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Case #1: Pantaleon vs. American Express International

Brief Facts: Pantaleon and Family joined an escorted tour to Western Europe. While in Amsterdam wife
wanted to purchase some diamonds, she used for payment her credit card. The store clerk informed
Pantaleon that his AmexCard had not yet been approved, they had to wait- so as the other tourist onboard
the same bus with the Pantaleons. One trip had to be cancelled due to waiting- Mrs. Pantaleon felt
embarrassed. They filed a case upon returning in the Philippines against respondent.
Principle Involved: Tripartite Relationship
1. Purchaser and business enterprise- contract of sale.
2. Credit card issuer/ bank and credit card holder- contract of loan
3. Credit card issuer and business enterprise- inominate contract of promise to pay.
------------------------------#2: Producers Bank vs. CA
The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as
money, the contract would be a mutuum. However, there are some instances where a commodatum may
have for its object a consumable thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of
the parties is to lend consumable goods and to have the very same goods returned at the end
of the period agreed upon, the loan is a commodatum and not a mutuum. The rule is that the
intention of the parties thereto shall be accorded primordial consideration in determining the actual
character of a contract. In case of doubt, the contemporaneous and subsequent acts of the parties shall be
considered in such determination.
-----------------------------#3: Pajuyo vs. CA
Facts: Pajuyo entrusted a house to Guevara for the latter's use provided he should return the same upon
demand and with the condition that Guevara should be responsible of the maintenance of the property.
Upon demand Guevara refused to return the property to Pajuyo. The petitioner then filed an ejectment
case against Guevara with the MTC who ruled in favor of the petitioner. On appeal with the CA, the
appellate court reversed the judgment of the lower court on the ground that both parties are illegal
settlers on the property thus have no legal right so that the Court should leave the present
situation with respect to possession of the property as it is, and ruling further that the contractual
relationship of Pajuyo and Guevara was that of a commodatum.
Issue: Is the contractual relationship of Pajuyo and Guevara that of a commodatum?
Held: No. The Kasunduan is not one of commodatum. In a contract of commodatum, one of the parties
delivers to another something not consumable so that the latter may use the same for a certain
time and return it. An essential feature of commodatum is that it is gratuitous. Another feature
of commodatum is that the use of the thing belonging to another is for a certain period. Thus, the
bailor cannot demand the return of the thing loaned until after expiration of the period stipulated, or after
accomplishment of the use for which the commodatum is constituted. If the bailor should have urgent
need of the thing, he may demand its return for temporary use. If the use of the thing is merely
tolerated by the bailor, he can demand the return of the thing at will, in which case the
contractual relation is called a precarium. Under the Civil Code, precarium is a kind of commodatum.
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated
him to maintain the property in good condition. The imposition of this obligation makes the

Kasunduan a contract different from a commodatum. The effects of the Kasunduan are also different
from that of a commodatum. Case law on ejectment has treated relationship based on tolerance as one
that is akin to a landlord-tenant relationship where the withdrawal of permission would result in the
termination of the lease. The tenants withholding of the property would then be unlawful.
------------------------------------#4: Republic vs. Bagtas
Brief Fact: Bagtas borrowed three bulls for a period of one year for breeding purposes subject to a
government charge of breeding fee of 10% of the book value of the books. Upon the expiration of the
contract, Bagtas asked for a renewal for another one year, however, the Secretary of Agriculture and
Natural Resources approved only the renewal for one bull and other two bulls be returned. Bagtas neither
paid nor returned the bulls. The Republic then commenced an action against Bagtas ordering him to return
the bulls or pay their book value.
Principle: If there is compensation- it is not one of commodatum but could be of lease since a
contract of commodatum is essentially gratuitous.
If contract was commodatum then Bureau of Animal Industry retained ownership or title to the bull it
should suffer its loss due to force majeure. If the breeding fee be considered a compensation, then the
contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to
the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the
expiry of the contract. And even if the contract be commodatum, still the appellant is liable if he keeps it
longer than the period stipulated.
-------------------------------------Case #5: Quintos vs. Beck
Facts: Beck was a tenant of Quintos and Ansaldo (Q and A). Q and A gratuitously allowed B the use of
their furniture with the clause that they be returned upon demand. When plaintiffsappellant sold
the property in which defendantappellee was currently residing, the plaintiffs ordered the return
of the furniture. Defendant only returned some of the furniture, and later on deposited the furniture
to the sheriff. The court of first instance ruled that the expenses be shared by the parties prorata,
and that they parties are to pay their respective legal fees.
Principle: The contract entered into between
the plaintiff gratuitously granted the use of
the ownership thereof by this contract the
the plaintiff, upon the latters demand, to be

the parties is one of commadatum, because under it

the furniture to the defendant, reserving for herself
defendant bound himself to return the furniture to
delivered at her residence or house.

Is the plaintiff legally bound to bear the expenses occasion by the deposit of the furniture? NO.
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the
latter's demand. The defendant was not entitled to place the furniture on deposit nor was the
plaintiff under a duty to accept the offer to return the furniture.
Case #1: Consolidated Bank vs. CA
The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple
loan. Article 1980 of the Civil Code expressly provides that x x x savings x x x deposits of money in banks
and similar institutions shall be governed by the provisions concerning simple loan. There is a debtorcreditor relationship between the bank and its depositor. The bank is the debtor and the depositor is the
creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand. The
savings deposit agreement between the bank and the depositor is the contract that determines the rights
and obligations of the parties.
The law imposes on banks high standards in view of the fiduciary nature of banking. This fiduciary
relationship means that the banks obligation to observe high standards of integrity and

performance is deemed written into every deposit agreement between a bank and its
depositor. The fiduciary nature of banking requires banks to assume a degree of diligence
higher than that of a good father of a family. Article 1172 of the Civil Code states that the degree of
diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the
diligence of a good father of a family. Section 2 of RA 8791 prescribes the statutory diligence required from
banks that banks must observe high standards of integrity and performance in servicing their
However, the fiduciary nature of a bank-depositor relationship does not convert the contract
between the bank and its depositors from a simple loan to a trust agreement, whether express
or implied. Failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of
trust. The law simply imposes on the bank a higher standard of integrity and performance in complying
with its obligations under the contract of simple loan, beyond those required of non-bank debtors under a
similar contract of simple loan. The fiduciary nature of banking does not convert a simple loan into a trust
agreement because banks do not accept deposits to enrich depositors but to earn money for themselves.
-------------------------------------------------Case #2: UCPB vs. Spouses Beluso
Principle: Mutuality of Contracts; Liability for Violation of truth in Lending Act
A promissory note which grants the creditor the power to unilaterally fix the interest rate means that the
promissory note does not contain a clear statement in writing of the finance charge. Such provision is
illegal because it violates the provisions of the Civil Code on mutuality of contracts Ratio:
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left
to the will of one of them.
Liability for Violation of Truth in Lending Act
RA 3765, otherwise known as the Truth in Lending Act. Section 6(a) of the Truth in Lending Act
which mandates the filing of an action to recover such penalty must be made under the following
Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any
person any information in violation of this Act or any regulation issued thereunder shall be liable to such
person in the amount of P100 or in an amount equal to twice the finance charge required by such creditor
in connection with such transaction, whichever is greater, except that such liability shall not exceed P2,000
on any credit transaction. Action to recover such penalty may be brought by such person within
one year from the date of the occurrence of the violation, in any court of competent
Rationale: to protect the public from hidden or undisclosed charges on their loan obligations, requiring a
full disclosure thereof by the lender.


Section 4 of the Truth in Lending Act clearly provides that the disclosure statement must be furnished
prior to the consummation of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent applicable
and in accordance with rules and regulations prescribed by the Board, the following information:
the cash price or delivered price of the property or service to be acquired;
the amounts, if any, to be credited as down payment and/or trade-in;
the difference between the amounts set forth under clauses (1) and (2)
the charges, individually itemized, which are paid or to be paid by such person in connection with the
transaction but which are not incident to the extension of credit;
the total amount to be financed;
the finance charge expressed in terms of pesos and centavos; and
the percentage that the finance bears to the total amount to be financed expressed as a simple annual
rate on the outstanding unpaid balance of the obligation.
Rationale: to protect users of credit from a lack of awareness of the true cost thereof, proceeding from
the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest

rates, deduction of interests from the loaned amount, and the like. The law thereby seeks to protect
debtors by permitting them to fully appreciate the true cost of their loan, to enable them to give full
consent to the contract, and to properly evaluate their options in arriving at business decisions.
The promissory notes, the copies of which were presented to the spouses Beluso after execution, are not
sufficient notification from UCPB. As earlier discussed, the interest rate provision therein does not
sufficiently indicate with particularity the interest rate to be applied to the loan covered by said promissory

Case # 4: Estores vs. Supangan

Facts: Estores entered into a Conditional Sale with spouses Supangan whereby petitioner offered to sell,
and respondent-spouses offered to buy, a parcel of land on certain conditions. Supangan failed to comply
with the obligation so Estores wants now the return of the money.
Petitioners Arguments:
Petitioner insists that she is not bound to pay interest on the P3.5 million because the Conditional Deed of
Sale only provided for the return of the downpayment in case of failure to comply with her obligations.
Petitioner also argues that the award of attorneys fees in favor of the respondent-spouses is unwarranted
because it cannot be said that the latter won over the former since the CA even sustained her contention
that the imposition of 12% interest compounded annually is totally uncalled for.
Respondent-spouses Arguments:
Respondent-spouses aver that it is only fair that interest be imposed on the amount they paid considering
that petitioner failed to return the amount upon demand and had been using the P3.5 million for her
benefit. Moreover, it is undisputed that petitioner failed to perform her obligations. As regards the
attorneys fees, they claim that they are entitled to the same because they were forced to litigate when
petitioner unjustly withheld the amount. Besides, the amount awarded by the CA is even smaller compared
to the filing fees they paid.
ISSUE: Whether it is proper to impose interest for an obligation that does not involve a loan or forbearance
of money in the absence of stipulation of the parties.
Principle: Interest may be imposed even in the absence of stipulation in the contract.
Article 2210 of the Civil Code expressly provides that [i]nterest may, in the discretion of the court, be
allowed upon damages awarded for breach of contract. In this case, there is no question that petitioner
is legally obligated to return the P3.5 million because of her failure to fulfill the obligation under the
Conditional Deed of Sale, despite demand. Petitioner enjoyed the use of the money from the time it was
given to her until now. Thus, she is already in default of her obligation from the date of demand.
Forbearance is defined as a contractual obligation of lender or creditor to refrain during a given period
of time, from requiring the borrower or debtor to repay a loan or debt then due and payable. This
definition describes a loan where a debtor is given a period within which to pay a loan or debt. In such
case, forbearance of money, goods or credits will have no distinct definition from a loan. We believe
however, that the phrase forbearance of money, goods or credits is meant to have a separate meaning
from a loan, otherwise there would have been no need to add that phrase as a loan is already sufficiently
defined in the Civil Code.
Forbearance of money, goods or credits should therefore refer to arrangements other than loan
agreements, where a person acquiesces to the temporary use of his money, goods or credits pending
happening of certain events or fulfillment of certain conditions.
In this case, the respondent-spouses parted with their money even before the conditions were fulfilled.
They have therefore allowed or granted forbearance to the seller (petitioner) to use their money pending
fulfillment of the conditions. They were deprived of the use of their money for the period pending
fulfillment of the conditions and when those conditions were breached, they are entitled not only to the
return of the principal amount paid, but also to compensation for the use of their money. And the

compensation for the use of their money, absent any stipulation, should be the same rate of legal interest
applicable to a loan since the use or deprivation of funds is similar to a loan.
Case # 11: Banco Filipino vs. Navarro
FACTS: Elsa and Calvin Arcilla secured, on 3 occassions, loan from petitioner as evidenced by promissory
note. REM was also executed. Under said deeds, Banco Filipino may increase rate of interest on said loans,
within the limits allowed by law. at that time, under Usury Law, the maximum rate of interest for loans
secured by REM was 12% pa. later, the Central bank issued Circular No. 494 provinding for the maximum
interest of 19%pa. meanwhile, Skyli Builders, thru President Calvin Arcilla secured loans from BPI with FGU
Insurance as surety. Banco Filipino issued an account statement with 17% pa as interest. The Arcillas filed
for annulment of the loan contracts because the rate of interests charged were usurious.
Principle: When there is an escalation clause there must be a corresponding de-escalation
clause. Also, Central Bank Circular 494, although it has the force and effect of law, is not a law
and is not the law contemplated by the parties which authorizes the petitioner to unilaterally raise the
interest rate of loan.
RULES on Escalation Clauses:
Escalation clauses are not void per se.
Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the
contracting parties. This Court has long recognized that there is nothing inherently wrong with escalation
clauses which are valid stipulations in commercial contracts to maintain fiscal stability and to retain the
value of money in long term contracts. Hence, such stipulations are not void per se.
Escalation clauses violating the principle of mutuality of contracts are void.
Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the debtor of the right to assent to an important
modification in the agreement" is void. A stipulation of such nature violates the principle of mutuality of
contracts. Thus, this Court has previously nullified the unilateral determination and imposition by creditor
banks of increases in the rate of interest provided in loan contracts.
Banco Filipino Savings & Mortgage Bank v. Navarro: While escalation clauses in general are
considered valid, we ruled that Banco Filipino may not increase the interest on respondent
borrowers loan, pursuant to Circular No. 494 issued by the Monetary Board, because said
circular is not a law although it has the force and effect of law and the escalation clause has
no de-escalation clause.
De-escalation Clause: provision for reduction of the stipulated interest "in the event that
the applicable maximum rate of interest is reduced by law or by the Monetary Board."
It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes
an increase in the stipulated rate of interest without the express conformity of the debtor. Such unbridled
right given to creditors to adjust the interest independently and upwardly would completely take away
from the debtors the right to assent to an important modification in their agreement and would also negate
the element of mutuality in their contracts. 34 While a ceiling on interest rates under the Usury Law was
already lifted under Central Bank Circular No. 905, nothing therein "grants lenders carte blanche authority
to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
------------------------------------------------Case #13: Spouses Juico vs. China Banking Corp. (same ruling above applies)
Petitioners contend that the interest rates imposed by respondent are not valid as they were not by virtue
of any law or Bangko Sentral ng Pilipinas (BSP) regulation or any regulation that was passed by an
appropriate government entity. They insist that the interest rates were unilaterally imposed by the bank
and thus violate the principle of mutuality of contracts. They argue that the escalation clause in the
promissory notes does not give respondent the unbridled authority to increase the interest rate
unilaterally. Any change must be mutually agreed upon.
Respondent, for its part, points out that petitioners failed to show that their case falls under any of the
exceptions wherein findings of fact of the CA may be reviewed by this Court. It contends that an inquiry as
to whether the interest rates imposed on the loans of petitioners were supported by appropriate

