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J.

GENERAL PROVISIONS

A.

Delinition of Credit or Socurity Trrnuctionr

Credit transactions include all tansactions involving the purchase or loan of goods, services or money in the present with a promise to pay oi delivir in the firture. Without a promise to pay or deliver in the future, there can be no security transaction.

B. B.l 8.2

Kinds of Bailment Contract


Those for the sole benefit ofthe bailor

I.l .2

gratuitous deposit mandatum

Those lbr the sole bcnefit ofthe bailee

2.1 2.2
8.3

commodatum gratuitous mutuum

Those flor the benefit ofboth parties

3.1 3.2 3.3

deposit lbr a compensation; involuntary deposit pledge bailments for hrre

C. C.l l.

Loan in Generel Characteristics of the Contract


Real Contract because the delivery of the thing loaned is necessary for the perfection (Article 1934: see also Article l3l6 ofthe Civil Code).

the contract

of

BPI Investment Corooretion vr. Court ofAoocak (377 SCRA 117)

A loan contract is not a consensual confact but a real contract. is perfected only upon the delivery ofthe object of the contract. The real contract of loan requires the delivery of the object 6f the contrapt for its perfection and gives rise to obligations only on the part ofthe borrower.
unilateral Contract because once the subject matter has been deliverd obligations on the part ofonly one ofthc porties, i.e., thc bonower.
MCO Ssmole Problem
Examples ol real bailment contracts arc:

2.

it

creates

a. * b. c. d.

antichresis and guaranty commodatum and pldge chnttcl mortgage and suretyship rcal cstatc rnortgag and deposit

Leqal

Basis: Articles

1934 and 2093

ofthc Civil Codc

C.2 l. 2.

Kinds of Loan

where the bailor (lender) delivers to the bailec (bonower) a nonCommodatum consumable thing so that the latter may use it for a certain time and retum the idcntical thing; and
where the bailor (lender) delivers to the bailee (borrower) mony or other consumable thing upon the condition that the lattcr shall pay the ssme amount ofthe same kind or quality.

Mutuum

MCO Samole Problem


An example of a bailment contract which is always gratuitous is:

a. b. c. .:. d. a. b. * c. d. C.3 L
2.

deJxrsit

antichresis guaranty cornrnotlatrrm

other$'ise, it becomes a contract of:


salc

usuliuct
lease

mortgage

Leqal

Basis: Articles

1933 and 1935 of the

Civil Code

Distinctions betx eetr Commodatum end Mutuum Commodatum

(Einm) things l.
2. 3.

Mutuun ([Itrlg)
subject mattcr

subject matter is non-consumable ownership retained by

is

moncy

or

other

consumable things

lender 3. essentially gratuitous


4. 5.
borrower must return the same thing
loaned may involve real or personal

owncrship tansfcrred to borrower may bc gratuitous or oneroug

4.

borrower need only pay

the samc amount of the same kind and quality


involves only personl property loan for consumption

property 6. loan flor use or temporary possession 7: right to demand the ritum of the thing
loaned before the expiration of term in case of urgcnt need

5. . 6. 7.

no right to demand Ole rcturn of the


thing loaned before the lapce of the term
agrdcd upon

8.

loss is shouldered by bailor since he is the owner

8.

bonower suffers the loss even if the loss is caused by a fortuitous evcnt

C.4 l. 2. 3.

Distinctiotrs between Commodatum @iram) and Leale (Upa)


Commodatum is a real contract, whereas lease is a consensusl corilracL

The object of commoaatdii is I nonconsumable (nonfungible) thing whcreas the object of lease may even be work or service.
Commodatum is essentially gratuitous, whereas leasc is not gratuitous.

C,5

Distinctions between Commodrtum and Ucufruct (1998 Bar E,xrm Oueslion| Commodatum

Urufruct

t.

constitutcd by law or by contract

l.

constituted by law or by contract, by testamentary succession or by prescription

creates a purely personal right to use another's property


J.
4. 5.

2.

creats a real right to the fruits another's property


may b onerous

of

always or essentially gratuitous real contract


4. 5.

consensual contract

bailec onlv acquires usc of the


thing loancd but not its fruits

the use and fruits of

usufructuary acquires the right to proprty subject of usufruct

6.

consumable goods may be the subject only when the purpose of the contract is merely for
exhibition

6.

may be

constituted

over

consumables like money

IL.
A.

COMMODATUM
Charecteristics
Gratuitous, otherwise it is a lease (Article 1935).

l.

Paiuvo vr. Court of Aooceb (430 SCnA a92)


The Kasunduan reveals that tht accommodation accorded by Pajuyo to Guevarra was not essentially gratuitous. Whilc the Kasunduan did not requirc Guevarra to pay rent, it obligated him to maintain the property in good condition. The imposition of this obligation makes the Kasunduan a contsact different from a commodatum. The effeas.of the Kasunduan are also different from that of a commodatum. Case law on cjcctment has treated relationship bascd on lolerurce as one that is akin to a tandlord+enant rclationship where thc withdrawal of permission would result in the termination of the lease. The telant's .withholding of the property would then be unlawful. This is sehled jurisprudence.
Even assuming that the rclationship between fajuyo rnd Guevana is one commodatum, Guevana as bailec would still have the duty to turn over possession of the property to Pajuyo, the boilor. The obliption to deliver or to retum the thing received attraches to confacts for safekccpinq. or cootrscls of commission, adrninistratign and commo&tum. Thcsc conaads certainlv involve the obligation to deliver or rctum the thine recsived.

of

2.

PurSr,osc is

thc tcmyrcrary usc of the thing loancd (Articlc 1935).

Catholic Vicar Anogtolic of the Mountain Province vs. Court of Aonerls (165 SCRA st5)
Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the church and the convent were destroyed. Thev never asked for the return of the house. but when tlc.v allowed is free use. thev became bailors in commodatum and the octitioner the bailee. The bailee's failure to return the subject mafter of commodatum to the bailor did not mean adverse possession on the part of the bonower. The bailce held in trust the Dropertv .subiect matter of commodatum. The adverse claim of petitioner came only in l95l when it declared.the lots for taxation purposes. The action of ptitioner Vicar by such adverse claim could not ripen into title by ,rvat'ol'ordrnury acquisitivr: prcscription becausc of thc absence ofjus! title.
3

Bailee's right to use is limited to the thing loanei and not to its fruits (Article 1935) unless there is a stipulation to the contrary (Article 1940).
Suhject mrtter is generally non-consumable things but may cover consumables purfx)sc ol' lhe contrncl is for cxhibition.

4.

if

the

I'rorlucers Brrnk ofthe Philionines vs. Court of Anoeals (J97 SCRA 65r )
Sonretime in | 979, private respondent Franklin Vives was asked by his neighbor and friend Angeles Sanchez to help her friend and towunate Col. Arturo Doronilla in incorporating his business, the Sterela Marketing and Services ("Sterela", for brevity). Sanchez asked Vives to deposit a oertain amount of money in the bank account of Sterela for purposes of its incorporation and assured that he could withdraw the same within a month's timc. Vivcs issucd a check in the amount ofF200,000.00 in favor of Sterela and instructed his wit'e to accompany Doronilla and Sanchez in opening a savings account in the name of Sterela in Producers Bank. Subsequcntly, upon leaming that Slcrcla rvas no longer holding oIlice in the address previously givcn to them, Mr. and Mrs. Vives went to the bar* but the assistant bank manager informed them that part ofthe money in Sterela's Savings Account No. 10-1567 had been withdrawn by Doronilla and the remaining P90,000.00 could not be rvithdrawn because it had to answer for some postdated checks issued by Doronilla. The bank likewise informed them that after Mrs. Vives and Sanchez opcnod Savings Aocount No. l0-1567, Doronilla opened Current Account No. l0-0320 for Sterela and authorized the bank to debit the said savings account for the amounts necessary to cover overdrawings in said current Account and was able to obtain a loan ofPl75,000.00 from Producers Bank.

Facts:

Issue:

Is the tr,.nsaction between Yives and Doronilla a conmct of mutuum or commodatum?

tleld. The transaction between Vives and Doronilla was a commodatum and not a mutuum. Therc are some instances where a commodatum mav have for its object a consumable thine. Thus. if consumable eoods are loaned only for purpqses of exhibition. or when the intention of the parties is to lend
pcriod a&reed uoon. the [<ian is a commodatum and not a mutuum.

l.

2.

fhc evidence shows that Vives agreed to deposit his morry in thc

it appear'that said firm had suflicient capitalization for incorporation, with the promise that J
savings account of Sterela specifically for the purpose of making

"accommodated" Doronilla by lerding his money without comsidcration, as a favor to his good friend Sanchcz It was however clcar to the parties to the transaction that the money would not be removed fiom Stelrela,s ssvings account and would be rcturned to Vives affer thirty days.

the amount shall be retumed within thirty (30) days..

Vio, ,.r"ly

Doronilla's attempts to rcturn to Vives the amount of I1j100,000.00 wtrich the latter deposited in Stercla's aooount together with an additioal t12,0@.00, allegedly representing interest on the mutuum, did not co,nvert the traasaction from a commodatum into a mutuum becausc the additional p12,000.00 conesponds to the fruits ofthe lending ofthe p200,000.00. Article 1935 ofthe Civil Code exoresslv states ihat the bailec in commodatum acquircs the use oi !h9lLi!c.-l9g!tgd-buf-[etlE-f!u!!s. Hencc, it rras only proper for Doronitla to remit to Vives the interest accruing to the latter,s moncy deposited with Pioducers Bank.
5.

3.

Bailor need nor be the o*ner; it is sufticient tbat he has possessory interest over subject
marter

(A(icle

1938).

commodatum is purely personal in character hence death of either the bailor or the bailee extinguishes the contract (Article 1939).

MCO Samole Problem


The death of either the bailor or the bailee extinguishes the contact of commodatum
because commodatum is a:

a. b. * c. d.

consensual conffact

bilateral contract purely personal contract reat contract

Article 1939 ofthe Civil Code


Rule: Bailee can ncither lend nor lease the object of thc contract to a third
Member of bailec's hornehold

Exception to the exception:

a) b)
B.

there is a contrary stipulation nature ofthing forbids such use.

Obligations of the Bailee


Bailee is iiable for ordirrary expenses for the use and preservation ofthe thing loaned.
General Rule:

l.
2.

Bail:e is not liable for loss or damagc due to a fortuitous event


(because the bailor retains ownership over thc thing loaaed).

Exceptions:

a)

b)

c) d)
e)

Bailee devotes thing to a different purpose Bailee keeps thing longer than the period stipulated or after the accomplishment of the use for which commoddum was )onstifutcd 'tlfrng loaned was delivered with appraisal of its value (unless there is cxp,ress stipulation to thc con&ary) Llailee lends thing to a third pcrson not a mcmbcr of his
. .

t,ousehold

ll,ailee, if being ablc to save either &e thing bononcd or his own tr ing, chose to save the latter

ri

1993

Bar Exam Ouestion

A, upon request, loaned his passenger jeepney to B to enable B to bring his sick wife from Paniqui, Tarlac to the Philippine General Hospital in Manila for tcafincnt. On the way
back to Paniqui, after leaving his wife at the hospital, people stopped the possengerjeepney. B stopped for them and allowed them to ridc on board, accepting payment from them just as in the case of ordinary passenger jeepneys plying their route. As B was crossing Bamban, thore was onrush of lahar from Mt. Pinatubo. The jecp that was loaned to him was wreckcd.

l. 2. L L 2. 3.

What do you call the contract that was entered into by

and

B with respect to the


wife to Manila?

passenger jeepney that was loaned by A to B to transport the latter's sick ls B obliged to pay A for the use ofthe passengel jeepney? ls ll liablc to A lirr the loss ofthejeepney?

Answer: Commodalum (Art. 1993, Civil Code) B is not obliged to pay A for the use ofthe passenger jeepney because commodatum is essentially gratuitous. (Art. 1933, Civil Code) B is liablc because he devoted the thing to a purpose different from that for which it has been loaned (Art . 1942, par.2, Civil Code) Altemative Answer:

B is not liable because an obligation which consists in the delivery ofa determinate thing shall be extinguished if it should be lost or destroyed without the fault ofthe debtor, and before he has incuned in delay. (A(. 1262, Civil Code)
1983 Bar Exam Ouestion

A borrowed B's truck. During a fire whioh broke out in A's garage, he had time to save only one vehicle and he saved his car instead of the truck. Is he liable for the loss of B's truck? whv?
Answer:

A is lisble for the loss of B's truck. The bailee in commodatum is liable for thc loss of the thing loaned even if the loss is due to a lbrtuitous event where, being ablc to save it or his own thing, he chose to save the latter.

3.

Bailees are solidarily liable when the thing is loaned to two or more bailees in the same contracl.

Note:

l.

Bailee is not liable for ordinary wear and tear due to us ofthe thing loaned.
Exceptions:

a. b.

he is guilty of fault or negligence if he devotes thing to any purpos different from that has been loaned

if

for which it

2.

Bailee cannot retain the thing loaned as scurity for claims lrc may hsve against the bailor, even though by reason of extraordinary expenses.

C. l.

Obligations of Bailor

To allow the bailee the use of the thing loancd for thc duration of period stipulated or until the accomplishment of the purpose for wtich commodatum was constitutcd.

a.

nrgont nccd
precariuno b.1

&ring wlilch tirnJthe eommodatum

is suspend.d

b.

b,2 b.3

ifduration ofthe confiact has not been stipulated ifusc or purposc of the thing has not been stipulated if use of thing is merely tolerated by the bailor
I

MCO Srmole Problem


Precarium arises:

a. b. c * d. 2.

ifthe use of the thing pledged has not been stipulated by the parties ifthe duration ofthe contract ofmutuum has not been itipulited by the parties ifthe purpose ofthe thing subjea ofdenosit has not been stipulated by the parties if the use of the thing subject of commbaatum is merely toreiated by t-he bailor.

Leml Basis; Article 1974 of the Civil Code


To refund exhaordinary expenses for fie preservation is notified before the expenses were incurred. '

ofthe thing loaned provided bailor

Exception:

urgent need hence no notice is necessary

To refrurd 50% of the extraordinary (i.e. caused by fortuitous went).

3'

.*p"n$s arising from actual

use of the thing loaned

Exception:

confary stipulation

4.
Note:

To pay damrges to boilee for known hidden flaws in the thing loaned.

l. Bailor

has the right to dcmand rotum

ofthc thing if bailec commirs any act of ingratitude.

III.

A.

Delinition

Mufuum is a contract whereby one of the parties delivers to another party, money or other consumable things with the understanding that the same amount of thc same kind and quality shall be paid.

Borrower acquires ownership of the thing and can therefore dispose bonowed. There is no criminal liability for failure to pay one,s debt.
Garcia vs. Thio (5r8 SCRA 433)

B. I

Characteristics

of the thing

A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object of the contact. Upon delivery of the object of the contract of loan (in this case the money received by the debtor when the checks were encashed), the debtor acquires ownership of such money or loan proceeds and is bound to pay the creditor an equal amount.
Delivery is the act by which the res or substance thereof is placed within the actual or constructive possession or control of another.

r'

fl--r1------- *' -'- "-''-*-'--T-peoole


:
0camoo III vs. (5,l3 SCRA,tSZ)
1953 of the Civil Code provides that ..[a] person who receives a loan of moncy or Bny other fungiblc thing acquires thi ownership thercof, anrt is bound to pay to the creditor an equal amount of the,same kind and quality Hcnce, pctitioner ocampo conectly argued that the NALGU funds shid their public charactr when they were lent to LTFI as it acquired ownership of the funds with an obligation to repay the province of rarlac the amount borrowed. The relationship between the province of rarlac and the LTFI is rhat of a creditor and debtor. Faiture to pay the indebtedness would give rise to a collection suit.

Art

(422SCRA459)

The DBP contends that the Special Loan program (SLp) is merely a normal loan transaction, akin to the loan granted by the-GSIS, SSS and the Oep Provident Fund. The records show otherwis. In roan transaction or mutuum, the borrower or debtor acquires owncnhip of the amount borrowed. As the owner, the debtor is then free to dispose of ot to ut ize the sum he loaned, subject to the condition thar he should later retum the amount with the stipulatei intcrest to thc crcditor. ln contrast, the amount borrowed by a qualified employee undcr the sLP was not even reteased to him. It merery allowed the debtor-employee to "bonod' a portion of his gratuity solely for tire purpose of inraesting it in certain instruments specified by DBp. 'ihe debtor-employee courd not dispose ofor utilize the loan in any other way and never had any iontrol or custody ofthe amount he supposedly borrowed.

? . _If the thing loaned is money, payment must be made in the currency which is legal renler in the Philippines and in case of extraordinary deflation or inflation, the 6asis of payrient shall be the value ofthe currency at the time ofthe creation of the obligation.
If fungible thing was loaned, the bonower is obliged to pay the lender another thing the same kind, quality and quantity.
Reves vs.

3.

of

Court of Apneals (383 SCRA 47r)

An acknowledgment receipt in the nature of a promissory notc is valid . and binding

between the parties who executed it, as a document ividencing the loan agreement they had entered into. Said document reads:

"This is to acknowledge receipt (of) the sum of five hundred thousand


pesos (F500,000.00) from (?) broken down as follows:

3116l$---P300,000.00711_9J9_0_c-Ltt_1_$a1-l

7/14t90

P200,000.00 + tlq0.00g

Total .amt. P500,000.00, with corresponding interest at five percent (5%) per month due and payable every 15u day ofthe month for a period of six months.',

The ststement of the interest payments negates the allegation that merely an aoknowledgnent recgip and not a promissory note.

it

is

-n-l
C. l. 2.
Dirtinctlonr between Mutuum (Utang) and Lease (Upa)
In mutuum, the object is money or any consumable (fungible) thing, whereas in lease, the object may be any thing whether movable or immovable, frmgible or nonfungible.

_I

In mutuum, the thing loaned becomes the property of the debtor, whereas in lease, the owner does not lose his right ofownership.

lJ*'rnaq vr. Court of Aooeals


281 SCRA 223nO991)

.therewasnotransferofownershipofthemoneydelivered,Liwanagisliablefor
conversion under Art. 315, par. 1(b) of the Revised Penal Code.

Neither can the transaction be considered a loan, since in a contract of Ioan once the money is received by the debtor, ownership over the same is transfened. Being the owner, the borrower can dispose of it for whatever purpose he may deem proper. In the instent petition, however, it is evident that Liwanag could not dispose of the money as she pleased because it was only delivered to her for a single purpose, namely, for the purchase of cigarettes, and if this was not possible then to retum the money to Rosales. Since in this case

3.

lease, the relationship that is created vs. Gonzales,50 Phil. 558). r

In mutuutn, the relationship which is created is that of creditor and debtor, whereas in ii that of landlord and tenant or lessor and lessee (Tolentino

Prudential Bank and Trugt Comornv (now Bank of the Philinnine Islandg) vs. Abasolo (631 SCRA 367)

Facts: The heirs of konor Rosales authorized Liwayway Abasolo to sell the properties of the deceased in Sta. Cruz, Lagura. Corazon Marasigan, an interested buyer, proposed to Liwayway to mortgage the suhjccl propcrties to petitioner Prudential Bank and Trust Company (PB'I'C) ro which rcsponilcnt
agreed on the condition that the proceeds would be paid directly to her. In the process, PBTC employee Norberto Mendiola advised Liwayway to transfer first the properties to Corazon for the immediate processing of the loan rvith the assurance that the proceeds would be directly paid to her. Without requesting for a bank guarantee, respondent acceded to the proposal. Upon Corazon's execution of a real estate mortgage on subject properties to secure the loan, -proceeds PBTC approved the loan and ieliased th" to her. Leaming ol the release of the proceeds to Corazon, Liwalrray demanded payment trom the latter. Corazon failed to fully pay the purchase price of the properties prompring Liwayway to file a complaint for collection of sum of money and annulment of sale with damages against Corazon and PBTC with the Regional Trial Cou( of Sta. Cruz, laguna. The trial court decided in Liwayway's favor and lbund PBTC subsidiarily liable. On appeal, the Court of Appeals affirmed the trial court's decision, hence the present petition.

Issue: Is petitioner PBTC subsidiarily liable with Corazon for the payment of the balance ofthc purchasc price to Liwayway? Rulinq: No, PBTC is not subsidiarily liable.

r1_E

the seller Liwayway, petitioner has no inherent obligation lo release thc proceeds of the loan to her. To a banking institution, rvell-dctlned lendinq policies and sound lending practices are essential to prlorm rts lending function
effectively and minimizc the risk inhcrcnt in any cxtcnsron ol'crcdit.
arril deliberate act olconlerring a lhvor u;xrn hcr rnust trc prcscnt. A rvrittcrr rctlucsl would have sutllced to prove this, given the naturc ol"a banking business, not to mention the amount involved. Under this fold lalls lhe issuance by a bank of'a guarantee which is cssentially a promise to repay the liabilities ofdebtor, in this case Coruon. lt would be contrary to cstablishcd banking practice rl'Mendiola issued a bank guarantee, even il no rcquest to tha.t ollbct was made. Srncc it has not been established that pctitioncr had an obligatitin to Lilvayrvay, thcrc is no Liwayway's claim should onlv be dircctcd against Coraz,rxr. breach to speak Petitioner cannot thui be held subsidiarily liable.

ln.the absbnce

ofa

lender-borrower relationship betrveen petitioncr anrl

For [.irvayrvll' to pr(]\'c lrcr clarnr gulnst l)ctltrotrcr, a clear

of

'l

Citibank. N.A. vs. Sabeninno (sl4 s('RA 44r)


Although thc Supreme Court conccdes that all thc I'hilippinc branchcs ol' Citibank should be treated as one unit rvilh rls head olllce, it cannot be persuaded to declare that thesc Philippine branchcs are likervrse a single unit rvith the Geneva branch - the ollsetting or conrpcnsution ol'a borrowcr's loans with Citibank-Manrla using her dollar accounls with ('rtibank-(icncva cannol bu effected. 1'he parties cannot be considcrcd princrpal crcdrlor o['the other. As for the dollar accounts, respondent was the creditor and Citibank-Geneva was the debtor; and as for thi outstanding loans. pctrtioncr Citibank, particularly 'was Citibank-Manila, the creditor hnd respondent was the debtor. Since legal compensation was not possible, petilroner Citibank could only usc resgrndcnt's dollar accounts with Citibank-Ceneva to liquidate hcr loans if she had exprcssly authorized it to do so by contract.

Citibank N,A,

vs. Cebamonqan

(488 SCRA 517)

The time deposit subject matter of herein petition is a simple loan. The provisions of the New Civil Code on simple loan govem the contracl bctwecn a bank and its depositor. Specifically, Art. 1980 thereof catcgoricallv providcs that "... savings . . . dgposits ofmoney in banks and.sinrilar rnstitutions shall bc govemed by the provisions conceming simple loan." Thus, the relationship between a bank and its depositor is that of a debtor-creditor, the depositor being the creditor as it lends the bank money, and the bank is the debtor which agrees to pay the depositor on demand.

In the province, a farmer couple borrowed money from the local merchant. To guarantee paymcnt, they left the Tonens title of their land with thc merchant, for him to hold until they pay

ttr locn.

Is there a

a. b. . c. d.

contract of pledge, contract of mortgage, conlracl ofantichresis. or none of the above?

ln

FI

:*.r:'Explain. T'here is no plcdgo bccausc only movablc propnv nray bc plcijgcd IArl. -lo.r.l. NCC). lf at all, there was a plcdge of the papr or document constituting thc 'l orrcns titlc, as a movable by itself, but not of the land which the titlc represents. There is no mortgage bccause no dced or contract was executed in the manner rcquired by law lbr a mortgage (Articles 2085 to 2092,2124 to 2l3l). l'here is no contract of antrchrcsis bccausc no right to thc ttuits of rhc property was given to the creditor (Arr. Z t :: t. Therefore, lhe ansrver is none of the ahor e.

Answer:

United Coconut Planters Bank vs. Beluso (s30 scRA s67). Opening a credit line does not create a credrt transaction ol'loan or muluum, since the former is mcrely a prcparalory conlract to the contract ol'loan ot nrutuutrt - under such credil line, thc bank. is mercly obligcd, lirr thc considerations spccified therelbr, to lend to thc othcr party amounts n()t exceeding the limit provided.

D. l.
r956)

Rules on Interest

In order that interest nray bc chargcd, it nrust bc csprossll stipulatcd in wrilrng (n rlielc

a) b) c) d)
'(tq

Garcia vs. Thio,518 SCRA 431 (2008) Ching vs. Nicdao,522 SCRA 316 (2008) Philippine Phosphate Fertilizer Corporation vs. Kamalig Rcsources, Inc., 5.10 scRA r39 (2008) Republic vs. Unimex Micro-Electronics CmBll, 5 l8 SCRA l9 (2007)

Exceptions:

l.

Debtor in delay is liable to pay lcgal interest as indemnity, lirr damages even in the absence of stipulation for the payment ol intercst (Articlo
220e1

F;

tr.

F,
il-

,i!

lr.
.

a) Eusebio-Calderonvs. People,44l SCRA l-17(2005) b) Difro vs. Jardines,43l SCRA 226 (7006) c) Ongson vs. People,466 SCRA 656 (2006) d) Citibank N.A. vs. Cabamongan. 4{18 SCRA 517 (2007) ' e) JL lnvestment and Dcvelopment, Inc. vs. 'l'endon

ir
11

0' lilll,li,lil;1"';;'# '.,.,-f,.*,fillJJ,*. vs c.urr or


C)
2,
.
Appeals,494 SCRA 25 \2007) United Coconut Planters Bank vs. Beluso, 530 SCRA 567 (2008)
Interest due shall eam interest flnterest is compounded fiom the trme it is judicially demanded although the obligation may be silent ufxrn this

{r

.it
''1

t',i
-n:.i

point (Article 2212) or when there is express stipulalion (Article


l e5e)1.

rl

BPI Familv Savinss Bank Inc. vs. First Metro Investment Corporation
(429 SCRA 30) Whcn the obligation is breachcd, and il consists in thc paymcnt ol'a sunr of nroncy, i.e., a loan or lbrbcarance of monoy, thc intcrcsl duc should hc thal which may havc been stipulatcd in writing, and the intcrest due shall itscll'earn legal interest from lhc timc it is.ludiciallv dcmandcd.

Torinq vs. Ganzoa0lan


(s6E SCRA 376)

ln a loan or
stipulated
annum.

in

forbearance of money, the intcrest duc should be that writing, and in the absence thereofi, the rate shall be l2o/o per

E.
f,,.1

Relevant Jurisprudence on Mutuum

lnterest Rates

thiliooine Rabbit Bus Lines. Inc. vs. Cruz


(143 SCRA rsE) and 'l'io Khc Chio vs. Court of Anpcalr (202 SCRA119)

xxx The legal rate of interest is six (6%) percent per annum, and not twelve (12%) percent, where a judgrnent award is based on an action for damages for personal injury, not use or forbearance of money, goods or credit.
JL Inv6tment rnd Developmcnt Ire. yl. Tendon Philiopiner. Inc. (sl2 scRA E4)
:

ri

t,

The lTYo rate of interest is proper only when the obligtion consist of loans or forbearance of money, in the abseoce of stipulation to trc contry. If the obligation is otherwise, as in this crse, the applicable rate is 6% pcr annum computed from the time of extrajudicial or judicial demsd. Upon thc finelity of this ruling, the entire amount due shall oarn interest at 12% pi:r annum rntii its
satisfaction.

i,
i..

f,astern Shinnins Linc+ Inc. v* Court ofAnperb (234 SCRA 78) and Almedr ir. Ceriio (39SSCRA t{4) aod Vicente vs. Planteru Dcvelooment Bank (3e6 SCRA 2E2)

l. 2.

In a loan, the interest due shoUId be that stipulated absence thereof, the rate shall be I2% pcr annum.

in rrriting and in thc

In case of other obligations, interest on the amount of damages may be imposed at the court's discretion at the rate of6% per annum. When the money judgrnent becomes final and e)rccutory, the rate of legal interest shall be l2o/o pr annum from such finality utit its satisfaction, the iiiterim period being equivalent to a forbearaoce of
credit.

3.

Peooie vs. [qlesia (365 SCRA ls6)

When the judgment of the Court awarding a sum ol' money becomcs final and executory, the rate ot'legal interest shall be l2% per annum liom such finality until its satisfaction. The interest should thus be compuled liom rhc time of the finality of the decision. and not liom tho Iiling of the complaint
against accused-appellant.

Schmitz Transoort

Brokerase ('orooration vs. Trsnsnort Venturc. Inc. (4s6 SCRA ss7).

&

As for the court a quo's award of interest on the amounr clairncd, thc same calls for modification following thc ruling in Easlern Shipping t.ines, Inc. vs. Cou( of Appeals that when the demand cannot be rcasonably established at the time the demand is made, the interest shall begin lo run not from the time the claim is made judicially or extrajudicially bur frorn the dare the judgment of the court is made (at which time the quantification of damage may be deemed to have been reasonably ascertained).

Korcrn Airlines l.s. ('ourt of Auoctls (2J.r s('RA 7r7)


Legal interest ol6% p.a. on thc atr()unt ol'tlantagcs in lhvor ol't littgant should commence from rendition ol.iudgrnent ol'thc trial court instcad ol'thc date of filing of the complaint. Food Terminal. Inc. vs. Court of Anneals (262 SCRA 339) 8nd Heirs of Isnacia Asuilar-Reves vs. Miiares (410 scRA e7)

\*
,i

When an obligation not constituting a loan or fbrbearance of'money is


breached, then an interest on the amount o{'damages awarded may be imposcd at the discretion ofthe court at the rate of 60,6 per annum in accordance with Art.

lf'

2209 of the Civil Code. Indeed, the monetary judgment in favor of privatc respondent does not involve a loan or iorbearance of money, hence the propcr imposable rate of interest is six (6%) prcent. However, as declared in the case ofEastern Shipping Lines, Inc. vs. CA (234 SCRA 78), the interim period frorn the finality of the judgment awarding a monetary claim and until payment thereof, is deemed to be equivalent to a lorbearance of'credit. Thus, from the time the judgment becomes final until its full satisfaction, the applicablc rale of legal interest shall be twelve percent (12%).

Petitioner Food Terminal was ordered. to pay the private respondent actual damages, uneamed profits and atlomey's fees. These amounts shall earn interest at the rate of SIX PERCENT (6%) per annum from May 15, I984 until fully satisfied, but before judgment becomes final. From the date of finality of the judgment until the obligation is toully paid by petitioner, a TWEI-VE PERCENT (12%) interest, in lieu of the SIX PERCENT (6%) interest, shall be
imposed.

ti

Philioniae Airlircrl, Ilc. v!. Court of Aluk (27s SCRA 621) end Lin vr. Court of APneals (373 SCRA 394) nnd Terminal Faciliticr ud Scrvir:es Corooration vr' Philiooine Ports 4qthoritY (378 SCRA 82)
We agree, however, with the contention that the intLerest of 6% imposed by respondent court should be computed from the date of rendition ofjudgrnent and not from the filing of the complaint. The rule has been laid down in Eastcm Shipping Lines, Inc. vs. Court of Appeals, et al. (234 SCRA 78) that:

"Wlrcn rn obligation, not constitutiog a loan or lirrbcarance of money, is hrcachcd. an interest on the amount of damages may tle imposed at the discretion of thc court at the rate of 6%o pr annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand cun be cstablished with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the lime the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such ce(ainty cannot be so reasonably established at the time the denrand is made, th{j interest shall begin to run only from thc date the judgnrent of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The aphul base for the cornputation of legal interest shall, in any casc, bc on the amoutrt finslly
adjudged

"

This is because at the time of the filing of the complain! the amour( of damages to which plaintiff may be entitled remains unliquidatcd sni not known, until it is definitely ascedained, assesscd and detcrmined by thc cowt, and only after the presentation of proofthereof National Commercial Bank of Saridi Arabir vs. Court of Aooealr (437 SCRA 1)

In Eastern Shipping Lines, Inc. v. Court of Appeals, this Court formulated the rules on the imposition of the proper interest on amounts due, and at no instance was interest to run until demand has bcen ma& abscnt any egreement htween the parties.
Santos

Venturl Hocorne Fourdation. Inc. vs. Sutc


(441 SCRA 472)

' '

rnd
Eurcbio-Crlde ron vs Pconle (441 SCRA 137)

In the absence of agreement, the legal rate of interest shall pevail. The legal interest for loan as forbearance of money is l2Vo pu annum to be computed from default, i,c., from judicial or exra;udicial demand under and subject to the provision ofArticle I 169 ofthe Civil Code.

l4

t--

_=--:=_

ffi
a)
4o/o

(sJ9 SCRA 226)

The trial courl ts vestcd rvrth discrctton trr 3\r.0[J thc lcgal rrrlcrcst despite the tbct that it rvas not prayc<.l lirr in thc (irrnJrlainl.

Slmmrtioo:

'

The Supreme Court ruled that the fbllowrng interest rales are cxcessivc, unconscionable inordinate and the courts will temgrer intercst rates whcn nccessary urd

pr

month or 4V/o per annum (Bulos, Jr. vs. Yasuma, 527 SCRA 727

b)

c)
d)

[2008]) l0% per month and even the reduced rate of 6% per month (Macalalag vs. People, 5l I SCRA 400 [2008]) l0% interest per month (Svendsen vs. People, 546 SCRA 659 [2008]) 360/o per annum (Poltan vs. BPI lramily Savings Bank, lnc., 517 SCRA 430
120081)

e)

18% per annum (Trade and Inveslment Devclopment Corporalion vs

i) j)

Robleft Industrial Construction Corporation,490 SCRA I [20071) 9% per month or 108% per annum or I 0r)i, pcr nronlh or I 20ori, pcr arrnurn (Difro vs. Jardines,43l SCRA 226 [20061) g) A combined interest and penalty rate at l0% per month or 12070 per annum (Dio vs. Japor, 463 SCRA I 70 [20061) h) 160/o per month and a penatty charge ol'50,i, per month in addition to regular interest and attorney's fees (lmperial vs. Jaucian, 427 SCRA 517 [2005]) l0% and 8% interest rates pcr month on a one-rn illion-pcso loan (Cuato vs. Salud,421 SCRA 278 [2005]) l0o/o compounded monthly intercst ancl l07o surcharge pcr month and 360/o interest per annum (Ruiz vs. Court ofAppcals,40l SCIIAll0[20041) k) 3% and 3.81% per month interest ('loring vs. Ganzon-Olan, 568 SCRA i76 [200e1)

f)

"

Solanson vs. Salazar (360 SCRA 379)

t:

A stipulated interest rate ol 60zo per month or 72o/o per annurn is definitely outrageous and inordinate - an interest of l2o,'o grr annum is deemed fair and reasonable.
Ruiz vs, Court of Apoeals

i
.A :;1,

(40r scRA 4r0)

;'.

h; iir

ii
lr ili *
trl
1r

The Supreme Court struck down as invalicl thc l0% compoun<.lcd monthly interest and thc l0% surchargc per month stipulated in the promissorv notes and equitably reduced the 3% per month or 36%o pr annum inleresr present in all four (4) promissory noles to l9lo per month or l27o per annum
interest. The Highest Tribunal.has previously invalidated a stipulated 5.SYo per month or 660/o per annum interest on a P500,000.00 loan in Medel vs. Court of Appeals (299 SCRA 481) and a 60/o per month or 72o/o per annum rnterest on a P60,000.00 loan in Spouses Solangon vs. Salazar (360 SCRA 379) for being excessive, iniquitous, unconscionable and exorbitant. In both cases, the Supremc Court reduced the interest ratc lo 1296 pcr annum. 'lhe l% penalty surcharge on the principal loan for every month ofdcfault is valid.'

.il

il cr
T{

fr
:fl

Tl. 2.

Ilocriel v* Jaucirn
(427 SCRA

5l7)

An interest rate of 16 percent per month is iniquitous, unconscionable

and exorbitant and must bc equitably rcduccd.

A penalty charge of 5 pcrcent per month, in addition to rcgular intercsts and attomey's fees, is iniquitous and unconscionable.
Cuaton vr. Srlud (421 SCRA 27r)
lnterest rates al l}Vo and8To per month'on a one-mitlion-peso loan is excessive, iniquitous, unconscionable and exorbitant and their reduction to 12% per annum is fair and reasonable. Stipulations authorizing iniquitous or unconscionable interests are contrary to morals, ifnot against the law.

Arrofo vs. 0uiilo


(449 SCRA 2E4)

The Court of Appeals ordered Quifro to py 7o/o interest per month on the P15,000 loan from Renato, computed from I I April 1990. This amounts to 84olo interest per annun, which is unconscionable. This Court dcems it equitable to reduce this interesl rate to l8% per annum.

E.L

Urury Law

'

Lirm [.lw vr.Olvmoic Sawmlll (r29 SCRA di9)

Usury is now legally non-existent. Interst can be charged as lender and borrower may agree upon. The Rules of Court in regard to allegations of usury, being procedural in nature, should be considered repealed with retroactivc

effea.
Philiooine National Bank vs. Encina (s44 SCRA 608)
The Usury Law had been rendersd lggally ineffectivc by Resolution No. 224 dated 3 December 1982 of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which took effect on I January 1983 and rcmoved the ceiling on interest rates for sccured and unsecured loans regardless of maturity. The effect of these oirculars. is to allow the parties to agrce on any intrest that may be charged on a losn. The virtual repeal of thc Usury taw is within the range ofjudicial notice which courts are bound to takc into rccount. After all, the fundamental tenet is that the law is deemed part of the contnct.

Medel w. Court of Aoperlg


(299 SCRA,l8l

The stipulated rate of interest al 5.5o/o per month on the P500,000.00 Ioan is excessive, iniquitous, unconscionable and exorbitant. Howwer, the rate cannot be considcred "usurious" because the Supreme Court has consistently held that Circular No. 905 of the Cental Bank, adopted on December 22, 1982,

the Usury Law is now "legally inexistent".

'l'rial Court ot' Security Bank and Trust Company vs. Regional Makati, Branch 61, thc Court hcld that CU Circular No. 905 did not repcal nor in any way amend the Usury [.aw but simply susgrcnded thc latter's clTectivitr A Ccntral Bank Circular can not repcal a law Only a lau'can rcpcal anolhcr law. In the recent case of Florendo vs. courl of Appeals, the court rcitcrated the ruling that by virtue of CB Circular 905, thc Ilsury [.arv has bccn rcndcrcd ineffective. usury has been legally non-existent in our junsdiction. Interesl

In

cdn now be charged as lender and borrower may agree upon'

Mortsase Bank. Dagulrar City f,ranch

(sls scRA

79)

The 24% interest rate agreed upon by the parties does not violate thc Usury Law, as amentlcd by P.D. I16. [ror somctimc now' usury has bcen lcgally non-existcnt and that interest can now he chargcd as lcnder and borrorvcr rrav llv agree upon. By no means is an intcrest ralc ol'249ir l(r rttttt agrcctl upoll the parties considcrctl unconscionahlc or cxccssivc

r"i#:iffii}While the pa(ies are trce to stlpulate on thc interest to bc imposed on monetary obligations, the Court will temper interest rates if they are Bank unconscionable:. Even if the Usury Law has been suspended by Ccntral Circular No. 905-82, and parties to a loan agreement have been given wide latitude to agree on any interest rate, rvg have held that stipulatcd interest rates are illegal iithey are unconscionable Consequently, in our vierv, thc Court of Appeali ened in sustaining the trial court's decision upholding the stipulatcd inierest of 3% and.3.gl% lper month). Thus, we are unanimous norv in our o'lo per month' in nrling to reduce the abovi stipulated interest rates to- I (2003) confirmity with our ruling in Ruiz v. Court of Appeals' 401 SCRA 410 Nothing in cB circular No. 905, Series of 1982 grants. lcnders cartc blanchc authori! to raise interest rates to levels which rvill either cnslave their bonowers or lead to a hemorrhaging of their assets'

1:

1.

ti

(263 SCRA 483)

I
ti.i
.'i
I

;;-erest rates of pror.nissory notes and thereby impose a l27o interest on the of a higher rare? i;;, i, the abslnce of evidence lustitying the imposition petition is whether or not the Staiea otrcrr rise, the sole issue to be settled in this petitioner bank and respondents 23o/o nteof interest pr annum agreed upon by
is allowable and not against the Usury Law'

tssue:DotheCourtshavelhcdiscrctiontoarbilrarilyovcrridestipulatcd

't
i

'ti
,i,
iii'
i

Rulins: l.

ffi ""rm

;,
1ll

the From the eximination ofthe records, it appears that indeed is 2370 rate of interest as stipulated on thc threc (3) prornissory notes -per 1982 Central Bank Circular No. 905 which took effect on 22 December partics to stipulatc licclv rcgardrng any subsctluent ullorn, f<irbearancc ol' "ontroating in the-iniercst rate that shall accruc o't a loan

udiu.,ran

.r

l7

F'

money, goods or aredits. ln fine, they can agre;, to adjust, upward or downward, the interest previously stipulated.

2.

All the promissory notes were sigred in 1983 and therefore, were already covered by CB Circular No. 905. Contrary to the claim of respondent court, this circular did not repeal nor in any way ar4cnd the Usury Law but simply suspended the laner's effectivity.
The rate of interest was agreed upon by the parties freely. Significantly, respondent did not question that rate. It is not for respondent u quo io "or.t changc the stipulation in the contract where it is not illegal. Furthermore, Artiole 1306 of the New Civil Code provides that contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to laq rirorals, good cuitoms, public order, or public policy. We find no valid reason for the respondent court a quo to impose a l2Yo rale of interest on thc principal balance owing to the petitioner by respondent in the presence of a valid stipulation. In a loan or forbearance of money, the interest due should be thai stipulated in writing, and in the ahsence thereof, thc ratc shall be 12% per onnum. Hcnce, only in the absence of a stipulation can the court impose the l2% rate of interest.

3.

'

Der,clopment B.trk of rhe ihlliopln$ ys, Perez (442 SCRA 238)

In usurious loans, the ontire obligation dces nol become void becausc of an egreement for usurious interest; the unpaid principal debt still stands and remains valid, but the stipulotion.as to tlrc usurious interest is void. Caroo vs. Chge (471 SCRA 47r)

A usurious loan transaction is not a complete nullity but defective only with respect to the agreed interest.
Since the mortgage contract derives its vitality from the validity of the

principal obligation, the invalid stipulation

on

interest rate

is

similarly

insu{ficient to render void lhe ancillary mortgage contract. PNB vs. CA (238 SCRA 20)
Presidential Decree No. 1684 and CB Circular No. 905 did not authorize either party to unilaterally raise the interest rate without the other's consent.

8.3

Escrletion Cleure

Inruhr Brnk of Asir rnd Amerlcr vr. Spousg Srhz.r (rs9 scRA 133)
It is the rule that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term controcts. However, the enforcement of such stipulations are subjsct to
certain conditions.

t8

Baaco Filioiro v* Nrvarro (1s2 SCRA 346) and

FNB vr. Irtermedirte Aorctlate Court (r&3 scnA l3r)

An escalation clauge can bc valid only if it also includcg a de+scalalion clause or a stipulation that the rate of interest agred upon shsll be rcduced in the event that the maximum rate of intercst is rcdrrced by law or by the Monctary Board.

Llorin vs. Court of Auperlt (2lE SCRA 436)

An escalation clause must be bilateral hence


PNB vs Court of Aooeals (196 SCRA s36)

it

must provide for

reduction or de-cscalatron oFinterest for said clause to be valid.

ln order that obligations arisrng from contracts may have the force of
law between the parties, there must be mutuality between the parties bosed on their essential cquality. A contract containing a condition which makes is fulfillment dependent exclusively upon the uncontrolled will of thc contracting parties, is void. Hence, even assuming that the loan agrcemcnt bctwcen the PNB and the private respondort grvc the PNB a licenr (altho4h in fact thcrc whs none) to increase the intercst rate at will during the term of thc loan, that license would have bcen null and void for being violative of the principle of mutuality essential in conkacts. It rrculd have invested the loon arccmcnt with the churacter ofa contract of edhesion, wherc the parties do not bsrgain oD egud f(roting, the weaker party's (the dcbtor) participation being rcduccd to thc altemative *to take it or leave it". Such a contract is a veritablc trap for the weaker party whom the courts of justice must protect against abuse and
imposition. Almeda vs. Court of Aooerlr (256 SCRA 2e2) Moreover, respondent bank's reliance on C.B. Circular No. 905, Serics 1982 did not authorize the bank, or any lending instituiion for that mattcr, to

of

progressively increase interest rates on bonowings to an extent which would have made it virtually impossible for debtors to comply with their own obligations. True, escalation clauses in credit agleements are pcrfectly valid and do not conmvene public policy. Such clauses, however, (as arc stiprlations in other contracts) are nonetheless still subject to laws and provisions govcming agreements between parties, which agreements while thcy may bc thc law betwccn the contracting parties implicitly incorporate provisions ofcxisting law. Conscquently, while the Usury Law ceiling on interest rates was liffed by C.B. Circular No 905, nothing in thc said circular could possibly bc rcad as granting respondent bank cartc blanche authority to raise intercst ratcs to lcvcls which would either enslqrrc its borrowcrs or lead to a hemonhaging of their

assets.

lisctlutrtrrr elruscs urc not basically wrong or lcgolly objectionable so long as they are not solely potcstative but based on reasonable and valid 'grounds. Here, as clearly demonstrated above, not only (are) the increases of

the interest rates on the basis of thc escalation clausc patcntll. unrcasonablc and unconscionable, but also there arc no valid and reasonable standards upon uhrch the increases are anchored.

Fkrirendo. Jr. vs. Metrooolitan Ban k and 'l'rusl ('om uanv (s32 S('RA 4J) Petitioner contcnds that the "escalation clausc" in thc promissory notc imJr,osing l5.4460/o intcrcst on 'thc loan "lirr thc llrst l0 davs .ruh1t,t ttt upwurd downwurtl ullustnent cycr.l,' -10 lu.ys tlrcrut/tr,r" is illcgal. cxccssivs and arbitrary. The detcrmination to increase or dccrease such intercst ratc is primarily left to the discrstion of respondcnt banJi, Wc agrce. We hold that ths increases of interest rate unilaterally imposed by respondent bank without petitioner's assent are violative of the principlc o{' mutuality of contracts ordained in Article 1308 of the Civil Code.

It would be converting the loan agreement into a contract ol' adhcsion. where the parties do not bargain on equal fooring, thc rveaker party's (petitioner's) participatron being reduccd to the alternalivc "to takc it or lcave it." While the Usury Law ceiling on interest rare was lilied by Central Bank
Circular No. 905, nothing therein could possibly bc read as ganting respondenr bank carte blanche authority to raise interest ratc to lcvels which would eilher enslave its borrower (petitioner herein)or lead to hcmorrhaging o1'his asscts.
E.4

Penalty Cherges

. L

Lisutan vs. Court of Anneals


(376 SCRA 560)

A penalty clause, expressly recognized hy law, rs an acccss()rv undertaking to assume geater liability on the part of the obligor in casc of breach of an obligation. It functions to strengthen lhe coercive force of lhc obligation and to provide, in etTect, for what could bc thc liquidated damagcs resulting from such a breach. The obligor would,thcn bc bound to pay the stipulated indemnity without the necessity of prool'on thc existsncc and un thc messure of damages caused by the breach. A stipulatcd grcnalty, ncverlhclcss, may be equitably reduced by the courts if it is iniquitous or unconscionablc or if the principal obligation has been partly or inegularly complied rvith.
annum is not cxccssive. 'l'he essence or rationale for the payment of interest, quite olien relbrred to as cost ol' money, is not exactly lhe same as that ofa surcharge or a penalty. n S:nalty stiPulation is not necessarily preclusive of interesl. rf there is an agreement to that eflecl. the two beins drstinct concepts which may. separately be dernanded.

2.

The stipulated interest

of

I 5. I

tl%

pr

,1,

Tan vs. Court of Aooeals (367 SCRA s7r)

Issues: Can a debtor be made liablc and the stipulated penalty charge?

l.

forbothrhc stipulated monthly interest

2.
by law?

Is compounding

ofthe penalty or compensatory rnterest sanctioned

T
Held: 1. The promissory note expressly provides for the imposition
of both interest and penalties in case of default on the part of the petitioner in the payment of the subject restructured loan. Penalty on delinquent loans may take different forms. In GSIS vs. CA, this Court has ruled that the New Civil Code permits an agrecment upon s penalty apart from the monetary intrcst also called penalty or compensatory intercst. Such a stipulation about psyment of an additional intrest ratc partakes of the nature of a penalty clause which is sanctioned by law, more particularly undcr Article 2209 of thc New Civil Code.

2. The contracting parties may by stipulation capitalize the interest duc antl unpaitl. rvhich as added principal, shall eam new interest. The cornpounding ol'ths penBlty or compensatory'intcrest is sanctioned by and allowed pursuant to Article 1959 of the New Civil Code.

'

State Investment Houge. Inc. vs. CourJ ofAnpealr (36r SCRA 201)

Petitioner was no longer entitled to the payment of the deficiency of' P600,000.00 after the extrajudicial foreclosure sale where respondent's properties were sold for Pl.2M because the principal obligation of respondent would not have ballooned to Pl.8M if not for the pcnalty charge of 3% 1x..-r month or 36010 per annum. The disallowancc of tlrc payment of deficiency was in effect merely a reduction of the lrnalty charges and not a deletion ofthe penalties as contended by the petitioncr. :

nmounl

E.5

Nature ofan Action to Annul a Contrect of Loan


Chua vs. Totrl Offrcc Product! and Servicer (Tonros). (471 SCRA sm)

hc.

An Ection to Bnnul a contrrct of loan and its accegsory real estatc mortgage is a personal action. In a personal action, the plaintiff scks the recovery of personal property, the enforcement of a contract or the recovcry of damages. A reul action is an action affecting titlc to rcal propcrty or for tlp recovery of possession, or for partition or condemnation of, or forcclosurc of
mortgage on, real property The rulc on real actions only mentions an action for foreclosure ofa rcal estate mortgage; it does not include an action for the calrcellation or annulment of a real estate mortgage. The place where the parties reside is the proper venue for an action to nulliS a loan and ral estate mortgage contract.

8.6

Assignment of

Credit

.i

Aouintcv vs Tibons (511 SCRA 4r4)


An assignment of credit is ari agrcement by virtue of which thc owncr of a credit, known as the assignor, by a legal cause, such as sale, dation in
payment, exchange or doottion, and withort thc consent of the. debtor, transfen hls credit and accessory rights to &nother, known as the assigncc, who acquires the power to enforce it to the same extent as the assigror could enforce it against the debtor.

In an assignment of credit, the consent of the debtor is not cssontial fbr perfection - the knowledge thereof or lack oi it affecting only the efficaciousness or ineflicaciousness ofany payrncnt that might have becn made.

its

Ledonio vs. Caoitol Develoument Corporation (s26 SCRA 379)

Although it may be said that the eflbct ol thc assignrnenr of credit is to ofthc original crcditor, thc Court still cannot definitively rule that assignment of credit and convcntional subrogation arc onc and the same. What the law requires in an assrgnment of credit is not the consent of the debtor, but merely notice to him'as the assignrnent takcs el'l"rct only from the timo hc has knowlcdgc therool' whi.lc conventional subrogalion requires an agreement among the partics conccrned - thc original creditor, thc
subrogate the assignec in the rights

debtor, and the new creditor.

The Supreme Court has already noted previously thal thcrc docs not appear to be anything in Philippinc statutos or.iurisprudcncc rvhrch prohibrts a creditor, without the consent ol thc debtor, tiom making an assignmcnt ol' his credit and the rights accessory thereto. Even if the consent of the debtor is unnecessary for the validity and enforceability of the assignrnent ol'credit, nonetheless, he must have knorvledge, acquired either by lormal nolrcc or sonle ofher means, of the assignment so lhat he may pay the debt to thc proper part\ ,
which shall now be the assignee. Rosario vs. PCI Leasinq and F'inance. Inc. ({7.t s('Rt 500)

There is no factual basis for thc petitioncrs' claim that CarMerchants, Inc. had assigned its rights to collect thc balance of the purchase price to thc respondent and that as assignee, respondent rvas proscnbed liom collecting from petitioners the balance of the purchase price ol the vchicle a{icr having taken possession of the chattel for purposes of foreclilsure. 'lhe lact of thc maner is that petitioners admitted ln thcir petition that thcy wsrc dcclarcd in default and failed to provc such clairn. 'lhc cvrdcncc on rccord clcarly shows that the pctitioncrs seuurod a loan liorrr thc rcs;xrndcrrt l'Cl l,uasing antl Finance, Inc. to pay thc P190,000.00 balance to CarMerchants, lnc., and evcn executed a promissory note evidencing their loan in lavor of the rcspondcnt. Petitioners forthrvith executed a chattel mortgage in favor of the respondent over the vehicle as security lbr the payment ol'thcir l0an ond thc intcrcsts lhereon. lt bears stressing that under Article 1615 ol'lhe Ncw Crvil Codc. an assignment of credit, right or action must appear in a public document to bind third persons. There is no evidence on rrlcord to prove lhal CarMerchants, lnc. cxecuted such a dccd, ussigning its rrghl to collcct thc halant:c ol'thc purchast: price ofthe vehicle liom ihe petitioners, in tbvor of respondcnt

L.7

Peyment by

I'hird

Persons

('rrrnrlrnp vr, llciis of Ouirino


(s08 s(:RA 469)

de (Juzman

Articles 1236 and lZ37 of the Civil Code are clear that, even in cases of payment by a third person and even in casb where the lhird person paid against the will of thc debtor. such payment would produce a debt in favor of the paying third person. In fact, the only
qvhere the debtor has no knowledge

pcrloo cE rs the PaYT T6t tistcn beneficial to the debtor; and (2) the third person is not subropted to the rights of the creditor, such as those arising from a mortgBge, guarantee or penalty.

8.8

Credit Cards
Aznar vr. Citibrnk N.A. (Philioliner)

(sl9 scRA

2E7)

A stipulation in a credit card agrcement which limits the crrd compsny's linhility to Fl.(XX) or the octunl damsge proven, whichever is lesser, connot be considcred as valid for bcing unconscionable as it precludes payment of r largcr
amount even though damage may be clearly proven.

E.9

I)octrine of Promissory Estoppel

Mendoza vs. Court of Anoerls (3se scRA 43r)

tlndcr lhc docrine of promissory estopp|, an estoppel may arise from the making ofa promise, even though without consideration, if it was intended that the promise should be relied upon and in fact it was relied upon, and if a refusal to enforce it would be virtually to sanction the perpetration of fraud or would result in other injustice. In order to make out a claim of promissory estoppel, a party bears the burden of cstablishing the following elements: (l) a promise reasonably expected to induce action or forbearance; (2) such promise dirl in fact induce such action or fortearancc; and (3) thc party sufrercd
dctriment as a result.

