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McMicking vs. Martinez

G.R. No. L-5219 February 15, 1910

The defendant, Pedro Martinez, some time during the year 1908 obtained judgment in the Court of First
Instance of the city of Manila against one Maria Aniversario; that thereafter execution was issued upon
said judgment and the sheriff levied upon a pailebot, Tomasa, alleged to be the property of said Maria
Aniversario; that thereupon the said defendant Go Juna intervened and claimed a lien upon said boat by
virtue of a pledge of the same to him by the said Maria Aniversario made on the 27th day of February,
1907, which said pledge was evidenced by a public instrument bearing that date.

This action was brought by the sheriff against Go Juna and Pedro Martinez to determine the rights of the
parties to the funds in his hands. Maria Aniversario was not made a party.

The said Pedro Martinez alleged as a defense that the pledge which said document was intended to
constitute had not been made effective by delivery of the property pledged, as required by article 1863 of
the Civil Code, and that, therefore, there existed no preference in favor of said Go Juna.


1. Whether or not the pledge was perfected.

2. Whether or not an instrument of pledge can establish the ‘credit’ transaction between the parties.


1. NO, the pledge was not perfected.

The court below found with the contention of the said Pedro Martinez, declared a preference in
his favor, and ordered the sheriff to pay over the said funds in consonance therewith. An appeal
was taken from said judgment.

The conclusion of the court below that the property was not delivered in accordance with the
provisions of article 1863 of the Civil Code is sustained by the proofs. His conclusion that the
pledge was ineffective against Martinez is correct.

THEREFORE, the pledge was not perfected.

2. YES, an instrument of pledge can establish the ‘credit’ transaction between the parties.

It appears, however, that the document of pledge is a public document which contains an admission of
indebtedness. In other words, while it is intended to be a pledge, it is also a credit which appears in a
public document. Article 1924, paragraph 3, letter a, is therefore applicable; and, said public document
antedating the judgment of defendant Martinez, takes preference thereover.

The validity of that document in so far as it shows an indebtedness against Maria Aniversario and its
effectiveness against her have not, however, been determined. She is not a party to this action. No
judgment can be rendered affecting her rights or liabilities under said instrument. If said instrument is
invalid or for any other cause unenforceable against her, it would be wholly unjust, by declaring its
preference over a debt acknowledged by and conclusive against her, to require that said funds be paid
over to the holder of said document. That would be to require her to pay a debt which has not only not
been shown to be enforceable against her but which, as a witness for the defendant Martinez on the
trial of this cause, she expressly and vehemently repudiated as a valid claim against her.

THEREFORE, an instrument of pledge can establish the ‘credit’ transaction between the parties.

Vda. de Bautista vs. Marcos, et al
G.R. No. L-17072 October 31, 1961


The main question in this appeal is whether or not a mortgagee may foreclose a mortgage on a piece of
land covered by a free patent where the mortgage was executed before the patent was issued and is
sought to be foreclosed within five years from its issuance.


On May 17, 1954, defendant Brigida Marcos obtained a loan in the amount of P2,000 from plaintiff
Cristina Marcel Vda. de Bautista and to secure payment thereof conveyed to the latter by way of
mortgage a two (2)-hectare portion of an unregistered parcel of land situated in Sta. Ignacia, Tarlac. The
deed of mortgage, , provided that it was to last for three years, that possession of the land mortgaged was
to be turned over to the mortgagee by way of usufruct, but with no obligation on her part to apply the
harvests to the principal obligation; that said mortgage would be released only upon payment of the
principal loan of P2,000 without any interest; and that the mortgagor promised to defend and warrant the
mortgagee's rights over the land mortgaged.

Subsequently, or in July, 1956, mortgagor Brigida Marcos filed in behalf of the heirs of her deceased
mother Victoriana Cainglet (who are Brigida herself and her three sisters), an application for the issuance
of a free patent over the land in question, on the strength of the cultivation and occupation of said land by
them and their predecessor since July, 1915. As a result, Free Patent No. V-64358 was issued to the
applicants on January 25, 1957, and on February 22, 1957, it was registered in their names under
Original Certificate of Title No. P-888 of the office of Register of Deeds for the province of Tarlac.

Defendant Brigida Marcos' indebtedness of P2,000 to plaintiff having remained unpaid up to 1959, the
latter, on March 4, 1959, filed the present action against Brigida and her husband (Civil Case No. 3382) in
the court below for the payment thereof, or in default of the debtors to pay, for the foreclosure of her
mortgage on the land given as security.

Defendants moved to dismiss the action, pointing out that the land in question is covered by a free patent
and could not, therefore, under the Public Land Law, be taken within five years from the issuance of the
patent for the payment of any debts of the patentees contracted prior to the expiration of said five-year
period; but the lower court denied the motion to dismiss on the ground that the law cited does not apply
because the mortgage sought to be foreclosed was executed before the patent was issued. Defendants
then filed their answer, reiterating the defense invoked in their motion to dismiss, and alleging as well that
the real contract between the parties was an antichresis and not a mortgage.