regulations from a government agency or the Central Bank requires a reevaluation of the evidence on
records. Thus, the Court would in effect, be confronted with a factual and not a legal issue.
Principle : The binding effect of any agreement between parties to a contract is premised on two settled
principles: (1) that any obligation arising from contract has the force of law between the parties; and (2)
that there must be mutuality between the parties based on their essential equality. Any contract which
appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is
void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of
one of the parties, is likewise, invalid.
Bank: that the interest rate changes every month based on the prevailing market rate and notified
petitioners of the prevailing rate by calling them thru a telephone monthly before their account becomes
past due. When asked if there was any written authority from petitioners for respondent to increase the
interest rate unilaterally, respondent answered that petitioners signed a promissory note indicating that
they agreed to pay interest at the prevailing rate. China Bank unilaterally increased the interest rates from
15% to as high as 24.50%.
Ecalation clause in this case: I/We hereby authorize the CHINA BANKING CORPORATION to increase or
decrease as the case may be, the interest rate/service charge presently stipulated in this note without any
advance notice to me/us in the event a law or Central Bank regulation is passed or promulgated by the
Central Bank of the Philippines or appropriate government entities, increasing or decreasing such interest
rate or service charge.
RULING: At no time did petitioners protest the new rates imposed on their loan even when their property
was foreclosed by respondent. This notwithstanding, we hold that the escalation clause is
still VOID because it grants respondent the power to impose an increased rate of interest without a written
notice to petitioners and their written consent. Respondents monthly telephone calls to petitioners
advising them of the prevailing interest rates would not suffice. A detailed billing statement based on the
new imposed interest with corresponding computation of the total debt should have been provided by the
respondent to enable petitioners to make an informed decision. An appropriate form must also be signed
by the petitioners to indicate their conformity to the new rates. Compliance with these requisites is
essential to preserve the mutuality of contracts. For indeed, one-sided impositions do not have the force of
law between the parties, because such impositions are not based on the parties essential equality.
Effect: Modifications in the rate of interest for loans pursuant to an escalation clause must be the result of
an agreement between the parties. Unless such important change in the contract terms is mutually agreed
upon, it has no binding effect. In the absence of consent on the part of the petitioners to the modifications
in the interest rates, the adjusted rates cannot bind them.
NOTE: The lender and the borrower should agree on the imposed rate, and such imposed rate should be in
writing. Escalation clauses are not basically wrong or legally objectionable as long as they are not solely
potestative but based on reasonable and valid grounds.
---------------------------------------------------Case # 19: Nacar vs. Gallery Frames
Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796, approved the amendment
of Section 2 of Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799, Series of 2013,
effective July 1, 2013, the pertinent portion of which reads:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six percent
(6%) per annum.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would
govern the parties, the rate of legal interest for loans or forbearance of any money, goods or credits and
the rate allowed in judgments shall no longer be 12% per annum but will now be 6% per annum effective
July 1, 2013.
It should be noted, nonetheless, that the new rate could only be applied prospectively and not
retroactively. Consequently, the 12% per annum legal interest shall apply only until June 30, 2013.
Come July 1, 2013 the new rate of 6% per annum shall be the prevailing rate of interest when

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines are
accordingly modified to embody BSP-MB Circular No. 799, as follows:
1. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasidelicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII
on "Damages" of the Civil Code govern in determining the measure of recoverable damages.
2. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
New guidelines in the award of interest:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.
In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except
when or until the demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to run only from
the date the judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
Application in this case: The interest of 12% per annum of the total monetary awards, computed from May
27, 2002 to June 30, 2013 and 6% per annum from July 1, 2013 until their full satisfaction, is awarded.
-------------------------------------------------Case # 25: First Metro Investment vs. Este Del Sol
FMIC granted Este del Sol a loan to finance a sports/resort complex in Montalban, Rizal. Under the
agreement, the interest was 16% pa based on the diminishing balance. In case of default, an acceleration
clause was provided and the amount due is subject to 20% one-time penalty on the amount due and such
amount shall bear interest at the highest rate permitted by law. respondent executed a REM, individual
continuing suretyship and an underwriting agreement whereby FMIC shall underwrite the public offering of
one P120,000 common shares of respondents capital stock for one-time underwriting fee of P200,000. For
failure to pay its obligation, FMIC caused the foreclosure of the REM. At the public auction, FIC was the
highest bidder. Petitioner filed to collect for alleged deficiency balance against respondents since it failed
to collect from the sureties, plus interest at 21% pa. the trial court ruled in favor of FMIC. Respondents
appealed before the CA which held that the fees provided for in the Underwriting and Consultacy
Agreements were mere subterfuges to camouflage the excessively usurious interest charged. The CA
ordered FMIC to reimburse petitioner representing what is ue to petitioner and what is due to respondent.

Whether or not the interests are lawful


No. an apparently lawful loan is usurious when it is intended that additional compensation for the
loan be disguised by an ostensibly unrelated contract for the payment by the borrower for the lenders
services which re of little value or which are not in fact to be rendered. Article 1957 clearly provides:
contracts and stipulations, under any cloak or device whatever, intended to circumvent the law agaistn
usury shall be void. The borrower may recover in accordance with the laws on usury.
--------------------------------------------------------------Case # 28: Macalinao vs. BPI

Macalinao was an approved cardholder of BPI Mastercard. She made some purchase thru the use of said
credit card and defaulted payment for such purchases. BPI demanded payment of the amount. Under the
terms and conditions of the use of credit card it provides that the charges or balance remaining unpaid
after the payment due date indicated on the monthly Statement of Accounts shall bear interest at the rate
of 3% per month and additional penalty of 3% of the amount due for every month or a fraction of a months
Contentions: Macalinao -interest rate and penalty charge of 3% is excessive and usurious. BPI- it is
provided in the terms and conditions- which she agreed.
Supreme Court: While C.B. Circular No. 905-82, which took effect on January 1, 1983, effectively removed
the ceiling on interest rates for both secured and unsecured loans, regardless of maturity, nothing in the
said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to
levels which would either enslave their borrowers or lead to a hemorrhaging of their assets.
Since the stipulation on the interest rate is void, it is as if there was no express contract thereon. Hence,
courts may reduce the interest rate as reason and equity demand.
The same is true with respect to the penalty charge. Notably, under the Terms and Conditions Governing
the Issuance and Use of the BPI Credit Card, it was also stated therein that respondent BPI shall impose an
additional penalty charge of 3% per month. Pertinently, Article 1229 of the Civil Code states:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the
penalty may also be reduced by the courts if it is iniquitous or unconscionable.
Case # 29: Anita Ledda vs. BPI
Whether Alcaraz v. Court of Appeals, instead of Macalinao v. BPI, is applicable.
Ledda contends that the case of Alcaraz v. Court of Appeals, instead of Macalinao. Ledda claims that
similar to Alcaraz, she was a prescreened client who did not sign any credit card application form or
terms and conditions prior to the issuance of the credit card. Like Alcaraz, Ledda asserts that the
provisions of the Terms and Conditions, particularly on the interests, penalties and other charges for nonpayment of any outstanding obligation, are not binding on her as such Terms and Conditions were never
shown to her nor did she sign it. We agree with Ledda.
The ruling in Alcaraz v. Court of Appeals applies squarely to the present case. In this case, BPI issued a preapproved credit card to Ledda who, like Alcaraz, did not sign any credit card application form prior to the
issuance of the credit card. Like the credit card issuer in Alcaraz, BPI, which has the burden to prove its
affirmative allegations, failed to establish Leddas agreement with the Terms and Conditions governing the
use of the credit card. It must be noted that BPI did not present as evidence the Terms and Conditions
which Ledda allegedly received and accepted. Clearly, BPI failed to prove Leddas conformity and
acceptance of the stipulations contained in the Terms and Conditions. Therefore, as the Court held in
Alcaraz, the Terms and Conditions do not bind petitioner (Ledda in this case) without a clear showing that
x x x petitioner was aware of and consented to the provisions of [such] document.
On the other hand, Macalinao v. Bank of the Philippine Islands, which the Court of Appeals cited, involves
a different set of facts. There, petitioner Macalinao did not challenge the existence of the Terms and
Conditions Governing the Issuance and Use of the BPI Credit Card and her consent to its provisions,
including the imposition of interests and other charges on her unpaid BPI credit card obligation. Macalinao
simply questioned the legality of the stipulated interest rate and penalty charge, claiming that such
charges are iniquitous. In fact, one of Macalinaos assigned errors before this Court reads: The reduction
of interest rate, from 9.25% to 2%, should be upheld since the stipulated rate of interest was
unconscionable and iniquitous, and thus illegal.
Therefore, there is evidence that Macalinao was fully aware of the stipulations contained in the Terms and
Conditions Governing the Issuance and Use of the Credit Card, unlike in this case where there is no
evidence that Ledda was aware of or consented to the Terms and Conditions for the use of the credit card.
Since there is no dispute that Ledda received, accepted and used the BPI credit card issued to her and that
she defaulted in the payment of the total amount arising from the use of such credit card, Ledda is liable to
pay BPI P322,138.58 representing the principal amount of her unpaid credit card obligation. Relevantly,
Ledda states in paragraph 28 of her petition that: Assuming, arguendo, that respondent was able to

establish a cause of action against petitioner, the same will only be limited Decision 9 G.R. No. 200868
Consistent with Alcaraz, Ledda must also pay interest on the total unpaid credit card amount at the rate of
12% per annum since her credit card obligation consists of a loan or forbearance of money.
-----------------------------------------------------------------Case #31: Toledo vs. Hyden
Principle: Estoppel; the law will not favor those transactions which grants unwise, foolish and
disastrous contracts.
Ruling: The 6% to 7% interest per month paid by Jocelyn is not excessive under the circumstances of this
In view of Central Bank Circular No. 905 s. 1982, which suspended the Usury Law ceiling on interest
effective January 1, 1983, parties to a loan agreement have wide latitude to stipulate interest rates.
Nevertheless, such stipulated interest rates may be declared as illegal if the same is unconscionable. There
is certainly nothing in said circular which grants lenders carte blanche authority to raise interest rates to
levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.
In this case, however, we cannot consider the disputed 6% to 7% monthly interest rate to be iniquitous or
unconscionable. Noteworthy is the fact that in Medel, the defendant-spouses were never able to pay their
indebtedness from the very beginning and when their obligations ballooned into a staggering sum, the
creditors filed a collection case against them. In this case, there was no urgency of the need for money on
the part of Jocelyn, the debtor, which compelled her to enter into said loan transactions. She used the
money from the loans to make advance payments for prospective clients of educational plans
offered by her employer. In this way, her sales production would increase, thereby entitling
her to 50% rebate on her sales. This is the reason why she did not mind the 6% to 7% monthly
interest. Notably too, a business transaction of this nature between Jocelyn and Marilou continued for
more than five years. Jocelyn religiously paid the agreed amount of interest until she ordered for stop
payment on some of the checks issued to Marilou. The checks were in fact sufficiently funded when she
ordered the stop payment and then filed a case questioning the imposition of a 6% to 7% interest rate for
being allegedly iniquitous or unconscionable and, hence, contrary to morals.
It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same carried
with it an interest rate of 6% to 7% per month, yet she did not complain. In fact, when she availed of said
loans, an advance interest of 6% to 7% was already deducted from the loan amount, yet she never uttered
a word of protest.
After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per month
and paying for the same, Jocelyn cannot now go to court to have the said interest rate annulled on the
ground that it is excessive, iniquitous, unconscionable, exorbitant, and absolutely revolting to the
conscience of man. This is so because among the maxims of equity are (1) he who seeks equity
must do equity, and (2) he who comes into equity must come with clean hands. The latter is a
frequently stated maxim which is also expressed in the principle that he who has done inequity shall not
have equity. It signifies that a litigant may be denied relief by a court of equity on the ground that his
conduct has been inequitable, unfair and dishonest, or fraudulent, or deceitful as to the controversy in
ISSUE: Is the contractual relation between a commercial bank and another party in a contract of rent of a
safety deposit box with respect to its contents placed by the latter one of bailor and bailee or one of lessor
In Tolentino vs. Gonzales, the Court held that the owner of the property loses his control over the property
leased during the period of the contract and Article 1975 of the Civil Code which provides:

Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall
be bound to collect the latter when it becomes due, and to take such steps as may be necessary in order
that the securities may preserve their value and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes.
Prevailing rule in the United States:
Where a safe-deposit company leases a safe-deposit box or safe and the lessee takes possession of
the box or safe and places therein his securities or other valuables, the relation of bailee and
bailor is created between the parties to the transaction as to such securities or other valuables;
the fact that the safe-deposit company does not know, and that it is not expected that it shall know,
the character or description of the property which is deposited in such safe-deposit box or safe does
not change that relation. That access to the contents of the safe-deposit box can be had only by the
use of a key retained by the lessee (whether it is the sole key or one to be used in connection with
one retained by the lessor) does not operate to alter the foregoing rule. The argument that there is
not, in such a case, a delivery of exclusive possession and control to the deposit company, and that
therefore the situation is entirely different from that of ordinary bailment, has been generally
rejected by the courts, usually on the ground that as possession must be either in the depositor or
in the company, it should reasonably be considered as in the latter rather than in the former, since
the company is, by the nature of the contract, given absolute control of access to the property, and
the depositor cannot gain access thereto without the consent and active participation of the
We agree with the petitioner's contention that the contract for the rent of the safety deposit box is
NOT an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not
fully subscribe to its view that the same is a contract of deposit that is to be strictly governed by the
provisions in the Civil Code on deposit. The contract in the case at bar is a special kind of deposit.
Not lease: It cannot be characterized as an ordinary contract of lease under Article 1643 because
the full and absolute possession and control of the safety deposit box was not given to the joint
renters the petitioner and the Pugaos. The guard key of the box remained with the respondent
Bank; without this key, neither of the renters could open the box. On the other hand, the
respondent Bank could not likewise open the box without the renter's key. In this case, the said key
had a duplicate which was made so that both renters could have access to the box.
Not deposit under 1975: the first paragraph of such provision cannot apply to a depositary of
certificates, bonds, securities or instruments which earn interest if such documents are kept in a
rented safety deposit box. It is clear that the depositary cannot open the box without the renter
being present.
Prevailing view: Bailment
The prevailing rule is that the relation between a bank renting out safe-deposit boxes and its customer with
respect to the contents of the box is that of a bailor and bailee, the bailment being for hire and mutual
benefit. In our jurisdiction, the prevailing rule in the US has been adopted. Section 72 of the General
Banking Act pertinently provides:
Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking
institutions other than building and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for
the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c) of this section
as depositories or as agents. . . .
Note that the primary function is still found within the parameters of a contract of deposit, i.e., the
receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the
safety deposit boxes is not independent from, but related to or in conjunction with, this principal function.
A contract of deposit may be entered into orally or in writing. The depositary's responsibility for the
safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code.
Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud,
negligence, delay or contravention of the tenor of the agreement. In the absence of any stipulation
prescribing the degree of diligence required, that of a good father of a family is to be observed. Hence,

any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on
account of fraud, negligence or delay would be void for being contrary to law and public policy.
It is not correct to assert that the Bank has neither the possession nor control of the contents of the box
since in fact, the safety deposit box itself is located in its premises and is under its absolute control;
moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open
their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to
the extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has
been said:
With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the
parties, since the relation is a contractual one, may by special contract define their respective duties or
provide for increasing or limiting the liability of the deposit company, provided such contract is not in
violation of law or public policy. It must clearly appear that there actually was such a special contract,
however, in order to vary the ordinary obligations implied by law from the relationship of the parties;
liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The
company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its
own fraud or negligence or that of its agents or servants, and if a provision of the contract may be
construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that
the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its own
negligence, the view has been taken that such a lessor may limits its liability to some extent by agreement
or stipulation.
Thus, we reach the same conclusion which the CA arrived at, that is, that the petition should be dismissed,
but on grounds quite different from those relied upon by the CA. In the instant case, the respondent Bank's
exoneration cannot, contrary to the holding of the CA, be based on or proceed from a characterization of
the impugned contract as a contract of lease, but rather on the fact that no competent proof was
presented to show that respondent Bank was aware of the agreement between the petitioner and the
Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon
both parties' joint signatures, and that no evidence was submitted to reveal that the loss of the certificates
of title was due to the fraud or negligence of the respondent Bank. This in turn flows from this Court's
determination that the contract involved was one of deposit. Since both the petitioner and the Pugaos
agreed that each should have one (1) renter's key, it was obvious that either of them could ask the Bank
for access to the safety deposit box and, with the use of such key and the Bank's own guard key, could
open the said box, without the other renter being present.
----------------------------------------------------Case #3: BPI vs. IAC
Rizaldy T. Zshornack and his wife maintained in COMTRUST a dollar savings account and a peso current
account. An application for a dollar drat was accomplished by Virgillo Garcia branch manager of
COMTRUST payable to a certain Leovigilda Dizon. In the PPLICtion, Garcia indicated that the amount was to
be charged to the dolar savings account of the Zshornacks. There wasa no indication of the name of the
purchaser of the dollar draft. Comtrust issued a check payable to the order of Dizon. When Zshornack
noticed the withdrawal from his account, he demanded an explainaiton from the bank. In its answer,
Comtrust claimed that the peso value of the withdrawal was given to Atty. Ernesto Zshornack, brother of
Rizaldy. When he encashed with COMTRUST a cashiers check for P8450 issued by the manila banking
corporation payable to Ernesto.
Issue: Whether the contract between petitioner and respondent bank is a deposit?
Held: The document which embodies the contract states that the US$3,000.00 was received by the bank
for safekeeping. The subsequent acts of the parties also show that the intent of the parties was really for
the bank to safely keep the dollars and to return it to Zshornack at a later time. Thus, Zshornack
demanded the return of the money on May 10, 1976, or over five months later.
The above arrangement is that contract defined under Article 1962, New Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with
the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not
the principal purpose of the contract, there is no deposit but some other contract.

-----------------------------------------------------Case #8: Durban Apartments vs. Pioneer Insurance

The Supreme Court passed upon the liability of hotels for providing valet parking to guests.
This arose after a hotel guest, and Pioneers insured, checked into the City Garden hotel in Makati. The
hotels parking attendant and co-defendant got the keys to the guests vehicle and parked it an adjacent
lot owned by a third party. The guest was subsequently awakened so as to be advised that his car had
been taken. The guest made the necessary reports and thereafter filed a claim for insurance with Pioneer
which paid the same as indemnity for the vehicles loss. Pioneer alleged that the loss was an offshoot of
the hotels negligence and accordingly filed a claim by means of subrogation, against the hotel and its
parking valet. It was established that there was a previous similar incident and yet no no necessary
precautions were taken to prevent its repetition xxx. Pioneer argued that the hotel was was wanting in
due diligence in the selection and supervision of its employees particularly its parking valet.
On a procedural note, Pioneer was allowed to present evidence ex parte in view of the hotels failure to file
a pre-trial brief and to appear at pre-trial.
The Hotel argued that the insured was not a guest of the hotel but a visitor therein, that its valet did not
get his keys but it was the insured who requested him to find a space wherever one was available, that
valet parking was provided for convenience of its customers and that it was a special privilege that was
given to the insured. The vehicle was taken without using the key which was even turned over to the
owner. Its valet even tried to run after the carnappers to no avail.
The guest testified that he drove his vehicle in front of the hotel where the parking attendant approached
and asked him for his key, and issued a valet parking customers claim stub. He then checked in at the
hotel with a companion. At around 1 a.m., he was advised of the carnapping incident. An adjuster
testified that based on his investigation, the hotel would assist guests in parking, and with only 12 parking
slots, entered into an agreement with an adjacent bank to use the latters space at night. He discovered
that a van had been carnapped from the same lot barely a month before.
The lower court ruled in favor of Pioneer and ordered Durban to pay the sum of P1,163,250.00 with legal
interest thereon from July 22, 2003 until the obligation is fully paid and attorneys fees and litigation
expenses amounting to P120,000.00. This was affirmed by the Court of Appeals.
The High Court upheld the ruling that the hotel was in default for failure to appear at the pre-trial
conference and to file a pre-trial brief, and thus, correctly allowed respondent to present evidence exparte. It also affirmed the finding that it was liable for the loss of the vehicle. The procedural aspect will
not be dealt with in detail here.
Despite the finding of default, the Supreme Court emphasized that defendants (petitioners) preclusion
from presenting evidence during trial does not automatically result in a judgment in favor of plaintiff
(respondent). The plaintiff must still substantiate the allegations in its complaint.
It found that the allegations of Pioneer in the complaint were substantiated, i.e., a contract of necessary
deposit existed between the insured xxx and petitioner. On this score, we find no error in the following
disquisition of the appellate court:
[The] records also reveal that upon arrival at the City Garden Hotel, See gave notice to the doorman and
parking attendant of the said hotel, x x x Justimbaste, about his Vitara when he entrusted its ignition key to
the latter. x x x Justimbaste issued a valet parking customer claim stub to See, parked the Vitara at the
Equitable PCI Bank parking area, and placed the ignition key inside a safety key box while See proceeded
to the hotel lobby to check in. The Equitable PCI Bank parking area became an annex of City Garden Hotel
when the management of the said bank allowed the parking of the vehicles of hotel guests thereat in the
evening after banking hours.
Interesting is the finding that the banks parking area was deemed an annex to the hotel. A hotels use
of an adjacent lot appears to subject the same to its control.
The Court cited Article 1962, in relation to Article 1998, of the Civil Code:

Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with
the obligation of safely keeping it and returning the same. If the safekeeping of the thing delivered is not
the principal purpose of the contract, there is no deposit but some other contract.
Art. 1998. The deposit of effects made by travelers in hotels or inns shall also be regarded as necessary.
The keepers of hotels or inns shall be responsible for them as depositaries, provided that notice was given
to them, or to their employees, of the effects brought by the guests and that, on the part of the latter, they
take the precautions which said hotel-keepers or their substitutes advised relative to the care and vigilance
of their effects.
The insured deposited the vehicle for safekeeping with the hotel, through its employee. This employee
issued a claim stub to the insured. The contract of deposit was perfected from the delivery of the vehicle,
when the keys were handed over to the hotels employee, and which he received with the obligation of
safely keeping and returning it.
This could conceivably be used as basis for users of mall and other public parking lots to claim indemnity
for loss or damage to their vehicles. It would be interesting to see if the practice of placing disclaimers of
liability in the parking stub, as well as in signages, would be upheld by the courts as binding on the users.
It does stand to reason that when you are made to park and pay, parking lot providers owe a degree of
care to insure your vehicle is kept safe and sound. And if they fail to adhere to this standard, then they
should be sorry they didnt, as in this case.
Warehouse cases:
Case #3: Limjoco vs. Director of Commerce
From the stipulation of facts as well as from the testimony of appellant the trial Court further found that
there were occasions when her customers brought more palay than could be milled in one day, whereupon
they would leave the same in the custody of appellant, piled inside the "camalig" to await its turn to be
milled; that sometimes the palay thus left in her possession amounted to as much as 100 cavans, and at
other times as little as 10 cavans; that no charge was made by appellant for thus keeping the palay, the
arrangement being, in accordance with the customs of the place, a favor done to the customers; and that,
on the other hand, appellant was also benefited by such arrangement, for unless she acceded thereto the
customers might take their palay for milling to her competitors.
Section 2 of the law in question provides:
As used in this Act, the term "Warehouse" shall be deemed to mean every building, structure, or
other protected inclosure in which rice is kept for storage. The term "rice" shall be deemed to mean
either palay, in bundles, or in grains, or clean rice, or both. "Person" includes a corporation or
partnership or two or more persons having a joint or common interest; "warehouseman" means a
person engaged in the business of receiving rice for storage; and "receipt" means any receipt
issued by a warehouseman for rice delivered to him. For the purpose of this Act, the business of
receiving rice for storage shall include (1) any contract or transaction wherein the warehouseman is
obligated to return the very same rice delivered to him or pay its value; (2) any contract or
transaction wherein the rice delivered is to be milled for and on account of the owner thereof; (3)
any contract or transaction wherein the rice delivered is commingled with rice delivered by or
belonging to other persons, and the warehouseman is obligated to return rice of the same kind or
pay its value.
Section 2, however, is too clear to permit of any exercise in construction or semantics. It does not stop at
the bare use of the word "storage," but expressly provides that any contract or transaction wherein the
palay delivered is to be milled for and on account of the owner shall be deemed included in the business of
receiving rice for storage for the purpose of the Act. In other words, it is enough that the palay is delivered,
even if only to have it milled. Delivery connotes transfer of physical possession or custody; and it may
indeed be seriously doubted if the concept of "storage" under the law would cover a situation where one
merely utilizes the services of the mill but keeps the palay under his physical control all steps of the way.
But in this case it is a fact that palay is delivered to appellant and sometimes piled inside her "camalig" in

appreciable quantities, to wait for its turn in the milling process. This is precisely the situation covered by
the statute.

Topic 4: Trust Receipts and Letters of Credit

Letters of Credit : General Concepts, Code of Commerce, Art. 567, Art. 568, Art. 2

Nature and use of letters of credit (credits)

The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual,
because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an
enforceable right.
Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter
regardless of problems subsequently arising in the underlying contract. Since the banks customer cannot
draw on the letter, it does not function as an assignment by the customer to the beneficiary.
Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability
following a default.
Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is
generally conditional, yet the draft presented under it is often negotiable.

