Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No.

120528 January 29, 2001

ATTY. DIONISIO CALIBO, JR., petitioner, vs. COURT OF APPEALS and DR. PABLO U. ABELLA, respondents. QUISUMBING, J.: Before us is the petition for review on certiorari by petitioner Dionisio Calibo, Jr., assailing the decision of the Court of Appeals in CA-G.R. CV No. 39705, which affirmed the decision of the Regional Trial Court of Cebu, Branch 11, declaring private respondent as the lawful possessor of a tractor subject of a replevin suit and ordering petitioner to pay private respondent actual damages and attorney's fees. The facts of the case, as summarized by respondent court, are undisputed. "on January 25, 1979, plaintiff-appellee [herein petitioner] Pablo U. Abella purchased an MF 210 agricultural tractor with Serial No. 00105 and Engine No. P126M00199 (Exhibit A; Record, p.5) which he used in his farm in Dagohoy, Bohol. Sometimes in October or November 1985, Pablo Abella's son, Mike abella rented for residential purpose the house of defendant-appellant Dionosio R. Calibo, Jr., in Tagbilaran City. In October 1986, Pablo Abella pulled out his aforementioned tractor from his farm in Dagohoy, Bohol, and left it in the safekeeping of his son, Mike Abella, in Tagbilaran City. Mike kept the tractor in the garage of the house he was leasing from Calibo. Since he started renting Calibo's house, Mike had been religiously paying the monthly rentals therefor, but beginning November of 1986, he stopped doing so. The following month, Calibo learned that Mike had never paid the charges for electric and water consumption in the leased premises which the latter was duty-bound to shoulder. Thus, Calibo confronted Mike about his rental arrears and the unpaid electric and water bills. During this confrontation, Mike informed Calibo that he (Mike) would be staying in the leased property only until the end of December 1986. Mike also assured Calibo that he would be settling his account with the latter, offering the tractor as security. Mike even asked Calibo to help him find a buyer for the tractor so he could sooner pay his outstanding obligation.1wphi1.nt In January 1987 when a new tenant moved into the house formerly leased to Mike, Calibo had the tractor moved to the garage of his father's house, also in Tagbilaran City. Apprehensive over Mike's unsettled account, Calibo visited him in his Cebu City address in January, February and March, 1987 and tried to collect payment. On all three occasions, Calibo was unable to talk to Mike as the latter was reportedly out of town. On his third trip to Cebu City, Calibo left word with the occupants of the Abella residence thereat that there was a prospective buyer for the tractor. The following week, Mike saw Calibo in Tagbilaran City to inquire about the possible tractor buyer. The sale, however, did not push through as the buyer did not come back anymore. When again confronted with his