Pre-trial of the case followed, after which the lower court rendered judgment finding the mortgage valid to
the extent of the mortgagor's pro-indiviso share of 15,333 square meters in the land in question, on the
theory that the Public Land Law does not apply in this case because the mortgage in question was
executed before a patent was issued over the land in question; that the agreement of the parties could not
be antichresis because the deed clearly shows a mortgage with usufruct in favor of the mortgagee; and
ordered the payment of the mortgage loan of P2,000 to plaintiff or, upon defendant's failure to do so, the
foreclosure of plaintiff's mortgage on defendant Brigida Marcos' undivided share in the land in question.
From this judgment, defendants Brigida Marcos and her husband Osmondo Apolocio appealed to this


1. Whether or not there was a valid mortgage constituted.

2. Granting that the mortgage is valid, can the subject land be validly foreclosed?

3. Whether or not Vda. de Bautista are entitled to the fruits of the land as usufructuary and
possessor in good faith.


1. NO, there was no valid mortgage constituted.

The right of plaintiff-appellee to foreclose her mortgage on the land in question depends not so
much on whether she could take said land within the prohibitive period of five years from the
issuance of defendants' patent for the satisfaction of the indebtedness in question, but on whether
the deed of mortgage is at all valid and enforceable, since the land mortgaged was apparently still
part of the public domain when the deed of mortgage was constituted.

As it is an essential requisite for the validity of a mortgage that the mortgagor be the absolute
owner of the thing mortgaged (Art. 2085), the mortgage here in question is void and ineffective
because at the time it was constituted, the mortgagor was not yet the owner of the land
mortgaged and could not, for that reason, encumber the same to the plaintiff-appellee.

THEREFORE, there was no valid mortgage constituted.

2. NO, the subject land cannot be validly foreclosed even if the mortgage was validly constituted.

The subsequent acquisition by the mortgagor of title over said land through the issuance of a free
patent validate and legalize the deed of mortgage under the doctrine of estoppel (cf. Art. 1434,
New Civil Code,1 since upon the issuance of said patient, the land in question was thereby
brought under the operation of the Public Land Law that prohibits the taking of said land for the
satisfaction of debts contracted prior to the expiration of five years from the date of the issuance
of the patent (sec. 118, C.A. No. 141). This prohibition should include not only debts contracted
during the five-year period immediately preceding the issuance of the patent but also those
contracted before such issuance, if the purpose and policy of the law, which is "to preserve and
keep in the family of the homesteader that portion of public land which the State has gratuitously
given to him" (Pascua v. Talens, 45 O.G. No. 9 [Supp.] 413; De los Santos v. Roman Catholic
Church of Midsayap, G.R. L-6088, Feb. 24, 1954), is to be upheld.

THEREFORE, the subject land cannot be validly foreclosed even if the mortgage was validly

3. YES, Vda. de Bautista is entitled to the fruits of the land as usufructuary and possessor in good faith.

The invalidity of the mortgage does not, however, imply the concomitant invalidity of the collate
agreement in the same deed of mortgage whereby possession of the land mortgaged was
transferred to plaintiff-appellee in usufruct, without any obligation on her part to account for its
harvests or deduct them from defendants' indebtedness of P2,000.

Defendant Brigida Marcos, who, together with her sisters, was in possession of said land by herself
and through her deceased mother before her since 1915, had possessory rights over the same even
before title vested in her as co-owner by the issuance of the free patent to her and her sisters, and
these possessory right she could validly transfer and convey to plaintiff-appellee, as she did in the
deed of mortgage.

The latter, upon the other hand, believing her mortgagor to be the owner of the land mortgaged and
not being aware of any flaw which invalidated her mode of acquisition, was a possessor in good faith
(Art. 526, N.C.C.), and as such had the right to all the fruits received during the entire period of her
possession in good faith (Art. 544, N.C.C.). She is, therefore, entitled to the full payment of her credit
of P2,000 from defendants, without any obligation to account for the fruits or benefits obtained by her
from the land in question.

THEREFORE, Vda. de Bautista are entitled to the fruits of the land as usufructuary and possessor in
good faith.

Cavite vs. Lim
G.R. No. 131679. February 1, 2000

Petitioners Cavite Development Bank (CDB) and Far East Bank and Trust Company (FEBTC) are
banking institutions duly organized and existing under Philippine laws. On or about June 15, 1983, a
certain Rodolfo Guansing obtained a loan in the amount of P90,000.00 from CDB, to secure which he
mortgaged a parcel of land situated at No. 63 Calavite Street, La Loma, Quezon City and covered by TCT
No. 300809 registered in his name. As Guansing defaulted in the payment of his loan, CDB foreclosed the
mortgage. At the foreclosure sale held on March 15, 1984, the mortgaged property was sold to CDB as
the highest bidder. Guansing failed to redeem, and on March 2, 1987, CDB consolidated title to the
property in its name. TCT No. 300809 in the name of Guansing was cancelled and, in lieu thereof, TCT
No. 355588 was issued in the name of CDB.