In commercial transactions, a letter of credit is a financial device developed by merchants as a

convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have
control of the goods before paying.
The use of credits in commercial transactions serves to reduce the risk of nonpayment of the purchase price
under the contract for the sale of goods.
However, credits are also used in non-sale settings where they serve to reduce the risk of nonperformance.
Generally, credits in the non-sale settings have come to be known as standby credits.
Commercial credits
Standby credits
involve the payment of money under a
contract of sale
become payable upon the presentation by the credit is payable upon certification of a
the seller-beneficiary of documents that party's nonperformance of the agreement.
show he has taken affirmative steps to
comply with the sales agreement.
beneficiary's draft tend to show that the
applicant has not performed.
The beneficiary of a commercial credit must The beneficiary of the standby credit must
demonstrate by documents that he has certify that his obligor has not performed the
performed his contract.
A letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay
money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the
addressee. A letter of credit, however, changes its nature as different transactions occur and if carried
through to completion ends up as a binding contract between the issuing and honoring banks without any
regard or relation to the underlying contract or disputes between the parties thereto.

Independence principle
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft
and the required documents are presented to it. The so-called independence principle assures the
seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes
the issuing bank from determining whether the main contract is actually accomplished or not.

Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions
stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for
the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or
standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever.

The independent nature of the letter of credit may be:

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

Issue: Can the beneficiary invoke the independence principle? YES.

In a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there is a
definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are
presented and the conditions of the credit are complied with. Precisely, the independence principle
liberates the issuing bank from the duty of ascertaining compliance by the parties in the main contract.
As the principles nomenclature clearly suggests, the obligation under the letter of credit is independent of
the related and originating contract. In brief, the letter of credit is separate and distinct from the
underlying transaction.
Held: Given the nature of letters of credit, petitioners argumentthat it is only the issuing bank that may
invoke the independence principle on letters of creditdoes not impress this Court. To say that the
independence principle may only be invoked by the issuing banks would render nugatory the purpose for
which the letters of credit are used in commercial transactions. As it is, the independence doctrine works
to the benefit of both the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the
benefit of the issuing bank but mainly for the benefit of the parties to the original transactions.
With the letter of credit from the issuing bank, the party who applied for and obtained it may confidently
present the letter of credit to the beneficiary as a security to convince the beneficiary to enter into the
business transaction.
The other party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured
of being empowered to call on the letter of credit as a security in case the commercial transaction does not
push through, or the applicant fails to perform his part of the transaction. It is for this reason that the
party who is entitled to the proceeds of the letter of credit is appropriately called beneficiary.
Respondent banks had squarely raised the independence principle to justify their releases of the amounts
due under the Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules
that the respondent banks were left with little or no alternative but to honor the credit and both of them in
fact submitted that it was ministerial for them to honor the call for payment.
Fraud exception principle
Citing Dolans treatise on letters of credit, petitioner argues that the independence principle is not without
limits and it is important to fashion those limits in light of the principles purpose, which is to serve the
commercial function of the credit.
Issue: Would injunction then be the proper remedy to restrain the alleged wrongful draws on the
Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that
the untruthfulness of a certificate accompanying a demand for payment under a standby credit may
qualify as fraud sufficient to support an injunction against payment. The remedy for fraudulent abuse is an
injunction. However, injunction should not be granted unless:
there is clear proof of fraud;
the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only
fraud under the main agreement; and


irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously
Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that
there exists a right to be protected and that the acts against which the writ is to be directed are violative
of the said right. It must be shown that the invasion of the right sought to be protected is material and
substantial, that the right of complainant is clear and unmistakable and that there is an urgent and
paramount necessity for the writ to prevent serious damage.
Case #2: FEATI BANK vs. CA
In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to
the beneficiary the existence of the letter of credit. A negotiating bank, on the other hand, is a
correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent
upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after
negotiation, a contractual relationship will then prevail between the negotiating bank and the seller. In the
case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability
is a primary one as if the correspondent bank itself had issued the letter of credit.
Facts: Bernardo Villaluz entered into a contract of sale with Axel Christiansen in which Villaluz agreed to
deliver to Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. On the
arrangements made and upon the instructions of consignee, Hanmi Trade Development, Ltd., the Security
Pacific National Bank of Los Angeles, California issued an irrevocable letter of credit available at sight in
favor of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust Company with the instruction to the latter that
it forward the enclosed letter of credit to the beneficiary. The letter of credit also provided that the draft
to be drawn is on Security Pacific National Bank and that it be accompanied by certain documents. The
logs were thereafter loaded on a vessel but Christiansen refused to issue the certification required in
paragraph 4 of the letter of credit, despite repeated requests by the private respondent. The logs however
were still shipped and received by consignee, to whom Christiansen sold the logs. Because of the absence
of the certification by Christiansen, the Feati Bank and Trust company refused to advance the payment on
the letter of credit until such credit lapsed. Since the demands by Villaluz for Christiansen to execute the
certification proved futile, he filed an action for mandamus and specific performance against Christiansen
and Feati Bank and Trust Company before the Court of First Instance of Rizal. Christiansen however left the
Philippines and Villaluz filed an amended complaint making Feati Bank and Trust Company.
Issue: Whether or not Feati Bank is liable for Releasing the funds to Christiansen
Held: In commercial transactions involving letters of credit, the functions assumed by a correspondent
bank are classified according to the obligations taken up by it. The correspondent bank may be called a
notifying bank, a negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to
the beneficiary the existence of the letter of credit.
A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the
letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no
liability with respect to the seller but after negotiation, a contractual relationship will then prevail between
the negotiating bank and the seller.
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its
liability is a primary one as if the correspondent bank itself had issued the letter of credit.
In this case, the letter merely provided that the petitioner forward the enclosed original credit to the
beneficiary. (Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing
bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not
a confirming bank as ruled by the courts below.
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is
only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows

therefore that when the petitioner refused to negotiate with the private respondent, the latter has no
cause of action against the petitioner for the enforcement of his rights under the letter.
Since the Feati was only a notifying bank, its responsibility was solely to notify and/or transmit the
documentary of credit to the private respondent and its obligation ends there.
At the most, when the petitioner extended the loan to the private respondent, it assumed the character of
a negotiating bank. Even then, the petitioner will still not be liable, for a negotiating bank before
negotiation has no contractual relationship with the seller. Whether therefore the petitioner is a notifying
bank or a negotiating bank, it cannot be held liable. Absent any definitive proof that it has confirmed the
letter of credit or has actually negotiated with Feati, the refusal by the petitioner to accept the tender of
the private respondent is justified.
---------------------------------------Trust Receipt Cases
Case #1: Colinares vs. CA
Trust receipt transaction - any transaction by and between a person referred to as the entruster, and
another person referred to as the entrustee, whereby the entruster who owns or holds absolute title or
security interest over certain specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latters execution and delivery to the entruster of a signed document
called a trust receipt wherein the entrustee binds himself to hold the designated goods, documents or
instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt.
2 possible situations in a trust receipt transaction.
Money received under the obligation involving the duty to deliver it (entregarla) to the owner of the
merchandise sold.
Merchandise received under the obligation to return it (devolvera) to the owner.

Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the trust receipt to
the entruster or to return said goods if they were not disposed of in accordance with the terms of the trust
receipt shall be punishable as estafa under Article 315 (1) of the RPC, without need of proving intent to
Case #2: Anthony Ng vs. People
Ng vs People
Anthony Ng was engaged in the business of building and fabricating telecommunication towers under the
trade name Capitol Blacksmith and Builders. Petitioner applied for a credit line of Php 3,000,000 with
Asiatrust. In support of Asiatrusts credit investigation, petitioner voluntarily submitted the following
(1) the contracts he had with Islacom, Smart, and Infocom;
(2) the list of projects wherein he was commissioned by the said telecommunication companies to
build several steel towers; and,
(3) the collectible amounts he has with the said companies. Asiatrust approved petitioners
Petitioner was thenrequired to sign several documents, among which are the Credit Line
Agreement, Application and Agreement for Irrevocable L/C, Trust Receipt Agreements,[4] and Promissory

Notes. Though the Promissory Notes had maturity dates, the two Trust Receipt Agreements did not bear
any maturity dates. After petitioner received the goods, consisting of chemicals and metal plates from his
suppliers, he utilized them to fabricate the communication towers ordered from him by his clients.
As petitioner realized difficulty in collecting from his client Islacom, he failed to pay his loan to
Asiatrust. Asiatrusts representative appraiser reported that approximately 97% of the subject goods of the
Trust Receipts were sold-out and that only 3 % of the goods remained. Efforts toward a settlement failed to
be reached. Asiatrust Account Officer filed a Complaint-Affidavit for Estafa, as defined and penalized under
Art. 315,par. 1(b) of the RPC in relation to Sec.3, PD 115 or the Trust Receipts Law.
Whether the petitioner is liable for Estafa under Art. 315, par. 1(b) of the RPC in relation to PD 115.
A trust receipt transaction is one where the entrustee has the obligation to deliver to the entruster the
price of the sale, or if the merchandise is not sold, to return the merchandise to the entruster. There are,
therefore, two obligations in a trust receipt transaction: the first refers to money received under the
obligation involving the duty to turn it over (entregarla) to the owner of the merchandise sold, while the
second refers to the merchandise received under the obligation to return it (devolvera) to the owner. A
violation of any of these undertakings constitutes Estafa defined under Art. 315, par. 1(b) of the RPC, as
provided in Sec. 13 of PD 115, viz: Section 13.
Penalty Clause.
The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust
receipt or to return said goods, documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the
provisions of Article Three hundred fifteen, paragraph one (b) of Act Numbered Three thousand eight
hundred and fifteen, as amended, otherwise known as the Revised Penal Code. A trust receipt is
considered a security transaction intended to aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be
able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased.
The principle is of course not limited in its application to financing importations, since the principle is
equally applicable to domestic transactions. Regardless of whether the transaction is foreign or domestic,
it is important to note that the transactions discussed in relation to trust receipts mainly involved sales.
The release of such goods to the entrustee is conditioned upon his execution and delivery to the entruster
of a trust receipt wherein the former binds himself to hold the specific goods in trust for the entruster and
to sell or otherwise dispose of the goods with the obligation to turn over to the entruster the proceeds to
the extent of the amount owing to the entruster or the goods themselves if they are unsold. Considering
that the goods in this case were never intended for sale but for use in the fabrication of steel
communication towers, the trial court erred in ruling that the agreement is a trust receipt transaction.
Petitioner is correct that there was no misappropriation or conversion on his part, because his liability for
the amount of the goods subject of the trust receipts arises and becomes due only upon receipt of the
proceeds of the sale and not prior to the receipt of the full price of the goods. PD 115 provides that an
entrustee is only liable for Estafa when he fails to turn over the proceeds of the sale of the goods covered
by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt in
accordance with the terms of the trust receipt.

Case #4: People vs. Nitafan

Facts: Allied Banking Corporation filed an information for estafa against Betty Sia Ang, proprietess of Eckart
Enterprises. The comlaint alleged that Ang received from the bank Goardon plastics amounting to
P398,000 specified in a trust receipt and covered by a Domestic Letter of Credit. Ang had the obligation to
sell the goods and to account for the proceeds, if sold, or to return the goods, if not sold, on or before 16
October 1980, or upon demand. Despite repeated demands, Ang paid only P283,115. It was alleged that
she misappropriated, misapplied and converted the balance to her own personal use and benefit. Ang filed
a motion to quash the information, alleging that violation of the trust receipt constitutes only a civil
liability. Judge Nitafan granted the Motion to quash. Ang also questioned the constitutionality of PD 115,
contending that it violates the constitutional prohibition for imprisonment for debt .
Issue: Whether or not PD 115 is constitutional.
Held: The Trust Receipts Law punishes the dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of another, regardless of whether or not the latter is the owner. The law does not
seek to enforce payment of the loan. There is thus no violation of the Constitutional right imprisonment for
non-payment of debts.
Section 1(b) of Article 315 states that one of the means by which to commit estafa is by misappropriating
or converting, to the prejudice of another, money, goods received by the offender in trust or under any
other obligation involving the duty to make delivery of or to return the same. It is the failure of Ang to
account for the balance that makes her liable for estafa.
Trust receipt arrangements do not involve a simple loan transaction. Apart from a loan feature, the trust
receipt arrangement has a security feature covered by the trust receipt itself. The second feature provides
needed financial assistance to traders in the importation or purchase of goods through the use of the
goods as collateral for the advancements made by the bank. The title of the bank to the security is the one
sought to be protected and not the loan which is a separate and distinct agreement. Like BP 22, PD 115
punishes the act as an offense against public order, not against property. The offense is punished as
a mala prohibitum regardless of the existence of intent or malice. A mere failure to deliver the proceeds of
the sale or the goods constitute a criminal offense that causes prejudice to another and, more importantly,
to the public interest.