It is clear from the foregoing that the doctrine of promissory


presupposes lhe existence of a promise on the

estoppel

is cluinrcd. 'l'he pnrmisc must bc ploin and unambiguous and cufficicntly

prrt ofone agrinrt whom dtoppel

specific so that the Judiciary can undcrstand the obligation assumcd and enforce the promise nccording to its terms. For petitionr to cluim that respondent PNB is estopped to deny the five-year rrstsuctudng plan, he must first prove that respondent PNB had promised to approve the plan in cxchange for the submission of the proposal. As discrrsed earlicr, no such promisc was provcil, therefore, the doctrine does not &pply to the case at bsr. A carrsc of rction for promissory estoppel does not lie where an alleged oral promisc ulras conditional, so that relisnce upon it was not reasotable. It does not opcratc to creatc liability where it does not otherwise exist-

E.l0

Gro$ or lntermcdiation Sprcad


New Sronasuita Bu.ilders Construction. Inc. vs. Piiliooioe Natiolal Bank (43s SCRA s65) The difference between the interest and other service fecs chargcd by a bank to its borrowers &nd clients and the interest it pays to its dcpositors and other suppliers of funds is the "gross or intermediation spread."

No penalty chargci or incrpases thcreof appcar either in the Dsclosur Statements or in any of the clauscs in thc crodit sgrGemcnts. While a stur&rd
penalty charge

of6

percent pcr annum has been imposcd on the amounts statad

23

in all tkee itomissory Notes still remaining unpaid or unrenewed when they fell due, there is no stipulation therein that would justi$ anv increase in that chorgcs. Thc cffect, thcrefore, whcn the borrowpr is no1 clearly informed of the Disclosure St tcmcDts prior to the consummation of the availment or draudoum -- is that the lender will have no right to collct upon such charge or inore.scr thcrpo{, cvcn rf stipulatcd in tho Notes. Thc time is now riJre to give rcoth to the often ignorcd forty-one-year old '"Truth in Lending Act'; and ihus transform it from a snivelling paper tiger to a growling financial watchdog of haplcss bonowcrs.

--

MCO Samote Problem The differerrcc bctween the interest and other service lbes charged by a bank to its borrowers and clients and the interest it pays to its depositors and other suppliers of funds
is the:
a.

*c.

b. d.

net rodiscounting sprcad gross credit differential intermcdiation spread gross refinancing differential

I"egal

Basis:

New Sampaguita Builders Construction, Inc. vs. Philippine Nationd Bank (435 SCRA 565)

A-

Statutory Purpore

Section 2 of Republic Act No. 3765 declites that it is "the policy of the State Io proiect its citizens from a lack of awareness of the tue cost of credit to the user by assuring a full disclosure of such cost with a view of prwenting the uninformed use of credit to the detriment of the national economy."
i

B.
B.

Delinition of Terms
As used in the Truth in Lending Act, the following terms are defined as follows:

"Credit" means any:

a. b. c. d. e. f. g. h.
8.2

loan, mortgage, deed oftrust, advance or discount; conditional sales contract; contract to sell, or sale or contract of sale of property or services, either for present or futurc delivery; rental - purchase contract; contract or arrangement for the hire, bailment, or leasing or property; optiorl demand, lien, pledge, or other claim against, or for the delivery of, proprty or money; purchase or acquisition of any credit upon the security ofany obligation arising out of any ofthe foregoing transactions; and any transaction or series of transactions having a similar purpose or effect. [Section 3(2) of R.A. 376s1

"Finance charge" includes interest, fees, service charges, discounts, and such other charges incident to the extension of credit as the Monetary Board of the Central Bank of the Philippines may by regulation Fescrih. [Secfion 3(3) of R.A. 3765]

B3

"Creditot'' refers to any person engaged in the business of extending credit (which includes any person who as a regular business practice makcs loans or sells or rents

r
I
C.

property or services on a time, credit or inslallmcnt hasis. cithcr as prrncrpal (,r as agcnt.) rvho requires as an incident 1o thc cxlcnsion oi crcdit, lhc pa\nlrnl ol'a liurntc chargc [Section 3(4) of R.A 37651

Obligation of Creditor to Borrower undcr thr 'I'ruth in l,cnding .,\ct

- Prior to lhe consummation of the transactron, the crcdrtor is obliged to lurnish to bach person to whom'credit is extcndcd a clear stalcmclrt in writing sctting fonh thc lollouing information:
I. 2. 3. 4.

5. 6. 7.

Cash or delivered price of the sen ice or propcrty to be acquired AmounVs to be credited as downpayment and/or trade-in, ifthere be any The difference benveen the cashidclivered pricc and downpayment trade-in Individually itemized charges rvhich are to b'e paid in connection rvith the transaclion which are not incident to the extension ofthe credit Total amount 10 be financed Finance chaJge in pesos and ccntavos; and

The percentage that the finance charge bears to thc total amount to be financcd expressed as an annual rale on the outstanding unpaid balance ol'the obligatron.
[Section 4

ofR.A

3765]

United Coconut Plsnters Bank vs. Beluso (530 SCRA s67)


The interest rale provisions in the case al bar are illegal not only because becausc they violate the Trulh in Lending Act. Not disclosing the true tinancc charges in connection with the cxtensions of credit is, fu(hermore, a lorm of deception which we cannot countenance.

of the provisions of the Civil Code on mutuality ol contracts, but also

Section 4 ofthc Truth in Lending Act clcarly provrdcs that thc drsclosurc statement must be furnished prior to thc consummation of the transaction. 'l'hc rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof, proceeding from the experience ihat banks are able to conceal such true cost by hidden charges, uncertainty olinterest rates, deduction of interests from the loaned amount, and the like. The law thereby sceks to protect debtors by permitting them to fully appreciate the true cost oltheir loan, to enable them to give full consent to the contract, and to properly evaluale their

options

in arriving af business dccisions. LJpholding LiCI'}ll's

clarnr ol'

substantial compliance rvould defeat those purposcs ol'the lruth in l.cnding Act. 'fhc bclated discovcrl of thc truc cost ol.crcdit uill lrxr olicrr nol bc ablc to rcverse the ill r:fl'ccts ol'an already consulnmatcd busiltcss dccisi0tt.

'l'hc allcgation that thc promissory notcs grant [J('l'lt thc poncr tu unilatcrally flx the intcrcst ratcs ccrtainly alsu mcans lhat thc prornissory nolcs do not contain a "clcar statement in rvriting" ol' "(6) thc linattcc charge expressed in terms of pesos and centavos; and (7) the perccntage thal the
tinance charge bcars to the amount lo be finartccd expressed as a sintplc annual ratc on the outstanding unpaid balanoc ol the obligation." Furthermorc, the spouses Beluso's prayer "for such other reliefs just and equitable in the premises" should be deemed to include the civil pcnalty providcd lirr in Section 6(a) ofthe Truth in Lending Act.

D.
l.

Consequences of Non-Compliance with the 'I'ruth in l,enrling Act

Any creditor who in connection with any crcdit trans otion l'ails to disc,losc to any pcrson to whom credit is extcndcd thc requircd infbrnratron untlcr thc'l ruth in Lcnding Act shall bc

liable to such person in the amount of One Hundred Pesos (P100.00) or in an amount equal to twice the finance charge required by such creditor, whichever is higher brrt shall not exceed Two Thousand Pesos (P2,000.00), plus attomey's fees and court costs, provided the sctior to recover such penalty is brought within one (1) year from the dale of occurrence of the said violation, but the validity or enforceability ofthe contrrct is not affected [Sections 6(a) and 6(b) ofRA 3765]

2.

less than orre Thousand Pesos (P1,000.00) nor more than Five Thousand Pesos (P5,000.00) or imprisonment of not less than six (6) months nor more.than one (l) year or both. [Section 6(c) ofRA 3765]

Willful violators of the Truth in knding Act shall be fined not

New Samprquitr Builderu Constructlon. Inc.


vs.

Philipoine Nrtional Bank


(435 SCRA s6s)

No penalty charges or increases thereof appear either in the Disclosure Statements or in any of the clauses in the credit agrecmcnts. While a standard penalty charge of 6 percent per annum has been imposed on the amounts stated in all threc Promissory Notes still rcmaining unpaid or unrencwcd whcn they fell due, there is no stipulation therein that would justiff any increase in that charge. The effect, therefore, when the bonower is not clearly informed of thc Disclosure Statements prior to the consummation of the availment or drawdown -- is that the lender will have no right to collect upon such charge or increases thereof, even if stipulated in the Notes. The time is now ripe to give teeth to the often ignored forty-one-year old "Truth in Lending Act" and thus transform it fiom a sniveling paper tiger to a growling financial watchdog of hryless borrowers.

--

IV.
A.

DEPOSIT
D,efinition

A deposit is constituted from the moment a person receives a thing bclonging to another, with t[e obligation of safely kee ping it and of retuming the same.
Durban Aorrtments Coroorrtion vs. Pioneer Insurance lnd Surctv Corooration (639 SCRA 441)

'

The contract of deposit was perfected when the hotel guest handed ovcr to the hotel's parking attendant the keys to his vehicle, which the lattcr received with the obligation of safely keeping and retuming it.

The insured Jeffrey S. See deposited his vehicle for safekeeping with . petitioner, through the latter's emfoyee, Justimbaste . In turn, Justimbaste issued a claim stub to See. Thus, the contract of deposit was perfocted from See's'delivery, when he handed over to Justimbastc the keys to his vehicle, which Justimbsste received with the obligation of safely keeping and returning it. [Jltimately, petitioner is liable for the loss ofSee's vehicle.
B.

Characteristics
If

l.
2.

Real contract because it is perfected by the delivery ofthe subject matter. gratuitous, it is unilateral because only the depositary has an obligation. is bilateral.

If onerous, it

3. 4.

-- _.*EFl!EiF!?q*

Principal purposc of thc contract ofdcJxrsit is thc salckccping ol'thc thirrg dclrrcrcr.l
Contract ofdeposit is generally graluitous.

Exception.

a) b) c)

contrarystipulation depository is in thc businr:ss ol'storing goods

propcrty savcd liom dcstruclion during calarnilr \\tth()ut ()r\ncr's knowlcdgc: just compensation should bc givcn thc dcpositorl

C. l. 2. 3. D. l. 2. E. l. 2. 3.

Distinctions between Deposit and Mutuum

Principal Retum . Ob.yect

Deoosit Safekeeping or mere ' custody Depositor can demand retum at rvill
Movable and immovatrle

lllutuum

Consumption subject matlcr

of

thc

l.ender must wait tbr the exprration of the


stipulated period

(extraludicial) propcrly

Money or
thing

ungiblc

(judicial) Distinctions between Deposit and Commodatum

Principal
Purpose

Dcoosit Safekeeping
May be

('ommodnlum
'l'ransfer of'uso

Nature
Kinds of Deposit
Judicial

gratuitous

Always

gratuitous

a. b. l.
2. 3. 4.

Extrajudicial Voluntary
Necessary

Distinctions between Extrajudicial and Judicial Deposits

An extrajudicial deposit is constituted by the will of the contracting parties while judicial deposit rs constituted by virlue ofa court order.

ln the first, the object must be movable propeny, whcreas in thc second, thc otrject may be either movable or immovable proprty. The purpose of an extrajudicial deposit is the safekeeping ol-the thing deposited whereas the main purpose of a judicial deposit is lo sccure or protect the owner's
right. The first is, as a general rule, gratuitous, whereas the second is always onerous. In an extrajudicial deposit, the depositary is obliged to retum the thing deposited upon demand made by the depositor whereas in a judicial deposit, the thing shall be delivered only upon order ofthe court.

5.

F. l.

Voluntary Deposit
Defined 0s one rvhcrern the dclilerv is rnadc bv thc rvill ol tht'dcposiror.

Although generally the owner, the depositor need not be the owner ofthe thing deposited.

3.

May be oral or in writing

G. Obligations of the Depositary l. , Depositary is obliged to kecp the thing safely and return it when required even though a specified term may have been
stipulated in the contnct.

Chan vg. Mrceda. Jr. (402 SCRA 3s2)

ln an action against the depositary, the burden is on the plaintiff to prove the bailment or deposit and the performance ofconditions prcccdent to the right of action. A depositary is obliged to return the.thing to the depositor, or to his heirs or successors, or to the person who may have been designated in the contract.
In the present casc, the record is bereft ofany contract of deposit, oral or written, between petitioners and respondent. If at all, it was only between petitioners and Moreman. And granting arguendo rhat there was indeed a contract of deposit between petitioners and Moreman, it is still incumbent upon respondent to prove its existence and that it was executed in his favor. However, respondent miserably failed to do so. The only pieces of evidence reSpondent presented to prove the contract ofdeposit were the delivery rcccipts. Sipnificantly, they are unsigned and not duly received or authcnticatcd by either Moreman, petitiorErs or rcspondent or ury of their &uthorizcd reprcsontativos. Hence, those delivery receipts have no probative value at all.

. 2.
whle

DeJnsitary is liable if the loss occurs through his fault or ncgligencc. Loss of thc thing depositary's possession raises a presumption of fault. Required degrcc of care ii -the greater if the deposit is for compensation than when it is gratuitous.
in

CA Aerc'Indmtrial Deyelooment Corporrtion vs. Courl of Anoerlc (2le scRA 426)

'Ihe contract for the rent ofa safety deposit box cannot be classified as an ordinary contract ol'leasc undcr Arlicle 1643 of the Civil Code becausc thc frrll and absolute possession and control of the safety deposit box is not given to the renter. Neither is it a contract ofdeposii that is to be strictly govemed by the provisions of the Civil Code on deposit. The contract for the rent ofa safety deposit box is a special kind of deposit. .

'

the Frties, sinc the relation is 8 conhactual onc, may by special contract define &eir respoctive duties or provide for incrcasing or limiting the liability of the deposit company, provided such contrac{ is not in violation of law or public policy. Any stipulation exempting thc dcposinry from any liability arising from the loss of the thing deposited on accour( of frau{ negligence or delay would be void for being contrary to law and public policy.
.E

With respect to property deposited in a safe-deposit box by a customcr _ of a safe deposit compony,

gompsny, in renting safedeposit boxee, cannot exempt itrclf from .. liability tbr loss of the contents by its own fraud or ncgligcnco or that of its agcnts or servants, and if a provision of the contract may be constued as an attempt to do so, it will be held ineffective for the purposc. Although it has been held that the lessor of a safedeposit box <innot limit its liability ior loss of the

T!.

contents thereofthrough its orvn negligcncc. the vic\\ has bccn talcn that sLrch lessor may limit its liabilitl, lo somc cxtcnt by,agrccnrcnt or slipulatrorr
Sia vs.

(lourt of Aoneals

(222 S(:RA 24)

A contract for the use ofa safety deposit box is a special kind ofdcposir and the relationship between the parties lhereto, with respect to the contents ol the box, is that of a bailor and bailee, rhe bailmcnr being lor hirc and mulual benefit.
Conditions in a Lease Agrcement coveging a safcty dcposit bo.r rvhich exempt lhc bank from any liahility lirr darnagr:. loss or dcstruction ol' rhu contents thereof arising lrom its own or its agcnr's liaud. ncgligcncc or ctcla! arc considcrcd null and void, lirr hcing contrary lo larv. and puhlic prlrcy

In the instant casc, Sccurity llank and'l rusl Conrpany (StilC) sas
guilty of negligence. SIJ'I'C's ncgli.gcncc aggravatctl tho rnjun,or damagc ro lhc prtltioncr which rcsultcrJ litxn lhc krss or dcstruclron ol'lhc starnp col[:elrorr SB'I'C rvas aware of' thc floods ol' l9tt5 and l9tl6; it also knov lhal lhc llmdwaters inundated thc room wherc Sal'e l)cposit llox No. 5.1 was locatcd. In vierv thereof, it Should have lost no time in notifying the pctitioner in order lhat the box could have been opened to retrieve ths slamps, thus saving thc sanre from lurther deterioration and loss.
1987 Bar Eram Ouestion

Ana rented a safety deposit box at the Alto Bank, paid the renral tec anti rvas given lhc Ana put her jewdlry and gold coins in the box. Days after, three armed men gained entry into lhe Alto Bank, opening its vault and sevcral safctv:deposit boxes, rncludrng Ana's and cmptied them of their contents.

key.

Could Ana hold the Alto Bank liable for the loss ol'thc conrcnrs ol'her deposit box? Explain.
Answer:

Alto Bank is nol liable lbr rhe loss of thc contcnts ol'Ana's <lepr.rsit box becausq under Article 1990 of the Civil Code, if the depository by forcc rnajeurc loscs the thing and reccrvcs money or another thing in its place, he shall deliver the sum or othcr thing to thc deposrtor. Thcre being rio showing that there was anythrng recerved in place of the things dctr)sitcd, Alto Brnk is not liable for the contenls ofthe sBlcty box.
Altemative Answer:

Alto Bank is not liable because the conlract belween Ana and Alto Bank is not a degrsit but a rental ofthe safety deposit box: Hence, Alto Bank isnot liablc for the lossof the contcnts of the box in the absence offault, delay or negligence on its part.

3. 4.
.

Deposirary is not allorvcd ro deposit thc thing with ir third t,..-rson. Dcpositary is liablc for thc loss of the thing depositocl il:

4.1

he transfers ihe deposit with a third pcrson wrthout aulhority although thorc rs no negligence on his parl and thc third person;

4.2

he deposits the thing with a third person who is manrlestly carelcss or unlit although authorized. even rn the absence of negligence; or

r'

4.3

the thing is lost through thc ncgligcncc ol'his crnpkryecs whcthcr the lattcr arc manifestly careless or not.
loss ofthe thrng rvithoul ncgligcncr"- of'thc thrrd perstin with rvhom he was allorvcd to deposit the thing if such third person is not maniltsrl\ careless or unfit.

Note: Depositary is not resg)nsiblc for

5.
will

Depositary is obliged to first notiry the deposrtor and s'ait lirr lhc lattcr's dccisron it'hc
change the way or manner of the deposit

Exception:

delay will cause danger

6.

If the thing deposited should cam interest, the deposrtary is under obligation ( I ) to collcct the interest as il becomes due and (2) to take such stepshs rnay be nccessary to prcscr\e its valuc and the rights corresponding to it. The deglsitary is bound to collect not only thc intcrcst but
also the capital itself when due.

?.

Depositary has ihe obligation not to comminglc things dcpositcd il'so strpulatctl. crcn il' the1, arc of the same kind and quality (Articlc 1976).

8.

Deposiury is under obligation not to make use ol'lhc thing deposited (becausc tlcposrt is for safekeeping ol the subject matter and not tbr its use); otherwise hc shall bc liablc tbr
damages.

Exceptions:

a) b)

ofthe depositor preservation of the thing deposited rcquircs its


express permission
use

(Article 1977)

Note:

l.

If the thing deposited is non-consumable and the depositary has permission to use the
Ifthe thing deposited
is moncy or olher consumablc thing. the conlract is convcrtcd into a

thing, the contract becomes one of commodatum.

simple loan or mutuum.


.t

Exccption:

Whcrc satckccping is still thc prirrcrpal purlxrsc ol'thc contract, thc sarnc shall be considered an irregular degxlsit.

3.

Depositary is liable for loss through a fortuitous cvent even without his lault:

'
'

a) b) c) d)

If it is so stipulated; If he uses the thing without the depositor's permissron; lf he delays its return: lf he allows others to use it, even though hc himsclf muy havc bccn aulhorizcd use the same (Article 1979).

to

X left his BMW car with his best friend Y lor salbkeeping because he had to imrnedratch loave for the United States for a medical check-up with instructions that Y may use lhc car rn ose of urgent need. A week after during one stormy night, Y and his brother Z had to bring their riling father (A) lo St. Luke's Hospitai. Y drove the car with Z and A on board. On the *a1'. Y srddenly expcricnccd an atlack of vertigo which constraincd him to rcqucsl Z to rcplace htrn at the steering wheel. Because of strong winds, a hig tree fell on top of thc fiont porlron ol'thc car lotally rwecking its engine heyond repair. ls Y liable lo X fbr damagcs arising liunt thc car's dcstruchon'

a. '!' b. c. d.

Yes, because an obligation rvhich consist rn thc delivcry ol'a dctenninatc thrng shall

be extinguished if it shall be lost or destrolcd without the lault of rhe debtor and before he has incuned in delay. Yes, becausc Y allorved another pcrson to uss it cvcn though thc depositar_,-, nrar have been authorized to use the samc. No, because bailee (Y) lent the car to Z who is a mcmtre'r of thc ftrrmcr's houschold. No, because the loss of the object ofdeposit was causcd by lbrtuitous evcnt

Legal

Basis:

Depositary is liable for loss through fo(uitous event cven rvithout his tirult if the depositary allorvs others to use the thing degrsited even though he himself may have been authorized lo use the same (Articlc 1979, Civil Code)

4.

Depositary has the obligation to:

(a) retum the thing deSrcsitcd when delivered closcd and scalcd, in thc samc conditron. (b) pay for damagcs should thc seal or lock bc broken through his lault uhich ts

(c)

presumed unlcss proven othcrwisci and

keep the secrcl of thc dcgnsit when lhc scal or lock rs hrokcn. rvith or uithout his fautt
and sealcd rr hen

Note: Depositary is authorized to open the thing depositcd which is closed


there is:

(a) presumed authoril)' (ke1's having been delivered to depositarv;, or (b) in the case ofnccessity. 5.
Depositary has.the obligation to retum not oniy the thing but also its product, accessions and accessories which are a consequence of orvnership.

H. l.

Penons to whom Return of Thing Deposited Muct Be Made

The depositary is obliged lo rctum the thing deposrted, rvhcn requrrcd, lo lhe dcJxrsrtor, to his heirs and successors, or to the person rvho may have been designated in the contract. (Articlc

te72)

2. 3.

Ifthc depositor was rncapacitated at the tinre of rnaking thc dcFnsit, thc propcrty must be returned to his guardian or adrninistrator ()r thc pcrson rvho rnrdc thc dcgrsit or kr lhc dcposilrtr himself should he acquire capacrty (Articlc 1970).
Even if the depositor had capacity at thc time of rnaking thc rlcposit but he subscqucntly loses his capacity during the deposit, the thing must be returned to his legal representative (Article 1986).

11

L l. 2.

Place of Return ofThing Deposited


at the place agreed upon by the parties, and

it the place where lhe thing deposrted might be cvcn rl' it place rvhere the original deposit was rnadc providcd the transl'cr rras should not be the same rccomplished without malice on the part of the depositary.
io the
absence

of stipulation,

Note: Dcpositor

shoulders the expenses for lransporlatittn

Time of Return of Thing Dcpositcd


LJpon demand or al

\\'ill, rvhethcr or not

a period has bcen strpulated.

Exceptions:

a) thing isjudicially attached while in the depositary's possession b) dcpositary rvas notitlcd of thc opposition ol'a third person to thc return or thc rcmoval ofthc thing dcposrtcd (Articlc 1988)

Right of Depositary to Rcturn'fhing l)cposittrt

l. 2.

ifdeposit is gratuitous, and justifiable reasons exist for its return

Note: otherwise; depositary may avail of consignation there{bre there is no righl to return bcforc cxpiration ol' thc tcrm dcsignatcd il'thc dcposit is lirr valuahlc corrsidcration
(Article
1989).

L.

Alteration by Depositary's Ileir

l If in good faith, heir may either rr:turn the price hc rcr:cived or assirn his right ol' action sgainst the buyer in case thc price has not been paid.

2. M.

If in bad faith, heir is liable for damagcs and may be sued lor estafa
Relation between Bank and Depositor

Deposits of money in banks, whether fixed, savings and current. are govemed by the provisions on mutuum and the relation between a depositor and a hank is thal ofa creditor and a debtor.

(lonsolidatcd Bank and 'frust (lornoration vs. Courl of Anpcals (4r0 scRA s62) The contract between the bank and its depsitors is governed by thc provisions o[ the Civil Code on simple loan. The law imposes on banks high standards in view of the fiduciary nature of banking which requires banks to assume a degree ofdiligence higher than that ofa good father ofa family. This fiduciary relationship means thar the bank's obligarion to obscrve "high standards of integrity and pcrlilrntancc" is tlccrncd rvrittcn into cvcry dcJxrsrt agreement belween a bank and its depositor.

MCO Srmole Problem

X Corporation bonowcd money from Y llank and was requircd lo surrcnder to Y []ank thc original of its certificatc of time deposit (C'lD) wilh said bank by way of securiry X Corporation repeatedly defaulted on its loan thereby comp:lling Y tlank lo encash subject C lt) upon its maturity. The bank's action is.

a. b. * c. d.

unlawful because the bank is only a depositary ol'the C'l'D unlawful because it amounts to pactum comnrissorium la*ful under the principle ofcompensation la*ful because it amounts to dacion en pago
1980.

Legal_Bam. Article

Civil Code. cf also tlPl vs CA (231 SCRA 301)

Reasons:

l.

Thcre is no pactutn conrrnissoriurn rn thrs casc. l)cposits ol rn()[cl rrr banls arrd I 9110, L'rr rl similar inslitutions are govemed by the prol rsions on sinrplc loans ( n Code). The relationship between thc depositor and a bank is that of'creditor and debtor. This is cssentially a rnattcr of' compensation as all thc elcmcnts of' compensation arc present in this casc (BI'l vs. CA,232 SCRA 302).

Where the security for the dcbt is also moncy deposited in a hank, it is not illcgal for the creditor to encash the time deposit certificates to pay the dcbtor's ovcrduc obligation. (Chu vs CA, et al , (i R 785 19. September 26, 1989)

2.

(96 S('RA 96)

A bank's failure to honor a deposit is lailure to pay rts obligalion as a


debtor and not a breach of trust arising from a depositaryls lailure to return the subject maner of the deposit.

Guineons vs. (litY l'iscuLqf f,funils

(r28SCRAs77),
While the bank has the obligation to retum thc amount deposrted, it has. however, no obligation to return or deliver the same money that was depositcd.

A bank's failure to relum money on deposit will not conslrtute cslala through misappropriation punishable under Article 315 (paragraph I [b]) ofthe Revised Penal.Code.

has bcen held that suspension of a bank rvhich had fallen into a "dislressed financial srluation" by ordcr ol the Ccntral llank cannol cxcusc il from its obligations to depositors rvho had nothing whalsocvcr to do rvith thc Central Bank actualion or the cvcnts lcading to thc bank's dislrcssed statc.

It

lntesrrted Reeltv Coro. vs. Philiooine National Bank (, ," aar*. .rt,
and Fidelitv Savinss vs. ('enzon (181 SCRA l4l)
The obligation ofa bank to pay intcrest on a deposit ceases the moment the operations of the bank is completely suspended by the Central Bank. The deposit is not entitled to interest during the period the bank is not allowed to operate. N.

Obligations of Depositor He is obliged to pay expenses for the preservation of the thing deposited,
gratuitous.

l.
2

if

dcposit is

He is obliged to pay lbr losses incurred due to the character of'thc thing dcprsited

Exceptions: a)

unlcss depositor tvas not arvarc thcrcot' depositor was not cxpcctcd lu know lhc dangcrous charactcr ol thc thing c). unless he notified the depositan ofthe samc. or d) dcpositary was awarc ol'it rvithour dcJxrsikrr's advtcc (Artrclc l99l)

b)

Nole: Dcposiiary

has tho nght to rctarn thc thing dcpositcd

in plcdgc until lull payment ol'\rhar

may be duc him by rcason of thc deposit

(Articlc

199.{).

O. l.

Necessary Deposit
Necessary deposit in compliance with a legal obligalron

The judicial deposit ola thing, the possession litigation by two.or more persons (Article 538);

1.1

of uhich is being disputed in

'

The deposit rvith a bank or public institution oipublic bonds or instrumcnts of credit payable to ordcr or bearer given in usuliuct when the usuliuctuary docs not grve proper security for thoir conscrvation (Articlc 5t161; when the crcditor uses lhe samc rvithoul the authority of the owner or misuses it in any other way (Article 2104)'

1.2

1.3

The deposit

ol'a thing pledged

Those constitutcd to guarantce contracts with the governmcnt. In this last casc, the deposit arises f,rom an obligation of public or administrative character.

1.4 1.5

Those required in suits as provided in the Rules

ofcourt;

and

2. 3.

Necessary deposit made on the occasion

ofa calamiry.

Deposit by travelers in hotels and inns

I 3.2
3.

They have tiben previously informed about the effects brought by thc gucsts. an<l The latter have takcn lhe precautions prescribcd rcgarding their saf'ekecping.

Note:

l.

Hotelkeeper is liable regardless of thc amount ofcare exercised in the follorving cases:

a) b)
2.

The loss o? injury is caused by his servants or employecs as well as by strangcrs (Article 2000) providcd that nolicc has bccn givcn and propor prccautions takcn (Arliclc
1998); and

Thc loss is caused by the act ofa thicf or robber done without the use of arms and inesistible force (Article 2001 ) for in this case, thc hotelkeeper is apparently negligent.
Hotelkeeper is not liable in the following cases.

a)

The loss or injury is caused by force majeure like flood, fire (Article 2000), theft or robbery by a stranger (not by hotelkeeper's servant or employee) with the usc of arms or inesistible force (Article 2001), etc., unless he is guilty of fault or negligence in failing to provide against the loss or injury tiom said cause (see Articles I 170, I174);

b)
2002
).

The loss is due to the acts of the guests, his family, scrvants or risitors (Article
'l he loss arrscs

c)
2001)

liom thc charactr:r ol thc lhirrgs br(,uglrl urlo thc h()lel ln rtrclc

Fl:
I

a.

* b.
c.
d.
Le,ral

done without the use of arms or irrcsistible force provided that notice has been grven and proper precautions have been taken done without the use ms and inesistible forcc regardless of the amount of care exercised by the hotelkeeper done with the use of arms and irresistible force unless the hotelkceper is guilty of fault or negligence in failing to provide against the loss from said cause done with the use of arms and inesistible force regardless of the amount of care exercised

of

tlasis:

Article 2001, Civil Code

3. 4. P.
Cause Purpose

Stipulations on exemption or diminution of liaOility is void (Article 2003).

Hotelkeeper has a right to retain the things

of

guests as security

for unpaid lodging

expenses and supplies.

Judicial Deposit or Sequ$trttion Judicial


. by will of court

Extraiudicial

bywilt of the parties ofa


custody and safekeeping

to recover in case of a favorable


party
judgment
Subject Matter
,

to secure the right

ofthe thing

movable
onerous

and

only movable property gencrally gratuitous dcpositor

immovable property
Remunerntion

Bc4eliciory

pcrson with favorablc


j udgment

v.

A.

Definition

Guaranty is a contract whereby person binds himself to the creditor obligation ofthe principal debt,rr in case the latter should fail to do so.

to fulfill

the

B. L

Characteristics
accessory

Prudent, al Guarantee and Assuratrce Inc. ys, ANcor LISILIE3 (630 SCRA 368)
'l"he Performance donC issued by the petitioner was meant to guarantee

the supply of labor, materiah tools, equipment, and necessar5r supervision to complete the construction proj( ct. A guarantee or a surety contract under Article

35

coltnct bcctusc it is ij 2047 of the civil Codc orm "n "ocrto"y dependcnt for its existcnce upon the principal obligation gruranteed by it. In fact, the primary and only reason behind the acquisition of the pcrformance bond by Kraft Realty and Development Corporation (KRDC) was to guarantee to Ansoor Land, Inc. (ALD that the construction project would proceed in accordance with the contract terms and conditions' In effeot, the performance bond becomes liable for the complaion of the construction projcct in the event KRDC fails in its contractual undertaking.
of the performance bond, the construction contract between ALI and KRDC is guarantced to be pcrformed even if KRDC fails in its
Because

rffif

obligation. In practice, a performance bond is usually a condition or a necessary co,nlron.nt ofconstruction contracts. In the case at bar, the performance bond was so connected \.Yith the construction contradt that the former was agreed by the parties to be a condition for the latter to push through and at the same time' the former is reliant on the latter for its existenc as an accessory contract.
2.

subsidiary and conditional


un

3. 4.

ilateral

reriuires thnt thc uu:rranlor must be a person distinct from the debtor

C.

Distincti0ns between Guaranty and Suretyship

Guaranty

Suretvshio

l.

Ouarantor is sccondarily liable.

l. 2. 3.

Surety

is primarily liable and is

therefore

exhaustion of the properties principal debtor.

not

entitled

to

of

the the

Guarantor binds himself to pay only when the principal cannot pay.

psrty

Surety assumcs liability as a regular

undertakes to pay does not pay.

to the underraking and


if
the principal

3.

Guarantor

is an insurer of

the

Surety is an insurer ofthe debt.

debtor's insolvency.

Prudentirl Guarantee and Arsunnce. Inc. vs. E{uinox Land Corooration


(533 SCRA 2s7)

Article 2047 of the Civil Code provides that suretyship arises upon the solidary binding of a person deemed the suety with the principol debtor for the purpose of fulfilling an obligation. lt Castellvi de Higgins and Higgins t Seliner, 41 Phil. 142 (1920), we held that while a surety and a guarantor are alike in that each promises to answer for the debt or default of another, the' surety assumes liability as a regular party to the undertaking and hence its
obligation is primary. Palmares vs. Court of Anpeals (288 SCRA 422) .

A surety is an insurer of the debt, whereas a guamntor is an insurer of the solvency of the debtor.' A suretyship is an undertaking that the debt shell be paid; a guaranty, an undertaking that the debtor shall pay. Stated differently, a

36

surety promises to pay the principal's debt if the principal will not pay, while a guarantor agees that the creditor, after proceeding against the principal, may proceed against tlre guarantor if the principal is unable to pay. A surety binds himself to perform ilthe principal does not without regard to his liability to do so. A guarantor, on the other han4 does not contract that the principal will pay, but simply that he is able to do so. In other words, a suretv undertakes directlv for the payment and is so resoonsible at once if the orincipel debtor makes default while a euarantor contracts to Dav if. by the use of due diligence. the xxx dgbt cannot be made

ou

. xxx

Even if it were otherwise, demand on the sureties is not necessary before bringing suil against them, since the commancement of the suit is a sufftcient denrand. On this point, it may be worth mehtioning that a sureB is not even entitled. as a rnatter of right, to be qiven notice of the orincipal's default. Inasmuch as lhe creditor owes no duty of active diligence to take care of the inreresl of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surclv. 'l he surctv is bound to take notice of the principal's default and to perlorm the obligation. He cannot complain that the creditor has not notified him in the absence of a special. agreement to that effect in the contract of surclvship.

1'he alleged failure ol'respondent corporation to prove thc fact of dunrarrd orr the principal debtors, by not attaching copies thereto to its pleadings, is likewise immaterial. In the absence ofa statutory or contractual requirement, !t is not necessary that payment or performance of his obligation be first demanded of the principal, especially where demand would have been useless; nor is il a requisite. before proceeding against thc sureties, ttrat the principal be called on to account. The underlying principle therefore is that a suretvshio is a duc.!:t -s,!lLg.c_! to-g1y,thg. dcbt ef another, A suretv is liable as much as hig pt!Ic'&tl_i), lirUlqgd-qbsglutely lioble as soon glgg1nd u[xn thc pnncilral whotsoevcr or any notice of dcfault. As an original promisor nnd debtor tiom the beginning, he is held ordinarily to know every dclault ol' hrs prrncrpal.

A creditor's right to proceed against the suety exists independently of his right to proceed against the principal. Under Article 12l6 ofthe Civil Code, . the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The rule, therefore, is that ifthe obligation is joint and several, the creditor has the right to proceed even against the surety alone. Since, generally. it is not necessary for a breditor to proceed against a principal in order to hold the surety liable, where, by tle terms of the contract, the
obligation of the surety is the same as that of the principal, then as soon as the orincipal is in default. the surew is likewise in default. and miy be sued imnrediately and before any Broceedinqs are had asainst the princioal. Perforce, in accordance with the nrle that, in the absence of statute or sgreement otherrvisc, a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the suretv cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or oblisee, before proceeding against the surety, to resoft to and exhaust his remedies against the. principol,

c.l

Jurisprudence on Distinctions between Guarenty and Suretyship

Fir3t Distinction

A gurrrntor is recondarily liable while r.urety is prlmarily liable


and is therefore not entitled to the benefit of ercu$ion or exhaustion ofthe properties ofthe principal debtor.

'

t-

:,1

JN Drrclolrit CoElontftr r* ?hilfudrc Exoort end Forciorr Loal Gurantce Coroonfior

({6rscRA55O
Under a contract ofguarantee, lte grurantor birds himselfto thc creditor should fail to do !o fulfill the obligatiur of the pnrrcipal debtor in case thc so, lhough thc gurranlor csllrrot be copcllod to pay thc crcdilor unlcss the raid credilor has exhaustod all the pmperty of thc debtor and rcsorod to all l"g"t rcmedies ,gFinst tltc debtor. Excussiur may only bc invokod aftcr legal remedies apins the principal dcbtor have been exhausEd

ler

'l'lre requirement that the guarantor should corsent to ary exlension ganted b)' the creditor to the dehor under Article 2079 is for the benefit of the gr.mrairtr)r who qrn waivc il. 'Itc law drrclr nol prhibit fhe ff,ymenf hy I guardntor on his own volrtion, hdlel;l of the bcnclit of cxcussion. ' 'l'hc law nxognizrs thc right o[ a guaranlor !o rEcovct lYlut it has pid, cvcn if the payment rvas made before tlre debt becomes due, or if rude withort notice to
lhc debtor, subject to some conditions.

Philinnine Nrtionrl BenL vs Court of Aoocels

(l9BSCRA767) A surety's liabititv to tlre creditor or uurisee of the princiml is said to be direcr orimarv and absolute. In othcr words, he is directly, pinurily and equally bound witXr thc pnncipal as oiginal promissm altlrough lre possesses no
direct or pcrsonal inleresl over thc benefits thercfiom.

latE's obliptims nor

does he receive any

Anq vL

Ar.oci.t

B.rk

(532 SCRA244)

The relatio r betu,Een an accommodation party aod th accommodaled party is one of prir ipl and surety - the accommodaion party bcing the surety. As such, he is deer. ed an original promissor ud &btor firom the beginning; he is considcred in law as the samc Frty as thc dcbtor in rclaion to urtalevcr is adjudged touching the obligation of thc larer sirce 6eir liabilties are interwoven as to be rnseparable. Althoueh a cofiract ofsuretyshio is in essence acccssory or collale ral to a valid rirrcilnl oblimtion. the surety's liabilitv to the qeditor is immediate. milrufv atd absohte: be is directlv and equllv furld with the princiml. As an equivaler* of a rcgular party to the undertaking; a surety becomes liable to the detfi and &fy of the pincipal obligor even without possessing a direct or personal hterest in the obligations nor does he receive any bcnefit therefror n.
Under the l6r,v, upon tlre manrity of the note, a surcty may pay the dbq demand the. collater:il secuity, if tlrcrc be any, ard dispocc of it to his.berrcfit, or, if applicablc, sul,rogate himself in the place 9f the qcditor with the right to enforce the guarantl' apinst the o0rer signers of the notc for the reimbursernent of what he is entitl ed to recover from thern. RegrAtaoly, none of these were prudently done by J retitioner. Whetr he rms first notificd by the batrk sometimc 1982 rcgardint his accountabilitics mder the pomissory notes, h lackadaisically reli, d on Antonio Ang Eng Liong urto rcprescnted tlnt trc would take care ol' \e matter, inseaa of dircc{y cornmunicaing with OE bank was pejdiccd by for its srttlernenr Tr s, petitioner curnot now claim tha the supposod anriit r of time" givcn by thc bail to his co{ebtor.

in

-r

3t

but also unconditional io a holder for value, cven if thc accommodated party receives an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the.whole obligation and such extension does nbt release him because as far as a holder for value is concemed, he is a sotidary co-debtor. It is a recognized doctrine in the mattcr of suetyship that with respect to the surety, the creditor is under no obligation to display any diligence in the enforcement of his rights as a creditor. His merc inaction, pasiiueness or delay in proceeding against the principal debtor, constitute no defense at all for the surety.

MCO Sample Problem A borrorved money from XYZ Bank with her best friend B as guarantor. A defaulted on her loan compelling the bank to file a case for collection of sum of money against A and_B with prayer for the issu-ance of a writ of preliminary attachment on the properties of A and B. B moreA to quash the wit of preliminary attachment issued by the trial court on her properties' The trial court should grant B's motion because:

a. Il is cntitled to the benefit ofexcussion. b. B did not personally benefit from A's loan.

c. A is not insolvent. d. B is not ajudicial bondsman.


Rcasqn: Guarantor
Second
has the benefit ofexcussion.

Distinction

A guarantor binds himsclf to pay only whcn the principal cannot pay. On the contrary, r Jurety urumql ltability er e rcgular party to thc undertrking and undertaket to psy if the principal doet not
pay.
Asset Builders Corooration vs. Stronebold Insurrnce ComDanv. Incoroorated

As provided in Article 2047 , the surety undertakes to be bound solidarily with the principal obligor. That undertaking makes a surety agreement an ancillary contract as it presupposes the existence of a principal contract. Although tle contract of surety is in essence secondary only to a valid principal obligation, the surety becomes liable for the Jebt or duty of another although it possesses no direct or personal interest over he obligations nor does it receive any benelit therefrom. Notwithstanding .the fact that the surety contract is secondary to the principal obligation, the surety assumes liability as a regular party to the undertaking.
Suretyship, in essence, contains two types of relationship - the principal relationship between the obligee Qteritioner) and the obligor (Lucky Star), and the accessory surety relationship belween the principal (Lucky Star) arrd the surruly (responderl). In this &rrangt ment, the obligee accepts the surety's solidary undertaking to pay if the obligor does not pay. Such acceptance, however, does not change in any maoial way the obligee's relationship with the principal obligor. Neither does it make the surety an active party to the principal obligee-obligor, reldtionship. Thus, the acceptanoe does not give the surety the right to intervene in the pri. rcipal contract. The surety's role arises onlv uoon the obliqor's default. at thc oblisoc lbr paymunt as a solidar.v obli ggl.

whi(l@
39

Suretyship arises upon &e solidary binding of a person - deemed the surety with the principal debtor, for the purpose of fulfilling an obligation. The prestation is not an original and direct obligation for the performance ofthe surety's own act, but merely accessory or collateral to the obligation contracted by the principal. Although thc suety contract is secondary to thc principal obligation, the surety assumes liability as a regular party to the undertaking.

In enfiorcing a surety contract, the'"complementary-contracts'construedtogethcr" doctrine finds application. According to this principle, an accessory contract must be read in its entirety and together with the princtpal agreement. This principle is used in constnung contractual stipulations in order to arrive at their true meaning; certain stipulations cannot be segregated and then made to
control.

Onq ys, Philionine Commercial International Bank (448 SCRA 70s)

Under fie suetyship contract entered into by petitioners-spouses with rcspondent bank, the former obligated themselves to be solidarily bound with the principal debtor Baliwag Mahogany Corporation @MC) for thc payment of its dt'bts to respondent bank amounting to F5,000,000.00. Under Article 1216 of the Civil Code, respondent bank as creditor may proceed against petitionersipouses as sureties despite the execution of the Memorandum of Agreement (MOA) which provided for the suspension of payment and filing of collection suits against BMC. Respondent bank's rieht to collect paymcnt from the suretv exiss indeoendently of its riqht to oroccd directlv agrinst the principal debtor. In fact. the creditor bank may go against tho suretv alone without Drior demand for pa),rnent on the princiml debtor. The provisions of the MOA regarding the suspension of payments by BMC and the non-filing of collection suits by the creditor banks pertein only to the prope(y of the principal debtor BMC. Firstly, in the rehabilitation receivership filed by BMC, only the properties of BMC were mentioned in the petition with the Securities and Exchange Commission (SEC). Seoondly, there is nothing in the MOA that involves thc liabilities of the sureties whose properties are separate and distinct from that of the debtor BMC. Lastly, the MOA executed by BMC and signed by the creditor-banks was approved by the SEC whose jurisdiction is limited only to corporations and corporate assefs. It has no jurisdiction over the properties of BMC's officers or sureties.
Banco de OTo.EPCL Inc. vs. JAPRL Development Corooration (55r SCRA 342)

Under the lnterim Rules of Procedure on Corporate Rehabilitation, a stay ordcr defers all actions or claims against the corporrtion sceking rehabilitation from the date of its issuance until the dismissal of the petition or termination of the rehabihtation proceedings. A creditor can demand pavment from the suretv solidarily liable with the corporation seekins rehabilitstion.

40

Suico

Rrttrn & Buri Intcriora' Irc. vr. Court of Al!.rk


(490 SCRA s6'0)

The surety obligates himself to pay the debt if the principal debtor will not pay, oblieation. Thus, a creditor can go directly against the surety althougb the principal debtor is solvent and is able to pay or no prior demand is made on thc principal debtor.

Although a suety 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. A srrety is considered in law to be on the same footing as the principal debtor in relation to whatever is adjudged against the
latter.

GatewaJl-E&ltI9rliql9-ogrr-Slgtionvs.
(s74 SCRA 618)
once if the principal dcblor makes default. If the obligation is joint and several, the creditor has the right to proceed even against the surety alone.

A srrrely undertakes directly for the payment and is so responsible at

A suretv of the distressed corporation can be sued seoaratelv to enforce liability as such. notwithstandinq a SEC order declarins the former under a its
State of suspension of Pavment.

Third Distinction

A gurraotor is an insurer of the dcbtor's inmlvency. A surety is an


insurer of the debt
E. Zobel.

hc.

vs. Court of Aonealr

(290SCRA

l)

A surety is usually bound with his principal by the same instrument,


executed at the same time, and on the same consideration. He is an original promissor and debtor from the beginning, and is held, ordinarily, to know every dethult of his principal. Usually, he will not be discharged, cithcr by the mere indulgence olthe creditor to the principal, or by want ofnotice of the default of the principal, no matter how much he may bc injured thereby. On the other hnntl, thc conlnrct of guuranty is thc guamntor's own sepBrate undertaking, in which the principal does not join. lt is usually entered into beforc or aftcr that of the principal, and is often supported on a separate consideration from that supporting the contract of the principal. The original contract ofhis principal is not his contract, and he is not bound to take notice of its non-performance. He is often discharged by the mere in&rlgence ofthe creditor to the principal, and is usually not liable unless notified ofthe default ofthe principal. Simply put, a surety is distinguished from a guaranty in that a quarantor is the insurer of the solvencv ofthe debtor and thus binds himself to pa)' if the princioal is unable to pay while a surety is the insurer of the debt. and he oblieates himself to pav the orincioal does not pa!,.

if

4l

Securitv Pedtlc

iiiffinaondol
(468 SCRA 526)

vr.

Trti.Irhroc

A surety is considercd in law as beins the same party as the debtor in

'

relation to whatever is adjudeed touchinq the obliqation of the latter. and their liabilities are interwoven and inseparable.
Suretyship is a contrachrat relation resulting from an agrecment whcreby one prson, the surety, engsges to be answerable for the debt, default or miscarriage of another known as a principal.

rc

Quiamco vs. Caoital lnsum

'fhe parties entered into a contract of suretyship wherein respondent as surety bound itself solidarily with petitioners (the principal debtors) to fulfill an obligation. The obligation was to pay the monetary award in the labor case
should the decision become final and executory against petitioners.

'

From the moment the contract is perfected, the pades are bound to conply with what is expressly stipulated as well as with what is required by the nature of the obligation in keeping with good faith, usage and the law. A surety is considered in law to be on the same footing as the principal debtor in relation to whatever is adjudged against the latter. Accordingly, as surety ofpetitioners, respondent was obliged to pay on the [ond when a writ of execution was served on it. Consequently, it now has the right to seek frrll reimbursement from pctitioncrs for the amount paid specially in view of an indcmnity agrecmcnt executed by petitioners in favor of respondent.

ffi.
D.

(s20 scRA 317)

A surety is considered in law as beine the same party as the debtor in


relation to whatever is adjudged as touching the obligation of the latter, their liabilities are interwoven as to be inseoarable.

ConstructionofGuaranty/SuretyshipCotrtrlct Tiu Hions Guan vs. Metrobank


(498 SCRA 246)

The liability of a surety is determined strictty on the basis of the terms and conditions set out in the surety agreement

Although a surety conmct is secondary to the principol obligation, the liability of the surety is direct primary and absolute; a surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal interest in the obligation constituted by the latter.

42

(434 SCRA 202)

Thal the guaranter issued by the petitioner is unconditional and irrevocable does not makc the petitioner a surety. As a guaranty, it is still characterized by i* subsidiary and conditional quality bccause it does not take effect until the fulfillment of the condition, namely, that the principal obligor should fail in his obligation at the time and in the form he bound himsclf. In other words, an 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. A conditional guaranty, as opposed to an unconditional guaranty, rs one rvhich depends upon some extraneous event, beyond the mere def'ault of the principal, and generally upon notice ofthe principal's default and reasonable diligence in exhausting proper remedies against the principal. Besides, suretvship is never presumed. A party should not bc considered a surety where the contract itself stioulates that he is actine only as a quarantor. It is only when the euarantor binds himself solidarilv with the principal debtor that the contlact bocomes one .

ofs

il 'l

t.,

1l ,L
,ii

,t,

Olbes vs. China Bankinq Corooretion (484 SCRA 330) No liability attaches under a contracf of suretyship for defaults occurring belbre it is entered into unless an intent to be so liable is indicated. In an old but still very much applicable case of Bank ofthe Philippine Islands vs. Foerster (49 Phil. 843), it was ruled that althoueh a contract of suetvshio is ordinarilv not to be construed as retrospective. in the end the intention of the parties. as revealed by the evidence is controllins.

tI

l*,
;&
:iH

i['
!ig

[[t

ti[
fifl

In the present case, the Suretyship Agreement expressly contemplated a solidary obligation. It is a cardinal rule that if the terms ofthe contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulation shall control.

:{t
.B

r'l
I

Tanchrn vs. Allied Bankins Corooration (571 SCRA 512)

'i
-j

A surety's involvement is marginal to the principal agreement between


the defendant and the plaintiff; hence, in order for the suretv to be subject to a proceeding for issuance of a writ of oreliminarv attachment. it must be shown that said suretv participated in or facilitated the fraudulent Bractice of the ql('lirrdirnt. such, us by ofiFtin&qiga.mly.-s0lcly tq iodps-the.plaintiflto enl$r into the asresrlr.,nt with the det'endant.

Stronghold lnsurance Comntnv. Inc. vg. Reoublic Asahi-Glass Corooration (492 SCRA 179) As a gencral rule, the death of either the creditor or the debtor does not extinguish the c,bligation. Obligations are transmissible to the heirs, except whcn tho tra[smi ;sion is prcvcnted by thc law, the stipulations of thc parties, or the nature of the obligation. Since death is not a defense that a party or his estate can set up to wipe out the obligations under a perfiormance bond, the surcty cannot use :ruch party's death to escape its monetary obligation.

43

De los Santos vs Vibrr (ss8 scRA 437)

Issue: Whether there exists a confiact of guaranty to hold petitioner liable for the loan ofthe princiPal debtor.
Cecilia's conduct in the course of the negotiations and contract signing shows that she consented to be a guarantor of the loan as witnessed by everyone presenr. Her act of "nodding her head' and at the same time even smiling, expressed her voluntary assent to the insertion of the word "guarantor" after her signature. It is the sa$e as saying that she hgreed to the insertion. Also, Cecilia's acts of making the partial payment of Pl5,000 and writing the letter to the Register of Deeds sustain the ruling that Cecilia aflirmed her obligation as do I eon's guaranlor to the loan. Thus, Cecilia is now estopped from denying that she is a guaranlor.

'

Quiamco vs. Canital Insurance & Suretv Co.. Inc. (s6s scRA 146)

Conlracts are perfected by mere consent. ttris is manifested by the meeting ofthe otfer and the acceptance upon the object and cause which are to conslitute the contract. I-lere, the object of the contract was the issuance of the bond. 'l he cause or consideration consisted of the premiums paid. The bond was issued after petitioners complied with the requircments. At this point, the contract of suretyship was perfected.
Petitioners cannot insist that the conhact was subject to a suspensive condition, that is, the stay of the judgnent of the labor arbitcr. This was not a condition tbr thc pcrfection of the contract but merely E stttcment of the purpose of the hond in its "whereas" clauses. Aside from this, there was no nrcrrlion ol'tht: contlition lhat bcforc the contrscl could becomc valid and binding, pcrl"ection oi'the appeal was nccessary. lf the intcntion was to makc it a suspensive condition, then the porties should have made it clear in certain and unambiguous term:. E. Zobel. Inc. vs. Court of Aope{ls (2e0 scRA r)

The use of the term "gu4rantee" does not ipso facto mcan that the contract is onc of guamnty. Authorities rccognize that the word "guarantee" is
frequcntly cmploycd in business transactions to describe not the security of the debt but an intention io be bound by a primary or independent obligation. As aptly observed by the trial court, the interpretation ofa contract is not limited to the title alone but to tl:e contents and intcntion of the parties.

!!!![,oine

Bank of Cqmmunicrtions vs Lim (45s S(:RA 714)

ln enforcing a ;urbty contract, the "complementary-contracts-construedtogether" doctrine fini s application. According to this principle, an accessory contract must be read in its entirety jild together with the principal agreement.

44

true

E. l.

Rules Governinq the Nature and Extent of Guamntv


Guaranty is generally gratuitous

Exception:

contrarystipulation

Garcia. Jr. vs. Court of Aoneals (r91 SCRA 493) peculiar nature of a guaranty or surety agreement is that it is regarded as valid despite the absence ofany diiect consideration received by the guarantor or surety either from the principal debtor or from the creditor. While a contl4e!_o_f_guaqlly_-ql5utgly, like any other contract, must eenerally be supported h-v a sufficient consideration such consideration need not pass directly to the quarantor or suretv: a consideration moving to the principal alone will suffice. The guarantor or surety, therefore, becomes liable for the debt or duty of another although he possesses no direct or, personal interest over the obligations nor drres hc receive any benefit therefrom.

lhe

Evnngelista vs, Mercator Finance Coro. (4(D SCRA 410)

'

A suret) is one rvho is solidarily liable with the principal. Pbtitioners cannot clairn that they did not personally receive any consideration for the conlrect for well-entrenched is ihe rule ihat the considcration necssary to supflort a suety obligation need not pass directly to the surEty, a consideration moving to the principal alone being sulficient. A suretv is bound bv the same Q9lidenliAn lhlmakes the contrac! etrec thircto. Xlllex Unsticlldnptrier Colpor&fu
vs. C'ourt of

Atrxrab

(2s6 SCRA 478)

. 2.