outstanding obligation, Mike reassured Calibo that the tractor would stand as a guarantee for its payment. That was the last time Calibo saw or heard from Mike. After a long while, or on November 22, 1988, Mike's father, Pablo Abella, came to Tagbilaran City to claim and take possession of the tractor. Calibo, however, informed Pablo that Mike left the tractor with him as security for the payment of Mike's obligation to him. Pablo offered to write Mike a check for P2,000.00 in payment of Mike's unpaid lease rentals, in addition to issuing postdated checks to cover the unpaid electric and water bills the correctness of which Pablo said he still had to verify with Mike. Calibo told Pablo that he would accept the P2,000.00-check only if the latter would execute a promissory note in his favor to cover the amount of the unpaid electric and water bills. Pablo was not amenable to this proposal. The two of them having failed to come to an agreement, Pablo left and went back to Cebu City, unsuccessful in his attempt to take possession of the tractor."1 On November 25, 1988, private respondent instituted an action for replevin, claiming ownership of the tractor and seeking to recover possession thereof from petitioner. As adverted to above, the trial court ruled in favor of private respondent; so did the Court of Appeals when petitioner appealed. The Court of Appeals sustained the ruling of the trial court that Mike Abella could not have validly pledged the subject tractor to petitioner since he was not the owner thereof, nor was he authorized by its owner to pledge the tractor. Respondent court also rejected petitioner's contention that, if not a pledge, then a deposit was created. The Court of Appeals said that under the Civil Code, the primary purpose of a deposit is only safekeeping and not, as in this case, securing payment of a debt. The Court of Appeals reduced the amount of actual damages payable to private respondent, deducting therefrom the cost of transporting the tractor from Tagbilaran, Bohol, to Cebu City. Hence, this petition. Essentially, petitioner claims that the tractor in question was validly pledged to him by private respondent's son Mike Abella to answer for the latter's monetary obligations to petitioner. In the alternative, petitioner 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. Petitioner maintains that even if Mike Abella were not the owner of the tractor, a principal-agent relationship may be implied between Mike Abella and private respondent. He contends that the latter failed to repudiate the alleged agency, knowing that his son is acting on his behalf without authority when he pledged the tractor to petitioner. Petitioner argues that, under Article 1911 of the Civil Code, private respondent is bound by the pledge, even if it were beyond the authority of his son to pledge the tractor, since he allowed his son to act as though he had full powers. On the other hand, private respondent asserts that respondent court had correctly ruled on the matter. In a contract of pledge, the creditor is given the right to retain his debtor's movable property in his possession, or in that of a third person to whom it has been delivered, until the debt is paid. For the contract to be valid, it is necessary that: (1) the pledge is constituted to secure the fulfillment of a principal obligation; (2) the pledgor be the absolute owner of the thing pledged; and (3) the person constituting the pledge has the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose.2 As found by the trial court and affirmed by respondent court, the pledgor in this case, Mike Abella, was not the absolute owner of the tractor that was allegedly pledged to petitioner. The tractor was owned by

his father, private respondent, who left the equipment with him for safekeeping. Clearly, the second requisite for a valid pledge, that the pledgor be the absolute owner of the property, is absent in this case. Hence, there is no valid pledge. "He who is not the owner or proprietor of the property pledged or mortgaged to guarantee the fulfillment of a principal obligation, cannot legally constitute such a guaranty as may validly bind the property in favor of his creditor, and the pledgee or mortgagee in such a case acquires no right whatsoever in the property pledged or mortgaged."3 There also does not appear to be any agency in this case. We agree with the Court of Appeals that: "As indicated in Article 1869, for an agency relationship to be deemed as implied, the principal must know that another person is acting on his behalf without authority. Here, appellee categorically stated that the only purpose for his leaving the subject tractor in the care and custody of Mike Abella was for safekeeping, and definitely not for him to pledge or alienate the same. If it were true that Mike pledged appeellee's tractor to appellant, then Mike was acting not only without appellee's authority but without the latter's knowledge as well. Article 1911, on the other hand, mandates that the principal is solidarily liable with the agent if the former allowed the latter to act as though he had full powers. Again, in view of appellee's lack of knowledge of Mike's pledging the tractor without any authority from him, it stands to reason that the former could not have allowed the latter to pledge the tractor as if he had full powers to do so."4 There is likewise no valid deposit in this case. 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.5 Petitioner himself states 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.6 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.1wphi1.nt We do not here pass upon the other assignment of errors made by petitioner concerning alleged irregularities in the raffle and disposition of the case at the trial court. A petition for review on certiorari is not the proper vehicle for such allegations. WHEREFORE, the instant petition is DENIED for lack of merit, and the decision of the Court of Appeals in CA-G.R. CV No. 39705 is AFFIRMED. Costs against petitioner. SO ORDERED. Bellosillo, Mendoza, Buena, and De Leon, Jr., JJ., concur. ================================= Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