Case #7: DBP vs. Prudential Life

Facts: Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter of credit with respondent
Prudential Bank for US$498,000. This was in connection with its importation of 5,000 spindles for spinning
machinery with drawing frame, simplex fly frame, ring spinning frame and various accessories, spare parts
and tool gauge. These were released to Litex under covering trust receipts it executed in favor of
Prudential Bank. Litex installed and used the items in its textile mill located in Montalban, Rizal. 9 years
later, DBP granted a foreign currency loan in the amount of US$4,807,551 to Litex. To secure the loan,
Litex executed real estate and chattel mortgages on its plant site in Montalban, Rizal, including the
buildings and other improvements, machineries and equipments there. Among the machineries and
equipments mortgaged in favor of DBP were the articles covered by the trust receipts.
Sometime in
June 1982, Prudential Bank learned about DBPs plan for the overall rehabilitation of Litex. In a July 14,
1982 letter, Prudential Bank notified DBP of its claim over the various items covered by the trust receipts
which had been installed and used by Litex in the textile mill. Prudential Bank informed DBP that it was the
absolute and juridical owner of the said items and they were thus not part of the mortgaged assets that
could be legally ceded to DBP. For the failure of Litex to pay its obligation, DBP extra-judicially foreclosed
on the real estate and chattel mortgages, including the articles claimed by Prudential Bank. During the
foreclosure sale held on April 19, 1983, DBP acquired the foreclosed properties as the highest bidder.
Learning of the intended public auction, Prudential Bank wrote a letter dated September 6, 1984 to DBP

reasserting its claim over the items covered by trust receipts in its name and advising DBP not to include
them in the auction. It also demanded the turn-over of the articles or alternatively, the payment of their
Issue: Whether or not the chattel mortgage covers the goods under the trust receipt
Held: No. Article 2085 (2) of the Civil Code requires that, in a contract of pledge or mortgage, it is essential
that the pledgor or mortgagor should be the absolute owner of the things pledged or mortgaged. Article
2085 (3) further mandates that the person constituting the pledge or mortgage must have the free
disposal of his property, and in the absence thereof, that he be legally authorized for the purpose. Litex
had neither absolute ownership, free disposal nor the authority to freely dispose of the articles. Litex could
not have subjected them to a chattel mortgage. Their inclusion in the mortgage was void and had no legal
effect. There being no valid mortgage, there could also be no valid foreclosure or valid auction sale. Thus,
DBP could not be considered either as a mortgagee or as a purchaser in good faith.
No one can transfer a right to another greater than what he himself has. Nemo dat quod non habet. Hence,
Litex could not transfer a right that it did not have over the disputed items. Corollarily, DBP could not
acquire a right greater than what its predecessor-in-interest had. The spring cannot rise higher than its
source. DBP merely stepped into the shoes of Litex as trustee of the imported articles with an obligation to
pay their value or to return them on Prudential Banks demand. By its failure to pay or return them despite
Prudential Banks repeated demands and by selling them to Lyon without Prudential Banks knowledge and
conformity, DBP became a trustee ex maleficio. As a consequence of the release of the goods and the
execution of the trust receipt, a two-fold obligation is imposed on the entrustee, namely: (1) to hold the
designated goods, documents or instruments in trust for the purpose of selling or otherwise disposing of
them and (2) to turn over to the entruster either the proceeds thereof to the extent of the amount owing to
the entruster or as appears in the trust receipt, or the goods, documents or instruments themselves if they
are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt. In the case of goods, they may also be released for other purposes substantially equivalent to (a)
their sale or the procurement of their sale; or (b) their manufacture or processing with the purpose of
ultimate sale, in which case the entruster retains his title over the said goods whether in their original or
processed form until the entrustee has complied fully with his obligation under the trust receipt; or (c) the
loading, unloading, shipment or transshipment or otherwise dealing with them in a manner preliminary or
necessary to their sale. Thus, in a trust receipt transaction, the release of the goods to the entrustee, on
his execution of a trust receipt, is essentially for the purpose of their sale or is necessarily connected with
their ultimate or subsequent sale.

------------------------------------------------------------------------------------------------------------------------------------------------------Topic 5: Guaranty and Suretyship

1.Southern Motors v. Barbosa

The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to demand exhaustion of
the property of the principal debtor, exists only when a pledge or a mortgage has not been given as
special security for the payment of the principal obligation.
In this case, defendants invocation of art. 2058 is misplaced because the righty of the guarantors to
demand exhaustion of the property of the principal debtor under said provision exists only when a pledge

or mortgage has not been given as special security for the payment of the principal obligation. Law on
mortgage and pledge shall govern.
It has been held already, that a mortgagor is not entitled to the exhaustion of the property of the principal
Although an ordinary personal guarantor not a mortgagor or pledgor may demand the
aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor,
who shall be entitled, however, to a deferment of the execution of said judgment against him until after
the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the

2. Dio v. CA
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not
known at the time the guaranty is executed. This is the basis for contracts denominated as continuing
guaranty or suretyship. A continuing guaranty is one which is not limited to a single transaction, but which
contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time
or until revoked. It is prospective in its operation and is generally intended to provide security with respect
to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they
accrue, the guarantor becomes liable.
A continuing guaranty is one which covers all transactions, including those arising in the future, which are
within the description or contemplation of the contract, of guaranty, until the expiration or termination
thereof. 10 A guaranty shall be construed as continuing when by the terms thereof it is evident that the
object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or
until a certain period, especially if the right to recall the guaranty is expressly reserved. Hence, where the
contract of guaranty states that the same is to secure advances to be made "from time to time" the
guaranty will be construed to be a continuing one.

3. Security Bank v. Cuenca

Surety: Obligations Secured, Art. 2053
Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every
doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require the creditor to
obtain the consent of the surety to any material alteration in the principal loan agreement, or at least to
notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtained in excess
of the amount or beyond the period stipulated in the original agreement, absent any clear stipulation
showing that the latter waived his right to be notified thereof, or to give consent thereto. This is especially
true where, as in this case, respondent was no longer the principal officer or major stockholder of the
corporate debtor at the time the later obligations were incurred. He was thus no longer in a position to
compel the debtor to pay the creditor and had no more reason to bind himself anew to the subsequent
That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the scope of
the principal obligation.

4. Palmares v. CA
Surety distinguished from Guaranty, Art. 2047
Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable
with the principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the
former deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the
solvency of the debtor? SURETY.
The Civil Code pertinently provides:

Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation
of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of
this Book shall be observed. In such case the contract is called a suretyship.
In the case at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable with the
principal maker of the note. The terms of the contract are clear, explicit and unequivocal that petitioner's
liability is that of a surety. Her pretension that the terms "jointly and severally or solidarily liable" contained
in the second paragraph of her contract are technical and legal terms which could not be easily understood
by an ordinary layman like her is diametrically opposed to her manifestation in the contract that she "fully
understood the contents" of the promissory note and that she is "fully aware" of her solidary liability with
the principal maker.
N.B.: distinguish surety from guaranty
Surety distinguished from Joint and Solidary Obligations, Art. 2047, Art. 2066, Art. 2067, Art. 1217
The Undertaking does not contain any express stipulation that the petitioners agreed to bind themselves
jointly and severally in their obligations to the Ortigas group, or any such terms to that effect. Hence,
such obligation established in the Undertaking is presumed only to be joint.
As provided in Article 2047 in a surety agreement the surety undertakes to be bound solidarily with the
principal debtor. Thus, a surety agreement is an ancillary contract as it presupposes the existence of a
principal contract. It appears that Ortigass argument rests solely on the solidary nature of the obligation of
the surety under Article 2047.
A suretyship requires a principal debtor to whom the surety is solidarily bound by way of an ancillary
obligation of segregate identity from the obligation between the principal debtor and the creditor. The
suretyship does bind the surety to the creditor, inasmuch as the latter is vested with the right to proceed
against the former to collect the credit in lieu of proceeding against the principal debtor for the same
obligation. At the same time, there is also a legal tie created between the surety and the principal debtor
to which the creditor is not privy or party to. The moment the surety fully answers to the creditor for the
obligation created by the principal debtor, such obligation is extinguished. At the same time, the surety
may seek reimbursement from the principal debtor for the amount paid, for the surety does in fact
become subrogated to all the rights and remedies of the creditor.
Note that Article 2047 itself specifically calls for the application of the provisions on joint and solidary
obligations to suretyship contracts. Article 1217 of the Civil Code thus comes into play, recognizing the
right of reimbursement from a co-debtor (the principal debtor, in case of suretyship) in favor of the one
who paid (i.e., the surety).
Note: A guarantor who binds himself in solidum with the principal debtor under the provisions of the
second paragraph does not become a solidary co-debtor to all intents and purposes.
N.B: Distinguish surety from solidary co-debtor
Topic #6: Pledge
Pactum Commissorium, Art. 2087, Art. 2088: Effects on Pledge or Mortgage
Par.12. After the Notice of Rescission, defendant DBP took possession of the Leasehold Rights of the
fishpond in question
Elements of pactum commissorium:
there should be a property mortgaged by way of security for the payment of the principal
obligation, and

there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in
case of non-payment of the principal obligation within the stipulated period.
Condition no. 12 did not provide that the ownership over the leasehold rights would automatically pass to
DBP upon CUBAs failure to pay the loan on time. It merely provided for the appointment of DBP as
attorney-in-fact with authority, among other things, to sell or otherwise dispose of the said real rights, in
case of default by CUBA, and to apply the proceeds to the payment of the loan. DBP, however, exceeded
the authority vested by condition no. 12 of the deed of assignment. It had without foreclosure
proceedings, whether judicial or extrajudicial, appropriated the leasehold rights of Cuba over the fishpond
in question. At any rate, DBPs act of appropriating CUBAs leasehold rights was violative of Article 2088
of the Civil Code, which forbids a creditor from appropriating, or disposing of, the thing given as security
for the payment of a debt. Instead of taking ownership of the questioned real rights upon default by CUBA,
DBP should have foreclosed the mortgage, as has been stipulated in condition no. 22 of the deed of
assignment. But, as admitted by DBP, there was no such foreclosure.
Article 2088 of the Civil Code which provides as follows:
ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void.

2. Ong v. Roban Lending

Pactum Commissorium, Art. 2087, Art. 2088: Effects on Pledge or Mortgage
The SECOND PARTY hereby signed another promissory note with a promise to pay the FIRST PARTY in full
within one year from the date of the consolidation and restructuring, otherwise the SECOND PARTY agree
to have their DACION IN PAYMENT agreement, which they have executed and signed today in favor of
the FIRST PARTY be enforced
Pactum Commissorium.
In the case at bar, the MOA and the Dacion in Payment contain no provisions for foreclosure proceedings
nor redemption. Under the MOA, the failure by the petitioners to pay their debt within the one-year period
gives respondent the right to enforce the Dacion in Payment transferring to it ownership of the properties
covered by the TCT. Respondent, in effect, automatically acquires ownership of the properties upon
petitioners failure to pay their debt within the stipulated period.
In a true dacion en pago, the assignment of the property extinguishes the monetary debt. In the case at
bar, the alienation of the properties was by way of security, and not by way of satisfying the debt. The
Dacion in Payment did not extinguish petitioners obligation to respondent. On the contrary, under the
MOA executed on the same day as the Dacion in Payment, petitioners had to execute a promissory note
which they were to pay within one year.
That the questioned contracts were freely and voluntarily executed by petitioners and respondent is of no
moment, pactum commissorium being void for being prohibited by law.


Pledge: Ownership of Collateral, Art. 2103, Art. 2102, Art. 2101, Art. 1951, Art. 2108, Art. 2112, Art. 2097

The fact that the deed of assignment was done by way of securing or guaranteeing Tan's obligation in
favor of George Litton, Sr., as observed by the appellate court, will not in any way alter the resolution on
the matter. The validity of the guaranty or pledge in favor of Litton has not been questioned. Our
examination of the deed of assignment shows that it fulfills the requisites of a valid pledge or mortgage.
Note: Private respondent has, from the very beginning, been fully aware of the deed of assignment
executed by Tan in favor of Litton, Sr. Having such knowledge thereof, private respondent is estopped from
entering into a compromise agreement involving the same litigated credit without notice to and consent of

the assignee, petitioner herein. More so, in the light of the fact that no reimbursement has ever been
made in favor of the assignee as required under Article 1634. Private respondent acted in bad faith and in
connivance with assignor Tan so as to defraud the petitioner in entering into the compromise agreement.
Although it is true that Tan may validly alienate the litigatious credit as ruled by the appellate court, citing
Article 1634 of the Civil Code, said provision should not be taken to mean as a grant of an absolute right on
the part of the assignor Tan to indiscriminately dispose of the thing or the right given as security. The Court
rules that the said provision should be read in consonance with Article 2097 of the same code. Although
the pledgee or the assignee, Litton, Sr. did not ipso factobecome the creditor of private respondent
Mendoza, the pledge being valid, the incorporeal right assigned by Tan in favor of the former can only be
alienated by the latter with due notice to and consent of Litton, Sr. or his duly authorized representative. To
allow the assignor to dispose of or alienate the security without notice and consent of the assignee will
render nugatory the very purpose of a pledge or an assignment of credit.
Moreover, under Article 1634, the debtor has a corresponding obligation to reimburse the assignee, Litton,
Sr. for the price he paid or for the value given as consideration for the deed of assignment. Failing in this,
the alienation of the litigated credit made by Tan in favor of private respondent by way of a compromise
agreement does not bind the assignee, petitioner herein.


