contract to Sell, then why was it interested
in appraising the lot six (6) months prior to the sale? And why
did petitioner's own lawyers prepare the Contract to Sell?
Obviously, petitioner actively participated in the sale to
ensure that the appraised lot would serve as adequate
collateral for the usurious loan it gave to AUTOWORLD.
Second, petitioner insists that the 9 February 1981
transaction was a legitimate "IPP" transaction where it only
bought the receivables of BARRETTO from AUTOWORLD
amounting to P12,999,999.60 at a discounted price of
P6,980,000.00. However, per instruction of petitioner in its
letter to BARRETTO dated 17 November 1980 the whole
purchase price of the receivables was to be "flowed back" to
AUTOWORLD. And in its subsequent letter of 24 February
1981 petitioner also gave instructions on how BARRETTO
should apply the proceeds worth P6,980,000.00.
It can be seen that out of the nine (9) items of appropriation
stated (in the letter), Item Nos. 2-8 had to be returned to
petitioner. Thus, in compliance with the aforesaid letter,
BARRETTO had to yield P4,058,468.47 of the P6,980,000.00 to
petitioner to settle some of AUTOWORLD's previous debts to
it. Any remaining amount after the application of the
proceeds would then be surrendered to AUTOWORLD in
compliance with the letter of 17 November 1980; none went
to BARRETTO.
The foregoing circumstances confirm that the P6,980,000.00
was really an indirect loan extended to AUTOWORLD so that
it could settle its previous debts to petitioner. Had petitioner
entered into a legitimate purchase of receivables, then
BARRETTO, as seller, would have received the whole
purchase price, and free to dispose of such proceeds in any
manner it wanted. It would not have been obliged to follow
the "Application of Proceeds" stated in petitioner's letter.
Third, in its 17 November 1980 letter to BARRETTO, petitioner
itself designated the proceeds of the "IPP" transaction as a
"loan." In that letter, petitioner stated that the "loan
proceeds" amounting to P6,980,000.00 would be released to
BARRETTO only upon submission of the documents it
required. And as previously mentioned, one of the required
documents was a letter agreement between BARRETTO and
AUTOWORLD stipulating that the P6,980,000.00 should be
"flowed back" to AUTOWORLD. If it were a genuine "IPP"
transaction then petitioner would not have designated the
money to be released as "loan proceeds" and BARRETTO
would have been the end recipient of such proceeds with no
obligation to turn them over to AUTOWORLD.
Fourth, after the interest rate ceilings were lifted on 21 July
1981 petitioner extended on 18 June 1982 a direct loan of
P3,000,000.00 to AUTOWORLD. This time however, with no
more ceiling rates to hinder it, petitioner imposed a 28%
effective interest rate on the loan. And no longer having a
need to cloak the exorbitant interest rate, the promissory
note evidencing the second transaction glaringly bore the
28% interest rate on its face. We are therefore of the
impression that had there been no interest rate ceilings in
1981, petitioner would not have resorted to the fictitious
"IPP" transaction; instead, it would have directly loaned the
money to AUTOWORLD with an interest rate higher than
12%.
Thus, although the three (3) contracts seemingly show at face
value that petitioner only entered into a legitimate
discounting of receivables, the circumstances cited prove that
the P6,980,000.00 was really a usurious loan extended to
AUTOWORLD.
Petitioner anchors its defense on Sec. 7 of the Usury Law
which states —
Provided, finally, That nothing herein contained shall
be construed to prevent the purchase by an
innocent purchaser of a negotiable mercantile
paper, usurious or otherwise, for valuable
consideration before maturity, when there has been
no intention on the part of said purchaser to evade
the provisions of the Act and said purchase was not
a part of the original usurious transaction. In any
case however, the maker of said note shall have the
right to recover from said original holder the whole
interest paid by him thereon and, in any case of
litigation, also the costs and such attorney's fees as
may be allowed by the court.
Indeed, the Usury Law recognizes the legitimate purchase of
negotiable mercantile paper by innocent purchasers. But
even the law has anticipated the potential abuse of such
transactions to conceal usurious loans. Thus, the law itself
made a qualification. It would recognize legitimate purchase
of negotiable mercantile paper, whether usurious or
otherwise, only if the purchaser had no intention of evading
the provisions of the Usury Law and that the purchase was
not a part of the original usurious transaction. Otherwise, the
law would not hesitate to annul such contracts. Thus, Art.
1957 of the Civil Code provides —
Contracts and stipulations, under any cloak or device
whatever, intended to circumvent the laws on usury
shall be void. The borrower may recover in
accordance with the laws on usury.
In the case at bar, the attending factors surrounding the
execution of the three (3) contracts on 9 February 1981
clearly establish that the parties intended to transact a
usurious loan. These contracts should therefore be declared
void. Having declared the transaction between the parties as
void, we are now tasked to determine how much
reimbursement AUTOWORLD is entitled to. The Court of
SECTRANS 2010/ ATTY. AGUINALDO
9
Appeals, adopting the computation of AUTOWORLD in its
plaintiff-appellant's brief, ruled —

According to plaintiff-appellant, defendant-appellee
was able to collect P3,921,217.78 in interests from
appellant. This is not denied by the appellee.
Computed at 12% the effective interest should have
been P1,545,400.00. Hence, appellant may recover
P2,586,035.44, representing overpayment arising
from usurious interest rate charged by appellee.
While we do not dispute the appellate court's finding that the
first transaction was a usurious loan, we do not agree with
the amount of reimbursement awarded to AUTOWORLD.
Indeed, it erred in awarding only the interest paid in excess of
the 12% ceiling. In usurious loans, the creditor can always
recover the principal debt. However, the stipulation on the
interest is considered void thus allowing the debtor to claim
the whole interest paid. In a loan of P1,000.00 with interest at
20% per annum or P200.00 per year, if the borrower pays
P200.00, the whole P200.00 would be considered usurious
interest, not just the portion thereof in excess of the interest
allowed by law.
In the instant case, AUTOWORLD obtained a loan of
P6,980,000.00. Thereafter, it paid nineteen (19) consecutive
installments of P216,666.66 amounting to a total of
P4,116,666.54, and further paid a balance of P6,784,551.24
to settle it. All in all, it paid the aggregate amount of
P10,901,217.78 for a debt of P6,980,000.00. For the 23month period of the existence of the loan covering the period
February 1981 to January 1982, AUTOWORLD paid a total of
P3,921,217.78 in interests. Applying the 12% interest ceiling
rate mandated by the Usury Law, AUTOWORLD should have
only paid a total of P1,605,400.00 in interests. Hence,
AUTOWORLD is entitled to recover the whole usurious
interest amounting to P3,921,217.78.




Issue:
Whether or not the 6% monthly interest is unconscionable?
Ruling:
Yes. The SC ruled that this is unconscionable.



Solangon vs Salazar
G.R. No. 125944
June 29, 2001
Facts:



Petitioner-spouses executed 3 real estate mortgages on a
parcel of land situated in Bulacan, in favor of the same
Respondent Salazar to secure payment of loans of P60 K,
P136 K and P230 K payable within 4 months, 1 year, and
4 months in that order, with 6% monthly interest on the
first loan, and legal interests on the others.
This action was initiated by the Petitioner-spouses to
prevent the foreclosure of the mortgaged property.
They alleged that they obtained only one loan from the
Respondent which was the P60 K secured by the first
mortgage. Also, Petitioner-spouses opined that the 6%
monthly interest was unconscionable.
The subsequent mortgages were merely continuations of
the first one, which is null and void.
Moreover, the Respondent assured them that he will not
foreclose the mortgage as long as they pay the stipulated
interest upon maturity or within a reasonable time
thereafter. Petitioner-spouses substantially paid the
loans with interest but were unable to pay it in full.
On the other hand, the Respondent claimed that the
mortgages were executed to secure 3 separate loans of
and that the first two loans were paid, but the last one
was not.
He denied having represented that he will not foreclose
the mortgage as long as the Petitioner-spouses pay
interest.
Lower courts ruled in favour of Respondent. Thus, this
petition.

While the Usury Law ceiling on interest rates was lifted
by C.B. Circular No. 905, nothing in the said circular
grants lenders carte blanche authority to raise interest
rates to levels which will either enslave their borrowers
or lead to a hemorrhaging of their assets.
In Medel v. Court of Appeals, the Court decreed that the
5.5% interest or 66% per annum was not usurious but
held that the same must be equitably reduced for being
iniquitous, unconscionable and exorbitant , and hence,
contrary to morals (‘contra bonos mores’), if not against
the law.
In the case at bench, Petitioner-spouses stand on a worse
situation. They are required to pay the stipulated interest
rate of 6% per month or 72% per annum which is
definitely outrageous and inordinate.
Hence, the interest rate must be reduced equitably. An
interest of 12% per annum is deemed fair and
reasonable.
SPOUSES PASCUAL VS. RAMOS
FACTS: Petitioners executed a Deed of Absolute Sale with
Right to Repurchase with respondent, in consideration of Php
150,000. The petitioners did not exercise their right to
repurchase the property within the stipulated one-year
period; hence, respondent prayed that the title over the
SECTRANS 2010/ ATTY. AGUINALDO
10
parcels of land be consolidated in his favor. Petitioners aver
that what was really executed between them and the
respondent is a real estate mortgage and that there was no
agreement limiting the period within which to exercise the
right to repurchase and that they have even overpaid
respondent.
Respondent offered in evidence a document denominated as
Sinumpaang Salaysay which had a provision of an interest of
7% per month on the principal loan of Php 150,000. RTC ruled
that the transaction was actually a loan and the payment was
secured by a mortgage of the property, and that the
petitioners had made payments which resulted in
overpayment as the interest was at 7% per annum.
Respondent filed an MR alleging that the interest stipulated
in the Sinumpaang Salaysay was 7% per month. The RTC
ruled in favor of the respondent acknowledging that the
correct interest rate stipulated was 7% per month. However,
the RTC declared that the 7% per month interest is too
burdensome and onerous and so the court unilaterally
reduced the interest rate from 7% per month to 5% per
month. Petitioners filed an MR alleging that either 5% or 7%
per month is exorbitant, unconscionable, unreasonable,
usurious and inequitable.
ISSUE: WON the interest of 5% month is exorbitant,
unconscionable, unreasonable, usurious and inequitable.
HELD: NO. It is a basic principle in civil law that parties are
bound by the stipulations in the contracts voluntarily entered
into by them. Parties are free to stipulate terms and
conditions which they deem convenient provided they are
not contrary to law, morals, good customs, public order, or
public policy.
EASTERN SHIPPING v CA
FACTS:
-
-
-
-
-
ISSUE: When should the interest rate commence and at what
rate
SC: 6% from the date of decision and 12% from date of
finality of judgment until payment
-
The interest rate of 7% per month was voluntarily agreed
upon by RAMOS and the PASCUALs. There is nothing from
the records and, in fact, there is no allegation showing that
petitioners were victims of fraud when they entered into the
agreement with RAMOS. Neither is there a showing that in
their contractual relations with RAMOS, the PASCUALs were
at a disadvantage on account of their moral dependence,
ignorance, mental weakness, tender age or other handicap,
which would entitle them to the vigilant protection of the
courts as mandated by Article 24 of the Civil Code.
With the suspension of the Usury Law and the removal of
interest ceiling, the parties are free to stipulate the interest
to be imposed on loans. Absent any evidence of fraud, undue
influence, or any vice of consent exercised by RAMOS on the
PASCUALs, the interest agreed upon is binding upon them.
This Court is not in a position to impose upon parties
contractual stipulations different from what they have agreed
upon
REFORMINA V. TOMOL
2 Fiber drums of Riboflavin were shipped from Japan
for delivery vessel owned by Eastern Shipping (P)
and that the shipment was insured by Mercantile
Insurance (R)
Upon arrival in Manila, it was discharged unto the
custody of Metro Port, which it stated in its survey
that 1 drum was in bad order.
It was then received by Allied Brokerage wherein it
stated in its survey that one drum was opened and
without seal
Allied then delivered it to the consignee’s W/H,
which it excepted that 1 drum contained spillages
while the rest was adulterated/fake
R then filed claims against P for the losses sustained
by the consignee (which R subrogated).
LC ruled in favor of R and ordered P to pay damages,
however, it failed to state when the interest rate
should commence – from date of filing of complaint
at 12% or from date of judgment of TC at 6%
-
-
This case laid down the rules on the interest rates:
A) when an obligation regardless of its source, is
breached, the contravenor can be held liable for
damages
B) with regard particularly to an award of interest in
the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof,
shall be as follows:
If it consists of payment of money
(loan/forbearance)
o Interest due imposed = as stipulated in
writing and the
o Interest due = earn legal interest from the
time it is judicially demanded
o No stipulation = 12% per annum from date
of default (judicial/extra judicial)
If it is not loan/forbearance
o Interest on amount of damages = imposed
by discretion of court at 6%
o No interest shall be ordered on
unliquidated claims/damages until demand
can be established with reasonable
certainty
o When demand is established with
reasonable certainty, interest shall begin to
run from the time the claim is made
(judicially/extrajudicially)
SECTRANS 2010/ ATTY. AGUINALDO
11
o
-
But if it cannot be reasonably established at
the time demand was made = interest to
run from date of judgment of the court
If judgment becomes Final and Executory
o Rate of legal interest = 12%
o From finality to satisfaction
o Why? It is already considered as
forbearance
EASTERN ASSURANCE AND SURETY CORPORATION (EASCO),
vs. Court of Appeals
2)
3)
4)
5)
6)
Issue: When the judgment of the court awarding a
sum of money becomes final and executory what is
the rate to be imposed?
Held: Petitioner's contentions are without merit.
The prior Eastern Shipping Lines, Inc. v. Court of Appeals, was
held:
Facts:
1)
7) In its appeal EASCO to the SC, it contended that the
CA wrongfully applied the aforecited paragraph 3 of
the suggested rules of thumb for future guidance [as
formulated in Eastern Shipping Lines, Inc. v. Court of
Appeals, and unlawfully ignored or disregarded the
agreed cut-off date for the payment of the legal rate.
On April 9, 1981, private respondent Vicente Tan
insured his building in Dumaguete City against fire
with petitioner Eastern Assurance and Surety
Corporation (EASCO) for P250,000.00.
On June 26, 1981, the building was destroyed by fire.
As his claim for indemnity was refused, private
respondent filed a complaint for breach of contract
with damages against petitioner. The RTC Court,
decided in favour of Vicente Tan. In its ruling, the
RTC court imposed the rate of interest at 12% per
annum, and decided that EASCO to pay immediately
to Vicente Tan the unpaid balance of interest of the
principal amount of P250,000.00 equivalent to 6%
per annum from June 26, 1981 to September
30,1994.
Petitioner EASCO appealed to the Court of Appeals,
which, on July 30, 1993, affirmed the decision of the
trial court. The CA, on the authority of prior case,
Eastern Shipping Lines, Inc. v. Court of Appeals, that
the interest rate on the amount due should be 6%
per annum from June 26, 1981 to August 24, 1993,
and 12% per annum beginning August 25, 1993 until
the money judgment is paid.
Thereafter, petitioner EASCO tendered payment of
the money judgment in the amount of P250,000.00
plus interest of 6% per annum from June 26, 1981 to
July 30, 1993.
However, private respondent refused to accept
payment on the ground that the applicable legal rate
of interest was 12% per annum. Subsequently,
private respondent brought the matter to the
Insurance Commission.
Then in, 1995, the parties agreed before the hearing
officer of the commission that the interest should be
computed from June 26, 1981 to September 30,
1994. Petitioner would file with the trial court a
motion to fix the legal rate of interest attaching
thereto a check in the amount of P250,000.00 with
6% interest per annum.
I. When an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasidelicts, is breached, the contravener can be held
liable for damages. The provisions under "Damages"
of the Civil Code govern in determining the measure
of recoverable damages.
II. With regard particularly to an award of interest in
the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is
imposed, as follows:
Par. 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.
Unquestionably, this case falls under the rule stated in
paragraph 3. The question is whether this rule can be applied
to this case.
The prior Eastern Shipping Lines, case. did not lay down any
new rules because it was just a a comprehensive summary of
existing rules on the computation of legal interest.
As to the "cut-off date" for the payment of legal interest:
The trial court's finding on this point is binding. Hence, the
payment of 12% legal interest per annum should commence
from August 25, 1993, the date the decision of the trial court
became final, up to September 30, 1994, the agreed "cut-offdate" for the payment of legal interest. The decision of the CA
is affirmed.
PILIPINAS BANK, petitioner,
vs.
SECTRANS 2010/ ATTY. AGUINALDO
12
THE HONORABLE COURT OF APPEALS, and LILIA R. ECHAUS,
respondents.
Facts: private respondent filed a complaint against petitioner
and its president, Constantino Bautista, for collection of a
sum of money. The complaint alleged: (1) that petitioner and
Greatland executed a "Dacion en Pago," wherein Greatland
conveyed to petitioner several parcels of land in
consideration of the sum of P7,776,335.69; (2) that Greatland
assigned P2,300,000.00 out of the total consideration in favor
of private respondent; and (3) that notwithstanding her
demand for payment, petitioner refused and failed to pay the
said amount assigned to her.
(2) the amount of P1,898,623.67 to be refunded by private
respondent to petitioner shall earn interest of 12% per
annum. - where money is transferred from one person to
another and the obligation to return the same or a portion
thereof is subsequently adjudged.
PNB v CA
FACTS:
-
Petitioner claimed: (1) that its former president had no
authority (2) that it never ratified the same; and (3) that
assuming arguendo that the agreement was binding, the
conditions stipulated therein were never fulfilled.
-
The trial court ruled in favor of private respondent.
Court of Appeals modified the Order dated April 3, 1985, by
limiting the execution pending appeal against petitioner to
P5,517.707.00
Trial court granted the new motion for execution pending
appeal. Petitioner complied with the writ of execution
pending appeal by issuing two manager's checks in the total
amount of P5,517,707.00
-
ISSUE: WoN the rate to be used is 6%
SC: YES!
-
The Court of Appeals rendered a decision in CA-G.R. No. CV06017, which modified the judgment of the trial court
-
Petitioner filed a motion in the trial court praying that private
respondent to refund to her the excess payment of
P1,898,623.67 with interests at 6%. It must be recalled that
while private respondent was able to collect P5,517,707.00
from petitioner pursuant to the writ of advance execution,
the final judgment in the main case awarded to private
respondent damages in the total amount of P3,619,083.33
-
(1) the amount of P2,300,000.00 adjudged to be paid by
petitioner to private respondent shall earn interest of 6% per
annum - The said obligation arose from a contract of
purchase and sale and not from a contract of loan or
mutuum. Hence, what is applicable is the rate of 6% per
annum as provided in Article 2209 of the Civil Code of the
Philippines and not the rate of 12% per annum as provided in
Circular No. 416.
This case does not involve a loan, forbearance of
money or judgment involving a loan or forbearance
of money as it arose from a contract of sale whereby
R did not receive full payment for her merchandise.
When an obligation arises “from a contract of
purchase and sale and not from a contract of loan or
mutuum,” the applicable rate is 6% per annum as
provided in Art. 2209 of the NCC
6% from filing of complaint until full payment before
finality of judgment
12% from finality of judgment
PLANTILLA vs. BALIWAG
358 SCRA 396
ISSUE: What interest rate applicable?
HELD: Note that Circular No. 416, fixing the rate of interest at
12% per annum, deals with (1) loans; (2) forbearance of any
money, goods or credit; and
(3) judgments.
Province of Isabela issued several checks drawn
against its account with PNB (P) in favor of Ibarrola
(R), as payments for the purchase of medicines.
The checks were delivered to R’s agents who turned
them over to R, except 23 checks amounting to
P98k.
Due to failure to receive full amount, R filed case
against P
LC, CA and SC ordered PNB to pay however, all 3
courts failed to specify the legal rate of interest – 6%
or 12%
Facts:


In a civil case, lower court rendered a decision ordering:
o Spouses Orga and Plantilla to reinstate Suiza as
share tenant
o That they pay Suiza unrealized shares from the
harvests of coconut fruits from August until
reinstated the amount of P1,000 with legal
interest until fully paid.
The decision, however, did not state the interest to be
charged.
SECTRANS 2010/ ATTY. AGUINALDO
13



A writ of execution was issued addressed to Sheriff
Baliwag.
Baliwag demanded payment from the spouses
representing the share of Suiza the amount of 480k,
representing the coconut harvest from Aug 1979 to Jan
1998 at P1,000 with 8 harvests per year with an interest
rate of 12% per annum or a total of 222% plus attorney’s
fees.
Col. Plantilla, administrator of the spouses, filed an
administrative complaint against Baliwag charging him of
serious irregularities in implementation of the writ of
execution alleging that dispositive portion of the decision
did not contain 8 harvest per year and Baliwag took it
upon himself to specify the number of harvests.
Issue: Whether or not Sheriff is guilty of irregularities?
Held:
Yes, Baliwag is guilty of malfeasance, not irregularities. The
determination of the amount due under the writ properly
pertained to the Judge. Yet, respondent assumed the task.
For doing so instead of pointing out to the court the
deficiency of the writ, he should be sanctioned. He should not
have arrogated unto himself judicial functions that were to be
performed only by the judge.
The computation of the amount due under the writ is not the
duty of the sheriff. Such amount should have already been
specifically stated in the writ if execution issued by the court
under Section 3 Rule 39 of the 1997 Rules of Court. All that
the sheriff should do upon receipt of that writ is the
ministerial duty of enforcing it.
RCBC vs ALFA
Facts:
Alfa on separate instances was granted by
RCBC 4 letters of credit to facilitate the purchase of raw
materials for their garments business. Alfa executed 4 trust
receipts and made comprehensive surety agreements
wherein the signatory officers of Alfa agreed in joint/several
capacity to pay RCBC in case the company defaulted. RCBC
filed a case versus Alfa for a sum of money. The CA awarded
only P3M (minimum amount) to RCBC instead of P18M as
stipulated in their contract.
this case it’s valid because it was not excessive under the
Usury Law.
*Atty. Aguinaldo assigned this case because he just wanted to
show us how to compute for the interest in long term deals.
He even made a diagram on the board. Di ko na ilalagay un sa
digest because I assume that my industrious & responsible
classmates took down notes... = p
RODZSSEN SUPPLY V. FAR EAST
Facts: On January 15, 1979, defendant Rodzssen Supply, Inc.
opened with plaintiff Far East Bank and Trust Co. a 30-day
domestic letter of credit, in the amount of P190,000.00 in
favor of Ekman and Company, Inc. (Ekman) for the purchase
from the latter of five units of hydraulic loaders, to expire on
February 15, 1979. The three loaders were delivered to
defendant for which plaintiff paid Ekman and which
defendant paid plaintiff before expiry date of LC. The
remaining two loaders were delivered to defendant but the
latter refused to pay. Ekman pressed payment to plaintiff.
Plaintiff paid Ekman for the two loaders and later demanded
from defendant such amount as it paid Ekman. Defendant
refused payment contending that there was a breach of
contract by plaintiff who in bad faith paid Ekman, knowing
that the two units of hydraulic loaders had been delivered to
defendant after the expiry date of subject LC.
Issue:
WON
petitioner
is
liable
to
respondent.
Ruling: The SC agrees with the CA that petitioner should pay
respondent bank the amount the latter expended for the
equipment belatedly delivered by Ekman and voluntarily
received and kept by petitioner. Equitable considerations
behoove us to allow recovery by respondent. True, it erred in
paying Ekman, but petitioner itself was not without fault in
the transaction. It must be noted that the latter had
voluntarily received and kept the loaders since October 1979.
When both parties to a transaction are mutually negligent in
the performance of their obligations, the fault of one cancels
the negligence of the other and, as in this case, their rights
and obligations may be determined equitably under the law
proscribing unjust enrichment.
MENDOZA vs CA
G.R.No. 116710, June 25,2001
Facts:
Issue:
W/N the CA can deviate from the provisions
of the contract between the parties?
Ruling: No. Contracting parties may establish agreements
terms, deemed advisable provided they are not contrary to
law/public policy. A contract is a law between the parties. In
PNB extended P500,000 credit line and P1 million
letter of credit infavor of Mendoza. As security for the credit
accomodations, he mortgaged real and personal properties to
PNB. The real estate mortgage provided for an escalation
clause.
SECTRANS 2010/ ATTY. AGUINALDO
14
He also executed 3 promissory notes covering the
P500,000 credit line in 1979. The said notes also provided for
an interest at the rate of 12% per annum until paid , and that
PNB may raise the interest without further notice.
He also executed 11 Application and Agreement for
the commercial letter of credit providing for 9% interest per
annum from the date of drafts until the arrival of payment in
New York and that the bank may increase the interest
without further notice. The bank sent a letter to Mendoza,
informing him that the interest rates increased to 14% per
annum.
Mendoza made some proposals for the restructuring
of his past due accounts into 5 year term loan and for an
additional P2 million letter of credit. However, PNB did not
approve his proposal and reduced the letter of credit to P 1
million only.
Mendoza claimed that he was forced to sign 2 blank
promissory notes and claimed that his proposal for 5 year
restructuring of his past due accounts was approved . He also
alleged taht PNB violated their agreement because PNB
inserted 21% instead of 18% in the first promissory note and
18% instead of 12% in the second promissory note. The 2
promissory notes also provided escalation clauses.
The 2 newly executed promissory notes novated the
three 1979 promissory notes and 11 Application and
Agreement for Commercial Letter of Credit executed by
Mendoza earlier.
After sometime, pursuant to the escalation clause,
the interests in the two promissory notes were again
increased. Due to Mendoza’s failure to pay the 2 promissory
notes, PNB foreclosed the real and personal mortgages.
Mendoza filed for specific performance, nullification of
foreclosure and damages.
Issue: Whether or not the interest rates imposed on the 2
newly executed promissory notes were valid.
Ruling:
The Court upheld the validity of the 2 newly
executed promissory notes on the ground that private
transactions are presumed to be fair and regular.
However, it ruled that interest rates imposed on the
2 newly executed promissory notes are not valid on the
ground that Mendoza was not informed beforehand by PNB
of the change in the stipulated interest rates.
It held that unilateral determination and imposition
of increased interest rates by PNB is violative of the principle
of mutuality of contract. Contract changes must be made
with the consent of the contractiong parties. The minds of all
parties must meet as to the proposed modification, especially
wwhen it affects an important aspect of the agreement. No
one receiving a proposal to change a contract to which the
party is obliged to answer the proposal, and his silence per se
cannot be construed as acceptance.
DEPOSIT
Topic: Deposit; Article 1962
Calibo v. CA
FACTS:
 Respondent Abella’s son Mike rented for residential
purposes the house of Petitioner Calibo.
 Respondent left a tractor in his son’s garage for
safekeeping
 Petitioner – Mike had not paid rentals, electric and
water bills
 Mike reassured Calibo that the tractor would stand
as guarantee for its payment
 Respondent wanted to take possession of his tractor
but Petitioner said that the Mike had left the tractor
with him as security for the payment of Mike’s
obligation to him.
 Respondent issued postdated checks but Petitioner
will only accept check if Respondent executes
Promissory Note to cover payment for unpaid
electric and water bills.
 Petitioner instituted an action for replevin claiming
ownership of the tractor and seeking to recover
possession thereof from petitioner. Likewise, he
asserts that the tractor was left with him, in the
concept of an innkeeper, on deposit and that he may
validly hold on thereto until Mike Abella pays his
obligations.
 TC and CA – Mike could not have validly pledged the
tractor because he was not the owner. NO DEPOSIT
ISSUE: WON there was a valid deposit?
HELD: NO
 In a contract of deposit, a person receives an object
belonging to another with the obligation of safely
keeping it and of returning the same. Petitioner
himself stated that he received the tractor not to
safely keep it but as a form of security for the
payment of Mike Abella’s obligations. There is no
deposit where the principal purpose for receiving
the object is not safekeeping.
 Consequently, petitioner had no right to refuse
delivery of the tractor to its lawful owner. On the
other hand, private respondent, as owner, had every
right to seek to repossess the tractor including the
institution of the instant action for replevin.
SECTRANS 2010/ ATTY. AGUINALDO
15
BISHOP OF JARO V. DELA PENA
CA Agro-Industrial vs CA
G.R. No. 90027 March 3, 1993
Facts










Petitioner (through its President) purchased 2 parcels of
land from spouses Pugao for P350 K with a
downpayment of P75 K.
Per agreement, the land titles will be transferred upon
full payment and will be placed in a safety deposit box
(SBDB) of any bank. Moreover, the same could be
withdrawn only upon the joint signatures of a
representative of the Petitioner and the Pugaos upon full
payment of the purchase price.
Thereafter, Petitioner and spouses placed the titles in
SDB of Respondent Security Bank and signed a lease
contract which substantially states that the Bank will not
assume liability for the contents of the SDB.
Subsequently, 2 renter's keys were given to the renters
— one to the Petitioner and the other to the Pugaos. A
guard key remained in the possession of the Respondent
Bank. The SDB can only be opened using these 2 keys
simultaneously.
Afterwards, a certain Mrs. Ramos offered to buy from
the Petitioner the 2 lots that would yield a profit of
P285K.
Mrs. Ramos demanded the execution of a deed of sale
which necessarily entailed the production of the
certificates of title. Thus, Petitioner with the spouses
went to Respondent Bank to retrieve the titles.
However, when opened in the presence of the Bank's
representative, the SDB yielded no such certificates.
Because of the delay in the reconstitution of the title,
Mrs. Ramos withdrew her earlier offer to purchase the
lots; as a consequence, the Petitioner allegedly failed to
realize the expected profit of P285K.
Hence, Petitioner filed a complaint for damages against
Respondent Bank.
Lower courts ruled in favour of Respondent Bank. Thus,
this petition.
Issues:
1.
2.
3.
Whether or not the disputed contract is an ordinary
contract of lease?
Whether or not the provisions of the cited contract are
valid?
Whether or not Respondent Bank is liable for damages?
Ruling:
1.
No. SC ruled that it is a special kind of deposit because:
2.
 the full and absolute possession and control of the
SDB was not given to the joint renters — the
Petitioner and the Pugaos.
 The guard key of the box remained with the
Respondent Bank; without this key, neither of the
renters could open the box and vice versa.
 In this case, the said key had a duplicate which was
made so that both renters could have access to the
box.
 Moreover, the renting out of the SDBs is not
independent from, but related to or in conjunction
with, the principal function of a contract of deposit
the receiving in custody of funds, documents and
other valuable objects for safekeeping.
NO. SC opined that it is void.




3.
Generally, the Civil Code provides that the
depositary (Respondent Bank) would be liable if, in
performing its obligation, it is found guilty of fraud,
negligence, delay or contravention of the tenor of
the agreement.
In the absence of any stipulation, the diligence of a
good father of a family is to be observed.
Hence, any stipulation exempting the depositary
from any liability arising from the loss of the thing
deposited on account of fraud, negligence or delay
would be void for being contrary to law and public
policy (which is present in the disputed contract)
Said provisions are inconsistent with the Respondent
Bank's responsibility as a depositary under Section
72(a) of the General Banking Act.
NO. SC ruled that:
 no competent proof was presented to show that
Respondent Bank was aware of the private
agreement between the Petitioner and the Pugaos
that the Land titles were withdrawable from the
SDB only upon both parties' joint signatures,
 and that no evidence was submitted to reveal that
the loss of the certificates of title was due to the
fraud or negligence of the Respondent Bank.
ART. 1977. OBLIGATION NOT TO MAKE USE OF THING
DEPOSITED UNLESS AUTHORIZED.
JAVELLANA VS. LIM
FACTS: Defendants executed a document in favor of plaintiffappellee wherein it states that they have received, as a
deposit, without interest, money from plaintiff-appellee and
agreed upon a date when they will return the money. Upon
the stipulated due date, defendants asked for an extension to
pay and binding themselves to pay 15% interest per annum
on the amount of their indebtedness, to which the plaintiff-
SECTRANS 2010/ ATTY. AGUINALDO
16
appellee acceded. The defendants were not able to pay the
full amount of their indebtedness notwithstanding the
request made by plaintiff-appellee. The lower court ruled in
favor of plaintiff-appellee for the recovery of the amount due.
future sale, which was never effected. D also
contended that in order for the plaintiffs to recover,
it is necessary that they should be able to establish
that the plaintiffs' palay was delivered in the
character of a sale, and that if, on the contrary, the
defendant should prove that the delivery was made
in the character of deposit, the defendant should be
absolved.
ISSUE: Whether the agreement entered into by the parties is
one of loan or of deposit?
HELD: The document executed was a contract of loan. Where
money, consisting of coins of legal tender, is deposited with a
person and the latter is authorized by the depositor to use
and dispose of the same, the agreement is not a contract of
deposit, but a loan. A subsequent agreement between the
parties as to interest on the amount said to have been
deposited, because the same could not be returned at the
time fixed therefor, does not constitute a renewal of an
agreement of deposit, but it is the best evidence that the
original contract entered into between therein was for a loan
under the guise of a deposit.
G.R. Nos. L-26948 and L-26949
October 8, 1927
ISSUE: WoN there was deposit
SC: NO
-
-
SILVESTRA BARON, plaintiff-appellant,
vs.
PABLO DAVID, defendant-appellant.
And
GUILLERMO BARON, plaintiff-appellant,
vs.
PABLO DAVID, defendant-appellant.
FACTS:
-
-
-
The defendant owns a rice mill, which was well
patronized by the rice growers of the vicinity.
On January 17, 1921, a fire occurred that destroyed
the mill and its contents, and it was some time
before the mill could be rebuilt and put in operation
again.
Silvestra Baron (P1) and Guillermo Baron (P2) each
filed an action for the recovery of the value of palay
from the defendant (D), alleged that:
o The palay have been sold by both plaintiffs
to the D in the year 1920
o Palay was delivered to D at his special
request, with a promise of compensation at
the highest price per cavan
D claims that the palay was deposited subject to
future withdrawal by the depositors or to some
Art. 1978. When the depositary has permission to
use the thing deposited, the contract loses the
concept of a deposit and becomes a loan or
commodatum, except where safekeeping is still the
principal purpose of the contract. The permission
shall not be presumed, and its existence must be
proved.
The case does not depend precisely upon this
explicit alternative; for even supposing that the
palay may have been delivered in the character of
deposit, subject to future sale or withdrawal at
plaintiffs' election, nevertheless if it was understood
that the defendant might mill the palay and he has in
fact appropriated it to his own use, he is of course
bound to account for its value.
In this connection we wholly reject the defendant's
pretense that the palay delivered by the plaintiffs or
any part of it was actually consumed in the fire of
January, 1921. Nor is the liability of the defendant in
any wise affected by the circumstance that, by a
custom prevailing among rice millers in this country,
persons placing palay with them without special
agreement as to price are at liberty to withdraw it
later, proper allowance being made for storage and
shrinkage, a thing that is sometimes done, though
rarely.
UNITED STATES, vs. IGPUARA
Facts: The defendant Jose igpuara was entrusted with the
amount of P2,498 by Montilla and Veraguth. Without the
consent of Montilla and Veraguth however, Igpuara used the
said amount for his own ends. Thus, igpuara was charged and
convicted with estafa, for having swindled Juana Montilla and
Eugenio Veraguth out of P2,498 which he had taken as
deposit from the former to be at the his disposal. Igpuara was
sentenced to pay Juana Montilla P2,498 . The instrument for
the deposit reads:
SECTRANS 2010/ ATTY. AGUINALDO
17
We hold at the disposal of Eugenio Veraguth the sum of two
thousand four hundred and ninety-eight pesos (P2,498), the
balance from Juana Montilla's sugar. — Iloilo, June 26, 1911,
— Jose Igpuara, for Ramirez and Co
Igpuara contended that the amount was not deposit for there
was no certificate of deposit, there was no transfer or
delivery of the P2,498 and what transpired was a loan. If
assuming that it was deposit, this is negotiable.
Issues: Whether or not it is necessary that there be transfer
or delivery in order to constitute a deposit.
Held: No.
“A deposit is constituted from the time a person
receives a thing belonging to another with the
obligation of keeping and returning it. (Art. 1758,
Civil Code.) “
His contention is without merit because firstly, the defendant
drew up a document declaring that they remained in his
possession. With the understanding that he would, for it has
no other purpose.
The certificate of deposit in question is not negotiable
because only instruments payable to order are negotiable.
Hence, this instrument not being to order but to bearer, it is
not negotiable.
As for the argument that the depositary may use or dispose
oft he things deposited, the depositor's consent is required
thus, the rights and obligations of the depositary and of the
depositor shall cease and the rules and provisions applicable
to commercial loans, commission, or contract which took the
place of the deposit shall be observed. Igpuara however has
shown no authorization whatsoever or the consent of the
depositary for using or disposing of the P2,498.
That there was not demand on the same or the next day after
the certificate was signed, does not operate against the
depositor, or signify anything except the intention not to
press it. Failure to claim at once or delay for sometime in
demanding restitution of the things deposited, which was
immediately due, does not imply such permission to use the
thing deposited as would convert the deposit into a loan.
FACTS: The plaintiff made an arrangement for the pasturing
of eighty-one head of cattle, in return for which she has to
give one-half of the calves that might be born and was to pay
the defendant one-half peso for each calf branded. On
demand for the whole, forty-eight head of cattle were
afterwards returned to her and this action is brought to
recover the remaining thirty-three.
Defendant in reply to the demand for the cattle, in which he
seeks to excuse himself for the loss of the missing animals.
As a second defense it is claimed that the thirty-three cows
either died of disease or were drowned in a flood. The
defendant's witnesses swore that of the cows that perished,
six died from overfeeding, and they failed to make clear the
happening of any flood sufficient to destroy the others.
HELD: If we consider the contract as one of deposit, then
under article 1183 of the Civil Code, the burden of
explanation of the loss rested upon the depositary and under
article 1769 the fault is presumed to be his. The defendant
has not succeeded in showing that the loss occurred either
without fault on his part or by reason of caso fortuito.
If, however, the contract be not one strictly of deposit but
one according to a local custom for the pasturing of cattle,
the obligations of the parties remain the same.
GULLAS vs. NATIONAL BANK
62 PHIL 519
Facts:





Judgment appealed from is affirmed
ANICETA PALACIO, plaintiff-appellee,
vs.
DIONISIO SUDARIO, defendant-appellant.



