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Article 1933.

By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the contract
is called a commodatum; or money or other consumable thing, upon the condition that the same amount
of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership
passes to the borrower. (1740a)

Article 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding
upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the
object of the contract. (n)

Article 1935. The bailee in commodatum acquires the use of the thing loaned but not its fruits; if any
compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum.
(1941a)

Article 1936. 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. (n)

Article 1937. Movable or immovable property may be the object of commodatum. (n)

Article 1938. The bailor in commodatum need not be the owner of the thing loaned. (n)

Article 1939. Commodatum is purely personal in character. Consequently:

(1) The death of either the bailor or the bailee extinguishes the contract;

(2) The bailee can neither lend nor lease the object of the contract to a third person.
However, the members of the bailee's household may make use of the thing loaned,
unless there is a stipulation to the contrary, or unless the nature of the thing forbids such
use. (n)

Article 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid. (n)

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,


vs.
JOSE V. BAGTAS, defendant.

On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of
Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a
Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes
subject to a government charge of breeding fee of 10% of the book value of the bulls. Upon the expiration
on 7 May 1949 of the contract, the borrower asked for a renewal for another period of one year. However,
the Secretary of Agriculture and Natural Resources approved a renewal thereof of only one bull for
another year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On 25 March
1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the value of the three
bulls. On 17 October 1950 he reiterated his desire to buy them at a value with a deduction of yearly
depreciation to be approved by the Auditor General. On 19 October 1950 the Director of Animal Industry
advised him that the book value of the three bulls could not be reduced and that they either be returned or
their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book value of the
three bulls or to return them. So, on 20 December 1950 in the Court of First Instance of Manila the
Republic of the Philippines commenced an action against him praying that he be ordered to return the
three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding
fee in the sum of P199.62, both with interests, and costs; and that other just and equitable relief be
granted in (civil No. 12818).

On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of
the bad peace and order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the
pending appeal he had taken to the Secretary of Agriculture and Natural Resources and the President of
the Philippines from the refusal by the Director of Animal Industry to deduct from the book value of the
bulls corresponding yearly depreciation of 8% from the date of acquisition, to which depreciation the
Auditor General did not object, he could not return the animals nor pay their value and prayed for the
dismissal of the complaint.

After hearing, on 30 July 1956 the trial court render judgment —

. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the
three bulls plus the breeding fees in the amount of P626.17 with interest on both sums of
(at) the legal rate from the filing of this complaint and costs.

On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18
October and issued on 11 November 1958. On 2 December 1958 granted an ex-parte motion filed by the
plaintiff on November 1958 for the appointment of a special sheriff to serve the writ outside Manila. Of this
order appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas, the surviving spouse of the
defendant Jose Bagtas who died on 23 October 1951 and as administratrix of his estate, was notified. On
7 January 1959 she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were
returned to the Bureau Animal of Industry and that sometime in November 1958 the third bull, the
Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda Felicidad Intal, and praying
that the writ of execution be quashed and that a writ of preliminary injunction be issued. On 31 January
1959 the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto. On the same day,
6 February, the Court denied her motion. Hence, this appeal certified by the Court of Appeals to this
Court as stated at the beginning of this opinion.

It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned
the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal
Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter
(Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's motion to quash the writ of
execution the appellee prays "that another writ of execution in the sum of P859.53 be issued against the
estate of defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls which already
had been returned to and received by the appellee.

The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in
November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the
animal was kept, and that as such death was due to force majeure she is relieved from the duty of
returning the bull or paying its value to the appellee. The contention is without merit. The loan by the
appellee to the late defendant Jose V. Bagtas of the three bulls for breeding purposes for a period of one
year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull, was subject
to the payment by the borrower of breeding fee of 10% of the book value of the bulls. The appellant
contends that the contract was commodatum and that, for that reason, as the appellee retained
ownership or title to the bull it should suffer its loss due to force majeure. A contract of commodatum is
essentially gratuitous.1 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, because article 1942 of the
Civil Code provides that a bailee in a contract of commodatum —

. . . is liable for loss of the things, even if it should be through a fortuitous event:

(2) If he keeps it longer than the period stipulated . . .

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of a fortuitous event;

The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for
another period of one year to end on 8 May 1950. But the appellant kept and used the bull until
November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and
delivered to the deceased husband of the appellant the bulls had each an appraised book value, to with:
the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated
that in case of loss of the bull due to fortuitous event the late husband of the appellant would be exempt
from liability.

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,


vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents.

The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a long
time ago can properly be considered res judicata by respondent Court of Appeals in the present two
cases between petitioner and two private respondents.

Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's conclusions
that the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the two cases
affirmed by the Supreme Court, touched on the ownership of lots 2 and 3 in question; that the two lots
were possessed by the predecessors-in-interest of private respondents under claim of ownership in good
faith from 1906 to 1951; that petitioner had been in possession of the same lots as bailee in commodatum
up to 1951, when petitioner repudiated the trust and when it applied for registration in 1962; that petitioner
had just been in possession as owner for eleven years, hence there is no possibility of acquisitive
prescription which requires 10 years possession with just title and 30 years of possession without; that
the principle of res judicata on these findings by the Court of Appeals will bar a reopening of these
questions of facts; and that those facts may no longer be altered.

... The documents and records presented reveal that the whole
controversy started when the defendant Catholic Vicar Apostolic
of the Mountain Province (VICAR for brevity) filed with the Court
of First Instance of Baguio Benguet on September 5, 1962 an
application for registration of title over Lots 1, 2, 3, and 4 in Psu-
194357, situated at Poblacion Central, La Trinidad, Benguet,
docketed as LRC N-91, said Lots being the sites of the Catholic
Church building, convents, high school building, school
gymnasium, school dormitories, social hall, stonewalls, etc. On
March 22, 1963 the Heirs of Juan Valdez and the Heirs of
Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2
and 3, respectively, asserting ownership and title thereto. After
trial on the merits, the land registration court promulgated its
Decision, dated November 17, 1965, confirming the registrable
title of VICAR to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No.
3655) and the Heirs of Egmidio Octaviano (plaintiffs in the herein
Civil Case No. 3607) appealed the decision of the land
registration court to the then Court of Appeals, docketed as CA-
G.R. No. 38830-R. The Court of Appeals rendered its decision,
dated May 9, 1977, reversing the decision of the land registration
court and dismissing the VICAR's application as to Lots 2 and 3,
the lots claimed by the two sets of oppositors in the land
registration case (and two sets of plaintiffs in the two cases now
at bar), the first lot being presently occupied by the convent and
the second by the women's dormitory and the sister's convent.

On May 9, 1977, the Heirs of Octaviano filed a motion for


reconsideration praying the Court of Appeals to order the
registration of Lot 3 in the names of the Heirs of Egmidio
Octaviano, and on May 17, 1977, the Heirs of Juan Valdez and
Pacita Valdez filed their motion for reconsideration praying that
both Lots 2 and 3 be ordered registered in the names of the
Heirs of Juan Valdez and Pacita Valdez. On August 12,1977, the
Court of Appeals denied the motion for reconsideration filed by
the Heirs of Juan Valdez on the ground that there was "no
sufficient merit to justify reconsideration one way or the other ...,"
and likewise denied that of the Heirs of Egmidio Octaviano.

Thereupon, the VICAR filed with the Supreme Court a petition for
review on certiorari of the decision of the Court of Appeals
dismissing his (its) application for registration of Lots 2 and 3,
docketed as G.R. No. L-46832, entitled 'Catholic Vicar Apostolic
of the Mountain Province vs. Court of Appeals and Heirs of
Egmidio Octaviano.'

From the denial by the Court of Appeals of their motion for


reconsideration the Heirs of Juan Valdez and Pacita Valdez, on
September 8, 1977, filed with the Supreme Court a petition for
review, docketed as G.R. No. L-46872, entitled, Heirs of Juan
Valdez and Pacita Valdez vs. Court of Appeals, Vicar, Heirs of
Egmidio Octaviano and Annable O. Valdez.

On January 13, 1978, the Supreme Court denied in a minute


resolution both petitions (of VICAR on the one hand and the
Heirs of Juan Valdez and Pacita Valdez on the other) for lack of
merit. Upon the finality of both Supreme Court resolutions in
G.R. No. L-46832 and G.R. No. L- 46872, the Heirs of Octaviano
filed with the then Court of First Instance of Baguio, Branch II, a
Motion For Execution of Judgment praying that the Heirs of
Octaviano be placed in possession of Lot 3. The Court, presided
over by Hon. Salvador J. Valdez, on December 7, 1978, denied
the motion on the ground that the Court of Appeals decision in
CA-G.R. No. 38870 did not grant the Heirs of Octaviano any
affirmative relief.

On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R.
No. 38830-R, affirmed by this Court, We see no error in respondent appellate court's ruling that said
findings are res judicata between the parties. They can no longer be altered by presentation of evidence
because those issues were resolved with finality a long time ago. To ignore the principle of res
judicata would be to open the door to endless litigations by continuous determination of issues without
end.

The Court of Appeals found that petitioner did not meet the requirement of 30 years possession for
acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession for
ordinary acquisitive prescription because of the absence of just title. The appellate court did not believe
the findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was
acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely no
documentary evidence to support the same and the alleged purchases were never mentioned in the
application for registration.

Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar
after the church and the convent were destroyed. They never asked for the return of the house, but when
they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees'
failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the
part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse
claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of
petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription
because of the absence of just title.

The Court of Appeals found that the predecessors-in-interest and private respondents were possessors
under claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee in commodatum;
and that the adverse claim and repudiation of trust came only in 1951.

REPUBLIC OF THE PHILIPPINES (BUREAU OF LANDS), petitioner,


vs.
THE HON. COURT OF APPEALS, HEIRS OF DOMINGO P. BALOY, ET AL., respondents.

Applicants' claim is anchored on their possessory information title (Exhibit F which had been translated in
Exhibit F-1) coupled with their continuous, adverse and public possession over the land in question. An
examination of the possessory information title shows that the description and the area of the land stated
therein substantially coincides with the land applied for and that said possessory information title had
been regularly issued having been acquired by applicants' predecessor, Domingo Baloy, under the
provisions of the Spanish Mortgage Law. Applicants presented their tax declaration on said lands on April
8, 1965.

The Director of Lands opposed the registration alleging that this land had become public land thru the
operation of Act 627 of the Philippine Commission. On November 26, 1902 pursuant to the executive
order of the President of the U.S., the area was declared within the U.S. Naval Reservation. Under Act
627 as amended by Act 1138, a period was fixed within which persons affected thereby could file their
application, (that is within 6 months from July 8, 1905) otherwise "the said lands or interest therein will be
conclusively adjudged to be public lands and all claims on the part of private individuals for such lands or
interests therein not to presented will be forever barred." Petitioner argues that since Domingo Baloy
failed to file his claim within the prescribed period, the land had become irrevocably public and could not
be the subject of a valid registration for private ownership.

A cursory reading of Sec. 3, Act 627 reveals that several steps are to be followed before any affected
land can "be conclusively adjudged to be public land." Sec. 3, Act 627 reads as follows:

Clearly under said provisions, private land could be deemed to have become public land only by virtue of
a judicial declaration after due notice and hearing. It runs contrary therefore to the contention of
petitioners that failure to present claims set forth under Sec. 2 of Act 627 made the land ipso facto public
without any deed of judicial pronouncement. Petitioner in making such declaration relied on Sec. 4 of Act
627 alone. But in construing a statute the entire provisions of the law must be considered in order to
establish the correct interpretation as intended by the law-making body. Act 627 by its terms is not self-
executory and requires implementation by the Court of Land Registration. Act 627, to the extent that it
creates a forfeiture, is a penal statute in derogation of private rights, so it must be strictly construed so as
to safeguard private respondents' rights. Significantly, petitioner does not even allege the existence of any
judgment of the Land Registration court with respect to the land in question. Without a judgment or order
declaring the land to be public, its private character and the possessory information title over it must be
respected. Since no such order has been rendered by the Land Registration Court it necessarily follows
that it never became public land thru the operation of Act 627. To assume otherwise is to deprive private
respondents of their property without due process of law. In fact it can be presumed that the notice
required by law to be given by publication and by personal service did not include the name of Domingo
Baloy and the subject land, and hence he and his lane were never brought within the operation of Act 627
as amended. The procedure laid down in Sec. 3 is a requirement of due process. "Due process requires
that the statutes which under it is attempted to deprive a citizen of private property without or against his
consent must, as in expropriation cases, be strictly complied with, because such statutes are in
derogation of general rights." (Arriete vs. Director of Public Works, 58 Phil. 507, 508, 511).

We also find with favor private respondents' views that court judgments are not to be presumed. It would
be absurd to speak of a judgment by presumption. If it could be contended that such a judgment may be
presumed, it could equally be contended that applicants' predecessor Domingo Baloy presumably
seasonably filed a claim, in accordance with the legal presumption that a person takes ordinary care of
his concerns, and that a judgment in his favor was rendered.

The finding of respondent court that during the interim of 57 years from November 26, 1902 to December
17, 1959 (when the U.S. Navy possessed the area) the possessory rights of Baloy or heirs were merely
suspended and not lost by prescription, is supported by Exhibit "U," a communication or letter No. 1108-
63, dated June 24, 1963, which contains an official statement of the position of the Republic of the
Philippines with regard to the status of the land in question. Said letter recognizes the fact that Domingo
Baloy and/or his heirs have been in continuous possession of said land since 1894 as attested by an
"Informacion Possessoria" Title, which was granted by the Spanish Government. Hence, the disputed
property is private land and this possession was interrupted only by the occupation of the land by the U.S.
Navy in 1945 for recreational purposes. The U.S. Navy eventually abandoned the premises. The heirs of
the late Domingo P. Baloy, are now in actual possession, and this has been so since the abandonment by
the U.S. Navy. A new recreation area is now being used by the U.S. Navy personnel and this place is
remote from the land in question.

Clearly, the occupancy of the U.S. Navy was not in the concept of owner. It partakes of the character of a
commodatum. It cannot therefore militate against the title of Domingo Baloy and his successors-in-
interest. One's ownership of a thing may be lost by prescription by reason of another's possession if such
possession be under claim of ownership, not where the possession is only intended to be transient, as in
the case of the U.S. Navy's occupation of the land concerned, in which case the owner is not divested of
his title, although it cannot be exercised in the meantime.

MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,


vs.
BECK, defendant-appellee.

The plaintiff brought this action to compel the defendant to return her certain furniture which she lent him
for his use. She appealed from the judgment of the Court of First Instance of Manila which ordered that
the defendant return to her the three has heaters and the four electric lamps found in the possession of
the Sheriff of said city, that she call for the other furniture from the said sheriff of Manila at her own
expense, and that the fees which the Sheriff may charge for the deposit of the furniture be paid pro
rata by both parties, without pronouncement as to the costs.

The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del
Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the
plaintiff and the defendant, the former gratuitously granted to the latter the use of the furniture described
in the third paragraph of the stipulation of facts, subject to the condition that the defendant would return
them to the plaintiff upon the latter's demand. The plaintiff sold the property to Maria Lopez and Rosario
Lopez and on September 14, 1936, these three notified the defendant of the conveyance, giving him sixty
days to vacate the premises under one of the clauses of the contract of lease. Thereafter the plaintiff
required the defendant to return all the furniture transferred to him for them in the house where they were
found. On November 5, 1936, the defendant, through another person, wrote to the plaintiff reiterating that
she may call for the furniture in the ground floor of the house. On the 7th of the same month, the
defendant wrote another letter to the plaintiff informing her that he could not give up the three gas heaters
and the four electric lamps because he would use them until the 15th of the same month when the lease
is due to expire. The plaintiff refused to get the furniture in view of the fact that the defendant had
declined to make delivery of all of them. On November 15th, before vacating the house, the defendant
deposited with the Sheriff all the furniture belonging to the plaintiff and they are now on deposit in the
warehouse situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.

The contract entered into between the parties is one of commodatum, because under it the plaintiff
gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership thereof;
by this contract the defendant bound himself to return the furniture to the plaintiff, upon the latter’s
demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil Code). The
obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's demand, means
that he should return all of them to the plaintiff at the latter's residence or house. The defendant did not
comply with this obligation when he merely placed them at the disposal of the plaintiff, retaining for his
benefit the three gas heaters and the four eletric lamps. The provisions of article 1169 of the Civil Code
cited by counsel for the parties are not squarely applicable. The trial court, therefore, erred when it came
to the legal conclusion that the plaintiff failed to comply with her obligation to get the furniture when they
were offered to her.

As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the
latter's demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of
the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on
deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the
defendant wanted to retain the three gas heaters and the four electric lamps.

The costs in both instances should be borne by the defendant because the plaintiff is the prevailing
party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the contract
of commodatum, and without any reason he refused to return and deliver all the furniture upon the
plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal expenses and
other judicial costs which the plaintiff would not have otherwise defrayed.

Article 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the
thing loaned. (1743a)

Article 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event:

(1) If he devotes the thing to any purpose different from that for which it has been loaned;

(2) If he keeps it longer than the period stipulated, or after the accomplishment of the use
for which the commodatum has been constituted;

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of a fortuitous event;

(4) If he lends or leases the thing to a third person, who is not a member of his
household;
(5) If, being able to save either the thing borrowed or his own thing, he chose to save the
latter. (1744a and 1745)

Article 1943. The bailee does not answer for the deterioration of the thing loaned due only to the use
thereof and without his fault. (1746)

Article 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him something,
even though it may be by reason of expenses. However, the bailee has a right of retention for damages
mentioned in article 1951. (1747a)

Article 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they
are liable solidarily. (1748a)

FELIX DE LOS SANTOS, plaintiff-appelle,


vs.
AGUSTINA JARRA, defendant-appellant.

On the 1st of September, 1906, Felix de los Santos brought suit against Agustina Jarra, the administratrix
of the estate of Magdaleno Jimenea, alleging that in the latter part of 1901 Jimenea borrowed and
obtained from the plaintiff ten first-class carabaos, to be used at the animal-power mill of his hacienda
during the season of 1901-2, without recompense or remuneration whatever for the use thereof, under
the sole condition that they should be returned to the owner as soon as the work at the mill was
terminated; that Magdaleno Jimenea, however, did not return the carabaos, notwithstanding the fact that
the plaintiff claimed their return after the work at the mill was finished; that Magdaleno Jimenea died on
the 28th of October, 1904, and the defendant herein was appointed by the Court of First Instance of
Occidental Negros administratrix of his estate and she took over the administration of the same and is still
performing her duties as such administratrix; that the plaintiff presented his claim to the commissioners of
the estate of Jimenea, within the legal term, for the return of the said ten carabaos, but the said
commissioners rejected his claim as appears in their report; therefore, the plaintiff prayed that judgment
be entered against the defendant as administratrix of the estate of the deceased, ordering her to return
the ten first-class carabaos loaned to the late Jimenea, or their present value, and to pay the costs.

The defendant has admitted that Magdaleno Jimenea asked the plaintiff for the loan of ten carabaos
which are now claimed by the latter, as shown by two letters addressed by the said Jimenea to Felix de
los Santos; but in her answer the said defendant alleged that the late Jimenea only obtained three
second-class carabaos, which were subsequently sold to him by the owner, Santos; therefore, in order to
decide this litigation it is indispensable that proof be forthcoming that Jimenea only received three
carabaos from his son-in-law Santos, and that they were sold by the latter to him.

The record discloses that it has been fully proven from the testimony of a sufficient number of witnesses
that the plaintiff, Santos, sent in charge of various persons the ten carabaos requested by his father-in-
law, Magdaleno Jimenea, in the two letters produced at the trial by the plaintiff, and that Jimenea received
them in the presence of some of said persons, one being a brother of said Jimenea, who saw the animals
arrive at the hacienda where it was proposed to employ them. Four died of rinderpest, and it is for this
reason that the judgment appealed from only deals with six surviving carabaos.

The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not evidenced by any
trustworthy documents such as those of transfer, nor were the declarations of the witnesses presented by
the defendant affirming it satisfactory; for said reason it can not be considered that Jimenea only received
three carabaos on loan from his son-in-law, and that he afterwards kept them definitely by virtue of the
purchase.

From the foregoing it may be logically inferred that the carabaos loaned or given on commodatum to the
now deceased Magdaleno Jimenea were ten in number; that they, or at any rate the six surviving ones,
have not been returned to the owner thereof, Felix de los Santos, and that it is not true that the latter sold
to the former three carabaos that the purchaser was already using; therefore, as the said six carabaos
were not the property of the deceased nor of any of his descendants, it is the duty of the administratrix of
the estate to return them or indemnify the owner for their value.

The Civil Code, in dealing with loans in general, from which generic denomination the specific one of
commodatum is derived, establishes prescriptions in relation to the last-mentioned contract by the
following articles:

ART. 1740. By the contract of loan, one of the parties delivers to the other, either
anything not perishable, in order that the latter may use it during a certain period and
return it to the former, in which case it is called commodatum, or money or any other
perishable thing, under the condition to return an equal amount of the same kind and
quality, in which case it is merely called a loan.

Commodatum is essentially gratuitous.

A simple loan may be gratuitous, or made under a stipulation to pay interest.

ART. 1741. The bailee acquires retains the ownership of the thing loaned. The bailee
acquires the use thereof, but not its fruits; if any compensation is involved, to be paid by
the person requiring the use, the agreement ceases to be a commodatum.

ART. 1742. The obligations and rights which arise from the commodatum pass to the
heirs of both contracting parties, unless the loan has been in consideration for the person
of the bailee, in which case his heirs shall not have the right to continue using the thing
loaned.

The carabaos delivered to be used not being returned by the defendant upon demand, there is no doubt
that she is under obligation to indemnify the owner thereof by paying him their value.

Article 1101 of said code reads:

Those who in fulfilling their obligations are guilty of fraud, negligence, or delay, and those
who in any manner whatsoever act in contravention of the stipulations of the same, shall
be subjected to indemnify for the losses and damages caused thereby.

The obligation of the bailee or of his successors to return either the thing loaned or its value, is sustained
by the supreme tribunal of Sapin. In its decision of March 21, 1895, it sets out with precision the legal
doctrine touching commodatum as follows:

Although it is true that in a contract of commodatum the bailor retains the ownership of
the thing loaned, and at the expiration of the period, or after the use for which it was
loaned has been accomplished, it is the imperative duty of the bailee to return the thing
itself to its owner, or to pay him damages if through the fault of the bailee the thing should
have been lost or injured, it is clear that where public securities are involved, the trial
court, in deferring to the claim of the bailor that the amount loaned be returned him by the
bailee in bonds of the same class as those which constituted the contract, thereby
properly applies law 9 of title 11 of partida 5.

Article 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the period
stipulated, or after the accomplishment of the use for which the commodatum has been constituted.
However, if in the meantime, he should have urgent need of the thing, he may demand its return or
temporary use.

In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the
possession of the bailor. (1749a)

Article 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium,
in the following cases:

(1) If neither the duration of the contract nor the use to which the thing loaned should be
devoted, has been stipulated; or

(2) If the use of the thing is merely tolerated by the owner. (1750a)

Article 1948. The bailor may demand the immediate return of the thing if the bailee commits any act of
ingratitude specified in article 765. (n)

Article 1949. The bailor shall refund the extraordinary expenses during the contract for the preservation
of the thing loaned, provided the bailee brings the same to the knowledge of the bailor before incurring
them, except when they are so urgent that the reply to the notification cannot be awaited without danger.

If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even
though he acted without fault, they shall be borne equally by both the bailor and the bailee, unless there is
a stipulation to the contrary. (1751a)

Article 1950. If, for the purpose of making use of the thing, the bailee incurs expenses other than those
referred to in articles 1941 and 1949, he is not entitled to reimbursement. (n)

Article 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the
same, shall be liable to the latter for the damages which he may suffer by reason thereof. (1752)

Article 1952. The bailor cannot exempt himself from the payment of expenses or damages by
abandoning the thing to the bailee. (n)

Article 1953. A person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. (1753a)

Article 1954. A contract whereby one person transfers the ownership of non-fungible things to another
with the obligation on the part of the latter to give things of the same kind, quantity, and quality shall be
considered a barter. (n)

Article 1955. The obligation of a person who borrows money shall be governed by the provisions of
articles 1249 and 1250 of this Code.

If what was loaned is a fungible thing other than money, the debtor owes another thing of the same kind,
quantity and quality, even if it should change in value. In case it is impossible to deliver the same kind, its
value at the time of the perfection of the loan shall be paid. (1754a)

Article 1956. No interest shall be due unless it has been expressly stipulated in writing. (1755a)

Article 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the
laws against usury shall be void. The borrower may recover in accordance with the laws on usury. (n)
Article 1958. In the determination of the interest, if it is payable in kind, its value shall be appraised at the
current price of the products or goods at the time and place of payment. (n)

Article 1959. Without prejudice to the provisions of article 2212, interest due and unpaid shall not earn
interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which
as added principal, shall earn new interest. (n)

Article 1960. If the borrower pays interest when there has been no stipulation therefor, the provisions of
this Code concerning solutio indebiti, or natural obligations, shall be applied, as the case may be. (n)

Article 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so far as
they are not inconsistent with this Code. (n)

CHEE KIONG YAM, AMPANG MAH, ANITA YAM JOSE Y.C. YAM AND RICHARD YAM, petitioners,
vs.
HON. NABDAR J. MALIK, PEOPLE OF THE PHILIPPINES, ROSALINDA AMIN, et al, respondents.

Petitioners alleged that respondent Municipal Judge Nabdar J. Malik of Jolo, Sulu, acted without
jurisdiction, in excess of jurisdiction and with grave abuse of discretion when:

(a) he held in the preliminary investigation of the charges of estafa filed by respondents Rosalinda Amin,
Tan Chu Kao and Augusto Sajor against petitioners that there was a prima facie case against the latter;

(b) he issued warrants of arrest against petitioners after making the above determination; and

(c) he undertook to conduct trial on the merits of the charges which were docketed in his court as Criminal
Cases No. M-111, M-183 and M-208.

Respondent judge is said to have acted without jurisdiction, in excess of jurisdiction and with grave abuse
of discretion because the facts recited in the complaints did not constitute the crime of estafa, and
assuming they did, they were not within the jurisdiction of the respondent judge.

In Criminal Case No. M-111, respondent Rosalinda M. Amin charges petitioners Yam Chee Kiong and
Yam Yap Kieng with estafa through misappropriation of the amount of P50,000.00. But the complaint
states on its face that said petitioners received the amount from respondent Rosalinda M. Amin "as a
loan." Moreover, the complaint in Civil Case No. N-5, an independent action for the collection of the same
amount filed by respondent Rosalinda M. Amin with the Court of First Instance of Sulu on September 11,
1975, likewise states that the P50,000.00 was a "simple business loan" which earned interest and was
originally demandable six (6) months from July 12, 1973. (Annex E of the petition.)

In Criminal Case No. M-183, respondent Tan Chu Kao charges petitioners Yam Chee Kiong, Jose Y.C.
Yam, Ampang Mah and Anita Yam, alias Yong Tay, with estafa through misappropriation of the amount of
P30,000.00. Likewise, the complaint states on its face that the P30,000.00 was "a simple loan." So does
the complaint in Civil Case No. N-8 filed by respondent Tan Chu Kao on April 6, 1976 with the Court of
First Instance of Sulu for the collection of the same amount. (Annex D of the petition.).

In Criminal Case No. M-208, respondent Augusto Sajor charges petitioners Jose Y.C. Yam, Anita Yam
alias Yong Tai Mah, Chee Kiong Yam and Richard Yam, with estafa through misappropriation of the
amount of P20,000.00. Unlike the complaints in the other two cases, the complaint in Criminal Case No.
M-208 does not state that the amount was received as loan. However, in a sworn statement dated
September 29, 1976, submitted to respondent judge to support the complaint, respondent Augusto Sajor
states that the amount was a "loan." (Annex G of the petition.).
We agree with the petitioners that the facts alleged in the three criminal complaints do not constitute
estafa through misappropriation.

Estafa through misappropriation is committed according to Article 315, paragraph 1, subparagraph (b), of
the Revised Penal Code as follows:

Art. 315. Swindling (Estafa). — Any person who shall defraud another by any of
the means mentioned herein below shall be punished by:

xxx xxx xxx

1. With unfaithfulness or abuse of confidence namely:

xxx xxx xxx

b) By misappropriating or converting, to the prejudice of another, money, goods,


or any other personal property received by the offender in trust or on
commission, or for administration, or under any other obligation involving the duty
to make delivery of or to return the same, even though such obligation be totally
or partially guaranteed by a bond; or by denying having received such money,
goods, or other property.

In order that a person can be convicted under the abovequoted provision, it must be proven that he has
the obligation to deliver or return the same money, goods or personal property that he received.
Petitioners had no such obligation to return the same money, i.e., the bills or coins, which they received
from private respondents. This is so because as clearly stated in criminal complaints, the related civil
complaints and the supporting sworn statements, the sums of money that petitioners received were loans.

The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.

It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted to
commodatum, the borrower acquires ownership of the money, goods or personal property borrowed.
Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code) and his act will
not be considered misappropriation thereof.

In U.S. vs. Ibañez, 19 Phil. 559, 560 (1911), this Court held that it is not estafa for a person to refuse to
pay his debt or to deny its existence.

We are of the opinion and so decide that when the relation is purely that of
debtor and creditor, the debtor can not be held liable for the crime of estafa,
under said article, by merely refusing to pay or by denying the indebtedness.

It appears that respondent judge failed to appreciate the distinction between the two types of loan,
mutuum and commodatum, when he performed the questioned acts, He mistook the transaction between
petitioners and respondents Rosalinda Amin, Tan Chu Kao and Augusto Sajor to be commodatum
wherein the borrower does not acquire ownership over the thing borrowed and has the duty to return the
same thing to the lender.

SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants,


vs.
BENITO GONZALEZ SY CHIAM, defendants-appellee.
Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon Rice Mills,
Inc., a piece or parcel of land with the camarin located thereon, situated in the municipality of Tarlac of
the Province of Tarlac for the price of P25,000, promising to pay therefor in three installments. The first
installment of P2,000 was due on or before the 2d day of May, 1921; the second installment of P8,000
was due on or before 31st day of May, 1921; the balance of P15,000 at 12 per cent interest was due and
payable on or about the 30th day of November, 1922. One of the conditions of that contract of purchase
was that on failure of the purchaser (plaintiffs and appellants) to pay the balance of said purchase price or
any of the installments on the date agreed upon, the property bought would revert to the original owner.

The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid so far as the record
shows upon the due dates. The balance of P15,000 due on said contract of purchase was paid on or
about the 1st day of December, 1922, in the manner which will be explained below. On the date when the
balance of P15,000 with interest was paid, the vendor of said property had issued to the purchasers
transfer certificate of title to said property, No. 528. Said transfer certificate of title (No. 528) was transfer
certificate of title from No. 40, which shows that said land was originally registered in the name of the
vendor on the 7th day of November, 1913.

PRESENT FACTS

On the 7th day of November, 1922 the representative of the vendor of the property in question wrote a
letter to the appellant Potenciana Manio (Exhibit A, p. 50), notifying the latter that if the balance of said
indebtedness was not paid, an action would be brought for the purpose of recovering the property,
together with damages for non compliance with the condition of the contract of purchase.

According to Exhibits B and D, which represent the account rendered by the vendor, there was due and
payable upon said contract of purchase on the 30th day of November, 1922, the sum P16,965.09. Upon
receiving the letter of the vendor of said property of November 7, 1922, the purchasers, the appellants
herein, realizing that they would be unable to pay the balance due, began to make an effort to borrow
money with which to pay the balance of their indebtedness on the purchase price of the property involved.
Finally an application was made to the defendant for a loan for the purpose of satisfying their
indebtedness to the vendor of said property. After some negotiations the defendants agreed to loan the
plaintiffs to loan the plaintiffs the sum of P17,500 upon condition that the plaintiffs execute and deliver to
him a pacto de retro of said property.