Put in another u,ay, the consideration necessary to support a swety obligation need not pass directly to the surety, a consideration moving to the principal alone being su{ficient. For a "guarantor or surety is bound by the same consideration tha'i makes the contract effective between Oe principal parties thereto...... It is never necessary that. a guarantor or suretv should receive any part or beneiit- if such there be. accruing to his orincipal.', xxx

Guaranty is an accessory contract therefore there must be a valid principal obligation for guaranty to be valid. Guarantor may secure the performance of voidable, unenforceable, natural, conditional and future obligations (Article 2052).

!.lst!o v$_(l$ig!
(526 SCRrr 26)

A suretl ship requir". a principal debtor to whom the surty is solidarily bound by way of an ancillary obligation of segregate identity from the otrligation bctrrcon thc principal debtor and the creditor. In the case ofjoint and

45

-oaly-d* sttatt
which corresponds to each, with the interest for the payment already made," while, in contrast, even as the surety is solidarily bound with the principal debtor to the creditor, the surety who does not pay the creditor has the right to recover the full amount paid, and not just any proportional share, from the principal debtor or debtors. The rights to indemnification and subrogation as esrablished and granted to the guarantor by Articles 2066 and 2067 of Civil Code extend as well to suretics as defined under Article 2047. Diamond Builders Conqlomeration vs. Countrv Bankers Insurance CorDoration (s4o scRA le4) Article 2047 ofthe Civil Code specifiially calls for the application of the provisions on solidary obligations to strretyship contracts. In particular, Article l2 I 7 ol the Civil Code recognizes the right of reimbursement from a codebtor (the principal.co-debtor, in case of suretyship) in favor of the one who paid (i.e., the suretl,). In contrast, Article l2l8 of the Civil Code is definitive on when reimlrursement is unavailing, such that only those payments made after the obligation has prescribed or became illegal shall noi entitle a solidary debtor to
reimbursement.

In the recent case of Escaiio vs. Ortigas (G.R. No. 151953, June 29, 2007. 526 S('l{A 26), rvc elucidated on the distinction betwcen a surety as a codebtor under a suretyship agreement and ajoint and solidary co-debtor, thus:

. . .

"(A)s indicated by Articlo 2047, a suretyship .requires a principal debior to whom thc surety is solidarily bound by way of m ancillary obligation of segregate identity from the obligation between 0re principal debtor and the creditor. The suretyship docs not bind the surety to the croditor, inasuch as the latter is vested with the right to proceed agains the foroer to collcct the oedit in lieu of proceeding against the principal debtor for the sarnc obligation, At the sarne time, thero is also a lcgal fie oeated bawecn 6c surcty ad thc principal debtor to which thc creditor is not privy or paty to, ThG momcnt thc surety tirlly onswcrs to the creditor for thc obligatiom crcatod by tho principal debtor, such obligation is oxtinguished. At the same timg the surety may seek reimbursement from the principal tlcbtor for the amount partl, for thc strcty
does in fact "become subrogated to

dl

the rights and rerncdics of thc creditor."

3.

Guarantor's liability cannot exceed the principal obligation (Article 2054).

Commonwealth lrsursnce Corooretion vs. Court of Appeals (42r SCRA 367)

even if in thus paying, its liability becomes more than the principal obligation. The increased liability is not because of the contract but becausc of the default and the necessitv ofjudicial oollection.

If a surety uoon demand fails to Erav. he,can be held liable for interest,

4.

Cuaranty cannot be presumed. If there is any doubr on the terms arid conditions of the guaranty or surety agreements, the doubt should be resolved in favor of th guarantor or surety (Philippine National Bank vs.,Court of Appeals, 198 SCRA 767). However the rule of strictissimi juris commonly refers to an accornmodation surety and is not applied in case of
compensated sureties.

46

ffi
Mila lbajan filed with the Regional Trial Court a complaint against spouses Jun and Susan Bartolome for replevin to recover from them the possession of an Isuzu jeepney, with damages. Plaintiff Ibajan alleged that they were the owners ofan Isuzu jeepney which was forcibly aken by defendants while parked at their residence. Plaintiffs filed a replevin bond thru petitioner Visayan Surety & Insurance Corporation and the trial coun issued the writ. Consequently, the sheriff seized subject vehicle and tumed over the same to plaintiff spouses Ibajan. Spouses Bartolome filed a motion to quash the writ of replevin. Meanwhile; Dominador lbajan, father of plaintiff Danilo, Facts:
Spouses Danilo and

filed a rmotion for leave of court to intervene, stating that he has a right superior to thc plaintiffs over the ownership and posses'sion of the subject vehicle. The trial court grantcd the motion to intervene. The trial court issued an order $anting the rnotion to quash the writ of replevin and directing plaintiffto retum thc subjcot jeepney to the intervenor Dominador. The trial court ordered the issuance of a writ of replevin directing the sheriff to take into his custody the subject motor vehicle and to deliver the same to the intervenor who was the regislered owner. '['he trial court issued a writ of replevin in favor of intervenor Dominador but it was returned unsatisfied. Intervenor Dominador filed a mbtion/applicalion for judgment against plaintiffs' bond which was granted.
Issucg.

l.

posted by petitioner in

Whethcr thc surety is liable to an intervenor on a replevin bond hvor of respondents.

May an interyenor be considered a parly to the contract of surety which he did not sigrr and which was executed by plaintiffs and defendants?

2.

Held: A contract of surety is an

agreement where a paay called the surety pe:formance party called the principal, or obligor of the another by luarantees an obligation or undertaking in favor ofa third person called the obligee. The oblisation of a iuretv cannot be extended by imolication bevond .its specified limits. The extent of a surety's liabiliw is determined only b], the clause of the contract of suretyshio. A contract of surefu is not presumed. it cannot extend to more than what is stipulated. Since the oblieation of the suretv cannot be extended by implication. it follows that the suretv cannot be held liable to the intervenor when the relationshio and oblisation of the surety is limited to the defendants soecified in the contract of surebr.
5.

The qualifications ofa guarantor are:


5.1

5.2 5.3

He possesses integrity; He has capacity to bind himself; and He has sufficient property to answer for the obligation which he guarantees.

6.

Where the creditor has required and stipulated that a specified person should be a gu{rantor, the substitution of guarantor may not be demanded (Article 2057) because in such a case the selcction of the guarantor is a term of the agreement and as a paAy, the creditor is, therefore, bound thereby (see Articles I159, 1306).

F.

Doctrine of Continuing Guaranty

47

Bank of Commerce vs. Flore3 (637 SCRA s63) continuing guaranty is a recognized exception to the rule that an action to foreclose a mortgage must be limited to the amount mentiond in the mortgage contract. Under Article 2053 of the Civil Code. a crrarantv may be siven to secure even future debls. the amount of which may not be known at the time the euaranty is executed. This is the basis for contncts denominated as a continuing guaranty or suretyship. xxx In other words, a continuing guar&nty is one that covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof

A guaranty shall be construed as continuing when, by the terms thercof, it is evident that the object is to give a standing credit to the prinoipal debtor to be uscd tiom time to time either indefinitely or until a certain period especially iflhc right to iecall the guaranty is expressly reserved.
Totan6s vs. China Bankinq Corporation (s76 SCRA 323)

j.

&e Act ttrat tte conm to the cxecution ofthe oromissorv note does not neqate the former's liabilitv.
A bank or financing oompany which anticipates entering into a series of credit transactions with a particular oompany, normally rcquires the projected principal debtor to execute a continuing surety agreement along with its sueties. By executing such an agreement, the principal places itself in a position to enter . into the projected series of kansactions with its creditor; with such swetyship
agreement, there would be no need to execute a separatE surety contract or bond for each financing or credit accommodation extended to the principal debtor.

Gatewsy Electronics CorDorEdO! rs. Asiabank Corooration (s74 SCRA 698)


Comprehensive or continuing su ety agreements are in fact quite commonplace in present day financial an I commercial practice. A bank or financing company which anticipates enteri g into a series ofcredit transactions with a particula( company, commonly requi es the projected principal debtor to execute a continuing surety agfeement along with its sureties. By executing such an agreement, the principal places itseif in ii position to entrer into the projected series of transactions with its creditor: with such suretyship agreement, there would be no need to execute a sepe rate surety contract or bond for each financins or credit accommodation exte. rded to the principal dcbtor. guaranty is one u hich covers all transactions, irrcluding those arising in the future which are wi .hin the description or contemplation of the contract of guaranty, until the expira;ion of termination thereof.

A continuing

48

r.l.

Fffi

trIGU'El5EE (r",

Tt

T-_!-I.l G

Affi

"a" "t r"

A continuing guaranty is one which is not limircd to a single transaction, but which contemplates a future course of dealing covering a series of transactions, generally for an indelinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits and contemplates a succcssion of liabilities, for which, as they accrue, the grurantor becomes liable.
be construed as continiring when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used t'rom tinro to time cither indefinitely or until a certain period; especially

A guaranty shall

if

the right to recall the guaranty is expressly reterved. Where the contract of guarantv states that the same is to serve advances to be made from time to time the euarann* will be construed to be a continuins one.
E. Zobel. Inc. vg. Court of Anoeals (290 SCRA 1)

lavirrg thus cstahlished that petitioner is a surety, Article 2080 of the Civil Code, rclicd upon by pedtioncr, finds no application to tht,. case at bar. In Bicol Savings and l-oan Association vs. Guinhawa (188 SCRA 647), we have nrled that Artts!: ?9!OOLthg il_el,/ ClyillAdgdoes not apply where tie liabilitv is3al surcty.,11trl il^s. a quaftlntor.
I

[]ut ovcn assuming that Article 2080 is applicable, SOLIDBANK's


lhilurc to rcgister tho chsttcl mortgage did not release petitioner suety from the obligation. In the Continuing Guaranty executed in favor of SOLIDBANK, petitioner bound itself to the contract inespective of the existence of any collateral. It even released SOLIDBANK from any fault or negligence.that may impair the contract as may be gleaned from the stipulation 'No apt or omission of any kind on the part of the Bank in the premises shall in any event affect or impair this guaranty xxx". Philinnine Bloomins Mills. Inc, vs. Court of Aooeals (413 SCRA 44s) The law expressly allows a suretyship for "futue debb". Article 2053 of the Civil Code provides: "A guaranty may also be given as security for fu!U!_dgb!t thc amount of which is not .yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured." (Emphasis supplied) Furthermore, this Court has ruled in Diflo v. Court of Appeals that: Under the Civil Code, a guaranty may be given to secue even future debts, the amount of which may not be known at tle time the guaranty is executed, This is the basis for contracts denominated as continuing guaranty or suretyship. A continuins quarantv is one which is not limited to a sinsle transaction- but which codfemolates a future course of dealinq. covering a series of transactions. qenerallv for an indefinite time or Unl1tl-Igyek{ It is prospective in its operation and is generally intended to provide security with respect to future fiansactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, ihe guarantor
becomes liable.

49

G.

Effects of Guaranty between the Guarantor and the Credltor


Guarantor has the right to the benefit of excussion or exhaustion of the debtor's proprty before he can be compelled to pay. Exceptions:

l.

,t

ii:

rl !l

a)

if guarantor has expressly renounced excussion


T'unaz vs. Court of Aooeals (47S SCRA e8)

I{cspondent bank's suit against petitioner Jose Tupaz stands despite thc Lburt's tinding that hc is liablc as guarantor only. lirst, cxcussion is not a prerequisite to secure judgment against a guarantor. The guarantor can still demand delerment ol' the.execution of the j udg,ment against him until after the assots ofthe principal debtor shall have been exhausted. Second, the benefit of excussion may be naived. Under the trust receipt dated 30 September 1981, pr:titioner .lose 'l-upaz waived excussion rvhen he agreed that his "liability in thc Lluurnn(.)' slurll hc tlin:r:l und rrurrtcdiato, willrout uny nr":cd whulsocvr:r olt xxx the part of respondent bank to take any steps or exhaust any legal remedies

rxx:'Pctitioncrclcarlvrvaivcdthclrene{itofcxcuisionundcrhisguarantcc.
b) c) d)

ifguarantor has bound himself solidarily with the debtor (suretyship) in case ol debtor's insolvency when guarantor has absconded or cannot be sued within the Philippines unless he left a
manager or representative

ll
0

if it may be presumed thBt an execution on the debtor's properiy will not satisfu the obligation if guarantor does not set up the benefit of excussion and fails to point out to the creditor available property ofthe debtor within the philippines

Bitanqa vs. Pvramid Construction Ensineering Corooration (s63 SCRA s44)

Petitioner cannot avail r,imself of the benefit of excussion. Under a contract of lparantee, the guarar, ror binds himself to the creditor to firlfill the ohligation oi'the principal debtor in case the latter should fail to do so. The Buurunlor wlro puys liu' u tlcblor, in turn, rnust bC indcrnnilicd by thc lattcr. However, the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the pr,operty of the debtor and resorted to all the legal remedies against the debtor. This is what is otherwise known as the benefit ofixcussion.

Article 2060 o1' the Civil'Code clearly requires that in order for the guarantor to make use ,f the benefit of excussion, he must set it up against the creditor upon the lattr demand firr pal,rnent and point out to the creditor "s ayailable property re debtor within the Philippines sufficient to cover the amount of the deot. It must be stftssed that despite having been served a demand letter at I Jice, petitioner stitl failed ro point out to the respondent properties of Ma rogen Realty sufiicient to cover its debt as required under Article 2060 of tle Civil Code. Such failure on petitioner's part forecloses his right to set up the delense ofexcussior

of

is

50

guarantor fails to interpose it as a defense before judgrrent is rendered against him (Saavedra vs. Price, 68 Phil. 669)
1980 Bar Exam 0uestion

if

"FF" and "GG" executed a promissory. note binding themselves, jointly and severally, to pay "X" Bank P10,000.00 within 90 days from January 10, 1979. "FF" signed the note as principal and "GG" as guarantor. Upon failure to pay the note on due date, *X" Bank sued "FF,' and "GC" ftrr pavmonl. "GC" intcrposcd the defense lhat he was just a guarantor and thc Uank must tirst exhaust all the remedies against the principal "FF" .
Ansrver:

"GG's" defense is not tenable. Had he not bound himself solidarily with "FF" to pay rhe obligation, undouhtcdly as guarartor, he could have availed himself of the defense ofbcncllt of excussion. In olher tvords, hc cannot be compelled to pay the creditor unless the latter has cxhnusted all the property ofthe debtor and has resorted to all the legal remedies against the said dcbtor. []ut lhcn in thc prornissorv note. he bountl himsclfjointly and scverally with "FF" to pay the otrligation to the crcdilor. The defense ofexcussion being invoked by "cG" is not available to a suret-v. (Ariicles 2068 and 2059, Civil Code).

2.

A compromise belw'een the creditor and the principal debtor benefits the guarantor but does not prejudice hirn. A compromise which is entered into between the guarantor and the
creditor benefits but does not prejudice the principal debtor (Article 2063).

3. Guarantor is likewise entitled to the benefit ofdivision where there are several guarantors of only one debtor and for the same debt. Guarantor's liability is only joint therefore, they are not li&ble beyond thi: shares which they are respectively bound to pay (Article 2065).
Exceptions: a) solidarity b) ifany of the circumstances in Article 2057 should
take place

Note: Article 2080 provides: The

guarantors, even though they be solidary, are released from thcir obligutron rvhcncvef by sorne act of the creditor they cannot bc subrogated o the rights, mortgages, and preferences ofthe latter.

Guaranty is a contact of indemnity. The guarantor who pays for a debtor must be indemnified by the latter. The indemnity comprises:

H. 1.

Effects of Guarffnty between the Dcbtor and the Gusrantor

I 1.2
I
.

1.3 |.4

The total amount of the debt; The legal interest thereon from the time thu payment was made known to the debtor, even though it did not earn interest for the crediloi; The expenses incuned by the guarantor after having notified the debtor that payment had been demanded of him; Damages, if they are due (Article 2066).

Exceptions:

a) b)

Where the guaranty is constituted without the knowledge or against the will of the principal debtor, the guarantor can recover only insofar as the payment had been beneficial to the debtor (Article 2050). Payment by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, whic[ however, requires the debtor,s

5l

c) 2.

The right to detnand reimbursement is subject to rraiver.

Guarantor has the right of subrogation against tlre debtor to enable him to enforce the indemnity granted in Article 2066 and he cannot demand more than what he actually paid (Article 2067).

3.

Guarantor has the right following instances:


3. I

to

proceed against the debtor even before payment

in

the

When he is sued for the payment

32
3.3
-1.4

3.5

3.6

5/

ln case ol insolvency ofthe principal debtor When the debtor has bound himself to relieve him from the guaranty withih a specific period, and this period hls expjred Whcrr thc dchl hls becorne demandable by reoson ofthe expiration olthe period tirr paynreut Al1or the lapse often years, when the principal obligation has no fixed period for i(s malirritv, unlcss it be of such nature that it cannot be extinguished except within a period longer than ten years lftherc are reasonable grounds to flear that the.principal debtor intends to abscond If thr: principal debtor is in imminent danger of becoming insolvent (Article 2071\.

Guarantor may either obtain release from the guaranty or demand a security that shall protect him from any proceedings by the creditor and from the danger of debtor's insolvency (Article 2071 ).

I. .
1

Effccts of Guarrnty rs btween Co-guarantorr

The obligation of several guamntors of the same debtor and for the same debt is joint and each i! bound only to pay his proportionate share. Therefore, onc who has paid the entire debt may seek reimbursement from each of his co-guarantors the share which is proportionately owing him. Requisites:

a) b) J. I.

payment must have been inade by virtue ofajudicial demand or because the principal debtor is insolvent

Extinguishoent ofGuarenty
Being accessory and subsidiary, guaranty is terminated when the principal obligation is extinguished by:

a) b) c) d) e) 0

palment or performance loss ofthe thing due condonation or remission ofthe debt confusion or merger of the'rights ofthe crcditor and debtor
compensation novalion

l[olino vs. Security Diners Corooration


(363 SCRA 3s8)

Facts: On July 24, 1987, Danilo Alto applied for a Regular Card with SDIC. He got as his sureq,, his own sister-inJaw Jeanettc Molino Alto. Thus, the tw'o signed the Surety tlndertaking. SDIC issued to Danilo a Regular Card with the
52

upgrade his Regular Card to a Diamond Edition with Jeancttc's approval. O*ito'. ,"quesi *as granted. On October l, 1988' Danilo defaulrcd in the payment of his obligation.

Issue: Was the upgrading a novation of the original agreement goveming the uie of Danilo Alto's first credit card, as to extinguish that obligation and the Surety Undertaking which was simply accessory to it?

Held: Upgrading was a novation of the original agreement covering the first credit card issued to Danilo Alto, basically since it was committed with the
intent of cancelling and replacing the said card. However, the novation did not serve to release petitioner from,her surety obligations because in the Surety Unde(aking, she expressly waived discharge in case of change or novation in thc agreement goveming use ofthe first credit Lard.

EaeLs l odovica applied tbr a credit card with BPI Express Card, with Ongkeko acting as surety. She rvas originally given a P3,000.00 credit limit. When l,odovica's card expired in 1991, it was renewed and her credit limit was increrssd to F10,000.00. As of 12 May 1996, Lodovica had an outstanding balance of P22,476.61. BPI brought an action for sum of money against l,odovica rnd Ongkeko. Ongkeko filed his Answer alleging that he can only be heltl liable fbr the origlnal credit limit of P3,000.00, and that the renewal of the credit card without his consent extinguished his undertaking.

'

Held: In Molino vs. Security Diners Intemational Corporation (363 SCRA


358), the Supreme Court ruled that suretyship under these circumstances is a continuing one and the surety is bound by the liabilities of the principal until it has bccn fully paid.
Ongkeko solidarily obliged himself to pay respondent all the liabilities incurred under the credit card account, whether under thc principal, renewal, or extension card issued, regardless of the changes or novation in the terms and conditions in the issuance and use of the credit card. Ongkeko's liability shall be extinguished only when the obligations are fully puid and satisfied.

Although petitioner's surety undertaking partakes the naturc

of

contract ofadhesion in that stipulations were unilaterally prepared and imposed by respondent on a take-it-or-leave-it basis, the Court ruled that such a contract is "as binding as ordinary contracts, the reason being that the party who adheres to the contract is free to reject it eniirely."

Note: Guaranty may also be extinguished if the creditor had released the guarantor although the principal obligation remains (Article 2078) or in case of
material alteration which imposes a new obligation or added burden on the party promising or which takes away some obligation already imposed, changing the legal effect of the original contract,and not merely the form thereof. (NASSCO vs. Tonento, 20 SCRA 427 [1967]). Release o[ one guarantpr by the creditor without the consent of the other guarantors benefits all to the extent of the share of the guarantor released (Article 2078).

2.

53

Toh vs. Solid Bank Corooration (408 SCRA s44)

Facts: Respondent Solid Bank Corporation agreed to extend a credit facility worth PIO million in favor of respondent First Business Paper Corporation (FBPC) as evidenced by a letter advise dated 16 May 1993. Petitioners Luis Toh and Vicky Tan Toh who are the Chairman of the Board and Vice-President, respectively, of FBPC, executed a continuing guaranty in favor of FBPC more than thirty (30) days from the original acceptance period as required in the "lelter-advise". The continuing guaranty stipulates that Solidbank "may at ant time, or tiom time to time, in (its) discretion xxx extend or change the time payment". FBPC defaulted. Issue: Is the Bank's authority to extend the due date at its discretion pursuant to the atbrequoted provision of continuing guaranty absolut?

Held: l. The aforequoted provision even if understood as a waiver is confined per se to the gant of an extension and does not surrender the prerequisites
therefor as mandated in the "letter-advise". In other words, the authority of the Bank to defer collection contemplates only authorized extensions, that is, those that meet the terms of the "letter-advise". While the Bank may extend the due datc at its discretion pursuant to the Continuing Guaranty, it should nonetheless comply with the requirements that domestic letters of credit be supported by fifteen percent (15%) marginal deposit extendible three (3) times for a period of thirty (30) days for each extension, subject to 25o/o rrrtid payment per 'extcnsion.

2.

An extension of the period for enforcing the indebtedness does not by ilself bring about the discharge of the sureties unless the extra time is not
permitted within the terms of the waiver, i.e., where there is no payment of there is deficient settlement of the marginal deposit and the twenty-five percent (25o/o) consideration, in which case the illicit extension releases tie sureties.
extensions are prohibited under Article 2079 of the Civil Code, which provides: "(a)n extension granted to the debtor by the creditor without the consent ofthe guarantor extinguishes the guaranty". The omission or negligence of Solid Bank in failing to safe-keep the security provided by the marginal dcposit and thc twenty livc percent (25%) requiremcnt rcsults in the material alteration in the principal contract, i.e.,'the "letter-advise", and consequently releases the surety.

3.

Illicit

Tafiedo vs. Allied Bankinq Corooration (374 SCRA r0l)

The amendatory agreement between the respondent Allied Banking Corporation and Cheng Ban Yek & Co., Inc. extended the maturity of the promissory notes without notice or consent of the petitioner as surety of the obligations. However, the "continuing guarantee" executed by the petitioner Emilio Tafledo provided, that he consents and agrees that the bank may, at any time or lrom the time to time extend or change the time of payments and/or the manner, place or terms of payment of all such instruments, loans, advances,

54

ttre loans did

na

rcl&siGffi'-'"'-

,-Tr]-l

Even if the "continuing guarantee" were considered as one of adhesion, we find the contract of "surety" valid because petitioner was "fiee to reject it entirely." Petitioner was a stockholder and officer of the debtor Cheng Ban Yek and Co., Inc. and it was common business and banking practice to require "sueties" to guarantee corporate obligations. The guarantor who pays is entitled to be subrogated to all the rights of the creditor (Article 2067). If there can be no subrogation because of the fault of the creditor, as when the creditor releases or fails to register a mortgage, th guarantors are thereby released. The same rule applies even though the guarantors be solidary (Article 2080). F'ilininas Textile Mills. Inc. vs. Court of Auoeals (4r5 SCRA 635) As regards the purported material alteration of the terms and conditions extension of time grantcd to Filipipn5'l'extile Mills to pay its obligation did not release the surety Vrllanuevu lionr his liability. 1'he neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues until the principal becomes insolvent. The raison d'etre for the rule is thirt therc is nothing to prevent the creditor lrom proceeding against the principal at anv time. At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himsclf and become subrogated to all the rights and remcdies of the creditor. Leniency shown to a debtor in default, by delay permitted by the , creditor without change in the time when the debt might be dcmanded docs not constitute an extension of the time of payment, which would release the surety. In order to constitute an extension discharging the suety, it should appear that the extension was for a definite period, pursuant to an enforceable agreement between the principal and the creditor, and that it was made without the consent of the surety or with a reservatio[ of rights with respect to him. The contract must be one which precludes the creditor from, or at least hinders him in, enforcing the principal contract within the period during which he could othenvise have enforced it, and precludes the surety from paying thc debt.

of lhe cornprehcnsive surety agreement, we rule that the

I(

Liability of Conjugal Partnership


Securitv Bank and Trust Comoanv vs. Mar Tierra Corooration (s08 scRA 419) Issue: May the conjugal partnership be held liable for an indemnity agreement
entered into by the husband to accommodate a third party?

Where the husband contracts an obligation on behalf of the family business, there is a legal presumption that such obligation redounds to the benefit of the conjugal partnership, but if the money or services are given to another person or entity and the husband acted only as a surety or guarantor, the transaction cannot by itlelf be deerned an obligation for the beoefit of the conjugal partnership.

55

husband atone defeats the Civil Code to protcct the rvell-being and of the family as a unit. The underlying concem ofthe law is the conservarion of the conjugal partnership. Hence, it limits the liability of the conjugal partnership only to debts and obligations contracted by the husband for the benefit ofthe conjugal partnership.

Chins vs. Court of Anpeals (423 SCRA 3s6)

The signing as surety is cenainly not an exercise of an industry or prol'ossion-'. no malter how often an executive acted on or is persuaded to ait as suroty firr his orvrr cmployer, this should not be taken to mean that he thereby emharked in rhe business of suretyship or guaranty. To make a conjugal partnership responsible for a liability that should appertain alone to one of the spouseS is to frustrate the objective of the New Civil Code to show the utmost concem for the solidarity and well-being of the farnilv as a unit .-the husband is therefore denied the power to assume unnecessary and unwarranted risks to the financial stability of the conjugal partnership. Thc bank failed to prove that the conjugal partnership of the petitioners was benefited by petitioner husband's act of executing a continuing guaranty and suretyship agreement with the bank in his capacity as EVp of Philippine Blooming Mills Company, Inc. No presumption can be infened from thc fact that vvhen the husband enters into an accommodation agreement or a contract of surety, the conj ugal partnership would thereby be benefited. The bank had the burden to establish that such benefit iedounded to the conjugal partnership. On the other hand, when the husband contracts obligations on behalf of the family business, the law presumes thal such obligation would redound to the benefit ofthe conjugal partrership.
Legal and Judicial Bonds

. L.

because they are not mere guarantors, but sureties whose

A judicial bondsman and the sub-surety are not entitled to the benefit of
Flores. Sr. vs. Stronqhold Insurance Co.. Inc" (sot scRA s63)

excussion

liability is primary and solidary.

An application for damages against the bonds must be filed in the same case where the bond was issued, either (a) before trial or (b) before the appeal is perfected or (c) before judgment becomes executory. The principal pafiy;d his surety or sureties must be notified of said application. The rule is mandatory. In
ggl!919d and executed aeainst it.

Yu

vs.

Nso Yet Te

(514 SCRA 423)

In Mulayan Insurunce Company, Itrc. vs. Salas (90 SCRA 252,llgTgl), we that if the surrity was not given notice when the claim for damagis .held against the principal the replevin bond was heard, then as a matter of procedural due process the surety is entitled to be heard when the judgnent for damages- against the principal is sought to be enforced against- thJ surety,s replevin bond.

ir

56

A.

Definition

Pledge is a contract by virtr"re of which the debtor delivers to the creditor or to a third person a movable (Article 2094) or document evidencing incorporeal rights (Article 2095) for the purpose of securing the fulfillment ofa principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions.

MCO Samnle Problem


and Y borrowed a sum of ron.y fiom Z and in order to guarantee the payment of rhe loan, the spouses entrusted to Z the transfer certificate of title of their parcel of agricultural land It rvas agreed that the Torrens title shall only be retumed by Z to the borrowers upon full pryment of the loan. No written document was drawn up between the parties. What
Spouses

contract wes constituted by the parties?

a. b. .3. c. d. B. l.

Real estate mortgage of the parcel ofland subject ofthe Tonens title Chattel nrortgage bfthe Torrens tide as a movable by itself Pledge of the Torrens title as a movable by itself Dcposit of the Tonens title as a movable by itself

Charncteristics

it is perfected by the delivery of the thing pledged by the debtor who is called the pledgor to the creditor who is the pledgee, or to a third person by common
because

A real contract

agreement:

II. Tambuntine Pawnshon. Inc. vs. (lommissioner of Internal Revenue (s84 SCRA 445)
True, the pawn ticket is neither a security nor a printed evidence of indebtedness. But, precisely being a receipt for a pawn, it doc;tnrents the pledge. A pledge is a real contract, hence,-it is necessary in order to constitute the contract of ptedge, that the thing pledged be placed in the possession of the creditor, or ofa third person by common agleement. Consequently, the issuance of the pawn ticket by the pawnshop means that the thing pledged has already been placed in its possession and tlrat the pledge has been constituted.
An accessory conlract because ir has no independent existence of its own;

'

3. 4.

A.unilateral contract because it creates an obligation solely on the part ofthe creditor to retum the thing subject thereof upon the fulfillment ofthe principal obligation; and

A subsidiary contnct because the obligation incurred does not arise until the fulfillment ofthe principal obligation which is secured.
1994

Bar Exam Ouestion

from Danny, collaterized by a pledge of shares of stock of Concepcion Corporation worth P800,000.00. In 1983, because of the economic crisis, the value of. the shares pledged fell to only F100,000.00. Can Danny demand that Steve surrender olher shares worth P700,000 00?

In 1982, Steve borrowed

i.+OO,OOO.OO

rn
Altemative Answers:

Bilateral contracts cannot be changed unilaterally. A pledge is only a subsidiary contract and Steve is still indebted to Danny for the amount of P100,000.00 despite the fall in the value ofthe stocks Pledged.

a)

No.

b)

No. Danny's right as pledgee is to sell the pledged shares at a, public sale and keep the proceeds as collateral for the loan in case Steve defaults. There is no showing that the fall in the value of the pledged proirrty was attributable to the pledgor's fault or fraud. On the contrary, the economic crisis was the cause tbr its decline in value. There is likewise no showing that the pledgee had been deceived as to the substance or quality ofthe pledged shares of stock in which ius", h" would have had the right to claim another thing in their place or to the immediate PaYment of the obligation.

. C. 1. 2. 3.

'l'he contracting parties to a pledge agreement may stipulate that the said pledge rvill also stand as security for any future advancements (or renewals thereot) that the pledgor may procure from the pledge.
,

Essential Requirements
The ptedge is constituted to secure the fulfillment ofa principal obligation. The pledgor or mortgagor is the absolute owner of the thing pledged or mortgaged.

The persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.

4.

The thing pledged must be delivered to the creditor or to a third penon by common

agreemenl.

Calibo. Jr. vs. Court of Aooeals (3s0 scRA 427)


Pablo Abella purchased a tractor and left it in the safekeeping ofhis son Mike. Mike kept the tractor in the garage of the house he is renting from Calibo. Mike left rcntal arrearages on Calibo's house and offered the tractor as security. Pablo Abella tried to take possession of the tractor from Calibo and filed an action for replevin. The trial court and the CA ruled in lavor of Pablo Abella. Calibo claims that the tractor was pledged to him by Mike Abella or in the ahemative, the tractor was left with him in the concept of deposit. He further alleged that even if Mike were not the owner of tlrc tractor, Pablo Abella failed

Facts:

to repudiate the alleged agency sinoe he allowed his son to act as t}ough he had

full powers.
pledge, the creditor is given the right to retain his properly in his possession, or in that ofa third person to whom debtor's movable it has been delivered, until the debt is pid. For the contact to be valid, it is necessary that ( I ) the pledge is constituted to s@ure the firlfillment of a principal obligation; (2)'thc pledgor be the sbsolute owner ofthe thing pledged; and (3) the frerson constituting the pledge has the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose.

Fleld: In a contract of

r:
As found by'the trial court and affirmed by respondent Court of Appeals, 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 frrlfillment of a principel obligation' caruiot legally constitutc such a guaranty as may validly bind thc property in favor of his creditor, and the pledgee or mortgagee in such a case acquires no right rvhatsoever in the property pledged or mortgaged.

In a contract of deposit, a person receives an object belonging to another with the obligation of safely keeping it and of retuming the same. Petitioner himself states that he received the tractor not to safely keep it but as a form of sccurrly lirr thc pavment of Mike Abella's obligations. There is no deposit rvherc the principal purpose [r:r rcceiving thc object is not for safekeeping.
Consequently, Calibo had no right to refuse delivery of the tractor to its Pablo Abella as owner had every right to seek to repossess the orvner. larvful tractor, including the institution of the instant action for replevin.

Contract may be constituted only by the absolute owner of the thing pledged or mgrtgaged otherwise the pledge or mortgage is void, such as that constituted by an impostor. (see DeLara vs. Ayroso, 95 Phil. 185 [954]; Parqui vs. Philippine National Bank,96 Phil. 157

D. l,

C6mmon Provisions Governing Pledge or Mortgage

lres4l)..

2. 3.

Amortgage ol'conjugal property by one of the spouses is valid only as to one-half ( l/2)

oftheentireproperty.(PhilippineNationalBankvs.CourtofAppeals,9ESCRA20T[1980]
While it is true that urder Article 2085 it is essential that the mortgagor be the absolute owner of the property mortgaged, a mortgagee has the right to rely upon what appears in the certificate of title and does not have to inquire further. Stated differently, an innocent purchaser ftrr value (like n mortgagce) relying on a Tonens title issued is protcted. (Duran vs. Intermediate Appellate Court, 138 SCRA 491 [l985])

4.

stipulation rvhoreby the thing spledged or mortgaged or under antichresis (Article 2137) shall automatically become the property of.the creditor in the event of nonpayment ofthe debt within the term fixed is known as pactum commissorium or pacto commissorio which is forbidden by law and declared null and void (Article 2088; see Vda. de Reyes vs. De kon, 20 SCRA389 [1967]; Hechanovavs. Adil, 144 SCRA450 [986])

PNB vs. Savo. Jr. (292 SCRA 202)

The creditor, in a contract of real security, like pledge, cannot appropriate without foreclosure the things given by way of pledge. Any stipulation to the contrary, termed pactum commissorium, is null and void. The
law requires frireclosure.ifi order to allow a transfer ofthe good given by way of security from its pledgor, and before any such foreclosure, the pledgor, not the pledgee, is the owner ofthe goods.

]
59

I_'

Fort Bonifacio Ilevclonnent Cornorttion vs. YUas Lendins Corooration


(s67 SCRA 4s4)

Facts: On 24 April 1998, Fort Bonifacio Development Corporation C'FBDC) leased one of its unit at the Entertainment Center of the Bonifacio Global City in Taguig in favor of Tirreno, Inc. ("Tirreno") which used the leased premises as rcstaurant and bar. Due to Tirreno's def'ault in its lcase payments, FBDC entered and occupied the leased premises on 29 September 2000 and appropriated the equipment and properties left behind by Tirreno pusuant to Scbtion 22 of'lhcir Contrrcl of l,euse as portiol peyment for Tirrcno's unpaid obligations. On 9 November 2000, Tineno executed a deed of chattel mortgage over the restaurant equipment, furnitures and fixtures in favor of respondent Yllas Lending Corporation as security for a Pl .5 Million loan. On 4 March 2002, Yllas Lending Corporation caused the sheriff to serve an alias writ of seizure against FBDC arising from a complaint for Foreclosure of Chattel Mortgage. FBDC liled a. motion to intervene and to admit complaint in intenention in the said foreclosure proceedings which the trial court denied on the ground that Section 22 of the subject Lease Contract is void under Article .2088 of thcCrril Code for being a pactum commissorium.

'

Issue: Whether or not Section 22 of the subject Lease Contract is commissoriun. Who has a better right over Tirreno's properties?

a pactum

Held:

Section 22 of the lease contract provides:

"Scclion 22. L.ien on the Properties of the Lessee.

Upon the termination of this Contract or the expiration of the Lease Period without the rentals, charges and/or damages, if any, being fully paid or settled, the LESSOR shall have the right to retain possession ofthe properties of the LESSEE used or situsted in the Leased premises and the LESSEE hereby authorizes the I-ESSOR to offset the prevailing value thereofas appraised by the I-ESSOR agoinsl any unpaid rentals, charges and/or damages, tfttre t ESSOR docs not want to usc sard propertics, it may insrcad sell the-same to third partics and apply the proceeds thereof against any unpaid rentats, charges and/or damages."
Respondents, as well as the trial court, contend thar Section 22 constitutes a poctum commissorium, a void stipulation in a contract of pledge. Petitioner FBDC, on the other hand, states that Section 22 is mercly a dacion en pa80.
Section 22, as vvorded, gives FBDC a means to collect payment from the case of termination ofthe lease contract or the expiration of t}e period lease and there are unpaid rentgls, charges, or damages. The existence of a contract of pledge, however, does not arise just because FBDC has means of collecting past due rent from Tirreno other than direct payment. The trial court concluded that Section 22 constitutes a pledge because of the presence of the first three requisites of a pledge: Tirreno's properties in the leased premises secure Tineno's lease payments; Tirreno is the absolute owner of the said propertics; and the persons representing Tirreno have legal authority to constitutc thc plctlg:. Ilowcvcr, thc fourth requilite, thst the thing pledged is placed in the possqssion of the creditor, is absent Therc is noncompliance with thr: fourth requisite even if Tirreno's personal properties are found in FBDC's real property. Tirreno's personal properties are in FBDC's real propeny because of the Contract of Lease, which gives Tirreno possession
lessee

Tirren. in

60

;;;;.-ffi
MCO Samnle Problem

FBDC to take whatever properties that Tineno left to pay the latter'g obligstions after terminating the lease contract without judicial intervention.

X Corporation leased a building to A Corporation which the latter will use as a car shop. The l,casc Contract cxpressly contains a stipulation authorizing X Corporation to retain possession ol' or to scll thc movablc rnachin'crics ftruntl in thc shop in thc cvcnt thc lcsssc defaults in its renlal ohligations and to apply the sale proceeds of said movables as payment for t}tc alorcntcrrl ionctl obligatiturs. Aller A Corporation lailcd to remit several rental payments, X Corporation took possession of and appropriated the machineries without judicial intervention. ls X Corporation legally allowed to do so pursuant to the. aforementioned contractual stipulation?

a. b. * c. d.
Reason:

No, because the said contractual stipulation constitutes a pactum commissorium


rvhich is a void stipulation in a contract ofpledge. Yes, because said contractual stipulation constitutes a dacion en pago. Yes. bccause said contractual stipulation operates as a forfeiture clause in the lease conlract and merely gives X Corporation a remedy against the lessee's failtre to conrply with its obligations. Yes, becausc the said stipulation constitutes the law betwen the parties and should be respected, not being contrary to law, morals, good customs, public order and public policy.

Whcrc the contract is not one ol pledge but merely a means to collect payment from lhe lcssoo in casc ol terrnination o[ ttre lease contract and there are unpaid rentals, there is

no pactum comrnissorium.

E.
l.

.l)irtinctiors bctwecn Pledge and Real Mortgagc

'
)
J.

Elsdse
t.
2.

Real Mortsaqe immovable property

rurovrrtllc propcrty

delivery of the object pledged to the pledgee or a third person pledge is not valid against third persons unless a description of the thing pledged and the date of the pledge appear in a public instnrment
Provisions Applicable only to Pledge

delivery

of the thing mortgaged

is not necessary
3.

mortgage is, not valid against third persons if not registered

The pledgor retains his ownership of the thing pledged. He may, therefore, sell the same provided the pledgee consents to the sale. As soon as the pledgee gives his consents, the ownership of thc thing pledged is transferred to the vendee subject to the rights of the pledgee, namely, that the thing sold may be alienated to satisfy the obligation (Article 2l 12) and that the pledgee must continue in possession during the existence of the pledge (Articles 2093 and 2096).

F. I.

2.

The possession of the pledgee constitutes his security. Hence, the debtor cannot demand its retum until the debt secured by it is paid. {see Article 2105 and Serrano vs. Court ofAppeals, 196 SCRA 107 [991 ]). But the right of retention is limited only to the fulfillment of the principal obligation for which the pledge was r:reated (Article 2098).

6t

Facts: Petitioner Citibank, N.A. is a banking corporation duly authorized and existing under the laws of the tlSA and licensed to do commcrcial banking rctivities in the Philippines. Petitioner lnvestors Finance Corporation, which does business under the name and style of FNCB Finance, is an afhliate of petitioncr Citibank and handles money market placements for its clients. Respondent lvlodesta Sabeniano is a client of both petitioners and had substantial deposits and money market placements with both entities.
llcsporrdont Sabcniano obtained several loans from petitioner Citibank, lbr rvhrch she excouted promissory notes secured by a) a Declaration ofPledge of her dollar accounts in Citibank-Ceneva, and b) Deeds of Assignment of her nronev market plaoements with petitioner FNCts Finance. When respondent failed to pay her loans, petitioner Citibank exercised its right to ofll-set or compensate respondent's outstanding loans with her deposits and money market placemcnts pursuant to the aforementioned Declaration of Pledge and Deed of Assignment.

Held: Petitioner Citibank


20139, paid

was only acting upon the authority granted to it under the Deed of Assignment when it finally used the proceeds ofPN Nos. 20138 and

f'
I

respondent Sabeniano's outstanding loans. Strictly speaking, it did not effect a legal compensation or off-set under Article 1278 ol the Civil Code, but rather, it partll r:xtinguishcd rcspondcnt's obligations through the application of the security given hy the respondent for her loans. Although th pertinent documents were entitled Deeds of Assignment, they were, in realiry, more of a pledge by respondent to petitioner Citibank of her crpdit due from petitioner FNCB Finance by virtue of her money market placements with the latter. *Art. 2218. If a credit which has According to Article 21 18 of the Civil Code: been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the surplus, should there be any, to the pledgor."
Pledgee has the obligation to take carc ofthe thing pledged with the diligence ofa good father of the family. He is entitled to reimbursement of the expenses incuned for its preservation and he is liable for loss or deterioration by reason of fraud, negligence, delay or violation ofthe
3.

by petitioner FNCB Finance, to paftly pay for

terms ofthe contract (Arlrcles I174, I I70).

4. . 5.

Pledgee is not authorized to hansfer possession of the thing pledged to a third person.

Exception: stipulation authorizing pledgee to transfer

possession (Article 2100)

The pledgee has no right to use the thing pledged or to appropriate the fruits thereof without the authority of the owner (Article 2104; see Article 1977). But the pledgee can apply the fruits, income, dividends or interests eamed or produced by the thing pledged to the payment of interest, if owing, and thereafter to the principal of his credit (see Article 2132).

Exception: contrarystipulation
1984 Bar Exam Ouestion

On January l, 1983, A bonowed P10,000 from B payable on December 1, 1983. As security therefor, A pledged his cat to B with aa agreement that B could use it. On June 30, 1983, A offered to pay tho loan in full and asked for the retum of his car.

62

Can A compel B to accep Answer:

No, A cannot compel B to accept tlie payment and to retum the car. Under the agreement with A, B is authorized to use the car. The creditor may use the thing pledged with the consent of the owner (Article 2104). A period for the payment of the obligation was also stipulated. Under Article 1196, it is presumed that whenever a period is designated it is presumed to have been established for the benefit of both the creditor and the debtor. Hence, A cannot prepay the loan and demand the retum ofthe pledged property until the term had arrived.

6.

The pledgor may ask that the thing pledged be deposited judicially or extrajudicially:

I 6.? 6.3
6.

ifthe crcditor uses the thing without authority; if he misuses the thing in any other way (Article 2104) if the thing is in danger of being lost or impaired because of the negligence or willful act of the pledgee (Article 2106).

7.

Piedgor cannol ask for the retum of the thing pledged until said obligation is fully paid including intercst due thereon and expenses incuned for its preservation (Article 2099).

Exr,cption:

Pledgor is allowed to substitute the thing pledged which is in dangei of destruction or impairment with another thing of the same kind and quality (Article 2107).

l'he possession of the thing pledged by the debtor or owner subsequent to the perfection plcdgc gives rise to a nrima frcie presurnption lhat the thing has been retumed and that of the lhe pledge has been extinguished.

8.

9.

When the thing pledged is later found in the hands of the pledgor or the owner, only the accessory obligation of pledge is presumed remitted, not the principal obligation itself (Article t274).

The sale of thc thing pledged extinguishes the principal obligation whether the price thc salc is rrrtrrc or lcss thun thc umourrt duc.

10.

of

a) If the price of the sale is more than the amount due the creditor,
enti
ed to the excess unless the contrary is provided.

the debtor is not

b) In the same way, if


l9tl6 lla r Ernnt 0uestion

the price of the sale is less, neither is the creditor entitled to recover the dcficiency. A contrary stipulation is void (Article 2115).

Mr. Matunod lent Mr. Maganaka the amount of P100,000.00. As security of the payment of said amount, Maganaka delivered to Matunod two rings in pledge. When Maganaka failed to pay, Matunod foreclosed, and had the rings sold at auction. The proceeds of the sale, after
deducting expenses, amounted to only P70,000.00.

(a) May Matunod demand the deficiency from Maganaka? Explain. (b) Assume that the proceeds, after deducting expenses, had come up to P150,000.00.
Would Matunod have been entitled to the excess? Explain.

(c)

Suppose the rings, instead of being pledged, had been mortgaged to Matunod, would Matunod have been entitled to the deficiency if the sale's proceeds were less than the indebtedness or to the excess, if the proceeds were more? Explain.

63

Code expressly provides that the foreclosure of the pledge extinguishes the principal obligation, whether the proceeds of the sale are morc or less than the obli$tion. Therefore:

Article

2ll5 of the Civil

(a) Matunod cannot recover the deficiency. (b) Matunod is entitled to keep the excess, unless there is a stipulation to the contrary.

(c)

If it is a chattel

mortgage, Matunod can still recover the deficiency as there is no prohibition in the Chattel Mortgage Law similar to pledge and the excess, if any, should be returned to the mortgagor Maganaka.

G.

Recent Jurisprudence on Pledge

Sondavon vs. P.J. Lhuiller. Inc. (s47 SCRA l6)

'

'

Facts: Petitioner Gloria Sondayon pledged her Patek Philippe solid gold watch worth P250.000.00 to respondent pawnshop P.J. Lhuiller, Inc. to secure a loan she oblained from the latter. The said watch was one of the jewelry items stolen in a robbery,' perpetrated by the respondent-pawnshop's hired security guard. The stolon jewelry ilenrs pledged to the said pawnshop including said watch werc not insured by respondent-pawnshop against fire and burglary as required by thc ['awnshop Regulation Act. Petitioner filed a complaint for'recovery of possession of personal property with prayer for preliminary attachment against herein respondents which was dismissed by the Regional Trial Court of Parafraque on the ground that the loss of the thing pledged was due to fortuitous event. On appeal, the Court of Appeals affirmed the trial court's decision .
Hencc, the instant petition. IE5uQ: Whnt is rcspondcnt-pawnshop's liability to petitioner in not insuring the laucr's tsold wutch ugninst lirc aud burglury?

As to the causal connection between respondent company's violation of the lcgal obligation to insure the articles pledged and thc heist-homicide committed by the security guard, the answer is simple: had respondent company insured the articles pledged against burglary, petitioner would have been compcnsated for the loss from the burglary. Resp,ondent company's failure to insure the articles is, therefore, a cirntributory cause to petitioner,s loss: Considcring, howevor, that pctitioncr agrecd to a valuation of P!5,000 for thc article pledged in case of loss, the replacement value for failure to insure is likewise limited to Pl 5,000.

MCO Sample Problem


By way of security f ,rr a lr:an he obtained, Z pledged his Rolex watch worth P100,000.00

to Y Pawnshop. The said rvatch was one of the items stolen in a robbery perpetrated by Y
Pawnshop's employee. The :;tolen jewelry items including subject watch were not insured by Y Pawnshop against {ire and trurgtary as required by the Pawnshop Regulation Act. Z signed a pawnshop ticket limiting the liab,lity ofY Pawnshop to is appraised value ofPl5,000.00 in case of los ofthe article. Is Y Pav mshop liable to Z and if so, for how much?

a.

Y Pa'*nshop is liable to Z for P100,000.00; had Y Pawnshop insured the pledged


article trgninst rrurglary, Z would have been compensated for the loss.

b.
I
I
I

*c.
d.

Y Pawnshop is liable to Z for P100,000.00 because the burglary was perpetrated by its employee therefore Y is presumed to have been negligent in the selection and engagement of its personnel. Y Pawnshop is liable to Z for P15,000.00 because Z agreed !o a valuation of P15,000.00 for the article pledged in case ofloss. Y Pawnshop is not liable because the loss of the pledged article was due to a
fortuitous event.

Leglrl

Basis:

Sondayon vs. P. J.

Lhuillier,hc. (547 SCRA

16)

Reason:

A pawnshop's failure to insure an article pledged to it is a contributory cause to the customer's loss. Liability is limited to the agreed valuation of the thing pledged.
H. Tambuntins Prwnshop. Inc. vs. Commissioner of Internal Revenue (s84 SCRA 44s)

Antam Pawnshoo Corooration vs. Commissioner of Internal Revenue (s66 SCRA s7) First Planters Pawnshoo. lnc. vs, Commissioner of Internal Rcvenue (s60 scRA 606)
-andMichel J. Lhuillier Pawnshoo. Inc. Interoal Revenue (489 SCRA 147)

vs. Commissioner of

Issue: Are pawn tickets subject to documentary stamp tax?


Section 195 of the NIRC imposes, among others, a DST on pledge of personal property made as a security for .the payment of a sr.m of money. A pledge may be defined as an accessory, real, and unilateral contmct by virtue of which thc debtor or a third person delivers to the creditor or third person movablc property as security tbr the performancc of the principal obligation, upon fulfillment of which the thing pledged with atl its accessions and accessories shall be retumed to the debtor or third person. Section 3 of P.D. No. I 14 defines a pawnshop as a person or entity engaged in the business oflcnding money on personal property delivered as security for loans. Thus, in essence, a pawnshop enters into a contract of pledge with the pawner or the borrower. The pawn ticket is evidently a proofofa contract of pledge. We agree rvith pctitioncr that lhc luw docs not consider the pawn ticket as a security nor a printed evidence of indebtedness. However, what is subject to DST is not the ticket itselfbut the privilege of entering into a contract of pledge xxx xxx xxx.

A documentary stamp tax is in the nature of an excise tax. It is not imposed upon the business transacted but is an excise upon the privilege, opportunity or facility offered at exchanges for the transaction of the business. It is an excise upon the facilities used in the transaction ofthe business separate and apart from the business itself. In general, documentary stamp taxes are
65

IlrdEro

creation, revision, or termination of spocific legat retationships through the execution of specific instruments. Examples of such privileges, the exercise of which, as effectcd through the issuance of particular documents, are subject to the payment of documentary stamp taxes are leases of lands, mortgages, pledges, and trusts and conveyances of real property. Thus, there is no basis for petitioner's assertion that a DST is literally a tax on the document and that no tax may be imposed on the pawn ticket.

Tambuntinq Pawnshoo. Inc. vg' Commissioner of Internal Revenue


(610 SCRA 514)

A Documentary Stamps Tax @ST) i*an excise tax on the exercise of a risht or orivileqe to transfer obligations, rights or properties incident thereto. Pledqe is arnons the privileqes. the exercise of which is subject to DST. A pledge ma-"- be defined an as accessory, real and unilateral contract by virtue of which the debtor or a third person delivers to the creditor or to a third person rnovahlc propcrty as security lor the performance of the principal obligation, upon the tulfi rncnt ol'which the thing pledged, with all its accessions and accessories, shall be retumed to the debtor or to the third person. This is esscnlially thc business of pawnshops which are defined under Section 3 of Prcsidontial l)ccrcc No. I14, or the Pawnshop Regulation Act, qs persons or entitics cngagcd in lending money on personal property delivered as security for
loans.

Section 3 of the Pawnshop Regulation Act defines a pawn ticket as lbllows: "Pawn ticket" is the pawnbrokers' receipt ficr a pawn. It is neither a ' security nor a printed evidence of indebtedness. True, the law does not consider ' said ticket as an evidence of security or indebtedness. However. for purposes of taxation. the same oawn ticket is oroof of en exercise of a taxable orivilese of concludins a contract of'pledqe, There is therefore no basis in Detitioner's assertion that a DST is literallv a tax on a document end that no tax mav be
imposed on a oawn ticket.

H.

Foreclosure of Pledge Parav vs. Rodrisuez (479 SCRA s71)

Preliminarily, it must be clarified that the subject sale of the pledged shares was an extrajudicial sale, specifically a notarial sale, as distinguished from a judicial sale as typified by an execution sale. Under thc 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 ofthe thing pledged.

redemption over mortgaged real properly 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 rvhich vests the right of redemption over personal property, since that law govems the extrajudicial sale of mortgagcd personal Foperty, but the statute is definitely si{ent on that 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 propcrties, not personal properties,

The right

of

sold on execution.

66

r-

Ii

No provision in the Rules of Court or in any law requires that pledged


properties sold at auction be sold separately'

Villanueva vs. Salvador (480 SCRA 39) Section 13 of Presidential Decree (P.D.) 114 otherwise known as lhe Pawnshop Regulation Act, and even the terms and conditions of the pledge .itself, accord the pawner a 90-day grace period from the dat of maturity of the loan obligation within which to redeem the pawn. But even before the lapse of the 90-day period, the same Decree requires the pawnbroker to notifr the defaulting debtor ofthe proposed auction sale
Over and above the foregoing presoription is the mandatory requirement for the publication of such notice once in at least two daily newspapers during the week preceding the date ofthe proposed auction sale'

A notice ofan auction sale made on the very scheduled auction day itself defeats the purpose of the notice, which is to inform a pawner beforehand that a sale is to occur so that he may have that last chance to redeem his pawned items.