Atty. Gullas has a current account with PNB.
The treasury of the US issued a warrant in the amount of
$361 payable to the order of Bacos. Gullas and Lopez
signed as indorsers of this warrant. Thereupon it was
cashed by PNB.
The warrant was subsequently dishonored by the Insular
treasurer.
At that time, Gullas had a balance of P500 in PNB. From
this balance, he also issued some checks which
eventually could not be paid when it was sequestered by
the Bank.
When it learned of the dishonor, PNB sent notice to
Gullas stating that it applied the outstanding balances
from his current account as payment of the dishonored
warrant. Such notice could not be delivered to him since
he was out of town.
Without any action from Gullas, PNB applied the
dishonored warrant against his account.
Because of this, Gullas was unable to pay for the checks
he issued before the application.
Gullas filed a complaint against PNB.
SECTRANS 2010/ ATTY. AGUINALDO
18
Issue:
Whether or not PNB has a right to apply a deposit to the debt
of a depositor to the bank?
Held:
Yes, PNB has a right to apply the payment against the account
of the depositor.
The relation between a depositor and a bank is that if
creditor and debtor. The general rule is that a bank has a right
to set off of the deposit in its hands for the payment of any
indebtedness to it on the part of the depositor.
However, prior to the mailing of the notice of dishonor and
without waiting for any action by Gullas, the bank made use
of the money standing in his account to make good for the
treasury warrant. At this point recall that Gullas was merely
an indorser. Notice should have been given to him in order
that he might protect his interest. He should be awarded with
nominal damages because of the premature action of the
Bank.
Facts: Sesbreno entered into a money market, giving 300k to
Philfinance. As an exchange, Philfinance gave checks and
confirmation of sale of Delta Motor Corp certificates. Checks
bounced. Sesbreno is running after Philipinas Bank (payee)
(Holder of security of primissory note) and Delta (maker).
Delta contends that it is not liable because there was
"reconstruction" of debt of Delta to Philfinance, the
promissory note is not valid anymore. It also contends that
the document cannot be assigned because its non negotiable.
RTC ruled that Philfinance is liable because Philfinance
already knows that the liability was already waived and it still
issued the certificate. However, since Philfinance was not
impleaded, judgment cannot be made against Philfinance.
The issue related in this case is regarding trasferrability and
assignability.
Issue: WoN the non-negotiable
transferrable/assignable
instrument
is
non
Ruling: Assignable is different from tranferrability. Negotiable
instruments can be indorsed. Non negotiable instrumets can
be assigned. Therefore, non negotiable instrument can be
assigned.
DE LOS SANTOS vs TAN KHEY
O.G.No.26695-R, July 30, 1962
SERRANO vs CENTRAL BANK
Facts:
Facts:
Serrano had P350K worth of time deposits
in Overseas Bank of Manila. He made a series of encashment
but was not successful. He filed a case against Overseas Bank
& he also included the Central Bank so that the latter may
also be jointly and severally liable. Serrano argued that the CB
failed to supervise the acts of Overseas Bank and protect the
interests of its depositors by virtue of constructive trust.
Tan Khey was the owner of International Hotel
located in Iloilo city. Romeo de los Santos lodged in Tna
Khey’s hotel. After arrival, he left the hotel, depositing his
revolver and his bag with the person in charge in the hotel.
When he returned to the hotel, he took his revolver and his
bag from the person in charge in the hotel and proceeded to
his room. He locked the door before sleeping.
Issue:
When he woke up, he discovered that the door in his
room was opened and his bag and pants, wherein he placed
his revolver , was missing. He reported the matter to the
Assistant Manager of the hotel, who in turn informed Tan
Khey.
W/N the Central Bank is liable?
Ruling: No. There is no breach of trust from a bank’s failure
to return the subject matter of the deposit. Bank deposits are
in the nature of irregular deposits. All kinds of bank deposits
are to be treated as loans and are to be covered by the law
on loans Art.1980. In reality the depositor is the creditor
while the bank is the debtor. Failure of the respondent bank
to honor the time deposit is failure to pay its obligation as a
debtor.
A secret service agent was sent to investigate and it
was found that the wall of the room occupied by De los
Santos was only seven feet high with an open space above
through which one could enter from outside. De los Santos
told the detective that he lost his revolver.
Tan Khey disclaimed liability because De los Santos
did not deposit his properties with the manager despite a
notice to that effect was posted in the hotel.
SESBRENO V. CA
Tan Khey contended that to be liable under Article
1998 of the Civil Code, the following conditions must concur:
SECTRANS 2010/ ATTY. AGUINALDO
19
1.
2.
3.
Deposit of effects by travellers in hotel or inn
Notice given to hotel keepers or employees of
the effects brought by guests
Guest or travellers take the precautions which
said hotel keepers or their substitutes advised
relative to the care and vigilance of their effects.
The requirement of notice being evidently for the
purpose of closing the door to fraudulent claims for nonexistent articles, the lack thereof was fatal to De los Santos’
claim for reparation for the loss of his eyeglass, ring, and
cash.
Precautions
Issue: Whether the hotel owner should be held liable for the
loss of the effects of the guest?
Rulng:
The Court ruled that the hotel owner should be
liable for the loss of the revolver, pants and bag of the guest.
Deposit
While the law speaks of “deposit” of effects by
travellers in hotels or inns, personal receipt by the innkeeper
for safe keeping of effects is not necessaily meant thereby.
The reason therefor is the fact that it is the nature of business
of an innkeeper to provide not only lodging for travellers but
also to security to their persons and effects. The secuity
mentioned is not confined to the effects actually delivered to
the innkeeper but also to all effects placed within the
premises of the hotel. This is because innkeepers by the
neture of their business, have supervision and controlof their
inns and the premises threof.
It is not necessary that the effect was actually
delivered but it is enough that they are within the inn. If a
guest and goods are within the inn, that is sufficient to charge
him.
The owner of a hotel may exonerate himself from
liability by showing that the guest has taken exclusive control
of his own goods, but this must be exclusive custody and
control of a guest, and must not be held under the
supervision and care of the innkeeper,ey are kept in a room
assigned to a guest or the other proper depository in the
house.
In this case, the guest deposited his effects in the
hotel because they are in his room and within the premises of
the hotel, and therefore, within the supervision and control
of the hotel owner.
Notice
The Court ruled that there was no doubt that the
person in charge had knowledge of his revolver, the bag, and
pants of the guest, De los Santos.
While an innkeeper cannot free himself from
responsibility by posting notices, there can be no doubt of the
innkeeper’s right to make such regulations in the
management of his inn as will more effectually secure the
property of his guest and operate as protection to himself,
and that it is incumbent upon the guest, if he means to hold
the inkeeper ho his responsibility, to comply with any
regulation that is just and reasonable, when he is requested
to do so.
However, in this case, the notice requiring actual
deposit of the effects with the manager was an unreasonable
regulation. It was unreasonable to require the guest to
deposit his bag ,pants and revolver to the manager. De los
Santos had exercised the necessary diligence with respect to
the care and vigilance of his effects.
Topic: Deposit; Article 2003
YHT Realty v. CA
FACTS:
 Respondent McLoughlin would stay at Tropicana
Hotel every time he is here in the Philippines and
would rent a safety deposit box.
 The safety deposit box could only be opened
through the use of 2 keys, one of which is given to
the registered guest, and the other remaining in the
possession of the management of the hotel.
 McLoughlin allegedly placed the following in his
safety deposit box – 2 envelopes containing US
Dollars, one envelope containing Australian Dollars,
Letters, credit cards, bankbooks and a checkbook.
 When he went abroad, a few dollars were missing
and the jewelry he bought was likewise missing.
 Eventually, he confronted Lainez and Paiyam who
admitted that Tan opened the safety deposit box
with the key assigned to him. McLoughlin went up to
his room where Tan was staying and confronted her.
Tan admitted that she had stolen McLouglin’s key
and was able to open the safety deposit box with the
assistance of Lopez, Paiyam and Lainez. Lopez alsto
told McLoughlin that Tan stole the key assigned to
McLouglin while the latter was asleep.
 McLoughlin insisted that it must be the hotel who
must assume responsibility for the loss he suffered.
 Lopez refused to accept responsibility relying on the
conditions for renting the safety deposit box entitled
“Undertaking For the Use of Safety Deposit Box”
SECTRANS 2010/ ATTY. AGUINALDO
20
ISSUE: Whether the hotel’s Undertaking is valid?
HELD: NO
 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.
 In an early case (De Los Santos v. Tan Khey), CA ruled
that to hold hotelkeepers or innkeeper liable for the
effects of their guests, it is not necessary that they
be actually delivered to the innkeepers or their
employees. It is enough that such effects are within
the hotel or inn. With greater reason should the
liability of the hotelkeeper be enforced when the
missing items are taken without the guest’s
knowledge and consent from a safety deposit box
provided by the hotel itself, as in this case.
 Paragraphs (2) and (4) of the “undertaking”
manifestly contravene Article 2003, CC 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 WAREHOUSE RECEIPTS LAW
G.R. No. L-16315
proportion stipulated in the milling contracts, and thereafter
is deposited in the warehouses of the latter. (Pp. 4-5, t.s.n.)
For the sugar deposited by the planters, the petitioner issues
the corresponding warehouse receipts of "quedans". It does
not collect storage charges on the sugar deposited in its
warehouse during the first 90 days period counted from the
time it is extracted from the sugarcane. Upon the lapse of the
first ninety days and up to the beginning of the next milling
season, it collects a fee of P0.30 per picul a month.
Henceforth, if the sugar is not yet withdrawn, a penalty of
P0.25 per picul or fraction thereof a month is imposed.
(Exhibits "B-1", "C-1", "D-1", "B-2", "C-2", p. 10, t.s.n.)
The storage of sugar is carried in the books of the company
under Account No. 5000, denominated "Manufacturing Cost
Ledger Control"; the storage fees under Account No. 521620;
the expense accounts of the factory under Account No. 5200;
and the so-called "Sugar Bodega Operations" under Account
No. 5216, under which is a Sub-Account No. 20, captioned,
"Credits". (Pp. 16-17, t.s.n., Exhibit "F".) The collections from
storage after the lapse of the first 90 days period are entered
in the company's books as debit to CASH, and credit to
Expense Account No. 2516-20 (p. 18, t.s.n.).
The credit for storage charges decreased the deductible
expense resulting in the corresponding increase of the
taxable income of the petitioner. This is reflected by the
entries enclosed in parenthesis in Exhibit "G", under the
heading "Storage Charges". (P. 18, t.s.n.) The alleged reason
for this accounting operation is that, inasmuch as the "Sugar
Bodega Operations" is considered as an expense account,
entries under it are "debits". Similarly, since "Storage
Charges" constitute "credit", the corresponding figures (see
Exhibit "C") are enclosed in parenthesis as they decrease the
expenses of maintaining the sugar warehouses.
Upon investigation conducted by the Bureau, it was found
that during the years 1949 to 1957, the petitioner realized
from collected storage fees a total gross receipts of
P212,853.00, on the basis of which the respondent
determined the petitioner's liability for fixed and percentage
taxes, 25% surcharge, and administrative penalty in the
aggregate amount of P8,411.99 (Exhibit "5", p. 11, BIR rec.)
May 30, 1964
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
HAWAIIAN-PHILIPPINE COMPANY, respondent.
After due hearing the Court of Tax Appeals ordered the CIR to
refund to respondent Hawaiian-Philippine Company the
amount of P8,411.99 representing fixed and percentage taxes
assessed against it and which the latter had deposited with
the City Treasurer of Silay, Occidental Negros
FACTS:
ISSUE:
The petitioner, a corporation duly organized in accordance
with law, is operating a sugar central in the City of Silay,
Occidental Negros. It produces centrifugal sugar from
sugarcane supplied by planters. The processed sugar is
divided between the planters and the petitioner in the
Whether or notpetitioner is a warehouseman liable for the
payment of the fixed and percentage taxes prescribed in
Sections 182 and 191 of the National Internal Revenue Code
SECTRANS 2010/ ATTY. AGUINALDO
21
HELD:
YES.

Respondent disclaims liability under the provisions quoted
above, alleging that it is not engaged the business of storing
its planters' sugar for profit; that the maintenance of its
warehouses is merely incidental to its business of
manufacturing sugar and in compliance with its obligation to
its planters. We find this to be without merit.

It is clear from the facts of the case that, after manufacturing
the sugar of its planters, respondent stores it in its
warehouses and issues the corresponding "quedans" to the
planters who own the sugar; that while the sugar is stored
free during the first ninety days from the date the it
"quedans" are issued, the undisputed fact is that, upon the
expiration of said period, respondent charger, and collects
storage fees; that for the period beginning 1949 to 1957,
respondent's total gross receipts from this particular
enterprise amounted to P212,853.00.
A warehouseman has been defined as one who receives and
stores goods of another for compensation (44 Words and
Phrases, p. 635). For one to be considered engaged in the
warehousing business, therefore, it is sufficient that he
receives goods owned by another for storage, and collects
fees in connection with the same. In fact, Section 2 of the
General Bonded Warehouse Act, as amended, defines a
warehouseman as "a person engaged in the business of
receiving commodity for storage."
That respondent stores its planters' sugar free of charge for
the first ninety days does not exempt it from liability under
the legal provisions under consideration. Were such fact
sufficient for that purpose, the law imposing the tax would be
rendered ineffectual.








Plaintiff Gonzales, totaling 368 sacks, for which he issued
receipts.
After he was licensed as a bonded warehouseman, Go
Tiong again received various deliveries of palay from
Plaintiff, totaling 492 sacks, for which he issued the
corresponding receipts, all the grand total of 860 sacks,
valued at P8,600 at the rate of P10 per sack.
Noteworthy is that the receipts issued by Go Tiong to the
Plaintiff were ordinary receipts, not the "warehouse
receipts" defined by the Warehouse Receipts Act (Act
No. 2137).
On or about March 15, 1953, Plaintiff demanded from Go
Tiong the value of his deposits in the amount of P8,600,
but he was told to return after two days, which he did,
but Go Tiong again told him to come back.
A few days later, the warehouse burned to the ground.
Before the fire, Go Tiong had been accepting deliveries of
palay from other depositors and at the time of the fire,
there were 5,847 sacks of palay in the warehouse, in
excess of the 5,000 sacks authorized under his license.
After the burning of the warehouse, the depositors of
palay, including Plaintiff, filed their claims with the
Bureau of Commerce.
However, according to the decision of the trial court,
nothing came from Plaintiff's efforts to have his claim
paid.
Thereafter, Gonzales filed the present action against Go
Tiong and the Luzon Surety for the sum of P8,600, the
value of his palay, with legal interest, damages in the
sum of P5,000 and P1,500 as attorney's fees.
While the case was pending in court, Gonzales and Go
Tiong entered into a contract of amicable settlement to
the effect that upon the settlement of all accounts due to
him by Go Tiong, he, Gonzales, would have all actions
pending against Go Tiong dismissed.
Inasmuch as Go Tiong failed to settle the accounts,
Gonzales prosecuted his court action
ISSUE:
Gonzalez vs Go Tiong
Facts:




Go Tiong (respondent) owned a rice mill and warehouse,
located in Pangasinan. Thereafter, he obtained a license
to engage in the business of a bonded warehouseman.
Subsequently, respondent Tiong executed a Guaranty
Bond with the Luzon Surety Co to secure the
performance of his obligations as such bonded
warehouseman, in the sum of P18,334, in case he was
unable to return the same.
Afterwards, respondent Tiong insured the warehouse
and the palay deposited therein with the Alliance Surety
and Insurance Company.
But prior to the issuance of the license to Respondent, he
had on several occasions received palay for deposit from
Whether or not Plaintiff’s claim is governed by the Bonded
Warehouse Act due to Go Tiong’s act of issuing to the former
ordinary receipts, not warehouse receipts?
RULING:
YES. SC ruled in favor Plaintiff.


Act No. 3893 provides that any deposit made with
Respondent Tiong as a bonded warehouseman must
necessarily be governed by the provisions of Act No.
3893.
The kind or nature of the receipts issued by him for the
deposits is not very material much less decisive since said
provisions are not mandatory and indispensable
SECTRANS 2010/ ATTY. AGUINALDO
22





Under Section 1 of the Warehouse Receipts Act, the
issuance of a warehouse receipt in the form provided by
it is merely permissive and directory and not obligatory. .
"Receipt", under this section, can be construed as any
receipt issued by a warehouseman for commodity
delivered to him
As the trial court well observed, as far as Go Tiong was
concerned, the fact that the receipts issued by him were
not "quedans" is no valid ground for defense because he
was the principal obligor.
Furthermore, as found by the trial court, Go Tiong had
repeatedly promised Plaintiff to issue to him "quedans"
and had assured him that he should not worry; and that
Go Tiong was in the habit of issuing ordinary receipts
(not "quedans") to his depositors.
Furthermore, Section 7 of said law provides that as long
as the depositor is injured by a breach of any obligation
of the warehouseman, which obligation is secured by a
bond, said depositor may sue on said bond.
In other words, the surety cannot avoid liability from the
mere failure of the warehouseman to issue the
prescribed receipt.
HELD: YES. The warehouse receipt in question is negotiable. It
recited that certain merchandise deposited in the ware house
“por orden” of the depositor instead of “a la orden”, there
was no other direct statement showing whether the goods
received are to be delivered to the bearer, to a specified
person, or to a specified order or his order. However, the use
of “por orden” was merely a clerical or grammatical error and
that the receipt was negotiable.
As provided by the Warehouse Receipts Act, in case the
warehouse man fails to mark it as “non-negotiable”, a holder
of the receipt who purchase if for value supposing it to be
negotiable may, at his option, treat such receipt as imposing
upon the warehouseman the same liabilities he would have
incurred had the receipt been negotiable. This appears to
have given any warehouse receipt not marked “nonnegotiable” practically the same effect as a receipt which, by
its terms, is negotiable provided the holder of such unmarked
receipt acquired it for value supposing it to be negotiable,
circumstances which admittedly exist in the present case.
Hence, the rights of the indorsee, ASIA, are superior to the
vendor’s lien.
WAREHOUSE RECEIPT: Failure to mark “non-negotiable.”
ROMAN V. ASIA BANKING CORPORATION
FACTS: U. de Poli, for value received, issued a quedan
convering the 576 bultos of tobacco to the Asia Banking
Corporation (claimant & appellant). It was executed as a
security for a loan. The aforesaid 576 butlos are part and
parcel of the 2, 766 bultos purchased by U. de Poli from Felisa
Roman (claimant & appellee).
The quedan was marked as Exhibit D which is a warehouse
receipt issued by the warehouse of U. de Poli for 576 bultos
of tobacco. In the left margin of the face of the receipt, U. de
Poli certifies that he is the sole owner of the merchandise
therein described. The receipt is endorsed in blank; it is not
marked”non-negotiable” or “not negotiable”.
Since a sale was consummated between Roman and U. de
Poli, Roman’s claim is a vendor’s lien. The lower court ruled in
favor of Roman on the theory that since the transfer to Asia
Banking Corp. (ASIA) was neither a pledge nor a mortgage,
but a security for a loan, the vendor’s lien of Roman should
be accorded preference over it.
However, if the warehouse receipt issued was nonnegotiable, the vendor’s lien of Roman cannot prevail against
the rights of ASIA as indorsee of the receipt.
ISSUE: WON the quedan issued by U. de Poli in favor of ASIA.
is negotiable, despite failure to mark it as not negotiable?
Bank of P.I. v. Herridge
FACTS:
The insolvent Umberto de Poli was for several years engaged
on an extensive scale in the exportation of Manila hemp,
maguey and other products of the country.
He was also a licensed public warehouseman, though most of
the goods stored in his warehouses appear to have been
merchandise purchased by him for exportation and deposited
there by he himself.chanr
In order to finance his commercial operations De Poli
established credits with some of the leading banking
institutions doing business in Manila at that time, among
them the Hongkong & Shanghai Banking Corporation, the
Bank of the Philippine Islands, the Asia Banking Corporation,
the Chartered Bank of India, Australia and China, and the
American Foreign Banking Corporation.
De Poli opened a current account credit with the bank against
which he drew his checks in payment of the products bought
by him for exportation.
Upon the purchase, the products were stored in one of his
warehouses and warehouse receipts issued therefor which
SECTRANS 2010/ ATTY. AGUINALDO
23
were endorsed by him to the bank as security for the
payment of his credit in the account current.
PNB v PRODUCER’S WAREHOUSE ASSOCIATION
FACTS:
When the goods stored by the warehouse receipts were sold
and shipped, the warehouse receipt was exchanged for
shipping papers, a draft was drawn in favor of the bank and
against the foreign purchaser, with bill of landing attached,
and the entire proceeds of the export sale were received by
the bank and credited to the current account of De
Poli.chanroble
De Poli was declared insolvent by the Court of First Instance
of Manila with liabilities to the amount of several million
pesos over and above his assets. An assignee was elected by
the creditors and the election was confirmed by the court
-
-
-
Among the property taken over the assignee was the
merchandise stored in the various warehouses of the
insolvent. This merchandise consisted principally of hemp,
maguey and tobacco.
The various banks holding warehouse receipts issued by De
Poli claim ownership of this merchandise under their
respective receipts, whereas the other creditors of the
insolvent maintain that the warehouse receipts are not
negotiable, that their endorsement to the present holders
conveyed no title to the property, that they cannot be
regarded as pledges of the merchandise inasmuch as they are
not public documents and the possession of the merchandise
was not delivered to the claimants and that the claims of the
holders of the receipts have no preference over those of the
ordinary unsecured creditors.law lib
-
ISSSUE:
-
Whether or not the warehouse receipts issued are
negotiable?
-
-
PNB (P) is a bank in PH, Producer’s Warehouse
Association (D) is a domestic corporation doing
general warehouse business and Phil. Fiber and
Produce Company (Fiber) is another domestic
corporation.
D and Fiber entered into a written contract, wherein
Fiber would act as the general manager of the
business of D and that Fiber would exercise a general
and complete supervision over the management of
the business of D.
Nov and Dec 1918 – D issued negotiable quedans to
Fiber for 15k++ piculs of Copra, which the terms
states that
o D agreed to deliver that amount of copra to
Fiber or its order
o D will deliver the packages noted therein
upon the surrender of the warrant to D
o No transfer of interest/ownership will be
recognized unless registered in the books of
D
o The words “negotiable warrant” were
printed in red ink in the quedan
Fiber then arranged for overdraft with P for P1M and
to secure it, the subject quedans were endorsed in
blank and delivered by Fiber to P, which became the
owner and holder thereof.
P later on requested D the delivery of copra
described in the quedans, however, D refused to
comply despite repeated requests of P, stating that it
could not be delivered since the goods mentioned
are not in the warehouse.
D stated that the quedans were invalid and
wrongfully issued and that the copra was not in its
warehouse
LC ruled in favor of D
HELD:
ISSUE: WoN the quedans were validly negotiated to P
Yes, a warehouseman who deposited merchandise in his own
warehouse, issued a warehouse receipts therefore and
thereafter negotiated the receipts by endorsement. The
receipt recites that the goods were deposited “por orden” of
the depositor, the warehouseman, but contained no
statement that the goods were to be delivered to the bearer
of the receipts or to a specified person. It is in the form of a
warehouse receipts and was not mark “nonnegotiable”.
SC: YES!
Therefore the receipts was negotiable warehouse receipts
and the words “por orden” must be construed to mean “to
the order”.
-
-
The quedans have legal force and effect
o They were duly executed by Wicks, as
treasurer and Torres as warehouseman, for
and in behalf of D.
o The said quedans were endorsed in blank
and physical possession was delivered to P
as collateral security for the overdraft of
Fiber Company and
o That the quedans were in negotiable form.
D cannot now deny the existence of the quedans
CRUZ vs. VALERO
SECTRANS 2010/ ATTY. AGUINALDO
24
Facts:
Valero is president of the Luzon Sugar Co. while appellant
Cruz had a share amounting to 1,544.38 piculs export
centrifugal sugar, which was exchanged for an equal amount
of domestic centrifugal sugar. Cruz deposited in the Luzon
Sugar Company's warehouse within its compound, with the
obligation on its part to deliver it to the appellant on demand,
that the appellant was entitled to 238.20 piculs of domestic
centrifugal sugar as his share in the 1940-1941 crop. On
different dates, the appellant had withdrawn several piculs of
sugar, reducing reducing the number of gallons of molasses.
Cruz claims that on December 1941, the Luzon Sugar
Company (LSC) did not have in its warehouse the sugar he
had stored in its warehouse for safekeeping and the number
of gallons of molasses he had left in its possession contained
in cylindrical tanks, because the Valero had disposed of the
same without the knowledge and consent of appellant and
that when the appellant wanted to withdraw his sugar from
the warehouse of LSC, the amount of sugar stored in the
warehouse was not manufactured by the Luzon Sugar
Company but by a different company.
This was denied by LSC, contending that it had sufficient
amount of sugar manufactured by it and was in a position to
deliver sugar. Its warehouse was however bombed by
Japanese and the warehouse damaged by shrapnel and some
piculs of centrifugal sugar were looted, some taken by the
Japanese after the occupation and the remaining brought by
the Japanese Army to Northern Luzon. Thus it became
impossible the deliver the centrifugal sugar and molasses
belonging of Cruz.
Issue: Whether or not the LSC still has the obligation to
deliver the same amount and kind of sugar stored in its
warehouse.
HELD: Since there was enough sugar to cover and deliver
1,081.79 piculs of domestic, reserve and additional sugar
belonging to the Cruz who, according to the milling contract,
was in duty bound to take delivery thereof at the warehouse,
since it was established that the LSC compound was bombed
on December 1941 by the Japanese who also occupied it
from 1 January to 20 February 1942, the loss was due to the
war or to a fortuitous event and therefore, the obligation of
the depositary to deliver what has been deposited in him has
been extinguished by the happening of a fortuitous event,
which in this case, is the pacific war. The judgment appealed
from is affirmed.
This is an appeal from a decision of the Court of First Instance
of Nueva Ecija which orders the defendant to pay to the
plaintiff the sum of P3,000, with interest thereon at the rate
of 6% per annum from June 26, 1940, and the costs of action.
ESTRADA V. CAR
DMG INC. vs CONSOLIDATED TERMINALS INC.
63 OG 10
Facts:




DMG ordered replacement parts for diesel conversion
engine from Germany.
Upon arrival in Manila, the shipment was placed in the
warehouse of Consolidated Terminals.
When DMG demanded for the delivery of the goods,
Consolidated stated that it was already released and
delivered to DMG through a delivery permit which was
presented by a certain Sandoval authorized by Alteza.
DMG contends that it has no such employees. It
demanded for the payment of such goods.
Issue:
Whether or not Consolidated is liable to DMG?
Held:
Yes, Consolidated is liable to DMG.
Consolidated did not faithfully comply with its duties and
obligations. Section 9 of the Warehouse Receipts Law does
not deem it sufficient as prerequisite for delivery the mere
presentment of the receipt. It further requires that the
person to whom the goods should be delivered is “one who is
either himself entitled to the property…or who has written
authority from the person so entitled.” Presentment of the
receipt must be couple with ascertainment that the person so
presenting it is rightfully entitled to take delivery of the goods
covered by the receipt.
Consolidated did not ascertain the identity of Sandoval and
Alteza. They have not called up DMG first and ascertained the
genuineness of the authority in writing before delivering the
articles considering that they did not know either Sandoval or
Alteza.
Consolidated becomes liable under Section 10 of the WRL for
misdelivery. On the contention that DMG was negligent for
allowing such permits to fall into the hands of unauthorized
persons, contributory negligence is not one of the defenses
specified in its answer. In order to for it to be a defense, it
must previously show to have been committed. The burden
of proof is in himself who alleges it as a defense. It cannot be
inferred from the fact that persons other than the consignee
or owner were able to take possession of the shipping
documents or the permit papers which were supposed to be
in the latter’s custody.
SECTRANS 2010/ ATTY. AGUINALDO
25
CONSOLIDATED vs ARTEX
Facts:
Consolidated Terminals Inc (CTI) operated a
customs warehouse in Manila. It received 193 bales of high
density compressed raw cotton worth P99k. It was
understood that CTI would keep the cotton on behalf of
Luzon Brokerage until the consignee Paramount Textile had
opened the corresponding letter of credit in favor of Adolph
Hanslik Cotton. By virtue of forged permits, Artex was able to
obtain the bales of cotton and paid P15k.
Issue:
W/N CTI as warehouseman was entitled to
the possession of the bales of cotton?
Ruling: No. CTI had no cause of action. It was not the owner
of the cotton. It was not a real party of interest in the case.
CTI was not sued for damages by the real party in interest.
LUA KIAN VS. MANILA RAILROAD
known as quedan. The warehouse receipt of the mercahndise
covered thereby was described as Cagayan tabacco en rama.
It was indorsed in blank by U. De Poli to American Foreign
Banking Corporation
As security for an overdraft. U. De Poli became insolvent and
the bank presented its claim for the delivery of the tobacco
covered in the warehouse receipt.
However, it was found that the tobacco had come
from Isabela and not from Cagayan, and the bank’s claim was
disputed by other creditors of the insolvent on the ground
that, among others, that the tobacco claimed, being Isabela
tobacco, was not correctly described in the warehouse
receipt and that, therefore, the receipt was ineffective as
against the general creditors.
Issue: Whether the use of the word “Cagayan” instead of
“Isabela” in describing the tobacco in the quedan renders the
quedan null and void as negotiable warehouse receipt for the
tobacco intended to be covered by it.
Ruling:
Facts: Manila Railroad received into its custody a shipment of
cases of milk, of which 3.171 wwere marked for Cebu and
1,829 for Lua Kia but according to the bills of lading in Manila
Railroad's possession, Lua Kia was entitled to 2000 cases and
Cebu was entitled to 3000 cases. Manila Railroad delivered
1,913 cases to Lua Kia, which is 87 cases short in the bill of
lading.
Issue: WoN manila RailRoad is liable to Lua Kia for the
underlivered
cases
of
milk
The identity of the tobacco was sufficiently
established by the evidence. In the warehouse, there was no
other tobacco stored nut only the Isabela tobacco. The
debtor also said that Isabela tobacco was the tobacco which
he transsfered to American Foreign Banking Corporation.
Aside from that, when the subaccountant of the bank went to
the warehouse to check which tobacco was covered by the
warehouse receipt, the assignee and one of his accountants
pointed to him the Isabela tobacco.
Ruling. Yes. The legal relationship between an arrastre
operator and the consignee is akin to that of a depositor and
warehouseman. As custodian of the goods discharged from
the vessel, it was A's duty like that of nay other depositary to
take good care of the goods and turn them over to the party
entitled to their possession. Under this particular set of
circumstances, A should have held delivery because of the
discrepancy between the bill of lading and the markings and
conducted its own investigation not unlike that under
Sectopm 18 of the Warehouse Receipts law, or called upon
the parties to interplead such ias in case under Section 17 of
the same law, in order to determint the rightful owner of the
goods.
The intention of the parties to the transaction must
prevail against such a technical objection to the sufficiency of
the description of the tobacco. It might be different if there
had been Cagayan tobacco in the warehouse at the time of
the issuance of the quedan, or if there were any doubt as to
the identity of the tobacco intended to be covered by the
quedan.
AMERICAN FOREIGN BANKING CORPORATION vs HERRIDGE
G.R.No.21005, December 20, 1924
Topic: Warehouse Receipts Law; sec. 38
PNB v. Atendido
Facts:
U. de Poli was a debtor of American Foreign Banking
Corporation. He issued a warehouse receipt, commonly
The quedan was a negotiable warehouse receipt
which was duly issued and delivered by the debtor U. de Poli
to American Foreign Banking Corporation and it divested him
of his title to said tobacco and transferred the position and
the title thereof the American Foreign Banking Corporation.
FACTS:
 Laureano Atendido obtained from PNB a loan of P3k
and pledged 2000 cavans of palay to guarantee
payment which were then deposited in the
warehouse of Cheng Siong Lam & Co and to that
SECTRANS 2010/ ATTY. AGUINALDO
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
effect the borrower endorsed in favour of the bank
the corresponding warehouse receipt.
Before the maturity of the loan, the 2000 cavans of
palay disappeared for unknown reasons in the
warehouse. When the loan matured, the borrower
failed to pay obligation
Defendant claimed that the warehouse receipt
covering the palay which was given as security
having been endorsed in blank in favour of the bank
and the palay having been lost or disappeared, he
thereby became relieved of liability.
merely retains the right to keep and with the
consent of the owner to sell them so as to satisfy the
obligation from the proceeds of the sale. This is for
the simple reason that the transaction involved is
not a sale but only a mortgage or pledge, and that if
the property covered by the quedans or warehouse
receipts is lost without fault or negligence of the
mortgagee or pledge or the transferee or endorsee
of the warehouse receipt or quedan, then said goods
are to be regarded as lost on account of the real
owner, mortgagor or pledgor.
ISSUE: Whether the surrender of the warehouse receipt
covering 2000 cavans of palay given as security, endorsed in
blank, to PNB, has the effect of transferring their title or
ownership OR it should be considered merely as a guarantee
to secure the payment of the obligation of Defendant?
HELD:
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MARTINEZ V. PNB
Siy Cong Bien vs HSBC
FACTS
Nature of contract is Pledge supported by the
stipulations embodied in the contract signed by
Defendant when he secured the loan from PNB.
The 2000 cavans of palay covered by the warehouse
receipt were given to PNB only as a guarantee to
secure the fulfilment by Defendant in his obligation.
This clearly appears in the contract wherein it is
expressly stated that said 2000 cavanes of palay
were given as collateral security.
It follows that by the very nature of the transaction
its ownership remains with the pledgor subject only
to foreclosure in case of non-fulfillment of the
obligation.
By this we mean that if the obligation is not paid
upon maturity the most that the pledge can do is to
sell the property and apply the proceeds to the
payment of the obligation and to return the balance,
if any, to the pledgor. This is the essence of the
contract, for, according to law, a pledge cannot
become the owner of, nor appropriate to himself the
thing given in pledge.
If by the contract of pledge, the pledgor continues to
be the owner of the thing pledged during the
pendency of the obligation, it stands to reason that
in case of loss of the property, the loss should be
borne by the pledgor.
The fact that the warehouse receipt covering the
palay was delivered, endorsed in blank, to the bank
does not alter the situation, the purpose of such
endorsement being merely to transfer the juridical
possession of the property to the pledge and to
forestall any possible disposition thereof on the part
of the pledgor.
Where a warehouse receipt or quedan is transferred
or endorsed to a creditor only to secure the payment
of a loan or debt, the transferee or endorsee does
not automatically become the owner of the goods
covered by the warehouse receipt or quedan but he
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Plaintiff is a corporation engaged in business generally,
and that the Defendant HSBC is a foreign bank
authorized to engage in the banking business in the
Philippines.
On June 25, 1926, Otto Ranft called the office of the
Plaintiff to purchase hemp (abaca), and he was offered
the bales of hemp as described in the contested
negotiable quedans.
The parties agreed to the aforesaid price, and on the
same date the quedans, together with the covering
invoice, were sent to Ranft by the Plaintiff, without
having been paid for the hemp, but the Plaintiff's
understanding was
o that the payment would be made against the
same quedans,
o and it appear that in previous transaction of the
same kind between the bank and the Plaintiff,
quedans were paid one or two days after their
delivery to them.
Immediately these Quedans were pledged by Otto Ranft
to the Defendant HSBC to secure the payment of his
preexisting debts to the latter.
The baled hemp covered by these warehouse receipts
was worth P31,635; 6 receipts were endorsed in blank by
the Plaintiff and Otto Ranft, and 2 were endorsed in
blank, by Otto Ranft alone
On the evening of the said delivery date, Otto Ranft died
suddenly at his house in the City of Manila.
When the Plaintiff found out, it immediately demanded
the return of the quedans, or the payment of the value,
but was told that the quedans had been sent to the
herein Defendant as soon as they were received by
Ranft.
Shortly thereafter the Plaintiff filed a claim for the
aforesaid sum of P31,645 in the intestate proceedings of
the estate of the deceased Otto Ranft, which on an
SECTRANS 2010/ ATTY. AGUINALDO
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appeal from the decision of the committee on claims,
was allowed by the CFI Manila.
In the meantime, demand had been made by the Plaintiff
on the Defendant bank for the return of the quedans, or
their value, which demand was refused by the bank on
the ground that it was a holder of the quedans in due
course.
bank relied. Subsequently, Plaintiff in this case has
suffered the loss of the quedans, but as far as the court
sees it, there is now no remedy available to the Plaintiff
equitable estoppel place the loss upon him whose
misplaced confidence has made the wrong possible as
ruled in National Safe Deposit vs. Hibbs (a US case)
WAREHOUSE RECEIPT: Who may negotiate a receipt?
ISSUE
PNB v. NOAH’S ARK SUGAR REFINERY
Whether or not the Quedans endorsed in blank gave the
HSBC rightful and valid title to the goods?
HELD
YES. SC ruled in favour of Defendant HSBC.
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It may be noted,
o first, that the quedans in question were
negotiable in form;
o second, that they were pledged by Otto Ranft to
the Defendant bank to secure the payment of
his preexisting debts to said bank;
o third, that such of the quedans as were issued in
the name of the Plaintiff were duly endorsed in
blank by the Plaintiff and by Otto Ranft;
o and fourth, that the two remaining quedans
which were duly endorsed in blank by him.
The bank had a perfect right to act as it did, and its action
is in accordance with sections 47, 38, and 40 of the
Warehouse Receipts Act
However, the pertinent provision regarding the rights
the Defendant bank acquired over the aforesaid quedans
after indorsement and delivery to it by Ranft, is found in
section 41 of the Warehouse Receipts Act (Act No. 2137):
FACTS: Defendant issued on several dates warehouse
receipts, which were substantial in form and contained the
terms prescribed by law, to Rosa Sy and Teresita Ng.
Subsequently, some of the warehouse receipts were
negotiated and indorsed to Luis Ramos and Cresencia Zoleta.
Ramos and Zoleta then used the quedans as security for loans
obtained by them from PNB. Upon maturity, both failed to
pay, prompting PNB to demand the delivery of the sugar
covered by the quedans indorsed to it by Ramos and Zoleta.
Noah’s refused to comply with the demand, PNB filed a case
for Specific Performance.
The main contention of Noah’s was that it was still the owner
of the subject quedans and the quantity of sugar represented
thereon because the corresponding payment of Sy and Ng
through checks were dishonoured and so they did not acquire
ownership. The it follows that the subsequent indorsers and
plaintiff itself did not acquire a better right of ownership than
the original vendees or first indorsers.
In the answer of Sy and Ng, they alleged that the transaction
between them and Noah’s, concerning the quedans, was
bogus and simulated. It was part of a complex banking
scheme and financial maneuvers to avoid VAT payment and
other BIR assessments.
o
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SEC. 41. Rights of person to whom a receipt has
been negotiated. — A person to whom a
negotiable receipt has been duly negotiated
acquires thereby:
(a) Such title to the goods as the person
negotiating the receipt to him had or had
ability to convey to a purchaser in good
faith for value, and also such title to the
goods as the depositor of person to whose
order the goods were to be delivered by the
terms of the receipt had or had ability to
convey to a purchaser in good faith for
value, and. . . .
Therefore, the bank is not responsible for the loss; the
negotiable quedans were duly negotiated to the bank
and as far as the record shows, there has been no fraud
on the part of the Defendant.
Moreover, Plaintiff is estopped to deny that the bank had
a valid title to the quedans for the reason that the
Plaintiff had voluntarily clothed Ranft with all the
attributes of ownership and upon which the Defendant
ISSUES:
1. WON the non-payment of the purchase price for the sugar
stock evidenced by the quedans, rendered invalid the
negotiation of said quedans by Sy and Ng to indorsers Ramos
and Zoleta and the subsequent negotiation of Ramos and
Zoleat to PNB?
2. WON PNB as indorsee of quedans was entitled to delivery
of sugar stocks from the warehouseman, Noah’s Ark?
HELD: The validity of the negotiation by RNS Merchandising
and St. Therese Merchandising to Ramos and Zoleta, and by
the latter to PNB to secure a loan cannot be impaired by the
fact that the negotiation between Noah's Ark and RNS
Merchandising and St. Therese Merchandising was in breach
of faith on the part of the merchandising firms or by the fact
that the owner (Noah's Ark) was deprived of the possession
of the same by fraud, mistake or conversion of the person to
whom the warehouse receipt/quedan was subsequently
negotiated if (PNB) paid value therefor in good faith without
SECTRANS 2010/ ATTY. AGUINALDO
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notice of such breach of duty, fraud, mistake or conversion.
(See Article 1518, New Civil Code). And the creditor (PNB)
whose debtor was the owner of the negotiable document of
title (warehouse receipt) shall be entitled to such aid from
the court of appropriate jurisdiction attaching such document
or in satisfying the claim by means as is allowed by law or in
equity in regard to property which cannot be readily attached
or levied upon by ordinary process. (See Art. 1520, New Civil
Code). If the quedans were negotiable in form and duly
indorsed to PNB (the creditor), the delivery of the quedans to
PNB makes the PNB the owner of the property covered by
said quedans and on deposit with Noah's Ark, the
warehouseman. (See Sy Cong Bieng & Co. vs. Hongkong &
Shanghai Bank Corp., 56 Phil. 598).
In the case at bar, PNB's right to enforce the obligation of
Noah's Ark as a warehouseman, to deliver the sugar stock to
PNB as holder of the quedans, does not depend on the
outcome of the third-party complaint because the validity of
the negotiation transferring title to the goods to PNB as
holder of the quedans is not affected by an act of RNS
Merchandising and St. Therese Merchandising, in breach of
trust, fraud or conversion against Noah's Ark.
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While PNB is entitled to the stocks of sugar as the
endorsee of the quedans, delivery to it shall be
effected only upon payment of the storage fees.
The warehouseman is entitled to the
warehouseman’s lien that attaches to the goods
invokable against anyone who claims a right of
possession thereon.
However, in this case, the lien was lost when R
refused to deliver the goods, which were not
anchored to a valid excuse (i.e. non satisfaction of
W/Hman Lien) but on an adverse claim of
ownership.
The loss of W/H Man’s lien does not necessarily
mean the extinguishment of the obligation to pay
the W/H fees and charges which continues to be a
personal liability of the owners, PNB in this case.
However, such fees and charges have ceased to
accrue from the date of the rejection by Noah’s Ark
to heed the lawful demand for the release of the
goods.
PNB v SAYO, JR.
FACTS
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Noah’s Ark Sugar Refinery (Noah’s) issued several
warehouse receipts (quedans), which were
negotiated to Rosa, RNS and St. Therese (vendees),
which were again negotiated to Luis and Cresencia,
which they (Luis and Cresencia) endorsed to PNB as
security for 2 loan agreements.
o Transfer of quedans – Noah’s  Rosa, RNS
and St. Therese  Luis and Cresencia 
PNB
Luis and Cresencia failed to pay their loans hence
PNB demanded delivery of sugar stocks, however,
Noah’s Ark refused, alleging ownership thereof.
Noah’s Ark contended that the agreement made by
them with the vendees was stopped since the bank
dishonored the payments made by the vendees to
Noah’s Ark. As such, the vendees and the endorsers
of the quedans never acquired ownership thereof.
Noah’s Ark claimed for warehouseman’s lien for the
storage of the goods.
LC granted lien
PNB appealed
ISSUE: WoN PNB is entitled to the stocks of sugar as the
endorsee of the quedans, without paying the lien
SC: YES
SECTRANS 2010/ ATTY. AGUINALDO
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is written in continuation of the contract for the construction
of the building, it is a collateral undertaking separate and
distinct from the latter. All of these circumstances are
distinguishing features of contracts of guaranty.
GUARANTY AND SURETYSHIP
MACHETTI v HOSPICIO DE SAN JOSE
FACTS:
1) In 1916, Romulo Machetti, agreed to construct a building
in Manila for the Hospicio de San Jose, for P64,000. One of
the conditions of the agreement was that the contractor
should obtain the "guarantee" of the Fidelity and Surety
Company of the Philippine Islands to the amount of P128,800.
Said contract read:
“For value received we hereby guarantee compliance
with the terms and conditions as outlined in the
above contract. “
2) Thereafter Machetti constructed the building and, as the
work progressed, payments were made to him from time to
time, until the entire contract price, except the sum of
P4,978.08, was paid.
3) Later on it was found that the work had not been carried
out in accordance with the specifications which formed part
of the contract and that the workmanship was not of the
standard required, and thus the Hospicio presented a
counterclaim for damages for the partial noncompliance with
the terms of the agreement abovementioned, in the total
sum of P71,350.
4) During the duration of the trial however, Machetti,
declared insolvent and an order was entered suspending the
proceeding in the present case. Thus, the Hospicio filed a
motion asking that the Fidelity and Surety Company be made
cross-defendant to the exclusion of Machetti and that the
proceedings be continued as to said company, which motion
was granted and subsequently, the Hospicio filed a complaint
against the Fidelity and Surety Company for a judgement
against the company upon its guaranty. The CFI rendered
judgment against Fidelity.
B) On the other hand, a surety undertakes to pay if the
principal does not pay, the guarantor only binds himself to
pay if the principal cannot pay. The one is the insurer of the
debt, the other an insurer of the solvency of the debtor. This
latter liability is what the Fidelity Company assumed in this
case. Thus, Fidelity having bound itself to pay only the event
its principal, cannot pay it follows that it cannot be compelled
to pay until it is shown that Machetti is unable to pay. The
judgment appealed from is therefore reversed.
PHIL EXPORT v VP EUSEBIO
FACTS: Respondent entered into contract with SOB for
construction of Therapy Bldg. SOB demanded bonds to secure
performance. Project was delayed
DOCTRINE:
By guaranty a person, called the guarantor,
binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so; if the
person binds himself solidarily with the principal debtor, the
contract is called suretyship.
That the guarantee issued by the petitioner is
unconditional and irrevocable does not make the petitioner a
surety. As a guaranty, it is still characterized by its subsidiary
and conditional quality because it does not take effect until
the fulfillment of the condition. Unconditional guarantee is
still subject to the condition that the principal debtor should
default in his obligation first before resort to the guarantor
could be had.
MANILA RAILROAD v ALVENDIA
Facts:
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ISSUE: Whether or not Fidelity is answerable to the Hospicio
as guaranty of Machetti.
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HELD:
A) Guarantor implies an undertaking of guaranty, as
distinguished from suretyship and in this case, it appears that
the contract is the guarantor's separate undertaking in which
the principal does not join, that its rests on a separate
consideration moving from the principal and that although it
CFI sentenced Manila Railroad Co. (MRC) and Manila Port
Service (MPS) to pay Bataan Refining Corp.
MPS filed a notice of appeal accompanied by an appeal
bond.
Noticing that the appeal bond was only executed by MPS
signed by the manager and Standard Insurance (as
surety) signed by the vice-president, the trial court
rejected the record on appeal.
It is contended by MRC that the MPS, being a mere
subsidiary or department of MRC, without legal
personality of its own, the bond filed by the former
should be a bond for the MRC and that the appeal of the
latter should have been given due course.
Issue: Whether or not the notice of appeal should be
accepted?
SECTRANS 2010/ ATTY. AGUINALDO
30
Held:
No, the notice of appeal should be rejected.
Where there is no principal debtor in the appeal bond, it is
void and unenforceable. The mere recital in the body of the
instrument, “We, MRC et. al, as principal and the Standard
Insurance Co. Inc xxx as surety” does not suffice to make
contract binding on the MRC unless it is shown that the same
was authorized by it. Neither the signature nor the
acknowledgment indicates that the act of that of the MRC or
that the latter had empowered MPS to execute the bond in
its behalf. The result would be that the appeal bond is void
and unenforceable for lack of principal debtor or obligation.
While the surety bound itself to pay jointly and severally,
such an undertaking presupposes that the obligation is to be
enforceable against someone else besides the surety and the
latter could always claim that it was never its intention to be
the sole person obliged thereby.
SEVERINO v SEVERINO
F: upon the death of x, who left considerable property, a
litigation ensued between c, x’s widow, and other heirs of x. a
compromise was effected by which d, a son of x, took over
the property pertaining to the estate of x at the same time
agreeing to pay P100k to c, payable, first in P40k cash upon
the execution of the document of compromise and the
balance, in three equal installments. G. affixed his name as
guarantor
Upon d’s failure to pay the balance, c instituted an action
against d and g, the latter contending that he received
nothing for affixing his signature as guarantor to the contract
and that in effect the contract was lacking in consideration as
to him.
Issue: is there a consideration for the guaranty?
IFC v IMPERIAL TEXTILE
Facts: IFC extended to PPIC a loan of
US$7,000,000.00, payable in sixteen (16) semiannual installments of US$437,500.00 each,
beginning June 1, 1977 to December 1, 1984. On
December 17, 1974, a “Guarantee Agreement” was
executed with Imperial Textile Mills, Inc. (ITM). ITM
agreed to guarantee PPIC's obligations under the
loan agreement. PPIC paid the installments due on
June 1, 1977, December 1, 1977 and June 1, 1978.
Despite the rescheduling of the installment
payments, however, PPIC defaulted. IFC demanded
ITM and Grandtex, as guarantors of PPIC, to pay the
outstanding balance. However, the outstanding
balance remained unpaid.
Issue: The issue is whether ITM is a surety, and thus solidarily
liable with PPIC for the payment of the loan.
Ruling: Yes. The Agreement uses “guarantee and guarantors”,
prompting ITM to base its argument on those words. This
Court is not convinced that the use of the two words limits
the Contract to a mere guaranty. The specific stipulations in
the Contract show otherwise.
While referring to ITM as a guarantor, the Agreement
specifically stated that the corporation was 'jointly and
severally liable. To put emphasis on the nature of that
liability, the Contract further stated that ITM was a primary
obligor, not a mere surety. Those stipulations meant only one
thing: that at bottom, and to all legal intents and purposes, it
was a surety.
Ruling: a guarantor or surety is bound by the same
consideration that makes the contract effective between the
principal parties thereto. The compromise and dismissal of
lawsuit is recognized in law as a valuable consideration; and
the dismissal of the action which c instituted against d was an
adequate consideration to support the promise on the part of
d to pay the sums stipulated in the contract subject of the
action
It is neither necessary that the guarantor or surety should
receive any part of the benefit, if such there be accruing to
his principal. The true consideration of this contract was the
detriment suffered by c in the former action in dismissing the
proceeding and it is immaterial that no benefit may have
accrued either to the principal or his guarantor
LEE v CA
FACTS: PBCOM was furnished by a board resolution stating
that they authorize President, Mr. Charles Lee, and the VicePresident and General Manager, Mr. Mariano A. Sio to apply
for, negotiate and secure the approval of commercial loans
and other banking facilities and accommodations, from the
Philippine Bank of Communications, in such sums as they
shall deem advantageous, the principal of all of which shall
not exceed the total amount of TEN MILLION PESOS
(P10,000,000.00), Philippine Currency, plus any interests.
Mico availed of the loans and as security for the loans, MICO
through its Vice-President and General Manager, Mariano
Sio, executed on May 16, 1979 a Deed of Real Estate
Mortgage over its properties situated in Pasig, Metro Manila.
Indubitably therefore, ITM bound itself to be solidarily.
SECTRANS 2010/ ATTY. AGUINALDO
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On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio,
Alfonso Yap and Richard Velasco, in their personal capacities
executed a Surety Agreement in favor of PBCom whereby the
petitioners jointly and severally, guaranteed the prompt
payment on due dates of overdrafts, promissory notes,
discounts, drafts, letters of credit, bills of exchange, trust
receipts, and other obligations of every kind and nature, for
which MICO may be held accountable by PBCom. It was
provided, however, that the liability of the sureties shall not
at any one time exceed the principal amount of Three Million
Pesos plus interest, costs, losses, charges and expenses
including attorney’s .
On July 14, 1980, petitioner Charles Lee, in his capacity as
president of MICO, wrote PBCom and applied for an
additional loan in the sum of Four Million Pesos). The loan
was intended for the expansion and modernization of the
company’s machineries. Upon approval of the said
application for loan, MICO availed of the additional loan of
Four Million Pesos (as evidenced by Promissory Note TA No.
094.
As per agreement, the proceeds of all the loan availments
were credited to MICO’s current checking account with
PBCom. To induce the PBCom to increase the credit line of
MICO, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap,
Richard Velasco and Alfonso Co (hereinafter referred to as
petitioners-sureties), executed another surety agreement in
favor of PBCom on July 28, 1980, whereby they jointly and
severally guaranteed the prompt payment on due of
overdrafts, promissory notes, discounts, drafts, letters of
credit, bills of exchange, trust receipts and all other
obligations of any kind and nature for which MICO may be
held accountable by PBCom. It was provided, however, that
their liability shall not at any one time exceed the sum of
Seven Million Five Hundred Thousand Pesos including
interest, costs, charges, expenses and attorney’s fees
incurred by MICO in connection therewith.
Upon maturity of all credit availments obtained by MICO
from PBCom, the latter made a demand for payment. For
failure of petitioner MICO to pay the obligations incurred
despite repeated demands, private respondent PBCom
extrajudicially foreclosed MICO’s real estate mortgage and
sold the said mortgaged properties in a public auction sale
held on November 23, 1982 and PBCom won and applied the
proceeds of the purchase price at public auction of Three
Million Pesos to the expenses of the foreclosure, interest and
charges and part of the principal of the loans, leaving an
unpaid balance of Five Million Four Hundred Forty-One
Thousand Six Hundred Sixty-Three Pesos and Ninety Centavos
exclusive of penalty and interest charges.
Aside from the unpaid balance, MICO likewise had another
standing obligation and PBCom then demanded the
settlement of the aforesaid obligations from herein
petitioners-sureties who, however, refused to acknowledge
their obligations to PBCom under the surety agreements.
Hence, PBCom filed a complaint with prayer for writ of
preliminary attachment, alleging that MICO was no longer in
operation and had no properties to answer for its obligations.
PBCom further alleged that petitioner Charles Lee has
disposed or concealed his properties with intent to defraud
his creditors. Except for MICO and Charles Lee, the sheriff of
the RTC failed to serve the summons on herein petitionerssureties since they were all reportedly abroad at the time. An
alias summons was later issued but the sheriff was not able
to serve the same to petitioners Alfonso Co and Chua Siok
Suy who was already sickly at the time and reportedly in
Taiwan where he later died.
Petitioners contend that there was no proof that the
proceeds of the loans or the goods under the trust receipts
were ever delivered to and received by MICO. But the record
shows otherwise. Petitioners-sureties further contend that
assuming that there was delivery by PBCom of the proceeds
of the loans and the goods, the contracts were executed by
an unauthorized person, more specifically Chua Siok Suy who
acted fraudulently and in collusion with PBCom to defraud
MICO.
ISSUE: Whether or not the individual petitioners, as sureties,
may be held liable under the two (2) Surety Agreements
executed on March 26, 1979 and July 28, 1980.
RULING: Yes.
The court ruled that it is proven that MICO received the
proceeds of the loan and that PBCom has the right to to
believe that Chua Siok Suy based on the Certificate issued by
the Sectretary of MICO.
The court ruled that as regards petitioners-sureties
contention that they obtained no consideration whatsoever
on the surety agreements, the court pointed that the
consideration for the sureties is the very consideration for the
principal obligor, MICO, in the contracts of loan.
In the case of Willex Plastic Industries Corporation vs. Court of
Appeals, we ruled that the consideration necessary to
support a surety obligation need not pass directly to the
surety, a consideration moving to the principal alone being
sufficient. For a guarantor or surety is bound by the same
consideration that makes the contract effective between
the parties thereto.
It is not necessary that a guarantor or surety should receive
any part or benefit, if such there be, accruing to his
principal.
DE GUZMAN v SANTOS
FACTS:
SECTRANS 2010/ ATTY. AGUINALDO
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Jerry O. Toole, Antonio Abad and Anastacio Santos
formed a general mercantile partnership – Philippine
American Construction Company with a capital of
P14k.
P10k of which were taken by way of loan from
Paulino Candelaria. The partnership and the copartners undertook and bound themselves to pay
jointly and severally the indebtedness.
Upon default, Paulino filed civil case against Phil-Am
Construction Company and co-partners for the
recovery of loan
TC – ordered all Defendants to pay jointly and
severally; CA affirmed
Upon filing of complaint, Paulino obtained a writ of
attachment against Defendants. The Sheriff attached
properties of 3 partners. Partnership offered to post
a bond of P10k.
Phil-Am Construction Company as principal then
represented by the partner Antonio Abad, Santiago
Lucero and Meliton Carlos as guarantors executed a
bond of P10k in favour of Paulino for the lifting of
the attachment.
After issuance of writ of execution, Sheriff found no
property of the judgment debtors. Paulino moved
for the issuance of writ of execution against the
guarantors of Defendants.
Guarantor-Plaintiff and co-guarantor Meliton Carlos
later paid the creditor and were able to recover from
Antonio Abad a sum of P3800, which they divided
equally.
It appeared that the payment made by the plaintiff
to Paulino was reduced to the sum of P3665. Plaintiff
now demands from Anastacio Santos the return of
the aforesaid sum but Anastacio refused.
ISSUE: Whether or not Defendant is bound to pay Plaintiff
what he had advanced to Paulino?
HELD: YES
 Article 1838 provides that any guarantor who pays
for the debtor shall be indemnified by the latter
even should the guaranty have been undertaken
without the knowledge of the debtor.
 IN THIS CASE: The guarantor was the deceased
Santiago Lucero, now represented by the plaintiff in
her capacity as judicial administratrix, and the
debtor is the defendant-appellant. Applying the
provision cited, it is obvious that the Defendant is
legally bound to pay what the Plaintiff had advanced
to the creditor upon the judgment, notwithstanding
the fact that the bond had been given without his
knowledge.
 Any person who makes a payment for the account
of another may recover from the debtor the
amount of the payment, unless it was made against
the express will of the latter. In the latter case, he