In accordance with that agreement the defendant paid to the plaintiffs by means of a check the sum of
P16,965.09. The defendant, in addition to said amount paid by check, delivered to the plaintiffs the sum of
P354.91 together with the sum of P180 which the plaintiffs paid to the attorneys for drafting said contract
of pacto de retro, making a total paid by the defendant to the plaintiffs and for the plaintiffs of P17,500
upon the execution and delivery of said contract.

An examination of said contract of sale with reference to the first question above, shows clearly that it is
a pacto de retro and not a mortgage. There is no pretension on the part of the appellant that said
contract, standing alone, is a mortgage. Language cannot be clearer. The purpose of the contract is
expressed clearly in said quotation that there can certainly be not doubt as to the purpose of the plaintiff
to sell the property in question, reserving the right only to repurchase the same. The intention to sell with
the right to repurchase cannot be more clearly expressed.

It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the sale of the
property, entered into a contract with the purchaser by virtue of which she became the "tenant" of the
purchaser.
From the foregoing, we are driven to the following conclusions: First, that the contract of pacto de retro is
an sale of the property with the right to repurchase and not a mortgage; and, second, that by virtue of the
said contract the vendor became the tenant of the purchaser, under the conditions mentioned in
paragraph 3 of said contact quoted above.

We come now to a discussion of the second question presented above, and that is, stating the same in
another form: May a tenant charge his landlord with a violation of the Usury Law upon the ground that the
amount of rent he pays, based upon the real value of the property, amounts to a usurious rate of interest?

The collection of a rate of interest higher than that allowed by law is condemned by the Philippine
Legislature (Acts Nos. 2655, 2662 and 2992). But is it unlawful for the owner of a property to enter into a
contract with the tenant for the payment of a specific amount of rent for the use and occupation of said
property, even though the amount paid as "rent," based upon the value of the property, might exceed the
rate of interest allowed by law? That question has never been decided in this jurisdiction. It is one of first
impression. No cases have been found in this jurisdiction answering that question. Act No. 2655 is "An
Act fixing rates of interest upon 'loans' and declaring the effect of receiving or taking usurious rates."

It will be noted that said statute imposes a penalty upon a "loan" or forbearance of any money, goods,
chattels or credits, etc. The central idea of said statute is to prohibit a rate of interest on "loans." A
contract of "loan," is very different contract from that of "rent". A "loan," as that term is used in the statute,
signifies the giving of a sum of money, goods or credits to another, with a promise to repay, but not a
promise to return the same thing. To "loan," in general parlance, is to deliver to another for temporary
use, on condition that the thing or its equivalent be returned; or to deliver for temporary use on condition
that an equivalent in kind shall be returned with a compensation for its use. The word "loan," however, as
used in the statute, has a technical meaning. It never means the return of the same thing. It means the
return of an equivalent only, but never the same thing loaned. A "loan" has been properly defined as an
advance payment of money, goods or credits upon a contract or stipulation to repay, not to return, the
thing loaned at some future day in accordance with the terms of the contract. Under the contract of "loan,"
as used in said statute, the moment the contract is completed the money, goods or chattels given cease
to be the property of the former owner and becomes the property of the obligor to be used according to
his own will, unless the contract itself expressly provides for a special or specific use of the same. At all
events, the money, goods or chattels, the moment the contract is executed, cease to be the property of
the former owner and becomes the absolute property of the obligor.

A contract of "loan" differs materially from a contract of "rent." In a contract of "rent" the owner of the
property does not lose his ownership. He simply loses his control over the property rented during the
period of the contract. In a contract of "loan" the thing loaned becomes the property of the obligor. In a
contract of "rent" the thing still remains the property of the lessor. He simply loses control of the same in a
limited way during the period of the contract of "rent" or lease. In a contract of "rent" the relation between
the contractors is that of landlord and tenant. In a contract of "loan" of money, goods, chattels or credits,
the relation between the parties is that of obligor and obligee. "Rent" may be defined as the compensation
either in money, provisions, chattels, or labor, received by the owner of the soil from the occupant thereof.
It is defined as the return or compensation for the possession of some corporeal inheritance, and is a
profit issuing out of lands or tenements, in return for their use. It is that, which is to paid for the use of
land, whether in money, labor or other thing agreed upon. A contract of "rent" is a contract by which one
of the parties delivers to the other some nonconsumable thing, in order that the latter may use it during a
certain period and return it to the former; whereas a contract of "loan", as that word is used in the statute,
signifies the delivery of money or other consumable things upon condition of returning an equivalent
amount of the same kind or quantity, in which cases it is called merely a "loan." In the case of a contract
of "rent," under the civil law, it is called a "commodatum."

From the foregoing it will be seen that there is a while distinction between a contract of "loan," as that
word is used in the statute, and a contract of "rent" even though those words are used in ordinary
parlance as interchangeable terms.
The value of money, goods or credits is easily ascertained while the amount of rent to be paid for the use
and occupation of the property may depend upon a thousand different conditions; as for example, farm
lands of exactly equal productive capacity and of the same physical value may have a different rental
value, depending upon location, prices of commodities, proximity to the market, etc. Houses may have a
different rental value due to location, conditions of business, general prosperity or depression, adaptability
to particular purposes, even though they have exactly the same original cost. A store on the Escolta, in
the center of business, constructed exactly like a store located outside of the business center, will have a
much higher rental value than the other. Two places of business located in different sections of the city
may be constructed exactly on the same architectural plan and yet one, due to particular location or
adaptability to a particular business which the lessor desires to conduct, may have a very much higher
rental value than one not so located and not so well adapted to the particular business. A very cheap
building on the carnival ground may rent for more money, due to the particular circumstances and
surroundings, than a much more valuable property located elsewhere. It will thus be seen that the rent to
be paid for the use and occupation of property is not necessarily fixed upon the value of the property. The
amount of rent is fixed, based upon a thousand different conditions and may or may not have any direct
reference to the value of the property rented. To hold that "usury" can be based upon the comparative
actual rental value and the actual value of the property, is to subject every landlord to an annoyance not
contemplated by the law, and would create a very great disturbance in every business or rural
community. We cannot bring ourselves to believe that the Legislature contemplated any such disturbance
in the equilibrium of the business of the country.

CARMEN LIWANAG, petitioner,


vs.
THE HON. COURT OF APPEALS and THE PEOPLE OF THE PHILIPPINES, respondents.

Petitioner was charged with the crime of estafa before the Regional Trial Court (RTC), Branch 93,
Quezon City, in an information which reads as follows.

That on or between the month of May 19, 1988 and August, 1988 in Quezon
City, Philippines and within the jurisdiction of this Honorable Court, the said
accused, with intent of gain, with unfaithfulness, and abuse of confidence, did
then and there, willfully, unlawfully and feloniously defraud one ISIDORA
ROSALES, in the following manner, to wit: on the date and in the place
aforementioned, said accused received in trust from the offended party cash
money amounting to P536,650.00, Philippine Currency, with the express
obligation involving the duty to act as complainant's agent in purchasing local
cigarettes (Philip Morris and Marlboro cigarettes), to resell them to several
stores, to give her commission corresponding to 40% of the profits; and to return
the aforesaid amount of offended party, but said accused, far from complying her
aforesaid obligation, and once in possession thereof, misapplied,
misappropriated and converted the same to her personal use and benefit,
despite repeated demands made upon her, accused failed and refused and still
fails and refuses to deliver and/or return the same to the damage and prejudice
of the said ISIDORA ROSALES, in the aforementioned amount and in such other
amount as may be awarded under the provision of the Civil Code.

Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan went to the house of complainant
Isidora Rosales (Rosales) and asked her to join them in the business of buying and selling cigarettes.
Convinced of the feasibility of the venture, Rosales readily agreed. Under their agreement, Rosales would
give the money needed to buy the cigarettes while Liwanag and Tabligan would act as her agents, with a
corresponding 40% commission to her if the goods are sold; otherwise the money would be returned to
Rosales. Consequently, Rosales gave several cash advances to Liwanag and Tabligan amounting to
P633,650.00.
During the first two months, Liwanag and Tabligan made periodic visits to Rosales to report on the
progress of the transactions. The visits, however, suddenly stopped, and all efforts by Rosales to obtain
information regarding their business proved futile.

Alarmed by this development and believing that the amounts she advanced were being misappropriated,
Rosales filed a case of estafa against Liwanag.

Liwanag advances the theory that the intention of the parties was to enter into a contract of partnership,
wherein Rosales would contribute the funds while she would buy and sell the cigarettes, and later divide
the profits between
them. 1 She also argues that the transaction can also be interpreted as a simple loan, with Rosales
lending to her the amount stated on an installment basis. 2

The Court of Appeals correctly rejected these pretenses.

Estafa is a crime committed by a person who defrauds another causing him to suffer damages, by means
of unfaithfulness or abuse of confidence, or of false pretenses of fraudulent acts. 4

From the foregoing, the elements of estafa are present, as follows: (1) that the accused defrauded
another by abuse of confidence or deceit; and (2) that damage or prejudice capable of pecuniary
estimation is caused to the offended party or third party, 5 and it is essential that there be a fiduciary
relation between them either in the form of a trust, commission or administration. 6

The receipt signed by Liwanag states thus:

May 19, 1988 Quezon City

Received from Mrs. Isidora P. Rosales the sum of FIVE HUNDRED TWENTY
SIX THOUSAND AND SIX HUNDRED FIFTY PESOS (P526,650.00) Philippine
Currency, to purchase cigarrets (sic) (Philip & Marlboro) to be sold to customers.
In the event the said cigarrets (sic) are not sold, the proceeds of the sale or the
said products (shall) be returned to said Mrs. Isidora P. Rosales the said amount
of P526,650.00 or the said items on or before August 30, 1988.

The language of the receipt could not be any clearer. It indicates that the money delivered to Liwanag
was for a specific purpose, that is, for the purchase of cigarettes, and in the event the cigarettes cannot
be sold, the money must be returned to Rosales.

Thus, even assuming that a contract of partnership was indeed entered into by and between the parties,
we have ruled that when money or property have been received by a partner for a specific purpose (such
as that obtaining in the instant case) and he later misappropriated it, such partner is guilty of estafa. 7

Neither can the transaction be considered a loan, since in a contract of loan once the money is received
by the debtor, ownership over the same is transferred. 8 Being the owner, the borrower can dispose of it
for whatever purpose he may deem proper.

In the instant petition, however, it is evident that Liwanag could not dispose of the money as she pleased
because it was only delivered to her for a single purpose, namely, for the purchase of cigarettes, and if
this was not possible then to return the money to Rosales. Since in this case there was no transfer of
ownership of the money delivered, Liwanag is liable for conversion under Art. 315, par. l(b) of the Revised
Penal Code.
SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.

In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance
Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be used as
follows: P250,000.00 for the construction of a factory building (for the manufacture of jute sacks);
P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment; and
P9,100.00 as additional working capital.

Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura
on the strength of a letter of credit extended by the Prudential Bank and Trust Co., and arrived in Davao
City in July 1953; and that to secure its release without first paying the draft, Saura, Inc. executed a trust
receipt in favor of the said bank.

On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to
be secured by a first mortgage on the factory building to be constructed, the land site thereof, and the
machinery and equipment to be installed. Among the other terms spelled out in the resolution were the
following:

1. That the proceeds of the loan shall be utilized exclusively for the following
purposes:

For construction of factory building P250,000.00

For payment of the balance of purchase

price of machinery and equipment 240,900.00

For working capital 9,100.00

T O T A L P500,000.00

Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however, evidently
having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a
modification of the terms laid down by it, namely: that in lieu of having China Engineers, Ltd. (which was
willing to assume liability only to the extent of its stock subscription with Saura, Inc.) sign as co-maker on
the corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an amount
equivalent to such subscription; and that Maria S. Roca would be substituted for Inocencia Arellano as
one of the other co-makers, having acquired the latter's shares in Saura, Inc.

In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the
members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the
aspects of this approved loan ... with special reference as to the advisability of financing this particular
project based on present conditions obtaining in the operations of jute mills, and to submit his findings
thereon at the next meeting of the Board."

On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-
signer for the loan, and asked that the necessary documents be prepared in accordance with the terms
and conditions specified in Resolution No. 145. In connection with the reexamination of the project to be
financed with the loan applied for, as stated in Resolution No. 736, the parties named their respective
committees of engineers and technical men to meet with each other and undertake the necessary
studies, although in appointing its own committee Saura, Inc. made the observation that the same "should
not be taken as an acquiescence on (its) part to novate, or accept new conditions to, the agreement
already) entered into," referring to its acceptance of the terms and conditions mentioned in Resolution No.
145.

On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling,
representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of mortgage,
which was duly registered on the following April 17.

It appears, however, that despite the formal execution of the loan agreement the reexamination
contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June 10,
1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the loan
from P500,000.00 to P300,000.00.

On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China
Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the loan and
therefore considered the same as cancelled as far as it was concerned. A follow-up letter dated July 2
requested RFC that the registration of the mortgage be withdrawn.

On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of
P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly
with the borrower-corporation," but with the following proviso:

That in view of observations made of the shortage and high cost of imported raw
materials, the Department of Agriculture and Natural Resources shall certify to
the following:

1. That the raw materials needed by the borrower-corporation to carry out its
operation are available in the immediate vicinity; and

2. That there is prospect of increased production thereof to provide adequately


for the requirements of the factory."

The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954,
wherein it was explained that the certification by the Department of Agriculture and Natural Resources
was required "as the intention of the original approval (of the loan) is to develop the manufacture of sacks
on the basis of locally available raw materials." This point is important, and sheds light on the subsequent
actuations of the parties. Saura, Inc. does not deny that the factory he was building in Davao was for the
manufacture of bags from local raw materials. The cover page of its brochure (Exh. M) describes the
project as a "Joint venture by and between the Mindanao Industry Corporation and the Saura Import and
Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture copra and corn bags,
runners, floor mattings, carpets, draperies; out of 100% local raw materials, principal kenaf." The
explanatory note on page 1 of the same brochure states that, the venture "is the first serious attempt in
this country to use 100% locally grown raw materials notably kenaf which is presently grown commercially
in the Island of Mindanao where the proposed jutemill is located ..."

This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first
place, and to require, in its Resolution No. 9083, a certification from the Department of Agriculture and
Natural Resources as to the availability of local raw materials to provide adequately for the requirements
of the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter of January 21, 1955:
(1) stating that according to a special study made by the Bureau of Forestry "kenaf will not be available in
sufficient quantity this year or probably even next year;" (2) requesting "assurances (from RFC) that my
company and associates will be able to bring in sufficient jute materials as may be necessary for the full
operation of the jute mill;" and (3) asking that releases of the loan be made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &

Trust Company P250,000.00

(For immediate release)

b) For the purchase of materials and equip-


ment per attached list to enable the jute
mill to operate 182,413.91

c) For raw materials and labor 67,586.09

1) P25,000.00 to be released on the open-


ing of the letter of credit for raw jute
for $25,000.00.

2) P25,000.00 to be released upon arrival


of raw jute.

3) P17,586.09 to be released as soon as the


mill is ready to operate.

On January 25, 1955 RFC sent to Saura, Inc. the following reply:

Dear Sirs:

This is with reference to your letter of January 21, 1955,


regarding the release of your loan under consideration of
P500,000. As stated in our letter of December 22, 1954, the
releases of the loan, if revived, are proposed to be made from
time to time, subject to availability of funds towards the end that
the sack factory shall be placed in actual operating status. We
shall be able to act on your request for revised purpose and
manner of releases upon re-appraisal of the securities offered for
the loan.

With respect to our requirement that the Department of


Agriculture and Natural Resources certify that the raw materials
needed are available in the immediate vicinity and that there is
prospect of increased production thereof to provide adequately
the requirements of the factory, we wish to reiterate that the
basis of the original approval is to develop the manufacture of
sacks on the basis of the locally available raw materials. Your
statement that you will have to rely on the importation of jute and
your request that we give you assurance that your company will
be able to bring in sufficient jute materials as may be necessary
for the operation of your factory, would not be in line with our
principle in approving the loan.

With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter
further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed the
corresponding deed of cancellation and delivered it to Ramon F. Saura himself as president of Saura, Inc.
On January 9, 1964, almost 9 years after the mortgage in favor of RFC was cancelled at the request of
Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC (as predecessor
of the defendant DBP) to comply with its obligation to release the proceeds of the loan applied for and
approved, thereby preventing the plaintiff from completing or paying contractual commitments it had
entered into, in connection with its jute mill project.

The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the
parties and that the defendant was guilty of breach thereof. The defendant pleaded below, and reiterates
in this appeal: (1) that the plaintiff's cause of action had prescribed, or that its claim had been waived or
abandoned; (2) that there was no perfected contract; and (3) that assuming there was, the plaintiff itself
did not comply with the terms thereof.

We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil
Code, which provides:

ART. 1934. An accepted promise to deliver something, by way of commodatum


or simple loan is binding upon the parties, but the commodatum or simple loan
itself shall not be perferted until the delivery of the object of the contract.

There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of
P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was
executed and registered. But this fact alone falls short of resolving the basic claim that the defendant
failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.

It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the
factory to be constructed would utilize locally grown raw materials, principally kenaf. There is no serious
dispute about this. It was in line with such assumption that when RFC, by Resolution No. 9083 approved
on December 17, 1954, restored the loan to the original amount of P500,000.00. it imposed two
conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to carry out its operation
are available in the immediate vicinity; and (2) that there is prospect of increased production thereof to
provide adequately for the requirements of the factory." The imposition of those conditions was by no
means a deviation from the terms of the agreement, but rather a step in its implementation. There was
nothing in said conditions that contradicted the terms laid down in RFC Resolution No. 145, passed on
January 7, 1954, namely — "that the proceeds of the loan shall be utilized exclusively for the following
purposes: for construction of factory building — P250,000.00; for payment of the balance of purchase
price of machinery and equipment — P240,900.00; for working capital — P9,100.00." Evidently Saura,
Inc. realized that it could not meet the conditions required by RFC, and so wrote its letter of January 21,
1955, stating that local jute "will not be able in sufficient quantity this year or probably next year," and
asking that out of the loan agreed upon the sum of P67,586.09 be released "for raw materials and labor."
This was a deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage
contract, implying as it did a diversion of part of the proceeds of the loan to purposes other than those
agreed upon.

When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been
going on for the implementation of the agreement reached an impasse. Saura, Inc. obviously was in no
position to comply with RFC's conditions. So instead of doing so and insisting that the loan be released as
agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The
action thus taken by both parties was in the nature of mutual desistance — what Manresa terms "mutuo
disenso" 1 — which is a mode of extinguishing obligations. It is a concept that derives from the principle
that since mutual agreement can create a contract, mutual disagreement by the parties can cause its
extinguishment. 2
CRISTOBAL ROÑO, petitioner,
vs.
JOSE L. GOMEZ, ET AL., respondents.

This petition to review a decision of the Court of Appeals was admitted mainly because it involves one
phase of the vital contemporary question: the repayment of loans given in Japanese fiat currency during
the last war of the Pacific.

On October 5, 1944, Cristobal Roño received as a loan four thousand pesos in Japanese fiat money from
Jose L. Gomez. He informed the later that he would use the money to purchase a jitney; and he agreed to
pay that debt one year after date in the currency then prevailing. He signed a promissory note of the
following tenor:

For value received, I promise to pay one year after date the sum of four thousand pesos
(4,000) to Jose L. Gomez. It is agreed that this will not earn any interest and the
payment. It is agreed that this will not earn any interest and the payment prevailing by the
end of the stipulated period of one year.

In consideration of this generous loan, I renounce any right that may come to me by
reason of any postwar arrangement, of privilege that may come to me by legislation
wherein this sum may be devalued. I renounce flatly and absolutely any condition, term
right or privilege which in any way will prejudice the right engendered by this agreement
wherein Atty. Jose L. Gomez will receive by right his money in the amount of P4,000. I
affirm the legal tender, currency or any medium of exchange, or money in this sum of
P4,000 will be paid by me to Jose L. Gomez one year after this date, October 5, 1944.

On October 15, 1945, i.e., after the liberation, Roño was sued for payment in the Laguna Court of First
Instance. His main defense was his liability should not exceed the equivalent of 4,000 pesos "mickey
mouse" money — and could not be 4,000 pesos Philippine currency, because the contract would be void
as contrary to law, public order and good morals.

One basic principle of the law on contracts of the Civil Code is that "the contracting parties may establish
any pacts, clauses and conditions they may deem advisable, provided they are not contrary to law,
morals or public order." (Article 1255.) Another principle is that "obligations arising from contracts shall
have the force of law between the contracting parties and must be performed in accordance with their
stipulations" (Article 1091).

Invoking the above proviso, Roño asserts this contract is contrary to the Usury law, because on the basis
of calculations by Government experts he only received the equivalent of one hundred Philippine pesos
and now he is required to disgorge four thousand pesos or interest greatly in excess of the lawful rates.

But he is not paying interest. Precisely the contract says that the money received "will not earn any
interest." Furthermore, he received four thousand pesos; and he is required to pay four thousand pesos
exactly. The increased intrinsic value and purchasing power of the current money is consequence of an
event (change of currency) which at the time of the contract neither party knew would certainly happen
within the period of one year. They both elected to subject their rights and obligations to that contingency.
If within one year another kind of currency became legal tender, Gomez would probably get more for his
money. If the same Japanese currency continued, he would get less, the value of Japanese money being
then on the downgrade.

Our legislation has a word for these contracts: aleatory. The Civil Code recognizes their validity (see art.
1790 and Manresa's comment thereon) on a par with insurance policies and life annuities.
The eventual gain of Gomez in this transaction is not interest within the meaning of Usury Laws. Interest
is some additional money to be paid in any event, which is not the case herein, because Gomez might
have gotten less if the Japanese occupation had extended to the end of 1945 or if the liberation forces
had chosen to permit the circulation of the Japanese notes.

Again Roño alleges it is immoral and against public order for a man to obtain four thousand pesos in
return for an investment of forty pesos (his estimate of the value of the Japanese money he borrowed).
According to his line of reasoning it would be immoral for the homeowner to recover ten thousand pesos
(P10,000), when his house is burned, because he invested only about one hundred pesos for the
insurance policy. And when the holder of a sweepstakes ticket who paid only four pesos luckily obtains
the first prize of one hundred thousand pesos or over, the whole business is immoral or against public
order.

In this connection we should explain that this decision does not cover situations where borrowers of
Japanese fiat currency promised to repay "the same amount" or promised to return the same number of
pesos "in Philippines currency" or "in the currency prevailing after the war." There may be room for
argument when those litigations come up for adjudication. All we say here and now is that the contract in
question is legal and obligatory.

MARIANO NEPOMUCENO and AGUEDA G. DE NEPOMUCENO, plaintiffs-appellants,


vs.
EDILBERTO A. NARCISO and MAURA SUAREZ, defendants-appellees.

On November 14, 1938, appellant Mariano Nepomuceno executed a mortgage in favor of the appellees
on a parcel of land situated in the municipality of Angeles, Province of Pampanga, to secure the payment
within the period of seven years from the date of the mortgage of the sum of P24,000 together with
interest thereon at the rate of 8 per cent per annum.

On September 30, 1943, that is to say, more than two years before the maturity of said mortgage, the
parties executed a notarial document entitled "Partial Novation of Contract" whereby they modified the
terms of said mortgage as follows:

(1) From December 8, 1941, to January 1, 1944, the interest on the mortgage shall be at
6 per cent per annum, unpaid interest also paying interest also paying interest at the
same rate.

(2) From January 1, 1944, up to the end of the war, the mortgage debt shall likewise bear
interest at 6 per cent. Unpaid interest during this period shall however not bear any
interest.

(3) At the end of the war the interest shall again become 8 per cent in accordance with
the original contract of mortgage.

(4) While the war goes on, the mortgagor, his administrators or assigns, cannot redeem
the property mortgaged.

(5) When the mortgage lapses on November 14, 1945, the mortgage may continue for
another ten years if the mortgagor so chooses, but during this period he may pay only
one half of the capital.

On July 21, 1944, the mortgagor Mariano Nepomuceno and his wife Agueda G. de Nepomuceno filed
their complaint in this case against the mortgagees, which complaint, as amended on September 7, 1944,
alleged the execution of the contract of mortgage and its principal novation as above indicated, and
7. That as per Annex B, No. 4, it is provided that the mortgagor cannot redeem the
property mortgaged while the war goes on; and that notwithstanding the said provision
the herein plaintiffs-mortgagors are now willing to pay the amount of the indebtedness
together with the corresponding interest due thereon;

8. That on July 19, 1944, the mortgagors-plaintiffs went to the house of the mortgagees-
defendants to tender payment of the balance of the mortgage debt with their
corresponding interest, but said spouses defendants refuse and still refuse to accept
payment;

9. That because of this refusal of the defendants to accept tender of payment on the
mortgage consideration, the plaintiffs suffered and still suffer damages in the amount of
P5,000;

10. That the plaintiffs are now and have deposited with the Clerk of Court of First
Instance of Pampanga the amount of P22,356 for the payment of the mortgage debt and
the interest due thereon;

Wherefore, it is more respectfully prayed that this Honorable Court will issue an order in
the following tenor:

(a) Ordering the defendants to accept tender of payment from the plaintiffs;

(b) Ordering defendants to execute the corresponding deed of release of mortgage;

Appellants contend that the stipulation in the contract of September 30, 1943, that "while the war goes on
the mortgagor, his administrators or assigns cannot redeem the property mortgaged," is against public
policy and therefore null and void. They cite and rely on article 1255 of the Civil Code, which provides:

ART. 1255. — The contracting parties may establish any pacts, clauses, and conditions
they may deem advisable, provided they are not contrary to law, morals, or public order.

They argue that "it would certainly be against public policy and a restraint on the freedom of commerce to
compel a debtor not to release his property from a lien — even if he wanted to by the payment of the
indebtedness — while the war goes on, which was undoubtedly of a very uncertain duration."

The first two paragraphs of article 1125 of the Civil Code provide:

ART. 1125. — Obligation for the performance of which a day certain has been fixed shall
be demandable only when the day arrives.

A day certain is understood to be one which must necessarily arrive, even though its date
be unknown.

Article 1127 says:

ART. 1127. Whenever a term for the performance of an obligation is fixed, it is presumed
to have been established for the benefit of the creditor and that of the debtor, unless from
its tenor or from other circumstances it should appear that the term was established for
the benefit of one or the other.

It will be noted that the original contract of mortgage provided for interest at 8 per cent per annum and
that the principal together with the interest was payable within the period of seven years from November
14, 1938. But by mutual agreement of the parties that term was modified on September 30, 1943, by
reducing the interest to 6 per cent per annum from December 8, 1941, until the end of the war and by
stipulating that the mortgagor shall not pay off the mortgage while the war went on.

We find nothing immoral or violative of public order in that stipulation. The mortgagees apparently did not
want to have their prewar credit paid with Japanese military notes, and the mortgagor voluntarily agreed
not to do so in consideration of the reduction of the rate of interest.

It was a perfectly equitable and valid transaction, in conformity with the provision of the Civil Code
hereinabove quoted.

Appellants were bound by said contract and appellees were not obligated to receive the payment before it
was due. Hence the latter had reason not to accept the tender of payment made to them by the former.

EQUITABLE PCI BANK,* AIMEE YU and BEJAN LIONEL APAS, Petitioners,


vs.
NG SHEUNG NGOR, owner of "KEN MARKETING," et al, Respondents.

On October 7, 2001, respondents Ng Sheung Ngor,4 Ken Appliance Division, Inc. and Benjamin E. Go
filed an action for annulment and/or reformation of documents and contracts5 against petitioner Equitable
PCI Bank (Equitable) and its employees, Aimee Yu and Bejan Lionel Apas, in the Regional Trial Court
(RTC), Branch 16 of Cebu City.6 They claimed that Equitable induced them to avail of its peso and dollar
credit facilities by offering low interest rates7 so they accepted Equitable's proposal and signed the bank's
pre-printed promissory notes on various dates beginning 1996. They, however, were unaware that the
documents contained identical escalation clauses granting Equitable authority to increase interest rates
without their consent.8

Equitable, in its answer, asserted that respondents knowingly accepted all the terms and conditions
contained in the promissory notes.9 In fact, they continuously availed of and benefited from Equitable's
credit facilities for five years.10

The Promissory Notes Were Valid

The RTC upheld the validity of the promissory notes despite respondents’ assertion that those documents
were contracts of adhesion.

A contract of adhesion is a contract whereby almost all of its provisions are drafted by one party. 58 The
participation of the other party is limited to affixing his signature or his "adhesion" to the contract. 59 For
this reason, contracts of adhesion are strictly construed against the party who drafted it.60

It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are, on the
contrary, as binding as ordinary contracts. A party is in reality free to accept or reject it. A contract of
adhesion becomes void only when the dominant party takes advantage of the weakness of the other
party, completely depriving the latter of the opportunity to bargain on equal footing. 61

That was not the case here. As the trial court noted, if the terms and conditions offered by Equitable had
been truly prejudicial to respondents, they would have walked out and negotiated with another bank at the
first available instance. But they did not. Instead, they continuously availed of Equitable's credit facilities
for five long years.

While the RTC categorically found that respondents had outstanding dollar- and peso-denominated loans
with Equitable, it, however, failed to ascertain the total amount due (principal, interest and penalties, if
any) as of July 9, 2001. The trial court did not explain how it arrived at the amounts of US$228,200
and P1,000,000.62 In Metro Manila Transit Corporation v. D.M. Consunji,63 we reiterated that this Court is
not a trier of facts and it shall pass upon them only for compelling reasons which unfortunately are not
present in this case.64 Hence, we ordered the partial remand of the case for the sole purpose of
determining the amount of actual damages.65

Escalation Clause Violated The Principle Of Mutuality Of Contracts

Escalation clauses are not void per se. However, one "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. Clauses of that nature violate the principle of
mutuality of contracts.66 Article 130867 of the Civil Code holds that a contract must bind both contracting
parties; its validity or compliance cannot be left to the will of one of them.68

For this reason, we have consistently held that a valid escalation clause provides:

1. that the rate of interest will only be increased if the applicable maximum rate of interest is increased by
law or by the Monetary Board; and

2. that the stipulated rate of interest will be reduced if the applicable maximum rate of interest is reduced
by law or by the Monetary Board (de-escalation clause).69

The RTC found that Equitable's promissory notes uniformly stated:

If subject promissory note is extended, the interest for subsequent extensions shall be at such rate as
shall be determined by the bank.70

Equitable dictated the interest rates if the term (or period for repayment) of the loan was extended.
Respondents had no choice but to accept them. This was a violation of Article 1308 of the Civil Code.
Furthermore, the assailed escalation clause did not contain the necessary provisions for validity, that is, it
neither provided that the rate of interest would be increased only if allowed by law or the Monetary Board,
nor allowed de-escalation. For these reasons, the escalation clause was void.

With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National Bank 71 we
held that, because the escalation clause was annulled, the principal amount of the loan was subject to the
original or stipulated rate of interest. Upon maturity, the amount due was subject to legal interest at the
rate of 12% per annum.72

Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their dollar-
denominated loans and 20% p.a. for their peso-denominated loans from January 10, 2001 to July 9,
2001. Thereafter, Equitable was entitled to legal interest of 12% p.a. on all amounts due.