On June 16, 1988, private respondent Lolita Chan Lim, assisted by a broker named Remedios
Gatpandan, offered to purchase the property from CDB. The written Offer to Purchase, signed by Lim and
Gatpandan, states in part:

We hereby offer to purchase your property at #63 Calavite and Retiro Sts., La Loma, Quezon City for
P300,000.00 under the following terms and conditions:

(1) 10% Option Money;

(2) Balance payable in cash;
(3) Provided that the property shall be cleared of illegal occupants or tenants. Sc

Pursuant to the foregoing terms and conditions of the offer, Lim paid CDB P30,000.00 as Option Money,
for which she was issued Official Receipt No. 3160, dated June 17, 1988, by CDB. However, after some
time following up the sale, Lim discovered that the subject property was originally registered in the name
of Perfecto Guansing, father of mortgagor Rodolfo Guansing, under TCT No. 91148. Rodolfo succeeded
in having the property registered in his name under TCT No. 300809, the same title he mortgaged to CDB
and from which the latters title (TCT No. 355588) was derived. It appears, however, that the father,
Perfecto, instituted Civil Case No. Q-39732 in the Regional Trial Court, Branch 83, Quezon City, for the
cancellation of his sons title. On March 23, 1984, the trial court rendered a decision [2] restoring Perfectos
previous title (TCT No. 91148) and cancelling TCT No. 300809 on the ground that the latter was
fraudulently secured by Rodolfo. This decision has since become final and executory.

Aggrieved by what she considered a serious misrepresentation by CDB and its mother-company, FEBTC,
on their ability to sell the subject property, Lim, joined by her husband, filed on August 29, 1989 an action
for specific performance and damages against petitioners in the Regional Trial Court, Branch 96, Quezon
City, where it was docketed as Civil Case No. Q-89-2863. On April 20, 1990, the complaint was amended
by impleading the Register of Deeds of Quezon City as an additional defendant.

On March 10, 1993, the trial court rendered a decision in favor of the Lim spouses. It ruled that:

(1) there was a perfected contract of sale between Lim and CDB, contrary to the latters contention
that the written offer to purchase and the payment of P30,000.00 were merely pre-conditions to the
sale and still subject to the approval of FEBTC;

(2) performance by CDB of its obligation under the perfected contract of sale had become impossible
on account of the 1984 decision in Civil Case No. Q-39732 cancelling the title in the name of
mortgagor Rodolfo Guansing;

(3) CDB and FEBTC were not exempt from liability despite the impossibility of performance, because
they could not credibly disclaim knowledge of the cancellation of Rodolfo Guansings title without
admitting their failure to discharge their duties to the public as reputable banking institutions; and

(4) CDB and FEBTC are liable for damages for the prejudice caused against the Lims. [3] Based on
the foregoing findings, the trial court ordered CDB and FEBTC to pay private respondents, jointly and
severally, the amount of P30,000.00 plus interest at the legal rate computed from June 17, 1988 until
full payment. It also ordered petitioners to pay private respondents, jointly and severally, the amounts
of P250,000.00 as moral damages, P50,000.00 as exemplary damages, P30,000.00 as attorneys
fees, and the costs of the suit.[4]

Petitioners brought the matter to the Court of Appeals, which, on October 14, 1997, affirmed in toto the
decision of the Regional Trial Court.


1. Whether or not a valid mortgage was constituted between CDB and Rodolfo Guansing.
2. Whether or not the doctrine of ‘mortgagee in good faith’ applies to banks.

3. Whether or not Lolita Chan Lim may recover his option money of P30,000.00 plus legal interests.


1. NO, there was no valid mortgage constituted between CDB and Rodolfo Guansing.

The Supreme Court explained its ruling in this wise:

The sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo Guansing must, therefore,
be deemed a nullity for CDB did not have a valid title to the said property. To be sure, CDB never
acquired a valid title to the property because the foreclosure sale, by virtue of which the property had
been awarded to CDB as highest bidder, is likewise void since the mortgagor was not the owner of the
property foreclosed.

A foreclosure sale, though essentially a "forced sale," is still a sale in accordance with Art. 1458 of
the Civil Code, under which the mortgagor in default, the forced seller, becomes obliged to transfer the
ownership of the thing sold to the highest bidder who, in turn, is obliged to pay therefor the bid price in
money or its equivalent.

Being a sale, the rule that the seller must be the owner of the thing sold also applies in a
foreclosure sale. This is the reason Art. 2085 [16] of the Civil Code, in providing for the essential requisites
of the contract of mortgage and pledge, requires, among other things, that the mortgagor or pledgor be

the absolute owner of the thing pledged or mortgaged, in anticipation of a possible foreclosure sale
should the mortgagor default in the payment of the loan.

THEREFORE, there was no valid mortgage constituted between CDB and Rodolfo Guansing.

2. NO, the doctrine of ‘mortgagee in good faith’ does not apply to banks except when it has
exercised the due diligence required from it by reason of public interest.