G.R. No. 132287

January 24, 2006

SPOUSES BONIFACIO and FAUSTINA PARAY, and VIDAL ESPELETA, Petitioners, vs. DRA. ABDULIA C. RODRIGUEZ, MIGUELA R. JARIOL assisted by her husband ANTOLIN JARIOL, SR., LEONORA NOLASCO assisted by her husband FELICIANO NOLASCO, DOLORES SOBERANO assisted by her husband JOSE SOBERANO, JR., JULIA R. GENEROSO, TERESITA R. NATIVIDAD and GENOVEVA R. SORONIO assisted by her husband ALFONSO SORONIO, Respondents. DECISION TINGA, J.: The assailed decision of the Court of Appeals took off on the premise that pledged shares of stock auctioned off in a notarial sale could still be redeemed by their owners. This notion is wrong, and we thus reverse. The facts, as culled from the record, follow. 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. The shares pledged are listed below: Miguel Rodriguez Jariol .1,000 shares covered by Stock Certificates No. 011, 060, 061 & 062; Abdulia C. Rodriguez . 300 shares covered by Stock Certificates No. 023 & 093; Leonora R. Nolasco .. 407 shares covered by Stock Certificates No. 091 & 092; Genoveva Soronio. 699 shares covered by Stock Certificates No. 025, 059 & 099; Dolores R. Soberano. 699 shares covered by Stock Certificates No. 021, 053, 022 & 097; Julia Generoso .. 1,100 shares covered by Stock Certificates No. 085, 051, 086 & 084; Teresita Natividad.. 440 shares covered by Stock Certificates

Nos. 054 & 0552 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. The actions, which were consolidated and tried before RTC Branch 14, Cebu City, sought the declaration of nullity of the pledge agreements, among others. 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 subject of these two cases."4 This decision attained finality after it was affirmed by the Court of Appeals and the Supreme Court. The Entry of Judgment was issued on 14 August 1991. Respondents then received Notices of Sale which indicated that the pledged shares were to be sold at public auction on 4 November 1991. However, before the 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. The deposited amounts were as follows: Abdulia C. Rodriguez.. P 120,066.66 .. 14 Oct. 1991 Leonora R. Nolasco . 277,381.82 .. 14 Oct. 1991 Genoveva R. Soronio 425,353.50 .. 14 Oct. 1991 38,385.44 .. 14 Oct. 1991 Julia R. Generoso .. 638,385.00 .. 25 Oct. 1991 Teresita R. Natividad . 264,375.00 .. 11 Nov. 1991 Dolores R. Soberano .. 12,031.61.. 25 Oct. 1991 520,216.39 ..11 Nov. 1991 Miguela Jariol . 490,000.00.. 18 Oct. 1991 88,000.00 ..18 Oct. 19915 Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal Espeleta successfully bidding the amount of P6,200,000.00 for all of the pledged shares. None of respondents participated or appeared at the auction of 4 November 1991. Respondents instead filed on 13 November 1991 a complaint seeking the declaration of nullity of the concluded public auction. The complaint, docketed as Civil Case No. CEB-10926, was assigned to Branch 16 of the Cebu City RTC. Respondents argued that their tender of payment and subsequent consignations served to extinguish their loan obligations and discharged the pledge contracts. Petitioners countered that the auction sale was conducted pursuant to the final and executory judgment in Civil Cases Nos. R-20120 and 20131, and that the tender of payment and consignations were made long after their obligations had fallen due. The Cebu City RTC dismissed the complaint, expressing agreement with the position of the Parays.6 It held, among others that respondents had failed to tender or consign payments within a reasonable period