There Was No Extraordinary Deflation

Extraordinary inflation exists when there is an unusual decrease in the purchasing power of currency (that
is, beyond the common fluctuation in the value of currency) and such decrease could not be reasonably
foreseen or was manifestly beyond the contemplation of the parties at the time of the obligation.
Extraordinary deflation, on the other hand, involves an inverse situation. 73

Article 1250 of the Civil Code provides:

Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should intervene, the
value of the currency at the time of the establishment of the obligation shall be the basis of payment,
unless there is an agreement to the contrary.
For extraordinary inflation (or deflation) to affect an obligation, the following requisites must be proven:

1. that there was an official declaration of extraordinary inflation or deflation from the
Bangko Sentral ng Pilipinas (BSP);74

2. that the obligation was contractual in nature;75 and

3. that the parties expressly agreed to consider the effects of the extraordinary inflation or
deflation.76

Despite the devaluation of the peso, the BSP never declared a situation of extraordinary inflation.
Moreover, although the obligation in this instance arose out of a contract, the parties did not agree to
recognize the effects of extraordinary inflation (or deflation). 77 The RTC never mentioned that there was a
such stipulation either in the promissory note or loan agreement. Therefore, respondents should pay their
dollar-denominated loans at the exchange rate fixed by the BSP on the date of maturity. 78

PAN PACIFIC SERVICE CONTRACTORS, INC. and RICARDO F. DEL ROSARIO, Petitioners,
vs.
EQUITABLE PCI BANK (formerly PHILIPPINE COMMERCIAL INTERNATIONAL BANK), Respondent.

Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in contracting mechanical works on
airconditioning system. On 24 November 1989, Pan Pacific, through its President, Ricardo F. Del Rosario
(Del Rosario), entered into a contract of mechanical works (Contract) with respondent for P20,688,800.
Pan Pacific and respondent also agreed on nine change orders for P2,622,610.30. Thus, the total
consideration for the whole project was P23,311,410.30.6The Contract stipulated, among others, that Pan
Pacific shall be entitled to a price adjustment in case of increase in labor costs and prices of materials
under paragraphs 70.17 and 70.28 of the "General Conditions for the Construction of PCIB Tower II
Extension" (the escalation clause).9

Pursuant to the contract, Pan Pacific commenced the mechanical works in the project site, the PCIB
Tower II extension building in Makati City. The project was completed in June 1992. Respondent
accepted the project on 9 July 1992.10

In 1990, labor costs and prices of materials escalated. On 5 April 1991, in accordance with the escalation
clause, Pan Pacific claimed a price adjustment of P5,165,945.52. Respondent’s appointed project
engineer, TCGI Engineers, asked for a reduction in the price adjustment. To show goodwill, Pan Pacific
reduced the price adjustment to P4,858,548.67.11

On 28 April 1992, TCGI Engineers recommended to respondent that the price adjustment should be
pegged atP3,730,957.07. TCGI Engineers based their evaluation of the price adjustment on the following
factors:

1. Labor Indices of the Department of Labor and Employment.

2. Price Index of the National Statistics Office.

PD 1594 and its Implementing Rules and Regulations as amended, 15 March 1991.

Shipping Documents submitted by PPSCI.

Sub-clause 70.1 of the General Conditions of the Contract Documents.12


Pan Pacific contended that with this recommendation, respondent was already estopped from disclaiming
liability of at least P3,730,957.07 in accordance with the escalation clause.13

Due to the extraordinary increases in the costs of labor and materials, Pan Pacific’s operational capital
was becoming inadequate for the project. However, respondent withheld the payment of the price
adjustment under the escalation clause despite Pan Pacific’s repeated demands.14 Instead, respondent
offered Pan Pacific a loan of P1.8 million. Against its will and on the strength of respondent’s promise that
the price adjustment would be released soon, Pan Pacific, through Del Rosario, was constrained to
execute a promissory note in the amount of P1.8 million as a requirement for the loan. Pan Pacific also
posted a surety bond. The P1.8 million was released directly to laborers and suppliers and not a single
centavo was given to Pan Pacific.15

Pan Pacific made several demands for payment on the price adjustment but respondent merely kept on
promising to release the same. Meanwhile, the P1.8 million loan matured and respondent demanded
payment plus interest and penalty. Pan Pacific refused to pay the loan. Pan Pacific insisted that it would
not have incurred the loan if respondent released the price adjustment on time. Pan Pacific alleged that
the promissory note did not express the true agreement of the parties. Pan Pacific maintained that
the P1.8 million was to be considered as an advance payment on the price adjustment. Therefore, there
was really no consideration for the promissory note; hence, it is null and void from the beginning. 16

Respondent stood firm that it would not release any amount of the price adjustment to Pan Pacific but it
would offset the price adjustment with Pan Pacific’s outstanding balance of P3,226,186.01, representing
the loan, interests, penalties and collection charges.17

Pan Pacific refused the offsetting but agreed to receive the reduced amount of P3,730,957.07 as
recommended by the TCGI Engineers for the purpose of extrajudicial settlement, less P1.8 million
and P414,942 as advance payments.18

On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the promissory note,
sum of money, and damages against the respondent with the RTC of Makati City, Branch 59.

Petitioners submit this sole issue for our consideration: Whether the CA, in awarding the unpaid balance
of the price adjustment, erred in fixing the interest rate at 12% instead of the 18% bank lending rate.

We grant the petition.

Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest
shall be due unless it has been expressly stipulated in writing. Therefore, payment of monetary interest is
allowed only if:

(1) there was an express stipulation for the payment of interest; and

(2) the agreement for the payment of interest was reduced in writing. The concurrence of
the two conditions is required for the payment of monetary interest.33

The written agreement entered into between petitioners and respondent provides for an interest at the
current bank lending rate in case of delay in payment and the promissory note charged an interest of
18%.

To prove petitioners’ entitlement to the 18% bank lending rate of interest, petitioners presented the
promissory note36prepared by respondent bank itself. This promissory note, although declared void by the
lower courts because it did not express the real intention of the parties, is substantial proof that the bank
lending rate at the time of default was 18% per annum. Absent any evidence of fraud, undue influence or
any vice of consent exercised by petitioners against the respondent, the interest rate agreed upon is
binding on them.37

HEIRS OF ZOILO ESPIRITU AND PRIMITIVA ESPIRITU, Petitioners,


vs.
SPOUSES MAXIMO LANDRITO AND PAZ LANDRITO, Respondents.

Petitioners DULCE, BENLINDA, EDWIN, CYNTHIA, AND MIRIAM ANDREA, all surnamed ESPIRITU,
are the only children and legal heirs of the Spouses Zoilo and Primitiva Espiritu, who both died during the
pendency of the case before the Honorable Court of Appeals.2

Respondents Spouses Maximo and Paz Landrito (Spouses Landrito) are herein represented by their son
and attorney-in-fact, Zoilo Landrito.3

On 5 September 1986, Spouses Landrito loaned from the Spouses Espiritu the amount of P350,000.00
payable in three months. To secure the loan, the Spouses Landrito executed a real estate mortgage over
a five hundred forty (540) square meter lot located in Alabang, Muntinlupa, covered by Transfer
Certificate of Title No. S-48948, in favor of the Spouses Espiritu. From the P350,000.00 that the Landritos
were supposed to receive, P17,500.00 was deducted as interest for the first month which was equivalent
to five percent of the principal debt, and P7,500.00 was further deducted as service fee. Thus, they
actually received a net amount of P325,000.00. The agreement, however, provided that the principal
indebtedness earns "interest at the legal rate."4

After three months, when the debt became due and demandable, the Spouses Landrito were unable to
pay the principal, and had not been able to make any interest payments other than the amount initially
deducted from the proceeds of the loan. On 29 December 1986, the loan agreement was extended to 4
January 1987 through an Amendment of Real Estate Mortgage. The loan was restructured in such a way
that the unpaid interest became part of the principal, thus increasing the principal to P385,000. The new
loan agreement adopted all other terms and conditions contained in first agreement. 5

Due to the continued inability of the Spouses Landritos to settle their obligations with the Spouses
Espiritu, the loan agreement was renewed three more times. In all these subsequent renewals, the same
terms and conditions found in the first agreement were retained. On 29 July 1987, the principal was
increased to P507,000.00 inclusive of running interest. On 11 March 1988, it was increased
to P647,000.00. And on 21 October 1988, the principal was increased toP874,125.00.6 At the hearing
before the trial court, Zoilo Espiritu testified that the increase in the principal in each amendment of the
loan agreement did not correspond to the amount delivered to the Spouses Landrito. Rather, the increase
in the principal had been due to unpaid interest and other charges. 7

The debt remained unpaid. As a consequence, the Spouses Espiritu foreclosed the mortgaged property
on 31 October 1990. During the auction sale, the property was sold to the Spouses Espiritu as the lone
bidder. On 9 January 1991, the Sheriff’s Certificate of Sale was annotated on the title of the mortgaged
property, giving the Spouses Landrito until 8 January 1992 to redeem the property. 8

The Spouses Landrito failed to redeem the subject property although they alleged that they negotiated for
the redemption of the property as early as 30 October 1991. While the negotiated price for the land
started atP1,595,392.79, it was allegedly increased by the Spouses Espiritu from time to time. Spouses
Landrito allegedly tendered two manager’s checks and some cash, totaling P1,800,000.00 to the
Spouses Espiritu on 13 January 1992, but the latter refused to accept the same. They also alleged that
the Spouses Espiritu increased the amount demanded to P2.5 Million and gave them until July 1992 to
pay the said amount. However, upon inquiry, they found out that on 24 June 1992, the Spouses Espiritu
had already executed an Affidavit of Consolidation of Ownership and registered the mortgaged property
in their name, and that the Register of Deeds of Makati had already issued Transfer Certificate of Title
No. 179802 in the name of the Spouses Espiritu. On 9 October 1992, the Spouses Landrito, represented
by their son Zoilo Landrito, filed an action for annulment or reconveyance of title, with damages against
the Spouses Espiritu before Branch 146 of the Regional Trial Court of Makati. 9 Among the allegations in
their Complaint, they stated that the Spouses Espiritu, as creditors and mortgagees, "imposed interest
rates that are shocking to one’s moral senses."10

The petition is without merit.

The Real Estate Mortgage executed between the parties specified that "the principal indebtedness shall
earn interest at the legal rate." The agreement contained no other provision on interest or any fees or
charges incident to the debt. In at least three contracts, all designated as Amendment of Real Estate
Mortgage, the interest rate imposed was, likewise, unspecified. During his testimony, Zoilo Espiritu
admitted that the increase in the principal in each of the Amendments of the Real Estate Mortgage
consists of interest and charges. The Spouses Espiritu alleged that the parties had agreed on the interest
and charges imposed in connection with the loan, hereunder enumerated:

1. P17,500.00 was the interest charged for the first month and P7,500.00 was imposed as service fee.

2. P35,000.00 interest and charges, or the difference between the P350,000.00 principal in the Real
Estate Mortgage dated 5 September 1986 and the P385,000.00 principal in the Amendment of the Real
Estate Mortgage dated 29 December 1986.

3. P132,000.00 interest and charges, or the difference between the P385,000.00 principal in the
Amendment of the Real Estate Mortgage dated 29 December 1986 and the P507,000.00 principal in the
Amendment of the Real Estate Mortgage dated 29 July 1987.

4. P140,000.00 interest and charges, or the difference between the P507,000.00 principal in the
Amendment of the Real Estate Mortgage dated 29 July 1987 and the P647,000.00 principal in the
Amendment of the Real Estate Mortgage dated 11 March 1988.

5. P227,125.00 interest and charges, or the difference between the P647,000.00 principal in the
Amendment of the Real Estate Mortgage dated 11 March 1988 and the P874,125 principal in the
Amendment of the Real Estate Mortgage dated 21 October 1988.

The total interest and charges amounting to P559,125.00 on the original principal of P350,000 was
accumulated over only two years and one month. These charges are not found in any written agreement
between the parties. The records fail to show any computation on how much interest was charged and
what other fees were imposed. Not only did lack of transparency characterize the aforementioned
agreements, the interest rates and the service charge imposed, at an average of 6.39% per month, are
excessive.

In enacting Republic Act No. 3765, known as the "Truth in Lending Act," the State seeks to protect its
citizens from a lack of awareness of the true cost of credit by assuring the full disclosure of such costs.
Section 4, in connection with Section 3(3)16 of the said law, gives a detailed enumeration of the specific
information required to be disclosed, among which are the interest and other charges incident to the
extension of credit. Section 617 of the same law imposes on anyone who willfully violates these
provisions, sanctions which include civil liability, and a fine and/or imprisonment.

Although any action seeking to impose either civil or criminal liability had already prescribed, this Court
frowns upon the underhanded manner in which the Spouses Espiritu imposed interest and charges, in
connection with the loan. This is aggravated by the fact that one of the creditors, Zoilo Espiritu, a lawyer,
is hardly in a position to plead ignorance of the requirements of the law in connection with the
transparency of credit transactions. In addition, the Civil Code clearly provides that:
Article 1956. No interest shall be due unless it has been stipulated in writing.

The omission of the Spouses Espiritu in specifying in the contract the interest rate which was actually
imposed, in contravention of the law, manifested bad faith.

In declaring void the stipulations authorizing excessive interest and charges, the Court declared that
although the Usury Law was suspended by Central Bank Circular No. 905, s. 1982, effective on 1
January 1983, and consequently parties are given a wide latitude to agree on any interest rate, nothing in
the said Circular grants lenders carte blanche authority to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets. 21

Stipulation authorizing iniquitous or unconscionable interests are contrary to morals, if not against the law.
Under Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning. They
cannot be ratified nor the right to set up their illegality as a defense be waived. 22 The nullity of the
stipulation on the usurious interest does not, however, affect the lender’s right to recover the principal of
the loan.23 Nor would it affect the terms of the real estate mortgage. The right to foreclose the mortgage
remains with the creditors, and said right can be exercised upon the failure of the debtors to pay the debt
due. The debt due is to be considered without the stipulation of the excessive interest. A legal interest of
12% per annum will be added in place of the excessive interest formerly imposed.

GIL JARDENIL, plaintiff-appellant,


vs.
HEFTI SOLAS (alias HEPTI SOLAS, JEPTI SOLAS), defendant-appellee.

This is an action for foreclosure of mortgage. The only question raised in this appeal is: Is defendant-
appellee bound to pay the stipulated interest only up to the date of maturity as fixed in the promissory
note, or up to the date payment is effected? This question is, in our opinion controlled by the express
stipulation of the parties.

Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date of maturity, or until
March 31, 1934. As the contract is silent as to whether after that date, in the event of non-payment, the
debtor would continue to pay interest, we cannot in law, indulge in any presumption as to such interest;
otherwise, we would be imposing upon the debtor an obligation that the parties have not chosen to agree
upon. Article 1755 of the Civil Code provides that "interest shall be due only when it has been expressly
stipulated." (Emphasis supplied.)

A writing must be interpreted according to the legal meaning of its language (section 286, Act No. 190,
now section 58, Rule 123), and only when the wording of the written instrument appears to be contrary to
the evident intention of the parties that such intention must prevail. (Article 1281, Civil Code.) There is
nothing in the mortgage deed to show that the terms employed by the parties thereto are at war with their
evident intent. On the contrary the act of the mortgage of granting to the mortgagor on the same date of
execution of the deed of mortgage, an extension of one year from the date of maturity within which to
make payment, without making any mention of any interest which the mortgagor should pay during the
additional period (see Exhibit B attached to the complaint), indicates that the true intention of the parties
was that no interest should be paid during the period of grace. What reason the parties may have
therefor, we need not here seek to explore.

Neither has either of the parties shown that, by mutual mistake, the deed of mortgage fails to express
their agreement, for if such mistake existed, plaintiff would have undoubtedly adduced evidence to
establish it and asked that the deed be reformed accordingly, under the parcel-evidence rule.

We hold therefore, that as the contract is clear and unmistakable and the terms employed therein have
not been shown to belie or otherwise fail to express the true intention of the parties and that the deed has
not been assailed on the ground of mutual mistake which would require its reformation, same should be
given its full force and effect. When a party sues on a written contract and no attempt is made to show
any vice therein, he cannot be allowed to lay any claim more than what its clear stipulations accord. His
omission, to which the law attaches a definite warning as an in the instant case, cannot by the courts be
arbitrarily supplied by what their own notions of justice or equity may dictate.

Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan of P2, 400 from
November 8, 1932 to March 31, 1934. And it being a fact that extra judicial demands have been made
which we may assume to have been so made on the expiration of the year of grace, he shall be entitled
to legal interest upon the principal and the accrued interest from April 1, 1935, until full payment.

PRISMA CONSTRUCTION & DEVELOPMENT CORP. and ROGELIO S. PANTALEON, Petitioners,


vs.
ARTHUR F. MENCHAVEZ, Respondent.

On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA, obtained
a P1,000,000.004loan from the respondent, with a monthly interest of P40,000.00 payable for six months,
or a total obligation ofP1,240,000.00 to be paid within six (6) months.

To secure the payment of the loan, Pantaleon issued a promissory note7 and six (6) postdated checks
corresponding to the schedule of payments. Pantaleon signed the promissory note in his personal
capacity,9 and as duly authorized by the Board of Directors of PRISMA.10 The petitioners failed to
completely pay the loan within the stipulated six (6)-month period.

From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to the
respondent:

September 8, 1994 ……………… P320,000.00

October 8, 1995…………………. P600,000.00

November 8, 1995……………. P158,772.00

January 4, 1997 …………………. P30,000.0011

As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00. However, the
respondent found that the petitioners still had an outstanding balance of P1,364,151.00 as of January 4,
1997, to which it applied a 4% monthly interest.12 Thus, on August 28, 1997, the respondent filed a
complaint for sum of money with the RTC to enforce the unpaid balance, plus 4% monthly
interest, P30,000.00 in attorney’s fees, P1,000.00 per court appearance and costs of suit.13

In their Answer dated October 6, 1998, the petitioners admitted the loan of P1,240,000.00, but denied the
stipulation on the 4% monthly interest, arguing that the interest was not provided in the promissory note.
Pantaleon also denied that he made himself personally liable and that he made representations that the
loan would be repaid within six (6) months.14

The core issue boils down to whether the parties agreed to the 4% monthly interest on the loan. If so,
does the rate of interest apply to the 6-month payment period only or until full payment of the loan?

We find the petition meritorious.

Interest due should be stipulated in writing; otherwise, 12% per annum


Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith.20 When the terms of a contract are clear and leave no doubt as to the
intention of the contracting parties, the literal meaning of its stipulations governs. 21 In such cases, courts
have no authority to alter the contract by construction or to make a new contract for the parties; a court's
duty is confined to the interpretation of the contract the parties made for themselves without regard to its
wisdom or folly, as the court cannot supply material stipulations or read into the contract words the
contract does not contain.22 It is only when the contract is vague and ambiguous that courts are permitted
to resort to the interpretation of its terms to determine the parties’ intent.

In the present case, the respondent issued a check for P1,000,000.00.23 In turn, Pantaleon, in his
personal capacity and as authorized by the Board, executed the promissory note quoted above. Thus,
the P1,000,000.00 loan shall be payable within six (6) months, or from January 8, 1994 up to June 8,
1994. During this period, the loan shall earn an interest of P40,000.00 per month, for a total obligation
of P1,240,000.00 for the six-month period. We note that this agreed sum can be computed at 4%
interest per month, but no such rate of interest was stipulated in the promissory note; rather a
fixed sum equivalent to this rate was agreed upon.

Article 1956 of the Civil Code specifically mandates that "no interest shall be due unless it has been
expressly stipulated in writing." Under this provision, the payment of interest in loans or forbearance of
money is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the
agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is
required for the payment of interest at a stipulated rate. Thus, we held in Tan v. Valdehueza24 and Ching
v. Nicdao25 that collection of interest without any stipulation in writing is prohibited by law.1avvphi1

Applying this provision, we find that the interest of P40,000.00 per month corresponds only to the six (6)-
month period of the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the
promissory note. Thereafter, the interest on the loan should be at the legal interest rate of
12% per annum, consistent with our ruling inEastern Shipping Lines, Inc. v. Court of Appeals:26

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 12% 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." (Emphasis supplied)

Thus, the RTC and the CA misappreciated the facts of the case; they erred in finding that the parties
agreed to a 4% interest, compounded by the application of this interest beyond the promissory note’s six
(6)-month period. The facts show that the parties agreed to the payment of a specific sum of
money of P40,000.00 per month for six months, not to a 4% rate of interest payable within a six (6)-
month period.

SEBASTIAN SIGA-AN, Petitioner,


vs.
ALICIA VILLANUEVA, Respondent.

On 30 March 1998, respondent Alicia Villanueva filed a complaint5 for sum of money against petitioner
Sebastian Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch 255, docketed as Civil
Case No. LP-98-0068. Respondent alleged that she was a businesswoman engaged in supplying office
materials and equipments to the Philippine Navy Office (PNO) located at Fort Bonifacio, Taguig City,
while petitioner was a military officer and comptroller of the PNO from 1991 to 1996.

Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered to
loan her the amount of P540,000.00. Since she needed capital for her business transactions with the
PNO, she accepted petitioner’s proposal. The loan agreement was not reduced in writing. Also, there was
no stipulation as to the payment of interest for the loan.6

On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as partial payment of the
loan. On 31 October 1993, she issued another check in the amount of P200,000.00 to petitioner as
payment of the remaining balance of the loan. Petitioner told her that since she paid a total amount
of P700,000.00 for theP540,000.00 worth of loan, the excess amount of P160,000.00 would be applied as
interest for the loan. Not satisfied with the amount applied as interest, petitioner pestered her to pay
additional interest. Petitioner threatened to block or disapprove her transactions with the PNO if she
would not comply with his demand. As all her transactions with the PNO were subject to the approval of
petitioner as comptroller of the PNO, and fearing that petitioner might block or unduly influence the
payment of her vouchers in the PNO, she conceded. Thus, she paid additional amounts in cash and
checks as interests for the loan. She asked petitioner for receipt for the payments but petitioner told her
that it was not necessary as there was mutual trust and confidence between them. According to her
computation, the total amount she paid to petitioner for the loan and interest accumulated
to P1,200,000.00.7

Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan despite
absence of agreement to that effect. Her lawyer told her that petitioner could not validly collect interest on
the loan because there was no agreement between her and petitioner regarding payment of interest.
Since she paid petitioner a total amount of P1,200,000.00 for the P540,000.00 worth of loan, and upon
being advised by her lawyer that she made overpayment to petitioner, she sent a demand letter to
petitioner asking for the return of the excess amount of P660,000.00. Petitioner, despite receipt of the
demand letter, ignored her claim for reimbursement.8

Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1) P660,000.00
plus legal interest from the time of demand; (2) P300,000.00 as moral damages; (3) P50,000.00 as
exemplary damages; and (4) an amount equivalent to 25% of P660,000.00 as attorney’s fees.9

Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as
monetary interest. Interest may also be imposed by law or by courts as penalty or indemnity for damages.
This is called compensatory interest.18 The right to interest arises only by virtue of a contract or by virtue
of damages for delay or failure to pay the principal loan on which interest is demanded. 19

Article 1956 of the Civil Code, which refers to monetary interest,20 specifically mandates that no interest
shall be due unless it has been expressly stipulated in writing. As can be gleaned from the foregoing
provision, payment of monetary interest is allowed only if: (1) there was an express stipulation for the
payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The
concurrence of the two conditions is required for the payment of monetary interest. Thus, we have held
that collection of interest without any stipulation therefor in writing is prohibited by law.21

It appears that petitioner and respondent did not agree on the payment of interest for the loan. Neither
was there convincing proof of written agreement between the two regarding the payment of interest.
Respondent testified that although she accepted petitioner’s offer of loan amounting to P540,000.00,
there was, nonetheless, no verbal or written agreement for her to pay interest on the loan.22

Petitioner presented a handwritten promissory note dated 12 September 1994 23 wherein respondent
purportedly admitted owing petitioner "capital and interest." Respondent, however, explained that it was
petitioner who made a promissory note and she was told to copy it in her own handwriting; that all her
transactions with the PNO were subject to the approval of petitioner as comptroller of the PNO; that
petitioner threatened to disapprove her transactions with the PNO if she would not pay interest; that being
unaware of the law on interest and fearing that petitioner would make good of his threats if she would not
obey his instruction to copy the promissory note, she copied the promissory note in her own handwriting;
and that such was the same promissory note presented by petitioner as alleged proof of their written
agreement on interest.24 Petitioner did not rebut the foregoing testimony. It is evident that respondent did
not really consent to the payment of interest for the loan and that she was merely tricked and coerced by
petitioner to pay interest. Hence, it cannot be gainfully said that such promissory note pertains to an
express stipulation of interest or written agreement of interest on the loan between petitioner and
respondent.

We have carefully examined the RTC Decision and found that the RTC did not make a ruling therein that
petitioner and respondent agreed on the payment of interest at the rate of 7% for the loan. The RTC
clearly stated that although petitioner and respondent entered into a valid oral contract of loan amounting
to P540,000.00, they, nonetheless, never intended the payment of interest thereon.

There are instances in which an interest may be imposed even in the absence of express stipulation,
verbal or written, regarding payment of interest. Article 2209 of the Civil Code states that if the obligation
consists in the payment of a sum of money, and the debtor incurs delay, a legal interest of 12% per
annum may be imposed as indemnity for damages if no stipulation on the payment of interest was agreed
upon. Likewise, Article 2212 of the Civil Code provides that interest due shall earn legal interest from the
time it is judicially demanded, although the obligation may be silent on this point.

All the same, the interest under these two instances may be imposed only as a penalty or damages for
breach of contractual obligations. It cannot be charged as a compensation for the use or forbearance of
money. In other words, the two instances apply only to compensatory interest and not to monetary
interest.29 The case at bar involves petitioner’s claim for monetary interest.

Further, said compensatory interest is not chargeable in the instant case because it was not duly proven
that respondent defaulted in paying the loan. Also, as earlier found, no interest was due on the loan
because there was no written agreement as regards payment of interest.

Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not apply
to the instant case. Thus, he cannot be compelled to return the alleged excess amount paid by
respondent as interest.30

Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no
stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall be applied. Article
2154 of the Civil Code explains the principle of solutio indebiti. Said provision provides that if something is
received when there is no right to demand it, and it was unduly delivered through mistake, the obligation
to return it arises. In such a case, a creditor-debtor relationship is created under a quasi-contract whereby
the payor becomes the creditor who then has the right to demand the return of payment made by
mistake, and the person who has no right to receive such payment becomes obligated to return the same.
The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself
unjustly at the expense of another.31 The principle of solutio indebiti applies where (1) a payment is made
when there exists no binding relation between the payor, who has no duty to pay, and the person who
received the payment; and (2) the payment is made through mistake, and not through liberality or some
other cause.32 We have held that the principle of solutio indebiti applies in case of erroneous payment of
undue interest.33

It was duly established that respondent paid interest to petitioner. Respondent was under no duty to make
such payment because there was no express stipulation in writing to that effect. There was no binding
relation between petitioner and respondent as regards the payment of interest. The payment was clearly
a mistake. Since petitioner received something when there was no right to demand it, he has an
obligation to return it.

SPOUSES DAVID B. CARPO & and RECHILDA S. CARPO, Petitioners,


vs.
ELEANOR CHUA and ELMA DY NG, Respondent.
The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they borrowed from Eleanor
Chua and Elma Dy Ng (respondents) the amount of One Hundred Seventy-Five Thousand Pesos
(P175,000.00), payable within six (6) months with an interest rate of six percent (6%) per month. To
secure the payment of the loan, petitioners mortgaged their residential house and lot situated at San
Francisco, Magarao, Camarines Sur, which lot is covered by Transfer Certificate of Title (TCT) No. 23180.
Petitioners failed to pay the loan upon demand. Consequently, the real estate mortgage was
extrajudicially foreclosed and the mortgaged property sold at a public auction on 8 July 1996. The house
and lot was awarded to respondents, who were the only bidders, for the amount of Three Hundred Sixty-
Seven Thousand Four Hundred Fifty-Seven Pesos and Eighty Centavos (P367,457.80).

Upon failure of petitioners to exercise their right of redemption, a certificate of sale was issued on 5
September 1997 by Sheriff Rolando A. Borja. TCT No. 23180 was cancelled and in its stead, TCT No.
29338 was issued in the name of respondents.

Despite the issuance of the TCT, petitioners continued to occupy the said house and lot, prompting
respondents to file a petition for writ of possession with the RTC docketed as Special Proceedings (SP)
No. 98-1665. On 23 March 1999, RTC Judge Ernesto A. Miguel issued an Order4 for the issuance of a
writ of possession.

On 23 July 1999, petitioners filed a complaint for annulment of real estate mortgage and the consequent
foreclosure proceedings, docketed as Civil Case No. 99-4376 of the RTC. Petitioners consigned the
amount of Two Hundred Fifty-Seven Thousand One Hundred Ninety-Seven Pesos and Twenty-Six
Centavos (P257,197.26) with the RTC.

Petitioners contend that the agreed rate of interest of 6% per month or 72% per annum is so excessive,
iniquitous, unconscionable and exorbitant that it should have been declared null and void. Instead of
dismissing their complaint, they aver that the lower court should have declared them liable to respondents
for the original amount of the loan plus 12% interest per annum and 1% monthly penalty charge as
liquidated damages,7 in view of the ruling in Medel v. Court of Appeals.8

In Medel, the Court found that the interest stipulated at 5.5% per month or 66% per annum was so
iniquitous or unconscionable as to render the stipulation void.

Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in
the promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"),
if not against the law. The stipulation is void. The Court shall reduce equitably liquidated damages,
whether intended as an indemnity or a penalty if they are iniquitous or unconscionable. 9

In a long line of cases, this Court has invalidated similar stipulations on interest rates for being excessive,
iniquitous, unconscionable and exorbitant. In Solangon v. Salazar,10 we annulled the stipulation of 6% per
month or 72% per annum interest on a P60,000.00 loan. In Imperial v. Jaucian,11 we reduced the interest
rate from 16% to 1.167% per month or 14% per annum. In Ruiz v. Court of Appeals,12 we equitably
reduced the agreed 3% per month or 36% per annum interest to 1% per month or 12% per annum
interest. The 10% and 8% interest rates per month on a P1,000,000.00 loan were reduced to 12% per
annum in Cuaton v. Salud.13 Recently, this Court, in Arrofo v. Quino,14 reduced the 7% interest per month
on a P15,000.00 loan amounting to 84% interest per annum to 18% per annum.

There is no need to unsettle the principle affirmed in Medel and like cases. From that perspective, it is
apparent that the stipulated interest in the subject loan is excessive, iniquitous, unconscionable and
exorbitant. Pursuant to the freedom of contract principle embodied in Article 1306 of the Civil Code,
contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. In
the ordinary course, the codal provision may be invoked to annul the excessive stipulated interest.
In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By the standards set
in the above-cited cases, this stipulation is similarly invalid. However, the RTC refused to apply the
principle cited and employed in Medel on the ground that Medel did not pertain to the annulment of a real
estate mortgage,15 as it was a case for annulment of the loan contract itself. The question thus sensibly
arises whether the invalidity of the stipulation on interest carries with it the invalidity of the principal
obligation.

The question is crucial to the present petition even if the subject thereof is not the annulment of the loan
contract but that of the mortgage contract. The consideration of the mortgage contract is the same as that
of the principal contract from which it receives life, and without which it cannot exist as an independent
contract. Being a mere accessory contract, the validity of the mortgage contract would depend on the
validity of the loan secured by it.16

Notably in Medel, the Court did not invalidate the entire loan obligation despite the inequitability of the
stipulated interest, but instead reduced the rate of interest to the more reasonable rate of 12% per
annum. The same remedial approach to the wrongful interest rates involved was employed or affirmed by
the Court in Solangon, Imperial, Ruiz, Cuaton, and Arrofo.

The Court’s ultimate affirmation in the cases cited of the validity of the principal loan obligation side by
side with the invalidation of the interest rates thereupon is congruent with the rule that a usurious loan
transaction is not a complete nullity but defective only with respect to the agreed interest.