can only recover from the debtor in so far as the
payment has been beneficial to the latter.
It is evident that Defendant is bound to pay to the
plaintiff what the latter had advanced to the creditor
upon the judgment, and this is more so because it
appears that although Lucero executed the bond
without his knowledge, nevertheless he did not
object thereto or repudiate the same at any time.
MUNICIPALITY OF GASAN v MARASIGAN
FACTS:
The plaintiff-appellee municipality, on December 9, 1930, put
up at auction the privilege of gathering whitefish spawn in its
jurisdictional waters for the period of one year from January
1, 1931. Two bidders, Graciano Napa and Miguel Marasigan,
appeared at the auction. Graciano Napa proposed to accept
the privilege by paying P5,000 therefor, Miguel Marasigan
proposed to do likewise, but by paying only P4,200.
The council of the plaintiff-appellee municipality, in its
resolution No. 161 (Exhibit 1) of December 11, 1930 rejected
Graciano Napa's bid and accepted that of the appellant
Miguel Marasigan.
To secure his compliance with the terms of the contract
which was immediately formalized by him and the plaintiff,
and pursuant to the provisions of section 8 of resolution No.
128, series of 1925, of the council of said plaintiff, Miguel
Marasigan filed the bond, Exhibit B, subscribed on December
15, 1930, by the defendants-appellants Angel R. Sevilla and
Gonzalo L. Luna, who bound themselves in said document to
pay to the plaintiff the sum of P8,400, if Miguel Marasigan
failed to deposit one-fourth of P4,200 quarterly in advance in
the municipal treasury of Gasan.
Graciano Napa forwarded a protest (Exhibit 4) to the
provincial board, which protest was later indorsed by said
provincial board to the Chief of the Executive Bureau, alleging
that the plaintiff municipality violated the provisions of
section 2323 of the Administrative Code in rejecting his bid.
The provincial board, passing upon Graciano Napa's protest
and acting under the authority which, in its opinion, was
granted to it by section 2233 of the Administrative Code, held
that resolution No. 161, series of 1930, by virtue of which the
municipal council of Gasan rejected Graciano Napa's bid and
accepted that of Miguel Marasigan, notwithstanding the fact
that the latter offered to pay less, was invalid, and suggested
that the privilege should be, awarded to Graciano Napa who,
in its opinion, appeared to be the highest bidder in
accordance with the provisions of sections 2323 and 2319 of
the Administrative Code (Exhibit 9). The Executive Bureau,
concurring with the provincial board's points of view,
SECTRANS 2010/ ATTY. AGUINALDO
33
declared, in turn, that the concession made to Marasigan was
illegal in view of the fact that Graciano Napa was the highest
bidder (Exhibit 13).
The plaintiff municipality decided to award the privilege of
gathering whitefish spawn within its waters to Graciano
Napa, giving him a period of seven days, from January 8, 1931
(Exhibit 19-A), to deposit the sum of P500.
Graciano Napa not only failed to make the deposit required
by the plaintiff but he formally declared, through his duly
authorized representative, that he yielded the privilege
granted him to Miguel Marasigan or to any other person
selected by the municipal authorities.
One day later plaintiff-appellee municipality sent the letter
Exhibit 21 to Miguel Marasigan informing him that the
contract between them becomes effective on January 14,
1931.
Prior to this, plaintiff informed Marasigan that the contract
granting Marasigan the privilege is suspended & considered
ineffective while the protest is pending.






Plaintiff filed an action to recover from Marasigan, Sevilla and
Luana the sum of P 3,780 as part of license fees which they
failed to pay.
ISSUE: w/n respondents are liable

HELD:
No. The contract was not only considered not consummated
but cancelled.
of P80,000, to be paid on delivery. This would be used for
the extraction of coconut oil.
It was understood that these expellers would be
manufactured in the US and delivery would be in the
month of February or March of the ensuing year.
In order to assure the prompt payment of the price upon
delivery, an arrangement was made between Harden and
the Philippine National Bank (PNB) whereby the latter
bound itself to Smith, Bell & Co. for the payment of the
contract price, but provided that the expellers would
delivered to them and must be new and in first class
working order.
Shortly after the contract was made, Harden appeared in
the office of Smith, Bell & Co. and requested them to
change the order for the expellers from "end-drive" to
"side-drive;" and in obedience to this instruction, the
house cabled to its agent in New York to change the
order accordingly, which was done.
On July 1919, Smith, Bell & Co. informed both Harden
and PNB that the expellers had arrived.
Shortly thereafter Harden, having examined the
machinery in the Plaintiff's bodega, advised the Bank that
the expellers were not as ordered.
Consequently, the Bank naturally refused to accept and
pay for the machinery, and the Plaintiff disposed of them
to the best advantage in the Manila market at a price
which was below the price at which Harden had agreed
to take them.
The ground upon which the defense is chiefly rested is
that the expellers tendered by the Plaintiff were "sidedrive" instead of "end-drive" expellers, and in support of
this contention Harden was produced by the Defendant
as a witness, and he denied that the order for expellers
had been changed upon his instructions.
It ceased to be valid when it was cancelled
Issue:
Neither the appellant nor his sureties were bound to comply
with the terms of their respective contracts of fishing
privilege and suretyship.
Whether or not PNB is subsidiary liable?
This is so particularly with respect to the sureties, because
suretyship cannot exist without a valid obligation.
Rulings:


Guaranty is not presumed.
The elimination of the obligation for which said sureties
desired to answer with their bond also rendered the bond
also eliminated.

SMITH BELL v PNB
FACTS

On April 1918, Fred M. Harden applied to Smith, to buy 8
Anderson expellers end drive, latest model, for the price

NO. The SC ruled that PNB’s liability is primary in nature.
The contract by which the Bank obligated itself is both in
form and effect an independent undertaking on the part
of the Bank directly to the Plaintiff; and inasmuch as the
Plaintiff had compiled, or offered to comply, with the
terms of said contract, the Bank is bound by its promise
to pay the purchase price.
Its obligation to the Plaintiff is direct and independent.
The debt must be considered a liquidated debt, in the
sense intended in article 1825 of the Civil Code; and the
action is now maintainable by the Plaintiff directly
against the Bank without regard to the position of
Harden.
The Bank is to be considered strictly in the light of an
independent promisor, a consequence would be that
SECTRANS 2010/ ATTY. AGUINALDO
34
Harden had no authority to change the order from enddrive to side-drive expellers; in other words, that the
Bank should be held to be obligated according to the
terms of the order as it stood when the Bank entered
into the undertaking which is the subject of the suit.
WISE & CO. v KELLY
FACTS: Kelly bought goods and merchandise on credit from
Wise and Co., with the agreement that Kelly will apply the
proceeds of its sale to the discharge of his indebtedness. Lim,
as surety for Kelly, guaranteed unto Wise & Co. the payment
of a sum of money which Kelly owes to Wise for goods and
merchandise received and purchased by Kelly, to be sold in
his establishment, upon the condition that Kelly will pay over
to Wise at the end of each month all sums which he may
receive from the sale of said goods and merchandise, and
that in the contrary event, the surety undertakes to pay Wise
such sums as Kelly may fail to turn in.
As alleged by Wise, Kelly has not paid any money and thus
filed a collection case against Kelly and Lim. Lim interposed
the defense that the obligation was conditional as to him, and
that the fact constituting the condition had not occurred.
Lower court dismissed the case against Lim on the ground
that wise has not proven that Kelly had failed to turn over any
money and established the conclusion that Lim had incurred
no liability.




ISSUE: WON Lim should be held liable.
HELD: NO. Lim is not liable for the difference between the
amount realized from the sale of the merchandise and the
purchase price of the same. Lim as surety did not undertake
to pay the principal amount due. His agreement was limited
to respond for the performance by Kelly of one of the
accessory pacts, namely, the undertaking to deliver to Wise
the total proceeds of the sales of the merchandise for the
invoice value of which the promissory note was given. Wise
has not proved that it has NOT in fact received all the money
derived from the sale of the merchandise mentioned in the
note, it follows that there is no evidence of the existence of
the condition to which the obligation assumed by Lim was
subordinated. In obligations subject to a suspensive condition
the acquisitions of the right on the part of the creditor
depends upon the occurrence of the event constituting the
conditions.
RCBC v ARRO
FACTS:

Residoro Chua and Enrique Go, Sr. executed a
comprehensive surety agreements to guaranty
among others, any existing indebtedness of Davao
Agricultural Industries Corporation provided that the
liability shall not exceed at any one time the
aggregate principal sum of P100,000.00.
A promissory note in the amount of P100,000.00
was issued in favor of petitioner. Said note was
signed by Enrique Go, Sr. in his personal capacity and
in behalf of Daicor. The promissory note was not
fully paid despite repeated demands; hence
petitioner filed a complaint for a sum of money
against Daicor, Enrique Go, Sr. and Residoro Chua
Petitioner alleged that by virtue of the execution of
the comprehensive surety agreement, private
respondent is liable because said agreement covers
not merely the promissory note subject of the
complaint, but is continuing; and it encompasses
every other indebtedness the Borrower may, from
time to time incur with petitioner bank.
The sole issue resolved by respondent court was the
interpretation of the comprehensive surety
agreement, particularly in reference to the
indebtedness evidenced by the promissory note
involved in the instant case, said comprehensive
surety agreement having been signed by Enrique Go,
Sr. and private respondent, binding themselves as
solidary debtors of said corporation not only to
existing obligations but to future ones.
Respondent court said that corollary to that
agreement must be another instrument evidencing
the obligation in a form of a promissory note or any
other evidence of indebtedness without which the
said agreement serves no purpose; that since the
promissory notes, which is primarily the basis of the
cause of action of petitioner, is not signed by private
respondent, the latter can not be liable thereon.
ISSUE: whether private respondent is liable to pay the
obligation evidence by the promissory note?
HELD:


YES, The comprehensive surety agreement was
jointly executed by Residoro Chua and Enrique Go,
Sr., President and General Manager, respectively of
Daicor, 1976 to cover existing as well as future
obligations which Daicor may incur with the
petitioner bank, subject only to the proviso that their
liability shall not exceed at any one time the
aggregate principal sum of P100,000.00
The agreement was executed obviously to induce
petitioner to grant any application for a loan Daicor
may desire to obtain from petitioner bank. The
guaranty is a continuing one which shall remain in
SECTRANS 2010/ ATTY. AGUINALDO
35


full force and effect until the bank is notified of its
termination.
The surety agreement which was earlier signed by
Enrique Go, Sr. and private respondent, is an
accessory obligation, it being dependent upon a
principal one which, in this case is the loan obtained
by Daicor as evidenced by a promissory note.
What obviously induced petitioner bank to grant the
loan was the surety agreement whereby Go and
Chua bound themselves solidarily to guaranty the
punctual payment of the loan at maturity. By terms
that are unequivocal, it can be clearly seen that the
surety agreement was executed to guarantee future
debts which Daicor may incur with petitioner, as is
legally allowable under the Civil Code
WILLEX PLASTICS v CA
FACTS:
- Inter Resin opened a Letter of Credit with Manila
Banking Corp. with security of “Continuing Surety
Agreement signed by Inter Resin and Investment and
Underwriting Corp (IUCP) wherein they bound
themselves solidarily for the.
- Later Inter Resin together with Willex (P) executed a
continuing guaranty in favor of IUCP, stating that
Inter Resin and P are solidarily liable. Due to this,
IUCP paid Manila Bank P4M (Letter of Credit)
- IUCP then demanded payment of the amount,
however, Inter Resin and P failed to do so. Hence,
this case
- P contends that it should not be liable since P is
merely a guarantor
ISSUE: WoN P ma be held jointly and severally liable with
Inter Resin for the amount paid by Interbank to Manila Bank
SC: YES
- The amount had been paid by InterBank to Manila
bank
- The intention of the parties is to secure the payment
of the obligation.
o CA held-to secure the guarantee
undertaken by Interbank of the credit
accommodation granted to Inter Resin by
Manila Bank, Interbank required P to sign a
Continuing Guaranty
DOCTRINE: Although a contract of suretyship is ordinarily not
be construed retrospective, in the end the intention of the
parties as revealed by the evidence is controlling
TRADERS INSURANCE v DY
FACTS:
1) For several years Destilleria Lim Tuaco & Co., Inc. had one
Dy Eng Giok as its provincial sales agent who has the duty of
turning over the proceeds of his sales to the distillery
company. In 1951, Dy’s outstanding running account was in
the sum of P12,898.61. Thereafter, a surety bond was
executed by Dy as principal and Traders Insurance as solidary
guarantor, whereby they bound themselves, jointly and
severally,
“WHEREAS, the contract requires the above bounden
principal to give a good and sufficient bond in the
above stated sum to secure the full and faithful
fulfillment on its part of said contract; namely, to
guarantee the full payment of the Principal's
obligation not to exceed the above stated sum.”
2) On the same date, by Eng Giok, as principal, with Pedro
Lopez Dee and Pedro Dy-Liacco, as counterboundsmen,
subscribed an indemnity agreement in favor of appellant
Surety Company, where, in consideration of its surety bond,
the three agreed to be obligated to the surety company.
Thereafter, Dy contracted obligations in favor of the
Destilleria in the amount of P41,449.93; and Dy made
remittances of the same amount
3) The distillary, however, applied said remittances first to Dy
Eng Giok's outstanding balance prior to August 4, 1951,
before the suretyship agreement was executed, in the sum
of P12,898.61; and the balance of P28,965.88 to Dy's
obligations between August 4, 1951 and August 3, 1952.
4) Then demanded payment of the remainder from Dy, and
later, from the appellant Surety Company. The latter paid
P10,000.00 (the maximum of its bond) on July 17, 1953,
apparently, without questioning the demand; and then
sought reimbursement from Dy Eng Giok and his counter
guarantors, who however failed to pay. Because of this the
company brought an action to enforce collection.
5) The CFI absolved the counter-guarantors on the theory
that in so far as they are concerned, the payments made by
Dy from August 4, 1951 to August 3, 1952, should have been
applied to his obligations during that period, which were the
ones covered by the surety bond and the counter-guaranty;
and since these obligations only amounted to P41,449.93, the
payments exceeding the obligations, the CFI concluded that
the Surety Company incurred no liability and the
counterbondsmen in turn had nothing to answer for.
HELD:
A) The CFI is correct. There are two reasons why the
remittances by Dy Eng Giok in the sum of P41,864.49 should
be applied to the obligation of P41,449.93 contracted by him
during the period covered by the suretyship agreement:
SECTRANS 2010/ ATTY. AGUINALDO
36
a.. In the absence of express stipulation, a guaranty
or suretyship operates prospectively and not
retroactively; that is to say, it secures only the debts
contracted after the guaranty takes effect because a
guaranty is not presumed, but must be express, and
can not extend to more than what is stipulated.
b.. Since the obligations of Dy between August 4,
1951 to August 4, 1952, were guaranteed, while his
indebtedness prior to that period was not secured,
then in the absence of express application by the
debtor, any partial payments made by him should be
imputed or applied to the debts that were
guaranteed, since they are regarded as the more
onerous debts from the standpoint of the debtor.
B) In essence therefore debts covered by a guaranty are
deemed more onerous to the debtor than the simple
obligations because, in their case, the debtor may be
subjected to action not only by the creditor, but also by the
guarantor, and this even before the guaranteed debt is paid
by the guarantor; hence, the payment of the guaranteed debt
liberates the debtor from liability to the creditor as well as to
the guarantor, while payment of the unsecured obligation
only discharges him from possible action by only one party,
the unsecured creditor.
C) Thus, payment voluntarily made by appellant was
improper since it was not liable under its bond; consequently,
it can not demand reimbursement from the
counterbondsmen but only from Dy.
D) Ultimately, the application by a creditor depends upon the
debtor acquiescence thereto. In the present case, as already
noted, there is no evidence that the receipts for payment
expressed any imputation, or that the debtor agreed to the
same. Judgment is affirmed.
SOCONY v CHO SIONG
FACTS: Cho Siong entered into contract of agency for
distribution of petroleum products, assumed liability of
former agent Tong Kuan. His agency bond was secured by
Ong Guan Can. Defaulted in the amount of P64.00
DOCTRINE:
Under the terms of the bond signed by the
surety, he did not answer for the principal obligor save for
the Latter’s acts by virtue of the contract of agency. He
cannot be held liable for the debt of a former agent, which
the principal obligor assumed by virtue of another contract,
of which said surety was not even aware. A contract of
suretyship is to be strictly interpreted and is not to be
extended beyond its terms.
GARON v PROJECT MOVERS
Facts:










Project Movers Realty and Devt Corp (PMRDC) obtained
a loan from Garon. The loan was covered by a Promissory
note to mature on December 19. The stipulated interest
rate was 36% per annum.
To secure the payment of the loan, PMRDC undertook to
assign to Garon its leasehold rights over a space at the
Monumento Plaza Commercial Complex.
The parties stipulated that failure to pay the note or any
portion thereof, or any interest thereon, shall constitute
as default and the entire obligation shall become due
and demandable without need of demand.
PMRDC obtained another loan from Garon at 17% per
annum to mature on December 31. It is covered by
another promissory note and secure a leasehold rights
over another space in Monumento Plaza.
To secure its obligations to assign the leasehold rights to
Garon, PMRDC procured a surety bond from Stronghold
Insurance, which the liability of the surety will not exceed
the sum of P12M and will expire on Nov 7.
When PMRDC defaulted in the payment of its
obligations, Garon sent a demand letter dated Nov 3
requiring PMRDC to execute and deliver a unilateral
Deed of Assignment of its leasehold rights over the
commercial spaces.
Garon also sent a demand letter to the surety on Nov 6.
For failure to comply with the demand, Garon filed a
complaint for collection of the principal obligation
against PMRDC and the surety.
The surety contends that the complaint stated no cause
of action and was prematurely filed. At the time Garon
sent the demand letter, the obligation guaranteed by the
bond had not yet matured.
On the part of PMRDC, it denied that it executed the
promissory noted and alleged instead that they were
mere roll-overs. It also alleged that it already complied
with its undertaking under the promissory notes when it
put up a surety bond. And that when Garon chose to
demand from the surety, she effectively waived the right
to claim for it.
Issue: Whether or not the surety is liable to Garon under
its surety bond.
Held:
Yes, the surety is liable in general. The principal obligation
guaranteed by the surety bond is the assignment of leasehold
rights of PMRDC to Garon over the subject spaces. Garon
made a formal demand but PMRDC defaulted. As such,
PMRDC’s liability arose. Consequently, the surety’s liability
likewise arose.
Suretyship arises upon the solidary binding of a person with
the principal debtor, for the purpose of fulfilling an
SECTRANS 2010/ ATTY. AGUINALDO
37
obligation. A surety is considered in law as being the same
party as the debtor in relation to whatever is adjudged as
touching the obligation of the latter and their liabilities are
interwoven as to be inseparable. Although a surety contract
is secondary to the principal obligation, the liability of the
surety is direct, primary and absolute or equivalent to that
of a regular party to the undertaking.
Ruling: Obviously, Commonwealth is obliged to pay the
principal being the surety. Regarding the interest, generally
no. However because Commonwealth refused to pay the
principal when the lower court ordered it to do so, it is now
bound to pay the interest.
Note:
FACTS: Properties, rights, obligations, and contracts of the
Philippine Relief and Trade Rehabilitation Administration
(PRATRA) had been transferred to the Price Stabilization
Corporation (PRISCO) and subsequently all rights and
contracts of the PRISCO involving real estate, fixed assets and
stock in trade had been assumed by herein plaintiff, the
NAMARCO.
Surety in this case was not held liable since its undertaking
under the surety bond was merely to guarantee the
assignment of PMRDC’s leasehold rights and not the payment
of the entire obligation and Garon is seeking to enforce her
right to collect the principal debt rather than enforce the
security.
REPUBLIC v PAL-FOX LUMBER
Facts: Pal-Fox Lumber Co., Inc. was indebted to the Bureau
of Internal Revenue for forest charges and surcharges
amounting to P11,851.56, and that the Far Eastern Surety &
Insurance Co., Inc. was jointly and severally liable with the
lumber company for the payment of said forest charges up to
P5,000.00. Republic moved for reconsideration, pointing out
that the surety company's correct liability under the appealed
decision was P5,000.00 plus legal interest from the filing of
the complaint. In other words, the Republic would want the
surety company to pay the legal interest adjudged by the trial
court before the case may finally be considered dismissed.
Far Eastern's denial of liability for such interest is based on
the stipulation in the bond that it was bound to the plaintiff
"in the sum of P5,000.00."
Issue: W/N Far Eastern should also pay interest?
Ruling: Yes. Article 2055, paragraph 2, of the Civil Code of the
Philippines is clearly applicable.
If it (the guaranty) be simple or indefinite, it shall comprise
not only the principal obligation but also all its accessories,
including judicial costs.
COMMONWEALTH v CA
This case is about SIGS and ELBA borrowing money from
RCBC worth P4m. Commonwealth being the surety. SIGS and
ELBA defaulted so RCBC went after Commonwealth.
Commonwealth insists on not paying. Lower Court ruled in
favor of RCBC and ordered Commonwealth to pay the
principal debt plus interest. Commonwealth refused.
Commonwealth appealed to CA and questions the ruling of
the lower court awarding interest. (focus on interest)
Issue: WoN Commonwealth whould pay principal and interest
NAMARCO v MARQUEZ
Marquez secured from the PRATRA one tractor and one rice
thresher, with a total value of P20,000.00 for which the said
defendant paid thereon the sum of P8,000.00 as down
payment, thereby leaving a balance of P12,000.00. Marquez
executed a promissory note in the amount of P12,000.00
payable in installments commencing from June 24, 1951 to
June 25, 1952, with interest thereon at the rate of 7% per
annum from June 24, 1950 until finally paid.
To guarantee full compliance with the aforementioned
obligation, defendant Marquez, as principal, and defendant
Plaridel Surety & Insurance Company, as surety, executed
Guaranty Bond P. S. & I. No. 4220 in favor of the PRATRA,
wherein they bound themselves, jointly and severally, to pay
the said amount of P12,000.00 (Exhibit C).
In this guaranty bond, the surety expressly waives its right to
demand payment and notice of non-payment and agrees that
the liabilities of this guaranty shall be direct and immediate
and not contingent upon the exhaustion by the PRATRA of
whatever remedies it may have against the principal, and that
the same shall be valid and continuous until the obligation so
guaranteed is paid in full.
After making partial payment, Marquez defaulted in the
payment of the other installments. Plaintiff demanded from
defendants Marquez and Plaridel Surety & Insurance
Company, payment of their outstanding obligation. The claim,
therefore, of defendant Plaridel Surety & Insurance Company
that they never received a demand for payment from plaintiff
must necessarily fail, considering that it is clearly shown in
registry return receipts that the same had been received by
the addressee.
ISSUES: Whether the surety's liability can exceed the sum of
P12,000.00.
RULING: Yes
While the guarantee was for the original amount of the debt
of Gabino Marquez, the amount of the judgment by the trial
SECTRANS 2010/ ATTY. AGUINALDO
38
court in no way violates the rights of the surety. The
judgment on the principal was only for P10,000.00, while the
remaining P9,990.91 represent the moratory interest due on
account of the failure to pay the principal obligation from and
after the same had fallen due, and default had taken place.
Appellant surety was fully aware that the obligation earned
interest, since the note was annexed to its contract, Exhibit
"C".


The contract of guaranty executed by the appellant Company
nowhere excludes this interest, and Article 2055, paragraph
2, of the Civil Code of the Philippines is clearly applicable.
If it (the guaranty) be simple or indefinite, it
shall comprise not only the principal obligation but
also all its accessories, including judicial costs,
provided with respect to the latter, that the
guarantor shall only be liable for those costs
incurred after he has been judicially required to
pay.