after default and that the proper remedy of respondents was to have participated in the auction sale.7 The Court of Appeals Eighth Division however reversed the RTC on appeal, ruling that the consignations extinguished the loan obligations and the subject pledge contracts; and the auction sale of 4 November 1991 as null and void.8 Most crucially, the appellate court chose to uphold the sufficiency of the consignations owing to an imputed policy of the law that favored redemption and mandated a liberal construction to redemption laws. The attempts at payment by respondents were characterized as made in the exercise of the right of redemption. The Court of Appeals likewise found fault with the auction sale, holding that there was a need to individually sell the various shares of stock as they had belonged to different pledgors. Thus, it was observed that the minutes of the auction sale should have specified in detail the bids submitted for each of the shares of the pledgors for the purpose of knowing the price to be paid by the different pledgors upon redemption of the auctioned sales of stock. Petitioners now argue before this Court that they were authorized to refuse as they did the tender of payment since they were undertaking the auction sale pursuant to the final and executory decision in Civil Cases Nos. R-20120 and 20131, which did not authorize the payment of the principal obligation by respondents. They point out that the amounts consigned could not extinguish the principal loan obligations of respondents since they were not sufficient to cover the interests due on the debt. They likewise argue that the essential procedural requisites for the auction sale had been satisfied. We rule in favor of petitioners. The fundamental premise from which the appellate court proceeded was that the consignations made by respondents should be construed in light of the rules of redemption, as if respondents were exercising such right. In that perspective, the Court of Appeals made three crucial conclusions favorable to respondents: that their act of consigning the payments with the RTC should be deemed done in the exercise of their right of redemption; that the buyer at public auction does not ipso facto become the owner of the pledged shares pending the lapse of the one-year redemptive period; and that the collective sale of the shares of stock belonging to several individual owners without specification of the apportionment in the applications of payment deprives the individual owners of the opportunity to know of the price they would have to pay for the purpose of exercising the right of redemption. The appellate courts dwelling on the right of redemption is utterly off-tangent. The right of redemption involves payments made by debtors after the foreclosure of their properties, and not those made or attempted to be made, as in this case, before the foreclosure sale. The proper focus of the Court of Appeals should have been whether the consignations made by respondents sufficiently acquitted them of their principal obligations. A pledge contract is an accessory contract, and is necessarily discharged if the principal obligation is extinguished. Nonetheless, the Court is now confronted with this rather new fangled theory, as propounded by the Court of Appeals, involving the right of redemption over pledged properties. We have no hesitation in pronouncing such theory as discreditable. Preliminarily, it must be clarified that the subject sale of pledged shares was an extrajudicial sale, specifically a notarial sale, as distinguished from a judicial sale as typified by an execution sale. Under the Civil Code, the foreclosure of a pledge occurs extrajudicially, without intervention by the courts. All the creditor needs to do, if the credit has not been satisfied in due time, is to proceed before a Notary Public to the sale of the thing pledged.9

In this case, petitioners attempted as early as 1980 to proceed extrajudicially with the sale of the pledged shares by public auction. However, extrajudicial sale was stayed with the filing of Civil Cases No. R20120 and 20131, which sought to annul the pledge contracts. The final and executory judgment in those cases affirmed the pledge contracts and disposed them in the following fashion: WHEREFORE, premises considered, judgment is hereby rendered dismissing the complaints at bar, and (1) Declaring the various pledges covered in Civil Cases Nos. R-20120 and R-20131 valid and effective; and (2) Giving due course to the foreclosure and sale at public auction of the various pledges subject of these two cases. Costs against the plaintiffs. SO ORDERED.10 The phrase "giving due course to the foreclosure and sale at public auction of the various pledges subject of these two cases" may give rise to the impression that such sale is judicial in character. While the decision did authorize the sale by public auction, such declaration could not detract from the fact that the sale so authorized is actually extrajudicial in character. Note that the final judgment in said cases expressly did not direct the sale by public auction of the pledged shares, but instead upheld the right of the Parays to conduct such sale at their own volition. Indeed, as affirmed by the Civil Code,11 the decision to proceed with the sale by public auction remains in the sole discretion of the Parays, who could very well choose not to hold the sale without violating the final judgments in the aforementioned civil cases. If the sale were truly in compliance with a final judgment or order, the Parays would have no choice but to stage the sale for then the order directing the sale arises from judicial compulsion. But nothing in the dispositive portion directed the sale at public auction as a mandatory recourse, and properly so since the sale of pledged property in public auction is, by virtue of the Civil Code, extrajudicial in character. The right of redemption as affirmed under Rule 39 of the Rules of Court applies only to execution sales, more precisely execution sales of real property. The Court of Appeals expressly asserted the notion that pledged property, necessarily personal in character, may be redeemed by the creditor after being sold at public auction. Yet, as a fundamental matter, does the right of redemption exist over personal property? No law or jurisprudence establishes or affirms such right. Indeed, no such right exists. The right to redeem property sold as security for the satisfaction of an unpaid obligation does not exist preternaturally. Neither is it predicated on proprietary right, which, after the sale of property on execution, leaves the judgment debtor and vests in the purchaser. Instead, it is a bare statutory privilege to be exercised only by the persons named in the statute.12 The right of redemption over mortgaged real property sold extrajudicially is established by Act No. 3135, as amended. The said law does not extend the same benefit to personal property. In fact, there is no law in our statute books which vests the right of redemption over personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have served as the vehicle for any legislative intent to bestow a right of redemption over personal property, since that law governs the extrajudicial sale of mortgaged personal property, but the statute is definitely silent on the point. And Section 39 of the 1997 Rules of Civil