The Supreme Court explained its ruling in this wise:

The Doctrine Of "The Mortgagee In Good Faith" based on the rule that all persons dealing with
property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required to go beyond
what appears on the face of the title. The public interest in upholding the indefeasibility of a certificate of
title, as evidence of the lawful ownership of the land or of any encumbrance thereon, protects a buyer or
mortgagee who, in good faith, relied upon what appears on the face of the certificate of title. (Philippine
National Bank v. Intermediate Appellate Court, 176 SCRA 736 (1989), citing Quimson v. Suarez, 45 Phil 901 (1924)

In Tomas v. Tomas,[18] 98 SCRA 280 (1980), we noted that it is standard practice for banks, before
approving a loan, to send representatives to the premises of the land offered as collateral and to
investigate who are the real owners thereof, noting that banks are expected to exercise more care and
prudence than private individuals in their dealings, even those involving registered lands, for their
business is affected with public interest.

There might be circumstances apparent on the face of the certificate of title which could excite
suspicion as to prompt inquiry, such as when the transfer is not by virtue of a voluntary act of the original
registered owner, as in the instant case, where it was by means of a self-executed deed of extra-judicial
settlement, a fact which should be noted on the face of Eusebia Tomas certificate of title. (Tomas v.
Tomas, supra)

IN THE CASE AT BAR, We are not convinced...that under the circumstances of this case, CDB
can be considered a mortgagee in good faith. While petitioners are not expected to conduct an exhaustive
investigation on the history of the mortgagors title, they cannot be excused from the duty of exercising the
due diligence required of banking institutions.

There is no evidence that CDB observed its duty of diligence in ascertaining the validity of
Rodolfo Guansings title. It appears that Rodolfo Guansing obtained his fraudulent title by executing an
Extra-Judicial Settlement of the Estate With Waiver where he made it appear that he and Perfecto
Guansing were the only surviving heirs entitled to the property, and that Perfecto had waived all his rights
thereto. This self-executed deed should have placed CDB on guard against any possible defect in or
question as to the mortgagors title.

Moreover, the alleged ocular inspection report[20] by CDBs representative was never formally
offered in evidence. Indeed, petitioners admit that they are aware that the subject land was being
occupied by persons other than Rodolfo Guansing and that said persons, who are the heirs of Perfecto
Guansing, contest the title of Rodolfo.

THEREFORE, the doctrine of ‘mortgagee in good faith’ does not apply to banks except when it
has exercised the due diligence required from it by reason of public interest.

3. YES, Lolita Chan Lim may recover his option money of P30,000.00 plus legal interests.

Article 1412(2) of the Civil Code provides:

If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense,
the following rules shall be observed: xxx

(2).......When only one of the contracting parties is at fault, he cannot recover what he has given
by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who
is not at fault, may demand the return of what he has given without any obligation to comply with
his promise.

IN THE CASE AT BAR, Private respondents are thus entitled to recover the P30,000.00 option
money paid by them. Moreover, since the filing of the action for damages against petitioners amounted to
a demand by respondents for the return of their money , interest thereon at the legal rate should be
computed from August 29, 1989, the date of filing of Civil Case No. Q-89-2863, not June 17, 1988, when
petitioners accepted the payment.

This is in accord with our ruling in Castillo v. Abalayan[24] 30 SCRA 359 (1969) that in case of a void
sale, the seller has no right whatsoever to keep the money paid by virtue thereof and should refund it,

with interest at the legal rate, computed from the date of filing of the complaint until fully paid. Indeed, Art.
1412(2) which provides that the non-guilty party "may demand the return of what he has given" clearly
implies that without such prior demand, the obligation to return what was given does not become legally

THEREFORE, Lolita Chan Lim may recover his option money of P30,000.00 plus legal interests.

Francisco Realty vs. CA
G.R. No. 125055. October 30, 1998

Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5 Million to private
respondents, the spouses Romulo and Erlinda Javillonar, in consideration of which the latter executed the
following documents:
(a) a promissory note, dated November 27, 1991, stating an interest charge of 4% per month for six
(b) a deed of mortgage over realty covered by TCT No. 58748, together with the improvements
thereon; and
(c) an undated deed of sale of the mortgaged property in favor of the mortgagee, petitioner A.
Francisco Realty.[2]

The interest on the said loan was to be paid in four installments: half of the total amount agreed upon
(P900,000.00) to be paid in advance through a deduction from the proceeds of the loan, while the balance
to be paid monthly by means of checks post-dated March 27, April 27, and May 27, 1992. The promissory
note expressly provided that upon failure of the MORTGAGOR [private respondents] to pay the interest
without prior arrangement with the MORTGAGEE [petitioner], full possession of the property will be
transferred and the deed of sale will be registered. [3] For this purpose, the owners duplicate of TCT No.
58748 was delivered to petitioner A. Francisco Realty.
Petitioner claims that private respondents failed to pay the interest and, as a consequence, it
registered the sale of the land in its favor on February 21, 1992. As a result, TCT No. 58748 was
cancelled and in lieu thereof TCT No. PT-85569 was issued in the name of petitioner A. Francisco Realty.