We are aware that the Court of Appeals, on certain occasions, had ruled that a usurious loan is wholly
null and void both as to the loan and as to the usurious interest.17 However, this Court adopted the
contrary rule, as comprehensively discussed in Briones v. Cammayo:18

Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and Pascua vs. Perez, L-
19554, January 31, 1964, 10 SCRA 199, 200-202. In the latter We expressly held that when a contract is
found to be tainted with usury "the only right of the respondent (creditor) . . . was merely to collect the
amount of the loan, plus interest due thereon."

SENTINEL INSURANCE CO., INC., petitioner,


vs.
CA, HON. FLORELIANA CASTRO-BARTOLOME, ROSE INDUSTRIES, INC., et al, respondents.

Petitioner Sentinel Insurance Co., Inc., was the surety in a contract of suretyship
entered into on November 15, 1974 with Nemesio Azcueta, Sr., who is doing
business under the name and style of 'Malayan Trading as reflected in SICO
Bond No. G(16)00278 where both of them bound themselves, 'jointly and
severally, to fully and religiously guarantee the compliance with the terms and
stipulations of the credit line granted by private respondent Rose Industries, Inc.,
in favor of Nemesio Azcueta, Sr., in the amount of P180,00.00.' Between
November 23 to December 23, 1974, Azcueta made various purchases of tires,
batteries and tire tubes from the private respondent but failed to pay therefor,
prompting the latter to demand payment but because Azcueta failed to settle his
accounts, the case was referred to the Insurance Commissioner who invited the
attention of the petitioner on the matter and the latter cancelled the Suretyship
Agreement on May 13, 1975 with due notice to the private respondent.
Meanwhile, private respondent filed with the respondent court of Makati a
complaint for collection of sum of money against herein petitioner and Azcueta,
docketed as Civil Case No. 21248 alleging the foregoing antecedents and
praying that said defendants be ordered to pay jointly and severally unto the
plaintiff.
a) The amount of P198,602.41 as its principal obligation,
including interest and damage dues as of April 29, 1975;

b) To pay interest at 14% per annum and damage dues at the


rate of 2% every 45 days commencing from April 30, 1975 up to
the time the full amount is fully paid:

As earlier stated, petitioner filed an ex parte motion seeking to amend the above-quoted decretal portion
which respondent court denied, hence the petition at bar.

The amendment sought, ostensibly in order that the dispositive portion of said decision would conform
with the body thereof, is the sole issue for resolution by the Court. Petitioner itself cites authorities in
support of its contention that it is entitled to a correct and clear expression of a judgment to avoid
substantial injustice. 6 In amplification of its plaint, petitioner further asseverates that respondent court
should not have made an award for "damage dues" at such late stage of the proceeding since said dues
were not the subject of the award made by the trial court. 7

We disagree with petitioner.

To clarify an ambiguity or correct a clerical error in the judgment, the court may resort to the pleadings
filed by the parties, the findings of fact and the conclusions of law expressed in the text or body of the
decision. 8

Indeed, this was what respondent court did in resolving the original petition. It examined the complaint
filed against the petitioner and noted that the prayer as stated in Paragraph (b) thereof was to "order
defendant to pay interest at 14 per centum and damage dues at the rate of 2% every 45 days
commencing from April 30, 1975 up to the time the full amount is fully paid." 9

Insofar as the findings and the dispositive portion set forth in respondent court's decision are concerned,
there is really no inconsistency as wittingly or unwittingly asserted by petitioner.

The findings made by respondent court did not actually nullify the judgment of the trial court. More
specifically, the statement that the imposition of 2% interest every 45 days commencing from April 30,
1975 on top of the 14% per annum (as would be the impression from a superficial reading of the
dispositive portion of the trial court's decision) would be usurious is a sound observation. It should,
however, be stressed that such observation was on the theoretical assumption that the rate of 2% is
being imposed as interest, not as damage dues which was the intendment of the trial court.

Certainly, the damage dues in this case do not include and are not included in the computation of interest
as the two are of different categories and are distinct claims which may be demanded separately, in the
same manner that commissions, fines and penalties are excluded in the computation of interest where
the loan or forbearance is not secured in whole or in part by real estate or an interest therein. 10

While interest forms part of the consideration of the contract itself, damage dues (penalties, and so forth)
are usually made payable only in case of default or non-performance of the contract. 11 Also, although
interest is subject to the provisions of the Usury Law, 12 there is no policy or provision in such law
preventing the enforcement of damage dues although the effect may be to increase the sum payable
beyond the prescribed ceiling rates.

In re Liquidation of the Mercantile Bank of China, GOPOCO GROCERY, ET AL., appellants,


vs.
PACIFIC COAST BISCUIT CO., ET AL., oppositors-appellees.
On petition of the Bank Commissioner who alleged to have found, after an investigation, that the
Mercantile Bank of China could not continue operating as such without running the risk of suffering losses
and prejudice its depositors and customers; and that with the requisite approval of the corresponding
authorities, he had taken charge of all the assets thereof; the Court of First Instance of Manila declared
the said bank in liquidation; approved all the acts theretofore executed by the commissioner; prohibited
the officers and agents of the bank from interfering with said commissioner in the possession of the
assets thereof, its documents, deed, vouchers, books of account, papers, memorandum, notes, bond,
bonds and accounts, obligations or securities and its real and personal properties; required its creditors
and all those who had any claim against it, to present the same in writing before the commissioner within
ninety days; and ordered the publication, as was in fact done, of the order containing all these provisions,
for the two consecutive weeks in two news-papers of general circulation in the City of Manila, at the
expenses of the aforesaid bank. After these publications, and within the period of ninety days, the
following creditors, among others, presented their presented their claims:

Tiong Chui Gion, Gopoco Grocery, Tan Locko, Woo & Lo & Co., Sy Guan Huat and La Bella Tondeña.

I. The claim of Tiong Chui Gion is for the sum of P10,285.27. He alleged that he deposited said
sum in the bank under liquidation on current account.

II. The claim of Gopoco Grocery (Gopoco) is for the sum of P4,932.48 plus P460. It described its
claim as follows:

Balance due on open account


P4,927.95
subject to check

Interest on c/a 4,53

4,932.48

Surety deposit 460.00

III. The claim of Tan Locko is for the sum of P7,624.20, and he describes it in turn as follows:

Balance due on open account


P7,610.44
subject to check L-759

Savings account No. 156


(foreign) with Mercantile Bank
of China L-1611 Amoy
$15,000,00 Interest on said
Savings Account No. 156 8.22

Interest on checking a/c 10.54

7,624.20

IV. The claim of Woo & Lo & Co. is for the sum of P6,972.88 and is set out in its written claim
appearing in the record on appeal as follows:

Balance due on open subject


P6,961.01
to check L-845

Interest on checking a/c 11.37

6,972.83
V. The claim of Sy Guan Huat is for the sum of P6,232.88 and the described it as follows:

Balance due on open account


P6,224.34
subject to check L-718

Interest on checking a/c 8.54

6,232.88

VI. The claim of La Bella Tondeña is for the sum of P1,912.79, also described as follows:

Balance due on open account


P1910.59
subject to check

Interest on account 2.20

1,912.79

Now, then, should the appellants' deposits on current account in the bank now under liquidation be
considered preferred credits, and not otherwise, or should they be considered ordinary credits only?

The appellants contend that they are preferred credits because they are deposits in contemplation of law,
and as such should be returned with the corresponding interest thereon. In support thereof they cite
Manresa, and what has been insinuated in the case of Rogers vs. Smith, Bell & Co. (10 Phil., 319), citing
the said commentator who maintains that, notwithstanding the provisions of articles 1767 and 1768 and
others of the aforesaid Code, from which it is inferred that the so-called irregular deposits no longer exist,
the fact is that said deposits still exist. And they contend and argue that what they had in the bank should
be considered as of this character.

But it happens that they themselves admit that the bank owes them interest which should have been paid
to them before it was declared in a state of liquidation. This fact undoubtedly destroys the character which
they nullifies their contention that the same be considered as irregular deposits, because the payment of
interest only takes place in the case of loans.

On the other hand, as we stated with respect to the claim of Tan Tiong Tick (In re Liquidation of
Mercantile Bank of China, G.R. No. 43682), the provisions of the Code of Commerce, and not those of
the Civil Code, are applicable to cases of the nature of those at bar, which have to do with parties who
are both merchants. (Articles 303 and 309, Code of Commerce.) We there said, and it is not amiss to
repeat now, that the so-called current account and savings deposits have lost their character of deposits,
properly so-called and are convertible into simple commercial loans because, in cases of such deposits,
the bank has made use thereof in the ordinary course of its transactions as an institution engaged in the
banking business, not because it so wishes, but precisely because of the authority deemed to have been
granted to it by the appellants to enable them to collect the interest which they had been and they are
now collecting, and by virtue further of the authority granted to it by section 125 of the Corporation Law
(Act No. 1459), as amended by Acts Nos. 2003 and 3610 and section 9 of the Banking Law (Act No.
3154), without considering of course the provisions of article 1768 of the Civil Code.

Wherefore, it is held that the deposits on current account of the appellants in the bank under liquidation,
with the right on their right on their part to collect interest, have not created and could not create a juridical
relation between them except that of creditors and debtor, they being the creditors and the bank the
debtor.
CENTRAL BANK OF THE PHILIPPINES as Liquidator of the FIDELITY SAVINGS BANK, petitioner,
vs.
HONORABLE JUDGE JESUS P. MORFE, Spouses PADILLA and Spouses ELIZES, respondents.

This case involves the question of whether a final judgment for the payment of a time deposit in a savings
bank which judgment was obtained after the bank was declared insolvent, is a preferred claim against the
bank. The question arises under the following facts:

On February 18,1969 the Monetary Board found the Fidelity Savings Bank to be insolvent. The Board
directed the Superintendent of Banks to take charge of its assets, forbade it to do business and instructed
the Central Bank Legal Counsel to take legal actions (Resolution No. 350).

Prior to the institution of the liquidation proceeding but after the declaration of insolvency, or, specifically,
sometime in March, 1971, the spouses Job Elizes and Marcela P. Elizes filed a complaint in the Court of
First Instance of Manila against the Fidelity Savings Bank for the recovery of the sum of P50, 584 as the
balance of their time deposits (Civil Case No. 82520 assigned to Branch I).

In another case, assigned to Branch XXX of the Court of First Instance of Manila, the spouses Augusta A.
Padilla and Adelaida Padilla secured on April 14, 1972 a judgment against the Fidelity Savings Bank for
the sums of P80,000 as the balance of their time deposits, plus interests, P70,000 as moral and
exemplary damages and P9,600 as attorney's fees (Civil Case No. 84200 where the action was filed on
September 6, 1971).

In its orders of August 20, 1973 and February 25, 1974, the lower court (Branch XIII having cognizance of
the liquidation proceeding), upon motions of the Elizes and Padilla spouses and over the opposition of the
Central Bank, directed the latter as liquidator, to pay their time deposits as preferred judgments,
evidenced by final judgments, within the meaning of article 2244(14)(b) of the Civil Code, if there are
enough funds in the liquidator's custody in excess of the credits more preferred under section 30 of the
Central Bank Law in relation to articles 2244 and 2251 of the Civil Code.

From the said order, the Central Bank appealed to this Court by certiorari. It contends that the final
judgments secured by the Elizes and Padilla spouses do not enjoy any preference because (a) they were
rendered after the Fidelity Savings Bank was declared insolvent and (b) under the charter of the Central
Bank and the General Banking Law, no final judgment can be validly obtained against an insolvent bank.

It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are
not true deposits. They are considered simple loans and, as such, are not preferred credits.

The aforequoted section 29 of the Central Bank's charter explicitly provides that when a bank is found to
be insolvent, the Monetary Board shall forbid it to do business and shall take charge of its assets. The
Board in its Resolution No. 350 dated February 18,1969 banned the Fidelity Savings Bank from doing
business. It took charge of the bank's assets. Evidently, one purpose in prohibiting the insolvent bank
from doing business is to prevent some depositors from having an undue or fraudulent preference over
other creditors and depositors.

That purpose would be nullified if, as in this case, after the bank is declared insolvent, suits by some
depositors could be maintained and judgments would be rendered for the payment of their deposits and
then such judgments would be considered preferred credits under article 2244 (14) (b) of the Civil Code.

We are of the opinion that such judgments cannot be considered preferred and that article 2244(14)(b)
does not apply to judgments for the payment of the deposits in an insolvent savings bank which were
obtained after the declaration of insolvency.
A contrary rule or practice would be productive of injustice, mischief and confusion. To recognize such
judgments as entitled to priority would mean that depositors in insolvent banks, after learning that the
bank is insolvent as shown by the fact that it can no longer pay withdrawals or that it has closed its doors
or has been enjoined by the Monetary Board from doing business, would rush to the courts to secure
judgments for the payment of their deposits.

The general principle of equity that the assets of an insolvent are to he


distributed ratably among general creditors applies with full force to the
distribution of the assets of a bank. A general depositor of a bank is merely a
general creditor, and, as such, is not entitled to any preference or priority over
other general creditors.

The assets of a bank in process of liquidation are held in trust for the equal
benefit of all creditors, and one cannot be permitted to obtain an advantage or
preference over another by an attachment, execution or otherwise. A disputed
claim of a creditor may be adjudicated, but those whose claims are recognized
and admitted may not successfully maintain action thereon. So to permit would
defeat the very purpose of the liquidation of a bank whether being voluntarily
accomplished or through the intervention of a receiver.

xxx xxx xxx

The available assets of such a bank are held in trust, and so conserved that each
depositor or other creditor shall receive payment or dividend according to the
amount of his debt, and that none of equal class shall receive any advantage or
preference over another.

And with respect to a national bank under voluntary liquidation, the court noted in the Rohr case that the
assets of such a bank "become a trust fund, to be administered for the benefit of all creditors pro rata and,
while the bank retains its corporate existence, and may be sued, the effect of a judgment obtained
against it by a creditor is only to fix the amount of debt. He can acquire no lien which will give him any
preference or advantage over other general creditors. (245 Pac. 249). *

Considering that the deposits in question, in their inception, were not preferred credits, it does not seem
logical and just that they should be raised to the category of preferred credits simply because the
depositors, taking advantage of the long interval between the declaration of insolvency and the filing of
the petition for judicial assistance and supervision, were able to secure judgments for the payment of their
time deposits.

The judicial declaration that the said deposits were payable to the depositors, as indisputably they were
due, could not have given the Elizes and Padilla spouses a priority over the other depositors whose
deposits were likewise indisputably due and owing from the insolvent bank but who did not want to incur
litigation expenses in securing a judgment for the payment of the deposits.

The circumstance that the Fidelity Savings Bank, having stopped operations since February 19, 1969,
was forbidden to do business (and that ban would include the payment of time deposits) implies that suits
for the payment of such deposits were prohibited. What was directly prohibited should not be
encompassed indirectly.

MANUEL M. SERRANO, petitioner,


vs.
CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA; et al, respondents.
Petition for mandamus and prohibition, with preliminary injunction, that seeks the establishment of joint
and solidary liability to the amount of Three Hundred Fifty Thousand Pesos, with interest, against
respondent Central Bank of the Philippines and Overseas Bank of Manila and its stockholders, on the
alleged failure of the Overseas Bank of Manila to return the time deposits made by petitioner and
assigned to him, on the ground that respondent Central Bank failed in its duty to exercise strict
supervision over respondent Overseas Bank of Manila to protect depositors and the general
public. 1 Petitioner also prays that both respondent banks be ordered to execute the proper and necessary
documents to constitute all properties fisted in Annex "7" of the Answer of respondent Central Bank of the
Philippines in G.R. No. L-29352, entitled "Emerita M. Ramos, et al vs. Central Bank of the
Philippines," into a trust fund in favor of petitioner and all other depositors of respondent Overseas Bank
of Manila.

On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one year with 6%
interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with the respondent Overseas Bank of
Manila. 3 Concepcion Maneja also made a time deposit, for one year with 6-½% interest, on March 6,
1967, of Two Hundred Thousand Pesos (P200,000.00) with the same respondent Overseas Bank of
Manila. 4

On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned and conveyed to
petitioner Manuel M. Serrano, her time deposit of P200,000.00 with respondent Overseas Bank of
Manila. 5

Notwithstanding series of demands for encashment of the aforementioned time deposits from the
respondent Overseas Bank of Manila, dating from December 6, 1967 up to March 4, 1968, not a single
one of the time deposit certificates was honored by respondent Overseas Bank of Manila. 6

Respondent Central Bank admits that it is charged with the duty of administering the banking system of
the Republic and it exercises supervision over all doing business in the Philippines, but denies the
petitioner's allegation that the Central Bank has the duty to exercise a most rigid and stringent supervision
of banks, implying that respondent Central Bank has to watch every move or activity of all banks,
including respondent Overseas Bank of Manila. Respondent Central Bank claims that as of March 12,
1965, the Overseas Bank of Manila, while operating, was only on a limited degree of banking operations
since the Monetary Board decided in its Resolution No. 322, dated March 12, 1965, to prohibit the
Overseas Bank of Manila from making new loans and investments in view of its chronic reserve
deficiencies against its deposit liabilities. This limited operation of respondent Overseas Bank of Manila
continued up to 1968. 7

Respondent Central Bank also denied that it is guarantor of the permanent solvency of any banking
institution as claimed by petitioner.

Furthermore, both parties overlooked one fundamental principle in the nature of bank deposits when the
petitioner claimed that there should be created a constructive trust in his favor when the respondent
Overseas Bank of Manila increased its collaterals in favor of respondent Central Bank for the former's
overdrafts and emergency loans, since these collaterals were acquired by the use of depositors' money.

Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest. All
kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be
covered by the law on loans. 14Current and savings deposit are loans to a bank because it can use the
same. The petitioner here in making time deposits that earn interests with respondent Overseas Bank of
Manila was in reality a creditor of the respondent Bank and not a depositor. The respondent Bank was in
turn a debtor of petitioner. Failure of the respondent Bank to honor the time deposit is failure to pay an
obligation as a debtor and not a breach of trust arising from depositary's failure to return the subject
matter of the deposit.
WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner.

TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS, petitioners,


vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, CLEMENT DAVID, et al, respondents.

The instant petition seeks to prohibit public respondents from proceeding with the preliminary
investigation of I.S. No. 81-31938, in which petitioners were charged by private respondent Clement
David, with estafa and violation of Central Bank Circular No. 364 and related regulations regarding foreign
exchange transactions principally, on the ground of lack of jurisdiction in that the allegations of the
charged, as well as the testimony of private respondent's principal witness and the evidence through said
witness, showed that petitioners' obligation is civil in nature.

On December 23,1981, private respondent David filed I.S. No. 81-31938 in the
Office of the City Fiscal of Manila, which case was assigned to respondent Lota
for preliminary investigation (Petition, p. 8).

In I.S. No. 81-31938, David charged petitioners (together with one Robert
Marshall and the following directors of the Nation Savings and Loan Association,
Inc., namely Homero Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez,
Jr., Perfecto Manalac, Jaime V. Paz, Paulino B. Dionisio, and one John Doe) with
estafa and violation of Central Bank Circular No. 364 and related Central Bank
regulations on foreign exchange transactions, allegedly committed as follows
(Petition, Annex "A"):têñ.£îhqwâ£

"From March 20, 1979 to March, 1981, David invested with the
Nation Savings and Loan Association, (hereinafter called NSLA)
the sum of P1,145,546.20 on nine deposits, P13,531.94 on
savings account deposits (jointly with his sister, Denise Kuhne),
US$10,000.00 on time deposit, US$15,000.00 under a receipt
and guarantee of payment and US$50,000.00 under a receipt
dated June 8, 1980 (au jointly with Denise Kuhne), that David
was induced into making the aforestated investments by Robert
Marshall an Australian national who was allegedly a close
associate of petitioner Guingona Jr., then NSLA President,
petitioner Martin, then NSLA Executive Vice-President of NSLA
and petitioner Santos, then NSLA General Manager; that on
March 21, 1981 NSLA was placed under receivership by the
Central Bank, so that David filed claims therewith for his
investments and those of his sister; that on July 22, 1981 David
received a report from the Central Bank that only P305,821.92 of
those investments were entered in the records of NSLA; that,
therefore, the respondents in I.S. No. 81-31938 misappropriated
the balance of the investments, at the same time violating
Central Bank Circular No. 364 and related Central Bank
regulations on foreign exchange transactions; that after
demands, petitioner Guingona Jr. paid only P200,000.00,
thereby reducing the amounts misappropriated to P959,078.14
and US$75,000.00."

As correctly pointed out by the Solicitor General, the sole issue for resolution is whether public
respondents acted without jurisdiction when they investigated the charges (estafa and violation of CB
Circular No. 364 and related regulations regarding foreign exchange transactions) subject matter of I.S.
No. 81-31938.
There is merit in the contention of the petitioners that their liability is civil in nature and therefore, public
respondents have no jurisdiction over the charge of estafa.

A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the City Fiscal of
Manila by private respondent David against petitioners Teopisto Guingona, Jr., Antonio I. Martin and
Teresita G. Santos, together with one Robert Marshall and the other directors of the Nation Savings and
Loan Association, will show that from March 20, 1979 to March, 1981, private respondent David, together
with his sister, Denise Kuhne, invested with the Nation Savings and Loan Association the sum of
P1,145,546.20 on time deposits covered by Bankers Acceptances and Certificates of Time Deposits and
the sum of P13,531.94 on savings account deposits covered by passbook nos. 6-632 and 29-742, or a
total of P1,159,078.14 (pp. 15-16, roc.). It appears further that private respondent David, together with his
sister, made investments in the aforesaid bank in the amount of US$75,000.00 (p. 17, rec.).

Moreover, the records reveal that when the aforesaid bank was placed under receivership on March 21,
1981, petitioners Guingona and Martin, upon the request of private respondent David, assumed the
obligation of the bank to private respondent David by executing on June 17, 1981 a joint promissory note
in favor of private respondent acknowledging an indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80,
rec.). This promissory note was based on the statement of account as of June 30, 1981 prepared by the
private respondent (p. 81, rec.). The amount of indebtedness assumed appears to be bigger than the
original claim because of the added interest and the inclusion of other deposits of private respondent's
sister in the amount of P116,613.20.

Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said indebtedness,
and petitioner Guingona executed another promissory note antedated to June 17, 1981 whereby he
personally acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2
of US$75,000.00) in favor of private respondent (p. 25, rec.). The aforesaid promissory notes were
executed as a result of deposits made by Clement David and Denise Kuhne with the Nation Savings and
Loan Association.

It must be pointed out that when private respondent David invested his money on nine. and savings
deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan
or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides that:

Article 1980. Fixed, savings, and current deposits of-money in banks and similar
institutions shall be governed by the provisions concerning simple loan.

In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We said:

It should be noted that fixed, savings, and current deposits of money in banks
and similar institutions are hat true deposits. are considered simple loans and, as
such, are not preferred credits.

This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA 102
[1980]) that:

Bank deposits are in the nature of irregular deposits. They are really 'loans
because they earn interest. All kinds of bank deposits, whether fixed, savings, or
current are to be treated as loans and are to be covered by the law on loans (Art.
1980 Civil Code Gullas vs. Phil. National Bank, 62 Phil. 519). Current and saving
deposits, are loans to a bank because it can use the same. The petitioner here in
making time deposits that earn interests will respondent Overseas Bank of
Manila was in reality a creditor of the respondent Bank and not a depositor. The
respondent Bank was in turn a debtor of petitioner. Failure of the respondent
Bank to honor the time deposit is failure to pay its obligation as a debtor and not
a breach of trust arising from a depositary's failure to return the subject matter of
the deposit (Emphasis supplied).

Hence, the relationship between the private respondent and the Nation Savings and Loan Association is
that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the
Bank upon the perfection of the contract and it can make use of the amount deposited for its banking
operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the
obligation to return the amount deposited, it has, however, no obligation to return or deliver the same
money that was deposited. And, the failure of the Bank to return the amount deposited will not constitute
estafa through misappropriation punishable under Article 315, par. l(b) of the Revised Penal Code, but it
will only give rise to civil liability over which the public respondents have no- jurisdiction.

PEOPLE OF THE PHILIPPINES, petitioner,


vs.
TERESITA PUIG and ROMEO PORRAS, respondents.

On 7 November 2005, the Iloilo Provincial Prosecutor’s Office filed before Branch 68 of the RTC in
Dumangas, Iloilo, 112 cases of Qualified Theft against respondents Teresita Puig (Puig) and Romeo
Porras (Porras) who were the Cashier and Bookkeeper, respectively, of private complainant Rural Bank
of Pototan, Inc.

INFORMATION

That on or about the 1st day of August, 2002, in the Municipality of Pototan, Province of
Iloilo, Philippines, and within the jurisdiction of this Honorable Court, above-named
[respondents], conspiring, confederating, and helping one another, with grave abuse of
confidence, being the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,
Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank and
with intent of gain, did then and there willfully, unlawfully and feloniously take, steal and
carry away the sum of FIFTEEN THOUSAND PESOS (P15,000.00), Philippine Currency,
to the damage and prejudice of the said bank in the aforesaid amount.

After perusing the Informations in these cases, the trial court did not find the existence of probable cause
that would have necessitated the issuance of a warrant of arrest based on the following grounds:

(1) the element of ‘taking without the consent of the owners’ was missing on the
ground that it is the depositors-clients, and not the Bank, which filed the complaint in
these cases, who are the owners of the money allegedly taken by respondents and
hence, are the real parties-in-interest; and

(2) the Informations are bereft of the phrase alleging "dependence, guardianship or
vigilance between the respondents and the offended party that would have created
a high degree of confidence between them which the respondents could have
abused."

It added that allowing the 112 cases for Qualified Theft filed against the respondents to push through
would be violative of the right of the respondents under Section 14(2), Article III of the 1987 Constitution
which states that in all criminal prosecutions, the accused shall enjoy the right to be informed of the
nature and cause of the accusation against him. Following Section 6, Rule 112 of the Revised Rules of
Criminal Procedure, the RTC dismissed the cases on 30 January 2006 and refused to issue a warrant of
arrest against Puig and Porras.

We find merit in the petition.


The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the Informations and,
therefore, because of this defect, there is no basis for the existence of probable cause which will justify
the issuance of the warrant of arrest. Petitioner assails the dismissal contending that the Informations for
Qualified Theft sufficiently state facts which constitute (a) the qualifying circumstance of grave abuse of
confidence; and (b) the element of taking, with intent to gain and without the consent of the owner, which
is the Bank.

In determining the existence of probable cause to issue a warrant of arrest, the RTC judge found the
allegations in the Information inadequate. He ruled that the Information failed to state facts constituting
the qualifying circumstance of grave abuse of confidence and the element of taking without the consent of
the owner, since the owner of the money is not the Bank, but the depositors therein.

At this point, it needs stressing that the RTC Judge based his conclusion that there was no probable
cause simply on the insufficiency of the allegations in the Informations concerning the facts constitutive of
the elements of the offense charged. This, therefore, makes the issue of sufficiency of the allegations in
the Informations the focal point of discussion.

Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is committed as
follows, viz:

ART. 310. Qualified Theft. – The crime of theft shall be punished by the penalties next
higher by two degrees than those respectively specified in the next preceding article, if
committed by a domestic servant, or with grave abuse of confidence, or if the property
stolen is motor vehicle, mail matter or large cattle or consists of coconuts taken from the
premises of a plantation, fish taken from a fishpond or fishery or if property is taken on
the occasion of fire, earthquake, typhoon, volcanic eruption, or any other calamity,
vehicular accident or civil disturbance. (Emphasis supplied.)

Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking of another’s
property without violence or intimidation against persons or force upon things. The elements of the crime
under this Article are:

1. Intent to gain;

2. Unlawful taking;

3. Personal property belonging to another;

4. Absence of violence or intimidation against persons or force upon things.

To fall under the crime of Qualified Theft, the following elements must concur:

1. Taking of personal property;

2. That the said property belongs to another;

3. That the said taking be done with intent to gain;

4. That it be done without the owner’s consent;

5. That it be accomplished without the use of violence or intimidation against persons, nor
of force upon things;
6. That it be done with grave abuse of confidence.

On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court requires, inter alia, that
the information must state the acts or omissions complained of as constitutive of the offense.

It is evident that the Information need not use the exact language of the statute in alleging the acts or
omissions complained of as constituting the offense. The test is whether it enables a person of common
understanding to know the charge against him, and the court to render judgment properly. 5

The portion of the Information relevant to this discussion reads:

A]bove-named [respondents], conspiring, confederating, and helping one another, with


grave abuse of confidence, being the Cashier and Bookkeeper of the Rural Bank of
Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of the management of
the Bank x x x.

It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who come into
possession of the monies deposited therein enjoy the confidence reposed in them by their employer.
Banks, on the other hand, where monies are deposited, are considered the owners thereof. This is very
clear not only from the express provisions of the law, but from established jurisprudence. The relationship
between banks and depositors has been held to be that of creditor and debtor.

In a long line of cases involving Qualified Theft, this Court has firmly established the nature of possession
by the Bank of the money deposits therein, and the duties being performed by its employees who have
custody of the money or have come into possession of it. The Court has consistently considered the
allegations in the Information that such employees acted with grave abuse of confidence, to the damage
and prejudice of the Bank, without particularly referring to it as owner of the money deposits, as sufficient
to make out a case of Qualified Theft.

In summary, the Bank acquires ownership of the money deposited by its clients; and the employees of
the Bank, who are entrusted with the possession of money of the Bank due to the confidence reposed in
them, occupy positions of confidence. The Informations, therefore, sufficiently allege all the essential
elements constituting the crime of Qualified Theft.

Article 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. (1758a)

Article 1963. An agreement to constitute a deposit is binding, but the deposit itself is not perfected until
the delivery of the thing. (n)

Article 1964. A deposit may be constituted judicially or extrajudicially. (1759)

Article 1965. A deposit is a gratuitous contract, except when there is an agreement to the contrary, or
unless the depositary is engaged in the business of storing goods. (1760a)

Article 1966. Only movable things may be the object of a deposit. (1761)

Article 1967. An extrajudicial deposit is either voluntary or necessary. (1762)

THE UNITED STATES, plaintiff-appellee,


vs.
JOSE M. IGPUARA, defendant-appellant.
The defendant therein is charged with the crime of estafa, for having swindled Juana Montilla and
Eugenio Veraguth out of P2,498 Philippine currency, which he had taken on deposit from the former to be
at the latter's disposal. The document setting forth the obligation reads:

We hold at the disposal of Eugenio Veraguth the sum of two thousand four hundred and ninety-eight
pesos (P2,498), the balance from Juana Montilla's sugar. — Iloilo, June 26, 1911, — Jose Igpuara, for
Ramirez and Co.

The defendant appealed, alleging as errors: (1) Holding that the document executed by him was a
certificate of deposit; (2) holding the existence of a deposit, without precedent transfer or delivery of the
P2,498; and (3) classifying the facts in the case as the crime of estafa.

A deposit is constituted from the time a person receives a thing belonging to another with
the obligation of keeping and returning it. (Art. 1758, Civil Code.)

That the defendant received P2,498 is a fact proven. The defendant drew up a document declaring that
they remained in his possession, which he could not have said had he not received them. They remained
in his possession, surely in no other sense than to take care of them, for they remained has no other
purpose. They remained in the defendant's possession at the disposal of Veraguth; but on August 23 of
the same year Veraguth demanded for him through a notarial instrument restitution of them, and to date
he has not restored them.

The appellant says: "He as Juana’s agent voluntarily accepted the sum of P2,498 in an instrument
payable on demand, and as no attempt was made to cash it until August 23, 1911, he could indorse and
negotiate it like any other commercial instrument. There is no doubt that if Veraguth accepted the receipt
for P2,498 it was because at that time he agreed with the defendant to consider the operation of sale on
commission closed, leaving the collection of said sum until later, which sum remained as a loan payable
upon presentation of the receipt." (Brief, 3 and 4.)