Procedure, extensively relied upon by the Court of Appeals, starkly utters that the right of redemption applies to real properties, not personal properties, sold on execution. Tellingly, this Court, as early as 1927, rejected the proposition that personal property may be covered by the right of redemption. In Sibal 1. v. Valdez,13 the Court ruled that sugar cane crops are personal property, and thus, not subject to the right of redemption.14 No countervailing statute has been enacted since then that would accord the right of redemption over personal property, hence the Court can affirm this decades-old ruling as effective to date. Since the pledged shares in this case are not subject to redemption, the Court of Appeals had no business invoking and applying the inexistent right of redemption. We cannot thus agree that the consigned payments should be treated with liberality, or somehow construed as having been made in the exercise of the right of redemption. We also must reject the appellate courts declaration that the buyer of at the public auction is not "ipso facto" rendered the owner of the auctioned shares, since the debtor enjoys the one-year redemptive period to redeem the property. Obviously, since there is no right to redeem personal property, the rights of ownership vested unto the purchaser at the foreclosure sale are not entangled in any suspensive condition that is implicit in a redemptive period. The Court of Appeals also found fault with the apparent sale in bulk of the pledged shares, notwithstanding the fact that these shares were owned by several people, on the premise the pledgors would be denied the opportunity to know exactly how much they would need to shoulder to exercise the right to redemption. This concern is obviously rendered a non-issue by the fact that there can be no right to redemption in the first place. Rule 39 of the Rules of Court does provide for instances when properties foreclosed at the same time must be sold separately, such as in the case of lot sales for real property under Section 19. However, these instances again pertain to execution sales and not extrajudicial sales. No provision in the Rules of Court or in any law requires that pledged properties sold at auction be sold separately. On the other hand, under the Civil Code, it is the pledgee, and not the pledgor, who is given the right to choose which of the items should be sold if two or more things are pledged.15 No similar option is given to pledgors under the Civil Code. Moreover, there is nothing in the Civil Code provisions governing the extrajudicial sale of pledged properties that prohibits the pledgee of several different pledge contracts from auctioning all of the pledged properties on a single occasion, or from the buyer at the auction sale in purchasing all the pledged properties with a single purchase price. The relative insignificance of ascertaining the definite apportionments of the sale price to the individual shares lies in the fact that once a pledged item is sold at auction, neither the pledgee nor the pledgor can recover whatever deficiency or excess there may be between the purchase price and the amount of the principal obligation.16 A different ruling though would obtain if at the auction, a bidder expressed the desire to bid on a determinate number or portion of the pledged shares. In such a case, there may lie the need to ascertain with particularity which of the shares are covered by the bid price, since not all of the shares may be sold at the auction and correspondingly not all of the pledge contracts extinguished. The same situation also would lie if one or some of the owners of the pledged shares participated in the auction, bidding only on their respective pledged shares. However, in this case, none of the pledgors participated in the auction, and the sole bidder cast his bid for all of the shares. There obviously is no longer any practical reason to apportion the bid price to the respective shares, since no matter how slight or significant the value of the purchase price for the individual share is, the sale is completed, with the pledgor and the pledgee not entitled to recover the excess or the deficiency, as the case may be. To invalidate the subject auction solely on this point serves no cause other than to celebrate formality for formalitys sake.