Right of Redemption
The right of redemption as affirmed under Rule 39 of the Rules of Court applies only to execution sales,
more precisely execution sales of real property.
N.B.: Does the right of redemption exist over personal property? No law or jurisprudence establishes or
affirms such right. Indeed, no such right exists.
The right to redeem property is a bare statutory privilege to be exercised only by the persons named in the
The right of redemption over mortgaged real property sold extrajudicially is established by Act No. 3135,
as amended. The said law does not extend the same benefit to personal property. In fact, there is no law in
our statute books which vests the right of redemption over personal property. Act No. 1508, or the Chattel
Mortgage Law, ostensibly could have served as the vehicle for any legislative intent to bestow a right of
redemption over personal property, since that law governs the extrajudicial sale of mortgaged personal
property, but the statute is definitely silent on the point. And Section 39 of the 1997 Rules of Civil
Procedure, extensively relied upon by the Court of Appeals, starkly utters that the right of redemption
applies to real properties, not personal properties, sold on execution.
Obviously, since there is no right to redeem personal property, the rights of ownership vested unto the
purchaser at the foreclosure sale are not entangled in any suspensive condition that is implicit in a
redemptive period.
On the other hand, under the Civil Code, it is the pledgee, and not the pledgor, who is given the right to
choose which of the items should be sold if two or more things are pledged. No similar option is given to
pledgors under the Civil Code. Moreover, there is nothing in the Civil Code provisions governing the
extrajudicial sale of pledged properties that prohibits the pledgee of several different pledge contracts
from auctioning all of the pledged properties on a single occasion, or from the buyer at the auction sale in
purchasing all the pledged properties with a single purchase price. The relative insignificance of
ascertaining the definite apportionments of the sale price to the individual shares lies in the fact that once
a pledged item is sold at auction, neither the pledgee nor the pledgor can recover whatever deficiency or
excess there may be between the purchase price and the amount of the principal obligation.
A different ruling though would obtain if at the auction, a bidder expressed the desire to bid on a
determinate number or portion of the pledged shares. In such a case, there may lie the need to ascertain
with particularity which of the shares are covered by the bid price, since not all of the shares may be sold
at the auction and correspondingly not all of the pledge contracts extinguished. The same situation also

would lie if one or some of the owners of the pledged shares participated in the auction, bidding only on
their respective pledged shares.
Issue #2: Whether the consignations made by respondents extinguished their respective pledge contracts
in favor of the Parays so as to enjoin the latter from auctioning the pledged shares.
Held: There is no doubt that if the principal obligation is satisfied, the pledges should be terminated as
well. Article 2098 of the Civil Code provides that the right of the creditor to retain possession of the
pledged item exists only until the debt is paid. Article 2105 of the Civil Code further clarifies that the
debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he
has paid the debt and its interest. At the same time, the right of the pledgee to foreclose the pledge is also
established under the Civil Code. When the credit has not been satisfied in due time, the creditor may
proceed with the sale by public auction under the procedure provided under Article 2112 of the Code.
Section 18, Rule 39 provides that the judgment obligor may prevent the sale by paying the amount
required by the execution and the costs that have been incurred therein. However, the provision applies
only to execution sales, and not extra-judicial sales, as evidenced by the use of the phrases sale of
property on execution and judgment obligor.
Case #7: Litonjua vs.L&R Corporation
Issue: May a mortgage contract provide: (a) that the mortgagor cannot sell the mortgaged property
without first obtaining the consent of the mortgagee and that, otherwise, the sale made without the
mortgagees consent shall be invalid; and (b) for a right of first refusal in favor of the mortgagee?
Petitioners defend the validity of the sale between them by arguing that paragraph 8 violates Article 2130
of the New Civil Code which provides that (A) stipulation forbidding the owner from alienating the
immovable mortgaged shall be void.
Earlier, in PNB v. Mallorca,[31] it was reiterated that a real mortgage is merely an encumbrance; it does not
extinguish the title of the debtor, whose right to dispose a principal attribute of ownership is not thereby
lost. Thus, a mortgagor had every right to sell his mortgaged property, which right the mortgagee cannot
Insofar as the validity of the questioned stipulation prohibiting the mortgagor from selling his
mortgaged property without the consent of the mortgagee is concerned, therefore, the ruling in the
Tambunting case is still the controlling law. Indeed, we are fully in accord with the pronouncement therein
that such a stipulation violates Article 2130 of the New Civil Code. Both the lower court and the Court of
Appeals in its Amended Decision rationalize that since paragraph 8 of the subject Deed of Real Estate
Mortgage contains no absolute prohibition against the sale of the property mortgaged but only requires the
mortgagor to obtain the prior written consent of the mortgagee before any such sale, Article 2130 is not
violated thereby. This observation takes a narrow and technical view of the stipulation in question without
taking into consideration the end result of requiring such prior written consent. True, the provision does not
absolutely prohibit the mortgagor from selling his mortgaged property; but what it does not outrightly
prohibit, it nevertheless achieves. For all intents and purposes, the stipulation practically gives the
mortgagee the sole prerogative to prevent any sale of the mortgaged property to a third party. The
mortgagee can simply withhold its consent and thereby, prevent the mortgagor from selling the
property. This creates an unconscionable advantage for the mortgagee and amounts to a virtual prohibition
on the owner to sell his mortgaged property. In other words, stipulations like those covered by paragraph 8
of the subject Deed of Real Estate Mortgage circumvent the law, specifically, Article 2130 of the New Civil
Being contrary to law, paragraph 8 of the subject Deed of Real Estate Mortgage is not binding upon
the parties. Accordingly, the sale made by the spouses Litonjua to PWHAS, notwithstanding the lack of
prior written consent of L & R Corporation, is valid.

On the other hand, the redemption made by PWHAS is valid. The sale by the spouses Litonjua of the
mortgaged properties to PWHAS is valid. Therefore, PWHAS stepped into the shoes of the spouses Litonjua
on account of such sale and was in effect, their successor-in-interest. As such, it had the right to redeem
the property foreclosed by L & R Corporation.
--------------------------------------------Case #10: Development Bank vs. Zaragoza
The issues raised in this appeal are: (a) whether or not the mortgagee is entitled to claim the deficiency in
extrajudicial foreclosure of mortgage; and (b) whether or not additional interests are properly chargeable
on the balance of the indebtedness during the period from notice of sale to actual sale.
A reading of the provisions of Act No. 3135, as amended (re extrajudicial foreclosure) discuss nothing, it is
true, as to the mortgagee's right to recover such deficiency. But neither do we find any provision
thereunder which expressly or impliedly prohibits such recovery.
Article 2131 of the new Civil Code, on the contrary, expressly provides that 'The form, extent and
consequences of a mortgage, both as to its constitution, modification and extinguishment, and as to other
matters not included in this Chapter, shall be governed by the provisions of the Mortgage Law and of the
Land Registration Law. Under the Mortgage Law, which is still in force, the mortgagee has the right to claim
for the deficiency resulting from the price obtained in the sale of the real property at public auction and the
outstanding obligation at the time of the foreclosure proceedings. (See Soriano v. Enriquez, 24 Phil. 584;
Banco de Islas Filipinos V. Concepcion e Hijos, 53 Phil. 86; Banco Nacional v. Barreto, 53 Phil. 101). Under
the Rules of Court (Sec. 6, Rule 70), 'Upon the sale of any real property, under an order for a sale to satisfy
a mortgage or other incumbrance thereon, if there be a balance due to the plaintiff after applying the
Proceeds of the sale, the court, upon motion, should render a judgment against the defendant for any such
balance for which by the record of the case, he may be Personally liable to the plaintiff, ...' It is true that
this refers to a judicial foreclosure, but the underlying principle is the same, that the mortgage is but a
security and not a satisfaction of indebtedness.
xxx xxx xxx
Let it be noted that when the legislature intends to foreclose the right of a creditor to sue for any
deficiency resulting from the foreclosure of the security given to guarantee the obligation, it so expressly
provides. Thus, in respect to pledges, Article 2115 of the new Civil Code expressly states: ... If the Price of
the sale is less (than the amount of the principal obligation) neither shall the creditor be entitled to recover
the deficiency, notwithstanding any stipulation to the contrary.' Likewise, in the event of a foreclosure of a
chattel mortgage on the thing sold in installments he (the vendor) shall have no further action against the
purchaser to recover any unpaid balance Of the price. Any agreement to the contrary shall be void.'
(Article 1484, paragraph 3, Ibid.). It is then clear that in the absence of a similar provision in Act No. 3135,
as amended, it can not be concluded that the creditor loses his right given him under the Mortgage Law
and recognized in the Rules Of Court, to take action for the recovery of any unpaid balance on the Principal
obligation, simply because he has chosen to foreclose his mortgage extra-judically pursuant to a special
Power of attorney given him by the mortgagor in the mortgage contract. As stated by this Court in Medina
v. Philippine National Bank(56 Phil. 651), a case analogous to the one at bar, the step taken by the
mortgagee-bank in resorting to extrajudicial foreclosure under Act 3135, was merely to find a proceeding
for the sale, and its action can not be taken to mean a waiver of its right to demand the payment of the
whole debt. (pp. 1028-1030).
Upon the second issue presented, Certainly, under thefactual circumstances, appellants cannot take
advantage of the delay which was their own making, to the prejudice of the other party. Apart from this
consideration, it must be noted that a foreclosure of mortgage means the termination of all rights of the
mortgagor in the property covered by the mortgage. It denotes the procedure adopted by the mortgagee
to terminate the rights of the mortgagor on the property and includes the sale itself. In judicial

foreclosures, the "foreclosure" is not complete until the Sheriff's Certificate is executed, acknowledged and
recorded. In the absence of a Certificate of Sale, no title passes by the foreclosure proceedings to the
vendee. It is only when the foreclosure proceedings are completed and the mortgaged property sold to the
purchaser that all interests of the mortgagor are cut off from the property. This principle is applicable to
extrajudicial foreclosures. Consequently, in the case at bar, prior to the completion of the foreclosure, the
mortgagor is, therefore, liable for the interest on the mortgage.
-------------------------------------------------------Case #16: Cando vs. Spouses Olazo
Under Article 1142 of the Civil Code, a mortgage action prescribes after ten (10) years. Jurisprudence,
however, has clarified this rule by holding that a mortgage action prescribes after ten (10) years from the
time the right of action accrued,[14] which is obviously not the same as the date of the mortgage contract.
Stated differently, an action to enforce a right arising from a mortgage should be enforced within ten (10)
years from the time the right of action accrues; otherwise, it will be barred by prescription and the
mortgage creditor will lose his rights under the mortgage. [15] The right of action accrues when the
mortgagor defaults in the payment of his obligation to the mortgagee.
--------------------------------------------------------Case #18: Spouses Yap vs. First e-Bank
Thus, we state the rule at present. If the debtor fails (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 against the debtor
and the exercise of one will bar the exercise of the others. He may pursue either of the three but not all or
a combination of them.
First, the creditor may file a collection suit against the debtor. This will open up all the properties of
the 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 collection 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.[20] Lastly, the creditor may opt to sue the debtor for violation of
BP 22 if the checks securing the obligation bounce. Circular 57-97 and Section 1(b), Rule 111 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. No reservation to file such
civil action separately shall be allowed or recognized.
Sadly, in the case at bar, Sad to say, Circular 57-97 (and, it goes without saying, Section 1(b), Rule 111 of
the Rules of Court) was not yet in force when PDCP sued Sammy for violation of BP 22 and when it filed a
petition for extrajudicial foreclosure on the mortgaged property of petitioners on February 8, 1993 and May
3, 1993, respectively. Thus, prior to the effectivity of Circular 57-97, the alternative remedies of foreclosure
of mortgage and collection suit were not barred even if a suit for BP 22 had been filed earlier, unless a
judgment of conviction had already been rendered in the BP 22 case finding the accused debtor criminally
liable and ordering him to pay the amount of the check(s).
------------------------------------------------------Case #26: Spouses Yap vs. Spouses Dy
Issue: To whom payment of the redemption money should be made?
1. purchaser or redemptioner, or
2. for him to the officer who made the sale.
Section 31, Rule 39 of the Rules of Court:
SEC. 31. Effect of redemption by judgment debtor, and a certificate to be delivered and recorded
thereupon. To whom payments on redemption made.If the judgment debtor redeem:
1. he must make the same payments as are required to effect a redemption by a redemptioner,
2. whereupon the effect of the sale is terminated and
3. he is restored to his estate, and,


the person to whom the payment is made must execute and deliver to him a certificate of
redemption acknowledged or approved before a notary public or other officer authorized to take
acknowledgments of conveyances of real property.
Such certificate must be filed and recorded in the office of the registrar of deeds of the province in
which the property is situated, and the registrar of deeds must note the record thereof on the margin
of the record of the certificate of sale.

Litonjua v. L & R Corporation:

This Court declared valid the sale by the mortgagor of mortgaged property to a third person
notwithstanding the lack of written consent by the mortgagee, and likewise recognized the third persons
right to redeem the foreclosed property (for having assumed the obligation to pay the mortgage debt
after buying the mortgaged property), to wit:
Therefore, such third person stepped into the shoes of the mortgagor (seller) on account of such sale and
was in effect, their successor-in-interest. As such, it had the right to redeem the property foreclosed by
the mortgagee

Tambunting, clarifies that

The third persons, by stepping into the mortgagors shoes as assignees, had the obligation to pay the
mortgage debts, otherwise, these debts would and could be enforced against the property subject of the
Stated otherwise, the Hernandezes, by the assignment, obtained the right to remove the burdenson
the property subject thereof by paying the obligations thereby secured; that is to say:
1. they had the right of redemption as regards the first mortgage, to be exercised within the time and
in the manner prescribed by law and the mortgage deed; and
2. as regards the second mortgage, sought to be judicially foreclosed but yet unforeclosed, they had the
so-called equity of redemption.
The requisites for a valid redemption:
a) the redemption must be made within 12 months from the time of the registration of the sale in
the Office of the Register of Deeds;
b) payment of the:
a) purchase price of the property involved,
b) plus 1% interest per month thereon in addition, up to the time of redemption,
c) together with the amount of any assessments or taxes which the purchaser may have paid
thereon after the purchase,
d) also with 1% interest on such last named amount; and
written notice of the redemption must be served on the officer who made the sale and a
duplicate filed with the Register of Deeds of the province.
Doctrine of indivisibility of the mortgage
does not apply once the mortgage is extinguished by a complete foreclosure thereof as in the instant case.