Private respondents subsequently obtained an additional loan of P2.5 Million from petitioner on
March 13, 1992 for which they signed a promissory note which reads:


For value received, I promise to pay A. FRANCISCO REALTY AND DEVELOPMENT

CORPORATION, the additional sum of Two Million Five Hundred Thousand Pesos (P2,500,000.00)
on or before April 27, 1992, with interest at the rate of four percent (4%) a month until fully paid and
if after the said date this note and/or the other promissory note of P7.5 Million remains unpaid
and/or unsettled, without any need for prior demand or notification, I promise to vacate voluntarily
appropriate and occupy for their exclusive use the real property located at 56 Dragonfly, Valle
Verde VI, Pasig, Metro Manila.[5]

Petitioner demanded possession of the mortgaged realty and the payment of 4% monthly interest
from May 1992, plus surcharges. As respondent spouses refused to vacate, petitioner filed the present
action for possession before the Regional Trial Court in Pasig City. [6]
In their answer, respondents admitted liability on the loan but alleged that it was not their intent to sell
the realty as the undated deed of sale was executed by them merely as an additional security for the
payment of their loan.
Furthermore, they claimed that they were not notified of the registration of the sale in favor of
petitioner A. Francisco Realty and that there was no interest then unpaid as they had in fact been paying
interest even subsequent to the registration of the sale. As an alternative defense,
respondents contended that the complaint was actually for ejectment and, therefore, the Regional Trial
Court had no jurisdiction to try the case. As counterclaim, respondents sought the cancellation of TCT No.
PT-85569 as secured by petitioner and the issuance of a new title evidencing their ownership of the
On December 19, 1992, the Regional Trial Court rendered a decision, the dispositive portion of
which reads as follows:

WHEREFORE, prescinding from the foregoing considerations, judgment is hereby rendered
declaring as legal and valid, the right of ownership of A. Francisco Realty And Development
Corporation, over the property subject of this case and now registered in its name as owner thereof,
under TCT No. 85569 of the Register of Deeds of Rizal, situated at No. 56 Dragonfly Street, Valle
Verde VI, Pasig, Metro Manila.

Consequently, defendants are hereby ordered to cease and desist from further committing acts of
dispossession or from withholding possession from plaintiff, of the said property as herein described
and specified.

Claim for damages in all its forms, however, including attorneys fees, are hereby denied, no
competent proofs having been adduced on record, in support thereof.[8]

Respondent spouses appealed to the Court of Appeals which reversed the decision of the trial court
and dismissed the complaint against them. The appellate court ruled that the Regional Trial Court had no
jurisdiction over the case because it was actually an action for unlawful detainer which is exclusively
cognizable by municipal trial courts. Furthermore, it ruled that, even presuming jurisdiction of the trial
court, the deed of sale was void for being in fact a pactum commissorium which is prohibited by Art. 2088
of the Civil Code.

Petitioner A. Francisco Realty filed a motion for reconsideration, but the Court of Appeals denied the
motion in its resolution, dated May 7, 1996.


1. Whether or not the Deed Of Sale is in the nature of pactum commissorium thus making it null and


1. YES, the Deed Of Sale is in the nature of pactum commissorium thus making it null and void.

The Supreme Court explained its ruling in this manner:

On the second issue, the Court of Appeals held that, even on the assumption that the trial court has
jurisdiction over the instant case, petitioners action could not succeed because the deed of sale on which
it was based was void, being in the nature of a pactum commissorium prohibited by Art. 2088 of the Civil
Code which provides:

ART. 2088. The creditor cannot appropriate the things given by way to pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.

With respect to this question, the ruling of the appellate court should be affirmed. Petitioner denies,
however, that the promissory notes contain a pactum commissorium. It contends that:

What is envisioned by Article 2088 of the Civil Code of the Philippines is a provision in the deed of
mortgage providing for the automatic conveyance of the mortgaged property in case of the failure of
the debtor to pay the loan (Tan v. West Coast Life Assurance Co., 54 Phil. 361). A pactum
commissorium is a forfeiture clause in a deed of mortgage (Hechanova v. Adil, 144 SCRA 450;
Montevergen v. Court of Appeals, 112 SCRA 641; Report of the Code Commission, 156).

Thus, before Article 2088 can find application herein, the subject deed of mortgage must be
scrutinized to determine if it contains such a provision giving the creditor the right to appropriate the
things given by way of mortgage without following the procedure prescribed by law for the
foreclosure of the mortgage (Ranjo v. Salmon, 15 Phil. 436). IN SHORT, THE PROSCRIBED

The contention is patently without merit. To sustain the theory of petitioner would be to allow a
subversion of the prohibition in Art. 2088.
In Nakpil v. Intermediate Appellate Court,[15] 225 SCRA 456 (1993) which involved the violation of a
constructive trust, no deed of mortgage was expressly executed between the parties in that case.
Nevertheless, this Court ruled that an agreement whereby property held in trust was ceded to the trustee
upon failure of the beneficiary to pay his debt to the former as secured by the said property was void for
being a pactum commissorium. It was there held:

The arrangement entered into between the parties, whereby Pulong Maulap was to be considered
sold to him (respondent) x x x in case petitioner fails to reimburse Valdes, must then be construed
as tantamount to a pactum commissorium which is expressly prohibited by Art. 2088 of the Civil
Code. For, there was to be automatic appropriation of the property by Valdez in the event of failure

of petitioner to pay the value of the advances. Thus, contrary to respondents manifestations, all the
elements of a pactum commissorium were present:

a. there was a creditor-debtor relationship between the parties;

b. the property was used as security for the loan; and

c. there was automatic appropriation by respondent of Pulong Maulap in case of default of

petitioner.[16] (Nakpil v. Intermediate Appellate Court, supra)

IN THE CASE AT BAR, Petitioner, to prove her claim, cannot rely on the stipulation in the contract
providing that complete and absolute title shall be vested on the vendee should the vendors fail to redeem
the property on the specified date.

Such stipulation that the ownership of the property would automatically pass to the vendee in case
no redemption was effected within the stipulated period is void for being a pactum commissorium which
enables the mortgagee to acquire ownership of the mortgaged property without need of foreclosure. Its
insertion in the contract is an avowal of the intention to mortgage rather that to sell the property .
(Olea v. Court of Appeals, 247 SCRA 274, 282-283 (1995)

Indeed, in Reyes v. Sierra[18] 93 SCRA 472 (1979) this Court categorically ruled that a mortgagees
mere act of registering the mortgaged property in his own name upon the mortgagors failure to redeem
the property amounted to the exercise of the privilege of a mortgagee in a pactum commissorium.

FURTHERMORE, IN THIS CASE, the subject transaction being void, the registration of the deed of
sale, by virtue of which petitioner A. Francisco Realty was able to obtain TCT No. PT-85569 covering the
subject lot, must also be declared void, as prayed for by respondents in their counterclaim.

THEREFORE, YES, the Deed Of Sale is in the nature of pactum commissorium thus making it null
and void.

Cruz vs. Serano
G.R. No. L-31018 November 6, 1929

It appears that prior to June 10, 1926, the plaintiff Cornelio Cruz had pledged valuable jewelry to two
different pawnshops in the city of Manila, namely, the Monte de Piedad and Ildefonso Tambunting,
receiving therefor twelve pawn tickets showing the terms upon which the articles pledged were held by
the pledges.

On the date stated the plaintiff, being desirous of obtaining a further loan upon the same and other jewels,
presented himself to the defendant Chua A.H Lee and pledged to him six pawn tickets of the Monte de
Piedad and a bracelet and the six tickets Lee delivered to the plaintiff a sum of money, for which the
plaintiff executed a receipt containing words to the effect that the amount of P3,020, therein stated,
represented the value of the bracelet and pawn tickets and that it was understood that Lee would become
the absolute owner of the articles pledge if Cruz should not return said sum of money within the period of
sixty days.

One week thereafter Cruz again presented himself at the place of business of Lee and received the
further sum of P3,500, at the same time delivering two pawn tickets of the House Of Ildefonso Tambunting
and four pawn tickets of the Monte de Piedad. At the same time Cruz signed a further receipt containing a
stipulation that the sale of the articles pledged would become absolute unless the amount stated in the
receipt should be return within sixty days.

The tickets which form the principal feature in these two pledges represented a pair of diamond earrings
previously pledged to Ildefonso Tambunting for P7,000, and several other pieces of jewelry previously
pledged to the Monte de Piedad for the aggregate amount of P2,020. All of these tickets were renewable,
according to the custom of pawnbrokers, upon payment from time to time of the sums of money
representing the interest accruing upon the debts for which the jewelry was pawned.

The right of repurchasing the jewelry, which was conceded to Cruz in the two receipt above mentioned,
was never exercised by him; and on September 25, 1926, Lee filed a complaint against Cruz in the Court
of First Instance of Manila (case No. 30569), in which it was allege that the receipts above mentioned had
been drawn in the form of a sale with stipulation for repurchase in sixty days but it was understood
between the parties that the transaction was a loan and that the jewelry and pawn tickets held by Lee
constituted a mere security for the money advanced by him to Cruz.

As a consequence Lee asked for judgment against Cruz in the amount of P6,520. On March 31, 1927,
judgment in said action was rendered in the Court of First Instance favorably to the plaintiff and, although
an attempt was made to get the decision reviewed in the Supreme Court, the judgment was affirmed for
failure of the appellants to cause a transcript of the oral testimony to be brought to said court. 1 After
affirmance of the judgment in the Supreme Court the cause was returned to the Court of First Instance for
execution, but as a result of certain proceedings not necessary to be here recounted, execution in that
case was suspended to wait the result of the judgment to be given in this case.

It appears that the defendant Lee on August 18, 1926, renewed the ten pawn tickets issued by the Monte
de Piedad by paying the interest necessary to effect the renewal, but these tickets all expired on October
18, 1926, and were never renewed. The pawn tickets issued by the Tambunting's pawnshop on the
diamond earrings were dated May 12, 1926, and remained good for one year, having expired on May 12,
1927. Although the pawn tickets issued by the Monte de Piedad expired on October 18, 1926, it is
admitted that they could have been renewed or the jewelry redeemed at any time prior to actual sale at
public auction, and these jewels were not sold by the Monte de Piedad until in the year 1927, when they
were, at different dates, brought in by the appraiser of the Monte de Piedad for the amount then due upon
the respective jewels.