Clearly, the theory adopted by the Court of Appeals is in shambles, and cannot be resurrected. The question though yet remains whether the consignations made by respondents extinguished their respective pledge contracts in favor of the Parays so as to enjoin the latter from auctioning the pledged shares. There is no doubt that if the principal obligation is satisfied, the pledges should be terminated as well. Article 2098 of the Civil Code provides that the right of the creditor to retain possession of the pledged item exists only until the debt is paid. Article 2105 of the Civil Code further clarifies that the debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest. At the same time, the right of the pledgee to foreclose the pledge is also established under the Civil Code. When the credit has not been satisfied in due time, the creditor may proceed with the sale by public auction under the procedure provided under Article 2112 of the Code. Respondents argue that their various consignations made prior to the auction sale discharged them from the loan and the pledge agreements. They are mistaken. Petitioners point out that while the amounts consigned by respondents could answer for their respective principal loan obligations, they were not sufficient to cover the interests due on these loans, which were pegged at the rate of 5% per month or 60% per annum. Before this Court, respondents, save for Dolores Soberano, do not contest this interest rate as alleged by petitioners. Soberano, on the other hand, challenges this interest rate as "usurious."17 The particular pledge contracts did not form part of the records elevated to this Court. However, the 5% monthly interest rate was noted in the statement of facts in the 14 October 1988 RTC Decision which had since become final. Moreover, the said decision pronounced that even assuming that the interest rates of the various loans were 5% per month, "it is doubtful whether the interests so charged were exorbitantly or excessively usurious. This is because for sometime now, usury has become legally inexistent."18 The finality of this 1988 Decision is a settled fact, and thus the time to challenge the validity of the 5% monthly interest rate had long passed. With that in mind, there is no reason for the Court to disagree with petitioners that in order that the consignation could have the effect of extinguishing the pledge contracts, such amounts should cover not just the principal loans, but also the 5% monthly interests thereon. It bears noting that the Court of Appeals also ruled that respondents had satisfied the requirements under Section 18, Rule 39, which provides that the judgment obligor may prevent the sale by paying the amount required by the execution and the costs that have been incurred therein.19 However, the provision applies only to execution sales, and not extra-judicial sales, as evidenced by the use of the phrases "sale of property on execution" and "judgment obligor." The reference is inapropos, and even if it were applicable, the failure of the payment to cover the interests due renders it insufficient to stay the sale. The effect of the finality of the judgments in Civil Cases Nos. R-20120 and R-20131 should also not be discounted. Petitioners right to proceed with the auction sale was affirmed not only by law, but also by a final court judgment. Any subsequent court ruling that would enjoin the petitioners from exercising such right would have the effect of superseding a final and executory judgment. Finally, we cannot help but observe that respondents may have saved themselves much trouble if they simply participated in the auction sale, as they are permitted to bid themselves on their pledged properties.20 Moreover, they would have had a better right had they matched the terms of the highest bidder.21 Under the circumstances, with the high interest payments that accrued after several years, respondents were even placed in a favorable position by the pledge agreements, since the creditor would be unable to recover any deficiency from the debtors should the sale price be insufficient to cover the principal amounts with interests. Certainly, had respondents participated

in the auction, there would have been a chance for them to recover the shares at a price lower than the amount that was actually due from them to the Parays. That respondents failed to avail of this beneficial resort wholly accorded them by law is their loss. Now, all respondents can recover is the amounts they had consigned. WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Appeals is SET ASIDE and the decision of the Cebu City RTC, Branch 16, dated 18 November 1992 is REINSTATED. Costs against respondents. SO ORDERED. DANTE O. TINGA Associate Justice WE CONCUR: LEONARDO A. QUISUMBING Associate Justice Chairman ANTONIO T. CARPIO Associate Justice CONCHITA CARPIO-MORALES Asscociate Justice ATTESTATION I attest that the conclusions in the above Decision had been in consultation before the case was assigned to the writer of the opinion of the Courts Division. LEONARDO A. QUISUMBING Associate Justice Chairman, Third Division CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairmans Attestation, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. ARTEMIO V. PANGANIBAN Chief Justice ============================ Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. 171138