General Rule: Art. 2089, Civil Code

Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the
successors in interest of the debtor or of the creditor.
Therefore, the debtors heir who has paid a part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.
Neither can the creditors heir who received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not been paid.
Exception: The case in which, there being several things given in mortgage or pledge, each one of these
guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the
portion of the debt for which each thing is specially answerable is satisfied.
What the law (Art. 2089) proscribes:
is the foreclosure of only a portion of the property or a number of the several properties
mortgagedcorresponding to the unpaid portion of the debt where before foreclosure proceedings
partial payment was made by the debtor on his total outstanding loan or obligation.

This also means that the debtor cannot ask for the release of any portion of the mortgaged property or
of one or some of the several lots mortgaged unless and until the loan thus, secured has been fully
paid,notwithstanding the fact that there has been a partial fulfillment of the obligation.
Hence, it is provided that the debtor who has paid a part of the debt cannot ask for the proportionate
extinguishment of the mortgage as long as the debt is not completely satisfied.

Once the mortgage is extinguished by a complete foreclosure thereof, said doctrine of indivisibility ceases
to apply since, with the full payment of the debt, there is nothing more to secure.
Piecemeal redemption, allowed.
Nothing in the law prohibits the piecemeal redemption of properties sold at one foreclosure proceeding. In
fact, in several early cases decided by this Court, the right of the mortgagor or redemptioner to redeem
one or some of the foreclosed properties was recognized:
Castillo v. Nagtalon: ten parcels of land were sold at public auction. Nagtalon, who owned three of the ten
parcels of land sold, wanted to redeem her properties. Though the amount she tendered was found as
insufficient to effectively release her properties, the Court held that the tender of payment was made
timely and in good faith and thus, in the interest of justice, Nagtalon was given the opportunity to
complete the redemption purchase of three of the ten parcels of land foreclosed.
Held: Clearly, the Dys and Maxinos can effect the redemption of even only two of the five properties
foreclosed. And since they can effect a partial redemption, they are not required to pay the P216,040.93
considering that it is the purchase price for all the five properties foreclosed.
------------------------------------------------Case # 31: Medida vs. CA
Issue: WON a mortgagor, whose property has been extrajudicially foreclosed and sold at the
corresponding foreclosure sale, may validly execute a mortgage contract over the same property in favor
of a third party during the period of redemption. YES.

If the purchaser at the foreclosure sale merely acquired an inchoate right to the property which
could ripen into ownership only upon the lapse of the redemption period without his credit having
been discharged.
during that same period of twelve months the mortgagor is NOT "divested" of his ownership,
otherwise the absurd result would be that the land will consequently be without an owner although
it remains registered in the name of the mortgagor.
what is divested from the mortgagor is only his "full right as owner thereof to dispose (of) and sell
the lands," - merely clarifying that the mortgagor does not have the unconditional power to
absolutely sell the land since the same is encumbered by a lien of a third person which, if
unsatisfied, could result in a consolidation of ownership in the lienholder but only after the lapse of
the period of redemption. Even on that score, it may plausibly be argued that what is delimited is
not the mortgagor's jus dispodendi, as an attribute of ownership, but merely the rights conferred by
such act of disposal which may correspondingly be restricted.
A redemptioner is defined as a creditor having a lien by attachment, judgment or mortgage on
the property sold, or on some part thereof, subsequent to the judgment under which the property
was sold.
A property sold at a public auction, while within the period of redemption, may still be
subsequently mortgaged by the mortgagor: Since the mortgagor remains as the absolute owner of
the property during the redemption period and has the free disposal of his property, there would be
compliance with the requisites of Article 2085 of the Civil Code for the constitution of another
mortgage on the property. To hold otherwise would create the inequitable situation wherein the
mortgagor would be deprived of the opportunity, which may be his last recourse, to raise funds
wherewith to timely redeem his property through another mortgage thereon.
Effect: The proceeding pursuant to which the mortgaged property was sold, a subsequent
mortgage could nevertheless be legally constituted thereafter with the subsequent mortgagee
becoming and acquiring the rights of a redemptioner, aside from his right against the mortgagor.

Held: In the case at bar what is presently involved is a mortgage, not a sale, to petitioner bank. Such
mortgage does not involve a transfer, cession or conveyance of the property but only constitutes a lien
thereon. There is no obstacle to the legal creation of such a lien even after the auction sale of the property
but during the redemption period.
------------------------------------------------------Case #37: Pablo Garcia vs. Rivera
Brief Facts: Galas owned a property which was mortgaged to Villar for a 2.2M loan, and subsequently to
Garcia for a 1.8M loan. Nov, 1996- it was sold to Villar and declared in the Deed of Sale that it is free from
lien and encumbrances. And since it is Villar who owns the property now, Garcia wants that it be foreclosed
in his favor against Villar.
1. Whether or not the second mortgage to Garcia and subsequent sale to Villar were valid;
Whether or not Garcias action for foreclosure of mortgage on the subject property can prosper.
Principle Involved: Pactum Commisorium and Mortgage- a real right.
1: Both mortgage and sale VALID.
- while it is true that the annotation of the first mortgage to Villar on Galass TCT contained a
restriction on further encumbrances without the mortgagees prior consent, this restriction was
nowhere to be found in the Deed of Real Estate Mortgage.
- Neither did this Deed proscribe the sale or alienation of the subject property during the life of the
mortgages. Such stipulation would have been void anyway, as it is not allowed under Article 2130
of the Civil Code.
- Prohibition on pactum commissorium
o Garcia claims that the stipulation appointing Villar, the mortgagee, as the mortgagors
attorney-in-fact, to sell the property in case of default in the payment of the loan, is in
violation of the prohibition on pactum commissorium, as stated under Article 2088 of the
Civil Code, viz:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.
The following are the elements of pactum commissorium:
(1) There should be a property mortgaged by way of security for the payment of the
principal obligation; and
(2) There should be a stipulation for automatic appropriation by the creditor of the
thing mortgaged in case of non-payment of the principal obligation within the
stipulated period.[39]
Villars purchase of the subject property did not violate the prohibition on pactum
commissorium. The power of attorney provision above did not provide that the ownership over the
subject property would automatically pass to Villar upon Galass failure to pay the loan on
time. What it granted was the mere appointment of Villar as attorney-in-fact, with authority to sell
or otherwise dispose of the subject property, and to apply the proceeds to the payment of the loan.

Galass decision to eventually sell the subject property to Villar for an additional P1,500,000.00 was
well within the scope of her rights as the owner of the subject property.The subject property was
transferred to Villar by virtue of another and separate contract, which is the Deed of Sale.

Issue #2:

A mortgage is a real right, which follows the property, even after subsequent transfers by the
mortgagor. A registered mortgage lien is considered inseparable from the property inasmuch as it
is a right in rem.
The sale or transfer of the mortgaged property cannot affect or release the mortgage; thus the
purchaser or transferee is necessarily bound to acknowledge and respect the encumbrance. In
fact, under Article 2129 of the Civil Code, the mortgage on the property may still be foreclosed
despite the transfer, viz:

Art. 2129. The creditor may claim from a third person in possession of the mortgaged
property, the payment of the part of the credit secured by the property which said third
person possesses, in terms and with the formalities which the law establishes.
While we agree with Garcia that since the second mortgage, of which he is the mortgagee, has not
yet been discharged, we find that said mortgage subsists and is still enforceable. However, Villar, in
buying the subject property with notice that it was mortgaged, only undertook to pay such
mortgage or allow the subject property to be sold upon failure of the mortgage creditor to obtain
payment from the principal debtor once the debt matures. Villar did not obligate herself to replace
the debtor in the principal obligation, and could not do so in law without the creditors consent.

Tavera vs El Hogar
This case involves a parcel of land co-owned by the Taveras. The co-owners agreed to organize a
corporation under the name of Tavera-Luna, Inc. for the purpose of building a modern structure on the
parcel of land and to that end they also agreed to accept shares of stock of the corporation to be organized
in exchange for their respective hares in the parcel of land and building erected thereon to be transferred
to the corporation. The mother and guardian of the minor co-owner filed a petition in the probate court
praying for the approval of the agreement and seeking authority to accept shares of stock of the
corporation in exchange for the share of the minor in the property. The probate court approved the
agreement in so far as the minor was concerned and authorized the guardian to accept the shares of stock
of the corporation in exchange for the share of the minor in the property. Tavera-Luna, Inc., was actually
incorporated and the guardian of the minor transferred her share in the property.After the transfer of the
shares of the co-owners in the property, TCT 1 was cancelled and in lieu thereof TCT 2 in the name of
Tavera-Luna, Inc. was issued. Upon application of the corporation, El Hogar Filipino, Inc., a loan and
building association, granted it a loan of P1,000,000 for the purpose of erecting a concrete building in lieu
of the wooden building standing thereon. This loan was secured by a first mortgage registered on the
certificate. An additional loan of P300,000 was obtained by the corporation from El Hogar Filipino, Inc.
secured by a mortgage on the same property. The period of the first mortgage of P1,000,000 was
extended. TCT 2 in the name of Tavera-Luna, Inc. was cancelled and in lieu thereof TCT 3 was issued also in
the name of Tavera-Luna, Inc., but the parcel of land was subdivided into several lots with their respective
description. Again, TCT 3 was partially cancelled as to one of the several lots and TCT 4 was issued in the
name of Tavera-Luna, Inc. Thereafter, partial cancellations were made of TCT 3 as to some of the small lots
and 7 new TCTs were issued in the name of Tavera-Luna, Inc. The last certificates of title cover small parts
of the original parcel of land. The larger part of the parcel of land is described in TCTs 3 and 4.Not long
after the construction of the building known as Crystal Arcade was finished, El Hogar Filipino, Inc., the
mortgagee, took over the possession and management of the property to apply the rents, after deducting
management expenses, to the payment of the mortgagee debt and the mortgagee foreclosed the
mortgage extrajudicially and purchased the whole property at public auction sale. The mortgagor having
failed to redeem the property, the mortgagee consolidated its title and the TCTs 3 and 4 in the name of
Tavera-Luna, Inc. were cancelled and in lieu thereof TCTs 5 and 6 were issued in the name of the
mortgagee, El Hogar Filipino, Inc. Nearly nine months after the filing of the original complaint in this case,
El Hogar Filipino, Inc. sold the whole property to Magdalena Estate, Inc. The TCTs 5 and 6 in the name of El
Hogar Filipino, Inc. were cancelled and lieu thereof TCTs7 and 8 were issued in the name of Magdalena
Estate, Inc. Magdalena Estate, Inc. sold one-third undivided share in the property to Ernest Berg. The minor
co-owner brought an action in the CFI Manila to annul the transfer of her right, share and interest in the
property made by her guardian to Tavera-Luna, Inc. However, before judgment could be rendered by the
Court, the battle for liberation of Manila supervened and the record of the case was destroyed. After
reconstitution of the record of the case, amendment to the pleadings were made to include the Magdalena
Estate, Inc. and Ernest Bergto party-defendants.CFI rendered judgment annulling the order of the probate
court that had granted authority to the guardian of the plaintiff to transfer her wards right, share interest
in the parcel of land to Tavera-Luna, Inc. and the transfer thereof pursuant thereto; transfers of the wards
share in the property to El Hogar Filipino, Inc., Magdalena Estate, Inc. and Ernest Berg; certificates of title
issued to the transferees in so far as the wards share in the property is concerned; and ordering
cancellation of transfer certificates issued to the transferees and issuance of new ones in the name of the
transferees and the plaintiff with the statement in the certificates to be issued that plaintiffs share in the
property is two-ninths, free from any lien or encumbrance, and accounting of the income collected by the

transferees during the periods of their respective possession of the property and payment or delivery
thereof to the plaintiff in so far as her share in the property is concerned. The defendants have appealed.
The point that the plaintiffs action is barred by the statute of limitations is no longer urged, because the
plaintiff became of age and released from guardianship and the action was brought within the period
provided for in section 579, Act No. 190. No action for the recovery of any estate sold by a guardian can be
maintained by the ward, or by any person claiming under him, unless it is commenced within three years
next after the termination of the guardianship, or, when a legal disability to sue exists by reason of
minority or otherwise, at the time when the cause of action accrues, within three years next after the
removal of such disability.