Compensated sureties are not entitled to have their contracts
interrupted strictissimi juris in their favor
VIZCONDE v IAC
FACTS:
 Perlas called Vizconde and asked her to sell an 8
carat diamond ring on a commission for P85k
 Vizconde later returned the ring. Afterwards,
Vizconde called on Perlas and claimed that there was
a “sure buyer” for the ring, Pilar Pagulayan
 Pagulayan gave a post-dated check; Perlas and
Vizconde signed a receipt (Exh. A)
 The check was dishonoured. After 9 days, Pagulayan
paid Perlas P5k against the value of the ring and
gave 3 Certificates of Title to guarantee delivery of
the balance of such value (Exh D)
 Perlas filed a complaint against Pagulayan and
Vizconde for estafa.
 TC and CA – Vizconde and Pagulayan had assumed a
joint agency in favour of Perlas for the sale of the
latter’s ring, which rendered them criminally liable,
upon failure to return the ring or deliver its agreed
value, under Art 315, par 1(b) of the Revised Penal
Code
 SOL GEN – disagreed; Vizconde can’t be convicted of
estafa based on the Exhibits presented
ISSUE: Whether Vizconde was considered as agent of Perlas
or mere guarantor of obligation of Pagulayan?
HELD: Mere guarantor
 Nothing in the language of the receipt, Exh A, or in
the proven circumstances attending its execution
can logically be considered as evidencing the


creation of an agency between Perlas, as principal,
and Vizconde as agent, for the sale of the former’s
ring.
If any agency was established, it was one between
Perlas and Pagulayan only, this being the logical
conclusion from the use of the singular “I” in said
clause, in conjunction with the fact that the part of
the receipt in which the clause appears bears only
the signature of Pagulayan.
To warrant anything more than a mere conjecture
that the receipt also constituted Vizconde the agent
of Perlas for the same purpose of selling the ring, the
cited clause should at least have used the plural
“we,” or the text of the receipt containing that
clause should also have carried Vizconde’s signature.
The joint and several undertaking assumed by
Vizconde in a separate writing below the main body
of the receipt, Exhibit “A,” merely guaranteed the
civil obligation Pagulayan to pay Perlas the value of
the ring in the event of her (Pagulayan’s) failure to
return said article.
What is clear from Exh A is that the ring was
entrusted to Pagulayan to be sold on commission;
there is no mention therein that it was
simultaneously delivered to and received by
Vizconde for the same purpose or, therefore, that
Vizconde was constituted, or agreed to act as, agent
jointly with Pagulayan for the sale of the ring.
What Vizconde solely undertook was to guarantee
the obligation of Pagulayan to return the ring or
deliver its value; and that guarantee created only a
civil obligation, without more, upon default of the
principal.
Upon the evidence, Vizconde was a mere guarantor,
a solidary one to be sure, of the obligation assumed
by Pagulayan to complainant Perlas for the return of
the latter’s ring or the delivery of its value. Whatever
liability was incurred by Pagulayan for defaulting on
such obligation – and this is not inquired into – that
of Vizconde consequent upon such default was
merely civil, not criminal.
ESTATE OF HEMADY v LUZON SURETY
FACTS:
The Luzon Surety Co. had filed a claim against the Estate
based on twenty different indemnity agreements, or counter
bonds, each subscribed by a distinct principal and by the
deceased K. H. Hemady, a surety solidary guarantor) in all of
them, in consideration of the Luzon Surety Co.’s of having
guaranteed, the various principals in favor of different
creditors.
The Luzon Surety Co., prayed for allowance, as a contingent
claim, of the value of the twenty bonds it had executed in
consideration of the counterbonds, and further asked for
judgment for the unpaid premiums and documentary stamps
affixed to the bonds, with 12 per cent interest thereon.
SECTRANS 2010/ ATTY. AGUINALDO
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The lower court, by order of September 23, 1953, dismissed
the claims of Luzon Surety Co., on the ground that “whatever
losses may occur after Hemady’s death, are not chargeable to
his estate, because upon his death he ceased to be
guarantor.”
The reasoning of the court below ran as follows:
“The administratrix further contends that upon the death of
Hemady, his liability as a guarantor terminated, and
therefore, in the absence of a showing that a loss or damage
was suffered, the claim cannot be considered contingent. This
Court believes that there is merit in this contention and finds
support in Article 2046 of the new Civil Code. It should be
noted that a new requirement has been added for a person
to qualify as a guarantor, that is: integrity. As correctly
pointed out by the Administratrix, integrity is something
purely personal and is not transmissible. Upon the death of
Hemady, his integrity was not transmitted to his estate or
successors. Whatever loss therefore, may occur after
Hemady’s death, are not chargeable to his estate because
upon his death he ceased to be a guarantor.
Another clear and strong indication that the surety company
has exclusively relied on the personality, character, honesty
and integrity of the now deceased K. H. Hemady, was the fact
that in the printed form of the indemnity agreement there is
a paragraph entitled ‘Security by way of first mortgage, which
was expressly waived and renounced by the security
company. The security company has not demanded from K.
H. Hemady to comply with this requirement of giving security
by way of first mortgage. In the supporting papers of the
claim presented by Luzon Surety Company, no real property
was mentioned in the list of properties mortgaged which
appears at the back of the indemnity agreement.” (Rec. App.,
pp. 407-408).
ISSUE: W/N the liability of the guarantor was terminated
upon his death
account of the obligations of the principal debtors. This
reimbursement is a payment of a sum of money, resulting
from an obligation to give; and to the Luzon Surety Co., it
was indifferent that the reimbursement should be made by
Hemady himself or by some one else in his behalf, so long as
the money was paid to it.
The second exception of Article 1311, p. 1, is
intransmissibility by stipulation of the parties. Being
exceptional and contrary to the general rule, this
intransmissibility should not be easily implied, but must be
expressly established, or at the very least, clearly inferable
from the provisions of the contract itself, and the text of the
agreements sued upon nowhere indicate that they are nontransferable.
Because under the law (Article 1311), a person who enters
into a contract is deemed to have contracted for himself and
his heirs and assigns, it is unnecessary for him to expressly
stipulate to that effect; hence, his failure to do so is no sign
that he intended his bargain to terminate upon his death.
Similarly, that the Luzon Surety Co., did not require
bondsman Hemady to execute a mortgage indicates nothing
more than the company’s faith and confidence in the
financial stability of the surety, but not that his obligation was
strictly personal.
The third exception to the transmissibility of obligations
under Article 1311 exists when they are “not transmissible by
operation of law”. The provision makes reference to those
cases where the law expresses that the rights or obligations
are extinguished by death, as is the case in legal support
(Article 300), parental authority (Article 327), usufruct (Article
603), contracts for a piece of work (Article 1726), partnership
(Article 1830 and agency (Article 1919). By contract, the
articles of the Civil Code that regulate guaranty or suretyship
(Articles 2047 to 2084) contain no provision that the guaranty
is extinguished upon the death of the guarantor or the surety.
HELD: NO.
Under the present Civil Code (Article 1311), as well as under
the Civil Code of 1889 (Article 1257), the rule is that —
“Contracts take effect only as between the parties, their
assigns and heirs, except in the case where the rights and
obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law.”
Under our law, therefore, the general rule is that a party’s
contractual rights and obligations are transmissible to the
successors.
Of the three exceptions fixed by Article 1311, the nature of
the obligation of the surety or guarantor does not warrant
the conclusion that his peculiar individual qualities are
contemplated as a principal inducement for the contract.
What did the creditor Luzon Surety Co. expect of K. H.
Hemady when it accepted the latter as surety in the
counterbonds? Nothing but the reimbursement of the
moneys that the Luzon Surety Co. might have to disburse on
WISE & CO. v TANGLAO
FACTS




In the CFI of Manila, Wise & Co filed a civil case against
Cornelio C. David for the recovery of a certain sum of
money.
David was an agent of Wise & Co. and the amount
claimed from him was the result of a liquidation of
accounts showing that he was indebted in said amount.
In said case Wise & Co. asked and obtained a preliminary
attachment of David's property.
To avoid the execution of said attachment, David
succeeded in having the defendant Attorney Tanglao sign
a power of attorney in his favor, with a clause
(considered a special POA to David) “ To sign as
guarantor for himself in his indebtedness to Wise &
Company of Manila, and to mortgage the Attorney’s lot”
SECTRANS 2010/ ATTY. AGUINALDO
40




Subsequently, David made a compromise with the
petitioner by paying P340 leaving an unpaid balance of
P296 and pledged the lot owned by the Atty as a
guaranty for the balance.
Wise & Co. now institutes this case against Tanglao for
the recovery of said unpaid amount.
There is no doubt that under POA, Tanglao empowered
David, in his name, to enter into a contract of suretyship
and a contract of mortgage of the property described in
the document, with Wise & Co.
However, David used said power of attorney only to
mortgage the property and did not enter into contract of
suretyship.
ISSUE
Whether or not Atty. Tanglao is liable?
RULING





NO.
The SC ruled that there is nothing stated in the
Compromise Agreement to the effect that Tanglao
became David's surety for the payment of the sum in
question. Neither is this inferable from any of the clauses
thereof, and even if this inference might be made, it
would be insufficient to create an obligation of
suretyship which, under the law, must be express and
cannot be presumed.
The only obligation which the Compromise Agreement,
in connection with POA, has created on the part of
Tanglao, is that resulting from the mortgage of a
property belonging to him to secure the payment of said
P640. However, a foreclosure suit is not instituted in this
case against Tanglao, but a purely personal action for the
recovery of the amount still owed by David.
At any rate, even granting that Defendant Tanglao may
be considered as a surety under the cited Compromise
the action does not yet lie against him on the ground
that all the legal remedies against the debtor have not
previously been exhausted (art. 1830 of the Civil Code,
and decision of the Supreme Court of Spain of March 2,
1891).
The Plaintiff has in its favor a judgment against debtor
David for the payment of debt. It does not appear that
the execution of this judgment has been asked for and
the Compromise, on the other hand, shows that David
has two pieces of property the value of which is in excess
of the balance of the debt the payment of which is
sought of Tanglao in his alleged capacity as surety.
SOUTHERN MOTORS v BARBOSA
FACTS: Defendant Barbosa executed a real estate mortgage
for the only purpose of guaranteeing – as surety and/or
guarantor – the payment of the debt of one Alfredo Brillantes
in favor of Southern Motors, Inc. due to the failure of
Brillantes to settle his obligation; plaintiff filed an action
against defendant to foreclose the real estate mortgage.
Defendant filed an answer alleging that the plaintiff has no
right of action against him because the plaintiff did not intent
to exhaust all recourses to collect from the true debtor
(Brillantes), notwithstanding the fact that the latter is solvent
and has many properties within the Province of Iloilo.
ISSUE: WHETHER THE MORTGAGE IN QUESTION COULD BE
FORECLOSED ALTHOUGH PLAINTIFF HAD NOT EXHAUSTED,
AND DID NOT INTEND TO EXHAUST, THE PROPERTIES OF HIS
PRINCIPAL DEBTOR.
HELD: NO. The right of guarantors, under Art. 2058 of the
Civil Code, to demand exhaustion of the property of the
principal debtor, exists only when a pledge or a mortgage has
not been given as special security for the payment of the
principal obligation.
Although an ordinary personal guarantor – not a mortgagor
or pledgor – may demand exhaustion of the properties of the
principal debtor, the creditor may, prior thereto, secure
judgment against said guarantor, who shall be entitled,
however, to a deferment of the execution of said judgment
against him until after the properties of the principal debtor
shall have been exhausted to satisfy the obligation involved
in the case.
SAAVEDRA v PRICE
FACTS:

This is a proceeding instituted by the petitioner to
annul the order of May 8, 1939, entered by the
Court of First Instance of Leyte, which provided for
the sale at public auction of the real property
described in Transfer Certificate of Title No. 395
issued in favor of the petitioner, so that the
proceeds thereof may be applied to the payment of
the credit of the respondent W.S. Price in the sum of
P15,000

In civil case No. 3707 of the Court of First Instance of
Leyte, W.S. Price, plaintiff vs. Ceferino Ibañez et al.,
defendants, said court rendered judgment ordering
the defendants to pay the plaintiff within ninety days
the sum of P15,000, with the legal interest thereon
from January 16, 1934, and in case of default on
their part, that the real property subject matter of
the mortgage be sold at public auction so that the
proceeds thereof may be applied to the payment of
the sum in question and the interest thereon.
SECTRANS 2010/ ATTY. AGUINALDO
41



After the period of ninety days has elapsed and
Rafael Martinez and Ceferino Ibañez failed to pay
the sum in question with the interest thereon, the
respondent Price filed a motion praying that the real
property mortgaged be sold at public auction for the
payment of his mortgage credit and its interest.
This was denied.
The petitioner now claims that the respondent Judge
acted with abuse of his discretion in not transferring
the hearing of the motion for the sale of the
mortgaged realty and that he exceeded his
jurisdiction in ordering the sale of said property.
ISSUE: Whether or not the order of sale of such property was
proper?
HELD:



It is contended that since the petitioner is not the
debtor and as she, on the other hand is the owner of
the mortgaged realty, she merely acted as surety to
Rafael Martinez, the principal debtor, and as such
she entitled to the benefit of the exhaustion of the
property of the principal debtor, in accordance with
the provision of article 1830 of the Civil Code.
We are of the opinion that this last contention is
likewise unfounded and untenable.
o In the first place, this alleged defense should
have been interposed before the judgment was
rendered in this case and it is too late to raise it
for the first time as a ground for opposing the
motion to sell the real property in question.
o In the second place, the contention that the
mortgaged real property belonging to the
petitioner cannot be sold to pay the debt for the
reason that she is a mere surety of Rafael
Martinez, finds no support in the law.
It is true that the petitioner is a surety with regard to
Rafael Martinez and as such surety she is entitled to
resort to the actions and remedies against him which
the law affords her, but we should not lose sight of
the fact that she was sued not as a surety but as a
mortgage debtor for being the owner of the
mortgaged property
ARROYO v JUNGSAY
FACTS:
- Arroyo (P) is an appointed guardian of an imbecile,
while Jungsay et al (D) are the previous guardian and
bondsmen who absconded.
- D, the former guardian of the ward, absconded with
the funds of his ward.
-
LC ordered D to pay P, which the bondsmen
appealed. D also pointed out properties of the
previous guardian which are now being adversely
claimed by 3rd parties
ISSUE: WoN the bondsmen are liable
SC: YES
- For the surety to be not liable, he must be able to
point out property of the principal debtor which are
realizable and is situated within the Philippines – to
insure the fulfillment of the obligation and furnish
the creditor with the means of obtaining its
fulfillment without delay
- The property pointed out by the sureties is not
sufficient to pay the indebtedness; it is not salable; it
is encumbered to 3rd parties
BITANGA v PYRAMID
FACTS:
1) On March 26 1997, Pyramid entered into an agreement
with Macrogen Realty, of which Bitanga is the President, to
construct for the latter a building, located in Sucat,
Parañaque. Pyramid then commenced civil, structural, and
architectural works on the construction project. However,
Macrogen Realty failed to settle respondent’s progress
billings. Bitanga, assured Pyramid that the outstanding
account of Macrogen Realty would be paid.Thus, Pyramid
continued the construction project.
2) In August 1998, Pyramid suspended work on the
construction project since the conditions that it imposed for
the continuation thereof, including payment of unsettled
accounts, had not been complied with by Macrogen Realty
and eventually, on 1 September 1999, respondent instituted
with the Construction Industry Arbitration Commission (CIAC)
a case for arbitration against Macrogen Realty seeking
payment by the latter of its unpaid billings and project costs.
Macrogen, chose to amicably settle the arbitration case and
both parties entered into a Compromise Agreement, with
Bitanga acting as signatory for and in behalf of Macrogen
Realty.
3) Under the Agreement, Macrogen Realty agreed to pay
Pyramid the total amount in six equal monthly installments,
that if it would default in the payment of two successive
monthly installments, immediate execution could issue
against it for the unpaid balance, without need of judgment
from any court or tribunal. Bitanga guaranteed the
obligations of Macrogen Realty under the Compromise
Agreement by executing a Contract of Guaranty in favor of
respondent, by virtue of which he irrevocably and
unconditionally guaranteed the full and complete payment of
the principal amount of liability of Macrogen Realty.
SECTRANS 2010/ ATTY. AGUINALDO
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4) However, despite this, Macrogen Realty failed and refused
to pay all the monthly installments agreed upon in the
Compromise Agreement. Thus, on 7 September 2000,
respondent moved for the issuance of a writ of execution
against Macrogen Realty, which was granted.
5) The sheriff however filed a return stating that he was
unable to locate any property of Macrogen Realty, except its
bank deposit of P20,242.33, with the Planters Bank, Buendia
Branch. Respondent then made, on January 3, 2001, a written
demand on petitioner, as guarantor of Macrogen Realty, to
pay the P6,000,000.00, or to have properties of the Macrogen
Realty sufficient to cover the obligation guaranteed. Said
demands met no reply.
6) As to Marilyn’s (bitanga’s wife) liability, Pyramid
contended that Macrogen Realty was owned and controlled
by bitanga and Marilyn and/or by corporations owned and
controlled by them. On the theory that since the completion
of the construction project would have redounded to the
benefit of both petitioner and Marilyn and/or their
corporations; and considering, Marilyn’s interest in a
corporation which controls Macrogen Realty, Marilyn cannot
be unaware of the obligations incurred by Macrogen Realty
and/or petitioner in the course of the business operations of
the said corporation.
7) Pyramid filed suit that a judgment be rendered ordering
petitioner and Marilyn to comply with their obligation under
the Contract of Guaranty by paying respondent the amount
of P6,000,000.000.
8) Marilyn contended that, since she did not co-sign the
Contract of Guaranty with her husband; nor was she a party
to the Compromise Agreement between respondent and
Macrogen Realty. She had no part at all in the execution of
the said contracts. This was denied
ISSUES:
(1) whether the defendants were liable under the contract of
guarantee dated April 17, 2000 entered into between
Benjamin Bitanga and the plaintiff;
(2) whether defendant wife Marilyn Bitanga is liable in this
action;
HELD:
A) Under a contract of guarantee, the guarantor binds himself
to the creditor to fulfill the obligation of the principal debtor
in case the latter should fail to do so. The guarantor who pays
for a debtor, in turn, must be indemnified by the latter.
However, the guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of
the debtor and resorted to all the legal remedies against the
debtor. This is what is otherwise known as the benefit of
excussion.
Article 2060 of the Civil Code reads:
In order that the guarantor may make use of the
benefit of excussion, he must set it up against the
creditor upon the latter’s demand for payment from
him, and point out to the creditor available property
of the debtor within Philippine territory, sufficient to
cover the amount of the debt.
B) Said provision imposes a condition for the invocation of
the defense of excussion. Article 2060 of the Civil Code clearly
requires that in order for the guarantor to make use of the
benefit of excussion, he must set it up against the creditor
upon the latter’s demand for payment and point out to the
creditor available property of the debtor within the
Philippines sufficient to cover the amount of the debt.
C) In this case, despite having been served a demand letter at
his office, petitioner still failed to point out to the respondent
properties of Macrogen Realty sufficient to cover its debt.
Such failure on petitioner’s part forecloses his right to set up
the defense of excussion.
D) Article 2059(5) of the Civil Code thus finds application and
precludes petitioner from interposing the defense of
excussion. We quote:
(5) If it may be presumed that an execution on the
property of the principal debtor would not result in
the satisfaction of the obligation.
E) Petition is DENIED.
ONG v PCIB
FACTS: Cho Siong entered into contract of agency for
distribution of petroleum products, assumed liability of
former agent Tong Kuan. His agency bond was secured by
Ong Guan Can. Defaulted in the amount of P64.00
DOCTRINE:
Under the terms of the bond signed by the
surety, he did not answer for the principal obligor save for
the Latter’s acts by virtue of the contract of agency. He
cannot be held liable for the debt of a former agent, which
the principal obligor assumed by virtue of another contract,
of which said surety was not even aware. A contract of
suretyship is to be strictly interpreted and is not to be
extended beyond its terms.
MIRA HERMANOS v MANILA TOBACCONISTS
Facts:
SECTRANS 2010/ ATTY. AGUINALDO
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





By virtue of a written contract, Mira Hermanos (MH)
agreed to deliver to Manila Tobacconists (MT)
merchandise for sale on consignment under certain
specified terms and MT agreed to pay MH on or before
the 20th day of each month the invoice value of all the
merchandise sold during the preceding month.
MH required MT a bond of 3,000 which was executed by
Provident Insurance (PI).
The volume of the business of MT increased so that the
merchandise received by way of consignment from MH
exceeded 3,000 in value.
MH required MT to post an additional bond of 2,000
which MT complied, executing a bond with same
conditions with the Manila Compania de Seguros (MCS)
for the excess of 3,000 up to 5,000.
After liquidation of the transaction, a balance was due
from MT to MH for the amount of 2,200 which MT is
unable to pay.
PI, as surety, only paid 1,300, alleging that the remaining
40% should be paid by the other surety, MCS.
Issue: Whether or not MCS should be held liable for the
remaining 40% of the balance due?
Held:
No, the bond of 3,000 filed by PI responded for the obligation
of MT up to the some of 3,000, inasmuch as the bond of
2,000 filed by MCS responded for the obligation of MT only
insofar as it might exceed 3,000 and up to 5,000.
The provision in the NCC with regard to several sureties of
only one debtor for the same debt does not apply in this case.
Although the two bonds on their face appear to guarantee
the same debt coextensively up to 2,000 – that of PI alone
extending beyond that sum up to 3,000 – it was pleaded and
conclusively proven that in reality said bonds, or the two
sureties, do not guarantee the same debt because PI
guarantees only the first 3,000 while MCS only the excess up
to 5,000.
CACHO v VALLES
Facts: On October 29, 1920, the National Sporting Club, of
Manila, obligated itself by a promissory note payable at four
months to pay to Jose Ma. Cacho. Below the signature of said
National Sporting Club, as signed by the proper officers of the
Club, the following personal guaranty was written: "We
guarantee this obligation." (Sgd.) J. A. Valles, J. L. Mateu, G. J.
Heffting, Ed. Chesley, Baldomero Roxas. This note was not
paid at maturity. An action was instituted thereon against the
National Sporting Club and the guarantors. Baldomero Roxas
interposed a defence claiming the right of division as among
the co-sureties, and asking that in case he should be found
liable that he should be held responsible only for his aliquot
part of the debt.
Issue: W/N in case of the insolvency of one or more of several
simple sureties, those who remain solvent can be made to
pay the entire debt?
Ruling: None of the sureties, so far as this record shows, has
been declared bankrupt. The benefit of division therefore has
not been lost, and the rule declaring each surety liable only
for his aliquot part of the guaranteed debt, must hold. The
obligation of the surety cannot be extended beyond its
specified limits. A co-surety is entitled to the benefit of
division from the very moment that he contracts the
obligation, except where there is stipulation to the contrary.
TUASON v MACHUCA
F: Universal Trading Company was going to withdraw goods
from the Bureau of Customs to be delivered to BPI. To
withdraw, they gave a bond executed by Manila Compania de
Seguros. That bond was secured solidarily by Tuason Co. and
Machuca of Universal Trading. It was to be paid whether or
not Manila Compania already paid CIR. Manila Compania
demanded payment from Tuason. Manila Compania filed a
case against tuason. Tuason later payed but incurred
litigation expenses. Tuason now demands payment from
Machuca. Tuason filed a case for collection of money from
Machuca. The lower court ruled that Machuca should pay the
debt and the expenses incurred by Tuason in the case for
collection of money.
Issue: Won Machuca should pay the expenses incurred by
Tuason in its case vs. Manila Compania
Ruling: NO! it was not Machuca’s fault why tuason incurred
expenses in the litigation of Manila Compania and Tuason. If
tuason paid Manila compania, no litigation expenses will be
paid.
AUTOCORP v INTRA STRATA
FACTS: Autocorp Group, represented by its President,
petitioner Peter Y. Rodriguez, secured two ordinary re-export
bond from private respondent Intra Strata Assurance
Corporation (ISAC) in favor of public respondent Bureau of
Customs (BOC) to guarantee the re-export of one unit of
Hyundai Excel 4-door 1.5 LS and Hyundai Sonata 2.4 GLS,
and/or to pay the taxes and duties thereon.
Petitioners executed and signed two Indemnity Agreements
with identical stipulations in favor of ISAC, agreeing to act as
surety of the subject bonds. Petitioner Rodriguez signed the
Indemnity Agreements both as President of the Autocorp
Group and in his personal capacity.
In sum, ISAC issued the subject bonds to guarantee
compliance by petitioners with their undertaking with the
BOC to re-export the imported vehicles within the given
SECTRANS 2010/ ATTY. AGUINALDO
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period and pay the taxes and/or duties due thereon. In turn,
petitioners agreed, as surety, to indemnify ISAC for the
liability the latter may incur on the said bonds.
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
Petitioner Autocorp Group failed to re-export the items
guaranteed by the bonds and/or liquidate the entries or
cancel the bonds, and pay the taxes and duties pertaining to
the said items despite repeated demands made by the BOC,
as well as by ISAC. By reason thereof, the BOC considered the
two bonds, with a total face value of P1,034,649.00, forfeited.
Failing to secure from petitioners the payment of the face
value of the two bonds, despite several demands sent to each
of them as surety under the Indemnity Agreements, ISAC filed
with the RTC on 24 October 1995 an action against
petitioners.
(3) When the debtor has bound himself to relieve him from
the guaranty within a specified period, and this period has
expired;
(4) When the debt has become demandable, by reason of
the expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation
has no fixed period for its maturity, unless it be of such
nature that it cannot be extinguished except within a period
longer than ten years;
Petitioners contend that their obligation to ISAC is not yet
due and demandable. They cannot be made liable by ISAC in
the absence of an actual forfeiture of the subject bonds by
the BOC and/or an explicit pronouncement by the same
bureau that ISAC is already liable on the said bonds.
(6) If there are reasonable grounds to fear that the principal
debtor intends to abscond;
ISSUES: Whether actual forfeiture of the subject bonds is
necessary for the petitioners to be liable to ISAC under the
Indemnity Agreements?
In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that shall
protect him from any proceedings by the creditor and from
the danger of insolvency of the debtor.
RULING: The liability of the guarantor already triggers the
liability of the debtor.
Autocrop’s liability
Actual forfeiture of the subject bonds is not necessary for
petitioners to be liable thereon to ISAC as surety under the
Indemnity Agreements.
Petitioners' obligation to indemnify ISAC became due and
demandable the moment the bonds issued by ISAC became
answerable for petitioners' non-compliance with its
undertaking with the BOC. Stated differently, petitioners
became liable to indemnify ISAC at the same time the bonds
issued by ISAC were placed at the risk of forfeiture by the
BOC for non-compliance by petitioners with its undertaking.
It is worthy to note that petitioners did not impugn the
validity of the stipulation in the Indemnity Agreements
allowing ISAC to proceed against petitioners the moment the
subject bonds become due and demandable, even prior to
actual forfeiture or payment thereof. Even if they did so, the
Court would be constrained to uphold the validity of such a
stipulation for it is but a slightly expanded contractual
expression of Article 2071 of the Civil Code which provides,
inter alia, that the guarantor may proceed against the
principal debtor the moment the debt becomes due and
demandable.
Art. 2071. The guarantor, even before having paid, may
proceed against the principal debtor:
(7) If the principal debtor is in imminent danger of becoming
insolvent.
Rodriguez’s liability
Petitioner Rodriguez posits that he is merely a guarantor, and
that his liability arises only when the person with whom he
guarantees the credit, Autocorp Group in this case, fails to
pay the obligation. Petitioner Rodriguez invokes Article 2079
of the Civil Code on Extinguishment of Guaranty, which
states:
Art. 2079. An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the
guaranty. The mere failure on the part of the creditor to
demand payment after the debt has become due does not of
itself constitute any extension of time referred to herein.
The use of the term guarantee in a contract does not ipso
facto mean that the contract is one of guaranty. It thus ruled
that both petitioners assumed liability as a regular party and
obligated themselves as original promissors, i.e., sureties.
The provisions of the Civil Code on Guarantee, other than the
benefit of excussion, are applicable and available to the
surety.[22] The Court finds no reason why the provisions of
Article 2079 would not apply to a surety.
This, however, would not cause a reversal of the Decision of
the Court of Appeals. The Court of Appeals was correct that
even granting arguendo that there was a modification as to
the effectivity of the bonds, petitioners would still not be
absolved from liability since they had authorized ISAC to
SECTRANS 2010/ ATTY. AGUINALDO
45
consent to the granting of any extension, modification,
alteration and/or renewal of the subject bonds

SAENZ v YAP CHUAN
FACTS:
 Engracio Palanca – a judicial administrator gave
bond to guarantee his administration of the estate of
Margarita Jose
 The bond was executed by Engracio, Plaintiff Saenz
and two others in favour of the government for the
sum of P60k
 On the same date, Engracio and 5 others executed a
bond in favour of Saenz; Yap Chuan P20k and the
other 4 P5k each
 TC ordered Saenz, as surety in solidum of the exadministrator Engracio to pay the estate the sum of
P41k
 Saenz paid to the administrator of the estate P8k; He
filed sut against 5 sureties who executed the bond
 TC acquitted Defendant from the P20k claim and
ordered the other 4 to pay P2k each.
 Both parties appealed. Defendants were claiming
that they are only liable for P1k each only according
to the terms of the contract. Plaintiff was claiming
that he is entitled to maximum sum of P5k for which
each one had bound himself in the contract.
ISSUE: Whether or not Vizmanos is entitled to P20k, a
reimbursement of P5k each from the Defendants?
HELD: NO
 The bond of a debtor to protect his surety is not a
sub bond nor a second bond with respect to the
original creditor. It is nothing but a substitution of
the obligation of the debtor with respect to his
surety, and is necessarily governed by the legal
provisions which regulate the right of action of the
surety against the party for whom he gave the bond,
that is, an action of subrogation which lies with the
surety to compel the debtor to comply with the
obligation to reimburse.
 This action arising out of subrogation is the remedy
for securing reimbursement of the amount that
another has paid, and cannot exceed, except there is
an express agreement to the contrary, the amount
actually paid by the surety in place of the debtor.
 IN THIS CASE: The following terms of an obligation
cannot be considered as an express agreement to
the contrary: “ x x x bind themselves as such
conjointly to reimburse or pay whatever amounts
the latter (the surety) may have to pay or shall have
paid by reason of the judicial bond,” inasmuch as
this manner of expressing the intention of the
obligated parties does not constitute a true
disjunctive proposition, but is merely explanatory of

the obligation as if contracted by the debtor himself,
the only natural and logical interpretation.
To ask an indemnity of P20k, when the loss to be
indemnified is only P8k is contrary to law.
Vizmanos only entitled to an action against 4
Defendants for recovery of maximum P5k. He cannot
collect more than the sum which he himself was
actually compelled to pay.
MANILA SURETY v BATU CONSTRUCTION
FACTS:
On July 8, 1950, the defendant Batu Construction &
Company, as principal, and the plaintiff Manila Surety &
Fidelity Co. Inc., as surety, executed a surety bond for the
sum of P8,812.00 to insure faithful performance of the
former's obligation as contractor for the construction of the
Bacarra Bridge, Project PR-72 (No. 3) Ilocos Norte Province.
On the same date, July 8,1950, the Batu Construction &
Company and the defendants Carlos N. Baquiran and
Gonzales P. Amboy executed an indemnity agreement to
protect the Manila Surety & Fidelity Co. Inc.., against damage,
loss or expenses which it may sustain as a consequence of the
surety bond executed by it jointly with Batu Construction &
Company.
On or about May 30, 1951, the plaintiff received a notice
from the Director of Public Works (Exhibit B) annulling its
contract with the Government for the construction of the
Bacarra Bridge because of its failure to make satisfactory
progress in the execution of the works, with the warning that
,any amount spent by the Government in the continuation of
the work, in excess of the contract price, will be charged
against the surety bond furnished by the plaintiff. It also
appears that a complaint by the laborers in said project of the
Batu Construction & Company was filed against it and the
Manila Surety and Fidelity Co., Inc., for unpaid wages
amounting to P5,960.10.
Trial Court dismissed the case holding that provisions of
article 2071 of the new Civil Code may be availed of by a
guarantor only and not by a surety the complaint, with costs
against the plaintiff.
ISSUE: The main question to determine is whether the last
paragraph of article 2071 of the new Civil Code taken from
article 1843 of the old Civil Code may be availed of by a
surety.
HELD:
A guarantor is the insurer of the solvency of the debtor; a
surety is an insurer of the debt. A guarantor binds himself to
pay if the principal is unable to pay; a surety undertakes to
SECTRANS 2010/ ATTY. AGUINALDO
46
pay if the principal does not pay.1 The reason which could be
invoked for the non-availability to a surety of the provisions
of the last paragraph of article 2071 of the new Civil Code
would be the fact that guaranty like commodatum 2 is
gratuitous. But guaranty could also be for a price or
consideration as provided for in article 2048. So, even if there
should be a consideration or price paid to a guarantor for him
to insure the performance of an obligation by the principal
debtor, the provisions of article 2071 would still be available
to the guarantor. In suretyship the surety becomes liable to
the creditor without the benefit of the principal debtor's
exclusion of his properties, for he (the surety) maybe sued
independently. So, he is an insurer of the debt and as such he
has assumed or undertaken a responsibility or obligation
greater or more onerous than that of guarantor. Such being
the case, the provisions of article 2071, under guaranty, are
applicable and available to a surety. The reference in article
2047 to, the provisions of Section 4, Chapter 3, Title 1, Book
IV of the new Civil Code, on solidary or several obligations,
does not mean that suretyship which is a solidary obligation is
withdrawn from the applicable provisions governing
guaranty.
The plaintiff's cause of action does not fall under paragraph 2
of article 2071 of the new Civil Code, because there is no
proof of the defendants' insolvency. The fact that the
contract was annulled because of lack of progress in the
construction of the bridge is no proof of such insolvency. It
does not fall under paragraph 3, because the defendants
have not bound themselves to relieve the plaintiff from the
guaranty within a specified period which already has expired,
because the surety bond does not fix any period of time and
the indemnity agreement stipulates one year extendible or
renewable until the bond be completely cancelled by the
person or entity in whose behalf the bond was executed or by
a Court of competent jurisdiction. It does not come under
paragraph 4, because the debt has not become demandable
by reason of the expiration of the period for payment. It does
not come under paragraph 5 because of the lapse of 10 years,
when the principal obligation has no period for its maturity,
etc., for 10 years have not yet elapsed. It does not fall under
paragraph 6, because there is no proof that "there are
reasonable grounds to fear that the principal debtor intends
to abscond." It does not come under paragraph 7, because
the defendants, as principal debtors, are not in imminent
danger of becoming insolvent, there being no proof to that
effect.
But the plaintiff's cause of action comes under paragraph 1 of
article 2071 of the new Civil Code, because the action
brought by Ricardo Fernandez and 105 persons in the Justice
of the Peace Court of Laoag, province of Ilocos Norte, for the
collection of unpaid wages amounting to P5,960.10, is in
connection with the construction of the Bacarra Bridge,
Project PR-72 (3), undertaken by the Batu Construction &
Company, and one of the defendants therein is the herein
plaintiff, the Manila Surety and Fidelity Co., Inc., and
paragraph 1 of article 2071 of the new Civil Code provides
that the guarantor, even before having paid, may proceed
against the principal debtor "to obtain release from the
guaranty, or to demand a security that shall protect him from
any proceedings by the creditor or from the danger of
insolvency of the debtor, when he (the guarantor) is sued for
payment. It does not provide that the guarantor be sued by
the creditor for the payment of the debt. It simply provides
that the guarantor of surety be sued for the payment of an
amount for which the surety bond was put up to secure the
fulfillment of the obligation undertaken by the principal
debtor. So, the suit filed by Ricardo Fernandez and 105
persons in the Justice of the Peace Court of Laoag, province
of Ilocos Norte, for the collection of unpaid wages earned in
connection with the work done by them in the construction
of the Bacarra Bridge, Project PR-72(3), is a suit for the
payment of an amount for which the surety bond was put up
or posted to secure the faithful performance of the obligation
undertaken by the principal debtors (the defendants) in favor
of the creditor, the Government of the Philippines.
The order appealed from dismissing the complaint is reversed
and set aside.
GEN. INDEMNITY v ALVAREZ
FACTS:




On February 1954, Appellee General Indemnity Co., Inc.,
filed a complaint in the CFI Manila against Appellant
Estanislao Alvarez for the recovery of the sum of P2,000
representing the amount of a loan allegedly taken by the
Appellant from the PNB, which the Appellee guaranteed
with an indemnity bond, and for which Appellant, as
counter-guaranty, executed in Plaintiff's favor a
mortgage on his share of land in a parcel of land .
The complaint further alleged that the Appellant failed to
pay said loan, together with interest, to PNB as a result
of which the bank deducted the amount thereof
Plaintiff's deposit.
Thereafter, Appellant averred that the loan in question
was secured by him only in accommodation of one Hao
Lam, and that Plaintiff agreed not to take any steps
against Appellant and the mortgage executed by him in
Plaintiff's favor until the latter had failed to obtain
payment from said Hao Lam.
Eight months later, Plaintiff filed a motion for summary
judgment saying that Appellang presented no real and
meritorious defense and that it was entitled to a
summary judgment in its favor, based on the affidavit of
its comptroller Pedro R. Mendiola essentially saying that:
o That he has personal knowledge of the indebtedness
of the Defendant.
o Notwithstanding said several demands by Plaintiff,
Defendant has failed and refused and still fails and
refuses to pay the same.
SECTRANS 2010/ ATTY. AGUINALDO
47

The lower courts ruled in favour of Plaintiff. Thus this
petition.
Issue:
Whether or not Defendant Alvarez is liable?
Ruling:




NO. The SC ruled that there exists a controversy in the
complaint and answer as to whether or not Appellee had
actually paid Appellant's obligation to the Philippine
National Bank, a matter which should be decided in the
affirmative before Appellant, as surety, can claim
reimbursement from Appellant, the principal debtor.
However, Appellee is correct in saying that said defense
is immaterial to its right to recovery, since the mortgage
deed executed by Appellant in its favor (the genuineness
and due execution of which Appellant admitted in his
answer) shows Appellant to be the actual and only
debtor, and Appellant is precluded from varying this
representation by parol evidence.
In ruling for the Appellant, the SC opined that the last
paragraph of Art. 2071 of the New Civil Code, provides
that the only action the guarantor can file against the
debtor "to obtain release from the guaranty, or to
demand a security that shall protect him from any
proceeding by the creditor and from the danger of
insolvency of the debtor."
An action by the guarantor against the principal debtor
for payment, before the former has paid the creditor, is
premature.
INTRA STRATA v REPUBLIC
FACTS: Grand Textile imported materials from other countries
which, upon arrival, were transferred to Customs Bonded
Warehouse. Grand Textile was obliged to pay customs
charges. To secure payment of these obligations, petitioners
issued general warehousing bonds in favor of the Bureau of
Customs (BOC). Without payment of any of the obligations
due, Grand Textile withdrew the imported goods from
storage. BOC demanded payment from Grand Textile as
importer and from the petitioners as sureties. All three failed
to pay. The government filed a collection suit against the
parties.
Lower Court ruled against petitioners, CA affirmed.
Petitioners allege that: (1) they were released from their
obligations under their bonds when Grand Textile withdrew
the imported goods without payment of taxes, duties, and
other charges; and (2) that their non-involvement in the
active handling of the warehoused items from the time they
were stored up to their withdrawals substantially increased
the risks they assumed under the bonds they issued, thereby
releasing them from liabilities under these bonds.
ISSUE: Whether the withdrawal of the stored goods, wares,
and merchandise – without notice to them as sureties –
released them from any liability for the duties, taxes, and
charges they committed to pay under the bonds they issued?
HELD: NO. By its very nature under the terms of the laws
regulating suretyship, the liability of the surety is joint and
several but limited to the amount of the bond, and its terms
are determined strictly by the terms of the contract of
suretyship in relation to the principal contract between the
obligor and the obligee. The definition and characteristics of a
suretyship bring into focus the fact that a surety agreement is
an accessory contract that introduces a third party element in
the fulfillment of the principal obligation that an obligor owes
an obligee. In short, there are effectively two (2) contracts
involved when a surety agreement comes into play – a
principal contract and an accessory contract of suretyship.
Under the accessory contract, the surety becomes directly,
primarily, and equally bound with the principal as the original
promissor although he possesses no direct or personal
interest over the latter’s obligations and does not receive any
benefit therefrom.
Considered in relation with the underlying laws that are
deemed read into these bonds, it is at once clear that the
bonds shall subsist – that is, “shall remain in full force and
effect” – unless the imported articles are “regularly and
lawfully withdrawn. . .on payment of the legal customs duties,
internal revenue taxes, and other charges to which they shall
be subject….” Fully fleshed out, the obligation to pay the
duties, taxes, and other charges primarily rested on the
principal Grand Textile; it was allowed to warehouse the
imported articles without need for prior payment of the
amounts due, conditioned on the filing of a bond that shall
remain in full force and effect until the payment of the duties,
taxes, and charges due. Under these terms, the fact that a
withdrawal has been made and its circumstances are not
material to the sureties’ liability, except to signal both the
principal’s default and the elevation to a due and demandable
status of the sureties’ solidary obligation to pay. Under the
bonds’ plain terms, this solidary obligation subsists for as long
as the amounts due on the importations have not been paid.
Thus, it is completely erroneous for the petitioners to say that
they were released from their obligations under their bond
when Grand Textile withdrew the imported goods without
payment of taxes, duties, and charges. From a
commonsensical perspective, it may well be asked: why else
would the law require a surety when such surety would be
bound only if the withdrawal would be regular due to the
payment of the required duties, taxes, and other charges?
We note in this regard the rule that a surety is released from
its obligation when there is a material alteration of the
contract in connection with which the bond is given, such as a
change which imposes a new obligation on the promising
party, or which takes away some obligation already imposed,
or one which changes the legal effect of the original contract
SECTRANS 2010/ ATTY. AGUINALDO
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and not merely its form. A surety, however, is not released
by a change in the contract which does not have the effect of
making its obligation more onerous.
We find under the facts of this case no significant or material
alteration in the principal contract between the government
and the importer, nor in the obligation that the petitioners
assumed as sureties. Specifically, the petitioners never
assumed, nor were any additional obligation imposed, due to
any modification of the terms of importation and the
obligations thereunder. The obligation, and one that never
varied, is – on the part of the importer, to pay the customs
duties, taxes, and charges due on the importation, and on the
part of the sureties, to be solidarily bound to the payment of
the amounts due on the imported goods upon their
withdrawal or upon expiration of the given terms. The
petitioners’ lack of consent to the withdrawal of the goods, if
this is their complaint, is a matter between them and the
principal Grand Textile; it is a matter outside the concern of
government whose interest as creditor-obligee in the
importation transaction is the payment by the importerobligor of the duties, taxes, and charges due before the
importation process is concluded. With respect to the
sureties who are there as third parties to ensure that the
amounts due are paid, the creditor-obligee's active concern is
to enforce the sureties’ solidary obligation that has become
due and demandable.
With regard to the issue on the notice, the surety does not,
by reason of the surety agreement, earn the right to
intervene in the principal creditor-debtor relationship; its role
becomes alive only upon the debtor’s default, at which time
it can be directly held liable by the creditor for payment as a
solidary obligor. A surety contract is made principally for the
benefit of the creditor-obligee and this is ensured by the
solidary nature of the sureties’ undertaking. Under these
terms, the surety is not entitled as a rule to a separate notice
of default, nor to the benefit of excussion, and may be sued
separately or together with the principal debtor. Significantly,
nowhere in the petitioners’ bonds does it state that prior
notice is required to fix the sureties’ liabilities. Without such
express requirement, the creditor’s right to enforce
payment cannot be denied as the petitioners became bound
as soon as Grand Textile, the principal debtor, defaulted.
Thus, the filing of the collection suit was sufficient notice to
the sureties of their principal’s default.
RADIO CORP. OF THE PHILS. v ROA
FACTS:

The defendant Jesus R. Roa became indebted to the
Philippine Theatrical Enterprises, Inc., in the sum of
P28,400 payable in seventy-one equal monthly
installments at the rate of P400 a month
commencing thirty days after December 11, 1931,
with five days grace monthly until complete




payment of said sum. On that same date the
Philippine Theatrical Enterprises, Inc., assigned all its
right and interest in that contract to the Radio
Corporation of the Philippines.
In the said contract there was an accelerating clause
that in case the vendee-mortgagor fails to make any
of the payments as hereinbefore provided, the
whole amount remaining unpaid under this
mortgage shall immediately become due and
payable and this mortgage on the property herein
mentioned as well as the Luzon Surety Bond may be
foreclosed by the vendor-mortgagee
Roa failed to pay the monthly installment and the
whole amount fell due.
The defendant asked for an extension which was
granted.
After the extension given, the surety now argued
that they already release from their obligation.
ISSUE:

Whether or not the extension granted in the above
copied letter by the plaintiff, without the consent of
the guarantors, the herein appellants, extinguishes
the latter's liability not only as to the installments
due at that time, as held by the trial court, but also
as to the whole amount of their obligation?
HELD:

NO, The rule that an extension of time granted to
the debtor by the creditor, without the consent of
the sureties, extinguishes the latter's liability is
common both to Spanish jurisprudence and the
common law; and it is well settled in English and
American jurisprudence that where a surety is liable
for different payments, such as installments of rent,
or upon a series of promissory notes, an extension of
time as to one or more will not affect the liability of
the surety for the others
VILLA v GARCIA BOSQUE
FACTS:
A sale of property was made by the attorney in fact for a
stated consideration, part of which was paid in cash and the
balance made payable in deferred instalments. The attorney
in fact then executed a substituted power of attorney in favor
of a third person to enable the latter to collect the deferred
instalments.
SC:
-
Extension of time by Creditor to Principal Debtor;
Effect on liability of sureties
Where the purchase price of property is payable in
various installments, an extension of time granted by
SECTRANS 2010/ ATTY. AGUINALDO
49
the creditor to the debtor with respect to one
instalment will discharge the sureties, whether
simple or solidary, from ALL liability as to such
instalment bit it DOES NOT AFFECT their liability for
other instalments unconnected with the extension
of time.