Then, after averring the true facts: (1) that a sales commission was precedent; (2) that this commission
was settled with a balance of P2,498 in favor of the principal, Juana Montilla; and (3) that this balance
remained in the possession of the defendant, who drew up an instrument payable on demand, he has
drawn two conclusions, both erroneous: One, that the instrument drawn up in the form of
a deposit certificate could be indorsed or negotiated like any other commercial instrument; and the other,
that the sum of P2,498 remained in defendant's possession as a loan.

It is erroneous to assert that the certificate of deposit in question is negotiable like any other commercial
instrument: First, because every commercial instrument is not negotiable; and second, because only
instruments payable to order are negotiable. Hence, this instrument not being to order but to bearer, it is
not negotiable.

It is also erroneous to assert that sum of money set forth in said certificate is, according to it, in the
defendant's possession as a loan. In a loan the lender transmits to the borrower the use of the thing lent,
while in a deposit the use of the thing is not transmitted, but merely possession for its custody or safe-
keeping.

In order that the depositary may use or dispose of the things deposited, the depositor's consent is
required, and then:

The rights and obligations of the depositary and of the depositor shall cease, and the
rules and provisions applicable to commercial loans, commission, or contract which took
the place of the deposit shall be observed. (Art. 309, Code of Commerce.)
The defendant has shown no authorization whatsoever or the consent of the depositary for using or
disposing of the P2,498, which the certificate acknowledges, or any contract entered into with the
depositor to convert the deposit into a loan, commission, or other contract.

That demand was not made for restitution of the sum deposited, which could have been claimed on the
same or the next day after the certificate was signed, does not operate against the depositor, or signify
anything except the intention not to press it. Failure to claim at once or delay for sometime in demanding
restitution of the things deposited, which was immediately due, does not imply such permission to use the
thing deposited as would convert the deposit into a loan.

Article 408 of the Code of Commerce of 1829, previous to the one now in force, provided:

The depositary of an amount of money cannot use the amount, and if he makes use of it,
he shall be responsible for all damages that may accrue and shall respond to the
depositor for the legal interest on the amount.

Whereupon the commentators say:

In this case the deposit becomes in fact a loan, as a just punishment imposed upon him
who abuses the sacred nature of a deposit and as a means of preventing the desire of
gain from leading him into speculations that may be disastrous to the depositor, who is
much better secured while the deposit exists when he only has a personal action for
recovery.

According to article 548, No. 5, of the Penal Code, those who to the prejudice of another
appropriate or abstract for their own use money, goods, or other personal property which
they may have received as a deposit, on commission, or for administration, or for any
other purpose which produces the obligation of delivering it or returning it, and deny
having received it, shall suffer the penalty of the preceding article," which punishes such
act as the crime of estafa. The corresponding article of the Penal Code of the Philippines
in 535, No. 5.

In a decision of an appeal, September 28, 1895, the principle was laid down that: "Since he commits the
crime of estafa under article 548 of the Penal Code of Spain who to another's detriment appropriates to
himself or abstracts money or goods received on commission for delivery, the court rightly applied this
article to the appellant, who, to the manifest detriment of the owner or owners of the securities, since he
has not restored them, willfully and wrongfully disposed of them by appropriating them to himself or at
least diverting them from the purpose to which he was charged to devote them."

It is unquestionable that in no sense did the P2,498 which he willfully and wrongfully disposed of to the
detriments of his principal, Juana Montilla, and of the depositor, Eugenio Veraguth, belong to the
defendant.

BANK OF THE PHILIPPINE ISLANDS, petitioner,


vs.
THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents.

The pertinent portions of the judgment, as modified, read:

IN VIEW OF THE FOREGOING, the Court renders judgment as follows:

1. Ordering the defendant COMTRUST to restore to the dollar savings account of


plaintiff (No. 25-4109) the amount of U.S $1,000.00 as of October 27, 1975 to
earn interest together with the remaining balance of the said account at the rate
fixed by the bank for dollar deposits under Central Bank Circular 343;

2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S.


$3,000.00 immediately upon the finality of this decision, without interest for the
reason that the said amount was merely held in custody for safekeeping, but was
not actually deposited with the defendant COMTRUST because being cash
currency, it cannot by law be deposited with plaintiffs dollar account and
defendant's only obligation is to return the same to plaintiff upon demand;

xxx xxx xxx

5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as


damages in the concept of litigation expenses and attorney's fees suffered by
plaintiff as a result of the failure of the defendant bank to restore to his (plaintiffs)
account the amount of U.S. $1,000.00 and to return to him (plaintiff) the U.S.
$3,000.00 cash left for safekeeping.

Undaunted, the bank comes to this Court praying that it be totally absolved from any liability to
Zshornack. The latter not having appealed the Court of Appeals decision, the issues facing this Court are
limited to the bank's liability with regard to the first and second causes of action and its liability for
damages.

1. We first consider the first cause of action, On the dates material to this case, Rizaldy Zshornack
and his wife, Shirley Gorospe, maintained in COMTRUST, Quezon City Branch, a dollar savings
account and a peso current account.

On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia, Assistant
Branch Manager of COMTRUST Quezon City, payable to a certain Leovigilda D. Dizon in the amount of
$1,000.00. In the application, Garcia indicated that the amount was to be charged to Dollar Savings Acct.
No. 25-4109, the savings account of the Zshornacks; the charges for commission, documentary stamp
tax and others totalling P17.46 were to be charged to Current Acct. No. 210465-29, again, the current
account of the Zshornacks. There was no indication of the name of the purchaser of the dollar draft.

On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia, issued a
check payable to the order of Leovigilda D. Dizon in the sum of US $1,000 drawn on the Chase
Manhattan Bank, New York, with an indication that it was to be charged to Dollar Savings Acct. No. 25-
4109.

When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an explanation
from the bank. In answer, COMTRUST claimed that the peso value of the withdrawal was given to Atty.
Ernesto Zshornack, Jr., brother of Rizaldy, on October 27, 1975 when he (Ernesto) encashed with
COMTRUST a cashier's check for P8,450.00 issued by the Manila Banking Corporation payable to
Ernesto.

Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of both the trial
court and the Appellate Court on the first cause of action. Petitioner must be held liable for the
unauthorized withdrawal of US$1,000.00 from private respondent's dollar account.

In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the bank has
adopted inconsistent theories. First, it still maintains that the peso value of the amount withdrawn was
given to Atty. Ernesto Zshornack, Jr. when the latter encashed the Manilabank Cashier's Check. At the
same time, the bank claims that the withdrawal was made pursuant to an agreement where Zshornack
allegedly authorized the bank to withdraw from his dollar savings account such amount which, when
converted to pesos, would be needed to fund his peso current account. If indeed the peso equivalent of
the amount withdrawn from the dollar account was credited to the peso current account, why did the bank
still have to pay Ernesto?

At any rate, both explanations are unavailing. With regard to the first explanation, petitioner bank has not
shown how the transaction involving the cashier's check is related to the transaction involving the dollar
draft in favor of Dizon financed by the withdrawal from Rizaldy's dollar account. The two transactions
appear entirely independent of each other. Moreover, Ernesto Zshornack, Jr., possesses a personality
distinct and separate from Rizaldy Zshornack. Payment made to Ernesto cannot be considered payment
to Rizaldy.

As to the second explanation, even if we assume that there was such an agreement, the evidence do not
show that the withdrawal was made pursuant to it. Instead, the record reveals that the amount withdrawn
was used to finance a dollar draft in favor of Leovigilda D. Dizon, and not to fund the current account of
the Zshornacks. There is no proof whatsoever that peso Current Account No. 210-465-29 was ever
credited with the peso equivalent of the US$1,000.00 withdrawn on October 27, 1975 from Dollar Savings
Account No. 25-4109.

2. As for the second cause of action, the complaint filed with the trial court alleged that on
December 8, 1975, Zshornack entrusted to COMTRUST, thru Garcia, US
$3,000.00 cash (popularly known as greenbacks) forsafekeeping, and that the agreement was
embodied in a document, a copy of which was attached to and made part of the complaint. The
document reads:

MR. RIZALDY T. ZSHORNACK

&/OR MRS SHIRLEY E. ZSHORNACK

Sir/Madam:

We acknowledged (sic) having received from you today the sum


of US DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for
safekeeping.

It was also alleged in the complaint that despite demands, the bank refused to return the money.

In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current account
at prevailing conversion rates.

It must be emphasized that COMTRUST did not deny specifically under oath the authenticity and due
execution of the above instrument.

During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank US
$3,000 for safekeeping. When he requested the return of the money on May 10, 1976, COMTRUST
explained that the sum was disposed of in this manner: US$2,000.00 was sold on December 29, 1975
and the peso proceeds amounting to P14,920.00 were deposited to Zshornack's current account per
deposit slip accomplished by Garcia; the remaining US$1,000.00 was sold on February 3, 1976 and the
peso proceeds amounting to P8,350.00 were deposited to his current account per deposit slip also
accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at
prevailing conversion rates, BPI now posits another ground to defeat private respondent's claim. It now
argues that the contract embodied in the document is the contract of depositum (as defined in Article
1962, New Civil Code), which banks do not enter into. The bank alleges that Garcia exceeded his powers
when he entered into the transaction. Hence, it is claimed, the bank cannot be liable under the contract,
and the obligation is purely personal to Garcia.

Having determined that Garcia's act of entering into the contract binds the corporation, we now determine
the correct nature of the contract, and its legal consequences, including its enforceability.

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.

Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence,
the transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange
Transactions, promulgated on December 9, 1949, which was in force at the time the parties entered into
the transaction involved in this case.

As earlier stated, the document and the subsequent acts of the parties show that they intended the bank
to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is
a Philippine resident. The parties did not intend to sell the US dollars to the Central Bank within one
business day from receipt. Otherwise, the contract of depositum would never have been entered into at
all.

Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one
business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be
considered as one which falls under the general class of prohibited transactions. Hence, pursuant to
Article 5 of the Civil Code, it is void, having been executed against the provisions of a
mandatory/prohibitory law. More importantly, it affords neither of the parties a cause of action against the
other. "When the nullity proceeds from the illegality of the cause or object of the contract, and the act
constitutes a criminal offense, both parties being in pari delicto, they shall have no cause of action against
each other. . ." [Art. 1411, New Civil Code.] The only remedy is one on behalf of the State to prosecute
the parties for violating the law.

WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to restore to the
dollar savings account of private respondent the amount of US$1,000.00 as of October 27, 1975 to earn
interest at the rate fixed by the bank for dollar savings deposits.

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,


vs.
CA and SECURITY BANK AND TRUST COMPANY, respondents.

On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula
Pugao entered into an agreement whereby the former purchased from the latter two (2) parcels of land for
a consideration of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance
was covered by three (3) postdated checks. Among the terms and conditions of the agreement embodied
in a Memorandum of True and Actual Agreement of Sale of Land were that the titles to the lots shall be
transferred to the petitioner upon full payment of the purchase price and that the owner's copies of the
certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be
deposited in a safety deposit box of any bank. The same could be withdrawn only upon the joint
signatures of a representative of the petitioner and the Pugaos upon full payment of the purchase price.
Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private
respondent Security Bank and Trust Company, a domestic banking corporation hereinafter referred to as
the respondent Bank. For this purpose, both signed a contract of lease (Exhibit "2") which contains, inter
alia, the following conditions:

13. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.

14. The bank has no interest whatsoever in said contents, except herein
expressly provided, and it assumes absolutely no liability in connection
therewith. 1

After the execution of the contract, two (2) renter's keys were given to the renters — one to Aguirre (for
the petitioner) and the other to the Pugaos. A guard key remained in the possession of the respondent
Bank. The safety deposit box has two (2) keyholes, one for the guard key and the other for the renter's
key, and can be opened only with the use of both keys. Petitioner claims that the certificates of title were
placed inside the said box.

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of
P225.00 per square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00
per square meter or a total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution
of a deed of sale which necessarily entailed the production of the certificates of title. In view thereof,
Aguirre, accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October 1979 to open
the safety deposit box and get the certificates of title. However, when opened in the presence of the
Bank's representative, the box yielded no such certificates. Because of the delay in the reconstitution of
the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as a consequence thereof, the
petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the latter filed on 1
September 1980 a complaint 2 for damages against the respondent Bank with the Court of First Instance
(now Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.

In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of action
because of paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the items
or articles contained in the box could not give rise to an action against it.

In a nutshell, petitioner maintains that regardless of nomenclature, the contract for the rent of the safety
deposit box (Exhibit "2") is actually a contract of deposit governed by Title XII, Book IV of the Civil Code of
the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the certificates of
title pursuant to Article 1972 of the said Code which provides:

Art. 1972. The depositary is obliged to keep the thing safely and to return it, when
required, to the depositor, or to his heirs and successors, or to the person who
may have been designated in the contract. His responsibility, with regard to the
safekeeping and the loss of the thing, shall be governed by the provisions of Title
I of this Book.

If the deposit is gratuitous, this fact shall be taken into account in determining the
degree of care that the depositary must observe.
The petition is partly meritorious.

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; 19the contract in the case at bar is a special kind of deposit. 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.

We observe, however, that the deposit theory itself does not altogether find unanimous support even in
American jurisprudence. We agree with the petitioner that under the latter, 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 the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear
that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the
General Banking Act 23pertinently 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. . . . 24 (emphasis supplied)

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 25 and, pursuant to Article 1306 of
the Civil Code, the parties thereto may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public order or public
policy. 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. 26 In the absence of any stipulation prescribing the degree of diligence required, that of a
good father of a family is to be observed. 27 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. In the instant case, petitioner maintains that conditions 13 and
14 of the questioned contract of lease of the safety deposit box, which read:

13. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein
expressly provided, and it assumes absolutely no liability in connection
therewith. 28

are void as they are contrary to law and public policy. We find Ourselves in agreement
with this proposition for indeed, said provisions are inconsistent with the respondent
Bank's responsibility as a depositary under Section 72(a) of the General Banking Act.
Both exempt the latter from any liability except as contemplated in condition 8 thereof
which limits its duty to exercise reasonable diligence only with respect to who shall be
admitted to any rented safe, to wit:

8. The Bank shall use due diligence that no unauthorized person shall be
admitted to any rented safe and beyond this, the Bank will not be responsible for
the contents of any safe rented from it. 29

Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. 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.

ANGEL JAVELLANA, plaintiff-appellee,


vs.
JOSE LIM, ET AL., defendants-appellants.

The attorney for the plaintiff, Angel Javellana, filed a complaint on the 30th of October, 1906, with the
Court of First Instance of Iloilo, praying that the defendants, Jose Lim and Ceferino Domingo Lim, he
sentenced to jointly and severally pay the sum of P2,686.58, with interest thereon at the rate of 15 per
cent per annum from the 20th of January, 1898, until full payment should be made, deducting from the
amount of interest due the sum of P1,102.16, and to pay the costs of the proceedings.

Authority from the court having been previously obtained, the complaint was amended on the 10th of
January, 1907; it was then alleged, on the 26th of May, 1897, the defendants executed and subscribed a
document in favor of the plaintiff reading as follows:

We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six
hundred and eighty-six cents of pesos fuertes, which we will return to the said gentleman, jointly and
severally, on the 20th of January, 1898. — Jaro, 26th of May, 1897. — Signed Jose Lim. — Signed:
Ceferino Domingo Lim.

That, when the obligation became due, the defendants begged the plaintiff for an extension of time for the
payment thereof, building themselves to pay interest at the rate of 15 per cent on the amount of their
indebtedness, to which the plaintiff acceded; that on the 15th of May, 1902, the debtors paid on account
of interest due the sum of P1,000 pesos, with the exception of either capital or interest, had thereby been
subjected to loss and damages.

The document of indebtedness inserted in the complaint states that the plaintiff left on deposit with the
defendants a given sum of money which they were jointly and severally obliged to return on a certain date
fixed in the document; but that, nevertheless, when the document appearing as Exhibits 2, written in the
Visayan dialect and followed by a translation into Spanish was executed, it was acknowledged, at the
date thereof, the 15th of November, 1902, that the amount deposited had not yet been returned to the
creditor, whereby he was subjected to losses and damages amounting to 830 pesos since the 20th of
January, 1898, when the return was again stipulated with the further agreement that the amount
deposited should bear interest at the rate of 15 per cent per annum, from the aforesaid date of January
20, and that the 1,000 pesos paid to the depositor on the 15th of May, 1900, according to the receipt
issued by him to the debtors, would be included, and that the said rate of interest would obtain until the
debtors on the 20th of May, 1897, it is called a deposit consisted, and they could have accomplished the
return agreed upon by the delivery of a sum equal to the one received by them. For this reason it must be
understood that the debtors were lawfully authorized to make use of the amount deposited, which they
have done, as subsequent shown when asking for an extension of the time for the return thereof,
inasmuch as, acknowledging that they have subjected the letter, their creditor, to losses and damages for
not complying with what had been stipulated, and being conscious that they had used, for their own profit
and gain, the money that they received apparently as a deposit, they engaged to pay interest to the
creditor from the date named until the time when the refund should be made. Such conduct on the part of
the debtors is unquestionable evidence that the transaction entered into between the interested parties
was not a deposit, but a real contract of loan.

Article 1767 of the Civil Code provides that —

The depository can not make use of the thing deposited without the express permission
of the depositor.

Otherwise he shall be liable for losses and damages.

Article 1768 also provides that —

When the depository has permission to make use of the thing deposited, the contract
loses the character of a deposit and becomes a loan or bailment.

The permission shall not be presumed, and its existence must be proven.

When on one of the latter days of January, 1898, Jose Lim went to the office of the creditor asking for an
extension of one year, in view of the fact the money was scarce, and because neither himself nor the
other defendant were able to return the amount deposited, for which reason he agreed to pay interest at
the rate of 15 per cent per annum, it was because, as a matter of fact, he did not have in his possession
the amount deposited, he having made use of the same in his business and for his own profit; and the
creditor, by granting them the extension, evidently confirmed the express permission previously given to
use and dispose of the amount stated as having been deposited, which, in accordance with the loan, to
all intents and purposes gratuitously, until the 20th of January, 1898, and from that dated with interest at
15 per cent per annum until its full payment, deducting from the total amount of interest the sum of 1,000
pesos, in accordance with the provisions of article 1173 of the Civil Code.

Moreover, for the reason above set forth it may, as a matter of course, be inferred that there was no
renewal of the contract deposited converted into a loan, because, as has already been stated, the
defendants received said amount by virtue of real loan contract under the name of a deposit, since the
so-called bailees were forthwith authorized to dispose of the amount deposited. This they have done, as
has been clearly shown.

Article 1968. A voluntary deposit is that wherein the delivery is made by the will of the depositor. A
deposit may also be made by two or more persons each of whom believes himself entitled to the thing
deposited with a third person, who shall deliver it in a proper case to the one to whom it belongs. (1763)

Article 1969. A contract of deposit may be entered into orally or in writing. (n)
Article 1970. If a person having capacity to contract accepts a deposit made by one who is incapacitated,
the former shall be subject to all the obligations of a depositary, and may be compelled to return the thing
by the guardian, or administrator, of the person who made the deposit, or by the latter himself if he should
acquire capacity. (1764)

Article 1971. If the deposit has been made by a capacitated person with another who is not, the
depositor shall only have an action to recover the thing deposited while it is still in the possession of the
depositary, or to compel the latter to pay him the amount by which he may have enriched or benefited
himself with the thing or its price. However, if a third person who acquired the thing acted in bad faith, the
depositor may bring an action against him for its recovery. (1765a)

Article 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the
depositor, or to his heirs and successors, or to the person who may have been designated in the contract.
His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the
provisions of Title I of this Book.

If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the
depositary must observe. (1766a)

Article 1973. Unless there is a stipulation to the contrary, the depositary cannot deposit the thing with a
third person. If deposit with a third person is allowed, the depositary is liable for the loss if he deposited
the thing with a person who is manifestly careless or unfit. The depositary is responsible for the
negligence of his employees. (n)

Article 1974. The depositary may change the way of the deposit if under the circumstances he may
reasonably presume that the depositor would consent to the change if he knew of the facts of the
situation. However, before the depositary may make such change, he shall notify the depositor thereof
and wait for his decision, unless delay would cause danger. (n)

Article 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. (n)

Article 1976. Unless there is a stipulation to the contrary, the depositary may commingle grain or other
articles of the same kind and quality, in which case the various depositors shall own or have a
proportionate interest in the mass. (n)

Article 1977. The depositary cannot make use of the thing deposited without the express permission of
the depositor.

Otherwise, he shall be liable for damages.

However, when the preservation of the thing deposited requires its use, it must be used but only for that
purpose. (1767a)

Article 1978. When the depositary has permission to use the thing deposited, the contract loses the
concept of a deposit and becomes a loan or commodatum, except where safekeeping is still the principal
purpose of the contract.

The permission shall not be presumed, and its existence must be proved. (1768a)
Article 1979. The depositary is liable for the loss of the thing through a fortuitous event:

(1) If it is so stipulated;

(2) If he uses the thing without the depositor's permission;

(3) If he delays its return;

(4) If he allows others to use it, even though he himself may have been authorized to use
the same. (n)

Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan. (n)

Article 1981. When the thing deposited is delivered closed and sealed, the depositary must return it in
the same condition, and he shall be liable for damages should the seal or lock be broken through his
fault.

Fault on the part of the depositary is presumed, unless there is proof to the contrary.

As regards the value of the thing deposited, the statement of the depositor shall be accepted, when the
forcible opening is imputable to the depositary, should there be no proof to the contrary. However, the
courts may pass upon the credibility of the depositor with respect to the value claimed by him.

When the seal or lock is broken, with or without the depositary's fault, he shall keep the secret of the
deposit. (1769a)

Article 1982. When it becomes necessary to open a locked box or receptacle, the depositary is
presumed authorized to do so, if the key has been delivered to him; or when the instructions of the
depositor as regards the deposit cannot be executed without opening the box or receptacle. (n)

Article 1983. The thing deposited shall be returned with all its products, accessories and accessions.

Should the deposit consist of money, the provisions relative to agents in article 1896 shall be applied to
the depositary. (1770)

Article 1984. The depositary cannot demand that the depositor prove his ownership of the thing
deposited.

Nevertheless, should he discover that the thing has been stolen and who its true owner is, he must advise
the latter of the deposit.

If the owner, in spite of such information, does not claim it within the period of one month, the depositary
shall be relieved of all responsibility by returning the thing deposited to the depositor.

If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the
depositor, the former may return the same. (1771a)

Article 1985. When there are two or more depositors, if they are not solidary, and the thing admits of
division, each one cannot demand more than his share.
When there is solidarity or the thing does not admit of division, the provisions of articles 1212 and 1214
shall govern. However, if there is a stipulation that the thing should be returned to one of the depositors,
the depositary shall return it only to the person designated. (1772a)

Article 1986. If the depositor should lose his capacity to contract after having made the deposit, the thing
cannot be returned except to the persons who may have the administration of his property and rights.
(1773)

Article 1987. If at the time the deposit was made a place was designated for the return of the thing, the
depositary must take the thing deposited to such place; but the expenses for transportation shall be borne
by the depositor.

If no place has been designated for the return, it shall be made where the thing deposited may be, even if
it should not be the same place where the deposit was made, provided that there was no malice on the
part of the depositary. (1774)

Article 1988. The thing deposited must be returned to the depositor upon demand, even though a
specified period or time for such return may have been fixed.

This provision shall not apply when the thing is judicially attached while in the depositary's possession, or
should he have been notified of the opposition of a third person to the return or the removal of the thing
deposited. In these cases, the depositary must immediately inform the depositor of the attachment or
opposition. (1775)

Article 1989. Unless the deposit is for a valuable consideration, the depositary who may have justifiable
reasons for not keeping the thing deposited may, even before the time designated, return it to the
depositor; and if the latter should refuse to receive it, the depositary may secure its consignation from the
court. (1776a)

Article 1990. If the depositary by force majeure or government order loses the thing and receives money
or another thing in its place, he shall deliver the sum or other thing to the depositor. (1777a)

Article 1991. The depositor's heir who in good faith may have sold the thing which he did not know was
deposited, shall only be bound to return the price he may have received or to assign his right of action
against the buyer in case the price has not been paid him. (1778)

PAULINO GULLAS, plaintiff-appellant,


vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.

The parties to the case are Paulino Gullas and the Philippine National Bank. The first named is a member
of the Philippine Bar, resident in the City of Cebu. The second named is a banking corporation with a
branch in the same city. Attorney Gullas has had a current account with the bank.

It appears from the record that on August 2, 1933, the Treasurer of the United States for the United
States Veterans Bureau issued a Warrant in the amount of $361, payable to the order of Francisco
Sabectoria Bacos. Paulino Gullas and Pedro Lopez signed as endorsers of this check. Thereupon it was
cashed by the Philippine National Bank. Subsequently the treasury warrant was dishonored by the Insular
Treasurer.

At that time the outstanding balance of Attorney Gullas on the books of the bank was P509. Against
this balance he had issued certain checks which could not be paid when the money was sequestered by
the. On August 20, 1933, Attorney Gullas left his residence for Manila.
The bank on learning of the dishonor of the treasury warrant sent notices by mail to Mr. Gullas
which could not be delivered to him at that time because he was in Manila. In the bank's letter of August
21, 1933, addressed to Messrs. Paulino Gulla and Pedro Lopez, they were informed that the United
States Treasury warrant No. 20175 in the name of Francisco Sabectoria Bacos for $361 or P722, the
payment for which had been received has been returned by our Manila office with the notation that the
payment of his check has been stopped by the Insular Treasurer. "In view of this therefore we have
applied the outstanding balances of your current accounts with us to the part payment of the foregoing
check", namely, Mr. Paulino Gullas P509. On the return of Attorney Gullas to Cebu on August 31, 1933,
notice of dishonor was received and the unpaid balance of the United States Treasury warrant was
immediately paid by him.

As a consequence of these happenings, two occurrences transpired which inconvenienced


Attorney Gullas. In the first place, as above indicated, checks including one for his insurance were not
paid because of the lack of funds standing to his credit in the bank. In the second place, periodicals in the
vicinity gave prominence to the news to the great mortification of Gullas.

A variety of incidental questions have been suggested on the record which it can be taken for
granted as having been adversely disposed of in this opinion. The main issues are two, namely, (1) as to
the right of Philippine National Bank, and to apply a deposit to the debt of depositor to the bank and (2) as
to the amount damages, if any, which should be awarded Gullas.

The Civil Code contains provisions regarding compensation (set off) and deposit. (Articles 1195 et
seq., 1758 et seq. The portions of Philippine law provide that compensation shall take place when two
persons are reciprocally creditor and debtor of each other (Civil Code, article 1195). In his connection, it
has been held that the relation existing between a depositor and a bank is that of creditor and debtor.

As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any
indebtedness to it on the part of a depositor. In Louisiana, however, a civil law jurisdiction, the rule is
denied, and it is held that a bank has no right, without an order from or special assent of the depositor to
retain out of his deposit an amount sufficient to meet his indebtedness. The basis of the Louisiana
doctrine is the theory of confidential contracts arising from irregular deposits, e. g., the deposit of money
with a banker. With freedom of selection and after full preference to the minority rule as more in harmony
with modern banking practice.

Starting, therefore, from the premise that the Philippine National Bank had with respect to the
deposit of Gullas a right of set off, we next consider if that remedy was enforced properly. The fact we
believe is undeniable that prior to the mailing of notice of dishonor, and without waiting for any action by
Gullas, the bank made use of the money standing in his account to make good for the treasury warrant.
At this point recall that Gullas was merely an indorser and had issued in good faith.

As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a
third party, it has been held that he has a right of action against the bank for its refusal to pay such a
check in the absence of notice to him that the bank has applied the funds so deposited in extinguishment
of past due claims held against him. The decision cited represents the minority doctrine, for on principle it
would seem that notice is not necessary to a maker because the right is based on the doctrine that the
relationship is that of creditor and debtor. However this may be, as to an indorser the situation is different,
and notice should actually have been given him in order that he might protect his interests.

We accordingly are of the opinion that the action of the bank was prejudicial to Gullas.

ASSOCIATED BANK (Now WESTMONT BANK), petitioner,


vs.
VICENTE HENRY TAN, respondent.
Vicente Henry Tan (hereafter TAN) is a businessman and a regular depositor-creditor of the Associated
Bank (hereinafter referred to as the BANK). Sometime in September 1990, he deposited a postdated
UCPB check with the said BANK in the amount of P101,000.00 issued to him by a certain Willy Cheng
from Tarlac. The check was duly entered in his bank record thereby making his balance in the amount
of P297,000.00, as of October 1, 1990, from his original deposit of P196,000.00. Allegedly, upon advice
and instruction of the BANK that the P101,000.00 check was already cleared and backed up by sufficient
funds, TAN, on the same date, withdrew the sum of P240,000.00, leaving a balance of P57,793.45. A day
after, TAN deposited the amount of P50,000.00 making his existing balance in the amount
of P107,793.45, because he has issued several checks to his business partners.

"However, his suppliers and business partners went back to him alleging that the checks he issued
bounced for insufficiency of funds. Thereafter, TAN, thru his lawyer, informed the BANK to take positive
steps regarding the matter for he has adequate and sufficient funds to pay the amount of the subject
checks. Nonetheless, the BANK did not bother nor offer any apology regarding the incident.
Consequently, TAN, as plaintiff, filed a Complaint for Damages on December 19, 1990, with the Regional
Trial Court of Cabanatuan City, Third Judicial Region, docketed as Civil Case No. 892-AF, against the
BANK, as defendant.

"In his [C]omplaint, [respondent] maintained that he ha[d] sufficient funds to pay the subject checks and
alleged that his suppliers decreased in number for lack of trust.

In its Memorandum, petitioner raises the sole issue of "whether or not the petitioner, which is acting as a
collecting bank, has the right to debit the account of its client for a check deposit which was dishonored
by the drawee bank."6

The Petition has no merit.

Petitioner-bank contends that its rights and obligations under the present set of facts were misappreciated
by the CA. It insists that its right to debit the amount of the dishonored check from the account of
respondent is clear and unmistakable. Even assuming that it did not give him notice that the check had
been dishonored, such right remains immediately enforceable.

In particular, petitioner argues that the check deposit slip accomplished by respondent on September 17,
1990, expressly stipulated that the bank was obligating itself merely as the depositor’s collecting agent
and -- until such time as actual payment would be made to it -- it was reserving the right to charge against
the depositor’s account any amount previously credited. Respondent was allowed to withdraw the amount
of the check prior to clearing, merely as an act of accommodation, it added.

A bank generally has a right of setoff over the deposits therein for the payment of any withdrawals on the
part of a depositor.8 The right of a collecting bank to debit a client’s account for the value of a dishonored
check that has previously been credited has fairly been established by jurisprudence. To begin with,
Article 1980 of the Civil Code provides that "[f]ixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple loan."

Hence, the relationship between banks and depositors has been held to be that of creditor and
debtor.9 Thus, legal compensation under Article 127810 of the Civil Code may take place "when all the
requisites mentioned in Article 1279 are present,"11 as follows:

"(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor."12

Nonetheless, the real issue here is not so much the right of petitioner to debit respondent’s account but,
rather, the manner in which it exercised such right. The Court has held that even while the right of setoff
is conceded, separate is the question of whether that remedy has properly been exercised. 13

The liability of petitioner in this case ultimately revolves around the issue of whether it properly exercised
its right of setoff. The determination thereof hinges, in turn, on the bank’s role and obligations, first, as
respondent’s depositary bank; and second, as collecting agent for the check in question.