But the jewelry represented by one of these pawn tickets was not sold until August 10, 1928. From this it
will be seen that all of the pawned jewelry was still subject to redemption when civil case No. 30569 was
first called for trial on January 3, 1927, and apparently the right of redemption on only one piece of jewelry
had been foreclosed by sale when the decision was rendered in the same case at the end of March. The
record does not show whether or not the earrings pawned to Ildefonso Tambunting were in fact sold after
the tickets lapsed on May 12, 1927, but it is proved that the jewelry was not forthcoming when a inquiry
was made therefor by the present plaintiff with a view to redemption after judgment had been rendered in
the instituted by Lee against him.


1. Whether a person who takes a pawn tickets in pledge is bound to renew the ticket from time to
time, by the payment of interest, or premium, as required by the pawnbroker, until the rights of the
pledgor are finally foreclosed.

2. Whether or not Chua, as pledgee, is liable for the loss of the thing pledged by reason of his


1. YES, a person who takes a pawn tickets in pledge is bound to renew the ticket from time to time,
by the payment of interest, or premium, as required by the pawnbroker, until the rights of the
pledgor are finally foreclosed.

Article 1867 of the Civil Code, provides that:

The creditor must take care of the thing given in pledge with the diligence of a good father of a family;
he shall be entitled to recover any expenses incurred for its preservation and shall be liable for its loss
or deterioration, in accordance with the provisions of this code.

In applying this provision to the situation before us it must be borne in mind that the ordinary
pawn ticket is a document by virtue of which the property in the thing pledged passes from hand to hand
by mere delivery of the ticket; and the contract of the pledge is, therefore, absolvable to bearer. It results
that one who takes a pawn ticket in pledge acquires domination over the pledge; and it is the holder who
must renew the pledge, if it is to be kept alive.

Article 1867 contemplates that the pledgee may have to undergo expenses in order to prevent
the pledge from being lost; and this expenses the pledgee is entitled to recover from the pledgor.

From this it follows that were, in a case like this, the pledge is lost by the failure of the pledgee to
renew the loan, he is liable for the resulting damage. Nor, in this case, was the duty of the pledgee
destroyed by the fact that the pledgee had obtained a judgment for the debt of the pledgor which was
secured by the pledge. The duty to use the deligence of a good father of the family in caring for the
pledge subsists as long as the pledge article remains in the power of the pledgee.

THEREFORE, a person who takes a pawn tickets in pledge is bound to renew the ticket from
time to time, by the payment of interest, or premium, as required by the pawnbroker, until the rights of the
pledgor are finally foreclosed.

2. YES, Chua, as pledgee, is liable for the loss of the thing pledged by reason of his negligence.

In Griggs vs. Day (32 Am. St. Rep., 718), is said:

As the holder of collateral security is entitled to its possession and to the extent of his interest is
substantially the owner thereof, he must, to a certain extent at least, assume the duties of the
ownership, and furthermore must protect the interest of his pledgor as well as his own, because
the latter, by giving the collateral security, has parted with the power to protect himself. The
contract carries with it the implication that the security shall be made available to discharge the
obligation': Wheeler vs. Newbould, 16 N.Y., 396. We apprehend that it carries with it the further
implication that the property, no matter what its character, shall be lost through the negligence or
inattention of the pledgee.

In commenting upon article 1867 of the Civil Code, the commentator Manresa points out that the
predecessor article in the Civil Code of 1851 limited itself to declaring that the creditor should take such
care of the pledged thing as the good father of the family, and this led to a lively controversy among the
civilians concerning the consequences of the duty of conservation or safekeeping imposed upon the
creditor. But this controversy, says the learned author, has largely lost its interest because the authors of
the Code put an end to such discussions by defining the responsibility of the creditor in a form so clear
and explicit as to leave no room for doubt (Manresa, Codigo Civil. 4426, 427).

In the treatise of Colin and Capitant on the Civil Law, it is stated that the creditor who receives an
article in pledge must bear all the expenses necessary to secure the conservation of the pledge and that
the debtor is bound to reimburse him for such expenses.

As an illustration of the duty of the pledgee to exercise diligence in preserving the pledge, he
states that a pledgee who fails to renew at the proper time the inscription of a mortgage guaranteeing a
credit will be liable for the damage resulting from its loss (opus citat, p. 77). To the same effect is a
passage found in the pages of the French commentator Troplong, Droit Civil Explique, Du Gage, sec.