April 7, 2009

H. TAMBUNTING PAWNSHOP, INC., Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. DECISION QUISUMBING, J.: This petition for review assails the Decision1 dated June 30, 2005 of the Court of Appeals in CA-G.R.-SP No. 79116 and its Resolution2 dated January 10, 2006, denying the motion for reconsideration. The appellate court had modified the Decision3 dated March 18, 2003 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 6366. The case stemmed from a Pre-Assessment Notice4 issued by the Commissioner of Internal Revenue (CIR) against H. Tambunting Pawnshop, Inc. (Tambunting) for, among others, deficiency documentary stamp tax (DST) of P50,910. Thereafter, the CIR issued an assessment notice5 with the corresponding demand letters6 for the payment of the DST and the corresponding compromise penalty for taxable year 1997. Tambunting filed its written protest to the assessment notice alleging that it was not subject to documentary stamp tax under Section 1957 of the National Internal Revenue Code (NIRC) because documentary stamp taxes were applicable only to pledge contracts, and the pawnshop business did not involve contracts of pledge. When Tambuntings written protest was not acted upon by the CIR, the former filed a petition with the CTA appealing the assessments issued by the CIR. The CTA gave due course to Tambuntings petition for review and rendered a Decision, the dispositive portion of which reads: WHEREFORE, in view of all the foregoing, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, petitioner is hereby ORDERED to PAY deficiency VAT assessment. However, finding that petitioner is not subject to the documentary stamp tax under Section 195 of the Tax Code, Assessment Notice No. 32-97 dated April 11, 2001 for deficiency documentary stamp tax is hereby CANCELLED and SET ASIDE. SO ORDERED.8 The CIRs motion for reconsideration was denied by the CTA. Thus, the CIR elevated the case to the Court of Appeals. The appellate court ruled in favor of the CIR and decreed: WHEREFORE, premises considered, Petition for Partial Review by the Commissioner of Internal Revenue is hereby GRANTED and the assailed March 18, 2003 Decision of the Court of Tax Appeals, , in so far as it cancelled the deficiency documentary stamp tax assessment of Php 50,910.00 against respondent TAMBUNTING, is hereby MODIFIED in that respondent TAMBUNTING is hereby ordered to pay petitioner Commissioner of Internal Revenue, the amount of Php50,910.00 as 1997 deficiency documentary stamp tax assessment, plus 25% surcharge, 20% deficiency interest, and 20% delinquency interest thereon from May 11, 2001 until fully paid pursuant to Section 248 and 249 (B) of the Tax Code. SO ORDERED.9

Tambunting now before us raises the following issue: WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN FINDING PETITIONER LIABLE FOR DST ON PAWN TICKETS.10 Stated simply, is Tambunting liable for documentary stamp taxes based on the pawn tickets that it issued? Petitioner contends that it is the document evidencing a pledge of personal property which is subject to the DST. A pawn ticket is defined under Section 3 of Presidential Decree No. 11411 as "the pawnbrokers receipt for a pawn [and] is neither a security nor a printed evidence of indebtedness." Petitioner argues that since the document taxable under Section 195 must show the existence of a debt, a pawn ticket which is merely a receipt for a pawn is not subject to DST. Petitioner further contends that the DST is imposed on the documents issued, not the "transactions so had or accomplished." It insists that the document to be taxed under the transaction contemplated should be the pledge agreement, if any is issued, not the pawn ticket. On the other hand, the CIR, through the Office of the Solicitor General, argues that Section 195 of the NIRC expressly provides that a documentary stamp tax shall be collected on every pledge of personal property as a security for the fulfillment of the contract of loan. Since the transactions in a pawnshop business partake of the nature of pledge transactions, then pawn transactions evidenced by pawn tickets, are subject to documentary stamp taxes. The CIR further argues that the pawn ticket is the pledge contract itself and thus, it is subject to documentary stamp tax. After considering the submission of the parties, we find that the instant petition lacks merit. First, on the subject of pawn tickets, the Bangko Sentral ng Pilipinas Manual of Regulations for NonBank Financial Institutions12 provides: Sec. 4322P Pawn Ticket. Pawnshops shall at the time of the loan, deliver to each pawner a pawn ticket which shall contain the following: a. Name and residence of the pawner; b. Date the loan is granted; c. Amount of the principal loan; d. Interest rate in percent; e. Period of maturity; f. Description of the pawn; g. Expiry date of redemption period; h. Signature of the pawnshops authorized representative; i. Signature or thumbmark of the pawner or his authorized representative; and