Obligation as
Depositary Bank

In BPI v. Casa Montessori,14 the Court has emphasized that the banking business is impressed with
public interest. "Consequently, the highest degree of diligence is expected, and high standards of integrity
and performance are even required of it. By the nature of its functions, a bank is under obligation to treat
the accounts of its depositors with meticulous care."15

Also affirming this long standing doctrine, Philippine Bank of Commerce v. Court of Appeals16 has held
that "the degree of diligence required of banks is more than that of a good father of a family where the
fiduciary nature of their relationship with their depositors is concerned."17 Indeed, the banking business is
vested with the trust and confidence of the public; hence the "appropriate standard of diligence must be
very high, if not the highest, degree of diligence."18 The standard applies, regardless of whether the
account consists of only a few hundred pesos or of millions.19

Did petitioner treat respondent’s account with the highest degree of care? From all indications, it did not.

It is undisputed -- nay, even admitted -- that purportedly as an act of accommodation to a valued client,
petitioner allowed the withdrawal of the face value of the deposited check prior to its clearing. That act
certainly disregarded the clearance requirement of the banking system. Such a practice is unusual,
because a check is not legal tender or money;21 and its value can properly be transferred to a depositor’s
account only after the check has been cleared by the drawee bank.22

Under ordinary banking practice, after receiving a check deposit, a bank either immediately credits the
amount to a depositor’s account; or infuse value to that account only after the drawee bank shall have
paid such amount.23Before the check shall have been cleared for deposit, the collecting bank can only
"assume" at its own risk -- as herein petitioner did -- that the check would be cleared and paid out.

Reasonable business practice and prudence, moreover, dictated that petitioner should not have
authorized the withdrawal by respondent of P240,000 on October 1, 1990, as this amount was over and
above his outstanding cleared balance of P196,793.45.24 Hence, the lower courts correctly appreciated
the evidence in his favor.

Obligation as
Collecting Agent
Let us go back to the facts as they unfolded. It is undeniable that the bank’s premature authorization of
the withdrawal by respondent on October 1, 1990, triggered -- in rapid succession and in a natural
sequence -- the debiting of his account, the fall of his account balance to insufficient levels, and the
subsequent dishonor of his own checks for lack of funds. The CA correctly noted thus:

"x x x [T]he depositor x x x withdrew his money upon the advice by [petitioner] that his
money was already cleared. Without such advice, [respondent] would not have withdrawn
the sum of P240,000.00. Therefore, it cannot be denied that it was [petitioner’s] fault
which allowed [respondent] to withdraw a huge sum which he believed was already his.

"To emphasize, it is beyond cavil that [respondent] had sufficient funds for the check. Had
the P101,000.00 not [been] debited, the subject checks would not have been dishonored.
Hence, we can say that [respondent’s] injury arose from the dishonor of his well-funded
checks. x x x."35

Aggravating matters, petitioner failed to show that it had immediately and duly informed respondent of the
debiting of his account. Nonetheless, it argues that the giving of notice was discernible from his act of
depositing P50,000 on October 2, 1990, to augment his account and allow the debiting. This argument
deserves short shrift.

First, notice was proper and ought to be expected. By the bank manager’s account, respondent was
considered a "valued client" whose checks had always been sufficiently funded from 1987 to 1990,36 until
the October imbroglio. Thus, he deserved nothing less than an official notice of the precarious condition
of his account.

Second, under the provisions of the Negotiable Instruments Law regarding the liability of a general
indorser37 and the procedure for a notice of dishonor,38 it was incumbent on the bank to give proper notice
to respondent. In Gullas v. National Bank,39 the Court emphasized:

"x x x [A] general indorser of a negotiable instrument engages that if the instrument – the
check in this case – is dishonored and the necessary proceedings for its dishonor are
duly taken, he will pay the amount thereof to the holder (Sec. 66) It has been held by a
long line of authorities that notice of dishonor is necessary to charge an indorser and that
the right of action against him does not accrue until the notice is given.

TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS, petitioners,


vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, et al, respondents.

If the bank officer who received the money did not credit the exact amount in the bank’s ledger and
misappropriated the money, the bank officer is liable for estafa.

COMPAÑIA MARITIMA, petitioner,


vs.
COURT OF APPEALS and PAN ORIENTAL SHIPPING CO., respondents.

On March 7, 1947, Fernando A. Froilan purchased from the Shipping


Administration a boat described as MV/FS-197 for the sum of P200,000.00, with
a down payment of P50,000.00. To secure payment of the unpaid balance of the
purchase price, a mortgage was constituted on the vessel in favor of the
Shipping Administration ....

xxx xxx xxx


Th(e) contract was duly approved by the President of the Philippines.

Froilan appeared to have defaulted in spite of demands, not only in the payment
of the first installment on the unpaid balance of the purchase price and the
interest thereon when they fell due, but also failed in his express undertaking to
pay the premiums on the insurance coverage of the vessel obliging the Shipping
Administration to advance such payment to the insurance company. ...

Subsequently, FROILAN appeared to have still incurred a series of defaults notwithstanding


reconsiderations granted, so much so that:

On February 21, 1949, the General Manager (of the Shipping Administration)
directed its officers ... to take immediate possession of the vessel and to suspend
the unloading of all cargoes on the same until the owners thereof made the
corresponding arrangement with the Shipping Administration. Pursuant to these
instructions, the boat was, not only actually repossessed, but the title thereto was
registered again in the name of the Shipping Administration, thereby re-
transferring the ownership thereof to the government.

On February 22, 1949, Pan Oriental Shipping Co., hereinafter referred to as Pan
Oriental, offered to charter said vessel FS-197 for a monthly rent of P3,000.00.
Because the government was then spending for the guarding of the boat and
subsistence of the crew members since repossession, the Slopping
Administration on April 1, 1949, accepted Pan Oriental's offer "in principle"
subject to the condition that the latter shall cause the repair of the vessel
advancing the cost of labor and drydocking thereof, and the Shipping
Administration to furnish the necessary spare parts. In accordance with this
charter contract, the vessel was delivered to the possession of Pan Oriental.

In the meantime, or on February 22, 1949, Froilan tried to explain his failure to
comply with the obligations he assumed and asked that he be given another
extension up to March 15, 1949 to file the necessary bond. Then on March 8,
Froilan offered to pay all his overdue accounts. However, as he failed to fulfill
even these offers made by him in these two communications, the Shipping
Administration denied his petition for reconsideration (of the rescission of the
contract) on March 22, 1949. It should be noted that while his petition for
reconsideration was denied on March 22, it does not appear when he formally
formulated his appeal. In the meantime, as already stated, the boat has been
repossessed by the Shipping Administration and the title thereto re-registered in
the name of the government, and delivered to the Pan Oriental in virtue of the
charter agreement. On June 2, 1949, Froilan protested to the President against
the charter of the vessel.

xxx xxx xxx

On June 4, 1949, the Shipping Administration and the Pan Oriental formalized the charter agreement and
signed a bareboat contract with option to purchase.

On September 6, 1949, the Cabinet revoked the cancellation of Froilan's contract


of sale and restored to him all his rights thereunder, on condition that he would
give not less than P10,000.00 to settle partially as overdue accounts and
that reimbursement of the expenses incurred for the repair and drydocking of the
vessel performed by Pan Oriental was to be made in accordance with future
adjustment between him and the Shipping Administration (Exh. I). Later,
pursuant to this reservation, Froilan's request to the Executive Secretary that the
Administration advance the payment of the expenses incurred by Pan Oriental in
the drydocking and repair of the vessel, was granted on condition that Froilan
assume to pay the same and file a bond to cover said undertaking (EXH. III).

On September 7, 1949, the formal bareboat charter with option to purchase filed
on June 4, 1949, in favor of the Pan Oriental was returned to the General
Manager of the Shipping Administration without action (not disapproval), only
because of the Cabinet resolution of September 6, 1949 restoring Froilan to his
rights under the conditions set forth therein, namely, the payment of P10,000.00
to settle partially his overdue accounts and the filing of a bond to guarantee the
reimbursement of the expenses incurred by the Pan Oriental in the drydocking
and repair of the vessel. But Froilan again failed to comply with these conditions.
And so the Cabinet, considering Froilan's consistent failure to comply with his
obligations, including those imposed in the resolution of September 6, 1949,
resolved to reconsider said previous resolution restoring him to his previous
rights. And, in a letter dated December 3, 1949, the Executive Secretary
authorized the Administration to continue its charter contract with Pan Oriental in
respect to FS-197 and enforce whatever rights it may still have under the original
contract with Froilan (Exh. 188).

xxx xxx xxx

On August 25, 1950, the Cabinet resolved once more to restore Froilan to his
rights under the original contract of sale, on condition that he shall pay the sum of
P10,000.00 upon delivery of the vessel to him, said amount to be credited to his
outstanding accounts; that he shall continue paying the remaining installments
due, and that he shall assume the expenses incurred for the repair and
drydocking of the vessel (Exh. 134). Pan Oriental protested to this restoration of
Froilan's rights under the contract of sale, for the reason that when the vessel
was delivered to it, the Shipping Administration had authority to dispose of the
said property, Froilan having already relinquished whatever rights he may have
thereon. Froilan paid the required cash of P10,000.00, and as Pan Oriental
refused to surrender possession of the vessel, he filed an action for replevin in
the Court of First Instance of Manila (Civil Case No. 13196) to recover
possession thereof and to have him declared the rightful owner of said property.

Upon plaintiff's filing a bond of P400,000.00, the court ordered the seizure of the
vessel from Pan Oriental and its delivery to the plaintiff. Pan Oriental tried to
question the validity of this order in a petition for certiorari filed in this Court (G.R.
No. L-4577), but the same was dismissed for lack of merit by resolution of
February 22, 1951. Defendant accordingly filed an answer, denying the
averments of the complaint.

The Republic of the Philippines, having been allowed to intervene in the


proceeding, also prayed for the possession of the vessel in order that the chattel
mortgage constituted thereon may be foreclosed. Defendant Pan Oriental
resisted said intervention, claiming to have a better right to the possession of the
vessel by reason of a valid and subsisting contract in its favor, and of its right of
retention, in view of the expenses it had incurred for the repair of the said
vessel. As counterclaim, defendant demanded of the intervenor to comply with
the latter's obligation to deliver the vessel pursuant to the provisions of the
charter contract.

xxx xxx xxx


Subsequently, Compañia Maritima, as purchaser of the vessel from Froilan, was
allowed to intervene in the proceedings (in the lower court), said intervenor taking
common cause with the plaintiff Froilan. In its answer to the complaint in
intervention, defendant set-up a counterclaim for damages in the sum of
P50,000.00, alleging that plaintiff secured the Cabinet resolutions and the writ of
replevin, resulting in its deprivation of possession of the vessel, at the instigation
and inducement of Compania Maritima. This counterclaim was denied by both
plaintiff and intervenor Maritima.

In the circumstances of this case, therefore, the resulting situation is that neither Froilan nor the Pan
Oriental holds a valid contract over the vessel. However, since the intervenor Shipping Administration,
representing the government practically ratified its proposed contract with Froilan by receiving the full
consideration of the sale to the latter, for which reason the complaint in intervention was dismissed as to
Froilan, and since Pan Oriental has no capacity to question this actuation of the Shipping Administration
because it had no valid contract in its favor, the decision of the lower court adjudicating the vessel to
Froilan and its successor Maritima, must be sustained.

(1) a motion, filed by appellant Pan Oriental to reconsider the ruling made in this case sustaining
Froilan's right to ownership and possession of the vessel FS-197, and holding that there was
never a perfected contract between said movant and the intervenor Republic of the Philippines.

1. .Appellant Pan Oriental's Motion must be denied.

It may be remembered that in the instant case, the alleged approval of the charter contract or permission
to proceed with said contract was given by the Executive Secretary in his own name and not under the
authority of the President.

The Court also orders the intervenor Republic of the Philippines to return the sum
of P15,000.00 tendered by defendant Pan Oriental Shipping Company as
provided in the option with legal interest from January 16, 1950, the date it was
paid by the latter.

For clarity, the sums ordered to be paid by MARITIMA and the REPUBLIC, jointly and severally, to PAN-
ORIENTAL are: (a) the sum of P6,937.72 a month from February 3, 1951, the date of PAN-ORIENTAL's
dispossession, in the concept of damages for the deprivation of its right to retain the vessel, it until it is
paid its useful and necessary expenses"; 4 (b) the sum of P15,000.00, representing PAN-ORIENTAL's
deposit with REPUBLIC for the purchase of the vessel, "with legal interest from January 16, 1950," the
date PAN-ORIENTAL had paid the same; 5 and (c) the sum of P40,797.54 representing the expenses for
repairs incurred by PAN-ORIENTAL, "with legal interest from February 3, 1951 until fully paid," minus the
amount of P59,500.00 representing the unpaid rentals due the REPUBLIC 6 The legal rate of interest is
made payable only on the last two amounts (b) and (c).

REPUBLIC attributes the following errors to the Appellate Court: (1) in not holding that compensation by
operation of law took place as between REPUBLIC and PAN-ORIENTAL as of the date of dispossession.
(4) in not holding that the Trial Court had no jurisdiction to order the return of P15,000.00 to PAN-
ORIENTAL. MARITIMA, for its part, aside from assailing the sums it was ordered to pay PAN-ORIENTAL,
jointly and severally, with REPUBLIC, echoed the theory of compensation and added that the question of
damages on account of alleged wrongful replevin was not a proper subject of inquiry by the Trial Court
when it determined the matter of necessary expenses, interest and rentals.

REPUBLIC's Submissions

1) REPUBLIC maintains that compensation or set-off took place between it and PAN-ORIENTAL as of
February 3, 1951, the date the latter was dispossessed of the vessel/ For compensation to take place,
one of the elements necessary is that the debts be liquidated. 7 In this case, all the elements for
Compensation to take place were not present on the date of dispossession, or on February 3, 1951. The
amount expended for repairs and improvements had yet to be determined by the Trial Court pursuant to
the Decision of this Court promulgated on October 31, 1964. At the time of dispossession also, PAN-
ORIENTAL was still insisting on its right to purchase the vessel. The obligation of REPUBLIC to
reimburse PAN-ORIENTAL for expenses arose only after this Court had so ruled. Rentals for the use of
the vessel by PAN- ORIENTAL were neither due and demandable at the time of dispossession but only
after this Court had issued its Resolution of August 27, 1965.

The return of Pl5,000.00 ordered by the Trial Court and affirmed by the Appellate Court was but just and
proper. As this Court found, that sum was tendered to REPUBLIC "which together with its (PAN-
ORIENTAL's) alleged expenses already made on the vessel, cover 25% of the cost of the vessel, as
provided in the option granted in the bareboat contract (Exhibit "C"). This amount was accepted by the
Administration as deposit ...." Since the purchase did not eventually materialize for reasons attributable to
REPUBLIC, it is but just that the deposit be returned.

Article 1992. If the deposit is gratuitous, the depositor is obliged to reimburse the depositary for the
expenses he may have incurred for the preservation of the thing deposited. (1779a)

Article 1993. The depositor shall reimburse the depositary for any loss arising from the character of the
thing deposited, unless at the time of the constitution of the deposit the former was not aware of, or was
not expected to know the dangerous character of the thing, or unless he notified the depositary of the
same, or the latter was aware of it without advice from the depositor. (n)

Article 1994. The depositary may retain the thing in pledge until the full payment of what may be due him
by reason of the deposit. (1780)

Article 1995. A deposit its extinguished:

(1) Upon the loss or destruction of the thing deposited;

(2) In case of a gratuitous deposit, upon the death of either the depositor or the
depositary. (n)

Article 1996. A deposit is necessary:

(1) When it is made in compliance with a legal obligation;

(2) When it takes place on the occasion of any calamity, such as fire, storm, flood,
pillage, shipwreck, or other similar events. (1781a)

Article 1997. The deposit referred to in No. 1 of the preceding article shall be governed by the provisions
of the law establishing it, and in case of its deficiency, by the rules on voluntary deposit.

The deposit mentioned in No. 2 of the preceding article shall be regulated by the provisions concerning
voluntary deposit and by article 2168. (1782)

Article 1998. The deposit of effects made by travellers 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. (1783)
Article 1999. The hotel-keeper is liable for the vehicles, animals and articles which have been introduced
or placed in the annexes of the hotel. (n)

Article 2000. The responsibility referred to in the two preceding articles shall include the loss of, or injury
to the personal property of the guests caused by the servants or employees of the keepers of hotels or
inns as well as strangers; but not that which may proceed from any force majeure. The fact that travellers
are constrained to rely on the vigilance of the keeper of the hotels or inns shall be considered in
determining the degree of care required of him. (1784a)

Article 2001. The act of a thief or robber, who has entered the hotel is not deemed force majeure, unless
it is done with the use of arms or through an irresistible force. (n)

Article 2002. The hotel-keeper is not liable for compensation if the loss is due to the acts of the guest, his
family, servants or visitors, or if the loss arises from the character of the things brought into the hotel. (n)

Article 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that
he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the
guest whereby the responsibility of the former as set forth in articles 1998 to 2001 is suppressed or
diminished shall be void. (n)

Article 2004. The hotel-keeper has a right to retain the things brought into the hotel by the guest, as a
security for credits on account of lodging, and supplies usually furnished to hotel guests. (n)

YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM, petitioners,


vs.
THE COURT OF APPEALS and MAURICE McLOUGHLIN, respondents.

The primary question of interest before this Court is the only legal issue in the case: It is whether a hotel
may evade liability for the loss of items left with it for safekeeping by its guests, by having these guests
execute written waivers holding the establishment or its employees free from blame for such loss in light
of Article 2003 of the Civil Code which voids such waivers.

Private respondent McLoughlin, an Australian businessman-philanthropist, used to stay at Sheraton Hotel


during his trips to the Philippines prior to 1984 when he met Tan. Tan befriended McLoughlin by showing
him around, introducing him to important people, accompanying him in visiting impoverished street
children and assisting him in buying gifts for the children and in distributing the same to charitable
institutions for poor children. Tan convinced McLoughlin to transfer from Sheraton Hotel to Tropicana
where Lainez, Payam and Danilo Lopez were employed. Lopez served as manager of the hotel while
Lainez and Payam had custody of the keys for the safety deposit boxes of Tropicana. Tan took care of
McLoughlin's booking at the Tropicana where he started staying during his trips to the Philippines from
December 1984 to September 1987.3

On 30 October 1987, McLoughlin arrived from Australia and registered with Tropicana. He rented a safety
deposit box as it was his practice to rent a safety deposit box every time he registered at Tropicana in
previous trips. As a tourist, McLoughlin was aware of the procedure observed by Tropicana relative to its
safety deposit boxes. The safety deposit box could only be opened through the use of two keys, one of
which is given to the registered guest, and the other remaining in the possession of the management of
the hotel. When a registered guest wished to open his safety deposit box, he alone could personally
request the management who then would assign one of its employees to accompany the guest and assist
him in opening the safety deposit box with the two keys.4

McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand US Dollars
(US$15,000.00) which he placed in two envelopes, one envelope containing Ten Thousand US Dollars
(US$10,000.00) and the other envelope Five Thousand US Dollars (US$5,000.00); Ten Thousand
Australian Dollars (AUS$10,000.00) which he also placed in another envelope; two (2) other envelopes
containing letters and credit cards; two (2) bankbooks; and a checkbook, arranged side by side inside the
safety deposit box.5

On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin opened his safety deposit
box with his key and with the key of the management and took therefrom the envelope containing Five
Thousand US Dollars (US$5,000.00), the envelope containing Ten Thousand Australian Dollars
(AUS$10,000.00), his passports and his credit cards.6 McLoughlin left the other items in the box as he did
not check out of his room at the Tropicana during his short visit to Hongkong. When he arrived in
Hongkong, he opened the envelope which contained Five Thousand US Dollars (US$5,000.00) and
discovered upon counting that only Three Thousand US Dollars (US$3,000.00) were enclosed
therein.7 Since he had no idea whether somebody else had tampered with his safety deposit box, he
thought that it was just a result of bad accounting since he did not spend anything from that envelope. 8

After returning to Manila, he checked out of Tropicana on 18 December 1987 and left for Australia. When
he arrived in Australia, he discovered that the envelope with Ten Thousand US Dollars (US$10,000.00)
was short of Five Thousand US Dollars (US$5,000). He also noticed that the jewelry which he bought in
Hongkong and stored in the safety deposit box upon his return to Tropicana was likewise missing, except
for a diamond bracelet.9

When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if some money and/or
jewelry which he had lost were found and returned to her or to the management. However, Lainez told
him that no one in the hotel found such things and none were turned over to the management. He again
registered at Tropicana and rented a safety deposit box. He placed therein one (1) envelope containing
Fifteen Thousand US Dollars (US$15,000.00), another envelope containing Ten Thousand Australian
Dollars (AUS$10,000.00) and other envelopes containing his traveling papers/documents. On 16 April
1988, McLoughlin requested Lainez and Payam to open his safety deposit box. He noticed that in the
envelope containing Fifteen Thousand US Dollars (US$15,000.00), Two Thousand US Dollars
(US$2,000.00) were missing and in the envelope previously containing Ten Thousand Australian Dollars
(AUS$10,000.00), Four Thousand Five Hundred Australian Dollars (AUS$4,500.00) were missing. 10

When McLoughlin discovered the loss, he immediately confronted Lainez and Payam who admitted that
Tan opened the safety deposit box with the key assigned to him. 11 McLoughlin went up to his room where
Tan was staying and confronted her. Tan admitted that she had stolen McLoughlin's key and was able to
open the safety deposit box with the assistance of Lopez, Payam and Lainez. 12 Lopez also told
McLoughlin that Tan stole the key assigned to McLoughlin while the latter was asleep. 13

McLoughlin requested the management for an investigation of the incident. Lopez got in touch with Tan
and arranged for a meeting with the police and McLoughlin. When the police did not arrive, Lopez and
Tan went to the room of McLoughlin at Tropicana and thereat, Lopez wrote on a piece of paper a
promissory note dated 21 April 1988. The promissory note reads as follows:

I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and US$2,000.00 or its equivalent
in Philippine currency on or before May 5, 1988.14

Lopez requested Tan to sign the promissory note which the latter did and Lopez also signed as a witness.
Despite the execution of promissory note by Tan, McLoughlin insisted that it must be the hotel who must
assume responsibility for the loss he suffered. However, Lopez refused to accept the responsibility relying
on the conditions for renting the safety deposit box entitled "Undertaking For the Use Of Safety Deposit
Box,"15 specifically paragraphs (2) and (4) thereof, to wit:

2. To release and hold free and blameless TROPICANA APARTMENT HOTEL from any liability arising
from any loss in the contents and/or use of the said deposit box for any cause whatsoever, including but
not limited to the presentation or use thereof by any other person should the key be lost;
...

4. To return the key and execute the RELEASE in favor of TROPICANA APARTMENT HOTEL upon
giving up the use of the box.16

On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as to the validity of the
abovementioned stipulations. They opined that the stipulations are void for being violative of universal
hotel practices and customs. His lawyers prepared a letter dated 30 May 1988 which was signed by
McLoughlin and sent to President Corazon Aquino.17 The Office of the President referred the letter to the
Department of Justice (DOJ) which forwarded the same to the Western Police District (WPD).18

Petitioners submit for resolution by this Court the following issues: (a) whether the appellate court's
conclusion on the alleged prior existence and subsequent loss of the subject money and jewelry is
supported by the evidence on record; (b) whether the finding of gross negligence on the part of petitioners
in the performance of their duties as innkeepers is supported by the evidence on record; (c) whether the
"Undertaking For The Use of Safety Deposit Box" admittedly executed by private respondent is null and
void; and (d) whether the damages awarded to private respondent, as well as the amounts thereof, are
proper under the circumstances.30

The petition is devoid of merit.

We are also not impressed by petitioners' argument that the finding of gross negligence by the lower court
as affirmed by the appellate court is not supported by evidence. The evidence reveals that two keys are
required to open the safety deposit boxes of Tropicana. One key is assigned to the guest while the other
remains in the possession of the management. If the guest desires to open his safety deposit box, he
must request the management for the other key to open the same. In other words, the guest alone cannot
open the safety deposit box without the assistance of the management or its employees. With more
reason that access to the safety deposit box should be denied if the one requesting for the opening of the
safety deposit box is a stranger. Thus, in case of loss of any item deposited in the safety deposit box, it is
inevitable to conclude that the management had at least a hand in the consummation of the taking,
unless the reason for the loss is force majeure.

Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had custody of the
master key of the management when the loss took place. In fact, they even admitted that they assisted
Tan on three separate occasions in opening McLoughlin's safety deposit box. 33 This only proves that
Tropicana had prior knowledge that a person aside from the registered guest had access to the safety
deposit box. Yet the management failed to notify McLoughlin of the incident and waited for him to
discover the taking before it disclosed the matter to him. Therefore, Tropicana should be held responsible
for the damage suffered by McLoughlin by reason of the negligence of its employees.

The management should have guarded against the occurrence of this incident considering that Payam
admitted in open court that she assisted Tan three times in opening the safety deposit box of McLoughlin
at around 6:30 A.M. to 7:30 A.M. while the latter was still asleep. 34 In light of the circumstances
surrounding this case, it is undeniable that without the acquiescence of the employees of Tropicana to the
opening of the safety deposit box, the loss of McLoughlin's money could and should have been avoided.

The management contends, however, that McLoughlin, by his act, made its employees believe that Tan
was his spouse for she was always with him most of the time. The evidence on record, however, is bereft
of any showing that McLoughlin introduced Tan to the management as his wife. Such an inference from
the act of McLoughlin will not exculpate the petitioners from liability in the absence of any showing that he
made the management believe that Tan was his wife or was duly authorized to have access to the safety
deposit box. Mere close companionship and intimacy are not enough to warrant such conclusion
considering that what is involved in the instant case is the very safety of McLoughlin's deposit. If only
petitioners exercised due diligence in taking care of McLoughlin's safety deposit box, they should have
confronted him as to his relationship with Tan considering that the latter had been observed opening
McLoughlin's safety deposit box a number of times at the early hours of the morning. Tan's acts should
have prompted the management to investigate her relationship with McLoughlin. Then, petitioners would
have exercised due diligence required of them. Failure to do so warrants the conclusion that the
management had been remiss in complying with the obligations imposed upon hotel-keepers under the
law.

Under Article 1170 of the New Civil Code, those who, in the performance of their obligations, are guilty of
negligence, are liable for damages. As to who shall bear the burden of paying damages, Article 2180,
paragraph (4) of the same Code provides that the owners and managers of an establishment or
enterprise are likewise responsible for damages caused by their employees in the service of the branches
in which the latter are employed or on the occasion of their functions. Also, this Court has ruled that if an
employee is found negligent, it is presumed that the employer was negligent in selecting and/or
supervising him for it is hard for the victim to prove the negligence of such employer. 35Thus, given the fact
that the loss of McLoughlin's money was consummated through the negligence of Tropicana's employees
in allowing Tan to open the safety deposit box without the guest's consent, both the assisting employees
and YHT Realty Corporation itself, as owner and operator of Tropicana, should be held solidarily liable
pursuant to Article 2193.36

The issue of whether the "Undertaking For The Use of Safety Deposit Box" executed by McLoughlin is
tainted with nullity presents a legal question appropriate for resolution in this petition. Notably, both the
trial court and the appellate court found the same to be null and void. We find no reason to reverse their
common conclusion. Article 2003 is controlling, thus:

Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he
is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest
whereby the responsibility of the former as set forth in Articles 1998 to 200137 is suppressed or
diminished shall be void.

Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely to apply
to situations such as that presented in this case. The hotel business like the common carrier's business is
imbued with public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for
hotel guests and security to their persons and belongings. The twin duty constitutes the essence of the
business. The law in turn does not allow such duty to the public to be negated or diluted by any contrary
stipulation in so-called "undertakings" that ordinarily appear in prepared forms imposed by hotel keepers
on guests for their signature.

In an early case,38 the Court of Appeals through its then Presiding Justice (later Associate Justice of the
Court) Jose P. Bengzon, ruled that to hold hotelkeepers or innkeeper liable for the effects of their guests,
it is not necessary that they be actually delivered to the innkeepers or their employees. It is enough that
such effects are within the hotel or inn.39 With greater reason should the liability of the hotelkeeper be
enforced when the missing items are taken without the guest's knowledge and consent from a safety
deposit box provided by the hotel itself, as in this case.

Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of the New Civil Code for
they allow Tropicana to be released from liability arising from any loss in the contents and/or use of the
safety deposit box for any cause whatsoever.40 Evidently, the undertaking was intended to bar any claim
against Tropicana for any loss of the contents of the safety deposit box whether or not negligence was
incurred by Tropicana or its employees. The New Civil Code is explicit that the responsibility of the hotel-
keeper shall extend to loss of, or injury to, the personal property of the guests even if caused by servants
or employees of the keepers of hotels or inns as well as by strangers, except as it may proceed from
any force majeure.41 It is the loss through force majeure that may spare the hotel-keeper from liability. In
the case at bar, there is no showing that the act of the thief or robber was done with the use of arms or
through an irresistible force to qualify the same as force majeure.42
Petitioners likewise anchor their defense on Article 200243 which exempts the hotel-keeper from liability if
the loss is due to the acts of his guest, his family, or visitors. Even a cursory reading of the provision
would lead us to reject petitioners' contention. The justification they raise would render nugatory the
public interest sought to be protected by the provision. What if the negligence of the employer or its
employees facilitated the consummation of a crime committed by the registered guest's relatives or
visitor? Should the law exculpate the hotel from liability since the loss was due to the act of the visitor of
the registered guest of the hotel? Hence, this provision presupposes that the hotel-keeper is not guilty of
concurrent negligence or has not contributed in any degree to the occurrence of the loss. A depositary is
not responsible for the loss of goods by theft, unless his actionable negligence contributes to the loss. 44

In the case at bar, the responsibility of securing the safety deposit box was shared not only by the guest
himself but also by the management since two keys are necessary to open the safety deposit box.
Without the assistance of hotel employees, the loss would not have occurred. Thus, Tropicana was guilty
of concurrent negligence in allowing Tan, who was not the registered guest, to open the safety deposit
box of McLoughlin, even assuming that the latter was also guilty of negligence in allowing another person
to use his key. To rule otherwise would result in undermining the safety of the safety deposit boxes in
hotels for the management will be given imprimatur to allow any person, under the pretense of being a
family member or a visitor of the guest, to have access to the safety deposit box without fear of any
liability that will attach thereafter in case such person turns out to be a complete stranger. This will allow
the hotel to evade responsibility for any liability incurred by its employees in conspiracy with the guest's
relatives and visitors.

DURBAN APARTMENTS CORPORATION, Petitioner,


vs.
PIONEER INSURANCE AND SURETY CORPORATION, Respondent.