HOSPICIO DE SAN JOSE v FIDELITY

SECURITY BANK v CUENCA
DOCTRINE:
An extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes
the guaranty. The 1989 Loan Agreement expressly stipulated
that its purpose was to “liquidate,” not to renew or extend,
the outstanding indebtedness. Moreover, respondent did not
sign or consent to the 1989 Loan Agreeement, which had
alledgedly extended the original P8 million credit facility.
Hence, his obligation as a surety should be deemed
extinguished, pursuant to Article 2079 of the Civil Code,
which specifically states that “[a]n extension granted to the
debtor by the creditor without the consent of the guarantor
extinguishes the guaranty.
An essential alteration in the terms of a Loan
Agreement without the consent of the surety extinguishes
the latter’s obligation. The submission that only the
borrower, not the surety, is entitled to be notified of any
modification in the original loan accommodation is
untenable-such theory is contrary to the to the principle that
a surety cannot assume an obligation more onerous than that
of the principal. That the Indemnity Agreement is a
continuing surety does not authorize the lender to extend the
scope of the principal obligation inordinately; A continuing
guaranty is one which covers all transaction, including those
arising in the future, which are within the description or
contemplation of the contract of guaranty, until the
expiration or termination thereof.
investigators found that more money were payable to
ATACO from BPW, because the latter allowed other
creditors to collect funds due to ATACO under the same
purchase order.
PNB demanded from ATACO and MSFC for payment but
both refused.
PNB filed a complaint against ATACO and MSFC to
recover the balance with interests and costs.
PNB contends that the power of attorney obtained from
ATACO was merely an additional security in its favor and
that it was the duty of the surety not that of the creditor
to see to it that the obligor fulfills his obligations and that
the creditor owed the surety no duty of active diligence
to collect any sum from the principal debtor.
Issue: Whether or not MFSC should be held liable for the
unpaid balance?
Held: No, MFSC is not liable.
PNB is not negligent in failing to collect from the principal
debtor but is negligent for its failure in collecting the sums
due to the debtor from the Bureau of Public Works, contrary
to its duty as holder of an exclusive and irrevocable power of
attorney to make such collections, since an agent is required
to act with care of a good father of the family and becomes
liable for damages which the principal may suffer through
non-performance.
Even if the assignment with power of attorney from the
principal debtor were considered as mere additional security,
still by allowing the assigned funds to be exhausted without
notifying the surety, PNB deprived the former of any
possibility of recoursing against that security. Article 2080 of
the Civil Code provides that guarantors even though they
are solidary, are released from their obligation whenever
some act of the creditor they cannot be subrogated to the
rights, mortgages and preferences of the latter.
PNB v MANILA SURETY
Facts:




PNB had opened a letter of credit and advanced thereon
$120K to Edgingtom Oil Refinery for 8,000 tons of hot
asphalt. Of this amount, 2,000 tons were released and
delivered to Adams & Taguba Corp (ATACO) under a trust
receipt guaranteed by Manila Surety & Fidelity Co.
(MSFC) up to the amount of 75K.
To pay for the asphalt, ATACo constituted PNB its
assignee and atty-in-fact to receive and collect from the
Bureau of Public Works (BPW) the amount aforesaid out
of funds payable to the assignor under a purchase order.
ATACO delivered to BPW and the latter accepted the
asphalt to the total value of 400K.
After this, PNB regularly collected for 8 months.
Thereafter, it ceased to collect until after 4 years, its
PROVISIONS COMMON TO PLEDGE AND MORTGAGE
ARENAS v RAYMUNDO
Facts: Estanislaua Arenas and Julian La O, brought suit against
Fausto O. Raymundo (pawnshop owner). The plaintiffs
alleged that the said jewelry, during the last part of April or
the beginning of May, 1908, was delivered to Elena de Vega
to sell on commission, and that the latter, in turn, delivered it
to Conception Perello, likewise to sell on commission, but
that Perello, instead of fulfilling her trust, pledged the jewelry
in the defendant's pawnshop. The said jewelry was then
under the control and in the possession of the defendant, as
a result of the pledge by Perello, and that the former refused
to deliver it to the plaintiffs.
SECTRANS 2010/ ATTY. AGUINALDO
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Issue: W/N the pawnshop should return the jewelry to the
plaintiffs?


Ruling: Yes. In the present suit, it was not proven that
Estanislaua Arenas authorized Perello to pawn the jewelry
given to her by Arenas to sell on commission. Conception
Perello was not the legitimate owner of the jewelry which she
pledged to the defendant Raymundo, for a certain sum that
she received from the latter as a loan, the contract of pledge
entered the jewelry so pawned cannot serve as security for
the payment of the sum loaned, nor can the latter be
collected out of the value of the said jewelry. The Civil Code
prescribes as one of the essential requisites of the contracts
of pledge and of mortgage, that the thing pledged or
mortgaged must belong to the person who pledges or
mortgages it. This essential requisite for the contract of
pledge between Perello and the defendant being absent as
the former was not the owner of the jewelry given in pledge.
UNION MOTOR CORP. v CA
This case is about the spouses respondents who bought a
jeepney worth 30k. to finance the purchase, the spouses
entered into a chattel mortgage with Union Motors wherein
the security will be the jeepney. Union motors then
transferred the mortgage to a financing company. Receipts
and other documents of ownership were issued however, the
jeep is still not in the possession of the spouses. The spouses
tried to have possession of the jeep but failed. Frustrated,
they did not continue the payment. LC ruled in favor of the
spouses saying that they are not liable because there is still
no delivery. Finance Co. claimed there was constructive
delivery because how can the spouses mortgage the property
if they do not own the it.
Issue: WoN there was delivery
Ruling: Non! Chattel mortgage do not prove delivery.
DBP v PRUDENTIAL
CAVITE DEVELOPMENT v SPOUSES LIM
FACTS:
 Rodolfo Guansing obtained a loan in the amount of
P90k from Cavite Devt Bank (CDB) and mortgaged a
parcel of land covered by TCT in his name to secure
the loan.
 When Guansing defaulted in the payment of his
loan, CDB foreclosed the mortgage and consolidated
the title to the property in its name
 R Lim offered to purchase the property from CDB
and paid P30k as option money. She later on
discovered that the subject property was originally
registered in the name of Perfecto Guansing, father
of Rodolfo Guansing.
R filed an action for specific performance and
damages against CDB for serious misrepresentation
CDB denied that a contract of sale was ever
perfected between them and R. R’s letter offer
clearly states that the sum of P30k was given as
option money NOT earnest money; therefore only
an option contract
ISSUE: WON there was a valid foreclosure of the mortgage
and subsequently a contract of sale?
HELD: NO
 NEMO DAT QUOD NON HABET
 The sale by CDB to Lim of the property mortgaged by
Rodolfo Guansing is deemed a nullity for CDB did not
have a valid title to the said property.

CDB never acquired a valid title to the property
because the foreclosure sale, by virtue of which, the
property had been awarded to CDB as highest
bidder, is likewise void since the mortgagor was not
the owner of the property foreclosed.
DE LEON v CALALO
FACTS:
This case was brought below by respondent Eduardo Calalo
for the annulment of the mortgage executed by his brother,
Augorio Calalo, in favor of petitioner Roberto de Leon
covering a piece of land and the improvements thereon,
consisting of a residential house and a commercial building
located at 45/4th Street, East Tapinac, Olongapo City.
Respondent Eduardo alleged that he was the owner of the
property mortgaged, having bought it for P306,000.00 from
the spouses Federico and Marietta Malit on September 13,
1984. He claimed that, as he was then a member of the
merchant marines and stayed abroad, the Deed of Absolute
Sale covering the land was made in favor of his brother,
Augorio Calalo; that on April 8, 1985, Augorio executed a
Deed of Donation in favor of the minor Julsunthie Calalo,
herein respondent’s son, who, from the time the property
was purchased until the filing of the complaint, had been
receiving the fruits of the property; that on September 14,
1988, Augorio mortgaged the said property to petitioner
Roberto de Leon without his [respondent’s] knowledge and
consent; that the mortgage was amended on September 30,
1988; that Augorio did not have any right to mortgage the
property because he was not the owner thereof; and that he
(respondent Eduardo) learned only in June 1992 that the
property was the subject of an extrajudicial foreclosure.
Named defendants in the action were petitioner Roberto de
Leon, Augorio Calalo and Benjamin Gonzales, the sheriff
conducting the foreclosure proceeding.
In due time, petitioner De Leon filed an answer in which he
claimed to be a mortgagee in good faith, having previously
ascertained the ownership of Augorio who occupied and
SECTRANS 2010/ ATTY. AGUINALDO
51
possessed the land in question and in whose name the land
was registered in the Register of Deeds and in various other
documents. He pointed out that even the deed of sale
attached to respondent’s complaint showed that the land
was in Augorio’s name, clearly proving that the latter owned
the property. Petitioner De Leon averred that the mortgage in
his favor was registered with the Register of Deeds and that it
had been amended four times.
ISSUE: W/N the mortgage executed by Augorio Calalo in favor
of petitioner De Leon is valid.
HELD:
There is no dispute that the land subject of the mortgage is
titled in the name of Augorio Calalo. Nor is there any question
that petitioner De Leon did not know of the claim of
ownership of respondent Eduardo Calalo until after the
present action was instituted. As the trial court found,
petitioner De Leon examined the relevant documents
pertaining to the land, consisting of the transfer certificate of
title, the tax declarations in the City Assessor’s Office and
information on the records in the barangay, and found that
the land was registered in the name of Augorio Calalo. Upon
due inspection of the property, he also found it to be
occupied by Augorio Calalo. Petitioner had no reason to
believe that the land did not belong to Augorio. Persons
dealing with 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 torrens titles, as evidence of
the lawful ownership of the land or of any encumbrance
thereon, protects buyers or mortgagees who, in good faith,
rely upon what appears on the face of the certificate of
title.4 Petitioner De Leon is a mortgagee in good faith.
Whether the money used in acquiring the property from the
original owners came from respondent Eduardo Calalo and
the title to the property was placed in the name of his
brother Augurio Calalo only because respondent thought he
was not qualified to acquire lands in the Philippines because
he had become an American citizen, and that the land was
subsequently donated to respondent Eduardo’s son,
Julsunthie, are matters not known to petitioner. Hence,
whether Augorio Calalo committed a breach of trust and
whether the property was validly donated to petitioner’s son
Julsunthie are questions which must be resolved in a separate
proceeding.
Mira Bernal. After a few months, respondent asked her sister
to get the TCT in the safety deposit box to be able to sell the
property. When the safe was broken, the items inside were
missing, including the title to the lot and tax declarations, as
well as jewelry.
Respondent discovered from Bernal that she and Jennifer
Ramirez, Victor’s daughter took the title and mortgaged it to
petitioner. There was a woman who pretended to be the
owner of the lot, showing the TCT in her name as “Vida Dana
Querrer and identification card. Petitioner verified with the
Office of the Register of Deeds that the property was in the
name of Vida Dana Querrer and that it was free of any lien or
encumbrance. Subsequently, petitioner was convinced to
enter into a Real Estate Mortgage Contract which was later
on notarized and filed with the Office of the Register of Deeds
and annotated on the TCT.
Respondent filed a complaint against petitioner, Bernal and
Ramirez for Nullification of Deed of Real Estate Mortgage.
The RTC ruled in favor of petitioner and declared the Deed of
Real Estate Mortgage valid. The CA rendered judgment in
favor of defendant on the ground that in a Real Estate
Mortgage contract, it is essential that the mortgagor be the
absolute owner of the property to be mortgaged; otherwise
the mortgage is void.
ISSUE: WON THE REAL ESTATE MORTGAGE CONTRACT IS
VALID?
HELD: NO. One of the essential requisites of a mortgage
contract is that the mortgagor must be the absolute owner of
the thing mortgaged. A mortgage is, thus, invalid if the
mortgagor is not the property owner. In this case, the trial
court and the CA are one in finding that based on the
evidence on record the owner of the property is respondent
who was not the one who mortgaged the same to the
petitioner.
CEBU INTERNATIONAL v CA
ERENA v QUERRA-KAUFFMAN
FACTS: Respondent is the owner of a lot with house, with the
TCT kept in a safety deposit box. She left the key of the box to
her husband as she was leaving for the US. Later on, the
daughter of respondent as well as her husband left for the
US, and the key was entrusted to the sister of her husband,
Petitioner cannot be considered an innocent purchaser for
value, relying on the Torrents title. While a Torrens title
serves as evidence of an indefeasible title to the property in
favor of the person whose name appears therein, when the
instrument presented for registration is forged, even if
SECTRANS 2010/ ATTY. AGUINALDO
52
accompanied by the owner’s duplicate certificate of title, the
registered owner does not thereby lose his title, and neither
does the assignee of the mortgagee, for that matter, acquire
any right or title to the property. In such a case, the
transferee or the mortgagee, based on a forged instrument, is
not even a purchaser or a mortgagee for value protected by
law.
-
-
Petitioner cannot also invoke the doctrine of a mortgagee on
good faith. Said doctrine speaks of a situation where, despite
the fact that the mortgagor is not the owner of the
mortgaged property, his title being fraudulent, the mortgage
contract or any foreclosure sale arising therefrom are given
effect by reason of public policy. 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 name and
that, after obtaining the said title, he succeeds in mortgaging
the property to another who relies on what appears on the
said title- it does not apply to a situation where the title is still
in the name of the rightful owner and the mortgagor is a
different person pretending to be the owner.
PNB v AGUDELO
Vda. DE JAYME v CA
FACTS:
- Spouses Jayme (P) are the registered owners of a
parcel of land. They entered into a contract of lease
with Asian Cars (R) covering half of the lot for 20
years
- The contract allows R to mortgage the property as
long as the proceeds will be for the construction of a
building on the land.
- R mortgaged the property for P6M to MetroBank,
covering the whole lot, and in which P signed the
documents. R also executed an undertaking wherein
the officers of R are liable personally to the
mortgage
- R defaulted and MetroBank foreclosed the property.
- P filed for annulment of mortgage as it was acquired
through fraud
- RTC and CA declared the mortgage and undertaking
valid
ISSUE: WON Mortgage allowing R to mortgage the property
was valid
SC: YES
- It has long been settled that it is valid so long as valid
consent was given. In consenting thereto even
granting that petitioner may not be assuming
personal liability for the debt, her property shall
nevertheless secure and respond for the
performance of the principal obligation
-
The law recognizes instances when persons not
directly parties to a loan agreement may give as
security their own properties for the principal
transaction.
In this case, the spouses should not be allowed to
disclaim the validity of a transaction they voluntarily
and knowingly entered into for the simple reason
that such transaction turned out prejudicial to them
later on.
Records show that P voluntarily agreed to use their
property as collateral for R’s loan, hence, no fraud
The undertaking made by R and its officers are valid,
hence they are liable to reimburse P for the damages
they suffered by reason of the mortgage
SPOUSES BELO v PNB
FACTS:
1) Eduarda Belo owned an agricultural land with an area of
661,288 square meters in Panitan, Capiz, which she leased a
portion to respondents spouses Eslabon, for a period of 7
years at the rate of P7,000.00 per year.
2) Respondents spouses Eslabon obtained a loan from PNB
secured by a real estate mortgage on their own 4 residential
houses located in Roxas City, as well as on the agricultural
land owned by Eduarda Belo. The assent of Eduarda Belo to
the mortgage was acquired through a special power of
attorney which was executed in favor of respondent Marcos
Eslabon on June 15, 1982.
3) The spouses Eslabon failed to pay their loan obligation, and
so extrajudicial foreclosure proceedings against the
mortgaged properties were instituted by PNB and was the
highest bidder of the foreclosed properties at P447,632.00.
4) Meanwhile, Eduarda Belo sold her right of redemption to
petitioners spouses Enrique and Florencia Belo under a deed
of absolute sale of proprietary and redemption rights. Before
the expiration of the redemption period, petitioners spouses
Belo tendered payment for the redemption of the agricultural
land which includes the bid price of respondent PNB, plus
interest and expenses.
5) However, PNB rejected the tender of payment of
petitioners spouses Belo contending that the redemption
price should be the total claim of the bank on the date of the
auction sale and custody of property plus charges accrued
and interests amounting to P2,779,978.72 to which the
spouses disagreed and refused to pay the said total claim of
respondent PNB. Thereafter the\ spouses Belo filed in the
RTC an action for declaration of nullity of mortgage, with an
alternative cause of action, in the event that the
accommodation mortgage be held to be valid, to compel
respondent PNB to accept the redemption price tendered by
SECTRANS 2010/ ATTY. AGUINALDO
53
petitioners spouses Belo which is based on the winning bid
price of respondent PNB in the extrajudicial foreclosure. The
RTC ruled in favour of the spouses belo.
6) On appeal, the CA ruled that the petitioners spouses Belo
should pay the entire amount due to PNB under the mortgage
deed at the time of the foreclosure sale plus interest, costs
and expenses.
ISSUE: whether or not the SPA the real estate mortgage
contract, the foreclosure proceedings and the subsequent
auction sale involving Eduarda Belo's property are valid. And
assuming they are valid, whether or not the petitioners are
required to pay, as redemption price, the entire claim of
respondent PNB in the amount of P2,779,978.72 as of the
date of the public auction sale on June 10, 1991.
HELD:
A) The validity of the SPA and the mortgage contract cannot
anymore be assailed due to petitioners Belo failure to appeal
the same after the trial court rendered its decision affirming
their validity.
B) Also, the SPA executed by Eduarda Belo in favor of the
respondents spouses Eslabon and the Real Estate Mortgage
executed by the respondents spouses in favor of respondent
PNB are valid. It is stipulated in paragraph three (3) of the SPA
that Eduarda Belo appointed the Eslabon spouses "to make,
sign, execute and deliver any contract of mortgage or any
other documents of whatever nature or kind . . . which may be
necessary or proper in connection with the loan herein
mentioned, or with any loan which my attorney-in-fact may
contract personally in his own name”
C) ThisSPA was not meant to make her a co-obligor to the
principal contract of loan between respondent PNB, as
lender, and the spouses Eslabon, as borrowers. Eduarda Belo
consented to be an accommodation mortgagor in the sense
that she signed the SPA to authorize respondents spouses
Eslabons to execute a mortgage on her land.
D) An accommodation mortgage isn’t void simply because
the accommodation mortgagor did not benefit from the
same. The validity of an accommodation mortgage is allowed
under Article 2085 of the New Civil Code which provides that
"(t)hird persons who are not parties to the principal obligation
may secure the latter by pledging or mortgaging their own
property."
E) An accommodation mortgagor, ordinarily, is not himself a
recipient of the loan.
F) There is no doubt that Eduarda Belo, assignor of the
petitioners, is an accommodation mortgagor. Section 25 of
P.D. No. 694 provides that "the mortgagor shall have the right
to redeem the property by paying all claims of the Bank
against him". From said provision can be deduced that the
mortgagor referred to by that law is one from whom the bank
has a claim in the form of outstanding or unpaid loan; he is
also called a borrower or debtor-mortgagor.
G) PNB has no claim against accommodation mortgagor
Eduarda Belo inasmuch as she only mortgaged her property
to accommodate the Eslabon spouses who are the loan
borrowers of the PNB. The principal contract is the contract
of loan between the Eslabon spouses, as borrowers/debtors,
and the PNB as lender. The accommodation real estate
mortgage which secures the loan is only an accessory
contract. Thus, the term "mortgagor" in Section 25 of P.D. No.
694 pertains only to a debtor-mortgagor and not to an
accommodation mortgagor.
H) Moreover, the mortgage contract provides that ". . . the
mortgagee may immediately foreclose this mortgage
judicially in accordance with the Rules of Court or
extrajudicially in accordance with Act No. 3135, as amended
and Presidential Decree No. 385 “ Thus, since the mortgage
contract in this case is in the nature of a contract of adhesion
as it was prepared solely by respondent, it has to be
interpreted in favor of petitioners.
J) While the petitioners, as assignees of Eduarda Belo, are not
required to pay the entire claim of respondent PNB against
the principal debtors, they can only exercise their right of
redemption with respect to the parcel of land belonging to
Eduarda Belo, the accommodation mortgagor. Thus, they
have to pay the bid price less the corresponding loan value of
the foreclosed 4 residential lots of the spouses Eslabon.
Thus, petitioners are allowed to redeem only the property
registered in the name of Eduarda Belo, by paying only the
bid price less the corresponding loan value of the foreclosed
(4) residential lots of the respondents spouses Eslabon.
BUSTAMANTE v ROSEL
ALCANTARA v ALINEA
Facts:






Alinea and Belarmino loaned P480 from Alcantara.
According to the loan agreement, if the period has
expired without payment of the loan, the house and lot
of Alinea and Belarmino will be considered sold to
Alcantara.
Alinea and Belarmino failed to pay.
They refused to deliver the property to Alcantara.
Alcantara filed an action against them.
The defendants contend that the amount claimed by
Alcantara included the interest and that the principal
borrowed was only 200 and that the interest was 280.
SECTRANS 2010/ ATTY. AGUINALDO
54

They also alleged as their special defense that they
offered to pay Alcantara the sum of 480 but the latter
had refused to accept the same.
which the debtor Blanc owed and failed to pay, and that the
latter did not reimburse Tuason the amount paid to the bank
together with interests thereon.
Issue: W/N Tuason can appropriate the things given by way of
pledge?
Issue:
1) WON there was a valid mortgage?
2) WON the defendants should deliver the property to
Alcantara?
Held:
1) No. The property, the sale of which was agreed to by the
debtors does not appear mortgaged in favor of the
creditor because in order to constitute a valid mortgage
it is indispensable that the instrument be registered in
the Register of Property and the document contract does
not constitute a mortgage nor it could possibly be a
mortgage, for the reason that the said document is not
vested with the character and conditions of a public
instrument.
The contract is not a pledge since the said property is not
personal property and the debtor continued in
possession thereof and was never been occupied by the
creditor.
It is also not an antichresis by reason that as the creditor
has never been in possession of the property nor has
enjoyed the said property nor for one moment received
its rents.
2) Yes. The will of the parties are controlling, In this case, a
contract of loan and a promise of sale of a house and lot,
the price of which should be the amount loaned, if within
a fixed period of time such amount should not be paid by
the debtor-vendor of the property to the creditor-vendee
of same. The fact that the parties have agreed at the
same time, in such a manner that the fulfillment of the
promise of sale would depend upon the nonpayment or
return of the amount loaned, has not produced any
change in the nature and legal conditions of either
contract, or any essential defect which would tend to
nullify the same.
Ruling: No. Tuason is entitled to retain and appropriate to
himself the merchandise received in pledge is null and
indefensible, because he can only recover his credit,
according to law, from the proceeds of the sale of the same.
Art. 2088.
LANUZA v DE LEON
Spouses lanuza executed a deed of sale with a right to
repurchase to Reyes. Upon expiration of term to repurchase,
the time was extended without the wife of lanuza signing the
document. A stipulation to the effect that the ownership will
only be passed to the vendee if the vendor fails to repurchase
the property was included. The spouses then mortgage the
property to respondent to secure a debt. The debt was
unpaid and respondent filed a case to foreclose the mortgage
which was granted. Reyes filed a case for consolidation,
claiming she has the right to the property. Reyes claims the
ownership in the property automatically passes immediately
to him after the sale and not after the end of the period to
repurchase.
Issue: won reyes contention valid
Ruling: yes. a stipulation in a purported pacto de retro sale
that the ownership over the property sold would
automatically pass to the vendee in case no redemption was
effected within the stipulated period is contrary to the nature
of a true pacto de retro sale, under which the vendee
acquires ownership of the thing sold immediately upon the
execution of the sale, subject only to the vendors rights of
redemption. The said stipulation is a pactum commissorium
which enables the mortgagee to acquire ownership of the
mortgaged property without need of forclosure. It is void. Its
insertion in the contract is an avowal of the intention to
mortgage rather than to sell the property.
DAYRIT v CA
MAHONEY v TUASON
Facts: P. Blanc, the owner of the jewels, entered into a
contract of pledge, delivering to the creditor Mariano Tuason
several jewels and other merchandise for the purpose of
securing the fulfillment of the obligation which he (Blanc) had
contracted in favor of the latter who had guaranteed the
payment of a considerable amount of money which Blanc
owed to the Chartered Bank. Creditor Tuason paid to the
Chartered Bank the sum of sixteen thousand pesos (P16,000)
FACTS: Dayrit, Sumbillo and Angeles entered into a contract
with Mobil Oil Phil, entitled LOAN & MORTGAGE
AGREEMENT. Defendants violated the LOAN & MORTGAGE
AGREEMENT because they only paid one installment. They
also failed to buy the quantities required in the Sales
Agreement.
The plaintiff made a demand, Dayrit answered acknowledging
his liability. Trial Court ruled in favor of plaintiff and also ruled
that each of the three defendants shall pay 1/3 of the cost.
SECTRANS 2010/ ATTY. AGUINALDO
55
No appeal had been taken so the decision became final and
executor.

Mobil filed for the execution of the judgment. Dayrit opposed
alleging that they had an agreement with Mobil, that he
would not appeal anymore but Mobil would release the
mortgage upon payment of his 1/3 share.
Mobil claimed that the agreement was that it would only
release the mortgage if the whole principal mortgaged debt
plus the whole accrued interest were fully paid.
ISSUE: Whether or not the CFI erred in ordering the sale at
public auction of the mortgaged properties to answer for the
entire principal obligation of Dayrit, Sumbillo and Angeles.
RULING:
While it is true that the obligation is merely joint and each of
the defendant is obliged to pay his 1/3 share of the joint
obligation, the undisputed fact remains that the intent and
purpose of the LOAN & MORTGAGE AGREEMENT was to
secure the entire loan.
The court ruled that a mortgage directly and immediately
subjects the property upon which it is imposed, the same
being indivisible even though the debt may be divided, and
such indivisibility likewise unaffected by the fact that the
debtors are not solidarily liable.
YU v PCIB
FACTS:
 P mortgaged their title, interest, and participation
over several parcels of land located in Dagupan City
and Quezon City in favour of PCIB (R) as security for
the payment of a loan in the amount of P9mill
 P failed to pay the loan; R filed a Petition for
Extrajudicial Foreclosure of Real Estate Mortgage on
the Dagupan City properties. A Certificate of Sale
was issued in favour of R. Subsequently, R filed an
Ex-Parte Petition for Writ of Possession before RTC
Dagupan
 P filed a Motion to Dismiss. They argued that the
Certificate of Sale is void because the real estate
mortgage is indivisible, the mortgaged properties in
Dagupan City and Quezon City cannot be separately
foreclosed.
 R – the filing of two separate foreclosure
proceedings did not violate Article 2089 of the Civil
Code on the indivisibility of a real estate mortgage
since Section 2 of Act No. 3135 expressly provides
that extra-judicial foreclosure may only be made in
the province or municipality where the property is
situated. R further submits that the filing of separate
applications for extra-judicial foreclosure of
mortgage involving several properties in different
locations is allowed by A.M. No. 99-10-05-0, the
Procedure on Extra-Judicial Foreclosure of Mortgage,
as further amended on August 7, 2001.
TC denied Motion
ISSUE: WON a real estate mortgage over several properties
located in different localities can be separately foreclosed in
different places?
HELD: YES
 What the law proscribes is the foreclosure of only a
portion of the property or a number of the several
properties mortgaged corresponding to the unpaid
portion of the debt where, before foreclosure
proceedings, partial payment was made by the
debtor on his total outstanding loan or obligation.
 This also means that the debtor cannot ask for the
release of any portion of the mortgaged property or
of one or some of the several lots mortgaged unless
and until the loan thus secured has been fully paid,
notwithstanding the fact that there has been partial
fulfillment of the obligation. Hence, it is provided
that the debtor who has paid a part of the debt
cannot ask for the proportionate extinguishment of
the mortgage as long as the debt is not completely
satisfied. In essence, indivisibility means that the
mortgage obligation cannot be divided among the
different lots, that is, each and every parcel under
mortgage answers for the totality of the debt
 A.M. No. 99-10-05-0,the Procedure on Extra-Judicial
Foreclosure of Mortgage, lays down the guidelines
for extra-judicial foreclosure proceedings on
mortgaged properties located in different provinces.
It provides that the venue of the extra-judicial
foreclosure proceedings is the place where each of
the mortgaged property is located. Relevant portion
provides:
Where the application concerns the extrajudicial
foreclosure of mortgages of real estates and/or
chattels in different locations covering one
indebtedness, only one filing fee corresponding
to such indebtedness shall be collected. The
collecting Clerk of Court shall, apart from the
official receipt of the fees, issue a certificate of
payment
indicating
the
amount
of
indebtedness, the filing fees collected, the
mortgages sought to be foreclosed, the real
estates and/or chattels mortgaged and their
respective locations, which certificate shall
serve the purpose of having the application
docketed with the Clerks of Court of the places
where the other properties are located and of
allowing the extrajudicial foreclosures to
proceed thereat. (Emphasis supplied)

The indivisibility of the real estate mortgage is not
violated by conducting two separate foreclosure
SECTRANS 2010/ ATTY. AGUINALDO
56
proceedings on mortgaged properties located in
different provinces as long as each parcel of land is
answerable for the entire debt
UCPB, for its part, denies its liability to SLGT [for lack
of privity of contract] … [and] questioned the
personality of SLGT to challenge the validity of the
mortgage reasoning that the latter is not party to the
mortgage contract … [and] maintains that the
mortgage transaction was done in good faith….
Finally, it prays for the suspension of the
proceedings because of the on-going rehabilitation
of ASB.
METROBANK v SLGT
FACTS:
On October 25, 1995, Dylanco and SLGT each entered into a
contract to sell with ASB for the purchase of a unit (Unit 1106
for Dylanco and Unit 1211 for SLGT) at BSA Towers then being
developed by the latter. As stipulated, ASB will deliver the
units thus sold upon completion of the construction or before
December 1999. Relying on this and other undertakings,
Dylanco and SLGT each paid in full the contract price of their
respective units. The promised completion date came and
went, but ASB failed to deliver, as the Project remained
unfinished at that time. To make matters worse, they learned
that the lots on which the BSA Towers were to be erected
had been mortgaged6 to Metrobank, as the lead bank, and
UCPB7 without the prior written approval of the Housing and
Land Use Regulatory Board (HLURB).
Alarmed by this foregoing turn of events, Dylanco, on August
10, 2004, filed with the HLURB a complaint for delivery of
property and title and for the declaration of nullity of
mortgage. A similar complaint filed by SLGT followed three
(3) days later. At this time, it appears that the ASB Group of
Companies, which included ASB, had already filed with the
Securities and Exchange Commission a petition for
rehabilitation and a rehabilitation receiver had in fact been
appointed.
What happened next are laid out in the OP decision adverted
to above, thus:
In response to the above complaints, ASB alleged …
that it encountered liquidity problems sometime in
… 2000 after its creditors [UCPB and Metrobank]
simultaneously demanded payments of their loans…;
that on May 4, 2000, the … Commission (SEC)
granted its petition for rehabilitation; that it
negotiated with UCPB and Metrobank … but nothing
came out positive from their negotiation ….
On the other hand, Metrobank claims that
complainants [Dylanco and SLGT] have no
personality to ask for the nullification of the
mortgage because they are not parties to the
mortgage transaction …; that the complaints must
be dismissed because of the ongoing rehabilitation
of ASB; xxx that its claim against ASB, including the
mortgage to the [Project] have already been
transferred to Asia Recovery Corporation; xxx.
In resolving the complaint in favor of Dylanco and
SLGT, the Housing Arbiter ruled that the mortgage
constituted over the lots is invalid for lack of
mortgage clearance from the HLURB.
ISSUE: W/N The declaration of nullity of the entire mortgage
constituted on the project land site and the improvements
was valid. and
HELD:
Both petitioners do not dispute executing the mortgage in
question without the HLURB’s prior written approval and
notice to both individual respondents. Section 18 of
Presidential Decree No. (PD) 957 – The Subdivision and
Condominium Buyers’ Protective Decree – provides:
SEC. 18. Mortgages. - No mortgage of any unit or lot
shall be made by the owner or developer without
prior written approval of the [HLURB]. Such
approval shall not be granted unless it is shown that
the proceeds of the mortgage loan shall be used for
the development of the condominium or subdivision
project …. The loan value of each lot or unit covered
by the mortgage shall be determined and the buyer
thereof, if any, shall be notified before the release
of the loan. The buyer may, at his option, pay his
installment for the lot or unit directly to the
mortgagee who shall apply the payments to the
corresponding mortgage indebtedness secured by
the particular lot or unit being paid for …. (Emphasis
and word in bracket added)
There can thus be no quibbling that the project lot/s and the
improvements introduced or be introduced thereon were
mortgaged in clear violation of the aforequoted provision of
PD 957. And to be sure, Dylanco and SLGT, as Project unit
buyers, were not notified of the mortgage before the release
of the loan proceeds by petitioner banks.
As it were, PD 957 aims to protect innocent subdivision lot
and condominium unit buyers against fraudulent real estate
practices. Its preambulatory clauses say so and the Court
need not belabor the matter presently. Section 18, supra, of
the decree directly addresses the problem of fraud and other
manipulative practices perpetrated against buyers when the
SECTRANS 2010/ ATTY. AGUINALDO
57
lot or unit they have contracted to acquire, and which they
religiously paid for, is mortgaged without their knowledge, let
alone their consent. The avowed purpose of PD 957 compels,
as the OP correctly stated, the reading of Section 18 as
prohibitory and acts committed contrary to it are void. Any
less stringent construal would only accord unscrupulous
developers and their financiers unbridled discretion to follow
or not to follow PD 957 and thus defeat the very lofty
purpose of that decree. It thus stands to reason that a
mortgage contract executed in breach of Section 18 of the
decree is null and void.
The next question to be addressed turns on whether or not
the nullity extends to the entire mortgage contract.
The poser should be resolved, as the CA and OP did resolve it,
in the affirmative. This disposition stems from the basic
postulate that a mortgage contract is, by nature, indivisible.
Consequent to this feature, a debtor cannot ask for the
release of any portion of the mortgaged property or of one or
some of the several properties mortgaged unless and until
the loan thus secured has been fully paid, notwithstanding
the fact that there has been partial fulfillment of the
obligation. Hence, it is provided that the debtor who has paid
a part of the debt cannot ask for the proportionate
extinguishments of the mortgage as long as the debt is not
completely satisfied.
The situation obtaining in the case at bench is within the
purview of the aforesaid rule on the indivisibility of mortgage.
It may be that Section 18 of PD 957 allows partial redemption
of the mortgage in the sense that the buyer is entitled to pay
his installment for the lot or unit directly to the mortgagee so
as to enable him - the said buyer - to obtain title over the lot
or unit after full payment thereof. Such accommodation
statutorily given to a unit/lot buyer does not, however,
render the mortgage contract also divisible. Generally, the
divisibility of the principal obligation is not affected by the
indivisibility of the mortgage. The real estate mortgage
voluntarily constituted by the debtor (ASB) on the lots or
units is one and indivisible. In this case, the mortgage
contract executed between ASB and the petitioner banks is
considered indivisible, that is, it cannot be divided among the
different buildings or units of the Project. Necessarily, partial
extinguishment of the mortgage cannot be allowed. In the
same token, the annulment of the mortgage is an all or
nothing proposition. It cannot be divided into valid or invalid
parts. The mortgage is either valid in its entirety or not valid
at all. In the present case, there is doubtless only one
mortgage to speak of. Ergo, a declaration of nullity for
violation of Section 18 of PD 957 should result to the
mortgage being nullified wholly.
It will not avail the petitioners any to feign ignorance of PD
957 requiring prior written approval of the HLURB, they being
charged with knowledge of such requirement since granting
loans secured by a real estate mortgage is an ordinary part of
their business.
CENTRAL BANK v CA
PLEDGE
YULIONGSIU v PNB
FACTS: Yulongsiu owned 2 vessels and equity in FS-203, which
were purchased by him from the Philippine Shipping
Commission, by installment. Plaintiff obtained a loan from
defendant and to guarantee payment, plaintiff pledged the 2
vessels and the equity on FS-203, as evidenced by a pledge
contract. Plaintiff made a partial payment and the remaining
balance was renewed by the execution of 2 promissory notes
in the bank’s favor. These two notes were never paid at all by
plaintiff on their respective due dates.
Defendant bank filed a criminal case against plaintiff charging
the latter with estafa through falsification of commercial
documents, and the trial court convicted the plaintiff and was
sentenced to indemnify the defendant. The corresponding
writ of execution issued to implement the order for
indemnification was returned unsatisfied as plaintiff was
totally insolvent.
Meanwhile, together with the institution of the criminal
action, defendant took physical possession of the 2 vessels
and transferred the equity on FS-203 to the defendant. Later
on, the 2 vessels were sold by defendant to third parties.
Plaintiff commenced an action for recovery on the pledged
items, and alleges, among others, that the contract executed
was a chattel mortgage so the creditor defendant could not
take possession of the chattel object thereof until after there
has been default.
ISSUE: Whether the contract entered into between plaintiff
and defendant is a chattel mortgage or a valid contract of
pledge?
HELD: It’s a contract of pledge. The contract itself provides
that it is a contract of pledge and the judicial admission that it
is a pledge contract cannot be offset without showing of
palpable mistake.
SECTRANS 2010/ ATTY. AGUINALDO
58
The pledgee defendant was therefore entitled to the actual
possession of the vessels. The plaintiff’s continued operation
of the vessels after the pledge contract was entered into
places his possession subject to the order of the pledge. The
pledge can temporarily entrust the physical possession of the
chattels pledged to the pledgor without invalidating the
pledge. In this case, the pledgor is regarded as holding the
pledge merely as a trustee for the pledge.
As to the validity of the pledge contract with regard to
delivery, plaintiff alleges that constructive delivery is
insufficient to make pledge effective. The Court ruled that
type of delivery will depend on the nature and peculiar
circumstances of each case. Since the defendant bank was,
pursuant to the pledge contract, in full control of the vessels
through plaintiff, the former could take actual possession at
any time during the life of the pledge to make more effective
its security.