!TI.
A. .

REAL MORTGAGE
Definition

Real nlortgage is a contract whereby the debtor secues l,o the creditor the fulfillment ola principal obligation, specially subjectirig to such security immovable property or real rights over immovable propcrty in casc the principal obligation is not complied with at the time stipulated.

Flancia vs. Court of Aoperls (4s7 SCRA 224)

Under Article 2085 of the Civil Code, the essential requisites of a contract of mortgage are: (a) that it be constituted to secu the firlfillment of a principal obligation; (b) that thq mo$gagor be the absolute owner ofthe thing mortgaged; and (c) that the persons constituting the mortgage have the free disposal of their property, and in the absence thereof, that they be legally
authorized for the purpose.

ln their memorandum, petitionerS cite our ruling in State Investnent House, Inc. v. Court of Appeals to the effect that an unregistered sale is
preferred over a registered mortgage over the same property. The citation is misplaced.

sale and a'contract to sell are worlds apart. Statc Investment House t,learly pertained to a contract of sale, not to a contract to sell which was what (.lakland and petitioners had. In State Investment House, ownership had pass.rd completely to the buyers and therefore, the former owner no longer had any legal right to mortgagp the property, notwithstanding the fact that the new owner- )uyers had not registered the sale. In the case before us, Oakland retained abuolute ownership over the property under the contract to sell and therefore had ev:ry right to mortgage it. Genato's registered mortgage was sup,erior to petitione:s' contract to sell, subject to any liabilities Oakland may have incurred in favcr of petitioners by irresponsibly mortgaging the property to Genato despite its co, nmitments to petitioners under their contract to sell.

contract

of

61

Mercado vs. Allied Bankinq CornoEtion (s28 SCRA 444)

The following requisites are essential to the contracts.of pledge and mortgage: (l) That they be constituted to secure the fulfillment ofa principal obligation; (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; (3) That the persons constituting the pledge or mortgage have the free disposal oftheir property, and in the absence thercof, that they be
legally authorized fbr the purpose.

A special power of attorney is necessary in cases where real rights over


immovable property are created or conveyed.
Where the mortgagee does not directly deal with the registered owner of real property, the law requires that a higher degree of prudence be exercised by the mortgagee. The principle is applicd more strenuously when the mortgagee is a bank or a banking institution.

Develooment Bank of the Philiooines vs. Prudential Brnk (47s SCRA 623) and

ii
l; !i

Heirs of Eduardo Manlaplt vs. Court,of Aooerls (4s9 SCRA 412)


For a person to validly constitute a valid mortgage on real estate, he must be the absolute owner thereof as required by Article 2085 of ttre New Civil Code. The mortgagor must be the owner, otherwise the mortgage is void. In a contract of mortgage, the mortgagor remains to be the owner of the property although the property is subjected to a lien. A mortgage is regarded as nothing more than a mere lien, encumbrance, or security for a debt, and passes no title or estate to the mortgagee and gives him no right or claim to the possession ofthe property. In this kind of contract, the property mortgaged is merely delivered to the mortgagee to secure the fulfillment of the principal obligation. Such delivery does not cmpower the mortgagee to convey any portion thereof in favor of another person as the right to dispose is an aftribute of ownership. The right to disposc includes the right to donate, to sell, to pledge or mortgage. Thus, the mortgagee, not being the owner of the property, cannot dispose ofthe whole or part thereof nor cause the impairment. of the security in any manner without violating the foregoing rule. The mortgagee only owns the mortgage credit, not the property itseli

li ll .

I
I I I I I

il
I
:

DBP vs. Court of Aoperls (2s3 SCRA 414)

With regard to the validity of the mortgage contracts entered into the parties, Article 2085, paragraph 2, of the New Civil Code specifically requires that the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. Thus, since the disputed property was r,ot owned by the Olidiana spouses when they mortgaged it to petitioner, the contracts of mortgage and all their subsequent legal consequences as regards Lot No. 2029 (Pls6l) are null and void. In a much earlier case (Vda. de Bautista vs. Marcos, 3 SCRA 434), we held that it was an essential requisite for the validity of a mortgege tlnt the mortgagor be the absolute owner ofa property mortgeged, and it appearing that

of the parcnt to thc mortgngor, the mortgage u,u..ooriitoiffiffi-.rr th" . the mortgage in question must of necessity be void and ineffective. For the law explicitly requires an imperative for the validity of a mortgage that the mortgagor be the absolute owner of what is mortgaged. Vde. de Javme vs. Court of Aooeals (3e0 scRA 3E0) The Deed of Real Estate Mortgage entered into by the Jayme spouses partake of a Third Party Mortgage under Art. 2085 (3) of the Civil Code. 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 transaction they voluntarily and knowingly entered into for the simple reason that such transaction turned out prejudicial to them later on.

io*i..

l99l Bar Exam Ouistion


Bruce is the registered ou.ner of a parcel ofland with a building thereon and is in peaceful possession thereoi He pays the rea! estate taxes and collects the rentals therefrom. Later, Catalino, the only brother of Bruce, filed a petition where he, misrepresenting to be the attomeyin-fact of Bruce and f-alsely alleging that the certificate of title was lost, succeeded in obtaining a second ou,ner's duplicate copy ofthe title and then had the same transferred in his name throueh -a simulated deed of sale in his favor. Catalino then mortgaged the property to Desiderio who had the mortgage annolated on the title. Upon leaming of the fraudulent transaction, Bruce filed a complaint against Caialino and Desiderio to have the title of Catalino and the mortgage in favor ofDesiderio declared null and void.

.Will the complaint prosper, or will the title of Catalino and the mortgage to Desiderio be
sustained?

Answer:

The conrplaint lbr the annulment of Catalino's title is meritorious. Firstly, thc sccond owner's copy of the title secured by him llom the Land Registration Cout is void ab initio, the owner's copy thereof not having been lost. Furthermore, said second owner's copy of the title was fraudulently procured and improvidently issued by the Court. The Transfer Certificate of Title procured by Catalino is equally null and void it having been issued on the basis of a simulated or forged Deed of Sale. A forged deed is an absolute nullity and conveys no title.
The mortgage in favor of Desiderio is likewise null and void becaure the mortgagor is not the ownor ol' thc rnortgsgud property. Although it may be contcnded that a buyer or mortgagee has the right to rely on what appears on the Certificate of Title, and in the absence of anything to excite suspicion, is under no obligation to look beyond the certificarc and investigate the mortgagor's title, this rule does not find application in the instant case because Catalino's title suffers from two fatal infirmities, namely:

a) b)

That it emanated from a forged deeC ofa simulated sale;

That ii was derived from a fraudulently procured or improvidently issued second owner's copy, the real owner's copy being still intact and in the possession ofthe true owner, Bruce.

The mortgage to Desid'erio should be cancelled without prejudice to his right to


Catalino and/or the government for compensation from the Assurance Fund.

sue

69

scna

299)

operations were conducrcd- RBL subseqrmtly obtained a lmn of n2,m0,000.00 from Philippine Natioul Bank (-PNB", for brwity) which uas sccured by a real estare mortgage in frvor of PNB over trvo (2) parcels of land un&r the name of RBL, located at Bago City, Ne3ros Occidenlal and anotlrcr rcd ad chauel mortgage over the hatchery facilities locaed in thc leased property of rhe lessor, PNB partially released to RBL the sum of P1,000,000-00 less the advance interests, which amormt RBL used for introdrrcing improvements on the leased property where the harchery business was locarcd- During the construction of tr*L improvemenLs, PNB refirsed fo rclease the balance of Tl,U)(),000-00 bccausc Rl]l- failtxl lo comply with PNB's rcquircmcnt that thc lessor should execute an undertaking or socure a lessor's conformity provided in the rcal cstate and chatlel mortgage contract. PNII foreclosed the mortgagod prope(ies lbr farlurc otRllL to comply with the additional rcquircment and to pay the amount of Pl,000,000.00.

Facts: RBL Enterpises, Itrc. (TBL", for hsvity) ope,ncd a pra.wn haichcry and leased from Nelly Be&ejo flessof) a prcel of lmd where the

Issuc:

Was PNB

justified in nol releasing the balance of the toan?

Held: Having released fifty percent ofthe loan proceeds on the basis of the signed loan and mortgage cotrtracts, petitiorer can no longer require the borro$rers to secure the lessor's conformity to the Mortgage Contract as a condition precedent to the release oftlrc loan batance. Nowhere nas it explicitty stated that the release of the second half of tlre loan facility ums subject to the mortgagor's procuremenl of the lessor's conformity to the mortgage contract. The conformity of the lessor was oot n@essary to protct the bant's intercst because respondents lrrcre rmqrstionably the absolUe otvners of thc mortgaged property. The lessor wils never a pofiy to the loan or the mortgrge contact. Furthermorc, the registration of the mortgage contract creatcd a r"at right ro the propcrtics which. in subs:txlucnl lransfcrs by tlrc mortgagor, lhc lransfcrees are
legally bound to respect.

()rule vg. Rurrl

hglpffonlcr,drr
(470SCRA3s2)

(Caoizl. lnc.

Only the exocutor or adminisffior of the est4te may be authorized by lhe inteElrte estate court to mortgage real esta$e belonging to tl|e e$afe. Unless and until the real estate mortgege contracts are apoved by the intestate estde cour! the same cannot have any binding effect upon thc estate nor serve as basis for any action against the estate and against the parcels of land dcscribed in the said contracls belonging fo

it

Any mortgage of realty of the estate without the appropriate th estate court has no legpl support and is voidGozun

afhority of

(sll scRA305)

v* Mercado

general rule in the taw of agency that, in ordcr to bind the qrincipl by a mortglgr, on real property executed by an ager( it must upon its face purport to be mr&, signed and sealed in the nme of tlre pincipal, otherwise, it will bind rfie agent only. lt is not enough merely tlrat the agent uas

It is a

70

r,i 'l

in fact authorired to matE principal.

ffi?@fffie

has not actcd

ir th

name

ofttc

Yasuma vs. Eeirc of Cecilio S. de Villa (499 SCRA 466)

A special power of attomey is necessary to create or convey real rights over immovable property. Furthermore, the special power of attorney must appear in a public document. In the absence ofa special power of attorney in
favor of the president of the corporation, no valid mortgage could be executed by hirn. Petitioncr should have checked if the person he was dealing with had the authority to mortgage the property being offered as collateral.
San Pedro vs. One (s69 SCRA 767)

l'hc real estatc mortgages constituted on tho subject properties based on false and fraudulent SPAs are void ab initio. In Veloso and Rosales v. La Urbana.58 Phil. 681,683 (1993), the Court ruled that the forged powers of attomey are without force and ellect and, thus, nullified the mortgage
constituted on the strength thereof:

'

facts, the court held that pursuant to Article I 7 14 of the Civil Code and under the Torrens Act in force in this jurisdiction, the lorged powers of attorney prepared by Del Mar were without fbrce and elfect and that the registration of the mortgages constituted by virtue thereof were likewise null and void and without force and effect, and that they could in any way --r-.-pejudice the rights of the plaintiffs as the registered owner of her participations in the properties in question."

"ln view of the lbregoing

Consequently, the foreclosure proceedings on the mortgaged properties are likewise void uh initio. Since Ong cannot be'deemed a mortgagee-in-goodfaith nor Bn innoccrrt purchaser for value of the subject properties at the auction sale thereof, his claim to the said properties cannot prevail over that of San Pedro. The Court's ruling, however,.is without prejudice to the right ofOng to proceed against those who perpetrated the fraud to his prejudice.

B.

Cherrctcristics
It is an accessory and r;ubsidiary contract. Reoublic vs. Lim (462 SCRA 26s)

l.

A mortgage i'; merely an accessory contract intended to secure the performance of the principal obligation. One of its characteristics is that it is inseparable from the f'roperty. It adheres to the propcrty regardless of who its owner may subsequenl ly be. Respondent must have known that even if Lot 932 is ultimately exproprizrted by the Republic, still, his right as a mortgagee is protected pursuant to A.tigle 2i 27 ofthe Civil Code.

7t

Naquirt vs. Conrt of Aoocrls (4r2 SCRA sel)


The consirieration of the mo(gage contract is the same as that of the principal contract from which it receives life, and without which it cannot exist as an independent contract. A mortgage contract being a mere accessory conmct, its validity would depend on the validity of the loan secured by it.
Development Bxnk ofthe Philippinc vs. Court of ADDerls (494 SCRA Tt
i
I

.t

The Court of Appeals sustained the validity of a loan obligation but annulled the mortgage securing it on the $ound of failure of consideration. This is erroneous. A mortgage is merely an accessory contract and its validity rvould depend on the validity of the loan secured by it. Hence, the consideration of thc nrortgage contact is tht: same as that ofthe principal contract from which it receives life, and without which it cannot exist as an independent contract. The debtor cannot escap the consequences of the mortgage contract once the validrty ofthe loan is uphcld.

Philiooine National Bink vs. Banatao (s84 SCRA 9s)

'respondents'

A rnortgage is merely an accessory agreement and does not affect the prirrciprl cr)ntrocl o[ lonn. 'l-he morlgoges, whilc void, can still be considered as instruments evidcncing the indebtedness of defendants-respondents to the Philippinc Nntional Bank in a proper case for the collection of the defendants[oan.

tlnited Oversets Bank ofthe Philipoines vs. Rosemoor Mining and Develooment Corooretion (s34 SCRA 528)

An allegation that the mortgagee committed fraudulent acts in thc


constitution of the Real Estate MortgBges is actually an attack on the mortg8ge contracts, and notjust on the foreclosures of these mortgages - the nullity of the foreclosures, therefore, was merely a necessary consequence of the invalidity of the mortgages. The mortgagor's failure to particularly pray for the nullification olthe Real Estate Mortgages may be considered as merely an oversight which is deemed cured when it asked from the aourt a quo foi such other reliefs and remedies as may be deemed just and equitable in the premises.

2. 3.

because it creates only an obligation on the part must free the propert], from the encumbrance once the ohligation is fulfilled.

lt is also unilateral

of the creditor who

The mortgagor, as a general rule, retains possession ofthe proprty mortgaged as security ior the payment of the sum borrowed from the mortga|ee, and pays the latter a certain percent thereof as interest on his orincipal by way of compensation for his sacrifice in depriving himself ofthe use of said money and the enjoyment of its fruits, in order to give them to the mortgagor.

AdEwrn vsJg,'res
(233 SCRA 64s)

By mortgaging a piece of 1;roperty, a debtor merely subjects brrt ownership thereof is not parted with.

it to a licn

72

Pineda vs. Court of Aooeals (409 SCRA 438)

Mortgage is merely an encumbrance on the proPerly and does not extinguish the title of the debtor who does not lose his principal auribute as owner to dispose of the property. The law even considers void a stipulation forbidding the owner of the property from alienating the mortgsged immovable.

4.

The objeit of a real mortgage are immovables (Article 415) and alienable real rights

imposed upon immovables.

La Bugal-N'Laan Tribal Association. Inc. vs. Reveg (44s SCRA 1)


contractor's right to mortgage and encumber its rights and interests in the Financral and Technical Assistance Agreement (FTAA) and the infrastructure and improvements intrcduced, as well as the mineral products extracted, is not objectionable per se. Ordinarily, banks lend not only on the security on mortgages on fixed assets, but also on encumbrances of goods produced that can easily be sold and converted into cash that can be applied to the repayment ol the loans. Banks even lend on the security of accounts receivable that are collectible within 90 days. It is not uncommon to find that a deblor corporation has executed deeds of assignment "by way of security'' over the production lbr the next twelve months antVor the proceeds of the sale thereof- or thc corresponding accounts receivable, if sold on terms - in favor of .its creditor banks. Such deeds may inctude authorizing the creditors to sell the products themselves and to collect the sales proceeds and/or the accounts receivable.
.

-l'he

'

Note: While a mortgage of land necessarily includes, in the absence of stipulation, the improvements thereon, a building by itself may be mortgaged apart from the land on which it is huilt. (Soriano vs. Calit,4lI SCRA 631) Possessory rights over said property before title is vested on the grantee may be validly transferred or conveyed as in a deed of mortgage.
(Prudential Bank vs. Panis, l53 SCRA 390

[987];

Nartales vs. GSIS, 156 SCRA 205 U987l)

5.

In order that a mortgage may be validly constituted, it must appear in a public document duly recorded in the Registry ofProperty (see Gaotian vs. Gaffud, 24 SCRA 706 [1969]).
Cuvco vs. Cuvco (487 SCRA 693)

ln order t(, constitute a legal mortgage, it must be executed in a public document, besidelr bcing recorded. A provision in a private document,.although denominating the agreement as one of mortgage, cannot be considered as it is not susceptible of inscription in the property registry. A mortgage in legal form is not constituted try a private document, even if such mortgage be accompanied with delivery of possession of the mortgaged property. What the parties could have done in order to bind the realty for the additional loans was to execute a new real estate mortgage or to amend the old mortgage conformably with the form prescribed by lhe law. Failing to do so, the realty cannot be Lround by such additional loans, which may be recovered by the respondents in an ordinary action for collcction of sums of money.

r=

1,

Dela Merced vs. Government Scrvicc Insurance Svgtem (36s SCRA r)

Issue: Whetler or not the mortgage and its foreclosure was valid inasmuch as subject properties had already been previously sold to petitioners Dela Merced.

Held: The registered right of the mortgagee of the property is inGrior to


unregistered right ofthe buyer to whom the properly was eatlier conveyed.

the

When the purchaser or mortgagee is a financing institution, the general rule that a purchaser or modgagee of land is not required to look further than what appears on the face of the title does not apply.
The constructive knowledge of the mortgagee ofthe defect in the title of the subject proprty, or lack of such knowledge due to its negligence, ukes the place of registration of the rights of a party to whom the property had been earlier sold.

DSM Construction and Develonment Corooration vs. (lourt of A oDeals (478 SCRA 618) Respondent's reliance on jurisprudence holding that buyer's rights of ownership over condeminium units even unregistered are superior over registered encumbrances is misplaced. The cases cited clearly indicated that the parties involved were condominium buyers and mortgage creditors. A creditor is not synonymous to a judgrnent creditor contrary to what respondent 'asserts. While the law expects a mortgage creditor to inquire as a reasonably irrudent man would regarding the encumbrances on the property in question, no such knowledge is imputed to a judgnent creditor who merely seeks the satisfaction of the j udgment awarded in his favor.

if

mortgage

Rodriquez vs; Court of Aooeals (4es scnA 4eo) mortgage is a registrable instrument. 11 must be registered with the Office of the. Register of Deeds in order to bind third partres.

The deed of sale with assumption

of

Note:

mortgage. nevertheless binding between the parties.

If

the instrument of

is noi recorded, the mortgage

is

Far East Bank and Trust Comornv vs. Shembirq Marketine Corp. (s10 scRA s6)

. 6.

Where the issue involves the validity of a mortgage, the action is one incapable ofpecuniary estimation.

A mortgage creates a real right (see Tuazon vs. Orosco, 5 Phil. 596 [905]), a lien inseparable from the property mortgaged, which is enforceable against the whole woild. Until discharged, it follorvs thc property whcrever it gges and subsrsts notwithstanding changes of ownership.

74

Metrooolitan Bank & Trust Companv vs. Aleio (364 SCRA 8r2)

In a suit to nullifr an existing Torrens Certificate of Title (TCT) in which a real estate mortgage is annotated, the mortgagee is an indispensable party. ln such suit, a decision cancelling the TCT and the mortgage snnotation is subject to a petition for annulment of judgment, because the non-joinder of the mortgagee deprived the court ofjurisdiction to pass upon the controversy.
Although a mortgage affecs the land itself and not merely the TCT covering it, the cancellation of the TCT and the mortgage annotation exposed petitioner to real prejudice, because its rights over the mortgaged property would no longer be known and respected by third parties. Necessarily, therefore, the nullification of TCT No. V-41319 adversely affected its property rights, consrdering that a real mortgage is a real right and a real property by itself.

'

Far llast Bank & Trust Co. vs. Marouez


(420 SCRA 349)

Under PD 957, the mortgage ofa subdivision lot or a condominium unit is void. ifexecuted by a property developer without the prior wriuen approval of the Housing and Land Use Regulatory Board. That an encumbrance has been constitutcd over rn entire property, ofl which the subject lot or unit is merely a part, does not allect the invalidity ofthe lien over the specific portl'on at issue.

DevelorrmeolBaq@
l,ikc on atluohmcnt lien, a mortgagc lien is a vested interest, an actual and substantial security, affording specific security for the satisfaction of the
debt put in suit which constitutes a cloud on the legal title.

'

Tanchan vs. Allied Bankins Corooration

(s7r scRA sl2)


mortgage creditor has a single cause of action against a mortgagor debtor, which is to recover the debt; but it has the option of either filing a personal action for collection of sum of money or instituting a real action to foreclose on the mortgage security. An election of the first bars recoursc to the sccond; otherwise, there would be multiplicity of suits in which the debtor would be tossed from one venue to another, depending on the location of the mortgaged properties and the residence of the parties. On the other hand, a creditor who elects to foreclose on the mortgage may yet file an independent civil action for recovery of whatever deficiency may remain in the outstanding obligation ol the debtor, after deducting the price obtained in the sale ofthe mortgaged properties at public auction. The complaint, though, must specifically allege that what is being sought is the recovery of the deficiency, or that in the pre-trial, such claim be raised as an issue.

W
Seltled in this jurisdiction is the doctrine that a prior registration ofa lien creatos & prclcrcncc; hcncc, the subsequent annotation of an adverse claim cannot defeat the rights of the mortgagee, or the purchaser at the auction sale

a
A contrary nugatory. or meaningless. The ioctrine applies with greater force in this case considering tlrat thJ annotation of the notice of lis pendens was made not only afler the registration of the mortgage, but also, and much later, after the conclusion ofthe foieclosure sale. Furthermore, the mortgagee itself, PVB, is thc purchaser ofthe subject properties in the foreclosure sale rule will make a prior registration of a mortgage or any lien
whose rights were derived from a prior mortgage validly registered.

PVB cannot be considered to have slept on is rights when it only registered the Sherilfs certificate of sale after the lapse of almost 15 years, beiause, as already discussed, it registered its prior mortgage and had akeady
foreclosed on the same. Petitioner, therefore, had every reason to expect that its rights rvere amply protected. The mortgagor lias even benefited by this late reigistration ot'tiri Sneriffs Sale, because then, he would still have a chance to redeem the property. Laches, being a doctrine in equity, cannot be invoked. to rcsist thr: cnii,ripnrcnt 0l'a lcg&l right. Furthermore, oft-repeated is the rule that the foreclosure sale retroacts to the date of the registration of the mortgage. Thus. it no longer matters that the annotation of the sherifPs certificate of sale and the atfidavit o[ consolidation of ownership was made subsequent to the annotation ofthc notice of lis pendens.
1989

Brr Exant Ouestion


Distinguish between a contract of real estate mortgage and a contract of sale with a right

of repurchase.

. Real Estate Mortqase

Sale

with a Riqht to Renurchase

l.

3.

an accessory contract no transfer of title no transfer of possession

l.
2.
3.

principal contact involves a oonditional title involves a conditional transfer


vendee is entitlcd to the fruits

of

4. 5.
Note:

creditor has no right to the upon default, the creditor is the owner

fruits not

title
4.
5.

upon consolidation, the vendee is the owner

the mortgagor sells the mortgaged property, the property remains subject to the fulfillment of the obligation secured by it. (see Bonnevie vs. Court of Appeals, 125 SCRA 122 [19S3]). All subsequent purchasers of the property must respect the mortgage, whether the iransfer to them is with or without the consent of the mortgagee. But the mortgage must be registered (Article 2125) or, if not registered, the buyer must know of its existenoe.) (see Phil. National Bank & Trust corp. vs. court of Appeals, 193 SCRA 158 [1991]. The mortgagor may

a)

If

not be the principal debtor (Article 2085, 2B paragraph).

State Investment House. Inc. vs. Court of APoesls (2s4 SCRA 368)

STATE'] fegistered mortgage right over the property is inferior to that of respondents-';pouses' unregistered right. The unrecorded sale between respondents-spot ses and SOLID is preferred for the reason that if the original owner (SOLID, ;n this case) had parted with his ownership of the thing sold
then he no longel had ownership and free disposal of that thing so as to be able

mctsage is of m oomcnt to mortgagc it agsitl undrstood to be withorl prejudice to lho bettcr dght ofthird parties.

As a gereral nrle u/here there is nolhing in the certificare of title to indicate ary cloud or vice in the oumership of the propeity, or may encumbrare thereon, the purchascr is not rcquircd to exd." 6rtgr rhen u,hat Ite Torrens Title r4on its hce indiares in quest for ary hidden defecl or inchoare ri$t tlEr may subsequemly defeat his righ thecto. This rule honrwer, admits of an exceptiotr as urtere fie puchaser or mutgagee, has knowledge of a defect or lack of title in his vendor, or that he was arrare of sufficient facts 1o induce a reasonably prudent man to inquire into the status of the title of the propcrly in litigation
Petitioner's constructive knowledgp of the defect in the title of the subject property, or lack of such lmowledge due to its negligence, takes the place of registration of ttrc rights of rcspondenc"spouses- Respon&nt court thrs corrextly nrled the pelilioner was mt a prchaser or mortgagge in good flttlt; hencc, petitioner can not solely rety on what merely appears on tlre face of the 'forrens.'l'itlc.

b)

The right or lien ofan innocent mortgagee for value upon the mortgaged property must be respected an{ protected, wen if the mortgagor obtained his title tluough fdtrd The rernedy of the persom prejudiced is to bring an action for damagcs against lhe person wlro caused the fiaud and if tn" Uit"i ir insolvent, an action xsBinsl the Treasurer of the Philipines may be filed for the recovery of damages apinst the Assurance Frmd. (Philipine National Bank vs. Court of Appcals, 187 SCRA 735 [19901)

Benh of Comme-ITgYr.i$lp Prblo- Jr. (522 SCnA 713)

In cases wlrerc the mortgagee does not direcdy deat wilt the registercd owncr ol' rc'ol poperty, thc law rcquircs tlut a hiBher dcgrcc of prudcnce bc excrcised by the mortgagee. As we havc enunciatcd in thc casc of Abod vs. Guimha,465 SCRA 356 (2005): While one who buys from the pgistcrcd ovarr drxx not ncrxl to l<xrk behind the c.crtilicae of title, orc who buys from orrc who is not a registered owrer is expected to examine nc only the certificate of tille but dl ttrc factual circumstances rteocssdy for [one] to detennine if thcre are any flaws in the title of the tramferor, or in [the] capacity io trarxfer the land" Although the instant case does not involve a sale bur only a mortgagc, the same rule applies inasrnuch as the law itself inchdes I mortgagee in tlE term "purchaser." Llanto vr. Alzone (4s0 scRA 288)
LJnder Article 2085 of the Civil Code, one of the esscntial requisites oi the contract of mortgage is that the mortgagff should be the absolute owrer of the propcrty to be mortgagd otherwise, the mortgage is considercd null and void. However, an exccption to this nrle is the doc{rine of 'mortgagee in good

faith." Under this doctrine, even if the mortgagor is not thc owncr of tlrc mortgaged property, lhe mortgage contract and any foreclosrre sale arising therefrom are given effeqt by rcason of pubtic policy. This primiple is based on the rule that all persom dealing with proPerty covgred by a Torrens CertifiGare of Title, as buyers or mortgagpcs, are not requircd to go beyod uthat appeaG on the face ol the titte. This is the same rule that uderlies the principle of
'innocent purchasers for value"-

77

rj

a mortgagpe has a The prevailing good faith on the certi{icate of title of the mortgagor to the property given as security and in the absence of any sigrr that might arouse suspicion, has no obligation to undertake further investigation. Hence, even ifthe mortgagor is not the rightful. owner of, or does not have a valid title to, the mortgaged property, the mortgagee in good faith is, nonetheless, entitled to protection. For persons, more particulady those who are engaged in real estate or financing business, to be considered as mortgagees in good faith, jurisprudence requires that they should take the necessary precaution expected of a prudent man to ascertain the status and condition of the properties offered as collateral and to verify the identity of the persons they transact business with, particularly those who claim to be the registered property owners.

flv

vs. Court of Appesls (3s9 SCRA 262)

Facts:

Respondents De Gumran were owners of th,ree lots in Greenhills Subdivision. ln 1971, they constructed a house on two of the lots. These lots have a combined area of 1,626 square meters. In 1987, the market value ofthe lots already range liom Pl-t to P5T per square meter while the house was worth about Pl0M. tn 1987, Nicanor De Guzman Jr. decided to run for the position of Representalive of the Fourth District of Nueva Ecija. However, his campaigrr lund lregan to run dry so he was compelled to borrow P2.5M from Mario Siochi'[hc l)e (iuzman spouses were required to sign, as a collateral, a deed of sale dated April 10, 1987. After its execution, De Cuzman was able to obtain several more loans from Siochi. No additional collateral was required. Despit,e the "deed of sale," however, the De Guzmans remained in possession of the property. The De Guzmans agreed with Siochi to have their vacant lot (which had already been "sold" to Siochi under the April 10, 1987 deed of sale), sold. In the meantime, and without the knowledge of the De Guzman spouses, Siochi had lhe titles to the lots cancelled, and had new Torrens titles issued in his rurnrc ln .lunc 1987. Siochi sold the lwo lots and the improvements thereon for P2.75M to pctitioncrs. 'l'hcroatcr, pctitioncrs had Siochi's titlcs ovcr thc lots cancelled and secured new titles. In July 1988, petitiona$ entered into a contract of lease with option to buy with Roberto Salapontan, who was unable to obtain possesiion of the lots since the premises were occupicd by the De Guzman spouses- Salapantan filed a complaint for ejectment in August 1988 against the De Cuzmans. It was only at this time that thc De Guzmans discovered the sale by Siochi. The De Guamans filed a complaint against Srochi. Suluptnlnn, ontl pclitioncr IIy, sceking the reformntion of the April 10, 1987 Dr:cd ol'At:solute Sale and reconveyancc of ownership and titles.

Issue: Whether or not petitioners are innocent purchasers in good faith and for
value.

Held: While it is true that

a person dealing with regrstered lands need not go beyond the certificate of title, it is likewise a rvell-settled rule that a purchaser or morlgagee cannot close his eyes to facts which should put a reasonable man on his guard, and then claim that he acted in good faith under the belief that there was no dr:fect in the title of the vendor or mortgagor. His mere refusal to face to the fbct that such defect exists, or his willful closing of his eyes to the possibility of the existence of a defect in the vendor's or mortgagor's title, wiu not make him an innocent purchaser for value, if it afterwards devetops that the title was in fact defectivr:, and it appears that he had such notice of the defect as would

78

have led to its discovery had he acted with the measure of precaution which may be required ofa prudent man in a like situation.

The circumstance that the original transaction was subsequently declared to be an equitable mortgage must mean .that tle title to the subject land which had been transferred to private respondents actually iemained or is transferred back to petitioners herein as owner-mortgagors, conformably with the wellestablished doctrine that the mortgagee does not become the owner of the mortgaged property because the ownership remains with the mortgagor. The issuance of a certificate of title in Siochi's favor did not vest upon him ownership of the property. Neither did it validate the sale made by Siochi to petitioner, which is null and void. Article 2088 of the Civil Code provides that "the creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them." Being null and void, the sale by Siochi of the questioned propcrty to petitioners, who are not innocent purchasers, produced no legal
efTects whatsoever.

Home Bankerr Savinss & Trust Co. vs. Court of Aooeals (4s7 SCRA 167) W'hilc thc cascs ci(ed by petitioner held that the mortgagee is not under obligation to l<xrk bcyond the certificate of title when ot its face, it was free from lien or encumbrances, the mortgagees therein were considered in good faith as they were totally innocent and free from negligence or wrongdoing in the transaction. [n this case, petitioner knew that the loan it was extending to Carcia/'fransArnerican was tbr 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 fotrnd 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 cvcrr usccrtrin from Garcia if there are buyers of lhe lots who tumed out to be privatc respondcnts. Petitioner's want of knowlcdge due to its ncgligence takes the place of registration, thus it is presumed to know the rights of respondents over the lot. The conversion of the status of petitioner from mortgagee to buyer-orvner will not lessen the importance of such knowledge. Neither will the conversion set aside the consequence ol its negligence as a mortgagee.

Judicial notice can be taken ot the uniform practice of banks to invcstigate, examine and assess the rea, 'state offered as security for the application ofa loan. 't'he Bank cannot barr'l:rcedly argue that simply because the title or titles offered as security were clean .rr'any encumbrances or lien, that it was thereby relieved of taking any other stct' to Verify the over-reaching implications should the subdivision be auctioned on loreclosure.

Rural Qank of Siaton (Neqros Oriental). Inc. (495 SCRA I27)

vs.

Macsiilos

ortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor's title, a banking institution must have at least exercised due diligence before entering into such oontract--$anks are expected to exercise more care and prudence than private individuals in their dealings because their business is impressed with public interest.

While

70

buyer rs rcle\.utt oily wDcll subject of the sale is a registered land but not where the property is an unrigistered land--one who purchases an unregistered land does so at his peril' nesi bought the proprty during the auction sale at its own peril and must suffer the ionsequences of its failure to investigate the true owners of subject propcrty.
The iisue of

liiElGFGE['Otra

'

GSIS vs. Santiaso 14H, scnA s63) end Asae vs. Aloha Financins Corporation (407 SCRA 602)

I)etitionor GSIS is not an ordinary inortgagee. It is a governmtint llnancial institution and, Iike banks, is expected to exercise gleater care and prudence in its dealings, i4cluding those involving registered lands' Dye iilig"n"" require6 of banks extend even to persons, or institutions like the petiioner, regularlv engaged in the business of lending money secured by real
estate mortgages.

Adriano vs. Paneilinan (373 SCRA s44)

Guillermo Adriano is the registered owner of a parcel of land in tvtonurlhan, Rizal covered by TCT No. 33?9'12. In November 1990, petitioner entrustc<J the original onmcr's copy ofthe afbresaid Transfer Certificate of Title to Angelina Salvador, a distant relative, for the purpose of securing a mortgge the .loan. Without the knowledge and consent of petitioner, Salvador mortgaged subject property to respondent. After a time, petitioner verified the status of his titl; witil the Register of Deeds and was surprised to discover that a First Real Estate Mortgage was annotated in the TCT purportedly executed by him in favor of respondent, for 160,000.00. Petitioner denied that he ever executed the deed and denounced his signature thereon as a forgery. Petitioner thereafter demanded that respondent rehrm or reconvey to him his title and when ignored, he institulcd the present suit. Respondent testified that he is a businessman engaged in buying and selling as well as in the mortgage of real estate propc(ics; that Salvador together with a person who introduced himself as Guillermo Adriano came to his house and upon verification of papers, he executed.the subject real estate mortgage, and then had it notarized and registered with the Register of Deeds. Respondent claimed that petitioner voluntarily entrustcd his title to the subjcat property to Salvador for the purpose of securing a loan, thereby creating a principal-agent relationship between the trvo. Thus, according to respondent, the execution of the real estate mortgage wus rvithirr lhc stopc of thc nulhority grorrlcd kr Snlvn<lorl thst in any event. lhe TC't and other documcnts came to his possession in the regular course ol' busincss: and that since thc said TCT has remained with petitioner, the latter has no oausc of aotion for reconveyance against him. 'l'he trial court ruled in favor ofpetitioner.

!act!

lssues:

Is the real estate mortgage in favor of respondent Pangilinan valid?

' 2. Was petitionrr negligent in entrusting and_ delivering his TCT to a


relative who was iuppoie,l to help him finci a money lender? negligence sullicient to deprrive him ofhis property?

If

so, was such

80

Held: Petitioner's act of entrusting and delivering his TCT and

Residence

Certificate to Salvador was only for the purpose of helping him find a money lender. Not having executed a special power 6f attorney in her favor under Art. l87S (7) and (12) of the Civil Code, he clearly did not authorize her to be his the mortgage. He only asked her to look for possible money agent in procuring -As between petitioner and respondent, we hold that the failure of the lJnders. latter to veriS essential facts was the immediate cause ofhis predicament. Ifhe were an ordinary individual without any expertise or experience in mortgages and real estate dealings, we would plobably understand his failure to veri$ essential facts. However, he has been in the mortgage business for seven years. Thus, assurning that both parties were ndgligent, the Court opines that respondent should bear the loss. His superior knowledge of the matter should have made him more cautious before releasing the loan and accepting the identitv of the.mortgagor.

'

Ilo{h larv and equity favor petitioner Adriano. First, the relevant legal pr-oIision, Articlo 208-5 ol'the Civil Code, requires that the "mortgagor be the absolute owner of the thing x x x mortgaged." Here, the mortgagor was an impostor who executed the contract without the knowledge and consent of the owner. Second, equity dictates that a loss brought about by the concurrent negligence of two persons shall be borne by one who was in the immediate, prirnary rntl oveniding position to prevent it. Herein respondent is engaged in ihc busin.ts. ol'lcrxJing tnoncy sccured by real cstate mortgoges - he could have easily avoided the loss by simply exercising due negligence in ascertaining the ideniity of the impostor who claimed to be the owner of the property being' ' mortgaged. Finally, the equity merely supplements, not supplants, the [aw. The
former cannot contravene or take the place of the latter.

C. l.

Effect of Mortgage

The mortgag subsists pending and until after the satisfaction of the debt, to be discharged only upon paymeni of the obligation. (Tormes vs. Llanes, 384 SCRA 561.). The only right ofa mortgagee in case of non-payment of a debt secured by ieal mortgage would be to .foreclose the mortgage and have the encumbered proprty sold to satisfy the outstanding indebtedness. (Guanzon vs. Argel,33 SCRA 474 U9701)

Viola vs. Eouitable PCI Bank Inc. (s72 SCRA 24s)


mor(gagc must suflicientty describe the dcbt sought to be secured, which description must not be such as to mislead or deceive, and an obligation is not sccurcd bv a mort8,oge unlcss it comcs fairly within the terms of lhe mortgage. ln this case, the mortgage contract provides that it secures notes and other evidences of indebtedness, under the rule of ejusdem generis, where a description of things of a particular class or kind is "accompanied by words of a generic character, the generic words will usually be limited to things of a A penalty charge does [indred nature with those particularly enumerated " not belong to the species of obligations enumerated in the mortgage, hence, the said contract cannot be dnderstood to s@ure the penalty.

"

81

Chiens vs. Santos (s31 SCRA 730)

Facts: To sewe as security for the loan they obtained, respondents executed in favor of the petitioner a mortgage over their property and issued several checks to petitioner. Some ofthe checks were dishonored which compelled petitioner to sue respondent Eulogio for violation of BP 22, which cases were subsequently settled through a compromise agreement. Respondent Eulogio violated said compromise agreement prompting petitioner to foreclose the mortgage. The trial court erdered respondents to pay petitioner. On appeal, the Court of Appeals reversed thc said decision and ruled that since petitioner already sued respondent Eulogio for violation of BP 22 which is equivalent to a collection suil, hc is alrcady harred from instituling an aclion for foreclosure of mortgage.
I

lcnce this appcul.

Whether or not a criminal action for violation of BP 22 is equivalent to a collection suit which bars a mortgage-creditor from suing for foreclosure of real estate mortgage.

lssue:

Held: A mortgage-creditor may, in the recovery of a debt secured by a. real


estate mortgage, institute against the mortgage-debtor either a personal action for dcbt or a rcal aclion to foreclose the mortgage. These remedies available to thc mortgagc-creditor are deemed alternative and not cumulative. An election of one remcdy operates as a uaiver ofthe other. A remedy is deemed chosen upon the filing by the mortgage-creditor of the suit for collection or upon his filing of the complarnt in an action for foreclosure of mortgage, pursuant to the provisions of Rule 68 of the Rules of Court. When the mortgage-crqditor files a criminal case fbr violation of BP 22 against the mortgage-debtor, he is deemed to have already availed himself of the remedy of collection suit, and following the rule on alternative remedies of a mortgage-creditor, he is baned from srrhr;<.tIrcr rl rcsolling lo nn nctirrn frrr firrecklsrrrc. llowever, it should be stressed that respondents have not yet f'ully paid the loan. ln fact, respondents themselves admitted that they still owe petitioner the balance of the loan. To allow resJxrndcnts to benefit from the loan without paying its whole amount to petitioner, and to preclude the petitioner from recovering the remaining balance of the loan, would constitute unjust enrichment at the expense of petitioner. The principle of unj ust enrichment obliges the respnndents to pay the remaining balancc ofthc loan plus intcrest. Relieving the respondcnts oftheir obligation to pay the balance of the loan would, indeed, be to sanction unjust enrichment in f'avor ofrcspondcnts and cause unjust poverty to petitioner.

ll

Tanchan vs. Allied Bankinq Cornoration (s7r scRA s12)

A mortgage creditor has a single cause of action against a mortgagor debtor, which is to recover the debt; but it has the option of either filing a personal action for collection of sum of money or instituting a real action to foreclose on the mortgage security. An election of the first bars recourse to the second; othenvise, there would be multiplicity of suits in which the debtor would be tossed from one venue to another, depending on the location of the mortgaged properties and the residence of the parties. On the other hand, a crcdikrr rvho elects io foteclose on the mortgage may yet file an independent civil action for recoveryof whatever dehciency may remain in the outstanding ohligation of tht: dcbtor, after ddducting the price obtained in the sale of the moflgagcd propcrties at public auction. 'l'he complaint, though, must

82

that in the pre{rial, such claim be raised as an issue.

Yao vs. First e-Bank Corporation (601 SCRA 2s1)


So as not to create any misunderstanding, however, the point should be underscored that the creditor's obvious purpose when forecloses on mortgaged property is to obtain payment for a loan which the debtor is unable or unjustifiablv reluscs to pav. The rationale is the same if the creditor opts to sue thc dcbtor lbr colluotion. 'l'hus, it is but logioul that a crcditor who obtains u personal judgment against the debtor on a loan waives his right to foreclose on the mortgage secudng the loan. Otherwise,. the creditor becomes guilty of splitting a single cause ofaction lor the debtor's inability (or unjustified refusal) to pay his debt. Nemo debet bis vexafe pro una el eadem cazsc. No man shall be twice vexed for one and the same cause.

it

If the debtor f'ails (or unjustly refuses) to pay his debt when it falls due and the debt is secured by a mortgage and by a check, the creditor has three options agarnst the debtor and the exercise of one will bar the exercise of the othcrs. I{e may pursue either of the three but not all or a combination of them. 1'irsr, the creditor may file a collection suit against the debtor. This will open up all the properties olthe debtor to attachment and execution, even the mortgaged property itself. Second, the creditor may opt to foreclose on the mortgaged property. In case the debt is not fully satisfied, he may sue the debtor for deficiency judgment (not a collegtion case for the whole indebtedness), in which case, all the properties of the debtor, other than the mortgaged property, are again opened up for the satisfaction of the deficiency. L^tly, the creditor may opt to sue the debtor for violation ofBP 22 if the checks securing the obligation bounce. Circular 57-97 and Section l(b), Rule I I i of the Rules of Court both provide that the criminal action for violation of BP 22 shall be deemed to necessarily include the corresponding civil action, i.e., a collection suit.
De los Santos vs, Court of Aooeals (278 SCRA 629)

Upon payment of the loaq there is no mortgage to which the property covered by the title is subject and therefore there exists no basis for the mortgagee's relusal to return the title to the petitioner mortgagor.

Metrooblitan Bank and Trust Comoanv. Inc. vs. SLGT Eoldinss. lnc. (s33 SCRA sr6)
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 olone 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.
Generally, the divisibility of the principal obligation is not affected by thc indivisibility of the mortgage. The real estate mortgage voluntarily constituted by tho debtor (ASB) on thc lots or units is one and indivisible. ln this case, the mortgage contract executed between ASB and the petitioner banks

83

is considered indivisible, that is, it cannot tre divided among the different buildings or units of the Project. Necessarily, partial extinguishments of the
mortgage cannot be allowed.

Yu vs. Philiopine Commercial International,Ban L (48s SCRA s6)

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 obligationthe debtor who has pard a part of the debt camot ask for the proportionate extinguishments of the mortgage as long as the dcbt is nbt completely satisfied, In essence, indivisibility means that the mortgage obligation cannot be divided among the different lots, ergo, each and every parcel under mortgage answers for the totality ofthe debt. MctrcPolitan Bank and Trust Co. /54? SCRA 146)
Facts: During the lawful union of Nicholson Pascual and Florencia Nevalga, the latter bought a lot with improvement from the Sering spouses which was subsequently registered in the name of Florencia married to Nelson Pascual a.k.a. Nicholson Pascual with the Registry of Deeds of Makati City as evidenced by Transfer Certificate of Title (TCT) No. I 56283. On July 3 I , 1995 Florencia Nevalga obtained a decree of nullity of her marriage with Nicholson under Article 36 of the Family Code. Without first liquidating their properties, Florencia together with Spouses Norberto and Elvira Niveros obtained a P58 Million loan from petitioner Metrobank and consequently executed several real estate mortgages (REM) on their properties including the abovementioned real property subject of TCT No. 156283 to secure said loans. Florencia and the Oliveros spouses failed to pay their loan obligation and as a result thereof Metrobank foreclosed the mortgaged properties. Metrobank was the highest bidder at the foreclosure sale on January 21,2000. Nicholson, on June 28,2000 filed a complaint to declare the nullity of the mortgage with the RTC of Makati City and alleged that the property, which is still conjugal property was mortgaged without his consent. The RTC ruled in favor of Nicholson and declared the REM on the property covered by TCT No. 156283 and the foreclosure proceedings null and void. On appeal, thc Court ol' Appcals aflirmed the RTC decision with modification deleting the award of damages and attonreys fees. Hence the present appeal to the Supreme Court. Issue: Is subject property conjugal proF,erty of Nicholson and Florencia or is it
paraphernal property ot' F'lorencia'l

l
I

I
I
I

The effect of the alienation or the mortgage, with respect to the cG' owners, shall be llmited to the portion which may be alkrtted to him in thc division upon the termination of the co-ownership. ln the case at bar, Florencia constituted the mortgage on the disputed lot on April 30, 1997, or a little less than two years after the dissolution of the conjugal partnership on July 31, 1995, but before the liquidation of the partnership. Be that as it may, what govemed Oe properly relalions of the former spouses when the mortgage was given is the aforequoted ArL 493. Under it, Florencia has the right to mortgage or even sell her one-half (%) undivided interest in the disputed property even without the consent of Nicholson. However, the rights of Metrobank, as mortgagee, are limited only to the % undivided portion thal Florencia owned.

l; n

t
I

Accordingly, the mortgage conffact insofar as it covered the remaining % undivided portion of the lot is null and void, Nicholson not having consented to the mortgage of his undivided half.
Producers Bank of the Philiooines vs. Court of Anoeals 36s SCRA 326

f:orcclosure is but a necessary consequence of non-payment of a morlgage indebtedncss-the rnortgagc can be foreclosed only when the debt remains unpaid at the time it is due. Where respondents have not yet defaulted in the payment oftheir loans and their loan was not yet due and demandable, the application for foreclosure of mortgage is prematue.

'

Mercado vs. Court of Aooeals (240 SCRA 616)

A does not lose his part ownership of a co-owned property "o-or*ne, rvherc his sharc is mortgaged by another co-owner without the former's
knorr l.'Jgc and consent.

Ocamno vs. Ocamoo (427 SCRA s4s) The effect of a rnortgage by a co-owner shall be limited to the portion that may be allotted to that person upon the termination ofthe co-ownership.

'

Fer East Bank and Trust Co. vs. Plaza


(407 SCRA 306)

An action to compel the nrortgagee to accept payment and for the consequent cancellation of a real estate mortgage is a personal action if the
mortgagee has not foreclosed the mortgage and the mortgagor is in possession of the premises since neither the mortgagor's title to nor possession of the propert) is in question.

2.

The mortgagor's default does not operate to vest in the mortgagee the ownership of the encumbered property. His failure to redeem the proprty does not automatically vest ownership of the property to the mortgagee which would grant the latter the right to appropriate the property or dispose of it for such effect is against public policy as enunciated by Article 2088. (Reyes vs. Sierra,93 SCRA 472; Ramirez vs. Court ofAppeals,409 SCRA 133)

lleirs of Jose Reves. Jr. vs. Reves


(626 SCRA 7s8)

The r:reditor cannot appropriate the things given by way of pledge or mortgage, ol dispose of them, and any stipulation to the contrary is null and void.

It is ttre duty of respondents, as mortgagees, to foreclose the mortgage if he wishes to recure a pqrfect title to the mortgaged property if he buys it in the
foreclosure s,rle.

2.1

l>uc'tum ('omnissorilr.ar stipulation is void.

t..

Olea vs. Court of Appealg (247 SCRA 274) automatically pass to the vendee in case no rcdemption is eflected within a stipulated period is void for being a pactum commissorium which enables the mortg?gee to acquire ownership ofthc mortgaged property without need of foreclosure.

a)

A stipulation that the ownership of the property would

Whcrc thc contract contains a stipulation that upon payment by the vendor of the purchase price within a certain period the document shall become null and void and have no legal force and effect, the purported sale should be
considered a mortgage contract.

b)

c) d)

In case of doubt, a contract purporting to be a sale with right of


A nrortgage action prescribes after ten years. Lesaspi vs. Onq (4s9 SCRA r22)

reptrrchase shall be considered an equitable mo(gage.

A stipulation $at should the vendor fail to comply with the terms and conilitions of the purported contract of sale, then the property shall by virtue thcrcul become the property of the vendee is contrary to the nature of a true pacto de retro sale - it is considered a pactum commissorium, enabling the mortgagee to acq[ire ownership of the mortgaged properties without the need of forcclosure proceedings, which is a nullity being contrary to the provisions of Article 2088 of the Civil Code. The inclusion of such stipulation in the deed shows the intention to mortgage rather than to sell.

MCO Ssmole Problem

X bonowed money from Y with his parcel of land as security for the payment of said loan. The pacto de retro sale executed by the parties expressly stipulate that in the event X fails
to exercise his right to repurchase the land within ninety (90) days from execution of the sale, said property shall ipso facto become the property of Y without need to perform any further action or document. X defaulted. Can X still recover subject proprty?

a.
.1.

No, because X's period to repurchase thc property undcr thc contract has already
lapsed.

b. c. d.
Leqal

Yes, because the said stipulation

is void, being in the nature of

pactum

commissorium. Yes, because the contract.is actually an equitable mortgage and subject property has not been foreclosed. No, because ownership of the property has already been trarisferred to Y who is now the rightful owner pursuant to thE contract which constitutes the law between the parties.

Basis: Article 2088 of the Civil Code; cf. also Olea vs. Court of Appeals (247
scRA274)

l!

Reason: A stipulation

in a pacto de retro sale that should the vendor fail to comply with the property terms thcreof, the shall become th proprty of the vendee without need of foreclosure proceedings is null and void, being a pactum commissorium.

2.2

Equitable Mortgage

Alvaro vg. Ternida


(47e SCRA 2E8)

Di[o

vg. Jardine! (48t scRA 226)

JMA House. Incoroorated vs. Sta. Monica Industri4 and Development Corporrtiotr (s00 scRA s26)
and Roberis vs. Panio (5rs scRA 346) An equitable mortgage is defined as one which although lacking in some formality, or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property. as security lbr a debt, and contains nothing impossible or contrary to law. For the prcsumption of an equitable mo(gage to arise, two requisits must conbur: (l ) thal the parties entered into a contmct denominated as sale; and (2) that their intention was to secure an existing debt by way of a mortgage. Consequently, the nonpayment ofthe debt when due gives the mortgagee the right to foreclose the mortgage, scll the property and apply the proceeds of the sale to the satisfaction of the loan obligation.

While there is no single conclusive test to determine whether a deed absolute on its face is really a simple loan accommodation secured by a mortgage, however, Article 1602 of the Civil Code enumerates several instances when a contract is clothed with the presumption that it is an equitable mortgage, to wit: (l) When the price a sale with right to repurchase is unusually inadequate; (2) When the vendor remains in possession as lessee or otherwise; (3) When upon or after the expiration of the right to repurchase another instrwnent exlending the period of redemption or gtanting a new period is executed; (4) When the purchaser retains for himself a part of thc purchase price; (5) When the vendor binds himself to pay the tsxes on the thing sold; (6) ln any other cases where it may be fairly infened that the real intention of the grrtics is thot the transaction shall secure the payment of a debt or the perlbrmuncc ol any othcr obligation.

of

Romulo vs. Lavue. Jr, ($l scRA 262)

For the presumption of equiable mortgage to arise, two requisites must be satisfied, namely: that the parties entered into a contract denominated as a contract of sale and that their intention was to sccure an existing debt by way of
mortgage.

Thc court has nol hesitated to declare a purported contract of sale as an equitable mortgage even when only one ofthe enumerated circumstances under Article 1602 is proved.

8?

Lecorte vs. Court of AoDeals (286 SCRA 24)


contract is presumed to be an equitable mortgage when the-vendor afte1 remains in possession as lessee or otherwise or when upon or .thethe period of expiration ofth. agirt to repurchase another instrument extending redemption or granting a new period is executed'

1980 Bar f,xam Ouestion

..S" cxecutcd a Deed of Absolute Sale of a parcel of land in favor of "T" reserving for date of the contracl 'l'he hinrscll' tlrc I rght lo rcpurchusc tltc sutrtc wirhin livi vcnrs fir)m thc land as that'6uring the repurchase period, "S" will retain possession,fthe .o"',#, the land but was P10,000.00 pay rhc tand tu*"rih"r.on. The consideration for the sale '.fo,,trle thi price. "S" failed to repurchase the land within the agreed period- and "T" *lor-*ortt and claimed .ppff"J1" tire C.ou.t fbr the consolidation oihis title. "S" opposed the application

il;;;

f."ii.d

that he had the right to repurchase the land.

Whosc st nd should br: uPhcld'f

the collateral or The contract in thc instant case is an equitable mortgage. The land is merely ,"."riry fu. thc paymcnr o{'a loan of p10,000.00. Thi.s is clear from the deed of sale itself. fiirtfy, l, proui.icsihat 'S- will retain possession of the land as lessee; moreover, it stipulates it*:ld-, the rendor, shall pay the taxes thereon; furthermore, the purchase price is unusually una.r irt. Civil bode, the presence of any of these will be sufficient to raise $e CA, that the conract is an equitable mo-rtg3Ce. (Art. !602, Civil Code; Gardner vs' fresumption 'g0 SCRA ISS; Gloria-Diaz vs. CA, 34 SCRA 483; Labasan vs. Lacuesta, 86 SCRA 16).

ffid;t" D.