On July 22, 2003, [respondent] Pioneer Insurance and Surety Corporation x x x, by right of subrogation,
filed [with the RTC of Makati City] a Complaint for Recovery of Damages against [petitioner] Durban
Apartments Corporation, doing business under the name and style of City Garden Hotel, and [defendant
before the RTC] Vicente Justimbaste x x x. [Respondent averred] that: it is the insurer for loss and
damage of Jeffrey S. See’s [the insured’s] 2001 Suzuki Grand Vitara x x x with Plate No. XBH-510 under
Policy No. MC-CV-HO-01-0003846-00-D in the amount of P1,175,000.00; on April 30, 2002, See arrived
and checked in at the City Garden Hotel in Makati corner Kalayaan Avenues, Makati City before midnight,
and its parking attendant, defendant x x x Justimbaste got the key to said Vitara from See to park it[. O]n
May 1, 2002, at about 1:00 o’clock in the morning, See was awakened in his room by [a] telephone call
from the Hotel Chief Security Officer who informed him that his Vitara was carnapped while it was parked
unattended at the parking area of Equitable PCI Bank along Makati Avenue between the hours of 12:00
[a.m.] and 1:00 [a.m.]; See went to see the Hotel Chief Security Officer, thereafter reported the incident to
the Operations Division of the Makati City Police Anti-Carnapping Unit, and a flash alarm was issued; the
Makati City Police Anti-Carnapping Unit investigated Hotel Security Officer, Ernesto T. Horlador, Jr. x x x
and defendant x x x Justimbaste; See gave his Sinumpaang Salaysay to the police investigator, and filed
a Complaint Sheet with the PNP Traffic Management Group in Camp Crame, Quezon City; the Vitara has
not yet been recovered since July 23, 2002 as evidenced by a Certification of Non- Recovery issued by
the PNP TMG; it paid the P1,163,250.00 money claim of See and mortgagee ABN AMRO Savings Bank,
Inc. as indemnity for the loss of the Vitara; the Vitara was lost due to the negligence of [petitioner] Durban
Apartments and [defendant] Justimbaste because it was discovered during the investigation that this was
the second time that a similar incident of carnapping happened in the valet parking service of [petitioner]
Durban Apartments and no necessary precautions were taken to prevent its repetition; [petitioner] Durban
Apartments was wanting in due diligence in the selection and supervision of its employees particularly
defendant x x x Justimbaste; and defendant x x x Justimbaste and [petitioner] Durban Apartments failed
and refused to pay its valid, just, and lawful claim despite written demands.

The petition must fail.


In this case, respondent substantiated the allegations in its complaint, i.e., a contract of necessary deposit
existed between the insured See 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.11

Article 1962, in relation to Article 1998, of the Civil Code defines a contract of deposit and a necessary
deposit made by persons in hotels or inns:

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.

Plainly, from the facts found by the lower courts, the insured See deposited his vehicle for safekeeping
with petitioner, through the latter’s employee, Justimbaste. In turn, Justimbaste issued a claim stub to
See. Thus, the contract of deposit was perfected from See’s delivery, when he handed over to
Justimbaste the keys to his vehicle, which Justimbaste received with the obligation of safely keeping and
returning it. Ultimately, petitioner is liable for the loss of See’s vehicle.

Article 2005. A judicial deposit or sequestration takes place when an attachment or seizure of property in
litigation is ordered. (1785)

Article 2006. Movable as well as immovable property may be the object of sequestration. (1786)

Article 2007. The depositary of property or objects sequestrated cannot be relieved of his responsibility
until the controversy which gave rise thereto has come to an end, unless the court so orders. (1787a)

Article 2008. The depositary of property sequestrated is bound to comply, with respect to the same, with
all the obligations of a good father of a family. (1788)

Article 2009. As to matters not provided for in this Code, judicial sequestration shall be governed by the
Rules of Court. (1789a)

PACIFIC BANKING CORPORATION, petitioner,


vs.
HON INTERMEDIATE APPELLATE COURT AND ROBERTO REGALA, JR., respondents.

On October 24, 1975, defendant Celia Syjuco Regala (hereinafter referred to as Celia Regala for brevity),
applied for and obtained from the plaintiff the issuance and use of Pacificard credit card (Exhs. "A", "A-l",),
under the Terms and Conditions Governing the Issuance and Use of Pacificard (Exh. "B" and hereinafter
referred to as Terms and Conditions), a copy of which was issued to and received by the said defendant
on the date of the application and expressly agreed that the use of the Pacificard is governed by said
Terms and Conditions. On the same date, the defendant-appelant Robert Regala, Jr., spouse of
defendant Celia Regala, executed a "Guarantor's Undertaking" (Exh. "A-1-a") in favor of the appellee
Bank, whereby the latter agreed "jointly and severally of Celia Aurora Syjuco Regala, to pay the Pacific
Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and
incurred by said Celia Aurora Syjuco Regala with the use of the Pacificard, or renewals thereof, issued in
her favor by the Pacific Banking Corporation". It was also agreed that "any changes of or novation in the
terms and conditions in connection with the issuance or use of the Pacificard, or any extension of time to
pay such obligations, charges or liabilities shall not in any manner release me/us from responsibility
hereunder, it being understood that I fully agree to such charges, novation or extension, and that this
understanding is a continuing one and shall subsist and bind me until the liabilities of the said Celia
Syjuco Regala have been fully satisfied or paid.

The defendant Celia Regala, as such Pacificard holder, had purchased goods and/or services on credit
(Exh. "C", "C-l" to "C-112") under her Pacificard, for which the plaintiff advanced the cost amounting to
P92,803.98 at the time of the filing of the complaint.

In view of defendant Celia Regala's failure to settle her account for the purchases made thru the use of
the Pacificard, a written demand (Exh. "D") was sent to the latter and also to the defendant Roberto
Regala, Jr. (Exh. " ") under his "Guarantor's Undertaking."

There is merit in this petition.

The pertinent portion of the "Guarantor's Undertaking" which private respondent Roberto Regala, Jr.
signed in favor of Pacific Banking Corporation provides:

I/We, the undersigned, hereby agree, jointly and severally with Celia Syjuco
Regala to pay the Pacific Banking Corporation upon demand any and all
indebtedness, obligations, charges or liabilities due and incurred by said Celia
Syjuco Regala with the use of the Pacificard or renewals thereof issued in his
favor by the Pacific Banking Corporation. Any changes of or Novation in the
terms and conditions in connection with the issuance or use of said Pacificard, or
any extension of time to pay such obligations, charges or liabilities shall not in
any manner release me/us from the responsibility hereunder, it being understood
that the undertaking is a continuing one and shall subsist and bind me/us until all
the liabilities of the said Celia Syjuco Regala have been fully satisfied or paid. (p.
12,Rollo)

The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's Undertaking," was in
substance a contract of surety. As distinguished from a contract of guaranty where the guarantor binds
himself to the creditor to fulfill the obligation of the principal debtor only in case the latter should fail to do
so, in a contract of suretyship, the surety binds himself solidarily with the principal debtor (Art. 2047, Civil
Code of the Philippines).

We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala,
Jr.'s undertaking. As a surety he bound himself jointly and severally with the debtor Celia Regala "to pay
the Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities
due and incurred by said Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in
(her) favor by Pacific Banking Corporation."

A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this sense
that a surety, although solidarily liable with the principal debtor, is different from the debtor. It does not
mean, however, that the surety cannot be held liable to the same extent as the principal debtor. The
nature and extent of the liabilities of a guarantor or a surety is determined by the clauses in the contract of
suretyship (see PCIB v. CA, L-34959, March 18, 1988, 159 SCRA 24).

E. ZOBEL, INC., petitioner,


vs.
CA, CONSOLIDATED BANK AND TRUST CORP, and SPOUSES CLAVERIA, respondents.

Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers," applied for
a loan with respondent Consolidated Bank and Trust Corporation (now SOLIDBANK) in the amount of
Two Million Eight Hundred Seventy Five Thousand Pesos (P2,875,000.00) to finance the purchase of two
(2) maritime barges and one tugboat 3 which would be used in their molasses business. The loan was
granted subject to the condition that respondent spouses execute a chattel mortgage over the three (3)
vessels to be acquired and that a continuing guarantee be executed by Ayala International Philippines,
Inc., now herein petitioner E. Zobel, Inc., in favor of SOLIDBANK. The respondent spouses agreed to the
arrangement. Consequently, a chattel mortgage and a Continuing Guaranty 4 were executed.

Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence, on January
31, 1991, SOLIDBANK filed a complaint for sum of money with a prayer for a writ of preliminary
attachment, against respondents spouses and petitioner. The case was docketed as Civil Case No. 91-
55909 in the Regional Trial Court of Manila.

Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was
extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its right
to be subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the chattel
mortgage with the appropriate government agency.

SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner is not
a guarantor but a surety.

The document referred to as "Continuing Guaranty" dated August 21, 1985 (Exh.
7) states as follows:

For and in consideration of any existing indebtedness to you of


Agro Brokers, a single proprietorship owned by Mr. Raul Claveria
for the payment of which the undersigned is now obligated to you
as surety and in order to induce you, in your discretion, at any
other manner, to, or at the request or for the account of the
borrower, . . .

We shall first resolve the issue of whether or not petitioner under the "Continuing Guaranty" obligated
itself to SOLIDBANK as a guarantor or a surety.

A contract of surety is an accessory promise by which a person binds himself for another already bound,
and agrees with the creditor to satisfy the obligation if the debtor does not. 7 A contract of guaranty, on the
other hand, is a collateral undertaking to pay the debt of another in case the latter does not pay the debt. 8

Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both.
However, under our civil law, they may be distinguished thus: A surety is usually bound with his principal
by the same instrument, executed at the same time, and on the same consideration. He is an original
promissor and debtor from the beginning, and is held, ordinarily, to know every default of his principal.
Usually, he will not be discharged, either by the mere indulgence of the creditor to the principal, or by
want of notice of the default of the principal, no matter how much he may be injured thereby.
On the other hand, the contract of guaranty is the guarantor's own separate undertaking, in which the
principal does not join. It is usually entered into before or after that of the principal, and is often supported
on a separate consideration from that supporting the contract of the principal. The original contract of his
principal is not his contract, and he is not bound to take notice of its non-performance. He is often
discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notified
of the default of the principal. 9

Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of
the debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer of the
debt, and he obligates himself to pay if the principal does not pay. 10

Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor of
SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of the
contract categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit to
respondent spouses. This can be seen in the following stipulations.

For and in consideration of any existing indebtedness to you of AGRO


BROKERS, a single proprietorship owned by MR. RAUL P. CLAVERIA, of legal
age, married and with business address . . . (hereinafter called the Borrower), for
the payment of which the undersigned is now obligated to you as surety and in
order to induce you, in your discretion, at any time or from time to time hereafter,
to make loans or advances or to extend credit in any other manner to, or at the
request or for the account of the Borrower, either with or without purchase or
discount, or to make any loans or advances evidenced or secured by any notes,
bills receivable, drafts, acceptances, checks or other instruments or evidences of
indebtedness . . . upon which the Borrower is or may become liable as maker,
endorser, acceptor, or otherwise, the undersigned agrees to guarantee, and does
hereby guarantee, the punctual payment, at maturity or upon demand, to you of
any and all such instruments, loans, advances, credits and/or other obligations
herein before referred to, and also any and all other indebtedness of every kind
which is now or may hereafter become due or owing to you by the Borrower,
together with any and all expenses which may be incurred by you in collecting all
or any such instruments or other indebtedness or obligations hereinbefore
referred to, and or in enforcing any rights hereunder, and also to make or cause
any and all such payments to be made strictly in accordance with the terms and
provisions of any agreement (g), express or implied, which has (have) been or
may hereafter be made or entered into by the Borrower in reference thereto,
regardless of any law, regulation or decree, now or hereafter in effect which
might in any manner affect any of the terms or provisions of any such
agreements(s) or your right with respect thereto as against the Borrower, or
cause or permit to be invoked any alteration in the time, amount or manner of
payment by the Borrower of any such instruments, obligations or indebtedness; .
. . (Emphasis Ours)

One need not look too deeply at the contract to determine the nature of the undertaking and the intention
of the parties. The contract clearly discloses that petitioner assumed liability to SOLIDBANK, as a regular
party to the undertaking and obligated itself as an original promissor. It bound itself jointly and severally to
the obligation with the respondent spouses. In fact, SOLIDBANK need not resort to all other legal
remedies or exhaust respondent spouses' properties before it can hold petitioner liable for the obligation.

The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty. Authorities
recognize that the word "guarantee" is frequently employed in business transactions to describe not the
security of the debt but an intention to be bound by a primary or independent obligation. 11 As aptly
observed by the trial court, the interpretation of a contract is not limited to the title alone but to the
contents and intention of the parties.
ROMULO MACHETTI, plaintiff-appellee,
vs.
HOSPICIO DE SAN JOSE, et al, defendant-appellants.

It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written agreement
undertook to construct a building on Calle Rosario in the city of Manila for the Hospicio de San Jose, the
contract price being P64,000. One of the conditions of the agreement was that the contractor should
obtain the "guarantee" of the Fidelity and Surety Company of the Philippine Islands to the amount of
P128,800 and the following endorsement in the English language appears upon the contract:

MANILA, July 15, 1916.

For value received we hereby guarantee compliance with the terms and
conditions as outlined in the above contract.

FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.

(Sgd) OTTO VORSTER,


Vice-President.

Machetti constructed the building under the supervision of architects representing the Hospicio de San
Jose and, as the work progressed, payments were made to him from time to time upon the
recommendation of the architects, until the entire contract price, with the exception of the sum of the
P4,978.08, was paid. Subsequently it was found that the work had not been carried out in accordance
with the specifications which formed part of the contract and that the workmanship was not of the
standard required, and the Hospicio de San Jose therefore answered the complaint and presented a
counterclaim for damages for the partial noncompliance with the terms of the agreement
abovementioned, in the total sum of P71,350. After issue was thus joined, Machetti, on petition of his
creditors, was, on February 27, 1918, declared insolvent and on March 4, 1918, an order was entered
suspending the proceeding in the present case in accordance with section 60 of the Insolvency Law, Act
No. 1956.

The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and Surety
Company be made cross-defendant to the exclusion of Machetti and that the proceedings be continued
as to said company, but still remain suspended as to Machetti. This motion was granted and on February
7, 1920, the Hospicio filed a complaint against the Fidelity and Surety Company asking for a judgement
for P12,800 against the company upon its guaranty. After trial, the Court of First Instance rendered
judgment against the Fidelity and Surety Company for P12,800 in accordance with the complaint. The
case is now before this court upon appeal by the Fidelity and Surety Company form said judgment.

As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San Jose
defendant, has been converted into an action in which the Hospicio de San Jose is plaintiff and the
Fidelity and Surety Company, the original plaintiff's guarantor, is the defendant, Machetti having been
practically eliminated from the case.

But in this instance the guarantor's case is even stronger than that of an ordinary surety. The contract of
guaranty is written in the English language and the terms employed must of course be given the
signification which ordinarily attaches to them in that language. In English the term "guarantor" implies an
undertaking of guaranty, as distinguished from suretyship. It is very true that notwithstanding the use of
the words "guarantee" or "guaranty" circumstances may be shown which convert the contract into one of
suretyship but such circumstances do not exist in the present case; on the contrary it appear affirmatively
that the contract is the guarantor's separate undertaking in which the principal does not join, that its rests
on a separate consideration moving from the principal and that although it is written in continuation of the
contract for the construction of the building, it is a collateral undertaking separate and distinct from the
latter. All of these circumstances are distinguishing features of contracts of guaranty.

Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to
pay if the principal cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of
the debtor. This latter liability is what the Fidelity and Surety Company assumed in the present case. The
undertaking is perhaps not exactly that of a fianza under the Civil Code, but is a perfectly valid contract
and must be given the legal effect if ordinarily carries. The Fidelity and Surety Company having bound
itself to pay only the event its principal, Machetti, cannot pay it follows that it cannot be compelled to pay
until it is shown that Machetti is unable to pay. Such ability may be proven by the return of a writ of
execution unsatisfied or by other means, but is not sufficiently established by the mere fact that he has
been declared insolvent in insolvency proceedings under our statutes, in which the extent of the
insolvent's inability to pay is not determined until the final liquidation of his estate.

Article 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. (1822a)

Article 2048. A guaranty is gratuitous, unless there is a stipulation to the contrary. (n)

SPOUSES ALFREDO and SUSANA ONG, petitioners,


vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondent.

The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the manufacture
and export of finished wood products. Petitioners-spouses Alfredo and Susana Ong are its President and
Treasurer, respectively.

On April 20, 1992, respondent Philippine Commercial International Bank (now Equitable-Philippine
Commercial International Bank or E-PCIB) filed a case for collection of a sum of money1 against
petitioners-spouses. Respondent bank sought to hold petitioners-spouses liable as sureties on the three
(3) promissory notes they issued to secure some of BMC’s loans, totalling five million pesos
(P5,000,000.00).

The complaint alleged that in 1991, BMC needed additional capital for its business and applied for various
loans, amounting to a total of five million pesos, with the respondent bank. Petitioners-spouses acted as
sureties for these loans and issued three (3) promissory notes for the purpose. Under the terms of the
notes, it was stipulated that respondent bank may consider debtor BMC in default and demand payment
of the remaining balance of the loan upon the levy, attachment or garnishment of any of its properties, or
upon BMC’s insolvency, or if it is declared to be in a state of suspension of payments. Respondent bank
granted BMC’s loan applications.

On November 22, 1991, BMC filed a petition for rehabilitation and suspension of payments with the
Securities and Exchange Commission (SEC) after its properties were attached by creditors. Respondent
bank considered debtor BMC in default of its obligations and sought to collect payment thereof from
petitioners-spouses as sureties. In due time, petitioners-spouses filed their Answer.

Petitioners-spouses claim that the collection case filed against them by respondent bank should be
dismissed for three (3) reasons: First, the MOA provided that during its effectivity, there shall be a
suspension of filing or pursuing of collection cases against the BMC and this provision should benefit
petitioners as sureties. Second, principal debtor BMC has been placed under suspension of payment of
debts by the SEC; petitioners contend that it would prejudice them if the principal debtor BMC would
enjoy the suspension of payment of its debts while petitioners, who acted only as sureties for some of
BMC’s debts, would be compelled to make the payment; petitioners add that compelling them to pay is
contrary to Article 2063 of the Civil Code which provides that a compromise between the creditor and
principal debtor benefits the guarantor and should not prejudice the latter. Lastly, petitioners rely
on Article 2081 of the Civil Code which provides that: "the guarantor may set up against the creditor all
the defenses which pertain to the principal debtor and are inherent in the debt; but not those which are
purely personal to the debtor." Petitioners aver that if the principal debtor BMC can set up the defense of
suspension of payment of debts and filing of collection suits against respondent bank, petitioners as
sureties should likewise be allowed to avail of these defenses.

We find no merit in petitioners’ contentions.

Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is misplaced as these
provisions refer to contracts of guaranty. They do not apply to suretyship contracts. Petitioners-
spouses are not guarantors but sureties of BMC’s debts. There is a sea of difference in the rights and
liabilities of a guarantor and a surety. A guarantor insures the solvency of the debtor while a surety is
an insurer of the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part of
the guarantor. It is only after the creditor has proceeded against the properties of the principal debtor
and the debt remains unsatisfied that a guarantor can be held liable to answer for any unpaid amount.
This is the principle of excussion. In a suretyship contract, however, the benefit of excussion is not
available to the surety as he is principally liable for the payment of the debt. As the surety insures
the debt itself, he obligates himself to pay the debt if the principal debtor will not pay, regardless of
whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor can go directly
against the surety although the principal debtor is solvent and is able to pay or no prior demand is made
on the principal debtor. A surety is directly, equally and absolutely bound with the principal debtor
for the payment of the debt and is deemed as an original promissor and debtor from the
beginning.5

Under the suretyship contract entered into by petitioners-spouses with respondent bank, the former
obligated themselves to be solidarily bound with the principal debtor BMC for the payment of its debts to
respondent bank amounting to five million pesos (P5,000,000.00). Under Article 1216 of the Civil
Code,6 respondent bank as creditor may proceed against petitioners-spouses as sureties despite the
execution of the MOA which provided for the suspension of payment and filing of collection suits against
BMC. Respondent bank’s right to collect payment from the surety exists independently of its right to
proceed directly against the principal debtor. In fact, the creditor bank may go against the surety alone
without prior demand for payment on the principal debtor.7

The provisions of the MOA regarding the suspension of payments by BMC and the non-filing of
collection suits by the creditor banks pertain only to the property of the principal debtor BMC.

Clearly, the collection suit filed by respondent bank against petitioners-spouses as sureties can prosper.
The trial court’s denial of petitioners’ motion to dismiss was proper.

CARMEN CASTELLVI DE HIGGINS and HORACE L. HIGGINS, plaintiffs-appellants,


vs.
GEORGE C. SELLNER, defendant-appellee.

The basis of plaintiff's action is a letter written by defendant George C. Sellner to John T. Macleod, agent
for Mrs. Horace L. Higgins, on May 31, 1915, of the following tenor:

DEAR SIR: I hereby obligate and bind myself, my heirs, successors and
assigns that if the promissory note executed the 29th day of May, 1915 by the
Keystone Mining Co., W.H. Clarke, and John Maye, jointly and severally, in your
favor and due six months after date for Pesos 10,000 is not fully paid at maturity
with interest, I will, within fifteen days after notice of such default, pay you in cash
the sum of P10,000 and interest upon your surrendering to me the three
thousand shares of stock of the Keystone Mining Co. held by you as security for
the payment of said note.

Respectfully,

(Sgd.) GEO. C. SELLNER.

Counsel for both parties agree that the only point at issue is the determination of defendant's status
in the transaction referred to. Plaintiffs contend that he is a surety; defendant contends that he is a
guarantor. Plaintiffs also admit that if defendant is a guarantor, articles 1830, 1831, and 1834 of the Civil
Code govern.

The points of difference between a surety and a guarantor are familiar to American authorities. A
surety and a guarantor are alike in that each promises to answer for the debt or default of another. A
surety and a guarantor are unlike in that the surety assumes liability as a regular party to the undertaking,
while the liability as a regular party to upon an independent agreement to pay the obligation if the primary
party fails to do so. A surety is charged as an original promissory; the engagement of the guarantor is a
collateral undertaking. The obligation of the surety is primary; the obligation of the guarantor is secondary.

The letter of Mr. Sellner recites that if the promissory note is not paid at maturity, then, within fifteen days
after notice of such default and upon surrender to him of the three thousand shares of Keystone Mining
Company stock, he will assume responsibility. Sellner is not bound with the principals by the same
instrument executed at the same time and on the same consideration, but his responsibility is a
secondary one found in an independent collateral agreement, Neither is Sellner jointly and severally liable
with the principal debtors.

With particular reference, therefore, to appellants assignments of error, we hold that defendant
Sellner is a guarantor within the meaning of the provisions of the Civil Code.

SALVADOR P. ESCAÑO and MARIO M. SILOS, petitioner,


vs.
RAFAEL ORTIGAS, JR., respondent.

On 28 April 1980, Private Development Corporation of the Philippines (PDCP) 1 entered into a loan
agreement with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make available and lend to
Falcon the amount of US$320,000.00, for specific purposes and subject to certain terms and
conditions.2 On the same day, three stockholders-officers of Falcon, namely: respondent Rafael Ortigas,
Jr. (Ortigas), George A. Scholey and George T. Scholey executed an Assumption of Solidary Liability
whereby they agreed "to assume in [their] individual capacity, solidary liability with [Falcon] for the due
and punctual payment" of the loan contracted by Falcon with PDCP. 3 In the meantime, two separate
guaranties were executed to guarantee the payment of the same loan by other stockholders and officers
of Falcon, acting in their personal and individual capacities. One Guaranty4 was executed by petitioner
Salvador Escaño (Escaño), while the other5 by petitioner Mario M. Silos (Silos), Ricardo C. Silverio
(Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J. Rodriguez (Rodriguez).

Two years later, an agreement developed to cede control of Falcon to Escaño, Silos and Joseph M. Matti
(Matti). Thus, contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of
then already deceased George T. Scholey assigned their shares of stock in Falcon to Escaño, Silos and
Matti.6 Part of the consideration that induced the sale of stock was a desire by Ortigas, et al., to relieve
themselves of all liability arising from their previous joint and several undertakings with Falcon, including
those related to the loan with PDCP. Thus, an Undertaking dated 11 June 1982 was executed by the
concerned parties,7 namely: with Escaño, Silos and Matti identified in the document as "SURETIES," on
one hand, and Ortigas, Inductivo and the Scholeys as "OBLIGORS," on the other.

Falcon eventually availed of the sum of US$178,655.59 from the credit line extended by PDCP. It would
also execute a Deed of Chattel Mortgage over its personal properties to further secure the loan. However,
Falcon subsequently defaulted in its payments. After PDCP foreclosed on the chattel mortgage, there
remained a subsisting deficiency of P5,031,004.07, which Falcon did not satisfy despite demand.9

On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for sum of money with the
Regional Trial Court of Makati (RTC) against Falcon, Ortigas, Escaño, Silos, Silverio and Inductivo.

Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable for the Undertaking,
as the language used in the agreement "clearly shows that it is a surety agreement"38 between the
obligors (Ortigas group) and the sureties (Escaño group). Ortigas points out that the Undertaking uses the
word "SURETIES" although the document, in describing the parties. It is further contended that the
principal objective of the parties in executing the Undertaking cannot be attained unless petitioners are
solidarily liable "because the total loan obligation can not be paid or settled to free or release the
OBLIGORS if one or any of the SURETIES default from their obligation in the Undertaking." 39

In case, there is a concurrence of two or more creditors or of two or more debtors in one and the same
obligation, Article 1207 of the Civil Code states that among them, "[t]here is a solidary liability only when
the obligation expressly so states, or when the law or the nature of the obligation requires solidarity."
Article 1210 supplies further caution against the broad interpretation of solidarity by providing: "The
indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply
indivisibility."

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. Ortigas, as the party alleging
that the obligation is in fact solidary, bears the burden to overcome the presumption of jointness of
obligations. We rule and so hold that he failed to discharge such burden.

Ortigas places primary reliance on the fact that the petitioners and Matti identified themselves in the
Undertaking as "SURETIES", a term repeated no less than thirteen (13) times in the document. Ortigas
claims that such manner of identification sufficiently establishes that the obligation of petitioners to him
was joint and solidary in nature.

The term "surety" has a specific meaning under our Civil Code. Article 2047 provides the statutory
definition of a surety agreement, thus:

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. [Emphasis supplied] 40

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 Ortigas’s argument rests solely on the solidary nature of the obligation
of the surety under Article 2047. In tandem with the nomenclature "SURETIES" accorded to petitioners
and Matti in the Undertaking, however, this argument can only be viable if the obligations established in
the Undertaking do partake of the nature of a suretyship as defined under Article 2047 in the first place.
That clearly is not the case here, notwithstanding the use of the nomenclature "SURETIES" in the
Undertaking.
Dr. Tolentino explains the differences between a solidary co-debtor and a surety:

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. There is a difference
between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he
assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the
other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor
has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil
Code.

The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship. The civil law
suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law
relationship existing between the co-debtors liable in solidum is similar to the common law suretyship. 46

In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected the
payment to the creditor "may claim from his co-debtors only the share which corresponds to each, with
the interest for the payment already made." Such solidary debtor will not be able to recover from the co-
debtors the full amount already paid to the creditor, because the right to recovery extends only to the
proportional share of the other co-debtors, and not as to the particular proportional share of the solidary
debtor who already paid. In contrast, even as the surety is solidarily bound with the principal debtor to the
creditor, the surety who does pay the creditor has the right to recover the full amount paid, and not just
any proportional share, from the principal debtor or debtors. Such right to full reimbursement falls within
the other rights, actions and benefits which pertain to the surety by reason of the subsidiary obligation
assumed by the surety.

What is the source of this right to full reimbursement by the surety? We find the right under Article 2066 of
the Civil Code, which assures that "[t]he guarantor who pays for a debtor must be indemnified by the
latter," such indemnity comprising of, among others, "the total amount of the debt."47 Further, Article 2067
of the Civil Code likewise establishes that "[t]he guarantor who pays is subrogated by virtue thereof to all
the rights which the creditor had against the debtor."48

WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial Court dated 5 October
1995 is modified by declaring that petitioners and Joseph M. Matti are only jointly liable, not jointly and
severally, to respondent Rafael Ortigas, Jr. in the amount of P1,300,000.00.

CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P. ALCANTARA, plaintiffs-appellants,


vs.
ESTEBAN PICZON and SOSING-LOBOS & CO., INC., defendants-appellees.

Appeal from the decision of the Court of First Instance of Samar in its Civil Case No. 5156, entitled
Consuelo P. Piczon, et al. vs. Esteban Piczon, et al., sentencing defendants-appellees, Sosing Lobos and
Co., Inc., as principal, and Esteban Piczon, as guarantor, to pay plaintiffs-appellants "the sum of
P12,500.00 with 12% interest from August 6, 1964 until said principal amount of P12,500.00 shall have
been duly paid, and the costs."

As regards the other two assignments of error, appellants' pose cannot be sustained. Under the terms of
the contract, Annex A, Esteban Piczon expressly bound himself only as guarantor, and there are no
circumstances in the record from which it can be deduced that his liability could be that of a surety. A
guaranty must be express, (Article 2055, Civil Code) and it would be violative of the law to consider a
party to be bound as a surety when the very word used in the agreement is "guarantor."

ESTRELLA PALMARES, petitioner,


vs.
COURT OF APPEALS and M.B. LENDING CORPORATION, respondents.
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?

Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation
extended a loan to the spouses Osmeña and Merlyn Azarraga, together with petitioner Estrella Palmares,
in the amount of P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of
6% per annum to be computed every 30 days from the date thereof. 1 On four occasions after the
execution of the promissory note and even after the loan matured, petitioner and the Azarraga spouses
were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were
made after the last payment on September 26, 1991. 2

Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent
corporation filed a complaint 3 against petitioner Palmares as the lone party-defendant, to the exclusion of
the principal debtors, allegedly by reason of the insolvency of the latter.

The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:

ATTENTION TO CO-MAKERS: PLEASE READ WELL

I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully
understood the contents of this Promissory Note for Short-Term Loan:

That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable
with the above principal maker of this note;

That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment
of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in
the payment of the note subject to the same conditions above-contained. 8

Petitioner contends that the provisions of the second and third paragraph are conflicting in that while the
second paragraph seems to define her liability as that of a surety which is joint and solidary with the
principal maker, on the other hand, under the third paragraph her liability is actually that of a mere
guarantor because she bound herself to fulfill the obligation only in case the principal debtor should fail to
do so, which is the essence of a contract of guaranty. More simply stated, although the second paragraph
says that she is liable as a surety, the third paragraph defines the nature of her liability as that of a
guarantor. According to petitioner, these are two conflicting provisions in the promissory note and the rule
is that clauses in the contract should be interpreted in relation to one another and not by parts. In other
words, the second paragraph should not be taken in isolation, but should be read in relation to the third
paragraph.

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.

It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no
doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control. 13 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.

Petitioner would like to make capital of the fact that although she obligated herself to be jointly and
severally liable with the principal maker, her liability is deemed restricted by the provisions of the third
paragraph of her contract wherein she agreed "that M.B. Lending Corporation may demand payment of
the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the
note," which makes her contract one of guaranty and not suretyship. The purported discordance is more
apparent than real.

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. 17 A
suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall
pay. 18 Stated differently, a surety promises to pay the principal's debt if the principal will not pay, while a
guarantor agrees that the creditor, after proceeding against the principal, may proceed against the
guarantor if the principal is unable to pay. 19 A surety binds himself to perform if the principal does not,
without regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal
will pay, but simply that he is able to do so. 20 In other words, a surety undertakes directly for the payment
and is so responsible at once if the principal debtor makes default, while a guarantor contracts to pay if,
by the use of due diligence, the debt cannot be made out of the principal debtor. 21

Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically
remove it from the ambit of a contract of suretyship. The second and third paragraphs of the aforequoted
portion of the promissory note do not contain any other condition for the enforcement of respondent
corporation's right against petitioner. It has not been shown, either in the contract or the pleadings, that
respondent corporation agreed to proceed against herein petitioner only if and when the defaulting
principal has become insolvent. A contract of suretyship, to repeat, is that wherein one lends his credit by
joining in the principal debtor's obligation, so as to render himself directly and primarily responsible with
him, and without reference to the solvency of the principal. 22

Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained in
the third paragraph of the controverted suretyship contract merely elucidated on and made more specific
the obligation of petitioner as generally defined in the second paragraph thereof. Resultantly, the theory
advanced by petitioner, that she is merely a guarantor because her liability attaches only upon default of
the principal debtor, must necessarily fail for being incongruent with the judicial pronouncements adverted
to above.