ISSUE: Whether or not the dismissal of FBDC's third party
claim upon the trial court's erroneous interpretation that
FBDC has no right of ownership over the subject properties
because Section 22 of the contract of lease is void for being a
pledge and a pactum commissorium?
HELD:

FBDC v YLLAS LENDING
FACTS:






FBDC executed a lease contract in favor of Tirreno,
Inc. (Tirreno) over a unit at the Entertainment Center
- Phase 1 of the Bonifacio Global City in Taguig,
Metro Manila
Two provisions in the lease contract are pertinent to
the present case: Section 20, which is about the
consequences in case of default of the lessee, and
Section 22, which is about the lien on the properties
of the lease.
Tirreno began to default in its lease payments in
1999. By July 2000, Tirreno was already in arrears by
P5,027,337.91. FBDC and Tirreno entered into a
settlement agreement on 8 August 2000. Despite the
execution of the settlement agreement, FBDC found
need to send Tirreno a written notice of termination
dated 19 September 2000 due to Tirreno's alleged
failure to settle its outstanding obligations
FBDC entered and occupied the leased premises.
FBDC also appropriated the equipment and
properties left by Tirreno pursuant to Section 22 of
their Contract of Lease as partial payment for
Tirreno's outstanding obligations.
Yllas Lending Corporation and Jose S. Lauraya, in his
official capacity as President, (respondents) caused
the sheriff of Branch 59 of the trial court to serve an
alias writ of seizure against FBDC. On the same day,
FBDC served on the sheriff an affidavit of title and
third party claim
Despite FBDC's service upon him of an affidavit of
title and third party claim, the sheriff proceeded
with the seizure of certain items from FBDC's
premises
The sheriff delivered the seized properties to
respondents. FBDC questioned the propriety of the
seizure and delivery of the properties to respondents
without an indemnity bond before the trial court.
FBDC argued that when respondents and Tirreno
entered into the chattel mortgage agreement on 9
November 2000, Tirreno no longer owned the
mortgaged properties as FBDC already enforced its
lien on 29 September 2000.


No, This stipulation is in the nature of a resolutory
condition, for upon the exercise by the [lessor] of his
right to take possession of the leased property, the
contract is deemed terminated. This kind of
contractual stipulation is not illegal, there being
nothing in the law proscribing such kind of
agreement.
Judicial permission to cancel the agreement was not,
therefore necessary because of the express
stipulation in the contract of [lease] that the [lessor],
in case of failure of the [lessee] to comply with the
terms and conditions thereof, can take-over the
possession of the leased premises, thereby
cancelling the contract of sub-lease. Resort to
judicial action is necessary only in the absence of a
special provision granting the power of cancellation.
We allow FBDC's forfeiture of Tirreno's properties in
the leased premises. By agreement between FBDC
and Tirreno, the properties are answerable for any
unpaid rent or charges at any termination of the
lease. Such agreement is not contrary to law, morals,
good customs, or public policy. Forfeiture of the
properties is the only security that FBDC may apply
in case of Tirreno's default in its obligations
PNB v ATENDIDO
(Re Incorporeal Rights)
FACTS:
Laureano Atendido (LA) obtained from PNB (P) a loan payable
in 120 days with interest. To guarantee its payment LA pledge
to the bank 2,000 cavans of palay which were deposited in a
warehouse and to that effect endorsed in favor of the bank
the corresponding WH receipt. Before the maturity of the
loan, the cavans of rice dissappeared from the WH. LA failed
to pay the loan upon matrity and so the present action was
instituted. LA set up the defense that the quedan covering
the palay which was given as security having been endorsed
SECTRANS 2010/ ATTY. AGUINALDO
59
in blank in favor of the bank and the palay having been lost or
disappeared, he thereby became relieved of liability.
the sellers have been unable to collect the purchase price of
the merchandise in question.
ISSUE: WoN LA is relieved from liability
5) The partnership Ocejo made a demand on the bank for the
delivery of the sugar, to which demand the bank refused to
accede. A suit was filed by Ocejo alleging that said defendant
was unlawfully holding the seized sugar, the property of the
plaintiff firm Ocejo, which the bank had received from Chua
Teng Chong, and prayed for the judgment for the possession
of said sugar.
SC: NO!
The surrender of the warehouse receipt fiven as security,
endorsed in blank was NOT that of a final transfer or that WH
receipt but merely as a guaranty to the fulfillment of the
obligation of P3k. This being so, the ownership remains with
the pledgor subject only to foreclosure in case of
nonfulfillment of obligation. The pledgor, continuing to be
the owner of the goods pledged during the pendency of the
obligation in case of the loss of the property, the loss is borne
by him.
OCEJO PEREZ v INTERNATIONAL BANK
FACTS:
1) On March 7, 1914, Chua Teng Chong, executed to the
International Banking Corporation a promissory note, payable
one month after date, for the sum of P20,000 which note was
also attached to another private document, signed by Chua,
which stated that he had deposited with the bank, as security
for the said note, 5,000 piculs of sugar, which were said
stored in a warehouse in Binondo, Manila.
2) The bank made no effort to exercise any active ownership
over said merchandise until the April 16, when it discovered
that the amount of sugar stored in the said warehouse was
much less than what was mentioned in the contract. The
agreement between the bank and Chua Teng Chong with
respect to the alleged pledge of the sugar was never recorded
in a public instrument.
3) On March 24, 1914, the plaintiff partnership Ocejo, Perez
and Co., entered into contract with Chua for the sale to him
of sugar where the delivery should be made in April. The
delivery was completed April 16, 1914, and the sugar was
stored in the buyer's warehouse situated at Muelle de la
Industria. On this same date, the bank sent an employee to
inspect the sugar described in the pledge agreement, which
should have been stored in the Calle Toneleros warehouse. It
was discovered that the amount of sugar in that warehouse
did not exceed 1,800 piculs, it was supposed to have 5,000
piculs of sugar. Eventually, the employee was informed that
the rest of the sugar covered by the pledge agreement was
stored in the warehouse at No. 119, Muelle de la Industria.
The bank's representative immediately went to this
warehouse, found 3,200 piculs of sugar, of which he took
immediate possession, closing the warehouse with the bank's
padlocks.
4) On April 17, 1914, partnership Ocejo presented, for
collection, its account for the purchase price of the sugar, but
chua refused to make payment, and up to the present time
6) Subsequently, by agreement of the parties, the sugar was
sold and the proceeds of the deposited in the bank.
Afterwards, a complaint in intervention was filed by Chua
Seco, the assignee of the insolvency of Chua Teng Chong,
asserting a preferential right to the sugar, or to the proceeds
of its sale contending that the sugar is the property of the
insolvent estate represented by him. The lower court
rendered judgment in favor of the Oceja
ISSUES:
(a) Did title to the sugar pass to the buyer upon its delivery to
him (chua seco)?
(b) Assuming to pay that the title passed to the buyer, did his
failure to pay the purchase price authorize the seller to
rescind the sale?
(c) Can the pledge of the sugar to the bank be sustained
upon the evidence as to the circumstances under which it
obtained physical possession thereof?
HELD:
A) The SC agreed with Chua’s contention that he was entitled
to demand payment of the sugar at any time after the
delivery. No term having been stipulated within which the
payment should be made, payment was demandable at the
time and place of the delivery of the thing sold. The seller did
not avail himself of his right to demand payment as soon as
the right to such payment arose, but as no term for payment
was stipulated, he was entitled, to require payment to be
made at any time after delivery, and it was the duty of the
buyer to pay the price immediately upon demand. In essence,
the delivery had the effect of transmitting the title of the
sugar to the buyer.
B) Failure on the part of the buyer to pay the price on
demand: Article 1506 of the Civil Code provides that the
contract of sale may be rescinded for the same causes as all
other obligations, in addition to the special causes
enumerated in the preceding articles. It is also observed that
the article does not distinguish the consummated sale from
the merely perfected sale. In the contract of the sale the
obligation to pay the price is correlative to the obligation to
SECTRANS 2010/ ATTY. AGUINALDO
60
deliver the thing sold. Nonperformance by one of the parties
authorizes the other to exercise the right, conferred upon
him by the law, to elect to demand the performance of the
obligation or its rescission.

C) The sugar here in question could not be possibly have been
the subject matter of the contract of pledge which the parties
undertook to create by the private document, inasmuch as it
was not at the time the property of the bank, and this
constitutes an indispensable requisite for the creation of a
pledge.

D) It is not shown that an effort was made to pledge the
sugar, the subject matter of this case. Though it happened
that the day the sugar was delivered, the Chua gave the
bank's representative the keys of the warehouse on the
Muelle de la Industria in which the sugar was stored, it was
not because of an agreement concerning the pledge of the
sugar. From the facts, no attempt was made to enter into any
agreement for the pledge of the sugar here in question. The
bank took possession of that sugar under the erroneous
belief, based upon the false statement of Chua Teng Chong,
that it was a part of the lot mentioned in the private
document. Even assuming that an attempt was made to
pledge the sugar and that delivery was made in accordance
with the agreement, the pledge so established would be void
as against third persons since it is provided Article 1865 of the
Civil Code that a pledge is without effect as against third
persons "if the certainty of the date does not appear by public
instrument."
E) As to assignee Chua Seco: He filed a complaint in
intervention in this suit, in which he contends that by reason
of its sale and delivery by plaintiff to the insolvent, title to the
sugar passed to the latter and that the pledge set up by the
bank is void as to third persons. The title to the sugar having
been commenced against him before the declaration of
insolvency, the assignee, Chua Seco, has a better right to its
possession or to the product of its sale during the pendency
of this action. The decision of the court below is therefore
reversed, and it is decided that the assignee of the
bankruptcy of Chua Teng Chong is entitled to the product of
the sale of the sugar here in question, to wit, P10,826.76,
together with the interest accruing thereon, reserving
proceedings. So ordered.
CRUZ v LEE
SARMIENTO v JAVELLANA
Facts:



Spouses Villasenor obtained a loan from Javellana to be
paid within one year with an interest of 25% p.a.
evidenced by to documents.
They pledged 4,000 worth of jewels.
Upon maturity, the Spouses requested for an extension.

After 7 years, Villasenor offered to pay the loan and
redeem the jewels.
Javellana refused on the ground that redemption period
has already expired and he has already bought the jewels
from the wife of Villasenor.
Villasenor brought an action against Javellana to compel
the return of the jewels pledged.
Issues:
1) WON Villasenor can still redeem the jewels?
2) WON the right to redeem has already expired?
Held:
1) Yes. As the jewels in question were in the possession of
the defendant to secure the payment of a loan of 1,500
with interest thereon and for having subsequently
extended the term of the loan indefinitely, and so long as
the value of the jewels pledged was sufficient to secure
the payment of the capital and the accrued interest, the
defendant is bound to return the jewels or their value to
the plaintiffs, and the plaintiffs have the right to demand
the same upon the payment by them of the sum of 1,500
plus interest.
2) An action for recovery of the goods which were pledged
to secure the payment of a loan evidenced by a
document is an action on a written contract which has a
prescriptive period of 10 years from the date on which
the debtor may have paid the debt and demanded the
return of the goods pledged.
In this case, the expiration of the contract was in 1912
and the action to recover was filed in 1920, therefore,
the action has not yet prescribed.
PARAY v RODRIGUEZ
Facts: Respondents were the owners, in their respective
personal capacities, of shares of stock in a corporation known
as the Quirino-Leonor-Rodriguez Realty Inc.1 Sometime
during the years 1979 to 1980, respondents secured by way
of pledge of some of their shares of stock to petitioners
Bonifacio and Faustina Paray ("Parays") the payment of
certain loan obligations. When the Parays attempted to
foreclose the pledges on account of respondents’ failure to
pay their loans, respondents filed complaints with the
Regional Trial Court (RTC) of Cebu City and , sought the
declaration of nullity of the pledge agreements. However the
RTC, in its decision3 dated 14 October 1988, dismissed the
complaint and gave "due course to the foreclosure and sale
at public auction of the various pledges. Respondents then
received Notices of Sale which indicated that the pledged
shares were to be sold at public auction. However, before the
SECTRANS 2010/ ATTY. AGUINALDO
61
scheduled date of auction, all of respondents caused the
consignation with the RTC Clerk of Court of various amounts.
It was claimed that respondents had attempted to tender
these payments to the Parays, but had been rebuffed.
Notwithstanding the consignations, the public auction took
place as scheduled, with petitioner Vidal Espeleta successfully
bidding. Respondents instead filed on 13 November 1991 a
complaint seeking the declaration of nullity of the concluded
public auction. Petitioners now argue that the essential
procedural requisites for the auction sale had been satisfied.
Issue: W/N the the essential procedural requisites for the
auction sale had been satisfied?
Ruling: Yes. Under the Civil Code, the foreclosure of a pledge
occurs extrajudicially, without intervention by the courts. All
the creditor needs to do, if the credit has not been satisfied in
due time, is to proceed before a Notary Public to the sale of
the thing pledged.
MANILA SURETY v VELAYO
F: Manila Surety & Fidelity Co., upon request of Rodolfo
Velayo, executed a bond for P2,800.00 for the dissolution of a
writ of attachment obtained by one Jovita Granados in a suit
against Rodolfo Velayo in the Court of First Instance of
Manila. Velayo undertook to pay the surety company an
annual premium of P112.00 and provided collateral jewelry
with the authority to sell in case Manila Surety will be obliged
to pay. Judgment having been rendered in favor of Jovita
Granados and against Rodolfo Velayo, and execution having
been returned unsatisfied, the surety company was forced to
pay P2,800.00 that it later sought to recoup from Velayo; and
upon the latter's failure to do so, the surety caused the
pledged jewelry to be sold, realizing therefrom a net product
of P235.00 only The surety files a claim against Velayo
because the security Is insufficient. Velayo claims the sale of
the jewelry even if insufficient extinguishes the principal
obligation.
P4,700,000.00 from the Philippine Commercial International
Bank (PCI Bank), which was later merged with Equitable Bank
and became known as Equitable PCI Bank, Inc.
To secure the payment of the loan, petitioners executed also
on March 31, 1997 a “Real Estate Mortgage” in favor of
PCIBank over their two parcels of land.
Petitioners availed of the full amount of the loan.
Subsequently, they made partial payments and made no
further payments and despite demand, they failed to pay
their outstanding obligation.
Respondent thus extrajudicially foreclosed the mortgage
before the Office of the Clerk of Court & Ex-Officio Provincial
Sheriff of the Regional Trial Court (RTC) of Marikina City. The
mortgaged properties were sold on April 10, 2003 for
P4,284,000.00 at public auction to respondent, after which a
Certificate of Sale dated April 21, 2003 was issued.
More than five months later or on October 8, 2003,
petitioners filed a complaint for annulment of foreclosure
sale. They claim that:
a) they had made substantial payments
b) the foreclosure proceedings and auction sale were
not only irregularly and prematurely held but were
null and void because the mortgage debt is only
P2,224,073.31 on the principal obligation and
P1,455,137.36 on the interest, or a total of only
P3,679,210.67 as of April 15, 2003, but the
mortgaged properties were sold to satisfy an inflated
and erroneous principal obligation of P4,783,254.69,
plus 3% penalty fee per month or 33% per year and
15% interest per year, which amounted to
P14,024,623.22 as of September 30, 2002;”
c) that “the parties never agreed and stipulated in the
real estate mortgage contract” that the 15% interest
per annum on the principal loan and the 3% penalty
fee per month on the outstanding amount would be
covered or secured by the mortgage;
Issue: Won Velayo’s contention is correct
Ruling: Yes! The sale of the thing pledged shall extinguish the
principal obligation, whther or not the proceeds of the sale
are equal to the amount of the principal obligation, interest
and expenses in a proper case.
REAL MORTGAGE
VIOLA v EPCIB
FACTS: Via a contract denominated as “CREDIT LINE AND
REAL ESTATE MORTGAGE AGREEMENT FOR PROPERTY LINE”
(Credit Line Agreement) executed on March 31, 1997, LeoMers Commercial, Inc., as the Client, and its officers spouses
Leopoldo and Mercedita Viola (petitioners) obtained a loan
through a credit line facility in the maximum amount of
ISSUE: whether the mortgage contract also secured the
penalty fee per month on the outstanding amount as
stipulated in the Credit Line Agreement.
RULING: A mortgage must “sufficiently describe the debt
sought to be secured, which description must not be such as
to mislead or deceive, and an obligation is not secured by a
mortgage unless it comes fairly within the terms of the
mortgage.
In the case at bar, the parties executed two separate
documents on March 31, 1997 – the Credit Line Agreement
granting the Client a loan through a credit facility in the
maximum amount of P4,700,000.00, and the Real Estate
Mortgage contract securing the payment thereof.
SECTRANS 2010/ ATTY. AGUINALDO
62
Undisputedly, both contracts were prepared by respondent
and written in fine print, single space.
any other property he then might have and on those
he might acquire in the future.
The provision of the mortgage contract does not specifically
mention that, aside from the principal loan obligation, it also
secures the payment of “a penalty fee of three percent (3%)
per month of the outstanding amount to be computed from
the day deficiency is incurred up to the date of full payment
thereon,” which penalty was expressly stipulates in the Credit
Line Agreement.
ISSUE: WON such a stipulation constitute a valid mortgage on
the 5 other parcels of land which LM subsequently acquired?
Since an action to foreclose “must be limited to the amount
mentioned in the mortgage” and the penalty fee of 3% per
month of the outstanding obligation is not mentioned in the
mortgage, it must be excluded from the computation of the
amount secured by the mortgage.
HELD: NO
 LM could not legally mortgage any property he did
not yet own. In order that a mortgage may be validly
constituted the instrument by which it is created
must be recorded in the Registry of Deeds and so far
as the additional parcels of land are concerned, the
registration of Deed of Mortgage did not affect and
could not have affected them because they were not
specifically described therein.
PBCOM v MACADAEG
Penalty fee” is entirely different from “bank charges.” The
phrase “bank charges” is normally understood to refer to
compensation for services. A “penalty fee” is likened to a
compensation for damages in case of breach of the
obligation. Being penal in nature, such fee must be specific
and fixed by the contracting parties, unlike in the present
case which slaps a 3% penalty fee per month of the
outstanding amount of the obligation.
DILAG v HEIRS OF RESSURECCION
FACTS:
 BEFORE 1936: Laureano Marquez (LM) was indebted
to Fortunato Resurreccion (FR) in the sum of P5k as
the balance of purchase price of a parcel of land
which LM bought and received from FR.
 FR was in turn indebted to Luzon Surety Company in
the same amt, secured by a mortgage on 3 parcels of
land – one of which was bought by LM from him
 AS EARLY AS 193: LM had agreed to pay FR’s
indebtedness to Luzon Surety Company by way of
satisfaction of his own indebtedness to FR in the
same amt
 LM failed to pay indebtedness of FR to the Luzon
Surety Company, and the latter foreclosed judicially
the mortgage executed in its favour by FR
 Since LM did not fulfil his promise, FR commenced
an action against LM to recover the value of lost
properties
 LM – sale at public auction of 5 parcels of land
mentioned in FR’s complaint is invalid because they
are not specifically described in the mortgage deed.
LM acquired those parcels of land subsequent to the
execution of mortgage deed.
 In the fifth clause of said document Laureano
Marquez stipulated that inasmuch as the five parcels
of land described in the fourth clause were not
sufficient to cover all his obligations in favor of
Fortunato Resurreccion, he also constituted a
mortgage in favor of the latter and his assignees on
FACTS:
On September 30, 1950, respondents Pedro B. Bautista,
Dativa Corrales Bautista, Inocencio C. Campos, and the Flash
Taxi Company jointly and severally applied for and obtained a
credit accommodation from the petitioner bank in the sum of
P100,000.00, and as a security therefor executed in favor of
the bank, in one single document, a real estate mortgage
over four parcels of land, and a chattel mortgage on some
movie equipment and thirty taxicabs. Respondents having
failed to pay the total amount of P128,902.42 due on the
credit accommodation referred to, the petitioner bank
procured the extrajudicial foreclosure of the real estate
mortgage in accordance with Act No. 3135, as amended, and
at the foreclosure sale on January 9, 1956, the bank acquired
the properties mortgaged as the highest bidder for the sum
of P68,365.60.
Claiming a balance of P62, 749.72 still due, the petitioner
bank, instead of foreclosing respondents' chattel mortgage,
filed against them on may 22, 1956, Civil Case No. 29752 for
the collection of said balance. The lower court, on June 30,
1956, rendered judgment ordering defendants to pay the
plaintiff bank, jointly and severally, the sum of P62, 749.72,
with interest thereon at the rate of 7% per annum from May
22, 1956 until the said amount is fully paid.
On September 18,1956, the court issued an order to execute
said judgment; it does not appear, though, that plaintiff
sought the enforcement of the writ of execution.
On April 24, 1957, the court issued another order for the
execution of the judgement, pursuant to which the sheriff of
Manila published a "Notice of Sale," setting for sale at public
auction on May 13, 1957 the rights, interest or participation
of respondents on the certificate of public convenience
registered in the name of the Flash Taxi Co. in cases Nos.
32578 of the Public Service Commission.
SECTRANS 2010/ ATTY. AGUINALDO
63
On May 13, 1957, the sheriff sold the rights, interests, or
participation of respondents in the certificate of public
convenience in question to the plaintiff bank as the highest
bidder for the amount of P60,371.25, and two days later, on
May 15, the sheriff issued to plaintiff the corresponding
certificate of sale.
Respondents Pedro B. Bautista, et al., filed in the court below
a "Petition To Set Aside Order dated June 8, 1957, Confirming
Sheriffs Sale of may 15, 1957 and to Declare its Nullity,"
claiming, as grounds for the petitions, that they had other
properties which they had pointed out to the plaintiff bank
with which the judgement could be satisfied that the law
grants to the judgement debtor the right to direct which of
his properties should be sold in execution of a judgement;
that the sale of the certificate of public convenience in
question would mean irreparable damage to them and would
prove of work about forth drivers employed in their taxicab
business; and that defendants had no objection to bearing
the expenses of the sale sought to be revoked and of any
subsequent execution sales in satisfaction of the judgement.
Plaintiff bank opposed the petition, contending that there
was no showing that the sheriff's sale in question was
irregular or not in accordance with law; that the subject of
the execution sale being personal property, and a certificate
of sale having already been delivered to it by the sheriff, the
court could no longer set aside said sale
290). This petitioner did by filing civil Case No. 29752 for the
collection of the unpaid balance of respondents'
indebtedness; and the validity and correctness of the action
was admitted by respondents themselves when they
confessed judgement thereto. The court in fact decision
pursuant to such confession of judgement, and the decision
has long since been final and executory.
PRUDENTIAL BANK v PANIS
HOME BANKERS v CA
Facts:





ISSUE: W/N the sheriff’s sale was irregular and therefore null
and void.
HELD:
The alleged nullity is claimed to arise from the fact that the
real estate and chattel mortgage executed by respondents to
secure their credit accommodation with the petitioner bank
was indivisible, and that consequently, the bank had no legal
right to extra judicially foreclose only the real estate
mortgage and leave out the chattel mortgage, and then sue
respondents for a supposed deficiency judgement; and for
this reason, respondents assert that the judgement in the
bank's favor for such deficiency in Civil Case No. 29752 is a
nullity.
The argument is fallacious because the mere embodiment of
the real estate mortgage and the chattel mortgage in one
document does not fuse both securities into an indivisible
whole. Both remain distinct agreements, differing not only in
the subject-matter of the contract but in the but in the
governing legal provisions. Petitioner bank, therefore, had
every right to foreclose the real estate mortgage and waive
the chattel mortgage, and maintain instead a personal action
for the recovery of the unpaid balance of its credit (De la
Rama vs. Sajo, 45 Phil., 703; Salomon vs. Dantees, 63 Phil.,
522; Brancharch Motor Co. vs. Rangal, et al., 68 Phil., 287,

Private respondents entered into a Contract to Sell
Agreement with TransAmerican through Engr. Garcia
over portions of land with one unit three-storey
townhouse to be built on each portion.
Engr. Garcia obtained a loan from petitioner and as
security executed a mortgage over the property
subject to the Contract to Sell with the private
respondents. Petitioner registered its mortgage on
these titles without any other encumbrance or lien
annotated therein.
When the loan was due, Engr. Garcia failed to pay
hence petitioner instituted an extrajudicial
foreclosure on the subject lots.
Private respondents prayed for the annulment of the
mortgage in favor of petitioner.
Petitioner filed its Answer contending that private
respondents have no cause of action against it; that
at the time of the loan application and execution of
the promissory note and real estate mortgage by
Garcia, there were no known individual buyers of the
subject land nor annotation of any contracts, liens or
encumbrances of third persons on the titles of the
subject lots; that the loan was granted and released
without notifying HLURB as it was not necessary.
CA ruled in favor of private respondents saying that
despite the contracts to sell, Garcia/TransAmerican
did not apprise petitioner of the existence of these
contracts nor did petitioner exhaust any effort to
inquire into their existence since petitioner merely
relied on the purported clean reconstituted titles in
the name of Garcia; that the mortgage of the subject
lots without the consent of the buyers and the
authorization of the HLURB is a clear violation of P.D.
No. 957; that the mortgage contract is void and
unenforceable against private respondents.
ISSUES:
1.
2.
3.
WON HLURB has jurisdiction over the case?
WON the mortgage is valid?
WON petitioner is a mortgagee in good faith and
since the titles on their face were free from any
claims, liens and encumbrances at the time of the
mortgage, it is not obliged under the law to go
SECTRANS 2010/ ATTY. AGUINALDO
64
beyond the certificates of title registered under the
Torrens system and had every reason to rely on the
correctness and validity of those titles.?
ISSUE: WON failure to register the Real Mortgage would
render it invalid
HELD:
1.
2.
3.
obligation. LC did not grant foreclosure on the ground that
the mortgage was not validly executed (not registered).
HLURB has jurisdiction. The Court ruled in a prior
case that “the jurisdiction of the HLURB to regulate
the real estate trade is broad enough to include
jurisdiction over complaints for specific performance
of the sale, or annulment of the mortgage, of a
condominium unit, with damages.”
THE MORTGAGE IS VOID. Under Section 18 of P.D.
No. 957, it is provided that no mortgage on any unit
or lot shall be made by the owner or developer
without prior written approval of the HLURB Such
approval shall not be granted unless it is shown that
the proceeds of the mortgage loan shall be used for
the development of the condominium or subdivision
project and effective measures have been provided
to ensure such utilization. Without the prior written
approval of the HLURB, the latter has the jurisdiction
to annul the mortgage for being void.
Petitioner is NOT A MORTGAGEE IN GOOD FAITH.
Petitioner knew that the loan it was extending to
Garcia/TransAmerican was for the purpose of the
development of the eight-unit townhouses.
Petitioner’s insistence that prior to the approval of
the loan, it undertook a thorough check on the
property and found the titles free from liens and
encumbrances would not suffice. It was incumbent
upon petitioner to inquire into the status of the lots
which includes verification on whether Garcia had
secured the authority from the HLURB to mortgage
the subject lots. Petitioner failed to do so. We
likewise find petitioner negligent in failing to even
ascertain from Garcia if there are buyers of the lots
who turned out to be private respondents.
Petitioner’s want of knowledge due to its negligence
takes the place of registration - thus it is presumed
to know the rights of respondents over the lot - and
the conversion of its status as mortgagee to buyerowner will not lessen the importance of such
knowledge.
SAMANILLA v CAJUCOM
MOBIL PHILIPPINES v DIOCARES
FACTS:
The parties Mobil and Diocares entered an agreement
wherein on cash basis, Mobil will deliver minimum of 50k
liters of petroleum a month. To secure this, diocares
executed a Real Mortgage. Diocares failed to pay the balance
of their indebtedness and Mobil filed an action for the
collection of the balance of the purchase amount or that the
Real Property mortgaged by Diocares be sold to a public
auction and the proceeds be applied to the payment of the
SC: NO!
- If the instrument is not recorded, the mortgage is
nevertheless binding between the parties. Its
conclusion, however, is that what was thus created
was merely a “personal obligation but did not
establish a real estate mortgage.”
- The mere fact that there is as yet no compliance
with the requirement that it be recorded cannot be a
bar to foreclosure
MCCULLOUGH v VELOSO
FACTS:
1) On March 23, 1920, the plaintiff McCullough & Co., sold to
Mariano Veloso the "McCullough Building," and the land
thereon, for the price of P700,000. Veloso paid P50,000 cash
on account at the execution of the contract, leaving a balance
of P650,000 to be paid.
2) Veloso assumed also the obligation to insure the property
for not less than P500,000, as well as to pay all legal taxes
that might be imposed upon the property, and in the event of
his failure to do so, the plaintiff should pay said taxes at the
expense of Veloso, with the right to recover of him the
amounts thus paid, with interest at 7 per cent per year. To
secure the payment of these amounts, Veloso mortgaged the
property purchased
3) It was, also, stipulated that in case of failure on the part of
Veloso to comply with any of the stipulations contained in the
mortgage deed, all the installments with the interest thereon
shall become due, and the creditor shall then have the right
to bring the proper action for the collection of the unpaid
part of the debt.
4) On August 21, 1920, Mariano Veloso, in turn, sold the
property, with the improvements thereon for P100,00 to
Joaquin Serna, who agreed to respect the mortgage of the
property in favor of the plaintiff and to assume Mariano
Veloso's obligation to pay the plaintiff the balance due of the
price of the estate on the respective dates when payments
should be made according to the contract between Mariano
Veloso and the plaintiff.
5) Veloso paid P50,000 on account of the P650,000, and
Serna made several payments up to the total sum of
P250,000. Subsequently, however, neither Veloso, nor Serna,
made any payment upon the last installments, by virtue of
which delay, the whole obligation became due, and Veloso
SECTRANS 2010/ ATTY. AGUINALDO
65
lost the right to the installments stipulated in his contract
with the plaintiff.
6) Upon a liquidation of the debt of Mariano Veloso in favor
of the plaintiff, including the interest due, with the result that
Veloso owed exactly P510,047.34. Thus, the plaintiff brings
this action to recover of the defendant the sum due of
P510,047.34. The defendant contends however that having
sold the property to Serna, and the latter having assumed the
obligation to pay the plaintiff the unpaid balance of the price
secured by the mortgage upon the property, he no more
obligation and it is upon Serna to pay the plaintiff.
The effect of the failure to implead a subordinate
lienholder or subsequent purchaser or both is to render the
foreclosure ineffective as against them, with the result that
there remains in their favor the unforeclosed equity of
redemption.
PADERES v CA
Facts:

HELD:
A) The mortgage is merely an encumbrance upon the
property and does not extinguish the title of the debtor, who
does not, therefore, lose his principal attribute as owner, that
is, the right to dispose. the fact that the plaintiff recognized
the efficaciousness of that sale cannot prejudice him, which
sale the defendant had the right to make and the plaintiff
cannot oppose and which, at all events, could not affect the
mortgage, since it follows the property whoever the
possessor may be.
B) The Mortgage Law in force at the promulgation of the Civil
Code and referred to in the latter, provided, among other
things, that the debtor should not pay the debt upon its
maturity after a judicial or notarial demand for payment has
been made by the creditor upon him. Accordingly, the
obligation of the new possessor to pay the debt originated
only from the right of the creditor to demand payment of
him, it being necessary that a demand for payment should
have previously been made upon the debtor and the latter
should have failed to pay.
C) The Civil Code imposes the obligation of the debtor to pay
the debt stand although the property mortgaged to secure
the payment of said debt may have been transferred to a
third person.
SANTIAGO v DIONISIO
DOCTRINE:
All persons having or claiming an interest in
the mortgaged premises subordinate in right to that of the
holder of the mortgage should be made defendants in the
action for the foreclosure of the mortgage. Intervening as a
subordinate lienholder in a foreclosure case merely to oppose
the confirmation of the sale upon learning that such a sale
had been made, is no the same as being a party to the suit to
the extent of being bound by the judgement in the
foreclosure suit.





Manila International Construction Corporation (MICC)
mortgaged 21 properties in favor of Banco Filipino (BF)
for a loan of P1.8M. The mortgaged was registered with
the Registry of Deeds.
2 of the lots were later sold to Spouses Paderes and
Spouses Bergardo.
MICC failed to pay the loan.
Without any redemption having been made within the
reglementary period, Banco Filipino foreclosed the
properties extra judicially.
BF won as the highest bidder in the auction sale.
Paderes and Bergardo filed a petition stating that their
right is superior than BF since they are buyers in good
faith and are still entitled to redeem.
Issue: WON Paderes and Bergardo has still rights over the
properties?
Held:
No. Sale or transfer cannot affect or release the mortgage. A
purchaser is necessarily bound to acknowledge and respect
the encumbrance to which is subjected the purchased thing
and which is at the disposal of the creditor in order that he,
under the terms of the contract, may recover the amount of
his credit therefrom.
For a recorded real estate mortgage is a right in rem, a lien on
the property whoever its owner may be because the
personality of the owner is disregarded. The mortgage
subsists notwithstanding changes of ownership. The last
transferee is just as much of a debtor as the first one. A
mortgage lien is inseparable from the property mortgaged.
All subsequent purchasers thereof must respect the
mortgage, whether the transfer to them be with or without
the consent of the mortgagee. For the mortgage until
discharged, follows the property.
With regard to the redemption period, it is settled that the
buyer in a foreclosure sale becomes the absolute owner of
the property purchased if it is not redeemed during the
period of one year after the registration of the sale. As such,
he is entitled to the possession of the said property and can
demand it any time following the consolidation of ownership
in his name and the issuance to him of a new TCT. If the
buyer demands the possession of the property before the
SECTRANS 2010/ ATTY. AGUINALDO
66
expiration period, he has to post a bond. No bond is required
after the redemption period if the property is not redeemed.
VELASCO v CA
Facts: November 10, 1965, Alta Farms secured
from the GSIS a Three Million Two Hundred Fifty
Five Thousand Pesos (P3,255,000.00) loan and an
additional loan of Five Million Sixty-Two
Thousand Pesos (P5,062,000.00) on October 5,
1967, to finance a piggery project. Alta Farms
defaulted in the payment because of this that Alta
Farms executed a Deed of Sale With Assumption of
Mortgage with Asian Engineering Corporation on
July 10, 1969 but without the previous consent or
approval of the GSIS and in direct violation of the
provisions of the mortgage contracts. Even without
the approval of the Deed of Sale With Assumption
of Mortgage by the GSIS, Asian Engineering
Corporation executed an Exclusive Sales Agency,
Management and Administration Contract in favor
of Laigo Realty Corporation, with the intention of
converting the piggery farm into a subdivision.
After developing the area, on December 4, 1969,
Laigo entered into a contract with Amable
Lumanlan, one of the petitioners, to construct for
the home buyers, 20 houses on the subdivision.
Petitioner Lumanlan allegedly constructed 20
houses for the home buyers and for which he claims
a balance of P309,187.76 from the home buyers and
Laigo. Out of his claim, petitioner Lumanlan admits
that Mrs. Rhody Laigo paid him in several checks
totalling P124,855.00 but which checks were all
dishonoured. On December 29, 1969, Laigo entered
into a contract with petitioner Pepito Velasco to
construct houses for the home buyers who agreed
with Velasco on the prices and the downpayment.
Petitioner Velasco constructed houses for various
home buyers, who individually agreed with
Velasco, as to the prices and the downpayment to be
paid by the individual home buyers.When neither
Laigo nor the individual home buyers paid for the
home constructed, Velasco wrote the GSIS to
intercede for the unpaid accounts of the home
buyers.
Issue: W/N GSIS is liable to the petitioners for the
cost of the materials and labor furnished by them in
construction of the 63 houses now owned by the
GSIS?
Ruling: Yes. GSIS should pay the petitioners. GSIS
assumed ownership of the houses built by
petitioners and was benefited by the same. Art.
2127, the mortgage extends to the natural
accessions, to the improvements, growing fruits,
rents.
AFABLE v BELANDO
Afable brought a suit against Belando for an unpaid
promissory note. Judgment was rendered in favor of him and
because Belando has no money, the rents in her property was
given to Afable. It turns out, before Afable filed a case for the
collection of money, another creditor of Belando, La Urbana,
already had a lien on the property because Belando borrowed
money from La Urbana and as a security, Belando mortgaged
the property being rented to La Urbana. La Urbana filed a
petition to intervene in the case of Afable v Belando and
claims that since the property was mortgaged to them, they
also own the rents and the rents cannot be given to Afable.
Issue: Won the contention of La Urbana is valid
Ruling: Yes. The mortgage extends to the rents not yet
received when the obligation becomes due. In this case,
because the property was mortgaged to La Urbana, they also
own the rents of the mortgaged property.
Bank of America v American Realty
F: Petitioner Bank of America NT & SA (BANTSA) is an
international banking and financing institution Bank of
America International Limited (BAIL), on the other hand, is a
limited liability company organized and existing under the
laws of England.
BANTSA and BAIL on several occasions granted three major
multi-million United States (US) Dollar loans to the following
corporate borrowers and which are foreign affiliates of
private respondent. 3
Due to the default in the payment of the loan amortizations,
BANTSA and the corporate borrowers signed and entered
into restructuring agreements. As additional security for the
restructured loans, private respondent ARC (American Realty)
as third party mortgagor executed two real estate
mortgages, over its parcels of land including improvements
thereon, located at Bulacan.
Eventually, the corporate borrowers defaulted in the
payment of the restructured loans prompting petitioner
BANTSA to file civil actions before foreign courts for the
collection. This includes the property of American Realty.
Petitioners already filed collection cases in foreign courts. It
also filed an extrajudicial foreclosure on the property in
Bulacan in which American Realty question because the
SECTRANS 2010/ ATTY. AGUINALDO
67
petitioners cannot file a case for collection and a case for
extrajudicial foreclosure at the same time.
the BANK 7,296 shares of stock of DALCO and 9,286 shares of
DAMCO to secure the same obligations.
Issue: Won the contention of respondents are valid
Upon DALCO's and DAMCO's failure to pay the fifth
promissory note upon its maturity, the BANK paid the same
to the Export-Import Bank of Washington D.C., and the latter
assigned to the former its credit and the first mortgage
securing it. Subsequently, the BANK gave DALCO and DAMCO
up to April 1, 1953 to pay the overdue promissory note.
Ruling: yes! The mortgagee cannot have both remedies. He
has only one cause of action, i.e., non-payment of the
mortgage debt; hence, he cannot split up his cause of action
by filing a compliant for payment of the and another
complaint for foreclosure.
PEOPLE’S BANK v DAHICAN LUMBER
FACTS: On September 8, 1948, Atlantic Gulf & Pacific
Company of Manila, a West Virginia corporation licensed to
do business in the Philippines— hereinafter referred to as
ATLANTIC — sold and assigned all its rights in the Dahican
Lumber concession to Dahican Lumber Company —
hereinafter referred to as DALCO. Thereafter, to develop the
concession, DALCO obtained various loans from the People's
Bank & Trust Company.
As security for the payment of the abovementioned loans,
DALCO executed in favor of the BANK — the latter acting for
itself and as trustee for the Export-Import Bank of
Washington D.C. — a deed of mortgage covering five parcels
of land together with all the buildings and other
improvements existing thereon and all the personal
properties of the mortgagor located in its place of business.
On the same date, DALCO executed a second mortgage on
the same properties in favor of ATLANTIC to secure payment
of the unpaid balance of the sale price of the lumber
concession.
Both deeds contained the following provision extending the
mortgage lien to properties to be subsequently acquired —
referred to hereafter as "after acquired properties" — by the
mortgagor:
All property of every nature and description taken in
exchange or replacement, and all buildings,
machinery, fixtures, tools equipment and other
property which the Mortgagor may hereafter
acquire, construct, install, attach, or use in, to, upon,
or in connection with the premises, shall
immediately be and become subject to the lien of
this mortgage in the same manner and to the same
extent as if now included therein, and the Mortgagor
shall from time to time during the existence of this
mortgage furnish the Mortgagee with an accurate
inventory of such substituted and subsequently
acquired property.
Both mortgages were registered in the Office of the Register
of Deeds. In addition thereto DALCO and DAMCO pledged to
After July 13, 1950 — the date of execution of the mortgages
mentioned above — DALCO purchased various machineries,
equipment, spare parts and supplies in addition to, or in
replacement of some of those already owned and used by it
on the date aforesaid. Pursuant to the provision of the
mortgage deeds quoted theretofore regarding "after
acquired properties," the BANK requested DALCO to submit
complete lists of said properties but the latter failed to do so.
The alleged sales of equipment, spare parts and supplies by
CONNELL and DAMCO to It, was subsequently rescinded by
the parties.
The BANK, in its own behalf and that of ATLANTIC, demanded
that said agreements be cancelled but CONNELL and DAMCO
refused to do so. As a result, ATLANTIC and the BANK
commenced foreclosure proceedings.
Main contentions of plaintiffs as appellants are the following:
that the "after acquired properties" were subject to the
deeds of mortgage mentioned heretofore; that said
properties were acquired from suppliers other than DAMCO
and CONNELL; that even granting that DAMCO and CONNELL
were the real suppliers, the rescission of the sales to DALCO
could not prejudice the mortgage lien in favor of plaintiffs.
The defendants-appellants contend that the mortgages
aforesaid were null and void as regards the "after acquired
properties" of DALCO because they were not registered in
accordance with the Chattel Mortgage Law.
ISSUES:
1.
2.
are the so-called "after acquired properties" covered
by and subject to the deeds of mortgage subject of
foreclosure?
assuming that they are subject thereto, are the
mortgages valid and binding on the properties
aforesaid inspite of the fact that they were not
registered in accordance with the provisions of the
Chattel Mortgage Law?
RULING:
1.
it is crystal clear that all property of every nature and
description taken in exchange or replacement, as
SECTRANS 2010/ ATTY. AGUINALDO
68
2.
well as all buildings, machineries, fixtures, tools,
equipments, and other property that the mortgagor
may acquire, construct, install, attach; or use in, to
upon, or in connection with the premises — that is,
its lumber concession — "shall immediately be and
become subject to the lien" of both mortgages in the
same manner and to the same extent as if already
included therein at the time of their execution.
Such stipulation is neither unlawful nor immoral, its
obvious purpose being to maintain, to the extent
allowed by circumstances, the original value of the
properties given as security. Indeed, if such
properties were of the nature already referred to, it
would be poor judgment on the part of the creditor
who does not see to it that a similar provision is
included in the contract.
the chattels were placed in the real properties
mortgaged to plaintiffs, they came within the
operation of Art. 415, paragraph 5 and Art. 2127 of
the New Civil Code. It is not disputed in the case at
bar that the "after acquired properties" were
purchased by DALCO in connection with, and for use
in the development of its lumber concession and
that they were purchased in addition to, or in
replacement of those already existing in the
premises on July 13, 1950. In Law, therefore, they
must be deemed to have been immobilized, with the
result that the real estate mortgages involved herein
— which were registered as such — did not have to
be registered a second time as chattel mortgages in
order to bind the "after acquired properties" .
PHIL SUGAR ESTATE v CAMPS
FACTS:
 Defendant executed and delivered to Plaintiff a
mortgage on certain real estate, which is particularly
described therein, including “the building erected
thereon,” in order to guarantee the payment of
certain sum of money; Another mortgage upon the
same property to secure the payment of an
additional sum of money
 Plaintiff commenced an action to recover said sums
and to foreclose said mortgages when neither of said
sums of money secured by said mortgages was fully
paid and satisfied
 Def – denied; alleged that the sum of P3k included in
said mortgages for the payment of expenses was
excessive
 TC Judge Ostrand – ordered foreclosure of said
mortgages
 While Sheriff tried to sell the property included in
said mortgages, Def interposed an objection that a



certain cinematograph which had been constructed
upon the property mortgaged was not included
therein and that it should not, therefore, be sold
under said execution.
Despite objection, Sheriff sold the property
mortgaged “together with the buildings erected
thereon”
Def objected to the confirmation of said sale; said
cinematograph in question was created by simply
reforming a building located on the land at the time
said mortgage was executed and delivered; that it
was not a new structure on said land; that it was the
result of changing and altering a building already
upon the land, for the purpose of making it into a
cinematograph
TC Judge Harvey confirmed said sale
ISSUE: WON the sale under execution by the sheriff of certain
real property including the buildings thereon should be
confirmed?
HELD: YES
 Questions presented by Camps have been discussed
by this court and decided against his contention in
the case of Bischoff v. Pomar and Compania General
de Tabacos.
 In that case, this court discussed the very articles of
the Mortgage Law upon which Camps now seeks
relief. In that case the Court said:
So that even though no mention had been
made of said machinery and tramway in the
mortgage instrument, the mortgage of the
property whereon they are located in
understood by law to extend to them and
they must be considered as included
therein, as well as all other improvements,
unless there was an express stipulation
between the parties that they should be
excluded.