Extent of Mortgage

to the General Rule: A mortgage constituted on immovable property is not. limited rents or gfowing fruits and property itself but also extends 1o all its accessions, improvements, LgJJ" tr"" Article 2102) as well as to the proceeds of insurance should the property be destroyei or the expropriation value ofthe property should it be expropriated'

Exception: contrarystipulation

E.

BlanketMortgage/DragnetClause
Bank of Commerce vs. Flores (637 SCRA s63) Traders Roval Bank vs. Casta ares (636 SCRA s19)
Producers Bank of the Philionines vs. Excelsa Indugtries. Inc. (s87 SCRA 370)

88

t-l

Reoublic Planters Bank vs. Sarmiento (s37 SCRA 303)


and

'Prudential Bank vr. Alviar


(464 SCRA 3s3)

"blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one which is specifically phrased to suhsume all debts of past or future origins. Such clauses are "carefirlly scrutinized and strictly construed." Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at thJ time, and they avoid the expnse and inconvenience of a nerv securily on each new transaction. A "dragnet clause" operates "*""riing as a cor*cnience and accommodation to the borrowers as it makes available additional fuirds without their having to execute additional security documents, thcreby saving time, travel, loan closing costs, costs of extra legal services, recording t'ees, etc. lndeed, it has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal contracts, und ih" umornls named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four comers of the instrument the intent to secure future and other indebtedness can be

gathered.

ln the absence of clear, supportive evidence of a contrary intention, a mortgage containing a "dragnet clause" will not be extended to cover future
advances rurless the document evidencing the subsequent advance refers to the

mortgage as providing security therefor.

Uniqn Bank of the Philiooines vs. Court of Aooesls (471SCRA 7sl)

A mortgage liability is usually limited to the amount mentioned in the contract, but where the intent of the contracting parties is manifest that the
mortgage properlv shall also answer for future loans or advancements' the same is vulit! and binding bctwcen the plrties. A "blanket mortgage clause," also knorvn as a "diagnet clause" in American jurisprudence, is one which is specifically phrased to subsume all debts of past or future origins, enabling the parties to provid,: continuous dealings, the nature or extent of which may not be known or anticipated at the time, end they avoid the expense and inconvenience ofexecuting a nr;w security on each new tansaction.

Cuvco vs. Cuvco (4U S(rRA 6eJ) and


Qu

intrdgglg'9s&fd,P944
(/?, scRA
3E?)

stipular ion that the amounts named as consideration in a contract of mortgage do not limit the amounl. for which the mortgage may stand as security if from the four <'omers of the instrument t}e intent to secure ftrture and other indebtedness can be gathered is valid and binding. It is known in American jurisprudcnoc os rhc "blonkc( mortgogc clausc," also known as a "dragnet

clause" and opeiates nrakes available additional flrnds wthout their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, etc. While a real estate mortgage may exceptionally secure future loans or advancements, these future debts must be sufticicntly described in the mortgage contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract.

Rule 68, Section 2 of the Rules of Court provides that the mortgage
prot,..-rtv may bc charged not only for the mortgage debl but also for the interest, other charges and costs approved by the court.

F. l.

Alienation or rtssignment of lllortgage

Said assig'nmcnt is valid and the assignee may loreclose the mortgage in case of nonp vrrcnl ol'lhc ,nortgagc indcbledness. (Santiago vs. Pioneer Savings and l,oan []ank, 157 S('lt.\ l(r() IlqRSl) l|orromco vs. Court of AtrDcBls
(sso scRA 269)

'I'hc right ol'ftrreclosure cannot be excrcised against the mortgagor by an\ p,crson othrrr than the creditor-mortgagee or its assigns. DIIP vs. Court of Arucrls (284 SCRA l4)

ln Pcople's Bank & Trust Co. vs. Odom (64 Phil. 126), this Court had the occasion to rule that an Bssi$1ment (of leasehold rights) to guarantee an
obligation is in effect a mortgage. 'I'hc clcments of pactum commissorium are as follows: (l) there should bc a propcrty rnortgaged by way ol sccurily for the payment ol the principal otrligction, arid (2) thcre should be a stipulation for automatic appropriation by thc crcdilor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.

Condition No. 12 did not provide that the ownership over the leasehold rights would automatically pass to DBP upon the mortgagor's failure to pay the loan on time. It merely provided for the appoinfinent of DBP as attomey-intact with authority, among other things, to sell or otherwise dispose of the said real rights, in case of default by the mortgagor, and to apply the proceeds to the palnrcnl of the loan. This provision is a standard condition in mortgage c{)ntrircls and is in conformity with Articlo 2087 of the Civil Code which authorizcs the mortgagee to foreclose the mortgage and alienate the mortgaged propert)' for the payment ofthe principal obligation.

2. 3.

The fact that the mortgagor has transferred the mortgaged property to a third person does not relieve him from his obligation to pay the debt to the mortgage creditor in the ailsence of novation (McCullough & Co. vs. Serna,4l Phil. 1 [1921]). Mortgage credit being a real right which folkrws the property, the creditor may demand front anv possessor the payrnent of the credit secured by said property. It is necessary, however, that prior denrand for payment must have been made on the debtor and the latter failed to pay. (llank ol'the Phil. Islands vs. Concepcion & Hijos, Inc., 53 Phil. 906 [19291; Nuflez vs. GSIS l;anrilv llank,475 S(-RA 305 [2006])

90

F-

ffi PhittpplgJg!i.r".*
(s16 SCRA 644)

The issue of whether demand was made before the foreclosure was effected is essential. If demand was made and duly received by the respondents and the latter still did not pay, then they were already in default and foreclosure was proper. Howeveq if demand was not made, then the loans had not yet become due and demandable. This meant that respondents had not defaulted in thcir payrnents and the foreclosure by petitioner was premature. Foreclosure is valid only when the debtor is in default in the payment of his obligation.
Unless demand is proven, one cannot be.held in default. Petitioner's cause of action did not accrue on the maturity dates stated in the promissory noles. It is only rvhen demand to pay is made and subsequently refused that respondents can be considered in delault and petitioner obtains the right to file ilrl ocli(i11 to t:oJk:ct the debt or loreclose the mortgage.
Srrrcc rlcnr:trttl. wlrich is nccessury to rrrakc lcs;xrndents gurlt.y of dclirult, \\'ils rlcvcl mnde on resJrondents, the Supreme Court ruled that the ioreclosure

\r:rs Ircnrtlur! arrd void. llcsgrndcnts cannot l)o hcltl liuhlc ,irr thi dcllcicncy cluuu. \\/hrlc it is truo thut in exlrajudicial lirruclosurc ol' lnortgugc, tho nrortqagoe has the right to recover the deficienoy from the debtor, this
prcsupp()scs that the fbrcclosure must first bc valid.

Luzon Development Bank vs. Conquilla (470 SCRA s33) An accelcration clause is a stipulation stating that, on the occasion ofthe nrongagor's default, the whole sum remaining unpaid automatically becomes
due and payable.

4.

An assignee cannot acquire greater rights than those pertaining to an assignor (Koa vs. Court of Appeals, 2 I 9 SCRA 541).
RCBC vs. Court of Apneals (289 SCRA 292)

It is basic and fundamental that the first mortgagee has superior rights
over .junior morlgagccs or attaching creditors.

l,ee vs. Banqkok Bank Public Comoanv. Limited (642 SCRA 447)

It is evidently a well-settled and elementary principle that the rights of thc llrst nrortgage creditor or mortgagee ovcr the tnortgaged properties are
sup,onor to those ol'a subsequent attaching creditor and otherjunior mortgagees. ln this case, it is a fact that the REM was annotated on the titles of the subject Antipolo properties ahead ofthe writs of preliminary attachment issued in favor

of Bangkok Bank. In fact, it was admitted by Bangkok Bank that it only knew of the existing mortgage that has already been annotated at the back of the subjcct titlcs rvhen it sought the annotation of the writs of preliminary attachrnent. Therefore, as between Asiatrust as mortgage creditor and Bangkok Bank as attaching creditor, the former has a superior right over the latter being the lirst to annotate its lien on the titles ofthe properties.

9l

r1
:

G.

Stiputation Forbidding Alienation of Mortgaged Property Such

a stipulation is void. However,

if

the mortgagor alienates the property, the

transferee is bound to respect the encumbrance because being a real right, the property remains subject to the fultillment ofthe obligation for whose guaranty'it was constituted ( Arlicle 2126).

Samatra vs. Vda. de Pariflas (J8r SCRA s22)


Petitioners insist that the tenancy contract was illegal as the mortgagor-

slx)uscs cannot validly enter into an alrictrltural lease agreement with '[he rJspondent during the effectivity of the mortgage contract. We disagree. Cou( of Appeals correctly applied Article 2130 ofthc Civil Code which renders void anv stipulation forbidding the owner from alienatins the immovable !ftqlCtggd-lpaq!o-d9--!q!--Aliendo) nroperty. It is settled that a real estatq n-lQilgirgq !!ges not extinsuish the title olthe debtor. He does not lose his right to usc or tlisgxrse ofthc mortgaged property (ius disponendi) which is one ofthe princrpal .lttribulcs ol'orvnership. Thus, in lhe case at bar, the mortgagorsp()us(s- \\'!'rc..L\:r;|[ within their rights when th-ey constituted respondent as an asriculturrl-b.sscc and the leqaliry a;sailgl qtr this qround.

'

\'ega vs, Social Securitv Svstem (SSS) (630 SCRA 647)

Although a stipulation in the mortgage contract requiring the mortgagor lo sccurc lhe mortgagee's consent before selling is valid and binding, in the scnso that lhe httercannot be compelled whilc thc loah is unpaid to recognize the sale, it cannot be interpreted as absolutely forbidding the mortgagor, as owner of the mortgaged Foperty, from selling the same while her loan remained unpaid. Such stipulation contravenes pubhc prolicy, being an undue impediment or interference on the transmission of property.
Whcrt n nrortgugrr sclls thc mortgugctl propcrty to n lhirtl pcrson, lhe crcditor rrrry dcrnand t'rum such third pcrsorr thc payment of' thc principul oblrga(ion lhe mortgage credit is a real right, which follows th() property rvhcrevcr it goes, even il'its ownership changes.

Articlc 2ll9 ol rhe Civil Code gives thc m(,rtgagce (SSS) the oprion of collecting from the third person in possession of the mortgaged property in the concept ol'ow'ner. Moreover, the mortgagor-owner's sale of the property does rrrrl rrlli'cl thc li1,.hl ol'llrc rcgislercd mo g.tucc ltt lirtcclosc o lhc somc cvcn if lts ()$ucrship had bccn translerred to anothct pctson. 'l'hc laltcr is bountl hy thr: rcllistcrcd mortgilgc on the titlo he acquirod.
Foreclosure of Mortgage

H.

W
lt

(63' SCRA 3S3)

Foreclosure is valid only when the debtor is in default in the payment of is a necessary consequcnco of non-payment of mortgage his otrligation. indebtedness. As a rutc, the mortgage can bc lbrcclosed only when the debt J

remains unpaid at the time it is due. In a real estate mortgage, udren rhe principal obligation is not paid when due, the mortgage has the right to foreclose on the mortgage, to have the property seized and sold, and to apply the proceeds to the obligation.
Respondent's passbooks indicate thai RCBC continued to receive his payments even after it made demands for him to pay his pat due accounts, and even after the auction sale. RCBC cannot deny receipt ofthe payments, even when it claims that the deposits were "not withdrawn." It is not respondent's fauh that RCBC did not withdraw the money he deposited. His obligation under the mortgage agreement was to deposit his payment in the savings.account he had opened for that purposc, in ordcr that RCBC may debit the amount of his monthly liabilities thcrclrom. He compliod with his pa( of the agreemenl.. This bolsters the conclusion of the Cou( of Appeals that respondent had no urrpaid installments and was not in default as would warrant the application ofthe acceleration clause and the subsequent foreclosure and auction sale of the propery.
Seleqna Manaqement and Development Corporation vs. UCPB (4E9 SCRA l2s)

and

W
Foreclosure is proper when the debtors are in default of the payment their obligation.

of

ln Spouses Estares vs. CA, 459 SCRA 604 (2005), we did not find any justification to $ant a preliminary injunction, even when the mortgagors were disputing the amount being sought from them. We held in that case that "upon the nonpayment ofthe loan, which was secured by the mortgage, the mortgaged property is properly subject to a foreclosure sale." A late partial payment could not have possibly forestalled
maturity date.
St. James Collese of Paraftaoue vs. Eoultrble PCI Bank (627 SCRA 328)
a long-expired

EPCIB has clearly established its status as unpaid mortgagee-creditor entitled to foreclose the mortgage, a remedy provided by law and the mortgage contract itseli On the other hand, petitioners can hardly claim a right, much less a clear arrd unmistakable one, which the intended foreclosure sale would violate il'not cnloincd. Surcly, the foreclosure of morlgnge does not by itself constitute a violatiorr of the righti ofa defaulting mortgagor.

93

's.' {
1

,'

re

Producers Bank of the Philioo

Where respondents have not yet defaulted on the payment oftheir loans and their loan was not yet due and demandable, the application for foreclosure of mortgage is premature.

Trmbuntine. Jr. vs. Sumabat


(470 SCRA 92)

rlithin

An action to enlorce a right arising from a mortgage should be enlorccd ten )'cars lrom the time the right of aclion accrues. Otherwise, it will be

baned by prescription and the mortgage creditor nl0rtgagc. Cando vs. Olazo

will lose his rights under

the

(sl8 scRA 74r)

n rnortgage aclion prescribes in ten (10) years lrom the time the right of rction accrues, that is from the time the mortgagor defaults in the payment of his obligation to the mortgagee, not from the date ofthe mortgage contract.
MCQ Sample Problelq

Arr sclion lo lirrcclose a real estate mortgage prescribes in: ten (10) years from the time the mortgagor receives a demand from the mJrtgagee to scttle his obligation tcn ( l0) ycars lrom thc dntc ofcxccution of thc mortgage contrect ten ( l0) years from the time the mo(gagor defaults in the payment of his obligation to the mortgagee ten (10) years 1'rom the date ol notarizrtion of the mortgage contract

a. b. {. c. d. '

L9S.il-llSsiS: Nufrez vs. GS.IS Family Bank (475 SCRA 305)


Cando vs. Olazo (5 I 8 SCRA 741 )

Banco de OTeEPCI. Inc. vs. Dasuna (s70 scRA 388)

Prior to foreclosure sale, an action for the release of the mortgage is a oer'sonal action, following the doctrine laid down in Hernandez v. Rural Bank of /.rrccza, possss5ion and ownership over the properties subject of the mortgage having remained with, in this case respondent-mortgagor. Since petitioner had, in the interregnum, foreclosed the mortgage, respondent had to withdraw its action for release of nrortgage and file the appropriate action for annulment of the tbrcclosurc in thr: proper venuc, which is Manila where the mortgaged properties are located As the Makati RTC still retained jurisdiction over the complaint for damager;, which is a personal action, it properly reinsated it as the subject of respondqnt's Second Amended Complaint. There is no gaiirsaying then that the action in Makati is different and distinct from the action in Manila, involving different per.iods of time, subject matter, and issues.

r
MCO Samole Problem
An aclion to annul a rcal estate mortgage is:

*a.
b.

c.
d.

a personal action which shall be filed where the parties reside an action quasi in rem and as such, jurisdiction over the person of the petitioner is not required, it being sufficient that the trial court is vested with jurisdiction over the subject matter. a real action which should be filed where the mortgaged real property is located an action in rem the mortgagee has .not foreclosed the mortgage and the mortgagor is in ;xrsscssion ol' lhc rnor tgagod prop9rty

if

Legal

Basis:

Chua vs. Total Office Products and Services (Topros), Inc. (471 SCRA 500, 509); Hemandez vs. Rural Bank of Lucena, Inc. (81 SCRA 75) and Biaco vs. Philippine Countryside Rural Bank (515 SCRA 106) Aqbada vs. Inter-Urban Develoners. lnc. (38e SCRA 430)

The proper remedy to seek reversal of judgment in an action .1'rrr foreclosure of real estate mortgage is not a petition for annulment ofjudgnent but an appeal from the judgment itself or from the order confirming the sale of the foreclosed real estate. Since petitioner-spouses faited to &vail ot'uppcal without sufficient justification, they cannot conveniently resort to the action for onnulmcn( for othcrwisc thcv would bcnclit frorn thcir orvn innction anrl
negligence.

Judicial lorcclosurc is govcrncd by Rule 68 o[thc llulcs ofCourt.

Monzon vs. Relova (s6s scRA sl4)

Unlike Rule 6ll, which govcrns judicial lbreclosurc srtlcs. ncithcr Acl No. 3135 as amended, nor A.M. No. 99-10-05-0 grants to.iunior encutttbrrtnecrs the right to receive the balance of lhe purchase price. 'l'he only righl givcn to second mortgagees in said issuances is the right to redeetn lhe lirrcclosed
property pursuant to Section 6 of Act No. 3135 as amended h1' Ac1 No, 'l I I 8

Even

if, for the sake of argument, Rule 68 is to be applicd

trr

extrajudicial foreclosure of mortgages, such right can only be given to second mortgagees who are made parties to the (udicial) foreclosure, Wtile a second mortgagee is a proper and in a sense even a necessary party to a proceeding to foreclose a first mortgage on real prope(y, he is not an indispensable party, because a valid decree may be made, as between the mortgagor and the tirst mortgagor, without regard to the second mortgage; btrt the consequence of failure to make the second mortgagee a Wry to the proceeding is that the lien of the second mort4agee on the equily of redemption is not affected by the decree offoreclosure.

The judicial foreclosure proceeding instituted by respondent Philippine Countryside Rural Bank undoubtedly vested the trial court with jurisdiction over the res. A judicial foreclosure proceeding is an action q asi in rern. As such,

jurisdiction over the person of petitioner is not required, it being suflicient that the trial court is vested with jurisdiction over th.: subject matter. In this case, while the trial court acquired jurisdiction over the res, its jurisdiction is limited to a rendition ofjudgment on the /es. It cannot extend its jurisdiction beyond the res and issue a judgment enforcing petitioner's personal liability. ln doing so without first having acquired jurisdiction over the person of petitioner, c it did, the trial court violated her constitutional right to due procss, wananting the annulment of the judgment rendered in the case.
Rosalcr vs. Subn (.{08 s('lLt 664)
As a gencral ruie, there is no right of:redemption in ajudicial foreclosure of rnortgage. '!'he only exemption is when the mortgagee is the Philippine National Bank under Act Nos. 2747 and 2938 or a banking institution under Ilcpuhlic Att No. 337. 'l'lrese laws confer on the mortgagor, his successors in interest or'any judgment creditor of the mortgagor, the right to redeem the propcrty sold on tirreclosure - after confirmation by the court ofthe foreclosure salu which right may he exerciscd within a period ol one (l) year, counted from the date ofregistration ofthe certificate of sale in the Registry ofProperty.

Sincc (he mortgagcc in this case is not onc olthosc mentioned, no right of redemption exists in lavor of petitioners. They merely have an equity of rcdcnrption which is the right of the defendant mortgagor to extinguish the mortgage and retairi ownership ol the property by paying the secured debt within the ninety-day period after the judgrnent becomes final, in accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation.

Development Bank of the Philiooines vs. West Neqros Collele. Inc. (39r SCRA 330) Where the real property is mortgaged to and foreclosed judicially or extrajudicially by the Development Bank of the Philippines, the right of redemption may be exercised only by paying to "the Bank all amount he owed the latter on the date of sale, witlr interest on the total indebtedness at the rate agreed upon in the obligation from said date, unless the bidder has taken material possession of the property or unless this had been delivered to him, in rvhich case the proceeds of the property shall compensate the interest." This rule applies whether the foreclosed property is sold to the DBP or another pcrson rrt the public auction, provided ofcourse that the property waS mortgaged to DBP. Where the property is sold to persons other than the mortgagec, the procedure is for the DBP "in cas0 of redemption, [tn] retum to the bidder the received from him as a result of the auction sale wi;h the amount corresponding interest paid by the debtor."

it

Extraiudicial foreclosure is govemed by Act No. 3135, as amended, mortg,lgcc is 11iven a spccific power or express outhority lo do so. Philippine National Bank vs. Cabatinean (ss7 scRA 426)

if

and when the

regulates the extrajudicial sale of mortgaged real properties by prescribing a procedure which effectively safeguards the rights of both debtor and creditor. Thus, its construction (or interpretation) must be equally and mutually beneficial to both parties.

Act

3 135

n
foreclosure of a mortgage does not ipso focto extinguish a debtor's obligation to his creditor. The proceeds of a sale at public auction may not be suflicient to extinguish the liability of the former to the latter. For this reason, we favor a construction of Scction 4 of Act 3135 that alTords the creditor greater opportunity to satisfy his claim without unduly rewarding the debtor for not

A creditor may foreclose on a real estate mortgage only if the debtor fails to pay the principai obligation when it falls due. Nonetheless, the

palng hisjust

debt.

A sale al public auction held within the intervening period provided by


taw (i.c., at any time fiom 9:00 a.m. until 4:00 p.m.) is valid, without regard to the duration or length of time it took the auctioneer to conduct the proceedings.

0quitablc PCI Bank. lnc. vs. OJ-Mark Tradins. lnc.


(628 SCRA 79)

agreements, mortgage contracts and promissory notes that the mortgagee is authorized to foreclose the mortgsged prope(ies in case of default by the mortgagors, the mortgagee has a clear right to foreclosure in case of dehult, making the issuance of a Writ of Preliminary Injunction improper. In these cases, unsubstantiated allegations of denial of due process and prematurity of a loan. are not sufficient to defeat the mortgagee's unmistakable right to an extrajudicial foreclosure.

Where the parties stipulated

in their credit

Requests by debtors-mortgagors for extersions to pay and proposals for restructuring ofthe loans, without acceptance by the creditor-mortgagee, remain

as that. Without more, those proposals neither novated the parties' mortgage contract nor suspended its execution. In the same vein, negotiations for settlement of the mortgage debt by dacion en pago do not extinguish the same nor forestall rhe creditor-mortgagee's exercise of its right to foreclose as provided in the mortgage contract.

LCK Industries Inc. vs' Planters Development Bank


(s38 SCRA 634)

A mortgagee who exercises the power of sale contained in a mortgage is considered a custodian of the fund, and, being bound to apply it properly, is lilhh lo llrr' lxrlsons cnlillcd lherclo il'he lirils lo tlo so. l')xtrajudicial foreclosure salcs are proper only when so provided under a special power inserted in or
attached to the mortgage contract. The mortgagee as custodian of the proceeds liorn thc foreclosure sale has no legal right to retain the excess of the bid price, and is under clear obligation to rrturn the same to the mortgagor. Paguvo vs. Gatbunton (s23 SCRA 1s6)

Thc duty tr.l cxamine an application for extrajudicial foreclosure to determine whether the deed of mortgage contains or incorporates a special
power authorizing the mortgagee to extrajudicially foreclose the mortgage in the event of nonpal,rnent of the loan by the mortgagor devolved upon the Clerk of Court, not on the respondent sheriff

In Development Bank of the Philippines vs. Cou of Appeals (403 SCRA 460), the republication of the Notice of Sheriffs Sale of a postponed oxtrajutlicial sale is necessary for ttre latter's validity. Respondent sheriff failed to publish in r newspaper of general circulation the notice of thc rescheduled
auction sale of the mortgaged real property. Casano vs, Maqat (374 SCRA so8)

llcslxrndcnl sheriff is administratively liable for proceeding with the cxtru.judrrrial lirrcclosurc sale notrvithstanding thc absence of the requisite spccial ;xxvcr in the rea I cstate mortgage confract authorizing the modgagee to tbreclose the nrortgage extrajudicially in iase of non-payment. [t was respontJent Sheriffs specific duty to examine whether the attached real estate rno(gage contract contained the requisite special power authorizing the mortglBcc to cxtrajudicially foreclose the mortgage in case of non-payment of

Ill( nrorlgaBc rrrJehtcdncss


a)

l)uhlic;rucliort nlusl ho con(luotctl irt thc provittcc whcrr: thc p()perly is sitrrtrlccl
Bcnquet Management Corooration vs. Court of Aopeals

(.ll I scRA 3{7) The applicant in an extrajudicial foreclosure covering Foperties in different provinces is required to pay only one filing fee regardless of the
number of properties to be foreclosed so long as the application covers only one the cxtrajudicial transaction or indebtedness. The venue, however, foreclosure proceedings is the place where each of the mortgaged property is Iocated.

'

of

b)

Posting ofnotice ofsale in at least three (3) public ptaces t}erein

Dgvelonment Bank of the Philiooines vs. Court of Aooeals (403 SCRA 460)

posting is not required much less considered indispcnsablc lbr thc volidity olan extrajudicial foreclosure sale ofrcal property under Act No. 3135. What the law requires is the posting of the notice of sale, which is present in this case,'and not the execution oithe certificate of posting. In the absence of contrary evidence, the presumption prevails that the sheriffs prformed their official duty of posting the notices of sale. The non-execution of thc certificate ofposting cannot nulliry the foreclosure ofthe chattel and real certificate

of

cststc monguges. Under the Chattel Mortgage Law, the only requirement is posting of the notice of auction sale. There was no postponement of the auction sale of the personal properties and the foreclosure took place as scheduled. Thus, the extrajudicial foreclosure of the chattel mortgage suffers ftom no procedural

infirmity.

98

Tagunicar vs. l,orna Exor$s Credit Corp.

@
weeks.

The mandatory requirements of notice and publication were complied. with if the notice of auction sale was posted in three public places in the locality where the property is located and published once a week for three consecutive

Guanco vs. Antolo (497 SCRA 273)

Posting of a notice of the foreclos'ure of the real estate mortgage conceming krans granted by rural banks in at least three of the most conspicuous public places not only in the municipality but also in the barno where the land mortgaged is situated during the 60-day period immediately prcccdrng the public auction is mandatory under Section 5 of Republic Act No. 7li), as arncntled hy Republic Act No. 7939.

lu (his cusc, thc provincial sheriff failed (o comply with the law. It
SheriffAtvior that the petition lor extrajudicial foreclosure of the real estate mortgagc purportedly filed with the said oflice was dated July 21,1997. The deputy
appears on the lace o1'the lrinal Deed of Sale cxecuted by Deputy
.

sheriff set the public auction sale on August 19, 1977 , or less than a month a{ter thc filing of the said petition, short of the 60 day-period under Section 5 of Rcpublic Act No. 720, as amendcd.

h.r

Dctinition of "puhlic place" Marcelo vs. Philiooine Commercial lnternational Bank (ocib) (607 SCRA 778)

A public place is a place exposed to the public and where the public gothcrs togethcr or passes to and fro. As can be gleaned from Sheriff Ipac's Afidavit of Posting, the Notices were posted on the Meralco posts within the vicinities of Baliuag Roman Catholic Church, Baliuag Public lvfurket and near the chapel of Sabang, Baliuag, Bulacan. The aforementioned vicinities where
the Meralco posts were erected are public places, to whioh the general public has a right to resort. The Meralco posts where the Notices were posted are but componbnt structurcs of the public place itself The law does not intend that notices to the public be posted on specific bulletin boards or information areas of a public place. What the law directs is for the notices to be placed in an area w'here the same is perceptible to the public.

c)

Publication in a newspaper ofgeneral circulation


Suico vs. Philiooine National Bank

(s3l scRA 5r4)


The puqxrse of the publication of the Notice of Sherilfs Sale is to inform all interested parties ofthe date, time and place of the foreclosure sale of the real property subject thereof. Logically, this not only requires that the correct date, time and place of the loreclosure sale appear in the notice, but also that any and all interested parties be able to determine that what is about tn be
sold at the foreclosure sale is the real property in which they have an interest. J

t:
the petitioner's obligation The discrepancy between the amount Sale and the of amount actually due and collected as reflected in the Notice from the ptitioners at the time of the auction sale does not constitute fraud which renders the extrajudicial foreclosure sale null and void. Petitioners failed to convince this Court that the difference between the amount stated in the Notice of Sale and the &mount of PNB's bid resulted in discouraging or rnisleading biddcrs, dcprc.ciBted the value of the property or prevented it from commanding a fair price.
Philipoine National Bank vs. Marava. Jr. (s99 SCRA 394)
Indeed, one of the most important rquirements of Act No. 3135 is that tho notice of the time and place of sale shall be given. If the sheriff acts without notice, or at e time and place other than that designated in the notice, the sheriff acts without rvarrant of larv. Publication is required to give the extrajudicial lirroclosurc salc a reasonably wide publicity such that those interested might

of

lttcnd thc puhlic sulc. '[o allow thc partics to waive lhis jurisdictional

requirr;mcnt would result in converting into a private sale what ought to be a public auctron. Ouano vs. Court of Aooeals (3e8 SCRA s2s)

Failure to advertise a mortgage foreclosure sale in compliance with statutory requirements constitutes a jurisdictional defect invalidating the sale. Consequently, such defect renders the sale absolutely void and no title passes.
ll,cpuhlication in the manner prescribed by Act No. 3'135 is necessary for thc vulidity ol'a grstponcd extrujudicial fotcclosurc salc. Thc partics havc absolutely no right to waive the posting and publication requirements ofAct No.
3 135

The mortgagee's inaction on the scheduled date ofsale and belated filing of requests to postpone may be deemed as an abandonment of the petition to Iirrcclosc it t'ilcd with the sheriff, making its right to foreclose based on said petition to havc lapsed.

'fhe parties have absolutely no right to waive the posting and publicatioo rcquirements of Act No. 3 135.

Philiioine National Bank vs. Nepomuceno Productions. Inc.


(394 SCRA 40s)

lssue. Can the parties to the mortgage validly waive the posting and publication requiremcnts mandated by Act No. 3135?

Held: 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 ol the
nature and condition of the propeny to be sold, and of the time, place, and tsrms

of the sale. Notices are given to scure bidders and prevent a sacrifice of the t)roperty- Clearly, the statutory requirements of posting and publication are ttrnrrtlok:tJ, rrul lirr lhc nlotlgngor'$ bcrrclit. llul [<rr thc prrblic or lhird persons. In
tbct, personal notice to the mortgagor in extrajudicial foreclosure proceedings is not even necessary. unless stipulated. As such, it is imbued with public policy J

rr

i;tt*;ilf"Ii

notice of mortgage foreclosure sales must be strictly complied with and slight deviations therefrom will invalidate the notice and render the sale at the very least voidable.

Metrooolitan Bg4k & Trust Co. vs. Nikko Sources Internrtional Coro,
(604 SCRA 336)

and

K-l'hil.. lnc. vs. Metrooolitnn llank & 'l'rust Comnanv


(s6e sc'RA 4s9)

Stalutury provisions goveming publication of notice of mortgage foreclosure sales must be strictly complied with and that even slight deviations thereliom will invalidate the notice. The reason was explained in Olizon v. Cd 2-16 SCRA 148(1994): The object ofa notice of sale is to inform the public of the nature and condition of the properly to be sold, and of the time, place and tenns of the srlc. Notices are given for the purpose of securing bidders and to prevent a sacrifice of the property. If these objects are attained, immatenal errors and mistakes will not affect the sufficiency of the notice; but if mistakes or omissions occur in the notices of sale, which are calculated to deter or rnislead bidders, to depreciate the value of the property, or to prevent it from bringing a lair price, such mistakes or omissions will be fatal to the validity of the notice, and also to the sals made pursuant thereto. The validity ofa notice of sale is not aflccted by immaterial errors; only substantial errors will invalidate it. Unless it was calculated to deter or mislead bidders, to depreciate the value of the property or to prevent it &om bringing a fair pricc, the discrepancy between the amount of the obligation as reflected in the notice of salc and the amount actually due and collected during the bidding does not
constitutc a substantial error that should invalidate the notice.

Centurv Sovinss Bank vs. Samonte


(634 SCRA 261)

Marcelo vs. Philiopine Commercial International Ban k (PCIB) (607 SCRA 778)

Brnk of the Philinpihe Islands vs. Pumn


(606 SCRA

sl)

China Bankine Corporation vs. Mortig (s99 SCRA 672)


and

Brluvut vs. Poblete (sr4 scRA 370)


The Court takes judicial notice of the fact that newspapcr publications have more ta--reaching effects than posting on hulletin boards in public places hence, the publication of the notice of sale in the newspaper of general

l0l

r-

circulation alone is more than sufiicient compliance with the notice-posting requirement of the law
Presidential Decree 1079 requires a newspaper of general circulation. A newspaper of general circulation is published for the dissemination of local news and general information; it has a bonu fide subscription list of paying subscrihers; and is published at regular intervals. The newspaper must not also bc devoted to the intcrest or published for the entertainment ofa particular class, prof'ession, trade, calling, race or religious denomination. The newspaper ncod not have llre largust circulation so long as it is of general circulation. Presidential Decree 1079, however, does not require accreditation. The requirement of accrediialion was imposed by the Court only in 2001, through A. M. No. 0 I - l -07-SC or lhe Guidelines in the Accreditation of Newspapers and l!,'r'unlt,tit l'(1'I'xrt'lo l'uhlish .lwli<'iul an<l Legul Nt ic't:s und ()thur Simiktr ,ltltr rttrr<.:L'n.rnls tuul rtt lhc l?ulfla 'l'hereiy'.

it

The i\ffidavit ol Publication executed by the account executive of the newspaper in the place where the properties are located stating that said newspirper is ol'general circulation and is published in the said locality is prima facie proof that the newspaper is generally circulated in said place,
Develoument llnnk of the Philiooines vs. Court of Aooeals (103 SCRA 460) Republication in the manner prescribed by Act No. 3135 is necessary for validitv the of a postponed extrajudicial foreclosure sale of real prope(y under Act No. 313-5. Anothcr publication is required in case the auction sale is ieschedutcd, and the absence of such republication irtvalidates the foreclosure sale. The parties have no right to waive the publication requirement in Act No.
3135.

The last paragraph of thc prescribed notice of sale allows the holding of a reschedulcd auction sale without reposting or republication of the notice. llowevcr, thc rcschcduled auction sale will only be valid if the rescheduled datc ol' uuctiou is r;lcur lv spccrliod rrr. llrc prior nolicc ol' sulc. 'l'hc ubscnoc of this information in the prior notice of sale will render the rescheduled auction sale void for lack of reposting or republication. If the notice of auction sale contains this particular information, whether or not the parties agrer:;d to such rescheduled date, thcre is no rnore need for the reposting or republication ofthe notice ofthe reschedulcd auction sale. Development Bonk of the Philippin6 vs. (364 SCRA 755)

rlgdll9

Lack of republication renders the sale held lwo months after the
published datt: ol'thc salc, void.

d)

Personal notice to mortgagor is not required (Bonnevie .,s. Court of Appeals, 125 SCRA 122 [98]l; (iSlS vs. Court olAppcals, 170 SCRA 533 [989]; Villavicencio v. Mojares, 398 SCRA 314 [2004]) hence not a ground to set aside the foreclosure sale (Ardiente vs. Provincial Sheriff,436 SCRA 655).

r:

ffiur

Mbtrooolitan Bank & Trugt Comoanv


(s9o scRA 188) and

Tamavo. Jr. vs. Eeirs of Gavino Dominsuez (498 SCRA 342)


Personal notice to the mortgagor in extrajudicial foreclosure proceedings is not necessary unless stipulated.

'l'he stipulation in the mortgage agreement requiring notice to the mo(gagor of extrajudicial actions to be taken operates &s a contractual

undeitaking for the iatter's sole benefit, such that the mortgagee is mandated to strictly abide by the same.

N'letronoljlan Bank rnd Trust Comoanv vs. Wons (3s9 SCRA 608)

'

'

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 trewspaper of general circulation. Pcrsonal notice to thc mortgagor is not necessary. Nevertheless' the parties to tho mortgage contract are not precluded fiom exacting additional rcquirernents. [n this case, the contract of real estate mortgage contained a pr<irision roquiring all notices to be sent to the mortgagor. Precisely, the purposc ol thc lixcgoing stipulrtion is to spprisc rcspondcnt tllany action which pctitroner might takc on the subject property, thus according to him the opportunity to safeguard his rights. When petitioner failed to send the notice of foreclosurc sale to respondent, he commifted a contractual breach sufficient to
rcndcr thc forcclosure sale null and void.

l'elitioner Melrobank's non-compliance with the posting requirement urrdcr ljc(tlon ,l ol' Acl No. 3 l3J wus l'utal to thc validity of lhe forecl<xurc
proceedings.

LBC Bsnk vs. Marouez --6ffit60)

On the matter of notice, complainant cannot plausibly be heard to complain about not having been personally notified or given a copy, if that be the case, of the notice of the sheriffs sale. Extant rules do not require that a
mortgagee be so notified, albeit such notification is a requirement under certain circumstances with respect to the mortgagor in an extrajudicial foreclosure sale.

e)

Burden ol proof on non-compliance with the requirements of foreclosure proceedings

Resort Ilotels CorDorstion vs. Develooment Bank of the Philionines (609 SCRA 168)

Petitioners are'adamant, however, that it was incumbent upon respondents to prove their denial of petitioners' claims; i.e., foreclosure proceedings were validly conducted consistent with Act 3135. We disagree. I'r 'incumbit probatio qtri dicil, non qui negal (he who asserts, not he who denies, must prove). The btrden of proof that foreclosure proceedings on the subject
103

properties were not validly conducted lies with mortgagor-party litigant clairning such. We have consistently applied the ancient rule that ifa plaintiff, upon whom rests the burden of proving his cause of action, fails to show in a
satisfactory manner facts on which he bases his claim, the defendant is under no obligation to prove his exception or defense.

Bank of the Philippineg vs. Puzon (606 SCRA 5l)

extrajudicial foreclosure of mortgage, the party alleging noncomplioncc rvith the publication requirement has the burden of proving the sarnc lrr this case, thc rccords arc bereft ofany evidence to prove lhat Citytrust did rrot cornply rvith thc requisitc publicatibn. Neither was there evidence disproving thc qualification of "The Guardian" newspaper to publish the n()ticc

ln

o1'

auction sale.

Ons vs. Premier Development Bank (642 SCRA 327)

. f)

The Regional Trial Court and the Court of Appeals ruled that the lorcclosure proceedings conducted on the mortgaged property of Spouses Ong enjoyed the presumption ofregularity in the absence ofevidence to the contrary. 'Ihe Court respccts the ruling of the courts below. lt is an elementary rule that the burdcn ol'proof is the duty of a party to present evidence on the facls in issue necessary to establish his claim or defense as required by law. The Cou( has likcwise rulcd in previous cases thal foreclosure proceedings enjoy the presumption of regularity and that the mortgagor who alleges absence of a requisite has the burden of proving such fact.
Debtor has the right to redeem the property sold within the term of one year from and ullor thc drto of'thc salc (Section 6). The reckoning datr: in cases of registered land is from the registration o[the certificate of sale since it is only from such date that the sale takes effect as a conveyance. (Jose vs. Blue,42 SCRA 351 [971]; Gorospe vs. Santos, 69 SCRA l9l fl9761; Ceneral vs. Banameda,69 SCRA 182U9761. The one-year period ol rcdcmption for real estate mortgages exists in cases where the mortgagor is an individual or where the mortgagor is a juridical person if the mortgagee is not a bank, quasi-bank or trust entity or even if the mortgagee is ban k, quasi-bank or trust entity in judicial foreclosures (Section 47, Republic Act No. 8791).' "Every conveyance of lands acquired under the free patenf or homestead provisions, vrhen proper, shall be subject to repurchase by the applicant his widow or legal heirs, v..ithin a period of five years from lhe date of the conveyance." (Section ll9, C.A. lr'o, l4l lPublic Land Law], as amended) or foreclosure sale (Tupas vs. Damasco, 132 S()RA 593 [1984]).

Notc. Ccrnu vs. Court of Appeals (220 SCRA 517): The fil,ng ofa collection suit bars the
foreclosure ol' mortgage. 1989 Bar Exam Ouestion

Does an action to foreclose a real estate mortgage tlfecting registered land under the Toffens Syslem prescribe? Give your reasons.
Answer:
is covered by a Toneos Title, the right to foreclose I real estate mortgage thereon prescribes because it is acr ually an action to enforce the collection of a loan.
[:]ven

if the property given as collateral

Ilvoitchins

vs. Ouiamco

(sl0sCRAl7D
There is a well-defined procedure for the recovery of possession of mortgaged property: if a mortgagee is unable to obtain possession of a mortgaged property for its sale of foreclosure, he must bring a civil action either to .""oue. iuch possession as a preliminary step to tie sale, or to obtain judicial
foreclosure.

c)

Effect ofexcessive, iniquitous and exorbitant interest rates

Ileirs of Zoilo Espiritu vs. Landrito (s20 scRA 383)


Sincc the debt due is limited to the principal ofP350'000.00 with 12% prr turnnt as iegal interest, the previous demand for payment ofthe amount of P871.115.00 cannot be considered -as a valid demand for payment. For an obligation to become due, there must be a valid demand. Nor can the forcclosure proceedings be considered valid since the total amount of the inrlebtedness during the foreclosure proceedings was pegged at P874,125.00 u'hich included interest and which this Court now nullifies for being excessive, iniquikrus and exorbitant. Ifthe loreclosure proceedings were considered valid, thii would resull in an inequitable situation wherein the Spouses Landrito will Invc thcrr lantl lirrccloscd lbr lailurr: to pay an ovr:r-inllatr:d loan only a small part olwhich thcy were obligatcd to pay.
Since the Spouses Landrito, the debtors in this case, were not given an opportunity to settle their debt, at the correct amount and without the iniquilous interest imposed, no foreclosure proceedings may be instituted. A judgment ordoring u lorcolosuro sale is conditioned upon a finding on the correct amount ol'thc unpaid obligation and thc failure of the debtor to pay the said amount. ln llrir cnsr'. il lxrs nol ycl hccn shown thal the SJxrtrses l,lndrito had already failed to puy thc oorrocl iulrount ol'thc dol)t und, thr:rclbrc, u lbrcolosurc sulc cunnot bc conducted in order to answer for the unpaid debt. l'he foreclosure sale conducted upon their failure to pay F874,125.00 in 1990 should be nullified since the amount demanded as the outstanding loan was overstated; consequently it has not been shown that the mortgagors - the Spouses Landrito, have failed to pay their outstanding obligation. Moreover, if the proceeds of the sale together with its reasonable rates of interests were applied to the obligation, only a small part of its original loans *ould actually remain outstanding, but because of the unconscionable interest rates, the larger part corresponded to said exccssive and iniquitous interest.

W
Escalation clauses are vtlid and do not contravene public policy' These clauses ar,: common in credit agreements as means of maintaining fiscal stability and retaining the value of money on long-term contracts. To avoid any rcsulting one-sided sitrgtion that escalation clauses may bring, we required in Bunut l;rli;tino lwvrngs & Morlgage Rank vs. Nuvurro 152 SCRA 346 (1987), the inclusian in the parties' agreement of a de-escalation clause that would authorize a rcduction in the i:nterest rates corresponding to downward changes made by l.rw or by the Moretary Board. The validity of escalation clauses notwithstac ding, we cautioned that these clauses do not give creditors the

J
I05

unbridled right to adjust interest rates unilaterally. As we said in the same Barrco interest made pursuant Filipino case, any increase the rate an escalation clause must be the r$ult of an agreement between the parties. The minds of all the parties must meet on the proposed modification as this modification affects an important aspect of the agrcement. There can be no contract in the true sense in the absence ofthe element ofan agreement, i.e., the parties' mutual consent. Thus, rny change must be mutually agreed upon, otherwise, the change carrier no binding effect.

to

in

of

Even with 4 de-escalation clause, no matter how elaborately worded, an transgresses the unconsented increase in interest rates is ineffective principle of mutuality of contracts. Philippine National Bank's failure to secure the spouses Rocamora's consent to the incrbased interest rates prompted the lorver courts to declare excessive and illegal the interest rates imposed.

if ir

Puerto vs. Court of Aoncals (383 SC]RA l8s)

'Ihe foreclosure rvhich stems from the enforcement of a


mortgage contract is invalid.

usurious

Cruz vs. Bancom Finance CorDoration


(379 SCRA 490)

. h)

An absolutely simulared contract of sale is void ab initio and transfers no owncrship right. The purported buyer, not being the owner, cannot validly mortgage the subject property. Consequently, neither does the buyer at the foreclosure sale acquire any title thereto.
Grounds firr annulnrent of lorcclosure sale

Ilnited Coconut Planters Bank vs. Belugo


(s30 scRA 567)

'l'he grounds for the proper annulment of the foreclosure sale arc the follorving: (l) that there was fraud, collusion, accident, mutual mistake, breach oftrust or misconduct by the purchaser; (2) that the sale had not been fairly and regularly conducted; or (3) that the price was inadequate and the inadequacy was so great as io shock the conscience ofthe court. Hi-Cement Corooration vs. Insular Bank of Asia and America (s34 SCRA 269)

Mere inadequacy of the price obtained at the sheriffs sale, unless shocking to the conscience, was not sufficient to set aside the sale.if there was no showing that, in the event ofa regular sale, a better price can be obtained.

Noel,yq..equ:! qf Apoeals (240 SCRA 78)

ln the absence ofproofof gross inadequacy ofthe price, the fact tiat the sale was made with what might appear as an inadequate consideration does not make the contract one ofmortgage.

r'
Centurr Saving Bank vs. Samonte
(634 SCRA 261)

The mortgagor is already estopped from challenging the validity of the foreclosure sale, after entering into a Contract of Lease with the buyer over one of the foreclosed properties - the title of the landlord is a conclusive presumption as against the tenant or lessee. The juridical relationship between petitioncr as lessor and respondcnts as lessecs carries with it a rocogrition ofthe lessor's title.

.
ln

Cebu Bionic Builders Suoolv. [nc. vs" Develonment Bank of the Philinnines (6Js SCRA tJ)

Runk,f rhe l'hilippines,336 SCRA 419 (2000), the Court rcspcot ol the lease on the iorcclosed property, the buyer at the loreclosure sale merely succeeds to the nghts and obhgations of the pledgormortgagor sub.lect lo the provisions of Article 1676 of the Civil Code on its possible tcrmination. This article provides that '[t]he purchaser of a piece of
It.v v. l.untl

hcld that "[rln

land which is under a lease that is not recorded in thc Registry of Property may tenninate the lcase, save rvhen there is a stipulation to the contrary in the contract of sale, or when the purchaser knows of the existence of the lease.' In short. the buyer at the foreclosure sale, as a rule, may terminate an unregistered least: except when it knows of the existence of the lease."

lf there be a balance due to the mongagee after applying the proceeds of the sale, the mortgagee is entitled to recover the deficiency. (Development Bank of the Philippines vs. Mirang,66 SCRA 14l [975]). In judicial foreclosure, the Rules of Court specifically gives the mortgagee the right to claim for deficiency in case a dcficiency exists (Section 6, Rule 70). While.Act No. 3135 goveming extrajudicial foreclosures of mo(gage does not give a mortgagee the right to recover the deficiency afler the auction sale, neither does it expressly or impliedly prohibit such recovery.
Note: This right to recover deficiency had been categorically resolved in State Investment vs. Court of Appeals (217 SCRA 32 [993]) Ergo, the mortgagee is entitled to recover the deficiency in case the sale proceeds are not suflicient to cover the debt in extrajudicial
foreclosures. (Cufiada vs. Drilon,432 SCf;A 618)

I; l.

Right of Mortgagee to Recover Deficiency

Tarnate vs. Court of Aoneals (241 SCRA 2s4)


may recover any deficiency in the mo(gage account which is not realized in a foreclosure sale and that the action lbr recovery ofthat deficiency may be hled even during the redemption period. The action to recover a deficiency after foreclosure prescribes after ten (10) years from the time the right of action accrues as provided in Article I 144(2) of the Civil Code (Development Bank of the Philippines vs. Tomeldan, l0l SCRA 171; Quirino Gonzales Logging Concessionaire vs. Court ofAppeals
(402 SCRA

It is a settled rule that a mortgagee

l8l)

lo7

United Planters Suqar Milline Co.. Inc. (UPSUMCO) vs. Court of Aoperlr (s27 SCRA 336)

In a foreclosure, the deficiency is determined by simple arithmetical


computation immediately after the foreclosure. '

J. l.

Waiver of Security by Creditor

'lhc nrortgagee nray waive the right to foreclose his mortgage and maintain a persbnal action lbr rcoovL-rv of the indebtedness. There is no statutory provision in our jurisdiction prohibiting a personal action to recover a sum of money though r mortgage has been given as security for the payment of the same. (Hijos de I. de la Rama vs. Sajo, 45 Phil. 703 [924];
Solomon and Lachica vs. Dantes,63 Phil. 522 [1937]).

Monzon vs. RelovR (56s SCRA s14)

'
2.

The rule is now settled that a mortgage creditor may elect to waive his security and bring, instead, an ordinary action to recover the indebtedness with the right to execute a judgment thereon on all the properties of the debtor including the subject matter ofthe mortgage, subject to the qualification that he fails in the reniedy elected by him, he cannot pursue further the remedy he has waived.

if

fhe mortgagee cannot avail of both remedies. He has only one cause 6f action, i.e. nonpayment ofthe mortgage debq hence, he cannot split up his cause of action by filing a complaint for payment of the debt and another complaint for foreclosure. (Caltex Phils. vs. Intermediate Appellate Court, 176 SCRA 741 [989]).

'

K,

Rcmedics of an l]npaid Creditor

BPI Family Sayinqs Bank. Inc. vs. Vda. de Coscolluels (493 SCRA 472)
On the nonpayment c:f a note secwed by a mortgxge, the creditor has a single cause of a,:tion against tle debtor. The single cause of action consists in the recovery of the credit with execution of the suit. In a mortgage credit transaction, the r;redit gives rise to a personal action for collection of money. The mortgage is the guarantee which gives rise to a mortgage foreclosure suit to collerit from thc very properly that secured the debt.

A mortgage creditor may institute two alternative remedies against the mortgage debtor, either personal action for collection of debt, or a real action to foreclose the mor tgage, but not both. Each remedy is complete by itself. If the mortgagee opts tc foreclose the real estate mortgage, he thereby waives the action for collecti, rn of the debt and vice versc. Considering that petitioner had already instituted extrajudicial foreclosure proceedings of the mortgaged property, it is no'' baned from availing itself of a personal action for the collection ofthe ind .btednbss.

lne

Suico Rattan & Buri Interiors. Inc. vs. Court of Aoneals

(490SCRA560)

The fact that the mortgaged property is sold at an emount less than its actual value should not militate sgainst the right to such recovery-a mortgagor stands to gain with a reduced price because he possesses the right of
redemption. secured by a real estate mortgage, institute against the mortgage debtor either personal action for a dcbt or u rcrl action to foreclose the mortgage. These remedies are deemed alternative and not cunrulative. An election ofone remedy operates as a waiver of the other.

A mortgage creditor may, in the recovery of a debt

A remedl, is deemed chosen upon the filing o[ the suit for collection or upon the tiling ol' the oomplaint in an action for lbreclosure of mortgage,
pursuant to the provisions of Rule 68 ofthe Rules ofCourt.

As to oxtrajudicial foreclosure, such remedy is deemed elected by the mo(gage oreditor upon filing of the petition not with any court ofjustice but with the ollce of the sheriff of the province where the sale is to be made, in accordance with the provisions ofAct No. 3135, as amended by Act No. 41 18.
Where the mortgagee avails of the remedy of extrajudicial foreclosure, is deemed to have waived its right to file an ordinary case for collection.

it

Where the mortgage creditor chooses the remedy of foreclosure and the proceeds ofthe foreclosure sale are insufficient to cover the debt, the mortgsgee is entitled to claim the dcticiency from the debtor. This rule is based on the principle that the mortgage is only a security and not a satisfaction of the mortgagor's entire obligation.

Philinpine Nrtional Bank vs. Court of Anoerls (360 SCRA 370) Facts: Spouses Antonio and Asuncion Chua were the owners of a parcel of land. Upon Antonio's death, the probate court appointed his son Allan as special administrator of Antonio's intestate estate. The court also authorized Allan to obtain a loan accommodation of P550,000.00 from Philippine National Bank to be secured by a real esat mortgage over the aforementioned parcel of land. In 1989, Allan obtained a loan of P150,000.00 from PNB and executed a deed ofreal estate mortgage on the aforesaid parcel oflard. In 1990, for failure to pay the loan in full, PNB extqiudicially foreclosed the real estate mortgage. During the auction, PNB was the highest bidder with a bid price of P306,360.00. Since PNB's total claim as of the date of rhe auction sale was p679,185.63, the lcian had a payable balance ofP372,825.63. To claim this deficiency, PNB instituted an action against Asuncion and Allan. Both the trial court and the Court of Appeals dismissed the iomplaint. Issue: Whether petitioner PNB may still pursue by civil action the recovery of the balance of indebtedness after having foreclosed the mortgaged property of
thc dcceasod.

Held:

Section 7 ofRule 86 of the Rules ofCourt grants to the mortgagee three distinr:t, indcpcndent and mutually exclusivc remedies that can be altematively pursued by the mortgage creditor for the satisfaction of his credit in case the

109

mortgagor dies, amon!ffifi"1ff6-It-ivc the mortgagp and ctaim ihe entire debt from the estate of the mortgagor as an ordinary claim; (2) to foreclosc the mortgage judicially and prove any deficiency as an ordinary claim and (3) to rely on the mortgage exclusively, foreclosing the sarne at any time before it is barred by prescription without right to file a claim for any deficiency.

The plain result of adoping the last mode of foreclosure is that the creditor waives his right to recover any deficiency from the esate. Following the ruling in Perez vs. PNB (17 SCRA 833) that the third mode includes extrajudicial foreclosure sales, the result of extrajudicial foreclosurc is that the
creditor waives any further deficiency claim.

lllortgrgor's Right to the f,xcBs in the Proceeds of l'oreclorure Sale


Crvstal vs. Bank of the Philiooine Islands
(s98 SCRA 464)
Where there is an excess amount ofthe proceeds ofthe foreclosure sale, the sanre must be retumed to the mortgagor. The excess amount to be returned to lhc rnorlltagor carns legal interost, at the rate of si.r prcent (6Yo) per annum from the time of the filing of the complaint until finality ofjudgnent. Once the judgrnent becomes final and executory, the interest of l2Vo per annum, should be imposed, to be computed from the time the judgment becomes final and executory until fully satisfied.