j. Such other terms and conditions as may be agreed upon between the pawnshop and the pawner. Notably, a pledge is an accessory, real and unilateral contract by virtue of which the debtor or a third person delivers to the creditor or to a third person movable property as security for the performance of the principal obligation, upon fulfillment of which the thing pledged, with all its accessions and accessories, shall be returned to the debtor or to the third person.13 The pawn ticket is required to contain the same essential information that would be found in a pledge agreement. Only the nomenclature of the requirements in the pawn ticket is changed to refer to the specific kind of pledge transactions undertaken by pawnshops.1avvphi1.zw+ The property or thing pledged is referred to as the pawn, the creditor (pledgee) is referred to as the pawnee14 and the debtor (pledgor) is referred to as the pawner. Petitioners explanations fail to dissuade us from recognizing the pawn ticket as the document that evidences the pledge. True, the pawn ticket is neither a security nor a printed evidence of indebtedness. But, precisely being a receipt for a pawn, it documents the pledge. A pledge is a real contract, hence, it is necessary in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement.15 Consequently, the issuance of the pawn ticket by the pawnshop means that the thing pledged has already been placed in its possession and that the pledge has been constituted. Second, on the subject of documentary stamp tax, the NIRC provides: SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments and Papers. Upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following Sections (Emphasis supplied.) SEC. 195. Stamp Tax on Mortgages, Pledges and Deeds of Trust. On every mortgage or pledge of lands, estate, or property, real or personal, heritable or movable, whatsoever, where the same shall be made as a security for the payment of any definite and certain sum of money lent at the time or previously due and owing or forborne to be paid, being payable, and on any conveyance of land, estate, or property whatsoever, in trust or to be sold, or otherwise converted into money which shall be and intended only as security, either by express stipulation or otherwise, there shall be collected a documentary stamp tax at the following rates: (a) When the amount secured does not exceed Five thousand pesos (P5,000), Twenty pesos (P20.00). (b) On each Five thousand pesos (P5,000), or fractional part thereof in excess of Five thousand pesos (P5,000), an additional tax of Ten pesos (P10.00). (Emphasis supplied.) xxxx The law imposes DST on documents issued in respect of the specified transactions, such as pledge, and not only on papers evidencing indebtedness. Therefore, a pawn ticket, being issued in respect of a pledge transaction, is subject to documentary stamp tax. Third, the issue in this case is not novel. The question of whether pawnshop transactions evidenced by pawn tickets are subject to documentary stamp taxes has been answered in the affirmative in Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue.16 There the Court held:

xxxx Section 195 of the National Internal Revenue Code (NIRC) imposes a DST on every pledge regardless of whether the same is a conventional pledge governed by the Civil Code or one that is governed by the provisions of P.D. No. 114. All pledges are subject to DST, unless there is a law exempting them in clear and categorical language. xxxx No law on legal hermeneutics could change the fact that the entries contained in a pawnshop ticket spell out a contract of pledge and that the exercise of the privilege to conclude such a contract is taxable under Section 195 of the NIRC.17 Even so, we note that the present case was filed with the Supreme Court before September 11, 2006, when the Court resolved for the first time the matter of surcharges and interest for failure to pay documentary stamp taxes on pledge transactions in Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue. Hence, as in the said case, we can still ascribe good faith to petitioner. Consequently, the imposition of surcharges and interest in the present case must also be deleted.18 WHEREFORE, the petition is PARTLY GRANTED. The Decision dated June 30, 2005 of the Court of Appeals in CA-G.R.-SP No. 79116 is AFFIRMED with the MODIFICATION that surcharges and interest imposed on the deficiency documentary stamp tax assessment are DELETED. SO ORDERED. LEONARDO A. QUISUMBING Associate Justice Chairperson WE CONCUR: CONCHITA CARPIO MORALES Associate Justice DANTE O. TINGA Associate Justice PRESBITERO J. VELASCO, JR. Associate Justice ARTURO D. BRION Associate Justice ATTESTATION I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. LEONARDO A. QUISUMBING Associate Justice Chairperson

CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. REYNATO S. PUNO Chief Justice