The question of the extent of the duty of the pledgee in caring for the property pledged has often
been discussed in connection with pledges of collateral security. In this case we find the following
observation made by the author of the title "Pledge" in 21 Ruling Case Law, to wit:

The rights and duties of parties to a pledge of securities for the payment of the debt may of course be
fixed by agreement as to the manner in which they are to be collected, but as a general rule not only
is it the right of the holder of collateral security to collect the money thereon and apply it to the
principal debt but his duties in this respect are active and he is bound to ordinary diligence to
preserve the legal validity and pecuniary value of the pledge, and if by negligence, wrongful act or
omission on his part loss is sustained, it must be borne by him. (Pledge, sec. 30.)

THE APPLICATION of the doctrine above expounded to the case in hand leads the conclusion
that the defendant Chua A. H. Lee in the case before us IS liable for the value of the securities lost by his
failure to keep the pledges alive in the extent of their actual value over the amounts for which the same
were pledged; and the trial court, in our opinion, committed no error is so holding.

THEREFORE, Chua, as pledgee, is liable for the loss of the thing pledged by reason of his

Manila v. Velayo
G.R. No. L-21069 October 26, 1967

Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No. 49435) sentencing
appellant Rodolfo Velayo to pay appellee Manila Surety & Fidelity Co., Inc. the sum of P2,565.00 with
interest at 12-½% per annum from July 13, 1954; P120.93 as premiums with interest at the same rate
from June 13, 1954: attorneys' fees in an amount equivalent to 15% of the total award, and the costs.

Hub of the controversy are the applicability and extinctive effect of Article 2115 of the Civil Code of the
Philippines (1950).

The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of Rodolfo Velayo,
executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita
Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila. Velayo undertook to
pay the surety company an annual premium of P112.00; to indemnify the Company for any damage and
loss of whatsoever kind and nature that it shall or may suffer, as well as reimburse the same for all money
it should pay or become liable to pay under the bond including costs and attorneys' fees.

As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety
Company "for the latter's further protection", with power to sell the same in case the surety paid or
become obligated to pay any amount of money in connection with said bond, applying the proceeds to the
payment of any amounts it paid or will be liable to pay, and turning the balance, if any, to the persons
entitled thereto, after deducting legal expenses and costs (Rec. App. pp. 12-15).

Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution
having been returned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to
recoup from Velayo; and upon the latter's failure to do so, the surety caused the pledged jewelry to be
sold, realizing therefrom a net product of P235.00 only. Thereafter and upon Velayo's failure to pay the
balance, the surety company brought suit in the Municipal Court. Velayo countered with a claim that the
sale of the pledged jewelry extinguished any further liability on his part under Article 2115 of the 1950 Civil
Code, which recites:

Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not
the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses
in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled
to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary.

The Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed to the
Court of First Instance, the defense was once more overruled, and the case decided in the terms set
down at the start of this opinion.


1. Whether or not Article 2115 is applicable in the instant case.


1. YES, Article 2115 is applicable in the instant case.

The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-72):

It is thus crystal clear that the main agreement between the parties is the Indemnity Agreement and
if the pieces of jewelry mentioned by the defendant were delivered to the plaintiff, it was merely as
an added protection to the latter. There was no understanding that, should the same be sold at
public auction and the value thereof should be short of the undertaking, the defendant would have
no further liability to the plaintiff. On the contrary, the last portion of the said agreement specifies
that in case the said collateral should diminish in value, the plaintiff may demand additional
securities. This stipulation is incompatible with the idea of pledge as a principal agreement. In this
case, the status of the pledge is nothing more nor less than that of a mortgage given as a collateral
for the principal obligation in which the creditor is entitled to a deficiency judgment for the balance
should the collateral not command the price equal to the undertaking.

It appearing that the collateral given by the defendant in favor of the plaintiff to secure this
obligation has already been sold for only the amount of P235.00, the liability of the defendant
should be limited to the difference between the amounts of P2,800.00 and P235.00 or P2,565.00.

The above quoted reasoning of the appealed decision is unsound.

The accessory character is of the essence of pledge and mortgage. As stated in Article 2085 of
the 1950 Civil Code, an essential requisite of these contracts is that they be constituted to secure the
fulfillment of a principal obligation, which in the present case is Velayo's undertaking to indemnify the
surety company for any disbursements made on account of its attachment counterbond. Hence, the fact
that the pledge is not the principal agreement is of no significance nor is it an obstacle to the application
of Article 2115 of the Civil Code.

The reviewed decision further assumes that the extinctive effect of the sale of the pledged
chattels must be derived from stipulation. This is incorrect, because Article 2115, in its last portion, clearly
establishes that the extinction of the principal obligation supervenes by operation of imperative law that
the parties cannot override:

If the price of the sale is less, neither shall the creditor be entitled to recover the
deficiency notwithstanding any stipulation to the contrary.

The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the
articles pledged, instead of suing on the principal obligation, the creditor has waived any other remedy,
and must abide by the results of the sale. No deficiency is recoverable.

It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the
legal prescription contained in Article 1484(3) of the same Code, concerning the effect of a foreclosure of
a chattel mortgage constituted to secure the price of the personal property sold in installments, and which
originated in Act 4110 promulgated by the Philippine Legislature in 1933.
THEREFORE, Article 2115 is applicable in the instant case.