A foreclosure sale buyer, having accepted paymeht from persons claiming right to redeem foreclosed property, has the obligation to account for such payment, to retum the excess, if any, and to allow redemption
Suico vs. Philiooine National Bank

($r

scRA514)

lf the mortgagee is rctaining more of the proceeds of the sale than hc is entitled to, this fact alone will not affect the validity ofthe sale but simply gives
the mortgagor a cause of action to recover such surplus.

Equitv of redemption or the right of the mortgagor to redeem the mortgaged property after his default in the performance of the conditions of ihe mortgage but beforeltri saie of the mortgaged property or confirmation of the sale (see TopRate lntimational services, Inc. vs. Intermediate Appellate court, 142 scRA 467 [i986]). The mortgagor,s equity ofredemption is simply the right ofthe mortgagor to extinguish the mortgage and retain ownlrsirip ofthe property by paying the secured debt within the 90-day period after the j udgrnent becomes hnit, in accordance with Section 2, Rule 68 of the Rules of Court or even after the foreclosure sale but prior to its confirmation. (l.impin vs. lnrermediate Appellate Court, 166 SCRA 87 tl986l).

It. l.

Kinds of Redemption

2.
within

a certain period after

Right of rcdemption or the right of the mortgagor to redeem the mortgaged property it was sold for the satisfaction ofthe mortgeged debt.

ll0

N. l.

Right of Redemption

In all

cases

of extrajudicial sale, the mortgagor may redeem the property at any time

within the term of one year from and after the date of registration ol the sale (see Section 6, Act No. 3135; Reyes vs. Tolentino,42 SCRA 365 [1971]; Landrito, Jr. vs. Court of Appeals, 466

scRA 107[2006]).
De La Pef,r vs. Alonzo (s91 SCRA 646)

lrr t:xtrrrjutlic itl lirrcckrsurc, what is exturrt is1hc right oI redcmption or the right ol'the rnortgagor to redecm the property within one year lrom and after the date of salc.
Srrrrrcmc Transliner. lnc. vs. BPI Familv Savings Bank. Inc. (6.t.1 SCRA 59) Uncler Section 63 ol Presidential Decree No. 1529 otherwise known as the Propcrty Registration Dccree, if no right of redemption exists, the certificate of titlc ol'the mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser. But where the right of redemption exists, the certificate of titlc olthc rnortgagor shall not be cancelled, but the certificate ofsale and the ordcr coullnning thc sale shall be registcrod by brief memorandum thercof made by the Register of Deeds upon the certificate of title. In the event the property is redeemed, the certificate or deed of redemption shall be filed with the Register of Deeds, and a brief memorandum thereof shall be made by the R.egister ofDeeds on the certificate oftitle.

It is therefore clear that in foreclosure sale, there is no actual transfer of the mortgaged real property until after the expiration ofthe one-year redemption period as providcd in Act No. 3135 and title thereto is consolidated in the name of the mortgagee in case of non-redemption. ln the interim, the mortgagor is given the option \.vhether or not to redeem the real property. The issuance of the Cenificate of Sale does not by itselftransfer ownership.
Considering that herein petitioners-mo(gagors exercised their right of redemption betbre the expiration of the statutory one-year period, petitioner bank is not liable to pay the capital gains tax due on the extrajudicial foreclosure sale. Thcro was no actual transfcr of title from the owners-mortgagors to the foreclosing bank. Hence, the inclusion ofthe said charge in the total redemption price was unwarranted and the corresponding amount paid by the petitionersmortgagors should be returned to them. l9E9 Bar Exam Ouestion
mortgaged h; . land to the Philippine National Bank (PNB) to secure a promissory note. He delaulted in th.: payment of the loan so that the land was sold at public auction on January 20, 1969, for P3,5C0 \r/ith the PNB as the highest bidder. On January 20, 1970, '.X' offered to redeem the proper ty in the amount of P3,500. He enclosed a postal money order for P1,000 as partial payment a rd stated that the balance is to be paid in 12 monthly installments. The PNB then discovered th the sherilfs certificate of sale prepared after the public auction of the land was not registered 't o that it caused the same to be registered on January 30, 1970. The PNB refused the offer of"X ' contending that the offer to redeem was beyond the one-year period provided under Act No. 3 135. In view of the refusal of the PNB, "X' filed an action to repurchase on February 20. 1970. Will the action prosper? Give your reasons.

"X"

ll

Answer: Yes, the Bction should be given due couvse. The one (l) year period of redemption is counted from the registration of the sherifPs certificate of sale hence- the action has not yet prescribed.

Ilisan Bay Manufacturins Coro. vs. Dv (s24 SCnA ss)


Redemption has been defined as the..right of a debtor, and sometimes ol'ir rk:lrror's otlrcr crc<litrlrs. lo reprrrchase from u btryer 0t s forced s$lc, pr()lk:rl! ol thc (lct)rr)r th l wrs soizcd sold irr sutislirclion ol'a.iudgrncnt or othrr ulairn against thc dcbttrr. wirich righr is usually limited to forcedlsale.l ,l' rcll propg11l " S!.r:(ion 78 olPI) 464 (Real Property Tax Code) providcs that thc period rvithin rvhich thc rcdonrptioner may exercise his/her right of redemplion is one (11 year from the date ofregistration ofthe sale.

ur

We have established in jurisprudence that in cases involving redemption, the larv protects the original owner. It is the policy of the law to aid rathei than to defeat the owner's right. Therefore "redemption should be looked with favor ahd whcrc no injury will fbllow, a liberal construction will be given to our redemption laws, specifically on the exercise of the right to iedeem.,, In Doronilla vs. Vasque:,72 Phil. 572 (1941), this Court allowed the redemption in certain cases even after the lapse of the one ( I )-year period in ordlr to promote justice. This court even went further in Delos Reyes vs. Intermediate Appellate Court, 176 SCRA 394 (1989) when the rule on redemption was liberally interpreted in favor of the original owner of the property to give him another oppo(unity to recover his property, should his fortuncj improvel

'

Cavton vs. Zeonnix Tradins Corooration (603 SCRA l4l)

^ registration of the foreclosure sale. It exists only in thi after oi *,1 extrajudicial foreclosure of the mortgage. No such rigirt is recogrized ""ri in a judicial foreclosure unless the mortgagoe is a bank.
To constitute valid redemption, thq arnount tendered must comply with the lbllorving requirements: (r) it should constitute the full amount pari 6y the purchaser; (2) with one percnt per month interest on the purchase price in addition, up lo rhe time ol redemptioni (3) together with the amount of any assessments or taxes which the purchaser may have paid thereon after purchase; (4) interest on taxes paid by the purchaser at the rate of one percent per _the month, up to the time of the redemption; and (5) if the purchasei be also a creditor having a prior lien to that ofthe redemptioner, other than the judgment under which such purchase was made, the amount of such other ii"r]*itfr', interest. exercising the right of redemption, the tender of payment must be -In amount for the full of the purchase price. Otherwise, to a[low paynent by installments would be to allow the indefinite extension of the 'redemption
period.

Right of redemption is the prerogative to reacquire a mortgaged property

The amount tendercd by the redemptioner may be considered sufficient for purposes of redemption, even if it failed to include the amount of taxes paid by the purchuscr whcre thc firrmcr immediatery paid thc amount of taxes when apprisei ! of the deficiency.

tt2

rT

Develoonent Benk of the Philiooincr vs. West, Npqr_og Colleqe. Inc. (429 SCRA s0) The right of legal redemption must be exercised within specified time limits. However, the statutory period of redemption can be extended by agreement of the parties. It bears noting that DBP acceprted installment
payments of20% ofthe compromise amount beyond the July I l, l99l deadline for redeeming the properties. Effectively, DBP and Bacolod Medicat Center rllrccrl kr tlrt crtcnsion olthe redcmption period. Significont, too, is lhe fact that l)ltl' tld rrot lilc I rnolron lirr. rcconsidcration ol'thc Dccision duted Ootobcr 28, 2002,. which granled assignee West Negros a grace period of 60 days from notice of finality o[ the judgment in this case within which to redeem the mortgagcd properties.

Gaiudo vs. Traders Roval Bank (48s SCRA 108)

converted into conventional redemption namely: (l) voluntary agteement of the parties to extend the redemption period; and (2) the debtor's commitment to pay the redemption price on a fixed date.

'l'irc orrc-year period of redemption provided in Act No. 3l 35, as amended, is only directory and, as such can be extended by agreement of the parties, but two requisites must be established for legal redemption to be

Villesar vs. Linqan

rhe "successor-in-in,",.:'::i;.T.t;ent debtor rererrcd to in Section 27, Rule 39 of the 1997 Rules of Civil Procedure includcs a pcrson who succeeds to his property by operation of law, or I person with ajoint interest in the property, or his spouse or heirs. All rights and title of the judgnent obligor orc transfcrred uFnn the expiration ofthe right of rcdemption.
Where the redemption is made under a property regime govemed by the . conjugal partnership of gains, Articlc 109 of the Family Code provides that property acquired by right of redemption is the exclusive property of the
spouses redeemiog the properly.

Ramirez vs. Court of Anoeals (2r9 SCRA s98)


Acceptance of redemption price after the expiration of the statutory period lor redemption is deemed a waiver of the one-year period to redeem
foreclosed propcrty.

Aclon yS. Court of Aooeals (387 SCRA 41s) In the absence of evidence proving that a judgnent debtor was merely trying to protect himself br save his property. and that no reliance could or
should have been placed upon his action in so doing, an attempt to redeem from an exccution sale has bcr:n construed &s a walver of defects or irregularities thercin, precluding him from relying upon them for thc purpose of challenging its vrlrtlitv Anv party othcrwise in a Jxrsrtion lo ohject to a mortgage113

foreclosure sale is precludcd nfin-,*-<Iiring so by conduct sufficient to bring into operation the doctrines of waiver and estoppel.

'
,

Metropolitan Bank and Trust Comoany vs. Tan


(s6e scRA 814)

ln a real estate mortgage when the principal obligation is not paid when due, the mortgagee has the right to foreclose the mortgage and to have the propcrty scizcd and sold with the view ofapplying the proceeds to the peyrnent of the obligation.
'l'he period within which to redeem the property sold at a sheriff s sale is not suspended by the institution ofan action to annul the foreclosure sale.

fhc onc-vc:rr rcdemption pcriod should be counted not from the date of loreclosurc sale, but lrom the time the certificate of sale is registered with the Registry ol l)ceds.
Thc general rule in redemption is that it is not sufficient that a person otfering to redeem manifests his/her desire to do so. The statement of intention must be accompanied by an actual and simultaneous tender of payment. This constitutes the exercise of the right to repurchase. Bona fide redemption necessarily implies a reasonable and valid tender of the entire purchase price, othenvise the rulc on the redemption period fixed by law can easily be circumvented. There is no cogent reason for requiring the vendee to accept paynlcnl by instalhnents from the redemptioner, as it would ultimately result in an indclinitc extcnsion of the redemption period.
The trial court, citing State Investrnent House, Inc. v. Court of Appeals, 215 SCRA 734 (1992), Belisario v. Intermediate Appellate Court, 165 SCRA l0l (1988), and Hi-Yield Realty, Inc. v. Court of Appeals, 388 SCRA 655 (2002), declared that the filing of the Civil Complaint has the elIect of freezing the redemption period and preserves the rights of the mortgagor to redeem thi propcrty lirrocloscd, and thut the filing ofthe court action to enforcc thc correct redemption price is equivalent to a formal ofler to redeem. Such rule has no application in the instant case. Such nrle applies only when the complaint to enforce a repurchase is filed within the period of redemption in which case, the sanre will be equivalent to an olIer to redeem and have the effect of prcscrving the right of redemption. ln the cace before us, the complaint for

'

complaint liled by rcspondents on I I December 1984, docketed as Civil Case No. 85-33933, for Annulment and Cancellation of Extrajudicial Foreclosure Sale to bc an action for judicial redemption because its iurpose was not for
redemption but tbr uullification of exfiaj udicial foreclosure sale.

redcrnpthn (Specific Pcrformance) was filed bcyond the one-yerr r('dcmption pcriod or on l2 Septcmber 1.997.' mor c than twclve yearr from 20 .trrrrr. lr)fK which lr thc tnrl dry of rnlrl pt r&xl. we <Jo not connidcr lhc

China Bankins Corooration vs. (se9 scRA 672)

Mrrtir

'fhe institution ofan action to annul a foreciosure sale does not suspend the running ofthe redemption period.
Petitioners have lost any right or interest over the subject property primarily because of their failure to redeem the same in the manner and within

l14

Ti:
:

c 2.

E qGEe r rlrqT ut Prloo rcscrrr oy E-au:E.EtrlF validity ofth foreclooure pocccdings and public aution must accordingly fail.

In judicial foreclosurc of real esUrc mortgngc, there is no right of redernption, only an equity of redernpion which he can excrcisc at any time aftcr service ofjurgrnent of foreclosure and within the ninety{ay period and even thereafler povided he does so before the foreclosure sale is confirmed by lhe ccurt (Anderson vs. Reyes, 54 Phil. 9,f4). Confirmtiot of the sate of mortgaged real propcrty cuts offall lhe rights or interests of rhe mortgagor ad of the morrpgee and persons holding under him and with tlrern OE equity of rdemption in the prroperty and vests thcm in the pschaser. Confirmation retoocB b tre daf of thc salc. It is a fina! or&r, not interlocutory. (Ocampo vs. Domalanta, 20 SCRA 1136 |9671; Binatbagan Estate lnc. vs. Gatuslao, 76 Phil. 128 [ 19,16]; Villar vs. Javier, 97 Phtl. [955]; Lonzone vs. Amorcs, 134 scRA 386 ue8sl).

Exception:

However, ifthe properfy has been mortgaged in favor of the Development Bank of the Philippines (CA 459) Philipine National Bank (RA 1300), banks, banking and credit institutions (RA 332 or fie General Banking Act) or rural banks (RA 2670), redemption is allowed within one year fiom the rcgistration of the sale- (Gonzales vs. Phil. National Banlq 48 Phil. 824 [ 1926]). The redemflion must be made within one year after the sale if the mortgagce is a bank, banking or qedit institrdon (Section 78, R.A. No. 337; Piano vs. Cayanong supra). Under the Revised Charrer of the PNB, the period is one year from the rcgistration of the foreclosurc
sale-

O. Requisites for Velid Redemption l. . 'ltc retlcmpfion musl bc within t*elrle (12) months from thc timc of fhc rcgistratron of
the sale,

vr. Govcrnmclt Service f nrurencc Svrteo

Mtlhri

(6lr scRA32)

'l'hc redemflion period envisioned under Act 3135 is rcckoncd tiom the datc of thc rcgistration of thc salc mt frorn and after thc dale of thc s8le.

(d6:,

scRA 64)

The righi of redemfiion should be exercised wirhin the specified tisre limit, which is orr year form the darc of registration of the certificate of sale.
case of disagreement ovcr the redernption pnce, the redcmpioner may preserve his right of redempion through judicial action which in evcry case must be filed within the one-year period of redcmpion.

ln

The general rule in redemption is th* it is not sufrciem rhat a person offering to redeem simply manifests hiyter desire to do so - the statement of intention must be accompanied by an actual ard simultaneous tcnder of
paymenl.

l5

Tolentino vs. Court of Aopeals (s17 SCRA 732)


and

Toletrtino vs. Shenton Rerltv Corporrtior


(seo scRA 24) Where the mortgagee is a banking institution, the determination of the redemption price is governed by Section 78 of the General Banking Act, as amended by P.D. No. 1828, which provides that the amount at which the foreclosed property is redeemable is the amount due under the mortgage deed, or the outstanding obligation ofthe mortgagor phrs interest and expenses.

ln Hi-l'ield Realty, Inc. vs. Court of Appeals, 388 SCRA 655 (2002), we held that the action for judicial redemption should be filed on time and in good faith, the redemption price is finally determined and. paid within a reasonable time, and the rights olthe parties are respected. Stated otherwise, the foregoing intcrprctation has thrce critical dimensions: ( I ) tirnely redemption or redemption by expiration date; (2) good faith as always, meaning, the filing of the action must havc been lbr thc sole purpose ol determining the redemption price and not to stretch the redemptive period indefinitely; and (3) once the redemption price is dctermined within a reaso:rable time, the redemptioner must make pronrpt payrncnt in full.

CC Dalton Industries. lnc. vs. Eouitqble pCI Bsnk (s96 SCRA 723)

certificate of foreclosure sale within three months after foreclosure, whichwer is earlier. Thereallcr, iuch mortgagor loses its right of redempiion. Because consolidation of title becomes a right upon the expiration of the redempdon period, respondent became the owner ofthe foreclosed property.

The mortgagor loses all legal ilterest over the foreclosed property after the expiration of the redemption period. Under Section 47 of the General Ilanking l-aw, if the mortgagor is a juridical person, it can exercise the right to redeem the foreclosed property until, but not after, the registration of the

BI'l l'amilv Srvinqs Bank lnc. vs. Veloso


(436 SCRA

l)

and
Banco Filioino Savinss and Mortpise Bank vs. Court of Anoeals (463 SCRA 64)

The general rule in. redemption is that it is not sufficient that a person offering to redeem manifests his desire to do so. The statement of intention must be accompanied by an actual and simultaneous lender of payment. This constitutes the exercise of the right to repurchase. Othemdse, the offer to redeem is ineffectuai.

l16

T-"
De Robleg vs. Court of Aooeals (431 SCRA s66)

As of May 3l, 1984, petitioners were redemptioners. As their mortgage indebtedness was extinguished with the foreolosure and sale of the mortgaged subject property, what they had was the right of redemption granted to them by law. But they lost the right when they failed to exercise it within the prescribed period. Petitioners offered to redeem the subject property only on Deccmber 1990, more than six (6) years after the foreclosure sale of lday 15, 1984. Evidently, that was a belated attempt at exercising a right which had long expired. To allow redemption at such a late time would simply be unreasonable and would work an injustice on respondent spouses.

l,cv vs. Union Bank of the Philinoines (s20 scRA l6e)

It is oniy uJxrn the expiration of the redemption period, without the judgrncnt delrtor having made usc of his right of redemption, does ownership of tlrc land sold bc(:ornc consolr(latcd in tho purohaser,
.lavelosa vs. Court of Aux'als (26s scRA .r9J)

lJnder the Rules,. if the mortgaged property is not redeemed within one year liom the foreilosure sale, the purchaser at public auction is entitled to possession ofthe property. To obtain possession, the vendee or purchaser may either ask for a writ of possession or bring an appropriate independent action, shch as a suit for ejectment, which private respondents did.
Payment of the purchase price of the property plus I o/o interest pcr month together with the taxes thereon, if any, paid by the purchaser with the same mte of interest computed from the date of registration ofthe sale.
2.

Allied Fankinq Corooration vs. Meteo


(s88 SCRA s3E)

The general rule in redemption is that it is not suffrcient that I person offering to redeem manifests his desire to do so. The ststement of intention must be accompanied by an actual and simultaneous tender of payment. This constitutes the exercise of the right to repwchase. In several cases deciJed by the Court where the right to repurchase was held to have been properly exercrsed, there was an unequivocal tender of payment for the full amount ofthe repurchase price. Otherwise, the offer to redeem is ineffectual. Bona fide redemption necessarily implies a reasonable and valid tender of the entire repurchase price, otherwise the rule on the redemption period fixed by law can
easily be circumvented.

Estanislao vs. Court of Aooeals (362 SCRA 22e)


The right of redemption should be exercised within the period prescribed by law. The tender of payment must b for the full amount of the purchase price. Otherwise, to allow payment by installmenf would be to allow the

tt7

t:1
:

indefinite extedsion of the redemption period. Consequently, the payment tendered by petitioners on 4 June 1993, while madc within the period of redemption (365 days), was ineffective since the amount offercd did not include the interest but was limited to the purchase price.
The interest rate on the auction price should be computed not from the the sale. but from the registration thereof. Since thc period of redemption begins only from the datc. of the registration of the certificate of sale in the Registry of Deeds, the computation of the interest on the pwchase price shoultl ulso lre ntrde to cotnmence Frorn that dale. dalc of

llcirs of Norbcrto J. Ouisdmbinq l'hilinpinf Nalional Btnk


(s76 SCRA 762)

vs.

Wlrctlrcr lhc rcdcrrrption is being made under Act No. 3135 or thc Gr:neral Banking Act, as amended by Presidential Decree No. 182g, or under P.l). No. 69.1, thc mortgagor or his assignee is required to tender payment to make said redemprion valid - something which petitioner's predecesioi failed to do. The only instance rvhen this rule may be construed liberally, i.e., allow the non-simultaneous tender of payment, is if a judicial action is instituted by the redemptioner.

ln case of disagreement over the redemption price, the redemptioner may preserve his right of redemption tkough judicial action which must be liled within the one-year period of redemption. The filing ofa court action io enforce redemption, being equivalent to a formal offer to redeem, would have. the effect of preserving his redemptive rights and..freezing,, the expiration ofthe o4e-year rciod. Bona fide tender of the redemption price, within the prescrilrcd period, is only essential to preserve the right of redemption for firture e.forcerneni beyond such period of redemption and within the period prescrib +d for thc action by the statute of limitations. Where the right to redeem exercised through judicial action within the reglementary period, the offer b redeem, accompanied.by u futnu fide tender of the redemption price, while ,ropcr, may f be unessential.

i;

Allied Bankinq Corooration vs. Mateo (s88 SCRA s38)

Petitioner being a banking institutioq the determination of the redemption price for the foreclosed property should be govemed by Section 7g of thc (icncral tlanking Act; Secti.n 78 of the Ceneral Banking \ct had the etTect of amending Section 6 of Act No. 3135 insofar as the redemg tion price is concemed rvhen the mortgagee is a bank or a banking credit instituti,rn. The amount at which the foreclosed propgrty is reder nrable is the amount due under the mortgage deed, or the outstanding obligation, of the mortgagor plus interest and expenses in accordance with Section 78 of the General Banking Act. It was manifest error for the Court of Appeals to apply in the case at bar the provisions of Section 30 of Rule 39 ofthe R-ules of Cburt in fixing the redemption price ofthe subject foreclosed property.

Iilt

F-.r...........-.......----Develooment Bank of the Philinnines vs. Environmental Aouatics. Inc. (634 SCRA 2r5) Section 16 of Executive Order (EO) No. 8l states that the redcmption price for properties mortgaged to and foreclosed by Development Bank of the Philippines (DBP) is equivalent to the remaining balance ofthe loan. Whcn thc DBP rcsorts to Act No. 3135 in order to sell the mortgaged propcrty extraj udrcially, it does so merely to find a proceeding for the sale. Evcn assuming that DBP chose Act No. 3135 as the governing law for the extraiudicial tirrcclosure, the redemption price would still be equivalent to the rcrnitirrinq tralarrcc ol'tho kran. tio No. 81, bcirig a soeciul and subsequent taw, amcndcd Act No. 3135 insof,ar as the redemption price is concerned.

Baluyut vs. Poblcte

(sl4 scRA 370) It bcars to note that the purpose for recluiring the purchaser to fumish copies of the amounts :ls assessments or taxes which he may have paid is to inform the mortgagor or redemptioner ofthe actual amount which he siould pay in case he chooses to exercise his right of redemption. If no such notice is given, the only effect is that the property may be redeemed without paying such assessment or taxes.
Written notice of the rcdcmption must be served on the oflicer who made the sale and a durilicata filed wirh the proper Register ofDeeds. (Rosales vs. yboa, 120 scRA g69

3.

tlr83])

Guillen vs. Court of Aooeals (s89 SCRA 3ee)

particular form of written notice nor any distinctive method notifi cation of redemption.

written norice is indispensable, actuar knowredge of the sare acquired in somc ,thcr manncrs by the rertemptioner, notwithstaniing. Hc or shi is still entitled to written notice, as exacted by the code to removJ all uncertainty as to the sale, its terms and its validity, and to quiet any doubt that the alienation is not definitive. The law not having provided for any altemative, the method of notifications remains exclusive, though'the code does not prescribe any

for

written

begun to run.

I'ctitioner-hcirs have not losr thcir right to rcdeem, for in the absencc of a written notification oftne sale by the vendors, the 30-day period has not even

Castro vs. Basue

(35rSCRA6

Rcdornption on 5 Junc 1995. on. 14 June 1995, complainani filed an opposition contending that Paul Mendoza was just one of several heirs of the mortgago. and thcrelore he could not exercise the right of redemption for more tha-n iis

highest bidder in the foreclosure sale conducted by respondent sheriff on the proprty of the Mendoza spouses. Respondent issued a certilicate of sare which was registered with the itegister of 6eds on 28 December 1994. when the foreclosure sale was held, coistantino Mendoza was alrcady dc'ceasoti. Ilis son paul Mendoza served .n respondent a Notice of

Facts: Complainant was the

ll9

=-

share Bs un heir. Respondent issued a cedficati of redempion to Paul Mendoza and enjoined complainant to accept the redemption money.

respondent sheriff usurp judicial fi.rnction in resolving the legality of the Notice of Redemption?

Issue: Did

Complainant's opposition to the redemption of the property and his insistence on the issuance to him of a final deed of sale gavc rise to a contentious mattcr. For this reason, respondent should have refrained from souling thc rodcrnption hy l)aul Mcndoza and should have advised Oe parties to seek redrcss in the courts. Respondent had no authority to decide the matter.
I

Held:

Inion llank vs. Court of Anoeals (3se scRA 480)

Unionbank

Facls: ln Maroh 1990, respondents mortgaged their residence in favor of to sccurc the payment of a loan to Delco for P1,000,000.00.

Respondents delaulted so tJnionbank extrajudicially foreclosed the mortgage and subnrlttcd the highest bid of P3,290,000.00 at the foreclosure sale. A certificate of sale was issued to Unionbank and annotated on the title on 8 May 1991. Prior to the expiration of the redemption period on 8 May 1992, respondents filed a complaint for annulment of mortgage with the court on the ground that the property was constituted as a family home as early as October 1989 and Article 158 of the Family Code prohibits the encumbrancr of a family home rvithout the wfitten consent of majority of the beneficiaries thereof of legal age. Petitioner contends that the properly could not be legally considered as a family home because its actual value exceeded P300,000.00, the maximum value for a family home in urban areas as stipulated in Article 157 of the Family Code.

Issuga

l.
2.

Is the mortgage valid? Does the action for annulment of mortgage suspend the running

of

the one year period of redemption?

Held:

The mo(gage is valid because Arficle t58 of thc Family Code is not applicable to respondenl's family home as the value of the lattcr at the time of its alleged constitution exceeded P300,000.00.

l lrc rrslllutrolt ()l'ult ucliot) tlucstiorring thc vulidity tll u rnortgagc docs not toll the running of the one year period of redemption. Respondents' failure to exercise their right of redempion divested them of said right ergo petitioner can proceed to have the title consolidated in its name and a writ of possession issued in its favor. To rule otherwise, and allow the institution of an action questioning the validity of a mortgagc to suspend the running of the one year 1*-rirxl ol' rctlcrlpt ion rvoukl c()nsti(rrtc u dungcrous prcccdcrrt. A likcly offshoot ol' such a ruling is the institution of frivolous suits for annulment of mortgage intended merclv to give the mortgagor more timc lo redeem the mortgaged pr0pcrty.

S4n

Jurn vs, Court of Aooeals


(363 SCRA 387)

Issue: Can courts validly order thc Register of Deeds to annotate a final Certificate of Sale in the Original Certificate of Title and to register such sale,

the registered owner-mortgagor duplicate Certificate of Title?


even

if

rcfrrsei6

sudE;

aE-fivniffi-

Held:

The annotation of private respondent's final Certificate of Sale in the Original Certificate of Title, even without the presentation of petitioner's duplicate was valid. To rule otherwise would result in a situation in which a purchaser in a foreclosure sale can never consolidate his or her title to the property even after the lapse of the redemption period, because of the sheer refusal or failure of the former owner to submit the latter's duplicate certificate oftitle. The mortgagee-purchaser would then be at the mercy ofthe mortgagor, if the latter rvithout any just cause withholds such duplicate.

P.

lVrit of Posscssion
Maliwat vs. Metropolitan Bank & Trust Comoanv (s32 SCRA 124)

A writ of possession is a writ of execution commanding the sheriff to enter the land and give possession thereof to the person entitled under the
judgment.

Metropolitan Bank & Trust Comoanv vs. Santos (608 SCRA 222)
possession is defined as "a writ of execution employed to enft>rce it judgmenl to recovet the possession of land, lt commands the sherif to enter the land and give its possession to lhe person entitled under the ' judgmcnt." There are three instances when a writ of possession may be issued: (a) in land registration proceedings under Section 17 of Act No. 496; (b) in judicial foreclosure, provided the debtor is in possession of the mortgaged realty and no thiri pcrson, not u party to the foreclosure suit, had intervcned; and (c) in extrajudicial foreclosure of a real estate mortgage under Section 7 of Act No. 3 I 35, as amended by Act 41 18. The present case falls under the third instance. 'l hc proccdurt: lor ohtnining a writ of possession in extrajudicial foreclosure cascs is lirund in Section 7 of Act No. 3 | 35, as amended by Act 4l I 8.

A writ ol

writ of possession may issue either (l) within the one year redemption period, upon the filing ofa bond, or (2) after the lapse of the redemption period, without need of a bond. In order to obtain a writ of possession, the purchaser in a foreclosure sale must lile a petition, in the form ofrn q parte frotioa. iD the reglstrstion or cadsstral proceedings of the registered property. The reason why this pleading although denominated as a pctition, is a<;tually considcrr:d a motion is best explained in Sps. Arquizu v. (:A. 459 SCRA 753 (2005) where we said: The certificatioo agsirrt forum shopping is required only in a complaint or other initlatory pleadlng. The a parle petition for the issuance of a writ of possession liled by the rcspondent is not an itritiatory pleading. Although the private respondent denominated its pleading as a petition, it is nonetheless, a motion. What distinguishes a motion from a petition or other pleading is not its form or the title given by the parey executing it, but rather its purpose. The office ofa motion is not to initiate new litigation, but to bring a material but incidental matter arising in the progress of the case in which the motion is filed. A motion is not an independent right or rcmcdy, but is confincd to incidental matters in the progress of r cause. It relstes to some question that is collateral to the main object of the action and is connected with and dependent upon the principal remedy, An application for a writ of possession is a mere incident in the registration
Based on this provision, a

12l

r-i

Hence, although it was denominated as a 'petitio4" it wus in substance merely a motion. xxx Apropos, as an incident or consequence of the original registration or cadastral proceedings, the motion or petition for the issuance of a writ of possession, not being an initiatory pleading dispels the requirement of a forum-shopping certification.

procding.

Mollari vs. Government Scrvice


Insurance Svstem (611 SCRA 32)
The petitioner, as defaulting mortgagor, was nottntitled under Act 3135, ofthe application for the issuance ofthe writ ofpossession.

as amended, and its pertinent j urisprudence to any prior notice

of real property, may be issued in: (l) land regishation proceedings under Section 17 ofAct No. 496; (2)judicial foreclosure, provided the debtor is in possession of the mortgaged property, and no third person, not a party to the tbreclosure suit, had intervened; (3) extrajudicial foreclosure of a real estate mortgage, pending redemption under Section 7 ofAct. No. 3135, as amended by Act No. 4l I 8; and (4) execution sales, pursuant to the last paragraph of Section 33 of Rulc 39 ofthe Rules ofCourt.
possession

A writ of

possession, which commands the sheriff to place a person in

Oliveros vs. Presidins Judse. RTC. Branch 24. Biflsn. Laquna (s32 SCRA 109)

'

and

Villanueva vg. Cherdan l*ldinq Investorr Cornoration (633 SCRA 173)


possession is an order whereby the sheriff is commanded to place a person in possession of a real or personal property. After the one-year redemption period, the mortgagor loses all interest over the foreclosed propertv - the purchaser, who has a right to possession that extends after the expiration of the redemption period, becomes the absolute owner of the property when no redemption is made.

A writ of

The proceeding in a petition for a writ of possession is ex parte and summary in nature - it is a proceeding wherein relief is granted without givrng
the person again;t whom the relief is sought an opportunity to be heard.

Sasarbarria vg. Philiooine Business Bank (se3 scRA 64s)


and

ffi

Mallari

vs. Government

The proceeding in a petition for a writ of possession is ex parte and summary in nature - it is a judicial proceeding brought for the benefit of one party only, and without notice to, or consent by any person adversly interested.

122

-l

The Regional Trial Cou* under which the application for the issuance of writ ofpossession is pending cannot defer the issuance of the said writ due to the pendency ofan action for annulment of mortgage and foreclosure sale.
a

Sulit vs. Court of Aopals (268 SCRA 44r)

Issue: Whether or not the mortgagee or purchaser in an extrajudicial foreclosure sale is entitled to the issuance of a writ of possession over the
mortgaged property despite his failure to pay the surplus proceeds of the sale to the mortgagor or the person entitled thereto.

hc Supreme Court rcsolved the ahove issuc in lhc negative. applicatron ol tho pr()cccds liom thc salc of the ,nortgagcd property to the mortgagor's obligation is an act of payment, not payment by dation; hence, it is the mortgagees' duty to tum over any surplus in the selling price to the mortgagor. Pertbrie, a mortgagee who exercises the power of sale contained in a mortg,age is considered a custodian of the fund, and being bound to apply it proJrcrlr'. is liablc lo thc pcrson entitlcd thcreto if he fails to do so. And even though lhc nrorlBagcc is not strictly considercd a trustee in a purely equitable scnsc, but us lirr us collccrns thc unconsumcd balunce, thc mortgBgee is dccmecl a tntstcL' tor thc mortgagor or owner of tlre equity of redemption.
.

|cld:

'l

fie

Saeuan vs. Philipoine Bank of Communications 63S SCRA 3r0)

FernglrCEzJl Erplnoza (ssr scRA 136)


Cua t ai Chu v. l,aoui (612 SCRA 227) and

Villanueva vs. Cherdan hndinq lnvestorg Corooration (633 SCRA 173)

Within the redemption period, the pUrchaser in a foreclosure sale may apply for a writ of possession by filing for that purpose an ex porte motion under oath, in the corresponding registration or cadastral procecding in the case of property covered by a Torrens Title. Upon the filing of an et parte motion and the .approval of the correspontring bond, the court is expressty directed to issuc the order for a writ of pr-rssession.
On the other hand, after the lapse of the redemption period, a writ of in favor of the puchaser in a foreclosure sale as the mortgagor is now considered to have lost interest over the foreclosed property. Consequently, the purchaser, wrro has a right of possession after the expiration of the redemption period, becornes the absolute owner of the proprty when no redemption is made. In this regard, the bond is no longer needed The purchaser can demand possession at anl time following the consolidation of ownership in his name and the issuance to him of a new TCT. After consolidation of title in the purchaser's name for fa ilure of the mortgagor to redeem the property, the purchaser's right to possesriion ripens into the absolute right of a confirmed owner. At that point, the issuance of a writ of possession, upon propr
possession may be issued

l?1

aiiiiE-uoi6a prooTofitrSEffiser
discretion.

in an extrajudicial forcctocure sale becomes merely a ministerial function. Effectively, the court cannot exercise its

Mehooolitan Bank & Trugt Co. vs. Ixmb Construction Consortium Corooration (606 SCRA 1s9) In Sn/ir v. (lourr of Appeals, 268 SCRA 441 (1997), we withheld the issuance of a writ of possession because the mortgagee failed to deliver the surplus from the proceeds of the foreclosure sale which is equivalent to approximately 40o/o ol the total mo('gage debt. .szr7 was considered as an exception to the general rule that it is ministerial upon the court to issue a writ of posst:ssion cven during the period of reilemption. We explained that
equitable considerations prevailing in said case demand that a r.lrit ofpossession should not issrte.

In the subsequent case of.Saguan v. Philippine Rank of Communications, 538 SCRA 390 (2007) however, we clarified that the exception made in Sz/ir does not tpply rvhen tho pcriod to redeem has already expired or when orvncrship ovcr lhc proporty has alrcady been consolidatcd in favor of the mortgagee-purchaser. ln other words, even if the mortgagee-purchaser fails to return the surplus, a writ of possession must still be issued. In the instant case, the period to redeem has already lapsed. Thus lollowing the ruling in Saguan, the issuance ofa writ olpossession in favor of the petitioner is in order. Relatedly, we held in Sa/ll that if the mortgagee is retaining more of the proceeds of the sale than he is entitled to, this fact alone .will not affect the validity ofthe sale but simply gives the mortgBgor a cruse of action to recover such surplus.

Unlike in the case of Saguan where the mortgagors did not challenge the validity of the foreclosurc but only demanded the retum of the surplus, respondent in this case sought to set aside the foreclosure sale. In fact, a Complaint for Nullification of Foreclosure Proceedings and Damages was filed before the RTC of Paraflaque docketed as Civil Case No. 00-0513 and raflled to Branch 194. The filing of a separate case for the collection of surplus by respondent would therefore be improper while the annulment case is still
pending. bears stressing that the collection of surplus is inconsistent with the annulment offoreclosure because in suing for the retum of the surplus proceeds, the mortgagor is deemed to have affirmed the validity of the sale since nothing is due il no valid sale has been made. lt is only afier the dismissal of the courpluult tbl unnulnrcnt or whcn thc l'trrcclosurc sule is dcclored valid that thc mortgagor may recover the surplus in an action specifically brought for the purpose. Howevcr, to avoid multiplicity of suits, the better recourse is for the mortgagor to file a case for annulment of foreclosure with an altemative cause ofaction for the retum ofthe surplus, ifany.

It

Cua Lai Chu vs. Lsoui (612 SCRA 227)


When privatc rospondent applied for the issr.iince ofa writ ofpossession, presented a new transfer certificate of title issu6d in its name dated 8 July 2003. The right of private respondent to the possession ofthe property was thus founded on its right of ownership. As the purchaser of the properly at the

it

124

foreclosure sale, in whose name title over the property was already issue4 the right of private respondent over the property had become absolute, vesting in it the corollary right of possession. Chailease Finance Corooration vr' Ma (4(D scRA 250)

Yulienco r s. Court of Aooeals (3e3 SCRA 143)

ldolor

Court of Appeals (4s0 scRA 3e6)


vs.

'foo Art Manufacturins. lncoroorated vs. l\[etropolitan Bonk and Trust ComDanv (s9s scRA 323)
and

Governmert Service Insurance Svstem

Mallari

vs.

(6rl scRA

32)

A writ o[possession may also be issued after consolidation ofownership of the property in the name of the purchaser. 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 regisration of sale. As such, hc is .entitled to the possessiqn of the property and can demand it.at any time following the consolidation of ownership in his name and the issuance to him of a new transfer certificate of title. In such a case, the. bond required in Section 7 of the Act No. 3135 is no longer netssary. Posscssion of thc land then becomes an absolute right of the purchaser as confirmed owner. Upon proper application and proof of title, the issuance of the writ of possession becomes a ministerial duty of the court.
Pensol vs. Msranan (49r SCRA 396)
Develop,ment Bank of the Philiooines vs. Prime NeiqhboThood Association (s87 SCRA s82)

and

Ton Art Manufrcturins. Incoioorated vs. Metropolitan Bank and Trust Comoanv (sgs scRA 323)
The foregoing rules, however, are not without exception. Under Section 35, Rule 39 of the Rules of Court, which is made suppletory to the extrajudicial foreclosure of real estate mortgages by Section 6 ofAct 3135, the possession of the mortgaged properly may be awarded to a purchaser in the extrajudicial foreclosure unless a third party is actually holding thc properly adversely to the judgment debtor. ln PNB v. CA, 374 SCRA 22 (2002), the Court held that the obligation of a court to issuc an ex parte writ of possession in favor of the purchaser in an extrajudicial foreclosure sale ceases to be. ministerial once it

|'-=

appears that there is a third party in possession right adverse to that ofthe debtor/mortgagor.

ofthe propcrty wto is claiming a

The fact that a person is not named in the writ of possession does not render the writ unenforceable against him where he was a party to the documents which were the bases ofthe foreclosure. Philippine National Brnk vs Court of Appeals (374SCRA 22) Villsnueva vs. Cherdan Lending Invesiors Corooration (633 SCRA 1?3)
and

BPI Fnmilv Savinqs Bank. Inc. vg. Golden Power Diesel Sales Center. Inc.
(63e SCRA 40s)

lssue: Whether or not an ex-parte writ of possession issued pursuant to Act No. :tfS, ,r amended, can be enforced against a third person who is in actual possession of the foreclosed property and who is not in privity with the
debtor/mortgagor. The obligation ofa court to issue an ex-parte writ of possession in favor ofthe purchaser in an extrajudicial foreclosurc sale oeases to be ministcrial once . it appea.rs that there is a third party in possession of the property who is claiming a right advcrse to that of thc debtor/mortgagor. Undar Article 433 of the Civil Code, one who claims to be the owner of a property possessed by another must bring the appropriate judicial action for its physical recovery.

Held:

An ex*parte petition for issuance of a writ of posscssion is a nonlitigious proceeding authorized in an extrajudicial foreclosure of mortgagc
pursuont to Act 3 135, os arncndcd.

Unlike ajudicial foreclosure of real estate mortgage under Rule 68 of the Rules of Court, any proprty brought within the ambit of Act 3135 is foreclosed by the filing of a petition, not with ony court of justice, but with office of the sheriff of the province where the sale is to be made. As such, a third person in possession of an cxtrujudicially lbrcolosed realty, who claims a right superior to that ofthe original mortgagor, will have no opportunity to be heard on his claim in a proceeding of this nature. It stands to reason, therefore, that such third person may not bc dispossessed on the strength ofa mere ex-parte possessory writ, since to do so would be tantamount to his summary ejectment, in violation of thc basic tcncts of duc process. Besides, Article 433 of the Civil Code requires nothing less than an action for ejectment to be brought even by the true owner. After all, the actual possessor ofthe property enjoys a legal presump,tion ol' jrrsl trtlc in l;is lbvor which musl be ovcrcome by the party claiming otherwrsc.

126

Davot vs. Shell Chemical (Phils.) Inc. (s2s scRA s3s) and

Policarnio vs. Active Bank (s66 SCRA 27) An order for the issuance of the writ of possession is simply.an incident in the transfer oltitle in the name of the buyer - such order cannot be said to be a judgment on the merits, i..e., one rendered after a consideration of the evidence or stipulaiions submitted by the partles at the trial of the case. The obligation of a court to issue a wlit of possession in favor of th.e purchaser in an extrajudicial foreclosure sale ofa mortgaged property ceases to 6c ministeriai onoc it is shown that there is a third party in possession of the property who is claiming a right adverse to that ofthe mortgagor and that such inira party is a stranger to the foreclosure proceedings in which the ex parte wlil of possession was applied for. Heiru of the Late Dominso N. Nipolas vs.

@
' '

MetroP@

A writ ofpossession issued pursuant to a foreclosure of mortgage cannot include the parts of the lot pertaining.to persons who were not impleaded by the buyer - they are strangers or third parties whose rights could not be determined in said pmceeding. While it is basic that after consolidation of title in the buyer's name for failure of the mortgagor to rirdeem, the writ of possession becomcs a matter of right and its issuance to a purchaser in an cxtrajudicial foreclosure is merely a ministerial function, however, considering the circumstances obtaining in the instant case and following the ruling in Rivero de Ortega, 71 Phil. 340 (1941), such writ of possession should apply only to the share of widow as may be determined in the appropriate procceding for the purpose of settling the undivided estate of deceased husband, and not to include the shares of the other heirs who were not parties to the foreclosure.
(lamacho
vs..

Philionlne Nalionrl Bank

(363 SCRA 3s2)

Dsvrit vs. Philiooine Bank of Commuoicrtions


(386 SCRA 117)

'

end

Bukidnon Doctort' Hosoital. Inc. vs.

MetroPs!iELEt!I-UIIg!!!]93
(463 SCRA

rrr)

The law expressly authorizes the purchaser to petition for a writ of possession during the redemption period by filing an ex parte motion under oath for that purpose in the corresponding registration or cadastral proceeding in the case of property with Torrens title; and upon the filing of such motion and approval of the conesponding bond, the law also in express terms directs the court to issue the order for a writ of possession. Said order for a writ of J
I
1

1,,1

of coursc upon filing of the proper motion and approval of the conesponding bond, No discretion is left to the court. Any question regarding the rcgularity and validity of the sele (and the consequent cancellation ofthe writ) is left to be determined in a susbsequent proceeding as outlined in Section 8. Such question is not to be raised as a justification for opposing the issuance of the writ of possession, since, under the Act, the proceeding is ex parte.
possession issues as a

.matter

Tonacio vs. Brnco Fllioino Savinqr rnd Mortsase Bank (635 SCRA s0)

Section 6, Rule 39 of the Rules of C<iurt finds application only to civil actions and not to special proceedings. Section 6, Rule 39 ofthe Rules of Court is not applicable to an ex parte petition tbr the issuance of the writ of possession as it is not in the nature of a civil action. The duty ofthe trial court to grant a writ of possession is ministerial; the issues as a matter of course upon the filing of the proper motion and the approval of the corresponding bond.

writ

The issuance of a writ of possession to a purchaser in an extrajudicial foreclosure is summary and ministerial in nature as such proceeding is merely an incidcnt in thc lronslirr of tille,

Ravo vs. llletrooolltrn Brnk ard Trust Comornv (539 SCRA s71)

An et parte petition for the issuance of a writ of posscssion under Section 7 of Act No. 3135 is not, strictly speaking, a 'Judicial prccess" as contemplated in Article 433 of the Civil Code - it is a judiciat proceeding for the enforcement ofone's right ofposscssion as a purchaser in a foreclosure salc, not an ordinary suit filed in court by which one party "sues another for the enforcoment ofa wrong or protection ofa right, or the prevention or redress ofa wrong."
The issuance of the writ of possession being a ministerial function, and summary in nature, it cannot be said to be a judgment on the merits. It is only and incident in the transfer of titte. Hence, a separate casc for annulment of mortgage and foreclosure sale cannot be baned by litis pendentia or re,t ludicata. Eouitable PCI Bank Inc. vs. DNG Realtv and Develooment Coroorhtion (627 SCRA 12s)

After the consolidation of title in the buyer's name for failure of the mortgagor to redeem, the writ of possession becomes a matter of right and the issuance ofsuch r.rrit of,possession to a purchaser in an extrajudicial foreclosure is merely a ministerial function. The basis of this right to possession is the purchaser's ownership of the property.

a petition to set aside the foreclosure sale and to cancel possession in the same proceedings where the writ of possession was the writ of

A party may file

requested. The aggrieved p6rty may thereafter appeal from any disposition by the court on the matter.

Respondent's recou$e to the Court of Appeals via Rule 65 was inappropriate even though the Sheriff had demanded that they vacat the property. Section 8 of Act No. 3135 mandates that even if an appeal is interposed from an order granting a petition for a writ of possessiorL such order shall continue to be in effect during the pendency ofan appeal.

Alarilla. Sr. vs. Ocamoo (4r7 SCRA 48s)


Mamerto Maniouiz Foundation. inc. vs. Pizaro (448 SCRA 140) Jetri Construction Corporation vs. Bank of the Philipoine Islands
(s24 SCRA s22)

rnd
Cua Lai Chu vs. Laqui (612 SCRA 227)

Any question regarding the validity of the mortgagc or its forcclosur cannot be a legal ground for refusing the issuance of a writ ofpossession.
Bsldueza v& Court of Aooerlr (s69 SCRA r35)
Samson vs. Rivera (428 SCRA 759)

rnd
Carlos vs Court of Aopetlg (s37 SCRA 247) The pendency of a civil case for annulment of foreclosure sale is not a sufficient ground to deny the issuance of a writ of possession - the motion for issuance ofa writ ofpossession can proceed independently and its issuance does not bar a separate case for annulment of mortgage and foreclosure sale. The law expressly authorizes the purchaser to petition for a writ of possession by filing an ex pqrte motion. The ex parte nature of the proceeding does not deny due process to the mortgagor because the issuance ofthe writ of possession does not bur a separatc casc for annulment of mortgBge and foreclosure sale.

,l,rm vs. Metrooolitan Bank

"'i=ltg'i=cgqPLl" (s46 SCRA 200)


'l'he issuance ofa writ of possession to a purchaser in a public auction ;s a ministerial act - after the consotidation of title in the buyer's name for fuilure

,rn

of the mortgagor td
becomes a matter of right. Regardless of whether or not there is a pending suit for annulmcnt

ofthe

mortgage or of the forectosure itsell the purchascr is entitled to a writ possession, without prejudice to the ensuing outoome of the other proceeding. Pahang vr. V6til (434 SCRA 139)

of

The filing of an action by the redemptioner to enforce his right to redecm does not suspend the running of the statutory period to redeem the property, nor bar the purchaser at public auction from procuring a writ of possession after the statutory period of iedemption had lapsed, wilhout prejudice to the final outcome of such complaint to enforce the right of
redemption. The proceedings in a petition and/or motion for the issuance ofa writ of possession, after the lapse ofthe statutory period for redanption, is summary in nature. Selegna Manrgement and Develooment Coroorrtion vs. UCPB (489 SCRA r2s) .

ln Spouses Estares vs. CA, 459 SCRA 604 (2005), we did not find any justification to grant a preliminary injunction, eVen when the mortgagors rrcrc

' disputing the amount being sought from them. We held in that

case that "upon the nonpayment of the loan, which was secured by the mortgage, the mortgagcd property is properly subject to a foreclosure sale."

A latb partial flaymcnt could not have possibly forestalled


mBturity date.

long<xpired

A wril ol' prelirninary injunction is issued to prcvent an extrajudicial foreclosure, only upon a clear showing of a violation of the mortgagor's unmistakable right. Unsubstantiated allegations of denial of due irocess and prematurity of a loan are not sufficient to defeat the mortgagee's unmistakable right to an extrajudicial foreclosure.
Philinnine Nationr! Bank vs. Saneo Marketins Corooration (46s SCRA 287)
The purchaser in a foreclosure sale may apply for a writ of possession during the redemption period by filing an ex parte motion under oath for that purpose in the corresponding registration or cadastral proceeding in the case of proprty covered by a Tonens title. A writ of possession may also be issued allcr consolidation of ownership of the propcrty in the name ofthe purchascr, in which case the bond required in Section 7 of Act No. 3135 is no longer
necessary.

Any question relarding the regularity and validity of the sale, as well as the consequent cancellation of the writ, is to. be determined in a subsequent proceeding as outlined in Section 8 of Act No. 3135, as amended by Act No. 4118. Such question is not to be raised as a justification for opposing the

130

Is'I@gUEE
foreclosure proceedings is not a bar to the issuance ofa writ of possession.

Arouiza vs Court of Aoperls


(4se scRA 753)

After the consolidation of title in the buyer': name for failure of the mortgagor to redeem, the writ of posscssion becomes a mattcr of right. Its issuance being a ministerial fimction and summary in nature cannot be said to be a judgment on the merits but simply an incident in the transfer of title. A separate case for annulment of mortgage and foreclosure sale cannot be baned
by litis pendentia or resjudicata.
The petitioners fault the trial court for nbt delving into the validity of the mortgage and the foreclosure proceeding before granting the petition for a writ of possession. This contention is banen of legal basis. The judge to whom an application for writ of possession is filed need not look into the validity of the mortgage or the manner of its foreclosure. ln the issuance of a writ of possession, no discretion is left to the trial cou(.
De Vera vs. Asloro (44E SCRA 203)

Under Section 8 of Act No. 3135, even if the mortgagor files a petition assailing the writ of possession granted to the buyer and the sale at public auction within thirty (30) days from the issuance ofa writ ofposscssion in favor of the buyer at public auction of the property, and the court denies the'same, the .buyer may appeal the order of denial. However, thc buyer at public auction remains in possession of thc proprty pending rcsolution of the appca.l. Wc have consistently ruled that it is the ministerisl duty of the court to issuc writ of possossion in favor ofthe purchascr in a foreclosure sale. The triel court has no discretion on this matter.

Paderes vs. Court ofAooesls (463 SCRA so4)

The debtor in extrajudicial foreclosures undcr Act No. 3135 or his successor-in-interest has, one year from the date of registration ofthe Ccrtificate of Sale with the Registry ofDeeds, a right to redeem the foreclosed mortgage. 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 regiskation of the sale.
The right of the applicant or a subsequent purchas;r to request for the ofa writ ofpossession of the land never prescribes.

issuance

a.

Remedy of Terceria

Facts: Petitioner China Banking Corporation granted three (3) loans in the total sum of P27,353,000.00 to TransAmerican Sales and Exposition, Inc.
(TransAmcrican) owned and controlled by spouses Jesus and Lorelie Garcia and

131

-*erc sec For failure

TransAmerican to pay its loans, petitioner foreclosed extrajudicially the three real estate mortgages and the mortgaged properties were sold at public auction for P38,004,205.01 to petitioner, being the highest bidder. The trial court granted the ex-part verified petition for issuance of writ of possession filed by petitioner and likewise approved the petitioner's surety bond. Respondents Mr. and Mrs. Ordinario filed a motion for reconsidcration praying that the parcel of land with its improvement covered by TCT No. 7637 be excluded from the above order.
respondents as legitimate buyers prevail petitioner's mortgage foreclosure? over the

of

Issue: Can the superior right of the

ljndcr Scction 33, Rule 39 of the 1997 Rules of Civil Procedure, as amended, the possession of the foreclosed property may be awarded to the
purchaser or highest bidder "unless a third party is actually holding the property adversely to the judgment debtor." Assuming arguendo tlnt respondent spouses are adverse third parties, as they so averred, Section 16 of Rule 39 reseryes to them the remedies of (l) terceria to determine whether the sheriff has rightly or rwongly taken hold of the property not belonging to the judgment debtor or obligor and (2) an independent "separate action" to vindicate their claim of orvncrslrip rrrrrVor lxrsscssion ovcr llrc I'orccloscd party.

tleld:

Under the above Rule, a third-parly claimant or a stranger to the ftrreclosure suit such as the respondents, can opt to file a remedy known as tercena against the sheriff or officer effectinq the writ bv servins on him an alfidavit of his title and a cooy thereof upon the judement creditor. By the terceria. the_ officer shall not be bound to keep the prooerty and could be unswcrulrlc lix' duurnselt. A thitd-nlrrtv cj&inrnnl nrqy nlie ropetd tq nn independent "seoarate action." the object of which is the recovery of ownershio or possession of the prope4v seized bv the sheriff. as weU_eC.dClSECeC_edSiBC from wronul'ul scizure and dctention of the oroperty desoite the third-oartv claim. If a "separate action" is the recourse, the third-party claimant must institute in a forum of competent jurisdiction sn action, distinct and separate tiorn the action in which the judgment is being enforced, even bcforc or without need of filing a claim in the court that issued the writ. Both remcdies are cumulative and may e availed of independently ofor seoaratelv from the other. Availment of the terceria is not a condition sine oua non to the institution of a "separate action."