WON the probate court has jurisdiction to issue the disputed order / YES*Plaintiff contends that the probate
court's order is a nullity because:
a. the provisions of section 569, Act No. 190, the law then in force, were not complied with and for
thatreason the probate court was without jurisdiction to order the transfer of her share in the property to
thecorporation to be organized and formed
b. as the petition which brought about the entry of the order of the probate court was not verified
c. it did not set forth the condition of the estate of the ward and the facts and circumstances upon which
the petition was founded tending to show the necessity or expediency of the sale (transfer)
d. the Court did not direct the next of kin to the ward, and all persons interested in the estate, to appear
before the judge or court, at the time and place therein specified, not less than four nor more than eight
weeks from the time of making such order, to show cause why an order should not be granted for the sale
or such estate
That the probate court in guardianship proceedings had jurisdiction over the petition filed by the guardian
admits of no doubt. Only upon the ground of lack of jurisdiction may an order entered by a court be
assailed collaterally. If the court had jurisdiction, irregularities in the proceedings which would or could
invalidate the courts order may be assailed directly by means of an appeal but not collaterally. Lack of
verification of a petition filed in a probate court for the sale of real property belonging to the estate of a
minor is not a jurisdictional defect. It should have been attacked directly and not collaterally. In her petition
the guardian alleged that the transfer of her wards share in the property to the corporation then to be
organized would be to or for her benefit and she expected that the construction of a new building would
enhance the value of her wards share in the property and increase her income. No other consideration or
motive could have prompted the guardian, mother of the minor, to file the petition. It is not necessary for a
grant of authority to the guardian to sell the estate of the ward to state that the income is insufficient to
maintain the ward and his family or to maintain or educate the ward when a minor. It is enough, as the
other alternative of the law provides, that it appears to the satisfaction of the court that it is for the
benefit of the ward that his real estate or some part thereof should be sold, and the proceeds thereof put
out at interest, or invested in some productive security. The petition of the guardian falls under the last
quoted part of section 569, Act No. 190. That part of the section, requiring the probate court to enter an
order directing the next of kin to the ward and all persons interested in the estate to appear before the
court at a time and place therein specified, was substantially complied with, because the next kin to the
ward was her own guardian and mother and all persons interested in the estate of the ward were her
uncles and aunt who agreed to make the transfer of their respective shares in the property to the
corporation, Tavera-Luna, Inc. Moreover, next of kin are those whose relationship is such that they are
entitled to share in the estate as distributees. There were no creditors to the wards estate. Notice to the
next of kin to the ward, and all persons interested in the estate, to appear before the judge or court, at the
time and place therein specified, was not necessary, because the next of kin to the ward and all persons
interested in the estate were her mother and guardian, uncles and aunt. Under these circumstances, that
part of the provision of section 569, Act No. 190, has been complied with. Hearing on the petition, as
required in said section does not necessarily mean that witnesses testify or documents be produced or
exhibited. If the court be satisfied that the allegations of the petition are true and the interested persons or

close relatives of the ward did not object because they themselves were interested in the scheme to
organize a corporation to which all their shares in the property were to be transferred, the provisions of the
law on hearing were also complied with. The conclusion arrived at renders it unnecessary to pass upon the
question whether El Hogar Filipino, Inc. was a purchaser for value and in good faith. Suffice it to say that
even if the loan was granted when the certificate of title was still in the name of the plaintiff and her coowners, the fact that the loan was applied for by an entity that was in the process of organization and by
the same persons who were the registered owners of the property, the mortgagee was entitled to rely
upon the order of the probate court granting authority to the guardian to make the transfer of the share of
her ward in the property and was not bound to inquire further to find out whether there were irregularities
committed or defects or vices that would render the order null and void. So also the question whether the
action brought by Carlos Pardo de Tavera y Cembrano in his own behalf and in behalf of the minor, the
herein plaintiff, is res judicata need not be passed upon. Certainly, it would be awkward forthis Court to
review a final decree or judgment which upheld the validity of the mortgage in favor of the El Hogar
Filipino, Inc., in the case of Carlos Pardo de Tavera and Carmen Pardo de Tavera Manzano vs. El Hogar
Filipino,Inc. and to declare null and void the order of the probate court as far as the share in the property of
the minor is concerned, a declaration which would partly reopen, review, reverse or set aside that final
decree or judgmentrendered by SC. This action would not have been brought if the scheme and plan of the
organizers or incorporators of the Tavera-Luna, Inc. should have met with success

Adrid vs Morga
Sps Adrid executed a sale with a right to repurchase in favor of Morga over their lot. Sps Adrid never
repurchased the same. Later on they brought an action to recover the lot contending that such agreement
had been converted into one of antichresis considering that Morga took possession of the same and
benefited himself of the yearly harvest of palay.
Whether or not the agreement had been converted into an antichresis.
No. There is nothing in the document or in the acts of the parties subsequent to its execution to show that
the parties had entered into a contract of antichresis. In the case of Alojado vs. Lim Siongco, 51 Phil., 339
this Court said:
What characterizes a contract of antichresis is that the creditor acquires the right to receive the fruits of
the property of his debtor with the obligation to apply them to the payment of interest, if any is due, and
then to the principal of his credit, and when such a covenant is not made in the contract which speaks
unequivocally of a sale with right of repurchase, the contract is a sale with the right to repurchase and not
an antichresis.
The agreement was in fact an equitable mortgage. The lot was given as security for Sps. Adrids loan. Adrid
also paid for the real estate tax.

Dizon vs Gaborro
FACTS: Petitioner Jose P. Dizon was the owner of the three (3) parcels of land. He constituted a first
mortgage lien in favor of the Develop. ment Bank of the Philippines in order to secure a loan in the sum of
P38,000.00 trial a second mortgage lien in favor of the Philippine National Bank to cure his indebtedness to
said bank in the amount of P93,831.91.Petitioner Dizon having defaulted in the payment of his debt, the
Development Bank of the Philippines foreclosed the mortgage extrajudicially.
Sometime prior to October 6, 1959 Alfredo G. Gaborro trial Jose P. Dizon met. Gaborro became interested in
the lands of Dizon. Dizon originally intended to lease to Gaborro the property which had been lying idle for

some time. But as the mortgage was already foreclosed by the DPB trial the bank in fact purchased the
lands at the foreclosure sale on May 26, 1959, they abandoned the projected lease.
Dizon and Alfredo Gaborro. on the same day, October 6, 1959, constitute in truth and in fact an absolute
sale of the three parcels of land therein described or merely an equitable mortgage or conveyance thereof
by way of security for reimbursement or repayment by petitioner Jose P. Dizon of any and all sums which
may have been paid to the Development Bank of the Philippines and the Philippine National Bank by
Alfredo G. Gaborro
Said documents were executed by the parties and the payments were made by Gaborro for the debt of
Dizon to said banks after the Development Bank of the Philippines had foreclosed the mortgage executed
by Dizon and during the period of redemption after the foreclosure sale of the mortgaged property to said
creditor bank.
Gaborros contention; Deed of Sale with Assumption of Mortgage trial Option to Purchase Real Estate
Dizons contention: merely an equitable mortgage or conveyance thereof by way of security for
reimbursement, refund or repayment by petitioner Jose P. Dizon
ISSUE: WoN the deed was of a Deed of Sale with Assumption of Mortgage', trial Option to Purchase Real
Estate or merely an equitable mortgage or conveyance thereof by way of security for reimbursement,
refund or repayment by petitioner Jose P. Dizon?
HELD: In the light of the foreclosure proceedings and sale of the properties, a legal point of primary
importance here, as well as other relevant facts and circumstances, We agree with the findings of the trial
and appellate courts that the true intention of the parties is that respondent Gaborro would assume and
pay the indebtedness of petitioner Dizon to DBP and PNB, and in consideration therefor, respondent
Gaborro was given the possession, the enjoyment and use of the lands until petitioner can reimburse fully
the respondent the amounts paid by the latter to DBP and PNB, to accomplish the following ends: (a)
payment of the bank obligations; (b) make the lands productive for the benefit of the possessor,
respondent Gaborro, (c) assure the return of the land to the original owner, petitioner Dizon, thus
rendering equity and fairness to all parties concerned.
In view of all these considerations, the law and Jurisprudence, and the facts established. We find that the
agreement between petitioner Dizon and respondent Gaborro is one of those inanimate contracts under
Art. 1307 of the New Civil Code whereby petitioner and respondent agreed "to give and to do" certain
rights and obligations respecting the lands and the mortgage debts of petitioner which would be
acceptable to the bank. but partaking of the nature of the antichresis insofar as the principal parties,
petitioner Dizon and respondent Gaborro, are concerned.

Case #2: Davao Sawmill vs. Castillo
FACTS: Petitioner is the holder of a lumber concession. It operated a sawmill on a land, which it doesnt
own. Part of the lease agreement was a stipulation in which after the lease agreement, all buildings and
improvements would pass to the ownership of the lessor, which would not include machineries and
In connection to this, petitioner had in its sawmill machineries and other equipment
wherein some were bolted in foundations of cement.
Issue: Whether or not the trial judge erred in finding that the subject properties are personal in nature.
HELD: The machinery must be classified as personal property.
The lessee placed the machinery in the building erected on land belonging to another, with the
understanding that the machinery was not included in the improvements which would pass to the lessor on

the expiration of the lease agreement. The lessee also treated the machinery as personal property
in executing chattel mortgages in favor of third persons.
The machinery was levied upon by the
sheriff as personalty pursuant to a writ of execution obtained without any protest being registered.
Furthermore, machinery only becomes immobilized when placed in a plant by the owner of the property or
plant, but not when so placed by a tenant, usufructuary, or any person having temporary right, unless
such person acted as the agent of the owner.
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 contracted or incurred?
This mortgage shall also stand as security for said obligations and any and all other obligations of the
MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been
contracted before, during or after the constitution of this mortgage
Security contracts
a. Personal security, such as a guaranty or a suretyship, the faithful performance of the obligation by
the principal debtor is secured by the personal commitment of another (the guarantor or surety).
b. real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by
anencumbrance of property
1. in pledge, the placing of movable property in the possession of the creditor;
2. in chattel mortgage, by the execution of the corresponding deed substantially in the form
prescribed by law;
3. in real estate mortgage, by the execution of a public instrument encumbering the real
property covered thereby; and
4. in antichresis, by a written instrument granting to the creditor the right to receive the fruits of
an immovable property with the obligation to apply such fruits to the payment of interest, if
owing, and thereafter to the principal of his credit - upon the essential condition that if the
principal obligation becomes due and the debtor defaults, then the property encumbered can be
alienated for the payment of the obligation, but that should the obligation be duly paid, then the
contract is automatically extinguished proceeding from the accessory character of the
As the law so puts it, once the obligation is complied with, then the contract of security becomes, ipso
facto, null and void.
Pledge, REM, or antichresis
may exceptionally secure after-incurred
obligations so long as these future debts are
accurately described

Chattel mortgage
can only cover obligations existing at the
time the mortgage 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, however, does not come into
existence or arise until after a chattel mortgage agreement covering the newly contracted debt is
executed either:
by concluding a fresh chattel mortgage or
by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law.
Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation
can constitute an act of default on the part of the borrower of the financing agreement whereon the
promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of
constitution and during the life of the chattel mortgage sought to be foreclosed.
Chattel mortgage
A chattel mortgage must comply substantially with the form prescribed by the Chattel Mortgage Law
itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted
that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid
between the parties (not against third persons acting in good faith), the fact, however, that the statute has
provided that the parties to the contract must execute an oath that -

(the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and
for no other purpose, and that the same is a just and valid obligation, and one not entered into for the
purpose of fraud."
makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely
Held: In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract
was the P3M loan which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel
Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or
terminated. There no longer was any chattel mortgage that could cover the new loans that were concluded
------------------------------------------------Case #4: Dy vs. CA
Right of the mortgagor over his mortgaged property
The mortgagor who gave the property as security under a chattel mortgage did not part with the
ownership over the same. He had the right to sell it although he was under the obligation to secure the
written consent of the mortgagee or he lays himself open to criminal prosecution under the provision of
Article 319 par. 2 of the RPC. And even if no consent was obtained from the mortgagee, the validity of the
sale would still not be affected.
Thus, we see no reason why Wilfredo Dy, as the chattel mortgagor can not sell the subject tractor. There is
no dispute that the consent of Libra Finance (mortgagee) was obtained in the instant case. Libra allowed
the petitioner to purchase the tractor and assume the mortgage debt of his brother. The sale between the
brothers was therefore valid and binding as between them and to the mortgagee, as well.
Constructive delivery
- Article 1496 of the Civil Code states that the ownership of the thing sold is acquired by the vendee
from the moment it is delivered to him in any of the ways specified in Articles 1497 to 1501 or in
any other manner signing an agreement that the possession is transferred from the vendor to the
vendee. We agree with the petitioner that Articles 1498 and 1499 are applicable in the case at bar.
- Art. 1498. When the sale is made through a public instrument, the execution thereof shall be
equivalent to the delivery of the thing which is the object of the contract, if from the deed the
contrary does not appear or cannot clearly be inferred.

Article 1499. The delivery of movable property may likewise be made by the mere consent or
agreement of the contracting parties, if the thing sold cannot be transferred to the possession of
the vendee at the time of the sale, or if the latter already had it in his possession for any other

In the instant case, actual delivery of the subject tractor could not be made. However, there was
constructive delivery already upon the execution of the public instrument pursuant to Article 1498
and upon the consent or agreement of the parties when the thing sold cannot be immediately
transferred to the possession of the vendee.

While it is true that Wilfredo Dy (mortgagor) was not in actual possession and control of the subject tractor,
his right of ownership was not divested from him upon his default. Neither could it be said that Libra was
the owner of the subject tractor because the mortgagee can not become the owner of or convert and
appropriate to himself the property mortgaged. (Article 2088, Civil Code) Said property continues to belong
to the mortgagor. The only remedy given to the mortgagee is to have said property sold at public auction
and the proceeds of the sale applied to the payment of the obligation secured by the mortgagee. There is
no showing that Libra Finance has already foreclosed the mortgage and that it was the new owner of the
subject tractor. Undeniably, Libra gave its consent to the sale of the subject tractor to the petitioner. It was
aware of the transfer of rights to the petitioner.
Where a third person purchases the mortgaged property, he automatically steps into the shoes of the
original mortgagor. His right of ownership shall be subject to the mortgage of the thing sold to him.