IN THIS CASE: the buildings erected thereon" were
expressly included in the mortgage. Nothing in the
form of buildings was exclude. The buildings,
therefore, were manifestly included in the mortgage.
TADY-Y v PNB
PRUDENTIAL BANK v ALVIAR
LOPEZ v ALVAREZ
FACTS: Appellee Evaristo holds a lien over the estate of one
Vicente Lopez as the latter executed a mortgage deed in
favor of Evaristo. On April 5, 1904, Evaristo assigned his lien
on the estate to appellant Manuel Lopez through a public
instrument but the same was not registered in the Registry of
Deeds. Appellee Grindrod is a creditor of Evaristo, to whom
SECTRANS 2010/ ATTY. AGUINALDO
69
the latter promised to pay his obligation through the sugar
yielded by the hacienda, said agreement was entered into
July 7, 1900. But the hacienda was not able to increase the
sugar it yielded and defendant On August 5, 1904, Grindrod
who feared of not getting paid obtained a preliminary
attachment over all the property of Evaristo including the lien
that was assigned to appellant. The same was registered on
August 12, 1904. A dispute arised over the rightful owner of
the lien, defendant’s main contention is that since the
assignment made to Lopez was not registered it is not binding
and has no effect.
ISSUE: WON THE ASSIGNMENT OF A MORTGAGE CREDIT
NEED TO BE REGISTERED FOR IT TO BE VALID AND
EFFECTIVE?
HELD: NO. Although the Civil Code provides that “ A mortgage
credit may be alienated or assigned to a third person, wholly
or partially, with the formalities required by law”, the fact
that such assignment was not registered in the property
register is no obstacle to the transfer of the dominion or
ownership of said credit in the sum therein stated in favor of
Lopez. In as much as the assignment or alienation of a credit,
made by the owner thereof in favor of another, is prior to the
act of its registration, and entirely independent of such
formality to such an extent that, if any question should arise
over the contract between the assignor and the assignee, it
would have to be decided according to common law without
need of previous registration of the title, which shows that a
credit secured by a mortgage may be assigned or alienated,
and is a perfectly valid contract even if it were not registered.
Also, the registration of the assignment or alienation of a
credit secured by mortgage, required, among others, of the
Mortgage Law, is only necessary in order that it may be
effectual as against third parties.
BPI v CONCEPCION
LITONJUA v L&R CORPORATION
FACTS:
- Spouses Litonjua (P) obtained a loan from L & R
Corporation (R) – Aug 6, 1974 (P200k) and Mar 27,
1978 (P200k) – which are secured by a mortgage on
2 parcels of land owned by P
- However, P sold to Phil White House Auto Supply
(PWHAS) the subject parcels of land, without prior
written consent of R, pursuant to the Mortgage
agreement that they have.
- Upon default of P, R initiated an extrajudicial sale
and won the bidding.
- P later on filed for redemption of the property but R
refused to do accept the payment contending that P
violated the contract
-
-
-
R informed the Sheriff and Register of Deeds,
stating: (1) that the sale of the mortgaged properties
to PWHAS was without its consent, in contravention
of their Deed of Real Estate Mortgage; and (2) that it
was not the spouses Litonjua, but PWHAS, who was
seeking to redeem the foreclosed properties,
Register of Deeds issued TCT in favor of R
A complaint for Quieting of Title, Annulment of Title
and Damages with preliminary injunction was filed
by the spouses Litonjua and PWHAS against R
LC ruled in favor of R and affirmed by CA
ISSUE: WON paragraphs 8 and 9 of the Real Estate Mortgage
are valid and enforceable;
SC: NO!
- Art. 2130 – stipulation forbidding alienation of
mortgaged property is VOID
- A real mortgage is merely an encumbrance; it does
not extinguish the title of the debtor, whose right to
dispose — a principal attribute of ownership — is
not thereby lost. Thus, a mortgagor had every right
to sell his mortgaged property, which right the
mortgagee cannot oppose.
- Although the provision does not absolutely prohibit
the mortgagor from selling his mortgaged property;
but what it does not outrightly prohibit, it
nevertheless achieves.
- For all intents and purposes, the stipulation
practically gives the mortgagee the sole prerogative
to prevent any sale of the mortgaged property to a
third party.
- The mortgagee can simply withhold its consent and
thereby, prevent the mortgagor from selling the
property. This creates an unconscionable advantage
for the mortgagee and amounts to a virtual
prohibition on the owner to sell his mortgaged
property. In other words, stipulations like those
covered by paragraph 8 (requiring P to acquire prior
consent of R before alienating the property) of the
subject Deed of Real Estate Mortgage circumvent
the law, specifically, Article 2130 of the New Civil
Code.
- Being contrary to law, paragraph 8 of the subject
Deed of Real Estate Mortgage is not binding upon
the parties.
UNION BANK v CA
FACTS:
1) A real estate mortgage was executed on December 1991
by spouses Dario (hereafter mortgagors) in favor of
UNIONBANK to secure a P3 million loan which covered a
Quezon City property in Leopoldo Dario's name and was
annotated on the title. For non-payment of the principal
SECTRANS 2010/ ATTY. AGUINALDO
70
obligation, UNIONBANK extrajudicially foreclosed the
property mortgaged on August 1993 and sold the same at
public auction, with itself posting the highest bid.
2) One week before the one-year redemption period expired,
private respondents filed a complaint with the RTC against
the mortgagors, UNIONBANK and the Register of Deeds
annulment of sale and real estate mortgage reconveyance
and prayer for restraining notice of lis pendens was
annotated on the title.
3) On October 1994, the RTC issued a TRO enjoining the
redemption of property within the statutory period and its
consolidation under UNIONBANK's name.
4) Without notifying private respondents, UNIONBANK
consolidated its title over the foreclosed property on October
1994, UNIONBANK's name was issued in the new TCT.
5) Private respondents filed an amended complaint, alleging
that they, not the mortgagors, are the true owners of the
property mortgaged and insisting on the invalidity of both the
mortgage and its subsequent extrajudicial foreclosure. They
claimed that the original title, was entrusted to a certain Atty.
Reynaldo Singson preparatory to its administrative
reconstitution after a fire gutted the Quezon City Hall
building. Mortgagor Leopoldo, private respondent Fermina's
son, obtained the property from Atty. Singson, had the title
reconstituted under his name without private respondents'
knowledge, executed an ante-dated deed of sale in his favor
and mortgaged the property to UNIONBANK.
6) On December 1994, the RTC admitted the aforementioned
amended complaint. UNIONBANK filed its answer ad
cautelam asserting its status as an innocent mortgagee for
value whose right or lien upon the property mortgaged must
be respected even if, the mortgagor obtained his title through
fraud. It also averred that the action had become "moot and
academic by the consolidation of the foreclosed property on
24 October 1994" in its name.
7) On appeal, the CA nullified the consolidation of ownership,
which was the prior judgment in the RTC, ordered the
Register of Deeds to cancel the certificate of title in
UNIONBANK's name and to reinstate TCT of respondents.
ISSUE: Whether UNIONBANK is a mortgagee in good faith and
for value with a right to consolidate ownership over the
foreclosed property with the redemption period having
expired and there having been no redemptioners.
HELD:
A) The SC disagrees with the CA’s judgment that
consolidation deprived private respondents of their property
without due process. Because the buyer in a foreclosure sale
becomes the absolute owner of the property purchased if it is
not redeemed during the period of one year after the
registration of the sale. In effect, consolidation took place as
a matter of right since there was no redemption of the
foreclosed property and the TRO expired upon dismissal of
the complaint.
C) UNIONBANK need not have informed private respondent
that it was consolidaint its title over the property, upon the
expiration of the redemption period, without the judgment
debtor having made use of his right of redemption, the
ownership of the property sold becomes consolidated in the
purchaser. Upon failure to redeem foreclosed realty,
consolidation of title becomes a matter of right on the part of
the auction buyer, and the issuance of a certificate of title in
favor of the purchaser becomes ministerial upon the Register
of Deeds.
C) At any rate, the consolidation of ownership over the
mortgaged property in favor of UNIONBANK and the issuance
of a new title in its name during the pendency of an action for
annulment and reconveyance will not cause injury to private
respondents because as purchaser at a public auction,
UNIONBANK is only substituted to and acquires the right,
title, interest and claim of the judgment debtors or
mortgagors to the property at the time of levy. With the main
action for reconveyance pending before the RTC, the notice
of lis pendens, sufficiently protects private respondents
interest over the property. Thus the Decision of the Court of
Appeals is REVERSED and SET ASIDE. The order of the trial
court dated 7 August 1999, declaring UNIONBANK's prayer
for writ of preliminary injunction moot and academic, is
hereby REINSTATED. Let this case be remanded to the
Regional Trial Court for trial on the merits.
DBP v LICUANAN
DOCTRINE:
All persons having or claiming an interest in
the mortgaged premises subordinate in right to that of the
holder of the mortgage should be made defendants in the
action for the foreclosure of the mortgage. Intervening as a
subordinate lienholder in a foreclosure case merely to oppose
the confirmation of the sale upon learning that such a sale
had been made, is no the same as being a party to the suit to
the extent of being bound by the judgement in the
foreclosure suit.
The effect of the failure to implead a subordinate
lienholder or subsequent purchaser or both is to render the
foreclosure ineffective as against them, with the result that
there remains in their favor the unforeclosed equity of
redemption.
DBP v GO
Facts:
SECTRANS 2010/ ATTY. AGUINALDO
71








In 1982, Go obtained a loan from DBP evidenced by two
promissory notes, one for 194K payable quarterly for 5
years and the other 300K payable quarterly for 7 years.
He mortgaged his real and personal property.
A contract provision states that DBP can unilaterally
increase the interest rate and requires Go to insure the
mortgaged properties.
DBP increased its interest rate to 35% then lowered it to
29%.
Go failed to pay the loan.
In 1986, DBP extrajudicially foreclosed the property and
was declared the winner as the highest bidder in the
auction sale.
Go filed an action to annul the auction sale.
Both RTC and CA declared that the extrajudicial
foreclosure was void because loan has not yet mature at
the time of the foreclosure sale (the foreclosure was
done less than 5 years from the execution of the
contract).
possession of Lot No. 2-B, the Provincial Sheriff
ordered them to vacate the premises.
Issue: W/N there was a valid extrajudicial
foreclosure sale?
Ruling: Yes. The formalities of a levy, as an
essential requisite of a valid execution sale under
Section 15 of Rule 39 and a valid attachment lien
under Rule 57 of the Rules of Court, are not basic
requirements before an extrajudicially foreclosed
property can be sold at public auction. The case at
bar, as the facts disclose, involves an extrajudicial
foreclosure sale. Act No. 3135, as amended by Act
No. 4118 otherwise known as "An Act to Regulate
the Sale of Property under Special Powers Inserted
in or Annexed to Real Estate Mortgages" applies in
cases of extrajudicial foreclosure sale.
Issue: WON the extrajudicial foreclosure should be
declared null and void?
Held:
BANK OF AMERICA v AMERICAN REALTY
Yes. The mortgage contract states that petitioner may resort
to either judicial or extrajudicial foreclosure in case of
default. Petitioner opted for extrajudicial foreclosure.
However, both the trial court and the CA declared that the
extrajudicial foreclosure void for being premature. For all
intents and purposes, there has been no foreclosure.
Therefore, this Court or any court cannot issue a writ of
execution to judicially foreclose the property.
FIESTAN v CA
Facts: Dionisio Fiestan and Juanita Arconada
owners of a parcel of land (Lot No. 2B) situated in
Ilocos Sur covered by TCT T-13218 which they
mortgaged to the Development Bank of the
Philippines (DBP) as security for their P22,400.00
loan. Lot No. 2-B was acquired by the DBP as the
highest bidder at a public auction sale on August 6,
1979 after it was extrajudicially foreclosed by the
DBP in accordance with Act No. 3135, as amended
by Act No. 4118, for failure of petitioners to pay
their mortgage indebtedness. On April 13,1982, the
DBP sold the lot to Francisco Peria in a Deed of
Absolute Sale. Francisco Peria mortgaged said lot to
the PNB Vigan Branch as security for his loan of
P115,000.00 as required by the bank to increase his
original loan from P49,000.00 to P66,000.00 until it
finally reached the approved amount of
P115,000.00. Since petitioners were still in
CHIENG v SPOUSE SANTOS
FIRST MARBELLA v GATMAYTAN
FACTS:
 R is the registered owner of Fontavilla No. 501
(condo unit), Marbella I Condominium, Roxas Blvd
under CCT No. 1972
 P filed a Petition for Extradudicial foreclosure of the
condominium unit of R and alleged that P is a duly
organized association of the tenants and
homeowners of Marbella I Condominium; that R is a
member thereof but has unpaid association dues
amounting to P3.2mill; that R refused to to pay his
dues despite demand
 P - that it is expressly provided under Section 20 of
Republic Act (R.A.) No. 4726 that it has the right to
cause the extrajudicial foreclosure of its annotated
lien on the condominium unit. Its petition then is
cognizable by the RTC under Administrative Matter
No. 99-10-05
 R – objected to P's right to file the petition for extrajudicial foreclosure, pointing out that the latter does
not hold a real estate mortgage on the condominium
unit or a special power of attorney to cause the
extra-judicial foreclosure sale of said unit.
- there is even a pending litigation regarding the
validity of petitioner's constitution as a
homeowners association and its authority to
assess association dues, annotate unpaid
assessments on condominium titles and enforce
the same through extrajudicial foreclosure sale
SECTRANS 2010/ ATTY. AGUINALDO
72

Clerk of Court, as Ex-Officio Sheriff, recommended to
RTC Exec. Judge :
Under the facts given, no mortgage exists between
the petitioner and respondent. Evidently, it is not
one of those contemplated under Act 3135 as
amended by Act 4118. The allegation simply does
not show a mortgagor-mortgagee relationship since
respondent liability arises from his failure to pay
dues, assessments and charges due to the petitioner.
As clearly stated, the authority of the Executive
Judge under Administrative Matter No. 99-10-05-0,
as amended dated March 1, 2001, covers extrajudicial foreclosure of real estate mortgages under
R.A. No. 3135 and chattel mortgages under P.D. No.
1508. There is nothing in the above mentioned
Circular which authorizes the Executive Judge and/or
the Ex-Officio Sheriff to extra judicially foreclose
properties covered by obligations other than the
said mortgages. Hence, the subject petition is not
proper for extra-judicial foreclosure under the
supervision of the Executive Judge. Dismissal of the
subject petition is recommended

TC – denied request for extrajudicial foreclosure of
the subject condo unit and dismissed the petition; It
not within the authority of Exec. Judge to supervise
and approve the extrajudicial foreclosures of
mortgage
ISSUE: WON P has a right to file a petition for extrajudicial
foreclosure?
HELD: NO
 In order to avail itself of a writ of mandamus,
petitioner must establish that it has a clear right to
the extrajudicial foreclosure sale of the
condominium unit of respondent. Under Circular No.
7-2002, implementing Supreme Court Administrative
Matter No. 99-10-05-0, it is mandatory that a
petition for extrajudicial foreclosure be supported by
evidence that petitioner holds a special power or
authority to foreclose
 Without proof of petitioner's special authority to
foreclose, the Clerk of Court as Ex-Oficio Sheriff is
precluded from acting on the application for
extrajudicial foreclosure
 IN THIS CASE: the only basis of petitioner for causing
the extrajudicial foreclosure of the condominium
unit of respondent is a notice of assessment
annotated on CCT No. 1972 in accordance with
Section 20 of R.A. No. 4726. However, neither
annotation nor law vests it with sufficient authority
to foreclose on the property
 The notice of assessment contains no provision for
the extrajudicial foreclosure of the condominium


unit. All that it states is that the assessment of
petitioner against respondent for unpaid association
dues constitutes a "first lien against [the]
condominium unit
Section 20 of RA 4726 does not grant P special
authority to foreclose. It merely prescribes the
procedure by which petitioner's claim may be
treated as a superior lien - i.e., through the
annotation thereof on the title of the condominium
unit.
While the law also grants petitioner the option to
enforce said lien through either the judicial or
extrajudicial foreclosure sale of the condominium
unit, Section 20 does not by itself, ipso facto,
authorize judicial as extra-judicial foreclosure of the
condominium unit. Petitioner may avail itself of
either option only in the manner provided for by the
governing law and rules. As already pointed out,
A.M. No. No. 99-10-05-0, as implemented under
Circular No. 7-2002, requires that petitioner furnish
evidence of its special authority to cause the
extrajudicial foreclosure of the condominium unit.
LANGKAAN REALTY v UCPB
BOHANAN v CA
METROBANK v WONG
FACTS: Mindanao Grains, Inc. applied for a credit
accommodation with petitioner. As security for such credit
accommodation, respondent Wong executed a real estate
mortgage in favor of petitioner. Due to MGI’s failure to pay
the obligation, petitioner filed an application for extrajudicial
foreclosure which was published in Pagadian Times once, for
three consecutive weeks setting the date for the auction sale.
No notice was posted in the municipality or city where the
mortgaged property was situated. The auction sale
proceeded and petitioner was adjudged as the sole and
highest bidder. After the expiration of the one year
redemption period, ownership was consolidated and TCT
correspondingly issued in the name of petitioner.
Respondent unaware of the foregoing developments, applied
for a credit accommodation with another bank, only to find
out that his property was already foreclosed by petitioner.
Respondent filed a case assailing the validity of the
extrajudicial foreclosure on the ground that petitioner did not
comply with the procedural requirements of law.
Petitioner on the other hand justifies his claim by citing
Olizon v. CA, (1) that its failure to comply with the posting
requirement did not necessarily result in the nullification of
the foreclosure sale since it complied with the publication
SECTRANS 2010/ ATTY. AGUINALDO
73
requirement; and (2) that personal notice of the foreclosure
proceedings to respondent is not a condition sine qua non for
its validity.
ISSUE: 1. WON PERSONAL NOTICE TO RESPONDENT IS A
CONDITION SINE QUA NON TO THE VALIDITY OF THE
FORECLOSURE PROCEEDINGS?
2. WON PETITIONER’S NON-COMPLIANCE WITH THE
POSTING REQUIREMENT IS FATAL TO THE VALIDITY OF THE
FORECLOSURE PROCEEDINGS?
HELD:
1.
2.
Section 3 of Act no. 3135 only requires: (1) the
posting of notices of sale in three public places, and
(2) the publication of the same in a newspaper of
general circulation. Personal notice to the mortgagor
is not necessary. Nevertheless, the parties are not
precluded from exacting additional requirements. In
the case at bar, it was stipulated that notice should
be served to the mortgagor. When petitioner failed
to send the notice of foreclosure sale to respondent,
he committed a contractual breach sufficient to
render the foreclosure sale null and void.
The general rule is that non-compliance with the
posting requirement is fatal to the validity of the
foreclosure proceedings. The Olizon case was an
exception due to the unusual nature of the
attendant facts and peculiarity of the confluent
circumstances which are not present in the instant
case. While the law recognizes the right of the bank
to foreclose a mortgage upon the mortgagor’s
failure to pay his obligation, it is important that such
right be exercised according to its clear mandate.
Each and every requirement of the law must be
complied with
PNB v CA
PNB v NEPOMUCENO PRODUCTIONS, INC.
FACTS:
PNB granted respondents (R) a credit line to finance the
filming of the movie “Pacific Connection”. The loan was
secured by mortgages on R’s real and personal properties
(Malugay property, Forbes Park Property and motion picture
equipments). However, R defaulted in their obligation. PNB
sought foreclosure of the mortgaged properties where pNB
was the highest bidder. R filed for annulment of foreclosure
sale since it is null and void for lack of publication of the
notice of sale. LC annulled foreclosure.
ISSUE: WoN the foreclosure sale was valid despite lack of
publication
SC: NO!
- Act 3135, governing EJF of mortgages on real
property is specific with regard to the posting and
publication requirements of the notice of sale, which
requires:
o Posting of notices of sale in 3 public places
o Publication of the same in a newspaper of
general circulation.
o FAILURE TO PUBLISH the notice of sale
constitutes a jurisdictional defect, which
INVALIDATES the sale.
- RE: WAIVER OF PUBLICATION REQUIREMENTS
o PNB and R have absolutely NO RIGHT to
waive the posting and publication
requirements of the law.
o The principal object of a notice of sale in a
foreclosure of mortgage is not so much to
notify the mortgagor as to inform the public
generally of the nature and condition of the
property to be sold, and of the time, place
and terms of the sale
- Notice is given to secure bidders and prevent a
sacrifice of the property
- Statutory requirement of Publication is mandatory
not for the mortgagor’s benefit, but for the public or
3rd persons.
PNB v SPOUSES CABATINGAN
FACTS:
1) Respondent spouses Cabatingan obtained two loans,
secured by a real estate mortgage, in the total amount of
P421,200 from petitioner PNB. They were unable to fully pay
their obligation despite having been granted more than
enough time to do so.
2) Thus, PNB extrajudicially foreclosed on the mortgage.
Thereafter, a notice of extrajudicial sale was issued. Pursuant
to this, the properties were sold at public auction on
November 5, 1991. PNB was the highest bidder.
3) On March 16, 1993, respondent spouses filed in
the RTC a complaint for annulment of extrajudicial
foreclosure of real estate mortgage and the
November 5, 1991 auction sale.
4) Petitioners claimed that the provisions of ACT no. 3135
must be observed strictly. Thus, because the public auction of
the foreclosed properties was held for only 20 minutes
(instead of seven hours as required by law), the consequent
sale was void. Thus, the RTC issued an order annulling the
sale at public auction.
ISSUE: Whether a sale at public auction, to be valid, must be
SECTRANS 2010/ ATTY. AGUINALDO
74
conducted the whole day from 9:00 a.m. until 4:00 p.m. of
the scheduled auction day.


HELD:
A) Section 4 of Act 3135 provides that the sale must
take place between the hours of nine in the
morning and four in the afternoon.
B) A creditor may foreclose on a real estate mortgage only if
the debtor fails to pay the principal obligation when it falls
due. But the foreclosure of a mortgage does not extinguish a
debtor’s obligation to his creditor. The proceeds of a sale at
public auction may not be sufficient to extinguish the liability
of the former to the latter. For this reason, Section 4 of Act
3135 should be construed in such a way that affords the
creditor greater opportunity to satisfy his claim without
unduly rewarding the debtor for not paying his just debt.
C) The word “between” ordinarily means “in the time interval
that separates.” Thus, “between the hours of nine in the
morning and four in the afternoon” merely provides a time
frame within which an auction sale may be conducted.
Therefore, a sale at public auction held within the intervening
period provided by law is valid, without regard to the
duration or length of time it took the auctioneer to conduct
the proceedings. Since it was conducted within the time
frame provided by law, the sale was valid.
MONZON v RELOVA
DOCTRINE:
Any person having a lien on the property
subsequent to the mortgage or deed of trust under which the
property is sold, may redeem the same at any time within the
term of one year from and after the date of sale.
Even if, for the sake of argument, Rule 68 is to be
applied to extrajudicial foreclosure of mortgages, such right
can only be given to second mortgagees who are made
parties to the (judicial) foreclosure. While a second
mortgagee is a proper and in a sense even a necessary party
to a proceeding to foreclose a first mortgage on real
property, he is not an indispensable party, because a valid
decree may be made, as between the mortgagor and the first
mortgagee, without regard to the second mortgagee; but the
consequence of a failure to make the second mortgagee a
party to the proceeding is that the lien of the second
mortgagee on the equity of redemption is not affected by the
decree of foreclosure.
SAGUAN v PBCOM


PBC extrajudicially foreclosed the property and won as
the highest bidder in the auction sale.
Because Saguan failed to redeem, the properties were
consolidated in the name of PBC which later on filed a
writ of possession.
Saguan filed an opposition since PBC failed to return the
excess amount of the extrajudicial foreclosure sale.
PBC points to Saguan’s remaining unsecured obligations
with the former to which the excess or surplus proceeds
were applied.
Issue:
1) WON the writ of possession should be issued?
2) WON PBC may unilaterally apply the excess proceeds to
petitioner’s remaining unsecured obligations?
Held:
1) Yes. A writ of possession is an order enforcing a
judgment to allow a person’s recovery of possession of
real or personal property. This writ may be issued either
1) within the one-year redemption period, upon filing of
the bond, 2) after the lapse of the redemption period,
without the need of a bond.
In this case, the issuance of RTC of a writ of possession in
favor of PBC is proper since the redemption period has
already expired. The duty of the trial court to grant a writ
of possession in such instances is ministerial, and the
court may not exercise discretion or judgment. Even if
the excess proceeds were not returned to the petitioner,
the writ is still valid.
A party may file a petition to set aside the foreclosure
sale to cancel the writ of possession in the same
proceeding where the writ was requested. However, in
this case, petitioners do not challenge the validity of the
foreclosure only the contention that the excess proceeds
were not returned to them.
2) No. The foreclosure of petitioner’s properties was meant
to answer only the obligation secured by the mortgage.
Even if the petitioners have remaining obligations with
the respondent, these obligations were not collateralized
by the foreclosed mortgage.
Facts:


Saguan obtained a loan of 3M from PBC and mortgaged
his 5 lands.
Saguan defaulted.
The petitioners’ remedy lies in a separate civil action for
collection of a sum of money and not an action to set
aside the foreclosure sale.
SECTRANS 2010/ ATTY. AGUINALDO
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SUICO v CA
QUIRINO GONZALES v CA
Facts: Petitioners applied for credit accommodations with
respondent bank, which the bank approved granting a credit
line of Php900,000.00. Petitioner’s obligations were secured
by a real estate mortgage on four parcels of land. Also,
petitioners had made certain advances in separate
transactions from the bank in connection with QGLC’s
exportation of logs and executed a promissory note in 1964.
Due to petitioner’s long default in the payment of their
obligations under the credit line, the bank foreclosed the
mortgage and sold the properties covered to the highest
bidder in the auction. Respondent bank, alleging nonpayment of the balance of QGLC’s obligation after the
proceedings of the foreclosure sale were applied and nonpayment of promissory notes despite repeated demands,
filed a complaint for sum of money against petitioners.
Petitioners, on the other hand, asserted that the complaint
states no cause of action and assuming that it does, the same
is barred by prescription or void for want of consideration.
Issue: Whether or not the cause of action is barred by
prescription.
Held: An action upon a written contract, an obligation
created by law, and a judgment must be brought within 10
years from the time the right of action accrues.
The finding of the trial court that more than ten years had
elapsed since the right to bring an action on the Bank’s first
to sixth causes had arisen is not disputed. The Bank contends,
however, that the notices of foreclosure sale in the
foreclosure proceedings of 1965 are tantamount to formal
demands upon petitioners for the payment of their past due
loan obligations with the Bank; hence, said notices of
foreclosure sale interrupted the running of the prescriptive
period.
The Bank’s contention has no merit. Prescription of actions is
interrupted when they are filed before the court, when there
is a written extrajudicial demand by the creditors, and when
there is any written acknowledgment of the debt by the
debtor.
The law specifically requires a written extrajudicial demand
by the creditor which is absent in the case at bar. The
contention that the notices of foreclosure are tantamount to
a written extrajudicial demand cannot be appreciated, the
contents of said notices not having been brought to light.
But even assuming that the notices interrupted the running
of the prescriptive period, the argument would still not lie for
the following reasons:
The Bank seeks the recovery of the deficient amount of the
obligation after the foreclosure of the mortgage. Such suit is
in the nature of a mortgage action because its purpose is to
enforce the mortgage contract. A mortgage action prescribes
after ten years from the time the right of action accrued.
The law gives the mortgagee the right to claim for the
deficiency resulting from the price obtained in the sale of the
property at public auction and the outstanding obligation
proceedings. In the present case, the Bank, as mortgagee,
had the right to claim payment of the deficiency after it had
foreclosed the mortgage in 1965. as it filed the complaint
only on January 27, 1977, more than ten years had already
elapsed, hence, the action had then prescribed.
PIANO v CAYANONG
FACTS: On March 17, 1952, the plaintiffs commenced an
action to foreclose a mortgage executed by the defendant in
favor of the plaintiffs upon a parcel of land. The partieslitigant submitted a compromise agreement.
The defendant failed to pay the obligation within the period
set by the Court; so the property in question was sold at
public auction on Jan. 30, 1952(should be 1953) per order of
the court, by the deputy sheriff of Maasin, Leyte, to the
plaintiffs, they being the only bidders for P2,475.
The certificate of sheriff's sale contained the provision that
the said property is subject "to redemption within one year
from the date hereof in the manner provided by the law
applicable to the case." On March 11, 1953, the plaintiffs filed
a motion for the confirmation of the sale executed by the
sheriff, which was unopposed by the defendant. The sale was
confirmed by the Court on March 21, 1953.
Thereafter, the plaintiffs filed a petition for writ of
possession; by virtue of such petition the court adjudicated
possession to the plaintiffs on Aug. 15, 1953. On Aug. 20,
1953, the deputy clerk issued the writ of possesion prayed for
by the plaintiffs.
On Jan. 26, 1954, the defendant deposited with the court the
sum of P2,783.93, P2,772 of which was in the concept of
redemption deposit to be delivered to Generosa Cayanong
and her husband.
The oppositor Francisco Pilapil, on Feb. 11, 1954, filed an
opposition to the defendants' motion of Jan. 26, 1954,
claiming that the property, subject of foreclosure, having
been sold at a judicial foreclosure sale, was not subject to
redemption after the judicial sale was confirmed, title thereto
having been fully vested and consolidated in favor of
Cayanong and Bellones, their assignees and successors-ininterest.
ISSUE: Whether the property subject of foreclosure, having
been sold at a judicial foreclosure sale is subject to
redemption after the judicial sale was confirmed.
RULING:
In a foreclosure of mortgage under Rule 70 of the Rules of
Court, there is no right of redemption after the sale is
confirmed, although there is an equity of redemption in favor
of the mortgagor or junior encumbrancer, consisting in the
right to redeem the mortgaged property within the 90-day
SECTRANS 2010/ ATTY. AGUINALDO
76
period, or even thereafter, but before the confirmation of the
sale.
It is only in cases of foreclosures of mortgages in favor of
banking and credit institutions (Sec. 76, General Banking Act
[Rep. Act 337]), to the Philippine National Bank (Acts Nos.
2747, and 2938), and in extrajudicial foreclosures (Act 3135
as amended by Act 4118), where, by express provision, the
law allows redemption. In all other foreclosure cases, there is
no legal redemption.
The sheriff, therefore, has no authority to grant or insert a
period of redemption in the certificate of sale, when the
same is conducted pursuant to Rule 70 and, wanting in said
authority, any insertion therein has no validity and effect.
Once the judicial sale is confirmed by the court, the rights are
vested in the purchaser (Sec. 3, Rule 70).
LANDRITO v CA
FACTS:
 P obtained a loan of P350k from R and secured
payment by executing a deed of real estate
mortgage of their parcel of land at Muntinlupa;
obtained again another loan P 1mill and was granted
by R with an amendment of real estate mortgage
 P defaulted and refused to comply with their
obligation despite repeated demands
 R filed a petition for the extrajudicial foreclosure of
the mortgage. Mortgaged property was sold in a
public auction with R as highest bidder. R registered
sheriff’s certificate of sale.
 P filed a complaint for annulment of the extrajudicial
foreclosure and auction sale and alleged that said
foreclosure and auction sale were null and void for
failure to comply with requirements of notice and
publication; the mortgaged property was illegally
foreclosed; application for consolidation of title was
premature because the R’s Husband granted them
an extension of the period of redemption
 TC – granted R’s Motion to Dismiss; action already
barred by laches. CA affirmed
ISSUE: WON the extrajudicial foreclosure and public auction
sale of the subject parcel of land are valid and lawful?
HELD: YES
 Records indubitably show that at the time of the
foreclosure sale on 11 August 1993, petitioners were
already in default in their loan obligation to
respondent Carmencita San Diego.
 A final notice of demand for payment had been sent
to them, despite which they still failed to pay.
Hence, respondent Carmencita San Diego’s resort to
extrajudicial foreclosure, provided no less in the
parties’ “Amendment of Real Estate Mortgage”.
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
The rule has been, and still is, that in real estate
mortgage, when the principal obligation is not paid
when due, the mortgagee has the right to foreclose
on the mortgage and to have the mortgaged
property seized and sold with the view of applying
the proceeds thereof to the payment of the
obligation
IN THIS CASE: The validity of the extrajudicial
foreclosure on 11 August 1993 was virtually
confirmed by the trial court when it dismissed
petitioners’ complaint, and rightly so, what with the
fact that petitioners failed to exercise their right of
redemption within the 1-year period therefor
counted from the registration of the sheriff’s
certificate of sale.
It appears from the evidence on record that despite
due notice and publication of the same in a
newspaper of general, P did not bother to attend the
foreclosure sale nor raise any question regarding the
propriety of the sale.
It was only on November 9, 1994, or more than one
year from the registration of the Sheriff’s Certificate
of Sale, that P filed the instant complaint. Clearly, P
had slept on their rights and are therefore guilty of
laches, which is defined as the failure or neglect for
an unreasonable or explained length of time to do
that which, by exercising due diligence, could or
should have been done earlier, failure of which gives
rise to the presumption that the person possessed of
the right or privilege has abandoned or has declined
to assert the same.
In Lazo v. Republic Surety & Insurance Co., Inc., this
Court has made it clear that it is only where, by
voluntary agreement of the parties, consisting of
extensions of the redemption period, followed by
commitment by the debtor to pay the redemption
price at a fixed date, will the concept of legal
redemption be converted into one of conventional
redemption.
IN THIS CASE: There is no showing whatsoever that
petitioners agreed to pay the redemption price on or
before 11 November 1994, as allegedly set by Mrs.
San Diego’s husband. On the contrary, their act of
filing their complaint on 09 November 1994 to
declare the nullity of the foreclosure sale is
indicative of their refusal to pay the redemption
price on the alleged deadline set by the husband. At
the very least, if they so believed that their loan
obligation was only for P1,000,000.00, petitioners
should have made an offer to redeem within one (1)
year from the registration of the sheriff’s certificate
of sale, together with a tender of the same amount.
This, they never did.
METROBANK v TAN
IBAAN RURAL BANK v CA
SECTRANS 2010/ ATTY. AGUINALDO
77
RAMIREZ v CA
FACTS: One Ronnie Garcia executed a first mortgage over a
parcel of land in favor of PNB as a security for a loan granted
by PNB. The deed was registered with the Register of Deeds
and annotated in the title of the mortgaged property. During
the subsistence of the first mortgage, Ronnie executed a
second mortgage over the same property in favor of private
respondent Marmeto which was also recorded on the title.
For failure to pay his loan, PNB extra-judicially foreclosed the
mortgage and a Certificate of Sale was issued in its favor on
Nov. 8, 1977. The second mortgage was also extra-judicially
foreclosed and a Certificate of Sale was issued in favor of
Marmeto on June 27, 1978.
On February 1980, Ronnie executed a “Waiver and
Renunciation of Rights” with respect to his right of
redemption with respect to the first mortgage in favor of his
father. The latter assigned his right to petitioner Nimfa
Ramirez, who in turn paid the total redemption price to PNB
which accepted it. Meanwhile, Ronnie having not exercised
his right of redemption over the second mortgage, Marmeto
filed in court for the Consolidation of Ownership over the
mortgaged property to which petitioner Ramirez filed an
adverse claim.
ISSUE:
1.
2.
2.
TOLENTINO v CA
SPOUSES OLIVEROS v PRESIDING JUDGE
FACTS:
The mortgagors (P) obtained 2 loans for the construction of
the Cabuyao Commercial Complex for P58M as evidenced by
promissory notes from Metrobank (R). To secure the loans,
Spouses Oliveros and Nevalga executed a Deed of Real Estate
Mortgage in favor of Metrobank over the 3 parcels of land
together with all the buildings and improvements existing
thereon. Due to the failure of mortgagors to pay their loan,
Metrobank instituted an EJF over the Real Estate Mortgage.
Metrobank won the bid. Mortgagors failed to redeem the
property hence, Metrobank consolidated its title to the
subject property. Metrobank demanded P to turn over the
actual possession of the property but the mortgagors failed
and refused to do so. Metrobank filed a writ of possession
which the Petitioner Spouses opposed claiming thata pending
case was in another court for nullification of foreclosure
proceedings.
ISSUE: WoN a writ of possession is proper when there is a
pending case to nullify the foreclosure sale
Whether Ramirez had acquired any right by virtue of
her having redeemed the property in question
beyond the one-year redemption period?
What will be the effect of the redemption by
Ramirez on private respondent Marmeto?
HELD:
1.
the statutory period. Marmeto failed to make the
redemption but instead it was the petitioner who
made such redemption.
Yes, by accepting the redemption price after the
statutory period for redemption had expired, PNB is
considered to have waived the one (1) year period
within which Ramirez could redeem the property.
There is nothing in the law which prevents such a
waiver. Allowing a redemption after the lapse of the
statutory period, when the buyer at the foreclosure
does not object but even consents to the
redemption, will uphold the policy of the law. Thus,
there is no doubt that the redemption made by
petitioner Ramirez is valid.
The rule is well settled that a second mortgagee
merely takes what is called an equity of redemption
and thus a second mortgagee has to wait until after
the debtor's obligation to the first mortgagee has
been fully settled. The rights of a second mortgagee
are strictly subordinate to the superior lien of the
first mortgagee. In the case at bar, the proper
foreclosure of the first mortgage gave, not only the
first mortgagor, but also subsequent lien holders like
Marmeto, the right to redeem the property within
SC: YES!
- Metrobank purchased the properties at a public
auction following the EJF of the subject properties.
Certificate of sale over the properties were issued in
favor of Metrobank and registered with RD. P as
mortgagors failed to redeem the properties within
the 1 year period of redemption hence Metrobank
consolidated its ownership over the subject
properties.
- Metrobank having consolidated its title to the
mortgaged properties is even more entitled now to
possession thereof and makes more unmistakable its
right to file an ex parte motion for the issuance of a
writ of possession.
- The issuance of the writ of possession becomes a
mere ministerial duty on the part of the judge,
regardless of WoN there is a pending action for
nullification of the sale at public auction or
foreclosure itself
CHINA BANK v ORDINARIO
FACTS:
1) Petitioner ChinaBank granted 3 loans to TransAmerican
owned by spouses Garcia, secured by real estate mortgages
constituted by Jesus Garcia 45 parcels of land The contracts
of mortgage were all registered in the same Registry.
SECTRANS 2010/ ATTY. AGUINALDO
78
Subsequently for failure of TransAmerican to pay its loans,
Chinabank foreclosed extrajudicially the three real estate
mortgages which were then sold at public auction for
P38,004,205.01 to the same bank. The Certificate of Sale was
then registered in the Registry of Deeds of Quezon City.
2) Thereafter Chinabank filed with the RTC a petition for
issuance of a writ of possession, which was granted, thus
placing Chinabank in possession of the 45 parcels of land.
Then, spouses Ordinario, filed a motion for reconsideration
praying that the parcel of land be excluded from the above
order alleging, that they purchased the land covered on
which was constructed their townhouse and that the
mortgage foreclosure cannot prevail over their superior right
as legitimate buyers of the area.
REVERSED and SET ASIDE. The orders of the RTC, Branch 90,
Quezon City, directing the issuance of a writ of possession in
favor of petitioner bank are AFFIRMED.
ANTICHRESIS
DELA VEGA v BALLILOS
BARRETTO v BARRETTO
Facts:

3) To this, Chinabank filed its opposition to respondents’
motion for reconsideration. The trial court denied Sps
Ordinario’s motion for reconsideration. On appeal, this was
overturned by the CA.