YIII. ANTICHRESIS

A.

Definition (19E9 Bar Exam Question)

Antichresis is a contract whereby the creditor acquires the right to receive the fruits ofan immovable of his debtor, with the obligadbn to apply them to thb paymcnt of the interest, if owing and thereafter to the principal ofhis credit.

B. l. 2.

Characteristics It is an accessory contract because it secures the performance ofa principal obligation.

It is a formal contract bechuse the amount ofihe principal and ofthe interest must both be in writing, othorwisc thc contract ofantichrcsis is void.

132

Obligations of Antichretic Creditor


The creditor is obliged, unless there is a stipulation to the contrary, to pay thc taxes and charges upon the estate. If he does not pay the taxes, he is by law (Article ll70) required to pay indemnity for damages to the debtor. (Pando vs. Gimenez, 54 Phil. 459 [930])

Another obligation of the creditor is to apply the fruits, after receiving them to the interest, if owing, and thereafter to the principal (Article 2132) in accordance with the provisions of Article 2133 or 2138. Hence, the duty ofthe creditor to render an account of said fruits to the debtor and the corresponding right of the latter that the said fruits be applied to the debt. (Barrctto vs. [Jarrotk),37 Phil. 234 [917]; Diaz and Rubillos vs. De Mendezona,48 Phil. 666 [928]; Macapilac vs. Gutiorrez Recipe 43 Phil.770 U922D
1995 Bar Exam Ouestion

2.

Olivia owns a. vast mango plantation which she can no longer properly manage due to a lingering illness. Since she is indebted to Peter in the amount ofP500,000.00, she asks Peter to manage the plantation and apply the harvest to the payment of her obligation to him, principal and interest, until her indebtedness shall have been fully paid. Peter agrees.

l. 2. 3. 4. l.

What kind of contract is entered into between Olivia and Peter? Explain. What specific obligations are imposed by law on Peter as a consequence of their contract? Does the law require any specific form for the validity oftheir contract? Explain. May Olivia re-acquire the plantation before her entire indebtedness shall have been fully paid? Explain.

Answi:n:
New Civil Code, pursuant to a contract of antichresis, the creditor acquires the right to A contract of antichresis was entered into between Olivia and Peter. Undcr'Article 2132 of the receive the fruits of an immovable of his debtor, with the obligation to apply them to the paymenl ofthe interest and thereafter to the principal ofhis credit.

2. 3.

Peter is obliged to pay taxes and charges upon the land and bear the necessary expnses for the preservation and repair which he may deduct from the fruits. (Article 2135, NCC)

The amount of the principal and interest must b specified in writing, otherwise the antichresis will be void. (Article 2134, NCC) No. Articlc 2.136 specifically pmvides that the dhtor cannot re-acquire the enjoyment of the immovable withoul tirst paying in full what he owes the creditor. However, it is potestative on the part ofthe creditor to do so in order to exempt him from his obligation under Article 2135, NCC. Olivia, the antichretic debtor, cannot re-acquire the enjoyment untess Peter compels the former to enter again the enjoyment ofthe property.

4,

D.. L 2.

Salient Points

l)clivcry ol'tho proF,crty to the crcditor is rcquircJ only in ordcr that the creditor may receive the fruits and not for the validity ofthc contract.

It is not essential that thp loan should eam interest in order that it can b guaranteed with a contract of antichresis. Anticlresis is suscepible of guaranteeing all kinds of obligations, pure or conditional. (Javier vs. Valliser, [CA] N. 2648-R, April 29, 1950; Sta. Rosa v. Noble, 35 O.G. 2741)

133

The fruits of the immovable which is the object of the antichiesis must be appraised at their actual market value at the time ofthe application' (see Article 2138)

3.

4.

The property delivered stands as a security for the payment ofthe obligation of the debtor in antichrcsis. Hence, the debtor cannot &mand its retum until th debt is totally poid.

5.

authorizing the antichretic creditor to appropriate thc property upon the non-payment ofthe debt within the period agreed upon is void. (see Article 2088)

A stipulation

E. I. 2. 3.
F.

Distinctions between Antichresis and Pledge (1989 Bsr Exam Question) Antichresis
refers to real proPerty perfected by mere consent
consensual cont.act

' l. 2. 3-

Pledee
refers to personal property perfected by delivery real contract

Distinctions between Antichresis and Real Mortgage (19E9 Bar Eram Question) Antichresis
Rcol Mortqrge

l.
.

property is delivered to th" c.Lditor

l.

debtor usually retains


possession of the property

the

creditor acquires only the right to receivc thc fruits of thc property, hence it does not produce a real right

creditor does not have any right to rcceivc thc fruiB, but mortgagp rcal right over the creates property which enforceablc against the whole world

is

3.

crcditor, unless there is a stipulation to ths contrary, is obliged to psy the taxes and charges upon the estatc. (Article 2135)

3.

cretlitor has no such obligation

4.

creditor given possession of the property shall apply the fruits thereof to the paymcnt of interest, if owing, and thereafter to the principal ofthe credit

4.

mortgagee has no such obligation

G. 1. 2.

Remedy of Antichretic Creditor in Case of Default


to bring an action for specific performance

to ptition for the sale ofthe real property as in a foreclosure of mortgage under Rul6 68 of the Rules of Court. The parties, however, may aglee on an extrajudioial foreclosure in the sarne menner as they are alloWed in confacts of mortgage and pledge (see Article 1307; Tavera vs. El Hogar Filipino, lnc. 68 Phil. 712 [939]).

134

CIIATTEL MORTGAGE
A. Delinition
A chauel mortgage is: an accessory contact because principal obligation;

l.

it is for the purpose of seouring the pcrformance of a

Philioo Brothers Oceanic. Inc. vs. Court of Apoeals


(404 SCRA 60s)

Chattel mortgage is a mere accessory contract. Hence, it should be deemed automatically extinguished upon the satisfaction of the principal obligation.
Saeuid vs. Securitv Finrnce. lnc. (477 SCRA 2s6)

'

As regards the chattel mortgage, it is settled that a mortgage is a mere accessory contract and its validity would depend on the validity of the loan secured by it. The chattel mortgage constituted over the subject vehicle is an accessory contract to the loan obligation as embodied in the promissory note. It cannot exist as an independent contract since its consideration is the same as that of the principal contract. A principal obligation is an indispensable condition for the existence of an accessory conract. Since it has bcen iu{Iiciently established that there wur no caus or consideration for the promissory note, it follows that the chattel mortgagp has no leg to stand on. Hence, it must be extinguished and cannot have any legal effect on petitioners.

2.

a formal contract because for its validity, registration in the Chattel Mortgagc Rcgister is indispensable; however, despite its non-registration, it will remain valid and binding behveen the parties.

Filininas Merble Corooration vs Intermediate Aooellate Court

(r42SCRArEo)

A mortgage is a mere acccssory contract thus, its validity would dcpend on the validity of the loan secured by it. We, howwer, reject thc petitioner's argument that since the chattel mortgage involved was not registered, the same is null and void. Article 2125 of the Civil Code clearly providcs that thc nonregistration ofthe mortgage does not affect the immediate parties. It states:

"Article 2125. ln addition to the requisitcs in Articlc 2085, it is indispensable, in order that mortgsge may be validly conSituted that the documenl in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding bctwcen thc parties."
The petitioner cainot invoke the above provision to nulli$ the chasel mortgage it executed in favor ofrespondent DBP.

135

MCO Srmole Problcm


The following credit transactions are formal confiects:
a.

..r

b. c.
d.

commodatum and Suaranty re&l estatc mortgege and surctyship deposit and pledge chattel mortgage and antichresis

Legal Basis: The ChaUel Mortgage Law and Article 2134

3.

a unilateral contract because it produces only obligations on the part of the creditor to free the thing from the encumbrance upon fulfillment of the obligation.
1993 Bar Examination Ouestion

A, ohout to lcavc thc counlry on a foreign assignment, entrusted to B his brand-new car and its certificate of registration. F'alsifying A's signature, B sold A's car to C for 8200,000.00. C then registered the.car in his name. To complete the needed amourt C bonowed P100,000.00 from the savings and loan association in his office, constituting a chattel mortgage on the car. For failure of C to pay the amount owe4 the savings and loan association filed in the RTC a complaint for collection with application for issuance of a writ of rcplevin to obtain possession of the vehiclc so that the chattel mortgage could be foreclosed. The RTC issued thc writ of replevin. The car was then seizbd from C and sold by the sheriff at public auction at which thc savings and loan association was the lone bidder. Accoidingly, the car was sold to it. A few days latcf, A anived from his foreigr assignment. Upon leaming what happcncd to fus car, A
sou'ght tg recover possession and ownership thereof from the savings and loan sssocietion.

Can

A rexbver his car from thc savings and loan association? Explrin your answcr.

Answcr:
Yes, A'can rccover his car from the savings and loan association.. In a chattel mortgage, the mortgagor must be th; absolute owner of the thing mortgaged. Furthermore, thc person constituting the mortgage must have the free disposal of the property, and in the abscncc thereof, must tre legally authorized for the purpose. In the case at bar, the mortgagor C did not have tlre free disposal of the property and was not legally authorized for the purpose therefore the chattel mortgage was not valid. A can therefore recover the car from the savings and loan association provided he pays the price at which thc savings and loan association bought thc car at public auction pursuant to'prevailing Supreme Court rulings. Inasmuch as A was unlawfully dqprived ofhis car, A can recover it from any person in possession thereof But since it wac bought at a public auction in good faith by the savings and loan association, he must reimbursc the savings and loan association the price at which the car was bought.

B.

Distinctions between Chettet Mortgirge and Pledge

Chrttel lVlortqage

PIedqe

l. 2.

personal property to the mortgagee is not necessary

delivery

of

l. 2.

dclivcry is neccssary

registration is validity

.Chattel is necessary Register for Mortgage

in the

registration in tlrc Registry of Propcrty is not neccssary for itc validity

r16

.rr.-------!lr-E!E-

3.

procedure

mortgaged property is Section 14 of Article 1508,


amended 4.

for sale of

the found in
as

3.

procedure for sale of pledged proprty is found in lrticle 2112 of the Civil Code property is sold" the debtor is not entitled to the excess
Exceptions: a) contrary stipulation (Article 2125) b) legal pledge

if

property

is

foreclosed, the

4.

if

excess over the amount due goes to the debtor

(Article

2l2l)

5. '

Exccption: if chattel mortgage is security for thc purchase of personal property in installments (Article 1484)

is entitlcd . to recover the deticioncy from the dcbtor

il-property is forccloscd, creditor

5.

property is sold, creditor is not entitlcd to recover the deficie cy notrvithstanding any stipulation to the contnrry (Article 2l l5)

if

Knowingly removing any personal property mortgaged under the Chattel Mortgage Law to any province or city other than the one in which it was located at the time ofthe execution of thO mortgage without written consent ofthe mortgagee; and
Selling or pledging personal proprty already mortgaged, or any part thereof, under the terms of the Chattel Mortgage Law without the consent of the mortgagee written on the back of the mortgage and duly recorded in the Chatel Mortgage Register (Article 319, Revised Penal
Code).

('. I.

()ffcnscs Involving ()hattcl Mortgrge

2.

Note: The mortgagor is not relieved of criminal liability even if the mortgage indebtedness is thereafter paid in full (U.S. vs. Kilayko, 32 Phil. 6l [9t5] or the mcrtgagor-seller informed the
purchaser that the thing sold had been mortgaged. (People vs. Alvares, 45 PhiL 472 U9231). But the sale is valid although no witten consent was obtained from the mortgagee but the

mortgagor lays himsell open to criminsl prosecution. (Servicewide Specialist, Inc. vs. lntermediate Appellate Court, 174 SCRA 80 [1989]; Dy, Jr. vs. Court of Appeals, 198 SCRA
826 D.

Ueell)
Subject Matter of Chatlel Mortgage

l.
2. 3.

4.

5. 6. 7.

ofstock in a corporation lnterest in business Machinery and house of mixed materials treated by parties as personal property and no innocent third per3;on will be prejudiced thereby (Makati kasing and Finance Corporation vs. Weaver Textile Mills, lnc.,122 SCRA296 [983]). Vessels, the mortgage of which had been recorded with the Philippine Coast Guard in order to be effective Bs to third persons. Motor vehicles, the mortgage of rvhich had been registered both with the Land Transportation Commissi<in and the Chattel Mortgage Regrstry in order to affect third persons House which is intended to be demolished Growing crops ar;d large cattle (Section 7, paragraphs 2 and 3, Act No. 1508)
Shares

171

tNote: Section 7 of the chattel Mortgage l,aw does not demand a minute and specific description of every chattel mortgaged in the deed of mo(gage, but only requires that thc
description of the mortgaged property be such as to enable the parties to the mortgage or any other person to identif, the same after a reasonable investigation and inquiry (Saldana vs. Phil Guaranty Co. Inc., 106 Phil. 919 [1960]); otherwise, the mortgage is invalid.
198J Bar Examination Duestion

'

To secure the payment to B ofa loan, A, the owner ofa lot, executed a chattel mortgage on the building he erected thereon as well as on some newly-bought machinery stored therein. Thereafter, a judgment was rendered against A in favor of c who had the building and machinery levied upon to satisfy the judgment.
ts the chattel mortgage binding on C? Explain.

Ansrver: 'l hc chattr:l mortgagc is valid with rcspect to the machinery, but the same is void as to the building. 'lhc machinery is movatrle property as it does not appear that A introduced it in the building in connection rvith any industry or works being carried on therein, while the building is immovable property and consequently cannot be the subject ofa chattel mortgage.

Tsai vs. Court of Aooeals (366 SCRA 324)

'

Petitioners contend that the nature of the disputed machineries, i.e., that thcy werc hcavy, bolted or cemented on the real property mortgaged by EVERTEX to PBCom, make them ipso facto immovable under Article 415 (3) and (5) of the New Civil Code. This assertion, however, does not settle the issu. Mere nuts and bolts do not foreclose the controversy. We have to look at the parties' intent. While it is true that the controverted properties appear to be immovablc, a perusal of lhe contract of Real and Chattel Mortgage executed by thc parties herein gives us a contrery indication. The true intention of PBCom and the owner EVERTEX, is to treat the machinery and equipment as chattels. Even if the properties are immovable by nature, nothing detracts the parties from treating them as chattels to secure an obligation under the principle of
estoppel.

'

1994

Bar Examinatir.n Ouestion

Vini constructed a building on a parcel of land he leased from Andrea. He chattel rnortgugcd thc lrrnd to trclicia. Whcn hc could not Jruy trclicia, Felicia initiated foreclosurc proceedings. Vini claimed that the building he had constructed on the leased land cannot be validly foreclosed because the building was, by law, an immovable.
Is Vini conect?

a) b)

The chattel mortgage is void and cannot be foreclosed because the building is an

immovable and cannot be the object of a chattel mortgage. depends. If the building is built of light materials, the chattel mortgage may be considered valid a between the parties and it may be considered in respect to them as movable property, since it can be transferred from one place to another. But if the building is of strong material and is not capable of being removed or transferred without being destroyed, the chattel mortgagc is void and cannot b foreclosed.

It

rc)
was the land over which Vini constituted a chattel mortgage, such mortgage would bc void. or at least unenlorceahle, since he does not own said land.

If it

If it was the building which was made subjgct of the chattel mortgage, said chattel mortgage is valid as between the parties only, on grounds of estoppel which would preclude the mortgagor from assailing the contrsct on the ground that its subject matter is an immovable. Vini's defense is untenable and Felicia can foreclose the mortgage over the building but is dutybound to comply with the procedure prescribed for the execution of sale of a judgment debtor's imnrovahlc under Rulc 39. Rules ol Court. specifically. that the notice of auction sale should be publishod in u newspupcr ol'gcncrtl ciroulation.

d)

Vini cunnot validly cncurnber land by way ofcharicl mortgage. Land can only be the subject mattcr ol a real estatc mortgage and only an absolute o'aner of real property may mongage a parcel of land. [Article 2085(2) Civil Code]. It is submitted that there can be no
loreclosure.

llowever, on the assumption that what was mortgaged by way of chattel was the building on leased land, then the parties considered the building as chattel. A building that is not merely superimposed on the ground bu1 is constructed thereon in such a manner that it cannot be removed without destroying the sarne is an immovablc property Ergo, a chattel mortgage on said building is legally void but the parties cannot be. allowed to disavow their contract on account of estoppel by deed. However, if third parties are involved, such chattel mortgage is void and has no effect.

.The law as it now stands provides for only one way for executing valid chattel mortgage, i.e., the registration ofthe personal property in the Chattel Mortgage Register as security for the performance of an obligation. (Article 2140; see Article 2085) Under the Chattel Mortgage l^aw, if the property is situated in a different province from that in which the mortgagor resides, the registration must be in both registers (Section 4, Act No. 1508); otherwise, th chattel mortgage is void.

E. l.

Creation of a Chattel Mortgage

2.

recorded, it is nevertheless binding between the parties. (Filipinas Marble Corporation vs. Intermediate Appellate Court, 142 SCRA 160 [966]; Article 2125)
has been ruled however that

lt

if the chattel mortgage is not

F.

Effect of Registration

Thc registration of the chattel mortgage 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 chatlel wherever it goes. The registration gives the mortgagee symbolical possession. (Northern Motors. Inc. vs. Coquia,68 SCRA 374119751)

G. L 2.

Registration of Assignment and Mortgage, Optional


There is no law expressly requiring the recording of the assiglment of a mortgage. While

such assigrment may be recorded, the law is permissive and not mandatory.

The assignee is subrogated to the rights and obligations of the assigror-mortgagee with respect to the chattel mortgage gonstituted in favor of the latter. Consequently, the assigrree is bound by the terms and conditions of the chi ttel mortgage executed between rhe mortgagor and the mortgagee, (BA Finance Corporation vs. Court ofAppeals,20l SCRA 157 [1991])

139

The affidavit ofgood taith is an oath in a contract ofchanel mortgage wherein the parties "severally swear that the mortgage is made foi 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."

H. l.

Aflidavit of Good Frith

2. Section 5 of the Chattel Mortgage Law, in describing what shall be deemed sufficient to cotlsliluic a goorl ulurltcl nrorltsngc, inolutlcs thc rctluircnrcnt of on affidavit ol good faith appended to the mortgage and recorded therewith. But the absence of the affidavit vitiates a mortgage only as against third persons without notice like creditors and subsequent encumbrancers. (Lilius vs. Manila Railroad, Co., 82 Phil. 50 [1935], Phil. Refining vs. .rarque, 6l Phil.229 [935]; Giberson vs. A.N. Jurreidini Bros.,44 Phil.216 U922))
1985 Bar Examination Ouestion

A constituted in 1980 a real estate mortgage on his lot and a chaftel mortgage on his car to secure the payment of a debt ofP200,000.00 which he then owed to B, as weil as other loans he may receive from him in the future. A paid his debt of P200,000.00 but not the loan of P30,000.00 which he obtained in 1982.
May B foreclose both mortgages to satisry A's unpaid obligation to him?
Reasons.

Answer:

B can foreclose the real estate mortgage because it covers future loans. However, B cannot foreclose on the chattel mortgage because of the alfidavit of good faith which requires that it be sjust and valid debt. A chattel mortgage cannot cover future loans and can only cover obligations existing at the time the chattel mortgage is constituted. (Acmc Shoe Rubber and
Plastic Corporation v. CA, 260 SCRA 714).

Cebu International Finance Corooration vs. Court of Aoncah (268 SCRA 178)
The special alfidavit ofgood faith is not necessary for the validity of the chattel mortgage itselfbut only to give it a preferred status.

A deed of chattel mortgage is void where it provides that the security stated therein 'is for the payrnent of any and all obligations hereinbefore contracted and which may hereafter be contracted by the mortgagor in favor oflthe mortgagee." A mortgage that conrains 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 ofthe mortgage. (Jaca vs. Davao Lumber Co., I 13 SCRA lO7 tlgS2J)

3.

MCO Samole Problem


This credit transaction can only cover obligations existing at the time of constitution and cannot validly secure after-incurred obligations:
a.

.i.

b. c. d.

real estate mortgage pledge chattel mortgage 0ntichresis

Legal

Basis: Acme Shoe, Rutrber and Plastic Corporation vs. Court of Appeals (260 scRA 714)
140

Fublic Sale - if the mortgagor defaults in the payment of the secured debt or otherwise fails to comply with the conditions of tle mortgage, the creditor has no right to appropriaie to himself the personal property (Artrcles 2141,2088) because he is permitted only to recover his credit from the proceeds of the sale of the property a! public auction through a public otlcer in the manner prescribed in Section l4 ofAct No. 1508. (Mahoney vs. Tuason,39 Phil. 951 [919]; Esguerra vs. Court ofAppeals, 173 SCRA I [989j)

I. l.

Foreclosure of Chattel Mortgage

MaIna F-inuncial Scrviccs Groun. lnc.


(477 SCRA 24s)

vs.

(lohrinr

Article 1484, paragraph 3, provides that i[ the vendor has availed himself of the right.to foreclose the chattel mortgage, "he shall have no fu(her action against the purchaser to recover any unpaid balance ofthe purchase price. Any agrccrnent to thc contrury shull bc void." In othcr wrrtls, rrr ull procccdings tbr the foreclosure of chattel mortgages executed on chattels which have been sold on installment plan, the mortgagee is limited to the property included in the
mortgage.

Since the pefitioner has undeniably elected a remedy of foreclosure under Article 1484 (3) of the Civil Code, it is bound by its elction and thus may not be allowed to change what it has opted for nor to ask for more.

Allied Bankins Corooration vg. Cheng Yonq (472 SCRA 101)


When the vessel sank before the chattel mortgage could be foreclosd uninsured as it is, its loss must be bome by the spouses Ong who own the said
vessel.

2.
Note:

Private Sale

- if there is an express stipulation in the contract

Exception: fraud or duress

1. The mortgagee may, after thirty (30) days from the time of the condition broken, cause the mortgaged property to be sold at public auction by a public olliccr (Scction 14. Act No.
1508)

2.

The 30-day period to foreclose a chattel mortgage is the minirnum period after violation of the mortgage condition for the mortgage credrtor with al lcast tcn (10) days nolicc to the mortgagor and posting of public notice of time, place and purpose ofsuch sale, and is a period of grace for the mortgagor, to discharge the mortgage obligation. After the sale of the chattel at public auction, the right of redemption is no longer available to the mortgagor. (Cabral v. Evangelista,23 SCRA 1000 [1969])

Rizal Commercial Bankinp Corooratiori vs. Royal Carqo Corporation (602 SCRA s4s)
Section 13 of the Chattel Mortgage Law (Act 1508) allows the would-be redempioner thereunder to redeem the mortgaged property only before its sale. Unmistakably, the redempion cited in Section 13 partakes of an equity of

r-i

redemption, which is the right of the mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage Lui b"fore the sale of the property to clear it from the encumbrance of the
mortgage.

1'he right or cquity of redcnrption is un inr:orporcal and intangible right' the value of which can neither be quantified nor equated with the actual value of the properties upon which it may be exercised.

The negligence or omission of a party to exercise its equity of redemption within a reasonable time, or even on the day of the auction sale,
warrants a presumption that it had either abandoned it or opted not to assert it.

Sincc thc rcgistrution ol'a chattcl mortg8so is an oflbctive and binding rr()ticc 1o otlrcr (rrc(lil()rs ol'its cxislcncc lttd crctttcs rcal right or lien thul foltows the property whorevsr it may be, the right ofan attaching creditor, or a purchaser at the auction sale, is subordinate to the lien of the mortgagee who has in his favor a vilid chattel mortgage.

Contrary then to the appellate court's ruling, petitioner is not liable for constructive fraud for proceeding with the auction sale nor for subsequently selling the chattel. For foreclosure suits may be initiated even during insolvency proceedings, as long as leave must first be obtained from the insolvency court.

J. 1.

Right of lYortgagee to Recover Deficiency

The creditor may maintain an action for the deficiency although the chattel Mortgage Lalv is silent on this point (Ablaza vs. Ignacio, [Unrep] 103 Phil. l15l [1959]; Garrido v. Tuason, 24 SCRA 727 11968l Phil. National Bank vs. Manila Investrnent & Construction, Inc., supra; Bank of the Phil. Islands vs. Olutanga Lumber C., 47 Phil.20 [192a]). The ac.ion may be sought within ten (10) years from the time the cause of action accrues.
Superlines Tranoortation Comoanv. Inc. vg. ICC lrasins & Financins Corporation (398 SCRA 30E) 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 goveming extrajudicial foreclosure of real estate mortgage, do not contain any provision, expressly or impliedly, precluding the mortgagee from reoovering dcficicncy of thc principal obligation.

l.

If in an extrajudicial

2.

ln the case of PAMECA Wood Treatnent Plant, Inc. vs. Court of Appeals (310 SCRA 281), this Court declared that under Section 14 of the Chattel Mortgage Law, the mortgagor is entitled to recover the balance of the proceeds, upon satisfaction of the principal obligation and costs, thus there is a corollary obligation on the part ofthe debtor-mortgagor to pay the deficiency in case ofa reduction in the price at public auction.

:.

tf 1}1e chattel mortgage is constituted, whether by thc dcbtor-vendec or a third person, as security for the purchase of personal property payable in installments, no deficiency judgrnent can be asked and any agreement to the contrary shall be void (Article 1484)

142

The chattel mortgagee is entitled to deficiency jud6,ment in an action for specific performance (Article 1484 [1]) where the mortgaged property is subsequently attached and sold. The execution sale in such case is not a foreclosure sale. (Industrial Finance Corporation vs.
Ramirez, 77 SCRA 152 U9771)

3.

Rosario vs. PCI Leasine and Finance. Inc. (474 SCRA s00) Petitioners miintain that by securing a writ of replevin, respondent had optcd to foreclose the chattel mortgage under Article 1484 of the New Civil Codc thus it rvas barred from suing ibr the unpaid balance of the purchase price of the vehicle. The Supreme Court ruled that respondents did not foreclose the chattel mortgage but opted to sue the petitionerS for the balanbe of their account under the promissory note with a plea for a writ of replevin. By securing a writ of replevin, respondent did not thereby foreclose the chaftel mor.tgage.
1984 Bar Examination Ouestion secured by a chattel mortgage executed As A's by A on the'truck. additional sccurity, brother, C, exccutcd a real eslnle mortgage in favor

A bought a truck from B payable in installment

ol'B.

A defaulted in the payment of several installments. Consequently, B filed an action lor


replevin, repossessed the truck,. and foreclosed the chattel mortgage.
Can B proceed against the other properties ofA and the real estate mortgage executd by C.to recover the deficiency, ifany, after the chattel mortgage foreclosure sale? Explain. Answer:

Undcr Articlc 1484, in a contract of sale of personal property the price of which is payable in installments, if the seller elecls to foreclose after the buyer defaults, he shall have no further action against the purchaser to recover any unpaid balance. Since the principal obligation is extinguished, the mortgage executed by C as security therefor will also necessarily be released (Article 2086). Therefore, B may no longer recover the deficiency after the chattel mortgage foreclosure sale.
Acme Shoe. Rubber and Plastic Corporation vs. Court of Aoneals (260 SCRA 714)

Issue: Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be contacted
or incuned?
Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a swetyship, the faithful performance of the obligation by the principal debtor is secured by the personal commifrnent of another (the guarantor or surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property in ple.ige, the placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of the conesponding deed substantially in the form prescribed by law; in red estate mortgage, by the execution ofa public instrument encumbering the real property covered thereby; and in antichresis, by a written instrument granting to th creditor the right to

Held:

143

receivc the fruits of an immovable property with the obligation to apply such fruits to the paynent of interest, if owing, and thereafter to the principal of his credit upon the essential condition that if the principal obligation becomes due and the debtor defaults, then the prope(y encumbered can be alienated for the payment of the obligation, but that should the obligation be duly paid, then the contrsct is eulomaticolly extinguished proceeding from the accessory character of the agreement. As the law so puts it, once the obligation is complied with, then the contract of secu ty becomes, ipso facto, null and void.

Whilc u plctlgc, rcol cstutc ,norlgogc, or nnlichresis nroy exceptionally secure after-incurred obligations so long as thcse f'uture debts are acouratcly dcscribed (M<1icu vs. Court of Ap;rals, 210 SCRA 517;Lim Julian vs. Lutero,
49 Phil. 703), a chattel mortgage, however, can only cover obligations existing at the time the mo(gage is constituted. 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, howeveq does not come into existence or arise until after a chattel mortgage agreement covering thc newly contracted debt is executed either by concluding a fresh chatlel mortgage or by amending the old contract conformably with the form prescribed bv the Chattel Mortgage Law (Act No. 1508). Refusal on the part of the bonower 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 agreemenl whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chaffel r1ortg3g6 5ought to be foreclosed.

chattel mortgage, as hereinbefole intimated, must comply substantially with the form prescribed by the Chattel Mortgage Law itself. One ' of the requisites, under Section 5 thereof, is an sffidavit of good faith. While it is not doubted that if such an affrdavit is not appended to the agreement, the chattel mortgage would still be valid between the parties (not against third persbns acting in good faith), the fact, however, that the statute has provided that the parties to the contract must execute an oath that

3.

"xxx

(the) mortgage is made for the purpose of securing the obligation spccilicd in thc ionditions thercof. and for no olhc.r purpose, ond lhat the same
is ajust and valid obligation, and one not entered into for the purpose of fraud." makes it obvious that the debt referred to in the law is current. not an obliqation that is vet merelv contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00 loan

which petitioncr 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.

x.

A.

Liability for Obligations


'l he dcbtor

is liablc with all his propcrty, presenl and luture, for the fulfillmenl of his obligations, subject to the exemptions provided by law.

Iarnily home constituted jointly by husband and wife or by unmarried head of a family (Articlc I 52, lirntily ('odc)1

B. l.

Exempt Property

t44

-'
Exceptions:

a) b) c) d)

For non-payment of taxes For debts incurred prior to the constitution of the family home; For debts secured by mortgages on the premises before or after such constitution; and For debts due to laborers, mechanics, architects, builders, materialmen and others who have rendered service or fumished materials for the construction of the building.

2. Right to receive support as well as any money or property obtained as such support (Article 205, Family Code);
Two horses, or two cows, or two carabaos or other beasts of burden, such as the debtor may select, not exceeding one thousand pesos in value and necessarily used by him in his ordinary occupation;

3. 4.

Tools and implements necessarily used by him in his trade or employment;

5. 6. 7. 8.

His necessary clothing and that ofall his family;

Household fumiture and utensils necessary for housekceping and used for that purpose by the debtor, such as the debtor may select, ofa value not exceeding one thousand pesosj Provisions for individual or family use sufficient for three months;

The professional libraries of attorneys, judges, physicians, pharmacists, dentists, en$ineep, surveyors, clergymen, teachers and other professionals not exceeding three thousand pcsos in value;

9.

one fishing boat and net, not exceeding the total value of one thousand pesos, the property ofany fishermen, by the l&wfirl use of which he eams a livelihood;
So much ol the earnings of the debtor for his personal services within the month preceding thc levy as &re necessary for thi support of his family;
I

10. l.

Lettered graveslonesl

All moneys, benefits, privileges, or annuities accruing or in any manner growing out of any life insurance, if the annual premiums paid do not exceed five hundred peslos, ard if tt"y cxcced the sum, a like excrnption shull cxist whiih shall bear the sam! proportion to the moneys, benefits, privileges and annuities so accruing or growing out of sucli insurance that said five hundred pesos bears to the whole premiums paid;
The right to receive legal support, or money or property obtained as such support, or any pension or gratuity from the govemment;

12.

13.

14. 15. c. 1.

copyrights and other properties especially exempted by law (section 12, Rule 39);
Property under le;al custody and ofthe public dominion.

Preferred credits with Rpspect to specilic Movable property utrder Article 2241
Duties, taxes and fees due thereon to the state or any subdivision thercof;

145

lnre:Petitionfor@
Rural Bank of Bokod

(Deusue0.IBc."EDIgi@

(s11 SCRA 123)

Duties, taxes, and fees due the govemment enjoy priority only whenthey are with ieference to a specific movable property, under Article 2241 (l) of the Civil Code, or immovable property, under Article 2242 (l) of the same Code. However, with reference to the other real and personal property of the debtor, sometimes referred to as "free property," the taxes and assessments due the National Govemment, other than those in /t.|ticle 2241 (l) afi Arlicle 2242 (l ) ofthe Civil Code, will come only in ninth place in the order ofpreference' Strategic Alliance Develooment Corooration vs. Rarlstock Securities l,imited (607 SCRA 413)

priorrty and prel'erence to ltadstock, the Compromise giving -is certainly in fraud of the other creditors of Philippine National Agreement

ln

will defraud the other PNCC creditors since the assigrment will place PNCC's . assets byond the reach of its creditors'

Cinstruction Corporaiion (PNCC), including the National Government, and vrolates the provisions 01'tho civil code on concurrenc(: and preference of credits. This court has held that while the corporation code allows the transfcr of all or substantiatly all of the assets of a corporation, the transfer should not prcjudioe thc crc<titors of the assignor corporation. lsllming that PNCC may iransfer all or substantially all its assets, to allow PNCC to do so without the consent of its creditors or without requiring Radstock to assume PNCC's debts

The law, specifically Article 1387 of the Civil Code, presumes that there is fraud of creditors when property is alienated by the debtor after judgment has been rendered against him, thus: Alienations by onerous fitle are also presumed flraudulent wherr made by persons against whom some judgnent has been rendered in any instance oi some writ of attachment has becn issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking rescission. As stated earlier, Asiavest is a judgnent creditor of PNCC in G.R. No. 110263 and a court has already issued a writ of execution in its favor. Thus, when PNCC entered into the Compromise Agreement conveying several prime lots in favor of Radstock, by way'of tlucion-en pago, there is a legal presumption that such conveyance is fraudulent under'Article 1387 of the Civil Code. This presumption is strcngthcncd by the fact that thc conveyance has virtually left PNCC's other with no crediiors, inclutling the biggest creditor-the National Govemment

other asset to gamish or levy.

Among the circumstances' indicating fraud is a transfer of all or nearly all of the debtor's assets, especially when the debtor is greatly embarrassed financially. Accordingly, neither a declaration of insoivency nor the institution of insolvency is a condition sine qua non for a transfer of all or nearly ali ofa debtor,s assets to be regarded in fraud of creditors. It is sufficient that a debtor is greatly embarrassed fi nancially.

PNCC owes the National Government substantial taxes and fees iimounting to billions of pesos. The P36 billion debt to the National Govemment was acknowledged by the PNCC Board in the same board resolution that recognized the Marubeni loans. Since PNCC is clearly insolvent with a huge n"guiiu" net worth, the govemment enjoys preference over Radstock in the

14(:,

satisfaction of PNCC's liability arising from taxes and duties' pursuant to the provisions of the Civil Code on concurence and prefelence of credits' Articles 2241,2242 aad 2243 of the Civil Code expressly mandaG that taxes and fees due the National Government "shall be prefened" and "shall first be satisfied" over claims like those arising from the Marubeni loans which "shall enjoy no preference" under Article 2244.

2.

Clainrs arising from misappropriation, breach of trust, or malfeasance by public officials committed in the perfornrance of their duties, on the movables, money or securities obtained by them;

3.

Claims for the unpaid price of movable sold, on said movables, so long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price, this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity; neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally;

4.

Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mo(gage, upon the lhings mortgaged, up to the value thereof;

5. 6. 7.

Credits for making repairs, safekeeping or preservation movable thus made, repaired, kepl or possessed;

of

personal property, on the

Claims for laborer's w&ges, on the goods manufactured or the work done; . For expenses ofsalvage, upon the goods salvaged;

8. 9.

Credits between the landlord and the tenant, arising from the contract of tenancy on shares, on the share ofeach in the fruits or hanest;

Crcdits for tronsFrrlotion, ulx,n the goods csrried, for the price of the contracl and incidental expenses, until their delivery and for thirty days thereafl,er;
Credits for lodging and supplies usually fumished to travelers by hotelkeepers, on the movables belonging to the guests as long as such movables are in the hotel, but not for money loaned to the guests; Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon the fruits harvested;
I

10. L

Credits for.rent for one year, upon the personal property of the lessee existing on the immovable leased on the fruits of the same, but not on money or instruments of credit; Claims in favor ofthe depositor if the depositary has wrongfully sold the thing deposited, upon the price ofthe salc. In the foregoing cases, if the movables to which the lien or preference attaches have been wrongfully taken, the creditor may demand them from any possessor, within thirty days from the unlawful seizure.

12.

13.

Summar.v:

a) b) c) d) e)

tax es ma lversation by

public offtcials

vendor's lien pletlge, chattel mortgage mechanic's lien

0
c) h)

laborei's wages
salvage

j)

i)
k)
r) m)

tenancy carrier's licn hotol's lion crop loan ren.als *- one year dcposit
is not an order of preference (Articles 2248

Note: The foregoing enumeration

2249)

D. l. 2. 3.

Preferred Credits with Respect to Specific tmmovable Property under Article 22.12
Taxes due upon the land or building;

For the unpaid price ol real. property sold, upon the immovable sold;

Claims for laborers, masons, mechanics and other workmen, as well as architects, engineers and contractors, engaged in the construction, reconstruction or repair of buildings,
canals or other rvorks. upon said buildings, canals or other works;

Claims of fumishers of materials used in the consh uction, reconstruction or repair of buildings, canals and other works, upon said buildings, canals or other works;

4.

5. '

Mortgagc crcdits rccordcd in thc Registry ol'Propcrty, upon the rcal cstats mortgage;

Consuckl Mctnl Cornoratlon vr. Planterr Dcvelooment Bank (sss scRA 465)

In Rizal Commercial Banking Corporation vs. Intermediate Appellate Court, 320 SCRA 279 (1999), we held that if rehabilitation is no longer feasible nnd the assets of the corporation are finally liquidated, secured creditors shall
errjoy prclbrcnc:c ovcr unsccurcd creditors, suhjcot only to thc provisions of thc Civil Code on concurrence and preference of credits. Creditors of secured obligations may pursue their security interest or lien, or they may choose to abandon the preference and prove their credits as ordinary claims. Scction 2248 ofthe Civil Code provides: Those credits which enjoy preference in relation to specific real property or real rights, cxclude all others to the extent of the value of the immovable or rcul right to rvhich thc prclbrencc refers.

'

ln this case, Planters Bank, as secured creditor, enjoys preference over a . s1--citic morlgagud prope(y and has a right to lbreclose the mortgage under Section 22.18 of the Civil Code. The creditor- mortgagee has the right to foreclose the mortgage over a specific real property whether or not the debtormortgagor is under insolvency or liquidation proceedings. The right to foreclose such mortgage is merely suspended upon the appointment of a management ('ouunillec or rehnhilitntion receiver u;nn lhe issuance of a stay order by the tlal court. I low.vcr, tlE crctfitor-nror1g,ag,cc ruuy cxcrcisc his right to lbrcclosc the mortgage upon the termination ofthe rehabilitation proceedings or upon the litling of the slav ortlet
.

148

Ir

6. 7. 8.

Expenses for the preservJ reimbursement, upon the immovable preserved or improved; Credits annotated in the Registry of Property, by virtue of a judicial order, by attachments or executions, upon the property affeded, and only as to later credits,

Claims of co-heirs for warranty in the partition of an immovabl among them, upon the property real thus divided;

9.

Claims of donors of real property for pecuniary charges or other conditions imposed upon thc donee, upon the imruovable donated;

10.

Credits of insurers, upon the propeny insured, for the insurance premium for two years.
a)

Summary:

b) c) d) e)

0
:

c)
h)

i)

i)
l

taxes vendor's lien contractor's lien lien of materialmen mortgage expenses of preservation recorded attachments waranty in partition conditional donations premiums for 2 year - insurers
vs.

The foregoing enumeration is not an order of preference (Carried Lumber Co. ACCFA,63 SCRA 411 [l975l).

1' '.

MCO Samole Prqblem

Proposition: If rehabilitation is no longer feasible and the assets of the corporation are finally liquidated, secured creditors shall enjoy preference over unsecured cre(itors, subject only to the provisions ofthe Civil Code on conculence and preference of ' credits. A creditor-mortgagce has the right to foreclose the mortgage over a

"

specific real property whether or not the debtor-mortgagor is under insolvency or liquidation proceedings.

Problem:
estate mortgage over its real proprty in tvlakati City to it obtained from Y Corporation. X failed to pay the said loan when it matured. X Corporation filed before the Securities and Exchange Commission (SEC) a petition to be declared in a state of suspension of payments, for rehabilitation and for the appointment of a management committee which the SEC granted in its Order of 5 January 2004. On 8 March 2009 upon recommendation of the management committee appointed by it, the SEC ordered the dissolution and liquidation of X Corporation. Thereafter, Y Corporation commenced the exhajudicial foreclosure of the Makati property. Is Y Corporation's foreclosure valid and secure a loan

X Corporation executed a real

lawful?

a.
:

Nq

ril

b. c.

!i
I I

because there is no showing that the foreolosure is with the knowledge and previous consent of the liquidator and other lien holders. No, because the right to foreclose the mortgage is suspended upon the appointment of'a management committee or rehabilitation rcceiver or upon the issuance ofa stay order by the trial court. Yes, because X Corporation failed to pay the loan obligation therefore Y Corporation has the right to foreclose the mort gage.

rl

149

v:

* d.

Ycs, bccausc Y unsecured creditors apropas spccific mortgaged property under the rule on concurence and preferencb of credits specially when rehabilitation is no longer
feasible.

L.eeal

Basis: Consuelo Metal Corporation vs. Planters Development Bank (555 SCRA
465)

E. l.

Order of Prefenence with Respect to Other Properties of the Debtor under Article
2244

Proper funeral expcnses for the debtor, or children under his or her parenlal authority who have no property oftheir own, when approved by the coun;

2. 3. 4.

Credits for services rendered the insolvent by employees, laborers, or household helpers for one year preceding tle commencement of the proceedings in insolvency;

of his or her spouse and'children under parental property his or her authority. ifthcy have no of their own;
Expenses durlng the last illness of the debtor or

Cornpensetion due to the laborers or their dependents under laws providing fior indemnity for damages in cases oflabor accident or illness resulting from the nahue of the cmployment;

DBP vs. NLRC (236SCnA l17)

l.

To the extent that claims for unpaid wages fall outside the scope of Articles 2241(6) arld22a2Q), they would come within ttr unbit of the

category of ordinary preferred credis under Article 222t4.

The right of first prcference as regards unpaid wages rccognized by Article 110 ofthe Labor Code does not constitute a lien on the property of the insolvent debtor in favor of worken. It is a right to a first preference in the discharge ofthe funds ofthe judgnent debtor. DBPv". NL,RC (229 SCRA 350)
t.

Article I l0 of the labor Code as amended must be viewcd and rcad in conjunction with the provisions of the Civil Code on concurrcnce and preference of crcdits.
The Civil Code and labor Code provisions require judicial proceedings in rpm in adjudication of creditor's claims against the debtor's assts to become operative.

2.

3.

RA 6715 expanded "worker preference" to cover not only unpaid wages but also other monctary claims of laborers, to which even claims of the Govemment must be decmed subordinate.

5.
6. 7.

Credits and advancemcnts made to the debtor for support of himself or herself, and family, during the last prece$ng insolvency; Suppo( during the insolvency proceedings and for three months thercaftr;
l'ines and civil indemnifioations arising from a criminal offense;

150

F!I .

_.-F>rq4E!ER:

Legal expenses, and expenses incuned in the administration of thc insolvent's estale the common interest of the creditors, when properly authorized and approved by the coud;

8.

for

9.
10.

Taxes and assessments due the national govemment, other than those mentioned in

Article224l,No. I and2242,No.
No.

l;
in Articles 2241,

Taxes and assessments due any province, other than those mentioned and 2242, No. l;

it. Taxes and assessments due any city or municipality other than those mentioned in Articles224l,No. I and2242,No. l; 12. 13. 14.
Damagcs for death or personal injuries caused b! a quasidelict;

Giffs due to public and private institutions of charity or beneficence;

Credits which without special privilege, appear in (a) a public instrument; or (b) in the judgnent, final if they have been the subject of litigation. Thesc credits shall have prefercncc among themselves in the order of priority of the dates of the instuments and of the judgnents, respectively.(Arti cle 2244).

ia

SgUEg,: a) b) c) d) ., e) . 0 ' g) h) i) j) k) l)
Note:

funeral expenses wages ofemployees - one year expenses of last illness workmen'scompensation support for one year support during insolvency fines in crimes legal expenses - administration
. taxes

tort
donations credits appearing in public instrument or final judgment

In conkast with Articles 2241 ana )UZ, Arricle 2244 creats no liens on determinate property which follow such property. What Article 2244 crenlcs are simply rights in favor of
certain creditors to have the cash and other assets of tlre insolvent applied in a certain sequence or order of priority (Republic vs. peralra, 150 SCRA 37 [19871).

l.

2.

Arlicle 2244 relates to the property of the insolvent that is not burdened with the liens or encumbranccs created or recognized by Articles 2241 and 2242.
1995

Ber Examination Ouertion

Lawrence, a retired air force captain, decrded to go into the air transport business. He purchased an aircraft in cash except for an outstanding balance ofP500,000.00. He incurred an indebtedness ofP300,000.00 for repairs with an aircraft repair company. He also bonowed Pl Million from a bank for additional capital and constituted a chattel mortgage on the aircraft to
secure the loan.

While on a test flight, tJre aircraft crashed causing physical injuries to a third party who was awarded damages of P200,000.00.

151

-ii
Lawrence's insurance claim for damage to the aircraft was denied thus leaving him nothing else but the aircraft which was then valued only at Pl Million. Lawrence was declared

--

insolvent.

Assuming that the aircraft was sold for Pl Million, grvc the order of preference of the creditors of l.awrence and distribute the amount of Fl Million.
Answer:

Assuming that subject aircraft was sold for Pl Million, there is no order of prcference. The entire Pl Million will go to the bank as a chattl mortgagoe beoause a chattel mortgage under Article 2241(4) NCC defeats damages for physical injuries caused by tort under Article 2244(12) and credits subject of a final judgrncnt'under Article 2244(14). Article 2241(3) covering vendor's lien and Article 2241(5) covering mcchanic's licn are not applicable because the aircraft is no longer in the possession ofthe crcditor.

A foreclosing bank creditor cannot be held liable for unpaid wages and the like of the employees of the mortgagor. The employees should filc their claims in a proceeding in bankruptcy on their employer (Development Bank of the Philippines vs. National Labor Relations Commission, 186 SCRA 841 [990]).
From the provisions ofArticle I l0 ofthe Labor Code and Section 10, Rule VIII, Book III of the Revised Rules and Regulations lmplcmcnting thc Labor Code, a declaration of bankrupcy or judicial liquidation must be present beforc the workcr's prefercncc may bc cnforccd (Development Bank ofthe Philippines vs. Santos, l7l SCRA 138 [989]).

3. a)

Relevant Jurisprudence on Concurrcnce and Preferenoe of Credits

b)

,a

BPI vs. Court of Anoeali (229 SCRA 223) Whenever a distressed corporation asks SEC for rchabilitation and suspension of payments, preferred crcditors may no longcr assert such prcference, but shall stand on qual footing with other creditors. This Rule will enahle the rehabilitation receiver to effectively exercise his powers free fiom judicial and exrajudicial interfereqcc that might unduly hinder rescue of the
comparry.

Those credits which enjoy preference with respect to spccific movables, exclude all others to the extent of the value of the personal property to which the preference refers (Article 2246).

F. l.

Order of Preference of Credits

2. 3.

If there are two or more credits wit$ respect to the same specific movable property, they shall be satisfied pro rata, after the payment of duties, taxes and fees due the State or any suMivision thereof (Article 2247).
Those credits which enjoy preference in relation to specilic real property or real rights, exclude all others to the extent of the value of tie immovable or real right to which the preference refers (Article 2248).

4.

If there are two or m# credits with respect to the same specific real proprty or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable property or real right (Article 2249).

152

fr
The excess, if any, aftcr the poymcnt of thc crcdits which cnjoy prcfcrencc with rcsFlcct to property, real or personal, shall be added to the free property ivhich the debtor may have, lpecific for the payment ofthe other credits (Article 2250). Those credits which do not enjoy any preference with respect to specific property, and those which enjoy preference, as to the amount not paid, sliall Le satisfied according io the following rules:

6.

a. b.
xI.

In the order established in Article 2244; Common credits referred to in Article 2245 shall enjoy no preference and shall be paid pro rata regardless of dates (Article 225 I ).

I.

Insolvency Delined

The inabitity or the lack of means to pay one's debt, oi the condition ofa person who is unable to pay his debts as they fall due. (Munion vs. vic corporation, 55 oG 96j17 as cited in Philippine Law Dictionary by Federico B. Moreno, Third Edition, 1988, p. 479)

II. a' b.

Purposes of the Insotvency Law (1949 and 1958 Bar Exams)

To cause an equitable distribution among his creditors; and

of the insolvent debtor's

assets and/or properties

To discharge the insolvent debtor from'his debts and financial liabilities to alTord him an opportunity to have a fresh beginning with the property set apart for him as exempt. Situations Addresed by the Insolvency Law
Suspension of Payments

).

m. a. b. c.
1985

Voluntary lnsolvency Involuntary lnsolvency

Bar Ersmination Ouestion

Act No. 1956, more popularly known as The Insolvency Larv, deals with - I ) suspension - payments, of 2) voluntary insolvency and 3) involuntary insolvency. Briefly discuss the said subjects and outline the procedure that will have to be undertaken in connection therewith. Answer:
I

RllQl

llslrli,s FoR stJSPtlNSIoN oF I,AYMI-NTS A ptririon lirr

srrspcnsirrn

payments should comply with the tbllowing requireme nts:

of

a)

b) c) d)

Pelilion to be filed by a natural perst>n who: (1) possesses sufllcient property to cover all his debts, (2) foresees the impossibility of meeting them when they respectively fall due, and (3) presents a proposal to pay his obligations on dates later than due dates and petitions that he be declared in the state of suspension of payments (Petition need not be verified) Docwnents that should accompany the petition: (l) verified schedule; (2) verified inventory; (3) the proposcd agreemcnt he requestcd of his crcditors. Venue: Regional Trial Court of the province or city in which the debtor has resided for six (6) months next preceding the filing ofsuch petition. (Section 2, Act le56) Brief Stmmory olthe Procedure:

153

a. f

Filing of petition for srsperrsion of payrGnts accompanied by an inventory of assets and a detailed schedule of obligations, amounts and their due
dates.

d.2) d.3) d.4) d.5) d.6) d.7) 2)

The court issues an order stating the venuc and datc lbr the meeting ol the petitioner's creditors. Said order shall be published in a newspaper of general circulation in the placc whcre thc pctition is filcd. The court shall cause the service of sumrnons to all creditors listed in the petition. The creditors of the petitioner will meet and approve debtor's proposal by tl leasl 213 of the creditors in number representing at least 3/5 of the total liabilities. Objections, ifany, by the other creditors. The court orders the implementation of the agreement.

REQLIISITES FOR VOLLTNTARY INSOLVENCY insolvency shall comply witl the following requirements:

- A

petition for voluntary

a)

b) c) d)

Verified Petition: To be filed by an insolvent debtor (l ) owing debts exceeding in amount the sum of P1,000.00, and (2) setting forth in his pqtition, his place of residence, the period of his residence therein immediately prior to the filing ofthe said petition, his inability to pay all his debts in full, his willingness to surrender all his properties not exempt from execution for the benefit of his creditors, and an npplication to be adjudged an insolvenli Documenls to uccunpany tlre petition. (l) vcrilicd schctlule; and (2) ventied inventory. Venuez Regional Trial Court of the province or city in which the debtor has rcsidcd for six monlhs next preceding thc filing ol'such pctition. (Scction 14, Act

1956)

ta

Brief &namary ofthe Procedure: d.l) Filing of petition for voluntary insolvcncv ucconrpunicd by nn inviniory gf assets and schedule of liabilities;

d.2) d.3) d.4)


d

5)

d.6) d7) d.8) 3)

The court issues an order declaring petitioner insolvent; Said order shall be published in a nervspaper of general circulation in the place where the petition is filed; The court shall cause the service of the order on thc crcditors listcd in the petition; Creditors shall meet to choose an assignee by election to rvhom all the assets ofthe debtor shall be delivered; Liquidation and payment of creditors; Composition (agreement between debtor and creditors), ifagreed; Order of discharge ofthe insolvent.

REQUISITES FOR 1NVOLUNTARY INSOLVENCY insolvency shall comply with the following requirements:

-- A petition for

involuntary

a)

Petition: To be filed (1) by three (3) oi more creditors, residents ofthe Philippines, and none ofthem has become a creditor by assignment within thirty (30) days prior to the filing of the petition, (2) their credits accrued in the Philippines and has an aggregate amount of not less than P1,CC0.00, (3) one or more acts of insolvency mentioned in Section 20 ofthe Insolvency Law are set forth in the petition; and (4)
said petition must be verified by at least three of the petitioning creditors.

b) c)

Doatments to accompa y the Wtirion.' A bond, approved by the court, with at leasl lwo sueties, in such penal sum as the court shall dircct. Venue: Regional Trial Court ofthe province or city in which the debtor resides or has principal place of business (residency of six months is not required) [Section
20,

Act

19561

154

l) d.2)
d

d.3) d.4) d.5) d.6) d.7) d.8)


rv.

Filing ofpetition for involuntary insolvency, Court shall issue an order requiring the defendant to show cause why he should not be adjudged an insolvent; Trial and order of the court adjudging debtor as an insolvent, if supported by the facts; Publication ofthe order and service ofsaid'order on all creditors; Crcditors shall elect an assignee and conveyance of debtor's assets to said
assigree; Assets of the debtor shall be liquidated and proceeds shall be equitably paid to defendanfs creditors; Composition; Discharge ofthe insolvent debtor.

Distinctions Between Suspension of Peyments and Insolvency

susPENsroN oF PAIMENTS
1.

INSOLVENC.Y

Debtor has sufficient assets but anticipates the impossibility of paying his liabilities as they fall
due. Purpose

l. Debtor has insufficient


to pay his liabilities.

assets

of petition is to delay the

2. 3.

payment of his liabilities.

Purpose is to release/discharge the insolvenl debtor from the payment of certain liabilities.
Some of the credi(ors may receive less than their actual credits

3.

Amount of liabilities of debtor is not aflected.

t^

4.

Number

of

the creditor/s of the

4. In

involunary insolvency, threp

petitioner debtor is irrelevant.

or more creditors arc needed.

Distinctions Between Voluntary Insolvency and Involuntary Insolvency

VOLTINTARY INSOI,VENCY

tNvot,UN't'ARY tNS()l.VttN('r'

l.

Petition is filed by the insolvent debtor himself

l. 2. 3. 4. 5.

Petition is filed by three or more qualificd crcditors ol lhc insolvcnt dcbtur.

2.

Only one creditor of the insolvent


debtor is sufficient.
Indebtedness of the insolvent debtor

Three or more creditors


Indebtedness

of

the

insolvent debtor are required.

must exceed one thousand


(P 1,000.00).
4.

pesos

dcbtor must not


One

ol

the

bc lcss one
).

insolvent

thousand pcsos (P I ,000.00

insolvency need not be committed by the insolvent debtor.

Acts

of

insolvency must have been committed by the insolvent debtor.

or

more acts

of

5.

Posting

of a

bond by insolvent

debtor is not required.

Bond must be posted with the petition with at llast two sureties
in such penal sum
direct.
as the

court may

155

A.

Definition

Suspension of payments is the postponement of payment of the debts possessing suflicient property to cover his debts, foresees the impossibility

of

a debtor, who,

of meeting

them

when they fall due. (1965 Bar Exam)

Pursuant to Section 5.2 of Republic Act No. 8799 otherwise known as "The Securities Regulation Code", the Securities and Exchange Commission's (SEC) jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A (Reorganization of the SEC with Additional Powers and Placing the said Agency Under thg Administrative Supervision of the Office of the President) was transfened to the Cou(s of general jurisdiction or the appropriate Regional Trial Court which includes cases involving:

B. l.

Jurirdiction lnd Venue over Petitions for Suspension of Payments

a)

Devices or schemes employed by or any acts, of the board of directors, business associates, its oflicers or partrership, amounting to fraud and misrepresentation which may be detrimental to the interest of the public anC /or of the stockholder, partners, members associations organizations registered with the Commission;

of

or

b)

Controversies arising out of intra-corporatc or parlncrship rclations, belrvecn and among stockholders, members or associates: betrveen any or all of them and the corporation, partnership or association of which they are slockholders. memhers or ossocintcr, rclpcctivcly; arrd hctwccn $uch corlx)rntrou, partucrship or association and the state insofar as it concems their individual franchise or right to exist as such entity; Controversies in the election or appointrnents of directors, trustees, olficers or managers of such corporations, partnerships or associations. Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses suflicient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no suflicient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree. (As added by Presidential Decree No. 1758)
l-I

c) d)

Under Administrative Matter No. 00-8-10-SC entitled lnterim Rules of Procedure on Corporate Rehabilitation, venue for plitions for rchabilitation shell bc liled in thc Rcgional 'lrial Court having jurisdiction over the territory where the debtor's principal oflice is located. This includes petitions filed by corporations, partnerships or associations for declaration in a state of suspension of payments as hereinabove provided under Section 5.2(d)of R.A. No. 8799. Chins vs.

2.

Irrd

Bsnk of the Philippines (20r scRA 190)

Under Act No. 1956, otherwise known as the Insolvency Law, jurisdiction over proceedings for suspension of poyments, voluntary and involuntary insolvency is exclusively vested in the regular courts. However, P.D. No. 1758 issued in l98l added to the exclusive and original jurisdiction of
the SEC, defined and delincated in Section 5 of P.D. 902-A, the following:

"(d) Pefitions of corponitions, partnerships or associations to be


declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient

156

@sbutforiGs

6e impossibility of

meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets lo cove, its liahilitics, but is undcr thc nurnitgcrnctrt of u Rehabrlitation Receiver or Management Committee created pursuant to this Decree."

that said additional par (d) effectively repealed the Insolvency Law so as to transfer and confer upon the SEC jurisdiction therefore enloyed by the regular courts over proceedings fbr suspcnsion of payments and voluntary and involuntary insolvency. We do not share such interpretation. xxx xxx xxx xxx xxx
Section 5, par. (d) should be ionstrued as vesting upon the SEC original and exclusive jurisdiction only over petitions to be declared in a state of
suspension of paymen6, which may either be: (a) simple petition for suspension

It is petitioner's contention

of payments based on the provisions of the Insolvency Law, or (b) a similar


petition accompanied by a prayer for the creation/appointment of a management committee and/or rehabilitation receiver based on the provisions of P.D. No. 902-A. Said provision cannot be stretched to include petitions for insolvency. Thc reason is that under said Section 5, par. (d) above-quoted, thejurisdiction of the SEC over cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, (and therefore insolvent) is qualified by the conjunctive phrase "but is under the management of a Rehabilitation Receiver or Management Committee created pursua to this Decree." This qualification effectively circumscribes the jurisdiction of the SEC over insolvent corporations, parherships and associations, and consequently, over proceedings for thc declaration of insolvency, It demonstrates beyond doubt that jurisdiction over insolvency proceedings pertains neither in the first instance nor exclusively to the SEC, but only in continuation of or as an incident to the exercise of its jurisdiction over petitions to be declared in a state of suspension of, payments wherein the petitioning corporation, parturership or association had previously been placed under a rehabilitation receiver or managcmcnt crunrnittcc bv thc SUC xxx xxx

t^

itself.

lc\x

xxx

xxx

As declared by the law itself, these are merely ancillary powers to enable

the SEC to effectively exercise its jurisdiction. These additional ancillary


powers cart be exercised only in connection with an action pending before the SEC and therefore had to be viewed in relation to Section 5 rvhich defines the SEC's original and exclusive jurisdiction. Section 6 does not enlarge or add to the exclusive and original jurisdiction of the SEC as particularly enumerated under Section 5 of said Presidential Decree, as amended.

Union Bank of the Philinpines vs. Concencion (s2s scRA 672) xxx Albeit jurisdiction over a petition to declare a corp()rotion in a statc of insolvency strictly lies with regular courts, the SEC possessed, during the priod material, amplc Jmwer undcr P.I). No.902-A, as atncndcd, to dechrc a corporation insolvent as an incident of and in continuation of its already acquired jurisdiction over the petition to be declared in the state of suspension of payments in the two instances provided in Section 5(d) thereof Said Section 5(d) vests the SEC with exclusive and original jurisdiction over petitions for suspension of payments which may either be: (a) a simple petition for suspension of palments based on the provisions of the Insolvency Law, rle.,.the

t,
L

ts7

petitioning corporation has suflicient assets to ull"its debts, but foresees "or", the impossibility of meeting the obligations as they fall due, or (b) a similar petition filed by an insolvent corporation accompanied by a prayer for the creation of a management committee and/or rehabilitation receiver based on the provisions of P.D. No. 902-A, a amended by P.D. No. 1758.

In the case at bench, EYCO's petition lor suspension of payments was, at bottom, a mix of both situations adverted to above. For, while EYCO, in the said petition, alleged being solvent but illiquid, it nonetheless pleaded for the constitution of a rehabilitation receiver/committee, with an altemative prayer for liquidation, if warranted. Clearly then, the SEC has, from the start, jurisdiction over EYCO's pctition for suspension of payment, such jurisdiction, following Ching (2Al SCRA 190), continuing for purposes of tiquidation after it (SEC) declared EYCO insolvent. The SEC appeared lo be aware of the continuity angle as it even ordered the remand to the SEC Hearing Panel of SEC Case No. 09-97 -5764 for ptrrposes of liquidating and dissolving the EYCO xxx xxx group. xxx xxx xxx
The Court is certainly aware of the transfer, effected by R.A. No. 8799, to the RTC of the SEC's jurisdiction defined under Section 5(d) of P.D. No. 902-A. Such transfer, however, did not, as the petitioner and the RTC posit, divest the SEC of its jurisdiction over SEC Case No. 09-9?-5764, given that it had already issued, as early as September 19, 1998, the suspension order after it found the pctition for suspension filed on Septemher 16, 1998 to be sufficient in form and substance. Subsection 5.2 of R.A. No. 8799 prescribing the jurisdiction transfer and the rules on transition provides as follows:

"5.2. The [Securities and Exchange] Commission's jurisdiction over all cases enumerated under Section 5 of [P.D.] No. 902-A is hereby transferred to the appropriste [RTC]: Provided that the Supreme Court . . . may designate the [RTC] branches that shall exercise jurisdiction over these cases. x.x x The
(Words in bracket and emphasis added.)"

i.

Commission shall retain jurisdiction over pending surpension of paymenUrehabilitation cases filed as of 30 June 2fi)0 until finally disposed.
EYCO's petition for suspension of payment was, for all intents and purposes, still pending with the SEC as of June 30, 2000. Accordingly, the SEC's jurisdiction thereon, by the express terms of R.A. No. 8999, still subsists "unlil [the.suspension of paynenl case and its incidents are] .finally disposed."
Union B3!rk of the PhilioPines vs. Court ofApoeals (290 SCRA r98) Since we have painstakingly probed said SEC rules but unearthed nothing that squarely treats of a situation where an individual and a corporate entity both filed together a petition for suspension of payments, recourse must then be had to the Rules of Court which is expressly made suppletory to the SEC rules. In this rcgard, we find Section 11, Rule 3 of the 1997 Rules of Civil Procedure applicable which provides: "Sec. Il. Misjoinder and non-joinder of parties. - Neither misjoinder nor non-joinder of parties is ground for dismissal ofan action. Parties may be dropped or added by order of the court on motion of any party or on its own initiative at any stage of the action and on suoh terms as are just. Any claim

against a misjoined party may be severed and picccdcd with separately.', lltalics suppliedl

competent j uri sdiction.

. . .Fpr_ F" foregoing, it is thus clear that in a case ol'misjoinder of parties which in this case is the co-filing of the petition for suspeniion of payments Ogtn Yutingcos and the EiCO grorp - the rerned'y has never been to !y ]ne dismissthe petiiion in its entirety but to jismiss it only as again.t the party upon yTT rh. tribruul or body cannot-acquire jurisdiction. The result, tt i, respect to EyCO stratt subsist and may be vatidty "r"io.", acicd ll"l-,1" u41 by ry,i,i":^"Lh the_ S-EC The Yutingcos, on the other hand, shall be dropped from rhe petition and be required to pursue their remedies in the regular courts of

Under Section 2.of Act No. 1956 also known as the ..Insolvency Law,,, an individual person, sociedad or a cor.^oration may file a petition in the regurai courts that he be declared in the state of suspensionof payments. This proviiion, however, is deemed to have been impliedly repealed ^oi modified by p.D. No. 902-A, as amended, i1.y: :yJ -vul .trs.rvrr. ua{.ngrsrups ano aSSoClaUonS wrth the SEC. Hence, rnotvlduals seekrng to be declared in a state of suspension of payments are the only ones required now to file their petitions with the regular courts.

C.

Consequences of the Filing of petition for Suspension of payments

a) b) c)
Note:

engaged.

Petitioner cannot dispose, in any -manner, of any of his propeny/ies except those necessary for the ordinary operations of the commerce or industry in wtrrcn tre is

Petitioner cannot make any payments except in the ordinary course ofhis business or industy, and s.uujT, to prior approvar of the.court, pending executions against lhe pelitioner shall be srayed with the exception of execurion uguin.t mortgaged.

prJpi.tyll;;rp;ii
it
are

with

respect to dishessed corporations, all craims filed against including claims of secured creditors; even foreclosures are stayed.

suspended

ffi

(22e SCRA 223)

(T)he doctrine in the PCIB vs. Court of Appeals (172 SCRA 436) case has since been abrogated. ln Alemar's Sibat & Soi.i v. tilinrun (lg6 SCRA 94), l).1,' [ht.mes,. {'ytrr Appeuls (190 ('(n .t ol. d SCI{A 262), trurtt,ru v. !ry.1. (2f Ayna<ylt l SCRA 390), and tt('h( ' v. ( l,urt rrf ..lpt*tt'(?t:r S(.ttA 8.l0). rvc already ruled that whenever a distressecl corporation'asks suc tbr rehabilitation and suspension of payments, prefened creditors may no longer assert such preference, but shall stantt on equal footing with othcr crtditois. Forecl.surc shall be disallowed so as not to prejudice ot[er creditors or cause <tiscrinrination among them. If foreclosure is undertaken despite the fact that a petition for rehabilitation has been filed, the certificates of sale shall not bi delivered pending rehabilitation. If this has already been done, no transfer certificate of title shall likewise be effected within the pgriod of rehabilitation. The rationale behind PD 902-A, as amended, is to effeci a feasible and viable rehabiritation. This cannot be achieved ifone creditor is preferred over the others.

159

t-

Rubberworld (Phils.). Inc. vs. NLRC


(30s scRA 721)

"(U)pon the appoinfinent [by the SEC] of a managernent committee or a rehabilitation receiver," all actions for claims against the corporation pending before any court, tribunal or board shall rpso jwe be suspended. The justification for the automatic stay of all pending actions for claims "is to enable the management committee or the rehabilitation receiver to effectively exercise itsihis powers free from any judicial or extrajudicial interference that might unduly hinder or prevent the 'rescue' of the debtor company. To allow such other actions to continue would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted in defending claims against the corporatiop instead of being directed toward its restnrcturing and rehabilitation."
Parenthetically, the rehabilitation of a financially distressed corporation
beniefits its employees, creditors, stockholders and, in a larger sense, the general

considering whether to rehabilitate or not, the SEC gives preference to the interest of creditors, including mployees. The reason is that ihareholders can recover their investments only upon liquidation of the corporation, and only if there are assets remaining after all corporate creditors

public. And

in

are paid.

xxx xxx No exception in favor of labor claims is mentioned in the law. Since the law make no distinction or exemptions, neither should this Court. tft, lex non distinguit nec ruts distinguere debemos. Allowing labor cases to proceed clearly defeats the purpose of the automatic stay and severely encumbers the management committee?s time and resources. The said committee would need to defend against these suits, to the detriment of its primary and urgent duty to work towards rehabilitating the corporation and making it viable again. To rule - otherwise would open the flriodgates to other similarly situated claimants and forestall if not defeat the rescue efforts. Besides, even if the NLRC awards the claim of private respondents, as it did, its nrling could not be enfbrced as long as the petitioner is under the management committee. Gatewav Electronics Corooration vs. Asianbank CorPoration (s74 SCRA 698)
Gateway, having been declared insolvent, argues that jurisdiction over all claims against all of its properties and asscts proJrrly pertains kr the insolvency court. Accordingly, Cateway adds, citing Sec. 60 ofAct No. 1956, as amended, or the Insolvency Law, any pending action against its properties and assets must be dismissed, the claimant relegated to the insolvency proceedings for the claimant's relief.
The contention, as formulated, is in a qualified sense meritorious. Under Sec. 18 of Act No. 1956, as couched, the issuance of an order declaring the petitioner insotvent aftcr the insolvency cOurt finds the corresJronding pctition ior insolvency to be meritorious shall stay all pending civil actions against the petitioner's property. For reference, said Sec. 18, setting forth the effects and contents ofa voluntary insolvency order, pertinently provides,

Upon receiving and filing said petition, schedule, and inventory, the court x x x shall make an order declaring the petitioner insolvent, and directing the sheriff of the province or city in which the petition is filed to

"section

18.

take possession o[, and saftly kccp;@!!--='-F+ assignee, all the deeds, vouchers, books of account, papers, notes, bonds. bills, and securities of the debtor and all his real and personal property, eshte and eflects x x x. Said order shall further forbid the payment to the creditor of any dcbts due to him and the delivery to the debtor, or to any person f<rr him, ofany property belonging to him, and the fiansfer of any propcrty by him, and sholl further appoint a time and piace for a meeting of the crcditors to choose an assignee of the estate. Said order shall [be published] x x x. Upon the granting of s,rid order, all civil proceedings pendipg agaitrst the srid insolvent sball be stayed. When a receiver is appointed, or an assignee chosen, as provided in this Act, the sheriff shall thereupon deliver'to such receiver or assignee, as the case may be all the property, assets, and belonglngs ofthe insolvent which have come into his possession x x x." (Emphasis supplied.)
Complementing Sec. 18 which appropriately comes into play "upon the granting of [the] ordef' of insolvency is the succeeding Sec. 60 which properly applies to the period "after the commencment of proceedings in insolvency." The two provisions may be harmonized as follows: Upon the filing of the petition for insolvency, pending civil actions against the property of the petitioner are nol ipso focto stayed, but the insolvent may apply with the court in which the actions are pending for a stay of the actions against the insolvent's property. If the court grants such application, pending civil actions against the petitioner's property shall be stayed: otherwise, they shall continue. Once an order of insolvency nevertheless issues, all civil proceedings against the petitioner's property are, by statutory command, automatically stayed. Sec. 60 is reproduced below:

"SECTION 60. Creditrtlt proving claims cannot sue; Slay of uction. No creditor proving his debt or claim, shall be allowed to maintain any suit therefor against the debtor, but shall be deemed to have waived all right of action and suit sgainst him and all proceedings already commenced, or any unsatisfid judgment already obtained thereon, shall be deemed to be discharged and surrendered thereby; and after the debtor's discharge, upon proper application and proof to the court having jurisdiction, all such proceedings shall be, dismissed, and such unsatisfied judgments satisfied of record: Provided, x x x. A creditor proving his debt or claim shall not be held to have waived his right of action or suit against the debtor when a discharge has been refused or the proceedings have been determined to the without a discharge. No creditor whose debt is provable under this Act shall be allowed, sfter the commencement of proceedir.gs in insolvency, to prosecute to final judgment any action therefor against the debtor until the question of the debtor's discharge shrll have been determined, and any such suit proceeding shall' upon the application of the debtor or any creditor, or the assignee, be stayed to rwait the determination ofthe court on the question of discharge: Provided, That if the amount due the creditor is in dispute, the suit, by leave of the court in insolvency, may procced to judgment for purpose of ascertaining the amount due, which amount, when adj udged may be allowed in the insolvency proceedings, but erecution shrll be stayed aforesaid." (Emphasis supplied.)

Applying the aforequoted provisions, it can rightfully be said that the issuance of the insolvency order of December 2, 2004 had the effect of ' automatically staying the civil action for a sum of money filed by Asianbank against Gateway. In net e{fect, the p(oceedings before the CA in CA-G.R. CV No. 80734, but only insofar as the claim against Gateway wa" concemed, was, or ought to have been, suspended after December 2, 2004, Asianbank having been duly notified ofand in fact was a porticipant in the insolvency proceedings.

l6t

lhe Courtofcourse

takes stock of the

pr;*ffi

{l:-fidVU. A.

luirig,ine and proceed to judgmenr ;lr:;xx1 lr"Jl1"j,jn:.,.",o,,wrth,.a in cA-c.n cv r.ril-19{";;1';;r;;,.i'"";,',','j,T,""illl,lJffiif,j; "-ii,ue the amount due from Cateway.. At any event, oi po.t lute that the over the properties oithe ries wirh the rnsotvency court, execution i"r;i;.dl;d;.'enr gA asainsr Gateway can only be pursued before the lnsolvency court. xxx,, ,

i""ii"

i;i'".;;:;;.h..it",.*u,

ii.

:lll.,

Voluntarylnsolvency Definition
is. the

..rr", J:i;:[""rtl:"ff:#

situation ora debtor, who having debts exceeding p r.000.00,

soesrocourrtohave,,,,#il{,111'XT,'1f,ffi
distributed among his creditors. (l:i3Thirteenth Idirion, 2005 by Jorge

B'
1.

:::.!r;,x:iix":$i}T*f.,ffi ff ii Materiars in commerciat t aw, V Mir;"itr, ;. ;j;i'^


gar;;;'il;;'R."iew '

ffill'lil:lffitions

in a Petition for votuntary rnsotvency (sectioa l.t of Act No.

Petitioner's place ol residence;

2.

4. 5.

inability to pay all t,i, a"UtJm irfi, Hrs wl rngness to surrender alr his property, estate and eftects not exempt from execution for the benefit of his creditors; An application to be adjudged an insolvent

,i"iLttli,?Ut'j;X,ff [iilT*'l?11[::: j*.tsix(6)monthsimmediateryprior ""-r, P-etirio.ner's

c.
l.
2.

*ffi:ri"
C.t
l.

the Petition for voluntary Insolvency (secrion 14 of Acr No. 1956,

as

Verified Schedule Verified Invenrory


Contents of the Schedule (Section t5 ofAct No. 1956, as amended) Full and true shrement "f .Jlhi. debrs and liabilities, rogerher with a lisr of all those ro whom, ro the besr said debts or liabirities are due; "r

!tk;;i""&;#;;i;i

2.

J
4.
5. 6. 7.

tr,",iir'i.orra.o on rvri.en security, obligation, contracl or otherwisel True cause and consideralion ofihe indebtedness or liability; Time and place when and where such ;debl;;;;;'#iuuiriry u...u.a; A declaration of anv exist mortgase, i,ae,*t, security r",
facts giving 1:,:ylli*,".f agarnst such insolvent debtor.

Place ofresidence of his creditors and the sum due each creditor; The nature of the indebtedness or liabirity and

ti,;;;;;";;'#";il'::,ij;flffi, |;t the

rise,ii*i,irf,

"i"iher

might give nse ro a cause of action

c.2
L
2.
?

Contents ofthe Inventory (Section 16 ofAct No, 1956, as amenderi) An accuate description of all the ,*l personal properry, estate, and effects of the petitioner, including his homestead, Td ifanv: A statement of the value of each item of said prope.ty, estate, and effeas and ifs location;

A statement ofthe encumbrance of said property, estate, and effectsl

162

5.
Note: The

or itr valuation, location and encumbrances thereof; and An outline of the facts giving rise, or which might give rise to a right of action in favor of the insolvent debtor. of
insolvency

i-

roffih;rtat","nt

mere filing of a petition for voluntary insolvency shall be an act (Section 14, Act No. 1956, as amended)

D. L 2. . 3. 4. 5. .

Actioo ofCourt upon Receipt of the Petition (Section 18, Act No. 1956,

as amended)

Issue an order declaring the petitioner insolvent which order is mandalory; Direct the sheriff of the province or city in which the petition is filed to take possession of, and safely keep all the deeds, vouchers, books of account, papers, notes, bonds, bills, and securities of the debtor and all his real and personal property, estate, and effects except such as may be exempt by law from execution, until the apFmintrnent ofa receiver

or assignee; Issue an order forbidding the payment to the debtor.ofany debts due him and lhe delivery to the debtor or to any person for him, ofany property by him; Appoint a time and place for a meeting of the creditors to choose an assignee of the estate; Designate a newspaper of general circulation published in the province or city in which the petition is filed, if there be one, and if there be none, in a newspaper which, in the opinion ofthejudge, will give best notice to lhe creditors ofthe said insolvent, and in the newspaper so designated said order shall be published as often as may be prescribed by the court or the judge thereof;

E.

Effects of a Judgment in Insolvency (1991 Bar Exam; Sections 1956, rs amended)

I8 and 2d, Act

No.

The declaration of insolvency by the court, after hearing or default, shall have the following effects:

l. 2. 3.
YIII.

Forbid the payment to the debtor of any debt due him and the delivery to him of any propefty belonging to him; Forbid the transfer ofany property by him; and Stay ofall civil proceedings against the insolvent.

Involuntary lnsolvency
Persons or Entities lVho

A. I. 2.

mly Petition for Adjudication of Involuntary Insolvency

Of'a Nntural Person - thrce or more creditors who are rcsidsnts ol' thc l)hilippincs, whose credits or demands accrued in the Philippines and the amount of which are in ihe aggregate sum ofnot less than one thousand pesos (P1,000-00). [Section 20, Act No.
1956, as amended]

Of aPartnership

a) the partners or any of them, or b) three or more creditors who are residents of the Philippines, whoqe credits or demands accrued in the Philippines and the amount of which are in the aggfegate sum of not less than one tiousand pesos (P1,000.00). [Section 51, Act No. 1956, as

I I

!
I

3.

of a corporatio,

- ") il:H::] of a corporation authorized by its board of directors or . trustees or by the written assent of a majority of its board of
directors or tnrstees, or

b) three or more creditors who are residenis of the Philippines' whose credits or demands accrued in the Philippines and the amount of which are in the aggregate sum of not less than one

163

:1

thousand pesos @1,000.00). t[Section 52, Act No. 1956, as


amendedl

. State

Investment llouse Inc. vs. CitibanlG (203 SCRA e)

IU!

There is no substantive law granting/r_rre ign banlu the power to petition for the adjudication of a Philippine Corporation as a bankrupt. ihis is inconsequential, for neither is 'there any legal provision expreisly giving domestic bonl<s the same power, although their capacity to petition for insolvency can scarcely be disputed and is not in truth disputed by petitioners. The law plainly grants to a jdridical person, whcthcr it be a hank or not or (whether) it be a foreign or domestic corporation, as.to natural persons as well, such a power to ptition for the adjudication of bankruptcy of any person, natural or juridical, provided that it is a resident corporation and joins at least two other residents in presenting the petition to the Bankruptcy Court. Jaca vs. Davao Lumber Comornv

(rr3 scRA r07)


The third reason stated is the fact that petitioners have no properties and assets to satisfr the judgrnent. The basis of respondent judge's conclusion that petifioners do not have sufficient assets is an unsubstantiated allegation in the motion for execution pending appeal of respondent lumber company. To rectify this omission, respondent lumber company, in its opposition to the motion for reconsideration of the ordcr of cxecution pending apgrcnl, tried lo point out thBt the sale of two Chewolet trucks of Urbano Jaca and their failure to file a counterbond indicate that they are without suflicient assets. This later attempt to substanliate a baseless allegation in the motion for execution pending appeal is futile. The trucks alleged to be sold are not properties of petitioner Urbano Jaca. Tney are paraphemal properties of his wife, Florentina Perez, and the same trucks were in fact sold by her. And even if said trucks were owned by Urbano Jaca, their sale to Atty. Raul Nengasca does not totally indicate insolvency. As has been repeatedly observed, petitioner Urbano Jaca is engaged in business. Sale of property used in business does not establish insolvency. The sale may have been promped by the need for more modem equipment on account of obsolescence, or the need of cash to be directed to more profitable endeavor. The same reason applies to their failure to file a counterbond. The cash needed for the counterbond may be utilized for the continuance of the business or to increase business profits. In short, the acts of petitioners cannot always be interpreted as signs of iisolvency but may also indicate. sound business judgment prompted by the need to have a liquid reserve ofcash.

B.

Acts of Involuntary Insolvency (Section 20, Act No. 1956, as amended)

l
2.

That such person is about to depart or has departed Iiom the Philippines, with intent to
defraud his creditors; That being absent from the Philippines, with intent to defraud his creditors, he remains absent; That he conceals himself to avoid the service of legal process for the purpose of hindering or delaying or defrauding his creditors; That he conceals, or is rernovin& any of his property to avoid its being attached or taken on legal process; That he has suffered his property to remain under attachment or legal process for three days for the purpose of hindering or delaying or defrauding his creditors;

J.
4.
5.

164

l.

6.
'7

8. 9. 10.
11.

12. 13.

That he has confessed or offered to allow judgnent in favor of any creditor or claimant for the purpose ofhindering or delaying or defrauding any creditor or claimant; That he has willfully suffered judgment to be taken against him by default for the purpose ofhindering or delaying or defrauding his creditors; That he has suffered or procured his property to be taken on legal process u/ith intent to give a preference to one or more of his creditors and ther6by hinder, delay or defraud any one of his creditors; That he has made any assignment, gift, sale, conveyance or transfer of his estate, proprty, rights or credits with intent to delay, defraud or hinder his creditors; That he has, in contemplation of insolvency, made any pa),rnent, gift, grant, sale, conveyance or transfer of his estate, property, rights or credits; 'That being a merchant or tradesman, he has generally defaulted in the payment of his current obligations for a period of thirty days; That for a period of thirty days, he has failed after demand, to pay any moneys deposited with him or received by him in a fiduciary capacity; and That an execution, having been issued against him on final judgment for money, he shall have been found to be without suflicient prpperty subject to execution to satis$ the judgrnent.
One or more

Note:

ofthe afore-enumerated acts of insolvency should be stated in the petition.

C.

Action of thc Court on the Petition for Involuntf,ry lnsolvency (Scction 21, Act 1956, rs amended)
The court shall issue 4n order requiring the defen&rnt debtor to show cause, at a time and place to be fixed by the court, why he should not be adjudged an insolvent debtor. At the same time, or thereafter. upon good cause shown therefor, the court may make an order forbidding the payment of any debts, and the delivery of^ any property belonging to such debtor to him or to any other person for his use or benefit or the transfer of any property by him.

D(. A. L 2. 3. B, l. 2. 3. 4. 5. C. l. 2.

ASSIGNEE Qualifications (Section 30, Act No. 1956, as amended)

Must be elected by majority, both in number and amount, of the creditors who have
proven their claims; Should file with the court, within five days, unless the time be extended by the court, a bond in an amount to be fixed by the court; Should have two or more sureties, approved by the court and conditioned upon the faithful performance of the duties devolving upon him.

Obligations of an Assignee
I

To To To To To

make a list or inventory ofthe assets ofthe insolvent deblor; recover, collect and gather all the assets ofthe said debtor; liquefo said assets to cash; be responsible for all the monies he has received and paid out; and allocate and distribute the said assets to the insolvent debtor's creditors.

'rli

Authorities ofan Assignee (Section 36, Act No. 1956' rs amended)


To sue and recover all assets blonging to or due the insolvent debtor; To take into his possession all the assets of the insolvent debtor except those set aside by law to be exemfl;

'

165

3. . 4.
J.

6.
7. 8.

sold by him; or to sell such property, subject io such mortgage, contracts, pledges, judgments or liensl To settle all matters and accounts between the insolvent debtor and his debtors; t9 gomnoyd with any person indebted to the insolvent debtor and thereupon discharge all demands against such person; and

In case of a nonresident or absconding or'concealed debtor, to demand and receive of every sheriff who shall have any ofthe property of such debtor, or who shall have in his possession any moneys arising from the sale ofsuch propeny; To sell- at public auction after advertisement and pursuant to Rule 39 of the Rules of Court for Execution of Jutlgrncnt, nny ol thc asscis of thc insolvcnt clcbtor uirricr thc assignee's possession; To redeem all void mortgages, and conditional contracts, all valid pledges of personal property and to satisry any judgments which mav be an encumbrance on any property

To. recover from any per:on receiving a conveyance, gift, transfer, payment, or assignment, made contrary to any provision ofAct No. lg56 the property transferred or assigned or the value thereof
Procedure to be observed by the Assignee from his eualification until his Discharge To inventory all the assets ofthe insolvent debtor; To take possession all the said assets which includes instituting legal actions to collect the insolvent debtor's credit, to recover his properties and to rede.-em iis mortgages; To lique& debtor's properties converting them into cash and in proper caseslsJll ihem at auction. To remit to the creditors their proportionate share ofthe net assets ofthe insolvent debtor after first satisfting the cosls ofthe insolvency action and other pretbned credits; and To.submit an accounting to the court ofall assets received by him including all expenses and payments he made to creditors.

D.

I. 2..
3.

4.
5.

E.

Effect of the Assignment to the Assignee of Insolvent Debtor's properties


The assignee shall hold the assets and properties of the insolvent debtor in trust for both the insolvent debtor and his creditors. Hi is considered a representative of the insolvent debtor in accumulating and collecting the latter's asseti and is likewise considered a rpresentative of the creditors in assuring that the assets gathered shall be proportionately and equitably distributed among the said creditors.

F.

Debts and Liabilities Provable against the Insolvent's Estate Debts and liabilities which are due and payable at the time of the adjudication of the insolvency petition; Debts and liabilities that are existing but not yet due; Debt and liabilities arising from guaranty and surety ofthe insolvent debtor; Debts and liabilities that arc conringcnt;
Debts and Liabilities Unprovabte against the Insblvent's Estate Debts and liabilities that have already prescribed; Debts and liabilities which are unliquidated; Debts and liabilities which were previously given fraudulent preference by the insolvent debtor; Claims which are sectred where the creditors opted to enforce the security; and Attachments that are levied, judgments enterid and exceptions issued more than one month preceding the petition.

L
2.
3.

4.

G.
1.

2.
3.

4.
5.

166

E.
t.

Preference of Payment in Insolvency Proceedings (Section 50, Act No. 1956 as amended by Article2244. Civil code)
court-approved funeral expenses ofthe debtor or his wife or children under his parental authority who have no property of their own; Debts for services rendered the insolvent by employees, laborers, or household helpers for one year preceding the commencement ofthe insoluency proceedings; -h", Expenses during the last illness.of the debtor or of his o, s1*ru.e ind children undcr his or her parental authority, ifthey have no property ol'their own; compensalion due the laborcrs or their depenticnti undcr laws providing f<rr indcmnity for damages in cases of labor accidents, or illness resulting hom thJ nature of the employment; credits and advancements made to the debtor for support of himsetf and family during the last year preceding the insolvency; Sup,port during the insolvency proceedings, and for three months thereafter; Fines and civil indemnifications arising from a criminal offense; Legal expcnses and cxpenscs incurrcd in the odministnrtion of lhc insolvcnt's estate lbr the common interest of the creditors; Taxes and assessments due the national govemment; Taxes and assessments due the provincial govemment; Taxes and assessmenB due the city or municipal government; Damages for death or personal injuries caused by a quasi-delict; Gifts to public or private institutions of charity or beneficience; Crcdits vhich, without special privilege, appear in (a) a public instrument; or (b) in a finaljudgment;

,
3.

4.

6. 7.
8.

9.
10. 12. 13.

ll.
14.

Composition, defined

It is a proceeding which is voluntary between the debtor and his creditors wtereby the former offers to pay his creditors a certain percentage oftheir claims for the discharge of the debtor from his obligations to them. Itls valid ind binding between tlre parties from the moment a majority of the creditors representing a majority in number and amount of the claims agree to the composition.
J.
Discharge, defined

J.t

the schedule and from all those claims which were oi might have been proved against the estate in imolvency (Section 69, Act No. 1956)

It is the release of the insolvent debtor from all his debts and liabilitics stated in

Who may rsk for Discharge?

l.
2

Natural persons Corporations are not entitldd to be discharged (Section 52, Act No. t 956) Debt and Liabilities that are not Discharged

1.2

l.
2.

.'.
4.
5.

6.

Taxes or assessments which are due the national and local governments; Debls or liabilities brought about or arising from fraudulent acts, misappropriation or defalcation of the insolvent debtor; Obligations and liabilities of the debtor with another wherein the insolvent debtor is solidarily accountable; Alimony or support; Corporate debts and liabilities; and Debts and liabilities which are not listed in the schedule submitted by the insolvent debtor.

167

J.3
1

Effects of a Discharge on the Insoh'ent Debtor


Releases the insolvent debtor from the liabilities and debts tisted in the schedule he

submitted to the r"'ur: including those which hare been proved in the insolvency proceedings. Serves to release the insolvent debtor ol his person and of his tuture acquisitions.

XtI.
A.

OUASI-CONTRA(JTS
Definition

Quasicontracts are jurldical relations arising from lawful, voluntary and unilateral acts of individuals based on the prer irise that no one should be unjustly enriched or benefited at the exprlse of another.

Hvatt Elevar)ors and Escalators Coroorl,tion vs. Cathedrsl Eelf,S_EuitalgS.Complg-A$o(,iation. Inc (636 SCRA 40r) This Court disagrees with the findings of the CA that the claims of petitioner are questionable, because the date of the sales invoice and the date stated in the corresponding delivery receipt are ioo far apart. It is not an uncommon practice for contraccors to deliver matenals and to bill the client at a later dat, especially since the parties in the present action have an existing
Service Agreement.

that the renairs made on the elevators ultimatelv redounded to the benefit of resgrndent for without said repairs. the elevators would not be ooerational. Under Article 2142 ofthe Civil Code. such Withal,
acts "qive rise to the iuridical relation of quasi-contract to the end that no one shall be uniustlv enriched or benefited at the expense-efl .1nq]t!gr." It would certainlv be unjust for respondent to benet'il I'rom the rcoairs done bv I--tttioner onlv to refuse oayment because the paoers submitted were not in order.

it is indisputable

Permanent Concrete Products. Inc. vs. 'leodoro (26 SCRA 332)

l"actg: Clementina Vda. de Guison engaged the se rvicos ol'l)onato 'l'eodoro ol' thc'l'eodoro & Associatcs lo construct a building firr hcr lor I o()ntract pricc ol' P44,000.00 subject to the stipulation that labor and materials shall be lbr the account of the contractor. Teodoro ordered and received from Permanent
Concrete Products, Inc. hollow blocks amounting to P759.88, rvhich rvere used in the construction of the said building. The contmctor refused to pay the said amount and alleged that payment thereof is the obligation ofthe building owner.

lssue: Who should pay for the cost of the hollow


or the conmctor?

blocks, the building owner

Ruling: By virtue of thc contract between Guison and Teodoro, the laner expressly assumed the cost of the materials by undertaking that "All of said labor and materials shall be supplied by me," and this logically because the contract was for the construction ofa building for which Guison agreed to pay a total lump sum.

r68

r
It is true that the installation of the hollow blocks in the house of Guison redounded to her benefit. It does h(t thereby follow, howovcr, that shc was enriched at the expense of the plairrtiff rhe contract between her and the contractor wa1 for a lump sum of p44,000.00, with the Iatter assuming the obligation to fumish all labor and m,nterials. In the absence of proof rhit he failed to comply with her covenant to pay p,14,000.00 to the contractor, the latter is legally obliged to make good its own undertaking to fumish a// . materials and labor.
Uv vs. Public Estates Authoritv (s89 SCRA l)
Neither can we hold the public Estates Authority (pEA) liable based on soluio indebiti, the legal maxim that no one should enrich itself at the expense glqotto.As we explained in Powton Conglomerate, Inc. v. Agcolicoi (400 SCRA 523 [2003]), the principle ofunjust enrichment cannot be validly invoked by the respondent who, through his own act or omission, took the ris[ ofbeing denied payment for additional costs by not giving the petitioners prior notice oi such costs and/or by not securing their written consent thereto, is required by law and their contract. Uy oannot, therefore, claim from pEA the cosis of thl additional hauling distance oftopsoil, and ofthe mobilization of water trucks.

Bank of America. NT & SA vs. Associated Citizens Bank (s88 SCRA 5l)
had not siven value for the monev oaid to him has no right to retain the monev he received. Thi. C.urtJh"r"foA quotes with approval the ruling ofthe Court ofAppeals in its decision:

It is well-settled that a person who

"It appearing, however, from the evidence on record that since Uy Seng and/or Uy Chung Guan Seng received the proceeds ofthe lhing checks as they were deposited in their personal joint account with Associated Bank, they should, thereforg be obliged to reimburse Associated Bank for the amount it has to pay to Bank of ,qmerica, in line with fte rule that no person should be allowed to unjustly enrich himself at the expense of another."
De [-eon vs. De Leon (s93 SCRA 768)

the sale of one-half of the conjugal property without liquidation of the partnership is void. Prio; to the liquidation of the corlugal partnership, the interest of each spouse in the conj ugal assets is inchoate, a mere expectancy,
wh.ich constitutes neither a legal nor an equitable estate, and does not iipen inio a title until it appears that there are assets in thi community as a resuit of the liquidation and settlement. The interest of each spouse is limited to the net

As a final consideration, the Court agrees with the Court of Appcals that

rcmnindcr or "r(morcnlo liqukht" (hthcr tr4nmn'irrl) rrsrrlting lhln lhe liquidation of the affair s of the partnership after its dissolution. Thus, the right of the husband or wife to one-halfofthe conjugal assets does not vest until the dissolution and liquidation ofthe conjugal partnership, or after dissolution of the marriage, when it is finally determined that, after settlement of conjugal obligations, there are net assets left which can be divided between the spouses
or their respective heirs.

169

? Therefore, even on tte suppr tition that Bonifacio on sold his portion of the conjugal partnership, '.he sale iri still theoretically void br, as previously stated, the right of the hustrand or thr: wife to one-half of t e conjugal assets does not vest until the liquidation ofthe conj ugal partnership.
Nevertheless, this Court is minrlful of the fact that th, Tanosas paid a valuable consideration in the amount of P19,000.00 for the pro rcrty in question. Thus, as a matter of faimess and eo uity, the share of Bc rifacio ifter the liquidation of the partners5ip should be liable to reimburse the amount paid b. the Tarrosas. It is well-se'-tled principle that no person shoulc unjustll,enric himself at the expense ofanother.

II.
l.
2.

Types of Quasi{ontracttr Nominate Innominate


Nom inate Quasi-Contracts

m.
A.
1.

Kinds:
Negotiorum Gestio Solutio Indebiti

2.

B.

Definition of Negotiorum Gestio

Negotiorum Gestio refers to the juridical relation which arises wtr,.rn a person voluntarily takes charge of the egency or management of the business or property o:l another, without any power from the latter, as a consequence of which he is obliged to continue the same until the termination of the affair and its incidents, or to require the person concemr.rd to substitute him, if the owner is in a position to do so. (Article 2144, Civil Code)

C. I' 2.
l
4.
5

Requisites There is no meeting of the minds between the gestor and the owner of the business or property. The gestor voluntarily assumed the agency or management ofthe business or proprty of
another. l'hc lrusirrcss or pr'opcrty rrrusl lttrvc bccrr rrcglcctcrl 0r rrbrrrrdotrctl by lltc orvrrcr. f'he owner did not authorize, either expressly or impliedly, the agency or management of his business or property. The gestor assumed the agency or management of the business or property in good faith.

Distinctions Between Negotiorum Gestio and Imptied Agency Neeotiorum Gestio

Imolied Aeencv

l.

The oflicious mamger

should never have been authorized in any manner to assume the agency or management of the business or property of aiother.

l.

The implied agent has

been

authorized to assume the agency by virtue of the acts of the owner or by virtue of his silence or inaction or his failue to repudiate the agency, knowing that the implied agent is acting on his behalf without any authority.

170

-l

The business or property suhject of voluntary management should either have been neglected or
abandoned.
3.

2.

It is nol neccssary for the business or proprty to be neglectcd or


abandoned.

So long as the owner

the business or property does not know

of

3.

that another person is acting on his behalf without authority, the juridical relation negotrorum gestio exists.

From ihc very momcnt the owncr property the business becomes aware that another

of

or

of

person is acting on his behalf without his authority and he still does not repudiate the acts of that person, negotorium gestio ceases to exist and lhe juridical

relationship becomes
implied agency.

one of

E. L 2. 3. 4.

Instsnces where the oflicious manager is liable even in cases of fortuitous events under Article 2147 of the Civil Code:

If

the officious manager undertakes risky operations which the owner was

not

accustomed to embark upon; Ifthe officious manager has prefened his own interest to that ofthe owner; lf the officious manager fails lo return the property or busincss aftcr dcmand by thc owner; and lf the officious manager assumed the management of thc business or property in had faith.

Except when the management was assumed to save the property or business from imminent danger, the gestor shall be liable for fortuitous events if a) he is manifestly unfit to carry on the management or b) by his intervention, he prevented a more competent person from taking up the management.

IV. A.

Solutio Indebiti

Definition of Solutio Indebiti

Solutio Indebiti refers to the juridical relation which arises whenever a person unduly delivers a thing by mistake to another who has no right to demand it. (Article 2154, Civil Code)
B.
1.

Requisites
There must be payment or delivery made by one person to another and the latter received the payment or delivery. The person to whom the payment or delivery was effected had no right to demand it. The payment or delivery was effected by reason ofa mistake either of fact or of law.

2.
J

Titan-Ikeda Construction & IlevelopEent Cornoration vs. Primetown Prooertv G.rouo. Inc.
(s44 SCRA 466)

The parties first entered into a contract for a piece of work when they executed the supplemental agreement. Petitioner as contmctor bound itself to execute the pro.iect for respondent, the owner/developer, in consideration of a price certain (8130,000.00). The supplemental agreement was reciprocal in nature because the obligation of respondent to pay the entire contract price

t7t

r
depended on the obligation
versa).

of petitioner to

complete the project (and vice

Thereafter, the parties entered into a second contract. They agreed to extinguish the supplemental agreement as evidenced by the October 12, 1995 their respective letter-agreement which was duly acknowledged

'by

representatives.

to extinguish the supplemental agreement, they were no longer required to fully perform their respective obligations. Petitioner was relieved of its obligation to complete the project while
Because the parties agreed respondent was freed of its obligation to pay the entire contract price. However, respondent, by executing the June 30,'1994 deed of absolute sale, was deemed to have paid Pl12,416,716.88. Nevertheless, because petitioner applied part of what it received to respo:rdent's outstanding liabilities, it admitted overpayment.

Because ptitionff acknowledged that it had been overpaid, it was obliged to retum the excess to respondent. Embodying the principle of soltttio indebiti, Article 2154 ofthe Civil Code provides:

it

"Article 2154. If something is received when there is no right to demed and it was unduly delivered through mistafte, the obligation to retum it

arises."

For the extra<ontractual obligation following requisites must bc proven:

of solutio indebiti to

arise, the

l. 2.

the absence ofa right to colloct the excess sums and the paryme,nt was made by misake.

With regard to the first requisite, because the supplemental agreement had been extinguished by the mutual agreement ofthe parties, petitioner became entitled only to the cost of services it actually rendered (r.e., that fraction ofthe project cost in proportion to the percentage of its actual accomplishment in the project). It was not entitled to the excess (or extent of overpayment).
On the second requisite, Article 2163 of the Civil Code provides:
,

"Article 2163. I is presurned that there was a mislike in ahe ptymcnt if somcthing which had ncver been duc or had alrcady been paid was delivcred; but, he from whom the return is claimed may prove that the delivery was made out of liberality or for any otherjust cause." (emphasis supplied) instancc, rcspontlcnt prid part of thc contraut- prrcc urrtlcr thc assumption that petitioner would complete the project within the stipulated period. However, after the supplemental agreement was extinguished' petitioner ceased working on the project. Therefore, the compensation petitioner received in excess of the cost of its actual accomplishment as of October 12, 1995 was never due. The condominium units and parking slots corresponding to the said excess were mistakenly delivered by respondent and were therefore not due to petitioner.

ln this

Stated simply, respondent errooeously delivered excess units to petitioner and the latter, pursuant to Article 2154, was obliged to return them to
respondent.

1rffi73iy
Petitioner insists that its payment of respondentls salary was by mistake since respondent who chose not to report for work was not entitled to it under the principle of"no work, no poy," thus he has the obligation to retum the same. Petitioner based such contention on the principle of solutkt indebiti under Article 2154 of the Civil Code. There is xtlutio indehiti where: (l) payment is made when there exists no binding relation between the payor, who has no duty to pay, and the pcrson whc received the payment; and (2) the fnyment is made through mistake, and not through liberality or some other cause. x x x Thc quasi-contract of solutirt indebiti is based on the ancient principle that no one shall enrich himself unjustly at the expense ofanother. Both elements are lacking in the present case. Mr. (lascarro, the l-lead of the Branches Division lnvestigation Unit, had catugorically ststcd thor respondent was only terminated from service on August 26, 1988. Respondent was not suspcnded from offrce. Consequently, during the period in question, there still existed an employer-employee relationship between petitioner and respondent which entitled respondent to the paynent of her salary during the said period. Thus, there can be no mistaken payment in this case. Moreover, it has been shown that the payment ofrespondent's salary was with the knowledge and approval of respondent's immediate superior oflicers. Hence, the principle of solutio inCebiti finds no application in this case.

Uniwide Srles Realtv and Resources Corooration vs. Titsn-Ikeda Construction and Development Corooration (srI SCRA 33s) Uniwide, as the owner who did pay the contractor for such additional works even if they had not been authorized in writing, has to establish its own right to reimbursement not under r',rt. 1724, but under a different provision of law. Uniwide's burden of establishing its legal right to reimbursement becomes even more crucial in the light of the general presumption contained in Section 3(f, Rule 13 I of the Rules of Court that "money paid by one to another was due to the latter. " Uniwide undertakes such a task before this Court, citing the provisions on solutio indebiti vndq Arts. 2154 and 2156 of the Civil Code. However, it is not enough to prove that the payments made by Unirvide to Titan were "not due" because there was no prior authorization or agreement with respect to additional works. There is a further requirement that the payment by the debtor was made eirher through mistake or under a cloud of doubt. In short, for the provisions on solutio indebiti to apply, there has to be evidence establishing the frame of mind of the payor at the time thc payment as made.

Note: When the payment was not by mistake but was made by virtue of the coercive process of the writ of execution, solutio indebiti does not apply. [Manila Surety and Fidelity Co., Inc. v. Lim, GR L9j4j, December 29, 1959 as cited in the Pre-Week Handbook in Civil Law by Edgardo L. Paras (Fifth Blition,2007)l

173

r
MCO Samotc Problcn!

'I

A obtained a loan liom F| in the amount o1P150,000.00. The parties never agreed on the rate of interest to be paid on the said loan and that the same was not Feduced in writing. A few monlhs alter, A partialiy paid B in the amount of P100,000.00 followed by anorher payment of P80,000.00 A later on realized that he overpard B by P30,000.00. A demanded from B the return of P30,000.00 but Il contends that the P30,000.00 represents the interest charges on thc money A horrowed. Is B corrcct?

a. b. c. d.

Ycs, bccause what A and Il fbilcd to stipulate on is the rale of interest to be paid on thc loan but not the non-paylncnt of interest which can be implied lrom A's excess final paymcnl to B. Yes, because lhe overpayment is due to A's negligence and the latter is now estoppcd to clairn its return. No, because pavment of intcrest cannot be implied and must be expressly agreed upon by the parties. No, hecausc [] is obliged to retum the undue interest erroneously paid by A to him under thc principlc ofsolttio indebiti.
Srga-an vs. Villanueva (576 SCRA 696)
-

Sq.Ugq:

Philinoine Geothermal. Inc, vs. (lommissioner of Internal Revenue (46s SCRA 308)
Undcr.thc principlc of stlutrt in<lcbiti, the governmcnt has to reslore to pclilioner the sunrs representing erioncous payments of taxes. lt is of no moment whethcr the National Power Corporation (NPC) .had alrcady rcirnbursed fxltitronsr or not because in this case, there should have been no Valuc Addcd Tax (VA1-) paid ar all

lhc

Surnrnary ol'l)avrncrrts and ( )Jlicral Rcccipts rssucd by a supplier is

Court

rrrx a rcliable basis lirr dctcrnrining thc VA'l' paytncnts ol'said supplier. The of 1-ax Appeals (CTA) grossly nrisappreciated the evidence and erroneously concludcd in rhrs casc thal Nlrc paid the VAT. The CTA should havc rclicd on the Vi\.l Rcturns liled bv the taxpayer to determine the actual

arnount rcmittcd

to the

[]urcau

ol

Internal Revenue

tbr the purpose of

ascertaining the refund due. Ihe presentation ofthe VAT Retums is considered sufliciont to ascerlain the amount of thc refund. Thus, upon finding that the supplv ol' steam to Nl)C is exompl fiom VAT, the CTA should have ordered rcspondent to reimburse petirroner lhe full amount of p39,328,775.41 as crroneousll paid VAT. StAtc l,and Investmcnt (lorlroration vs, ('omm issioncr of lnternal Revcnuc (542

s('RA r r1)

ln ortlcr to shorv that it would havc bccn rmJxrssible lbr petitioner lo utilrze lhc csccss crcdit in taxable vear 1999, it attached its 1999 and 2000 annual inconrc ta\ returns in its motion fbr reconsideration filed with the Court ol Iax Appcals lhese show that petitioner incuned losses in 1999 in the anrount ol'Pil.6l0,0l8 00 Clearly, peritioncr has no tax liability in 1999 to rlhich lhe 1997 exccss tax credits could be applied or utilized. This Court has held that if a taxpavcr suffered a net loss in a subsequent year, incurring no tax lrahilitr to rvhich a prcvious ycar's lax credit could be applied, there is no

ttE uax tEtunq

which rightfully belongs to the taxpayer.


Substantial justice, equity and fair play are on rhe side of petitioner. Technicalities and legalisms, however cxaltcd, should not bc misused by the govemment to keep money not belonging to it, thereby enriching itsell at thc expcnse of its law-abiding citizens. Under rhe principle ol' :*tlutut rntlcbttt provided in Art. 2154, Civil Code, the BIR received something .'when rhere [was] no right to dernand it," and thus, it has rhe obligation to rerurn it. Ileavily militating against rcspondcnt Commissioner is lhc ancient prinoiplc that no one, not cven the slulc, shall enrich oncscll at thc cxpr:rrsc ol'arrothcr. Inrlccd, simplc justice requires the spccdy rcfund ol'thc wrongly hcld tnxcs.

Note: Pal.rnent by a joint co-dcbtor for the bcnefit qf another co-debtor or co-surety ts not soluto indebiti bui a piyment by a person inlerested in the lulfillment of the obligation under Article 1236. [Monte de Piedad v. llodrig4 63 Phil. 312 as cited in the Pre-Week Handbook in
Civil Law by Edgardo L.
Paras

(Fifth Edition,2007)l

v.
l.
2. 3.

Innominate Quasi-Contracts Governcd by Articles 2164 to 2173 of the Civil Code


Support given by a strangcr (Arricle 2164) Funeral expenses borne by a third person (Arricle 2165) Support given by a third person to an orphan, insane or indigcnt whose suppon was unj ustly refused by thc pcrson obligcd to do so (Arliclc 2 166) Payment for medical scrviccs rcndcrcd to a p'*rson rnjurcd or scriously ill rvho was lrcated while he was not in a condition to givc conscnt (Articlc 2167) Owner's obligation to pay just compcnsation to a third person who saved his property from destruction without his knowledgc during a fire, flood, storm or other calamity (Article 2168) ' Liability of a person to pay expenses in cascs rvhere the govemment undertakes necessary work and such person fails to comply with health or safety regulations conceming property (Article 2 169). Commingling or confusion of movablcs separately ptrtaining to two or morc persons through accident or fortuitous event (Article 2170). Rights and obligations of the finder of lost persorial property are governcd by Articles 719 and 720 (Article 2l7l ). Right ofa possessor in good faith to reinrbursctncn( lor neccssrry and uscful cxpcnses is govomed by Article 546 (Article 2 172). Payment ofa debt by a third person without thc knorvlcdge of thc dcb(or (A(iclc 2173) Liability ofa person to pay his shaie in the expenses for the implementation of measures for protection againSt lawlessness, [ire, flood, storm or other calamity who objects to the plan but has benefited therefrom (Article 2 174) Reimbursement of a person who was constrained to pay the taxcs oi anothcr (A(icle

4.

5.
6.

7.

9.

t0.
I

l.

12.

2175\

t75