HELD:

A) Under Section 7 of Act No. 3135, the purchaser in a
foreclosure sale is entitled to possession of the property.
Thus the writ prayed for by petitioner granting it possession
has to be issued as a matter of course, being a ministerial
duty of the trial court to grant such writ of possession. No
discretion is left for the trial court.
B) Under the Rules of Court a third-party claimant or a
stranger to the foreclosure suit, like respondents herein, can
opt to file a remedy known as terceria against the sheriff or
officer effecting the writ by serving on him an affidavit of his
title and a copy thereof upon the judgment creditor. By the
terceria, the officer shall not be bound to keep the property
and could be answerable for damages. A third-party claimant
may also resort to an independent "separate action," the
object of which is the recovery of ownership or possession of
the property seized by the sheriff, as well as damages arising
from wrongful seizure and detention of the property despite
the third-party claim. If a "separate action" is the recourse,
the third-party claimant must institute in a forum of
competent jurisdiction an action, distinct and separate from
the action in which the judgment is being enforced, even
before or without need of filing a claim in the court that
issued the writ. Both remedies are cumulative and may be
availed of independently of or separately from the other.
Availment of the terceria is not a condition sine qua non to
the institution of a "separate action."
C) In essence, the Court of Appeals committed palpable error
when it granted Spouses Ordinario’s motion for
reconsideration and set aside the orders dated April 10, 1991
and September 21, 1992 of the RTC. Thus, the appealed
Decision and Resolution of the Court of Appeals are

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
After the death of Juan Antonio Barretto, Sr., his son Juan
Antonio Grandpre, in his own behalf and as the executor
of his father, mortgaged, the cultivated half of said
hacienda in favor of Antonio Vicente Barretto as security
for the amount of P11,000 which the latter loaned to
him.
By verbal agreement, Antonio will collect his credit from
the products of the property.
His three children and heirs Antonio Ma Barretto,
Ricardo Esteban Barretto, and Guadalupe Barretto came
to succeed after the death of Antonio.
Guadalupe made a donation inter vivos in favor of the
plaintiff Alberto Barretto of the undivided one-third part
of the hypothecary credit and of the rights belonging to
her deceased father Antonio Vicente Barretto, assigning
to the donee all the rights and actions which she might
have in the foreclosure proceedings exhibited at the trial
of the present action, on the condition that as soon as
the donee Alberto Barretto could collect the said onethird part of the credit or should obtain the assignment
of the property of the debtor, he would divide what was
donated, into nine equal parts among the donee himself
and six living brothers and the heirs of their two brothers
now dead, each receiving one-ninth part.
Alberto Barretto, complying with the condition imposed
in said document of the donation paid to each of his
brothers and nephews, and in exchange for the sums
received as such price his co-donees assigned and
conveyed to him one-eight part of the third of the said
hacienda and whatever rights and interests the grantors
might have by virtue of the said donation in favor of the
plaintiff Barretto.
It is to be noted that the plaintiff bought one-eight
undivided part of the third of the whole hacienda of
Balintagac and paid to every claimant the price of the
eight part sold to him. The third part of the ownership of
the hacienda was transferred to the plaintiff by the
donor Guadalupe Barretto.
Antonio and Ricardo, as grantors, sold and conveyed all
their rights and actions included and derived from the
said hypothecary credit for the price of P14,000 which
would be paid by the grantee and vendee by installments
and in the manner prescribed in the said deed, assigning
SECTRANS 2010/ ATTY. AGUINALDO
79
to him, besides, all the rights which the said brothers had
over the two-third parts of the said hacienda.
antichresis to the creditor, without having previously paid the
latter all his debt and interests thereon, the creditor being
entitled to ask the courts that the said real property be sold
to satisfy his credit.
Issue: WON there was a transfer of ownership to Alberto?
Held:
No. the plaintiff did not obtain by assignment, sale, or
transfer, as expressed in said deeds, the ownership of the
said hacienda of Balintagac, but only the hypothecary credit
which the heirs of the deceased creditor Antonio Vicente
Barretto had inherited from the latter, after the plaintiff had
obtained from his other brothers the conveyance of their
respective rights to the donation.
The rights acquired by the creditor were transmitted by
hereditary title through operation of law to the heirs of the
same Antonio M.a, Ricardo Esteban, and Guadalupe, Barretto
y Rocha and these in turn assigned, sold and transferred the
credit with all their rights as hypothecary creditors, as well as
the right to the usufruct of all the hacienda of Balintagac to
the plaintiff Alberto Barretto.
With regard to prescription, the creditor in antichresis can
never by prescription acquire the ownership of the real
property received in antichresis, as he entered into the
possession of the same not as an owner but as a creditor with
right only to collect his credit from the fruits of said real
property.
The extinguishment of the right as creditor and the
termination of his use and possession of the real property
given in antichresis depend upon the full payment of the debt
and its interests, after the liquidation of the amounts entered
on the account of the debtors and received by the creditor.
LEGAZPI & SALCEDO v CELESTIAL
ANGELES v SEC. OF JUSTICE
PANDO v GIMENEZ
When in the record of an action it is fully established that the
parties indebted in a certain amount, which is secured with a
mortgage over ½ of their hacienda, having delivered to the
creditor not only the mortgaged half but the whole hacienda,
not in the nature of an assignment of property in payment of
a debt, still unpaid, but with the object that the creditor may
collect by means of usufruct his credit and the interest agreed
upon, the verbal contract which is inferred from such facts
and presumed to have been entered into between the
parties, although not set in any document, deserves in law
the name of antichresis as defined in Article 1881 of the Civil
Code.
By the antichresis a creditor acquires a right to
receive the fruits of real property of his debtor,
with the obligation to apply them to the payment
of the interest, if due, and afterwards to the
principal of his credit.
The creditor in antichresis cannot by mere possession of the
real property which he received by virtue of an antichresis
acquire ownership over the same for failure of the debtor to
pay the debt within the stipulated time, any agreement to the
contrary being void; and the debtor on his part cannot
recover the enjoyment and use of the real property given in
FACTS: This action was instituted for the purpose of
foreclosing a mortgage executed by defendant Antonio
Gimenez. Massy Teague was also impleaded for having
purchased at public auction one of the mortgaged properties.
In order to secure the payment of P8,000 which the
defendant Gimenez owed the plaintiff, he mortgaged the
house at No. 655 Santa Mesa, Manila, and the leasehold right
on the lot upon which it stands (Exhibit A). This was payable
on October 27, 1925, but, in spite of nonpayment, the
creditor, who is the plaintiff herein, did not foreclose the
mortgage.
The defendant was leaving the City of Manila in order to
attend to his business in the Province of Cagayan, and at the
special instance and request of the herein plaintiff, said
defendant gave to the plaintiff the full control, and complete
and absolute administration of the building and the parcel of
land on which said building was erected, situated in Santa
Mesa, District of Santa Mesa, mortgaged to the plaintiffIt and
it was agreed between them that the plaintiff would collect
the rents of said house, in order to apply them to the
payment of interest on the amount of the indebtedness.
For default in the payment of taxes for the years 1925 and
1926, the house was on November 23, 1926 sold at public
auction, and, for failure to exercise the right of legal
redemption, the City of Manila, the attachment creditor and
SECTRANS 2010/ ATTY. AGUINALDO
80
vendor of the property, executed a final deed of sale in favor
of the purchaser, the other defendant Massy Teague.
Furthermore, for default in the payment of the rents due on
the lot of said house for the years 1925 to 1928, the Santa
Mesa estate, the lessor of said land, cancelled the lease on
July 13, 1928, pursuant to the terms of the contract.
The creditor is obliged to pay the taxes and charges
which burden the estate, in the absence of an
agreement to the contrary.
He shall also be obliged to pay any expenses
necessary for its preservation and repair.
Any sums he may expend for such purposes shall be
chargeable against the fruits. (Art. 1882, Civil Code.)
The appellant Gimenez contends that the plaintiff was
responsible for the delinquency in the payment of both the
tax on the house and the rent of the lot, which caused him
the loss of the said house and the leasehold right on the lot,
because the plaintiff was at that time in charge of the
administration of the premises with the obligation to attend
to the payment of the tax and the rents.
These obligations arise from the very nature of the covenant,
and are correlated with the plaintiff's acquired right to take
charge of the property and collect the fruits for himself.
The plaintiff denied that he had such obligation, alleging that
his duties were confined to the collection of the rents of the
house in order to apply them to the payment of the interest
on the mortgage.
PERALTA v QUIMPO
51 OG No. 3 p. 1383, Sept 1954
NO COPY AVAILABLE
Such was in fact the original agreement; but the appellant
asserts that it was modified by the letter.
VILLANUEVA v IPONDO
CHATTEL MORTGAGE
ISSUE: Whether or not the the administration of the property
in question assumed by the plaintiff toward the end of
October, 1925 is antichretic in character.
RULING:
Taking into account the language of the letter Exhibit 1 and
the appellant's unimpeached testimony, we are constrained
to hold that it has been proved by a preponderance of
evidence, that even though at first the plaintiff had only
undertaken to collect the rents of the house, later on,
towards the end of October, 1925, he assumed the obligation
to pay both the tax on the house, and the rent of the lot.
As to the consideration contained in the judgment appealed
from to the effect that, in view of the reduction of the rent of
the house in May, 1926, the plaintiff would not have
accepted the administration under the conditions alleged by
the defendant-appellant, it must be remembered that the
plaintiff took over such complete administration months
before such reduction of rents, and it does not appear that
the reduction was foreseen.
From all these circumstances it follows that the
administration of the property in question assumed by the
plaintiff toward the end of October, 1925 is antichretic in
character, and therefore justice and equity demand that
application be here made of the Civil Code provisions
touching the obligations of the antichretic creditor, to wit:
ALEMAN v CATERA
ALLIED BANK v SALAS
FACTS: Petitioner-bank (through petitioner’s predecessor)
granted Gencor Marketing, Inc. a time loan and was secured
by a Deed of Chattel Mortgage over certain printing
machineries and equipments; said deed was recorded in the
Chattel Mortgage Registry in Feb. 7, 1974. Gencor failed to
pay prompting petitioner to extra judicially foreclose the
mortgage and requested the Sheriff of Quezon City to effect
the said foreclosure. Upon issuance of the Notice of Sheriff’s
sale, private respondent filed a motion in court to enjoin the
public auction alleging that the properties have been
previously levied and attached by the Sheriff of Rizal.
Metrobank is a creditor of Gencor’s president and claims the
properties as the exclusive property of the president doing
business under the firm name of Gencor Printing and as such
may not be foreclosed and sold at auction. During the trial it
was admitted by petitioner that the properties belonged to
the president and not to Gencor.
ISSUE: WHO between the two claimants has a better right
over the property.
HELD: Petitioner has the better right. Even though petitioner
admitted that it was the president and not gencor who
owned the properties, the Court nevertheless finds that the
chattel mortgage over the printing machineries and
equipment was ratified and approved by Clarencio Yujuico. As
SECTRANS 2010/ ATTY. AGUINALDO
81
earlier stated and as pointed out by petitioner, it was
Clarencio Yujuico as president of Gencor Marketing, Inc., who
signed the promissory note evidencing the time loan granted
by petitioner's predecessor General Bank and Trust Company
in favor of Gencor Marketing, Inc.
Finding the chattel mortgage to be valid, the Court takes
special note of the fact that said chattel mortgage was
registered and duly recorded in the Chattel Mortgage
Registry of Quezon City on February 7, 1974, prior to April 22,
1977, the date the writ of attachment of the properties in
question was issued. This is a significant factor in determining
who of two contending claimants should be given preference
over the same properties in question.
The registration of the chattel mortgage more than three
years prior to the writ of attachment issued by respondent
judge is an effective and binding notice to other creditors of
its existence and creates a real right or a lien, which being
recorded, follows the chattel wherever it goes. 7 The chattel
mortgage lien attaches to the property wherever it may be.
Thus, private respondent as attaching creditor acquired the
properties in question subject to petitioner's mortgage lien as
it existed thereon at the time of the attachment.
In this regard, it must be stressed that the right of those who
so acquire said properties should not and cannot be superior
to that of the creditor who has in his favor an instrument of
mortgage executed with the formalities of law, in good faith,
and without the least indication of fraud. 8
Applying the foregoing principle to the case at bar, the Court
finds the lien of petitioner's chattel mortgage over the
mortgaged properties in question superior to the levy on
attachment made on the same by private respondent as
creditor of chattel mortgagor Clarencio Yujuico. What may be
attached by private respondent as creditor of said chattel
mortgagor is only the equity or right of redemption of the
mortgagor.
MAKATI LEASING v WEAREVER TEXTILES
TSAI v CA
FACTS:
- Ever Textile (R) obtained a P3M loan from PBCOM
(P), with Real Property and Chattel Mortgage over
the lot, where its factory stands and the chattels
located therein as enumerated in its attached
schedule
- A 2nd loan was obtained secured by a Chattel
Mortgage over personal properties listed in its
attached list, which is similar to the attached list to
the 1st mortgage.
- On the same date of the 2nd loan, R purchased
various machines and equipments
- Later, R filed insolvency proceedings
-
-
-
-
P commenced an extrajudicial foreclosure (EJF),
wherein P won the bid and the properties were
leased and later sold to Tsai. P sold the factory,
properties and the contested machineries of R.
R filed for annulment of sale contending that the
machineries bought by R which are not included in
the list should be excluded from the sale to TSAI
P contended that the machineries, which are
connected to the land, are part of the real estate
stated in the Mortgage.
RTC and CA ruled in favor of R.
ISSUE: WoN the contested machineries (property bought by R
on the same day that the 2nd loan was executed) should be
inlcluded in the auction sale and sale to TSAI
SC: NO!
- Based on the pieces of evidence, the true intention
of P and R is to treat machinery and equipment as
chattels.
- The controverted machineries are not covered by or
included in either of the 2 mortgages
- The machineries were not included in the Notice of
Sale
- An immovable may be considered a personal
property if there is a stipulation as when it is used as
security in the payment of an obligation where a
chattel mortgage is executed over it, as in the case at
bar.
DOCTRINE: a chattel mortgage shall be deemed to cover only
the property described therein and not like or substituted
property thereafter acquired by the mortgagor and placed in
the same depository as the property originally mortgaged.
ACME SHOE v CA
FACTS:
1) Petitioner Chua Pac, the president and general manager of
co-petitioner Acme Shoe, executed on June 1978, for and in
behalf of the company, a chattel mortgage in favor of private
respondent Producers Bank of the Philippines as security for
petitioner's corporate loan of P3,000,000.00. It was stated
that:
“In case the MORTGAGOR executes subsequent promissory
note or notes either as a renewal of the former note, as an
extension thereof, or as a new loan, or is given any other kind
of accommodations such as overdrafts, letters of credit,
acceptances and bills of exchange, releases of import
shipments on Trust Receipts, etc., this mortgage shall also
stand as security for the payment of the said promissory note
or notes and/or accommodations without the necessity of
executing a new contract and this mortgage shall have the
same force and effect as if the said promissory note or notes
and/or accommodations were existing on the date thereof.
SECTRANS 2010/ ATTY. AGUINALDO
82
This mortgage shall also stand as security for said obligations
and any and all other obligations of the MORTGAGOR to the
MORTGAGEE of whatever kind and nature, whether such
obligations have been contracted before, during or after the
constitution of this mortgage”
2) On 10 and 11 January 1984, the bank yet again extended to
petitioner corporation a loan of P1,000,000.00 covered by
four promissory notes for P250,000.00 each. Due to financial
constraints, the loan was not settled at maturity. The bank
then applied for an extra judicial foreclosure of the chattel
mortgage, with the Sheriff of prompting Acme to file an
injunction, which was dismissed. The court also ordered the
foreclosure of the chattel mortgage. It held petitioner
corporation bound by the stipulations.
ISSUE: Whether it is valid and effective to have a clause in a
chattel mortgage that purports to likewise extend its
coverage to obligations yet to be contracted or incurred.
HELD:
A) Contracts of security are either personal or real. In
contracts of personal security, such as a guaranty or a
suretyship, the faithful performance of the obligation by the
principal debt or is secured by the personal commitment of
another.
B) In contracts of real security, such as a pledge, a mortgage
or an antichresis, that fulfillment is secured by an
encumbrance of property — in pledge, the placing of movable
property in the possession of the creditor; in chattel
mortgage, by the execution of the corresponding deed
substantially in the form prescribed by law; in real estate
mortgage, by the execution of a public instrument
encumbering the real property covered thereby; and in
antichresis, by a written instrument granting to the creditor
the right to receive the fruits of an immovable property with
the obligation to apply such fruits to the payment of interest,
if owing, and thereafter to the principal of his credit — upon
the essential condition that if the obligation becomes due
and the debtor defaults, then the property encumbered can
be alienated for the payment of the obligation, but that
should the obligation be duly paid, then the contract is
automatically extinguished proceeding from the accessory
character 8 of the agreement.
C) While a pledge, real estate mortgage, or antichresis may
secure after-incurred obligations so long as these future
debts are accurately described, a chattel mortgage, can only
cover obligations existing at the time the mortgage is
constituted.
D) Although a promise expressed in a chattel mortgage to
include debts that are yet to be contracted can be a binding
commitment that can be compelled upon, the security itself,
however, does not come into existence or arise until after a
chattel mortgage agreement covering the newly contracted
debt is executed either by concluding a fresh chattel
mortgage or by amending the old contract. Refusal on the
part of the borrower to execute the agreement so as to cover
the after-incurred obligation can constitute an act of default
on the part of the borrower of the financing agreement
whereon the promise is written but the remedy of
foreclosure can only cover the debts extant at the time of
constitution and during the life of the chattel mortgage
sought to be foreclosed.
E) A chattel mortgage, as hereinbefore so intimated, must
comply substantially with the form prescribed by the Chattel
Mortgage Law itself. One of the requisites, under Section 5
thereof, is an affidavit of good faith. The fact, .that the
statute has provided that the parties to the contract must
execute an oath that “the mortgage is made for the purpose
of securing the obligation specified in the conditions thereof,
and for no other purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose of fraud”
means that the debt referred to in the law is a current, not an
obligation that is yet merely contemplated.
F) In the chattel mortgage here involved, the only obligation
specified in the chattel mortgage contract was the
P3,000,000.00 loan which petitioner corporation later fully
paid. By virtue of Section 3 of the Chattel Mortgage Law, the
payment of the obligation automatically rendered the chattel
mortgage void or terminated. In other words, “A mortgage
that contains a stipulation in regard to future advances in the
credit will take effect only from the date the same are made
and not from the date of the mortgage.”
CERNA v CA
MAGNA FINANCIAL v COLARINA
Facts:




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Elias Colarina bought on installment from Magna
Financial Services (MFS) one Suzuki Multicab.
After making a down payment, Colarina executed a
promissory note for the balance of P229,284.00 payable
in 36 equal monthly installments. To secure payment,
Colarina executed an integrated promissory note and
deed of chattel mortgage over the motor vehicle.
Colarina failed to pay the monthly amortization
accumulating an unpaid balance of P131,607.00.
Despite repeated demands, he failed to make the
necessary payment.
MFS filed a Complaint for Foreclosure of Chattel
Mortgage with Replevin.
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Upon the filing of a Replevin Bond, a Writ of Replevin
was issued. Summons, together with a copy of the Writ
of Replevin, was served on Colarina who voluntarily
surrendered physical possession of the vehicle to the
Sheriff.
The motor vehicle was turned over by the sheriff to
Magna Financial Services Group, Inc.
The trial court rendered judgment in favor of MFS and
asked Coralina to pay the unpaid balance and foreclose
the chattel mortgage.
Colarina appealed to the Regional Trial Court which
affirmed in toto the decision of the MTCC.
CA reversed the decision of MTCC and RTC stating that
MTC and the RTC erred in ordering the defendant to pay
the unpaid balance of the purchase price of the subject
vehicle irrespective of the fact that the instant complaint
was for the foreclosure of its chattel mortgage.
Issue:
1) WON MFS can avail of the two remedies, payment of
unpaid balance and foreclosure of chattel mortgage?
2) WON there was actual foreclosure?
Held:
1) No. Article 1484, paragraph 3, provides that if the vendor
has availed himself of the right to foreclose the chattel
mortgage, he shall have no further action against the
purchaser to recover any unpaid balance of the purchase
price. Any agreement to the contrary shall be void. In
other words, in all proceedings for the foreclosure of
chattel mortgages executed on chattels which have been
sold on the installment plan, the mortgagee is limited to
the property included in the mortgage.
Petitioner resolutely declared that it has opted for the
remedy provided under Article 1484(3) of the Civil Code,
that is, to foreclose the chattel mortgage. The
petitioner’s prayer contains two remedies, payment of
unpaid balance and foreclosure of chattel mortgage.
Such a scheme is not only irregular but is a flagrant
circumvention of the prohibition of the law. By praying
for the foreclosure of the chattel, Magna Financial
Services Group, Inc. renounced whatever claim it may
have under the promissory note.
2) No. In the case at bar, there is no dispute that the subject
vehicle is already in the possession of the petitioner,
Magna Financial Services Group, Inc. However, actual
foreclosure has not been pursued, commenced or
concluded by it. Where the mortgagee elects a remedy of
foreclosure, the law requires the actual foreclosure of
the mortgaged chattel. It is the actual sale of the
mortgaged chattel that would bar the creditor (who
chooses to foreclose) from recovering any unpaid
balance. And it is deemed that there has been
foreclosure of the mortgage when all the proceedings of
the foreclosure, including the sale of the property at
public auction, have been accomplished.
Be that as it may, although no actual foreclosure as
contemplated under the law has taken place in this case,
since the vehicle is already in the possession of Magna
Financial Services Group, Inc. and it has persistently and
consistently avowed that it elects the remedy of
foreclosure, the Court of Appeals, thus, ruled correctly in
directing the foreclosure of the said vehicle without
more.
BA FINANCE v CA
BICOL SAVINGS v GUINHAWA
F: Victorio Depositario together with private respondent
Jaime Guinhawa, acting as solidary co-maker, took a loan
from petitioner Bicol Savings and Loan Association (BISLA)
payable every 19th day of each month. To secure the
payment of the foregoing loan obligation, the principal
borrower Victorio Depositario put up as security a chattel
mortgage which was a Yamaha Motorcycle. Said motorcycle
was eventually foreclosed by reason of the failure of
Depositario and private respondent Guinhawa to pay the
loan. There was a deficiency in the amount of P5,158.06
where BISLA made a demand to pay the same. Petitioner
BISLA (plaintiff therein) filed a complaint for the recovery of a
sum of money constituting the deficiency after foreclosure of
the chattel mortgage put up by the principal borrower
Depositario against the latter and his solidary co-maker
Guinhawa (herein private respondent) as defendants.
Eventually, a stipulation of facts was entered into between
BISLA and Guinhawa. They agreed to drop Depositario, as "his
whereabouts being unknown now and he could not be served
with summons". The creditor claims that he can maintain an
action for deficiency and claim P5k balance.
Issue: WoN creditor can claim remaining balance
Ruling: Yes! The creditor may maintain an action for
deficiency although the chattel mortgage law Is silent on this
point. The reason is tat a chattel mortgage is only given as a
security and not as payment for the debt in case of failure of
payment
PAMECA WOOD v CA
FACTS: On April 17, 1980, petitioner PAMECA Wood
Treatment Plant, Inc. (PAMECA) obtained a loan of
US$267,881.67, or the equivalent of P2,000,000.00 from
respondent Bank. By virtue of this loan, petitioner PAMECA,
through its President, petitioner Herminio C. Teves, executed
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a promissory note for the said amount, promising to pay the
loan by installment.
As security for the said loan, a chattel mortgage was also
executed over PAMECA's properties in Dumaguete City,
consisting of inventories, furniture and equipment, to cover
the whole value of the loan.
On January 18, 1984, and upon petitioner PAMECA's failure
to pay, respondent bank extrajudicially foreclosed the chattel
mortgage, and, as sole bidder in the public auction,
purchased the foreclosed properties for a sum of P322,
350.00.
On June 29, 1984, respondent bank filed a complaint for the
collection of the balance.
Petitioners submit that Articles 1484 and 2115 of the Civil
Code be applied in analogy to the instant case to preclude the
recovery of a deficiency claim.
ISSUES: Whether the foreclosure of the chattel mortgage
valid
RULING:
The court did not find anything irregular or fraudulent in the
circumstance that respondent bank was the sole bidder in the
sale, as all the legal procedures for the conduct of a
foreclosure sale have been complied with, thus giving rise to
the presumption of regularity in the performance of public
duties.
The effects of foreclosure under the Chattel Mortgage Law
run inconsistent with those of pledge under Article 2115.
Whereas, in pledge, the sale of the thing pledged
extinguishes the entire principal obligation, such that the
pledgor may no longer recover proceeds of the sale in excess
of the amount of the principal obligation, Section 14 of the
Chattel Mortgage Law expressly entitles the mortgagor to the
balance of the proceeds, upon satisfaction of the principal
obligation and costs.
Since the Chattel Mortgage Law bars the creditor-mortgagee
from retaining the excess of the sale proceeds there is a
corollary obligation on the part of the debtor-mortgagee to
pay the deficiency in case of a reduction in the price at public
auction.
As correctly pointed out by the trial court, the said article
applies clearly and solely to the sale of personal property the
price of which is payable in installments. Although Article
1484, paragraph (3) expressly bars any further action against
the purchaser to recover an unpaid balance of the price,
where the vendor opts to foreclose the chattel mortgage on
the thing sold, should the vendee's failure to pay cover two or
more installments, this provision is specifically applicable to a
sale on installments.
SUPERLINES v ICC
FACTS:
 Superlines decided to acquire five (5) new buses
from the Diamond Motors Corporation for the price
of P10k. However, Superlines lacked financial
resources for the purpose so by virtue of a board
resolution, it authorized its President and Gen Mgr
Lavides to look for a loan for the purchase of said
buses.
 Lavides negotiated with ICC Leasing. ICC agreed to
finance the purchase of the new buses via a loan and
proposed a 3-yr term for the payment. The new
buses to be purchased were to be used by Superlines
as security for the loan.
 Diamond Motors sold to Superlines 5 new buses and
was registered under the name of Superlines.
 Superlines executed 2 docus – Deed of Chattel
Mortgage over said buses a security for the purchase
price of buses in P13mill loaned by ICC to Superlines;
a Continuing Guaranty to pay jointly and severally in
favour of ICC the amount of P13mill
 After paying only 7 monthly amortizations,
Superlines defaulted in the payment of its obligation
to ICC.
 ICC filed a complaint for collection of sum of money
with a prayer for a writ of replevin
 TC dismissed; ICC and Superlines forged a consumer
loan agreement and not an amortized commercial
loan.
 CA reversed;
ICC and Superlines entered into an amortized
commercial loan agreement with ICC as
creditor-mortgagee and Superlines as debtormortgagor, and ordered Superlines and Lavides
to pay jointly and severally the sum of P5mill as
deficiency
It was Diamond Motors Corporation and not ICC
which sold the subject buses to Superlines. It
held that no evidence had been presented by
Superlines to show that ICC bought the said
buses from Diamond Motors Corporation under
a special arrangement and that ICC sold the
buses to Superlines. The appellate court also
ruled that Article 1484(3) is applicable only
where there is vendor-vendee relationship
between the parties and since ICC did not sell
the buses to Superlines, the latter cannot invoke
said law.
ISSUE: WON there was an amortized commercial loan
agreement?
HELD: YES
 DIAMOND is the seller of the five units of buses and
not the plaintiff
 No convincing evidence, except the self-serving
testimony of defendant Manolet Lavides, was
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presented to prove that there was an internal
arrangement between the plaintiff, as financing
agent, and Diamond, as seller of the buses. In fact,
defendant Lavides admitted under oath that
DIAMOND and plaintiff did not enter into transaction
over the sale of the buses
The evidence shows that the transaction between
the parties was an "amortized commercial loan" to
be paid in installments
P failed to adduce a preponderance of evidence to
prove that R and Diamond Motors Corporation
entered into a special arrangement relative to the
issuance of certificates of registration over the buses
under the name of petitioner Superlines.
P were also unable to prove that respondent
purchased from Diamond Motors Corporation the
new buses. In contrast, the vehicle invoices of
Diamond Motors Corporation irrefragably show that
it sold the said buses to petitioner Superlines. The
net proceeds of the loan were remitted by
respondent to petitioner Superlines and the latter
remitted the same to Diamond Motors Corporation
in payment of the purchase price of the buses. In
fine, respondent and Diamond Motors Corporation
had no direct business transactions relative to the
purchase of the buses and the payment of the
purchase price thereof.
The evidence on record shows that under the
Promissory Note, Chattel Mortgage and Continuing
Guaranty, respondent was the creditor-mortgagee of
petitioner Superlines and not the vendor of the new
buses. Hence, petitioners cannot find refuge in
Article 1484(3) of the New Civil Code.
What should apply was the Chattel Mortgage
executed by petitioner Superlines and R in relation
to the Chattel Mortgage Law.
This Court had consistently ruled that if in an extrajudicial foreclosure of a chattel mortgage a
deficiency exists, an independent civil action may be
instituted for the recovery of said deficiency. To
deny the mortgagee the right to maintain an action
to recover the deficiency after foreclosure of the
chattel mortgage would be to overlook the fact that
the chattel mortgage is only given as security and
not as payment for the debt in case of failure of
payment. Both the Chattel Mortgage Law and Act
3135 governing extra-judicial foreclosure of real
estate mortgage, do not contain any provision,
expressly or impliedly, precluding the mortgagee
from recovering deficiency of the principal
obligation.
ESGUERRA v CA
SERVICEWIDE v CA
FACTS:
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Respondents executed a promissory note and a
chattel mortgage over a vehicle they bought from
the mortgagee itself, C. R. Tecson Enterprises, for
the payment in installments of the vehicle. C. R.
Tecson Enterprises, on the same date, assigned in
favor of Filinvest Credit Corporation. The
respondents were aware that the new mortagee is
Filinvest.
Respondent spouses by way of Deed of Sale with
Assumption of Mortgage transferred and delivered
the vehicle to Conrado Tecson.
Subsequently, Filinvest assigned all its rights as
mortgagee to petitioner.
Respondents failed to pay the installments and
despite demands from petitioner-mortgagee to pay
or to return the vehicle.
Petitioner filed a complaint for Replevin but the
respondents alleged in their Answer that they can no
longer be held liable as they had already conveyed
the car to Conrado Tecson.
ISSUE:
1.
2.
WON the assignment of credit by the creditormortgagee quires the notice and consent of the
debtor- mortgagor?
WON the assignment of credit by the debtormortgagor requires the notice and consent of the
creditor-mortgagee?
HELD:
1.
2.
Only notice to the debtor-mortgagor of the
assignment of credit is required. His consent is not
required.
In contrast, consent of the creditor-mortgagee to
the alienation of the mortgaged property is
necessary in order to bind said creditor. Since the
assignee of the credit steps into the shoes of the
creditor-mortgagee to whom the chattel was
mortgaged, it follows that the assignee's consent is
necessary in order to bind him of the alienation of
the mortgaged thing by the debtor-mortgagor. This
is tantamount to a novation. As the new assignee,
petitioner's consent is necessary before respondent
spouses' alienation of the vehicle can be considered
as binding against third persons. Petitioner is
considered a third person with respect to the sale
with mortgage between respondent spouses and
third party defendant Conrado Tecson.
BPI CREDIT v CA
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CONCURRENCE AND PREFERENCE OF CREDITS
DE BARRETTO v VILLANUEVA
SAMPAGUITA PICTURES v JALWINDOR
FACTS:
- Sampaguita (P) is the owner of a building which its
roofdeck was leased to Capitol 300 (Capitol),
wherein it was agreed that whatever improvements
introduced therein by Capitol will later be owned by
P.
- Capitol purchased on credit from Jalwindor (R) glass
and wooden jalousies which were DELIVERED and
INSTALLED in the leased premises by R, replacing the
existing windows of P.
- Capitol failed to pay and R filed an action for
collection of sum of money against Capitol.
- R made a levy on the glass and wooden jalousies in
question, which P intervened in the case alleging
that it cannot be levied upon since it is already the
owner of the subject jalousies.
ISSUE: WoN R may levy the jalousies
SC: NO!
- When the glass and wooden jalousies were delivered
and installed in the leased premises, P became the
owner thereof, due to the contract between P and
Capitol in which it stated that all permanent
improvements made by lessee shall belong to the
lessor and that said improvements hav been
considered as part of the monthly rentals.
- The fact that Capitol failed to pay R the purchase
price of the items levied upon did not prevent the
transfer of ownership to Capitol and then to P.
UY v ZAMORA
3) On January 12, 1961, Uy and Zamora, submitted to the
court a compromise agreement wherein Zamora admitted
being indebted to Uy. Since the motor vehicle had already
been sold on order of the Court for P2,500 to prevent
depreciation, defendant Zamora agreed to have plaintiff Uy's
credit paid out of the proceeds of the sale.
4) The court found defendant Zamora to be liable to plaintiff
Uy in the amount of P2,500, and to the intervenor in the
amount of P2,451.93, plus interest. Uy claims preference on
the basis of a lien arising from the attachment of the vehicle
on August 11, 1960. On the other hand, allied bases its claim
to preference on a Deed of Chattel Mortgage covering the
same motor vehicle.
ISSUE: Which of the two credits is preferred?
HELD:
A) Considering the fact that Allied Finance, Inc. registered its
mortgage only on August 24, 1960, or subsequent to the date
of the writ of attachment obtained by plaintiff Uy on August
11, 1960, the credit of the intervenor cannot prevail over that
of the plaintiff.
B) The SC disagreed with the lower court’s decision upheld
Allied’s credit on the ground that, being embodied in a public
instrument of an earlier date (June 20, 1960), it should take
precedence over plaintiff's lien by attachment (August 11,
1960), pursuant to Article 2244 of the Civil Code, for the
reason that, as already stated, the credit of the Allied cannot
be considered as preferred until the same has been recorded
in the Motor Vehicles Office.
C) A mortgage of motor vehicles, in order to affect third
persons, should not only be registered in the Chattel
Mortgage Registry, but the same should also be recorded in
the Motor Vehicles Office The decision of the lower court is
reversed, without pronouncement as to costs.
FACTS:
1) At the instance of plaintiff Uy, the MTC ordered the
attachment of a vehicle belonging to Zamora. The writ was
levied on the vehicle on August 11, 1960. Subsequently, the
Municipal Court rendered judgment for the plaintiff Uy and
ordered defendant Zamora to pay the sum of P1,740. Zamora
appealed to the CFI.
2) While the case was pending appeal, the Allied Finance, Inc.
intervene. According to it, the vehicle, which was attached by
the Sheriff, had previously been mortgaged to it by Zamora to
secure the payment of a loan and that at the time of the filing
of the complaint in intervention, a balance of P2,451.93
remained in its favor. Allied, prayed that Zamora be ordered
to pay P2,451.93 as principal.
CORDOVA v REYES
CENTRAL BANK v MORFE
Facts:
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The Monetary Board found the Fidelity Savings Bank to
be insolvent. The Board directed the Superintendent of
Banks to take charge of its assets, forbade it to do
business and instructed the Central Bank Legal Counsel
to take legal actions.
Prior to the institution of the liquidation proceeding but
after the declaration of insolvency, the spouses Elizes
filed a complaint in the CFI against the Fidelity Savings
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Bank for the recovery of the balance of their time
deposits.
In the judgment rendered in that case, the Fidelity
Savings Bank was ordered to pay the Elizes spouses the
sum plus accumulated interest.
In another case, the spouses Padilla secured a judgment
against the Fidelity Savings Bank for the sums as the
balance of their time deposits, plus interests, moral and
exemplary damages and attorney's fees.
The lower court (having cognizance of the liquidation
proceeding), upon motions of the Elizes and Padilla
spouses and over the opposition of the Central Bank,
directed the latter as liquidator, to pay their time
deposits as preferred judgments, evidenced by final
judgments, within the meaning of article 2244(14)(b) of
the Civil Code.
Central Bank contends that the final judgments secured
by the Elizes and Padilla spouses do not enjoy any
preference because (a) they were rendered after the
Fidelity Savings Bank was declared insolvent and (b)
under the charter of the Central Bank and the General
Banking Law, no final judgment can be validly obtained
against an insolvent bank.
Issue: Whether a final judgment for the payment of a time
deposit in a savings bank which judgment was obtained after
the bank was declared insolvent, is a preferred claim against
the bank?
Held:
No. It should be noted that fixed, savings, and current
deposits of money in banks and similar institutions are not
true deposits. They are considered simple loans and, as such,
are not preferred credits.
The aforequoted section 29 of the Central Bank's charter
explicitly provides that when a bank is found to be insolvent,
the Monetary Board shall forbid it to do business and shall
take charge of its assets. Evidently, one purpose in prohibiting
the insolvent bank from doing business is to prevent some
depositors from having an undue or fraudulent preference
over other creditors and depositors.
We are of the opinion that such judgments cannot be
considered preferred and that article 2244(14)(b) does not
apply to judgments for the payment of the deposits in an
insolvent savings bank which were obtained after the
declaration of insolvency.
In the Rohr case, the general principle of equity that the
assets of an insolvent are to be distributed ratably among
general creditors applies with full force to the distribution of
the assets of a bank. A general depositor of a bank is merely a
general creditor, and, as such, is not entitled to any
preference or priority over other general creditors.
The assets of a bank in process of liquidation are held in trust
for the equal benefit of all creditors, and one cannot be
permitted to obtain an advantage or preference over another
by an attachment, execution or otherwise.
Considering that the deposits in question, in their inception,
were not preferred credits, it does not seem logical and just
that they should be raised to the category of preferred credits
simply because the depositors, taking advantage of the long
interval between the declaration of insolvency and the filing
of the petition for judicial assistance and supervision, were
able to secure judgments for the payment of their time
deposits.
MANABAT v LAGUNA FED
PHIL SAVINGS BANK v LANTIN
F: c built a duplex apartment house on a registered lot of
spouses x and y, using his own money, P25k to finish the
construction. Meanwhile, x and y obtained from psb a loan
secured by a mortgage to complete construction. At the time
of the registration of the mortgage, the transfer certificate of
title over the property was free from all liens and
encumbrances. PSB foreclosed the mortgage, and being the
highest bidder a new certificate of title was subsequently
issued in its favor
C filed an action against the spouses to collect the unpaid
cost of construction. As x and y did not have any properties to
satisfy the judgment rendered in his favor, c demanded from
psb a pro rata share in the value of the duplex apartment in
accordance with article 2242.
Issue: is c entitled to claim pro rata share in the value of the
property in question.
Ruling: no. the action filed by c to collect the unpaid cost of
the construction of the duplex apartment is far from being a
general liquidation of the estate of x and y.
Although the lower court found that there were no known
creditors other than c and psb, this cannot be conclusive. It
will not bar other creditors in the event they show up and
present their claims against psb, claiming they have also
preferred claims against the property. Consequently, the
transfer certificate of title issued to psb which is supposed to
be indefeasible would remain constantly unstable and
questionable. Such could not have been the intention of
article 2243 of the civil code although it considers claims and
credits under article 2242 as statutory liens. Neither does the
de barreto caes sanction such instability.
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