It is a well-entrenched rule that in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall also be principally considered. 24 Several attendant factors
in that genre lend support to our finding that petitioner is a surety. For one, when petitioner was informed
about the failure of the principal debtor to pay the loan, she immediately offered to settle the account with
respondent corporation. Obviously, in her mind, she knew that she was directly and primarily liable upon
default of her principal. For another, and this is most revealing, petitioner presented the receipts of the
payments already made, from the time of initial payment up to the last, which were all issued in her name
and of the Azarraga spouses. 25 This can only be construed to mean that the payments made by the
principal debtors were considered by respondent corporation as creditable directly upon the account and
inuring to the benefit of petitioner. The concomitant and simultaneous compliance of petitioner's obligation
with that of her principals only goes to show that, from the very start, petitioner considered herself equally
bound by the contract of the principal makers.

In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the
principal, 26and as such is deemed an original promisor and debtor from the beginning. 27 This is because
in suretyship there is but one contract, and the surety is bound by the same agreement which binds the
principal. 28 In essence, the contract of a surety starts with the agreement, 29 which is precisely the
situation obtaining in this case before the Court.
FABIOLA SEVERINO, accompanied by her husband RICARDO VERGARA, plaintiffs-appellees,
vs.
GUILLERMO SEVERINO, ET AL., defendants.

This action was instituted in the Court of First Instance of the Province of Iloilo by Fabiola Severino, with
whom is joined her husband Ricardo Vergara, for the purpose of recovering the sum of P20,000 from
Guillermo Severino and Enrique Echaus, the latter in the character of guarantor for the former. Upon
hearing he cause the trial court gave judgment in favor of the plaintiffs to recover the sum of P20,000 with
lawful from November 15, 1929, the date of the filing of the complaint, with costs. But it was declared that
execution of this judgment should issue first against the property of Guillermo Severino, and if no property
should be found belonging to said defendant sufficient to satisfy the judgment in whole or in part,
execution for the remainder should be issued against the property of Enrique Echaus as guarantor. From
this judgment the defendant Echaus appealed, but his principal, Guillermo Severino, did not.

Upon the death of Melecio Severino a number of years ago, he left considerable property and litigation
ensued between his widow, Felicitas Villanueva, and Fabiola Severino, on the one part, and other heirs of
the deceased on the other part. In order to make an end of this litigation a compromise was effected by
which Guillermo Severino, a son of Melecio Severino, took over the property pertaining to the estate of
his father at the same time agreeing to pay P100,000 to Felicitas Villanueva and Fabiola Severino. This
sum of money was made payable, first, P40,000 in cash upon the execution of the document of
compromise, and the balance in three several payments of P20,000 at the end of one year; two years,
and three years respectively. To this contract the appellant Enrique Echaus affixed his name as
guarantor. The first payment of P40,000 was made on July 11, 1924, the date when the contract of
compromise was executed; and of this amount the plaintiff Fabiola Severino received the sum of
P10,000. Of the remaining P60,000, all as yet unpaid, Fabiola Severino is entitled to the sum of P20,000.

It appears that at the time of the compromise agreement above-mentioned was executed Fabiola
Severino had not yet been judicially recognized as the natural daughter of Melecio Severino, and it was
stipulated that the last P20,000 corresponding to Fabiola and the last P5,000 corresponding to Felicitas
Villanueva should retained on deposit until the definite status of Fabiola Severino as natural daughter of
Melecio Severino should be established. The judicial decree to this effect was entered in the Court of First
Instance of Occidental Negros on June 16, 1925, and as the money which was contemplated to be held
in suspense has never in fact been paid to the parties entitled thereto, it results that the point respecting
the deposit referred to has ceased to be of moment.

The proof shows that the money claimed in this action has never been paid and is still owing to the
plaintiff; and the only defense worth noting in this decision is the assertion on the part of Enrique Echaus
that he received nothing for affixing his signature as guarantor to the contract which is the subject of suit
and that in effect the contract was lacking in consideration as to him.

The point is not well taken. A guarantor or surety is bound by the same consideration that makes the
contract effective between the principal parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise
and dismissal of a lawsuit is recognized in law as a valuable consideration; and the dismissal of the action
which Felicitas Villanueva and Fabiola Severino had instituted against Guillermo Severino was an
adequate consideration to support the promise on the part of Guillermo Severino to pay the sum of
money stipulated in the contract which is the subject of this action. The promise of the appellant Echaus
as guarantor therefore binding. It is never necessary that the guarantor or surety should receive any part
of the benefit, if such there be, accruing to his principal. But the true consideration of this contract was the
detriment suffered by the plaintiffs in the former action in dismissing that proceeding, and it is immaterial
that no benefit may have accrued either to the principal or his guarantor.

Article 2049. A married woman may guarantee an obligation without the husband's consent, but shall not
thereby bind the conjugal partnership, except in cases provided by law. (n)
Article 2050. If a guaranty is entered into without the knowledge or consent, or against the will of the
principal debtor, the provisions of articles 1236 and 1237 shall apply. (n)

Article 2051. A guaranty may be conventional, legal or judicial, gratuitous, or by onerous title.

It may also be constituted, not only in favor of the principal debtor, but also in favor of the other guarantor,
with the latter's consent, or without his knowledge, or even over his objection. (1823)

Article 2052. A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an


unenforceable contract. It may also guarantee a natural obligation. (1824a)

Article 2053. A guaranty may also be given as security for future debts, the amount of which is not yet
known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation
may also be secured. (1825a)

Article 2054. A guarantor may bind himself for less, but not for more than the principal debtor, both as
regards the amount and the onerous nature of the conditions.

Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor.
(1826)

Article 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is
stipulated therein.

If it be simple or indefinite, it shall compromise not only the principal obligation, but also all its
accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only
be liable for those costs incurred after he has been judicially required to pay. (1827a)

Article 2056. One who is obliged to furnish a guarantor shall present a person who possesses integrity,
capacity to bind himself, and sufficient property to answer for the obligation which he guarantees. The
guarantor shall be subject to the jurisdiction of the court of the place where this obligation is to be
complied with. (1828a)

Article 2057. If the guarantor should be convicted in first instance of a crime involving dishonesty or
should become insolvent, the creditor may demand another who has all the qualifications required in the
preceding article. The case is excepted where the creditor has required and stipulated that a specified
person should be the guarantor. (1829a)

FLORENTINA DE GUZMAN, plaintiff-appellee,


vs.
ANASTACIO R. SANTOS, defendant-appellant.

On October 28, 1924, Jerry O. Toole, Antonio K. Abad and Anastacio R. Santos, the defendant, formed a
general mercantile partnership under the style Philippine-American Construction Company, with a capital
of P14,000, P10,000 of which were taken by way of loan from Paulino Candelaria. The partnership and
the co-partners undertook and bound themselves to pay, jointly and severally, the said indebtedness in or
before June, 1925. Having violated the conditions of the contract executed for the purpose, Paulino
Candelaria brought civil case No. 3838 of the Court of First Instance of Nueva Ecija on May 15, 1925,
against the Philippine-American Construction Company and its co-partners, for the recovery of the loan,
plus interest thereon and stipulated attorney's fees. On January 25, 1926, the said court rendered
judgment therein sentencing all the defendants to pay the plaintiff, jointly and severally, the sum of
P9,317, with legal interest thereon from the filing of the complaint, plus P500 as liquidated damages and
P1,000 as attorney's fees. On appeal this judgment was affirmed by this court on December 17, 1926
(G.R. No. 26131). A writ of execution of the affirmed judgment having been issued, the herein plaintiff, in
her capacity as judicial administratrix of the deceased Santiago Lucero, on February 10, 1932, paid to be
creditor Paulino Candelaria the sum of P5,665.55 on account of the judgment.

Upon filing of the complaint in civil case No. 3838, Paulino Candeleria obtained a writ of attachment
against the then defendants by virtue of which the sheriff attached properties of Jerry O. Toole valued at
P50; of Antonio K. Abad valued at P12,150; and of Anastacio R. Santos valued at P2,733. No property of
the partnership Philippine-American Construction Company was attached. In view of these attachments,
the Philippine-American Construction Company moved for the discharge of the attached properties and
offered to post a bond for P10,000. The court granted the motion and fixed the bond at the amount
offered. On May 29, 1925, the Philippine-American Construction Company, as principal, then represented
by the partner Antonio K. Abad, and Santiago Lucero and Meliton Carlos, as guarantors, executed a bond
for P10,000 in favor of Paulino Candelaria for the lifting of the attachment under section 440 of the Code
of Civil Procedure. In the bond thus executed, the defendant Anastacio R. Santos neither intervened nor
signed individually, but Abad testified that the former was the one who induced him to get the signature of
Lucero by taking advantage of his good relations with him. Upon the approval of the bond, the attachment
was discharged and the attached properties were returned to their owners.

After the issuance of the writ for the execution of the judgment rendered in civil case No. 3838, the sheriff
returned the same with the statement that the writ could not be executed as he found no property of the
judgment debtors. In view of this, Paulino Candelaria moved for the issuance of a writ of execution
against the guarantors of the defendants. The court granted the motion and issued a writ of execution
against the plaintiff, as judicial administratrix of the deceased Santiago Lucero, and the other guarantor
Meliton Carlos. The plaintiff tenaciously refused to pay the judgment obtained by Paulino Candelaria, but
after all her efforts had failed, she was eventually compelled to pay to said creditor the sum of P5,565.55,
the co-guarantor Meliton Carlos also paid upon the bond signed by him the sum of P5,135. The plaintiff
and Carlos later recovered from Antonio K. Abad, one of the defendants in the said civil case, the sum of
P3,800 which they divided equally. It thus appears that the payment made by the plaintiff to Candelaria
was reduced to the sum of P3,665.55. The plaintiff, in her said capacity, demanded of the defendant
Anastacio R. Santos the return of the aforesaid sum and, upon the latter's refusal, she brought the action
which culminated in the appealed judgment.

The four errors assigned by the appellant raise only one legal question, namely, whether under the
proven facts admitted by the parties, he is bound to pay to the plaintiff what the latter had advanced to
Paulino Candelaria upon the bond which the deceased Santiago Lucero had executed. The appellant
vigorously insists that he is not so bound under the law, because he neither applied for nor intervened in
the bond in any capacity.

It is beyond question that the appellant neither intervened nor signed the bond which was filed to
discharge the attachment of the properties of the judgment debtors, but it is clear, and this is admitted,
that the bond was filed to release the attached properties, it was approved by the court and it resulted in
the discharge of the attachment and the return of the attached properties to their respective owners.
When the sheriff attempted to execute judgment and looked for the discharged properties, he found that
they had disappeared, for which reason the court subsequently issued a writ of execution against the
guarantors. As a result of this last execution, the plaintiff was forced to pay and in fact paid the said sum
to the creditor Candelaria. Now, then, under article 1822 of the Civil Code, by guaranty one person binds
himself to pay or perform for a third person in case the latter should fail to do so; and the article 1838
provides that any guarantor who pays for the debtor shall be indemnified by the latter even should the
guaranty have been undertaken without the knowledge of the debtor. In the present case, the guarantor
was the deceased Santiago Lucero, now represented by the plaintiff in her capacity as judicial
administratrix, and the debtor is the defendant-appellant. Applying the provision of the last cited article, it
is obvious that the appellant is legally bound to pay what the plaintiff had advanced to the creditor upon
the judgment, notwithstanding the fact that the bond had given without his knowledge.
The obligation of the appellant to pay the plaintiff what the latter had advanced is further sanctioned by
the general provisions of the Civil Code regarding obligations. Article 1158 provides that "payment may
be made by any person, whether he has an interest in the performance of the obligation or not, and
whether the payment is known and approved by the debtor or whether he is unaware of it. Any person
who makes a payment for the account of another may recover from the debtor the amount of the
payment, unless it was made against the express will of the latter. In the latter case he can only recover
from the debtor in so far as the payment has been beneficial to the latter." According to this legal
provision, it is evident that the plaintiff-appellant is bound to pay to the plaintiff what the latter had
advanced to the creditor upon the judgment, and this is the more so because it appears that although
Lucero executed the bond without his knowledge, nevertheless he did not object thereto or repudiate the
same at any time.

From the proven facts it cannot logically be deduced that the appellant did not have knowledge of the
bond, first, because his properties were attached and the attachment could not have been levied without
his knowledge, and, secondly, because the said properties were returned to him and in receiving them he
was necessarily apprised of the fact that a bond had been filed to discharge the attachment.

ROMULO MACHETTI, plaintiff-appellee,


vs.
HOSPICIO DE SAN JOSE, et al, defendant-appellants.

MANILA, July 15, 1916.

For value received we hereby guarantee compliance with the terms and
conditions as outlined in the above contract.

FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.

But in this instance the guarantor's case is even stronger than that of an ordinary surety. The contract of
guaranty is written in the English language and the terms employed must of course be given the
signification which ordinarily attaches to them in that language. In English the term "guarantor" implies an
undertaking of guaranty, as distinguished from suretyship. It is very true that notwithstanding the use of
the words "guarantee" or "guaranty" circumstances may be shown which convert the contract into one of
suretyship but such circumstances do not exist in the present case; on the contrary it appears
affirmatively that the contract is the guarantor's separate undertaking in which the principal does not join,
that its rests on a separate consideration moving from the principal and that although it is written in
continuation of the contract for the construction of the building, it is a collateral undertaking separate and
distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty.

PHILIPPINE NATIONAL BANK, petitioner,


vs.
LUZON SURETY CO., INC. and THE HONORABLE COURT OF APPEALS, respondent.

... sometime prior to 27 November 1951, defendant Augusto R. Villarosa, a sugar planter adhered to the
Lopez Sugar Central Milling Company, Inc. applied for a crop loan with the plaintiff, Philippine National
Bank, Exhibit A; this application was approved on 6 March, 1952 in the amount of P32,400, according to
the complaint; but the document of approval has not been exhibited; at any rate, the planter Villarosa
executed a Chattel Mortgage on standing crops to guarantee the crop loan.

that was why due to its non-payment, plaintiff filed this complaint, as has been said, on 8 June, 1960;

now the complaint sought relief not only against the planter but also against the three (3) bondsmen,
Luzon Surety, Central Surety and Associated Surety.
Likewise an extract from the Surety Bond executed by and between the PNB on one hand and Augusto
Villarosa and respondent Luzon Surety Company, Inc. on the other, is hereby reproduced, viz:

That we Augusto Villarosa of Bacolod City, as principal and Luzon Surety


Company, Inc. a corporation duly organized and existing under and by virtue of
the laws of the Philippines, as surety, are held firmly bound unto Philippine
National Bank, Bacolod City, Philippines, in the sum of Ten Thousand Pesos
(P10,000.00) Philippine Currency, for the payment of which sum, well and truly to
be made, we bind ourselves, our heirs, executors, administrators, successors,
and assigns jointly and severally, firmly by these presents:

The foregoing evidences clearly the liability of Luzon Surety to petitioner Philippine National Bank not
merely as a guarantor but as surety-liable as a regular party to the undertaking (Castelvi de Higgins vs.
Sellner 41 Phil. 142).

The Court of Appeals, to Our mind did not give credence to an otherwise significant and unrebutted
testimony of petitioner's witness, Romanito Brillantes, that Exhibit B was the only chattel mortgage
executed by Augusto Villarosa evidencing the crop loan contract and upon which Luzon Surety agreed to
assume liability up to the amount of P10,000 by posting the said surety bond. Moreover Article 1354 of
our New Civil Code which provides:

Art. 1354.— Although the cause is not stated in the contract., it is presumed that
it exist and is lawful, unless the debtor proves the contrary.

bolster petitioner's stand. Considering too that Luzon Surety company is engaged in the business of
furnishing guarantees, for a consideration, there is no reason that it should be entitled to a rule
of strictissimi juris or a strained and over-strict interpretation of its undertaking. The presumption indulged
in by the law in favor of guarantors was premised on the fact that guarantees were originally gratuitous
obligations, which is not true at present, at least in the great majority of cases.

The next question to take up is the liability of Luzon Surety Co. for interest which, it contends, would
increase its liability to more than P10,000 which is the maximum of its bond. We cannot agree to this
reasoning. In the cases ofTagawa vs. Aldanese, 43 Phil. 852, 859; Plaridel Surety Insurance Co. vs. P. L.
Galang Machinery Co., 100 Phil. 679, 682, cited in Paras Civil Code of the Philippines, Vol. V, 7th Ed.
1972, p. 772, it was held:

If a surety upon demand fails to pay, he can be held liable for interest, even if in
thus paying, the liability becomes more than that in the principal obligation. The
increased liability is not because of the contract but because of the default and
the necessity of judicial collection. It should be noted, however, that the interest
runs from the time the complaint is filed, not from the time the debt becomes due
and demandable.

SPOUSES ALFREDO and SUSANA ONG, petitioners,


vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondent.

Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the manufacture and export
of finished wood products. Petitioners-spouses Alfredo and Susana Ong are its President and Treasurer,
respectively.

On April 20, 1992, respondent Philippine Commercial International Bank (now Equitable-Philippine
Commercial International Bank or E-PCIB) filed a case for collection of a sum of money1 against
petitioners-spouses. Respondent bank sought to hold petitioners-spouses liable as sureties on the three
(3) promissory notes they issued to secure some of BMC’s loans, totalling five million pesos
(P5,000,000.00).

The complaint alleged that in 1991, BMC needed additional capital for its business and applied for various
loans, amounting to a total of five million pesos, with the respondent bank. Petitioners-spouses acted as
sureties for these loans and issued three (3) promissory notes for the purpose. Under the terms of the
notes, it was stipulated that respondent bank may consider debtor BMC in default and demand payment
of the remaining balance of the loan upon the levy, attachment or garnishment of any of its properties, or
upon BMC’s insolvency, or if it is declared to be in a state of suspension of payments. Respondent bank
granted BMC’s loan applications.

On November 22, 1991, BMC filed a petition for rehabilitation and suspension of payments with the
Securities and Exchange Commission (SEC) after its properties were attached by creditors. Respondent
bank considered debtor BMC in default of its obligations and sought to collect payment thereof from
petitioners-spouses as sureties. In due time, petitioners-spouses filed their Answer.

Petitioners-spouses claim that the collection case filed against them by respondent bank should be
dismissed for three (3) reasons: First, the MOA provided that during its effectivity, there shall be a
suspension of filing or pursuing of collection cases against the BMC and this provision should benefit
petitioners as sureties. Second, principal debtor BMC has been placed under suspension of payment of
debts by the SEC; petitioners contend that it would prejudice them if the principal debtor BMC would
enjoy the suspension of payment of its debts while petitioners, who acted only as sureties for some of
BMC’s debts, would be compelled to make the payment; petitioners add that compelling them to pay is
contrary to Article 2063 of the Civil Code which provides that a compromise between the creditor and
principal debtor benefits the guarantor and should not prejudice the latter. Lastly, petitioners rely
on Article 2081 of the Civil Code which provides that: "the guarantor may set up against the creditor all
the defenses which pertain to the principal debtor and are inherent in the debt; but not those which are
purely personal to the debtor." Petitioners aver that if the principal debtor BMC can set up the defense of
suspension of payment of debts and filing of collection suits against respondent bank, petitioners as
sureties should likewise be allowed to avail of these defenses.

We find no merit in petitioners’ contentions.

Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is misplaced as these
provisions refer to contracts of guaranty. They do not apply to suretyship contracts. Petitioners-
spouses are not guarantors but sureties of BMC’s debts. There is a sea of difference in the rights and
liabilities of a guarantor and a surety. A guarantor insures the solvency of the debtor while a surety is
an insurer of the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part of
the guarantor. It is only after the creditor has proceeded against the properties of the principal debtor
and the debt remains unsatisfied that a guarantor can be held liable to answer for any unpaid amount.
This is the principle of excussion. In a suretyship contract, however, the benefit of excussion is not
available to the surety as he is principally liable for the payment of the debt. As the surety insures
the debt itself, he obligates himself to pay the debt if the principal debtor will not pay, regardless of
whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor can go directly
against the surety although the principal debtor is solvent and is able to pay or no prior demand is made
on the principal debtor. A surety is directly, equally and absolutely bound with the principal debtor
for the payment of the debt and is deemed as an original promissor and debtor from the
beginning.5

Under the suretyship contract entered into by petitioners-spouses with respondent bank, the former
obligated themselves to be solidarily bound with the principal debtor BMC for the payment of its debts to
respondent bank amounting to five million pesos (P5,000,000.00). Under Article 1216 of the Civil
Code,6 respondent bank as creditor may proceed against petitioners-spouses as sureties despite the
execution of the MOA which provided for the suspension of payment and filing of collection suits against
BMC. Respondent bank’s right to collect payment from the surety exists independently of its right to
proceed directly against the principal debtor. In fact, the creditor bank may go against the surety alone
without prior demand for payment on the principal debtor.7

The provisions of the MOA regarding the suspension of payments by BMC and the non-filing of
collection suits by the creditor banks pertain only to the property of the principal debtor BMC.

Clearly, the collection suit filed by respondent bank against petitioners-spouses as sureties can prosper.
The trial court’s denial of petitioners’ motion to dismiss was proper.

INTERNATIONAL FINANCE CORPORATION, Petitioner,


vs.
IMPERIAL TEXTILE MILLS, INC.,* Respondent.

"On December 17, 1974, [Petitioner] International Finance Corporation (IFC) and [Respondent] Philippine
Polyamide Industrial Corporation (PPIC) entered into a loan agreement wherein IFC extended to PPIC a
loan of US$7,000,000.00, payable in sixteen (16) semi-annual installments of US$437,500.00 each,
beginning June 1, 1977 to December 1, 1984, with interest at the rate of 10% per annum on the principal
amount of the loan advanced and outstanding from time to time. The interest shall be paid in US dollars
semi-annually on June 1 and December 1 in each year and interest for any period less than a year shall
accrue and be pro-rated on the basis of a 360-day year of twelve 30-day months.

"On December 17, 1974, a ‘Guarantee Agreement’ was executed with x x x Imperial Textile Mills, Inc.
(ITM), Grand Textile Manufacturing Corporation (Grandtex) and IFC as parties thereto. ITM and Grandtex
agreed to guarantee PPIC’s obligations under the loan agreement.

"PPIC paid the installments due on June 1, 1977, December 1, 1977 and June 1, 1978. The payments
due on December 1, 1978, June 1, 1979 and December 1, 1979 were rescheduled as requested by
PPIC. Despite the rescheduling of the installment payments, however, PPIC defaulted. Hence, on April 1,
1985, IFC served a written notice of default to PPIC demanding the latter to pay the outstanding principal
loan and all its accrued interests. Despite such notice, PPIC failed to pay the loan and its interests.

Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding balance.
However, despite the demand made by IFC, the outstanding balance remained unpaid.

"Thereafter, on May 20, 1988, IFC filed a complaint with the RTC of Manila against PPIC and ITM for the
payment of the outstanding balance plus interests and attorney’s fees.

The Petition is meritorious.

The premise of the Guarantee Agreement is found in its preambular clause, which reads:

"Whereas,

"(A) By an Agreement of even date herewith between IFC and PHILIPPINE POLYAMIDE INDUSTRIAL
CORPORATION (herein called the Company), which agreement is herein called the Loan Agreement,
IFC agrees to extend to the Company a loan (herein called the Loan) of seven million dollars
($7,000,000) on the terms therein set forth, including a provision that all or part of the Loan may be
disbursed in a currency other than dollars, but only on condition that the Guarantors agree to guarantee
the obligations of the Company in respect of the Loan as hereinafter provided.

"(B) The Guarantors, in order to induce IFC to enter into the Loan Agreement, and in consideration of IFC
entering into said Agreement, have agreed so to guarantee such obligations of the Company."18
The obligations of the guarantors are meticulously expressed in the following provision:

"Section 2.01. The Guarantors jointly and severally, irrevocably, absolutely and unconditionally
guarantee, as primary obligors and not as sureties merely, the due and punctual payment of the principal
of, and interest and commitment charge on, the Loan, and the principal of, and interest on, the Notes,
whether at stated maturity or upon prematuring, all as set forth in the Loan Agreement and in the
Notes."19

The Agreement uses "guarantee" and "guarantors," prompting ITM to base its argument on those
words.20 This Court is not convinced that the use of the two words limits the Contract to a mere guaranty.
The specific stipulations in the Contract show otherwise.

While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was "jointly
and severally" liable. To put emphasis on the nature of that liability, the Contract further stated that ITM
was a primary obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and to
all legal intents and purposes, it was a surety.

Indubitably therefore, ITM bound itself to be solidarily21 liable with PPIC for the latter’s obligations under
the Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not be deemed
merely secondarily liable.

Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITM’s liability commenced
only when it guaranteed PPIC’s obligation. It became a surety when it bound itself solidarily with the
principal obligor. Thus, the applicable law is as follows:

"Article 2047. By guaranty, a person, called the guarantor binds himself to the creditor to fulfill the
obligation of the principal 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 shall be called suretyship."22

The aforementioned provisions refer to Articles 1207 to 1222 of the Civil Code on "Joint and Solidary
Obligations." Relevant to this case is Article 1216, which states:

"The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously.
The demand made against one of them shall not be an obstacle to those which may subsequently be
directed against the others, so long as the debt has not been fully collected."

Pursuant to this provision, petitioner (as creditor) was justified in taking action directly against respondent.

The Court does not find any ambiguity in the provisions of the Guarantee Agreement. When qualified by
the term "jointly and severally," the use of the word "guarantor" to refer to a "surety" does not violate the
law.23 As Article 2047 provides, a suretyship is created when a guarantor binds itself solidarily with the
principal obligor. Likewise, the phrase in the Agreement -- "as primary obligor and not merely as surety" --
stresses that ITM is being placed on the same level as PPIC. Those words emphasize the nature of their
liability, which the law characterizes as a suretyship.

The use of the word "guarantee" does not ipso facto make the contract one of guaranty. 24 This Court has
recognized that the word is frequently employed in business transactions to describe the intention to be
bound by a primary or an independent obligation.25 The very terms of a contract govern the obligations of
the parties or the extent of the obligor’s liability. Thus, this Court has ruled in favor of suretyship, even
though contracts were denominated as a "Guarantor’s Undertaking" 26 or a "Continuing Guaranty."27
We note that the CA denied solidary liability, on the theory that the parties would not have executed a
Guarantee Agreement if they had intended to name ITM as a primary obligor. 31 The appellate court
opined that ITM’s undertaking was collateral to and distinct from the Loan Agreement. On this point, the
Court stresses that a suretyship is merely an accessory or a collateral to a principal obligation. 32 Although
a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary and
absolute; or equivalent to that of a regular party to the undertaking.33 A surety becomes liable to the debt
and duty of the principal obligor even without possessing a direct or personal interest in the obligations
constituted by the latter.34

With the present finding that ITM is a surety, it is clear that the CA erred in declaring the former
secondarily liable.35 A surety is considered in law to be on the same footing as the principal debtor in
relation to whatever is adjudged against the latter.36 Evidently, the dispositive portion of the assailed
Decision should be modified to require ITM to pay the amount adjudged in favor of IFC.

THE TEXAS COMPANY (PHIL.), INC., petitioner,


vs.
TOMAS ALONSO, respondent.

On November 5, 1935 Leonor S. Bantug and Tomas Alonso were sued by the Texas Company (P.I.), Inc.
in the Court of First Instance of Cebu for the recovery of the sum of P629, unpaid balance of the account
of Leonora S. Bantug in connection with the agency contract with the Texas Company for the faithful
performance of which Tomas Alonso signed the following:

For value received, we jointly and severally do hereby bind ourselves and each of us, in
solidum, with Leonor S. Bantug the agent named in the within and foregoing agreement,
for full and complete performance of same hereby waiving notice of non-performance by
or demand upon said agent, and the consent to any and all extensions of time for
performance. Liability under this undertaking, however, shall not exceed the sum of
P2,000, Philippine currency.

Leonor S. Bantug was declared in default as a result of her failure to appear or answer, but Tomas
Alonso filed an answer setting up a general denial and the special defenses that Leonor S. Bantug made
him believe that he was merely a co-security of one Vicente Palanca and he was never notified of the
acceptance of his bond by the Texas Company.

The Court of Appeals has placed reliance upon our decision in National Bank vs. Garcia (47 Phil., 662),
while the petitioner invokes the case of National Bank vs. Escueta, (50 Phil., 991). In the first case, it was
held that there was merely an offer to give bond and, as there was no acceptance of the offer, this court
refused to give effect to the bond.

The Court of Appeals found as a fact, and this is conclusive in this instance, that the bond in question was
executed at the request of the petitioner by virtue of the following clause of the agency contract:

Additional Security. — The Agent shall whenever requested by the Company in addition
to the guaranty herewith provided, furnish further guaranty or bond, conditioned upon the
Agent's faithful performance of this contract, in such individuals of firms as joint and
several sureties as shall be satisfactory to the Company.

In view of the foregoing clause which should be the law between the parties, it is obvious that, before a
bond is accepted by the petitioner, it has to be in such form and amount and with such sureties as shall
be satisfactory hereto; in other words, the bond is subject to petitioner's approval. The logical implication
arising from this requirement is that, if the petitioner is satisfied with any such bond, notice of its
acceptance or approval should necessarily be given to the property party in interest, namely, the surety or
guarantor. In this connection, we are likewise bound by the finding of the Court of Appeals that there is no
evidence in this case tending to show that the respondent, Tomas Alonso, ever had knowledge of any act
on the part of petitioner amounting to an implied acceptance, so as to justify the application of our
decision in National Bank vs. Escueta (50 Phil., 991).

While unnecessary to this decision, we choose to add a few words explanatory of the rule regarding the
necessity of acceptance in case of bonds. Where there is merely an offer of, or proposition for, a
guaranty, or merely a conditional guaranty in the sense that it requires action by the creditor before the
obligation becomes fixed, it does not become a binding obligation until it is accepted and, unless there is
a waiver of notice of such acceptance is given to, or acquired by, the guarantor, or until he has notice or
knowledge that the creditor has performed the conditions and intends to act upon the guaranty. (National
Bank vs. Garcia, 47 Phil., 662; C. J., sec. 21, p. 901; 24 Am. Jur., sec. 37, p. 899.) The acceptance need
not necessarily be express or in writing, but may be indicated by acts amounting to acceptance. (National
Bank vs. Escueta, 50 Phil., 991.) Where, upon the other hand, the transaction is not merely an offer of
guaranty but amounts to direct or unconditional promise of guaranty, unless notice of acceptance is made
a condition of the guaranty, all that is necessary to make the promise binding is that the promise should
act upon it, and notice of acceptance is not necessary (28 C. J., sec. 25, p. 904; 24 Am. Jur., sec 37, p.
899), the reason being that the contract of guaranty is unilateral.

PHILIPPINE PRYCE ASSURANCE CORPORATION, petitioner,


vs.
THE COURT OF APPEALS, (Fourteenth Division) and GEGROCO, INC., respondents.

Petitioner, Interworld Assurance Corporation (the company now carries the corporate name Philippine
Pryce Assurance Corporation), was the butt of the complaint for collection of sum of money, filed on May
13, 1988 by respondent, Gegroco, Inc. before the Makati Regional Trial Court, Branch 138. The complaint
alleged that petitioner issued two surety bonds (No. 0029, dated July 24, 1987 and No. 0037, dated
October 7, 1987) in behalf of its principal Sagum General Merchandise for FIVE HUNDRED THOUSAND
(P500,000.00) PESOS and ONE MILLION (1,000,000.00) PESOS, respectively.

In its Answer, dated July 29, 1988, but filed only on August 4, 1988, petitioner admitted having executed
the said bonds, but denied liability because allegedly 1) the checks which were to pay for the premiums
bounced and were dishonored hence there is no contract to speak of between petitioner and its supposed
principal; and 2) that the bonds were merely to guarantee payment of its principal's obligation, thus,
excussion is necessary.

Petitioner hinges its defense on two arguments, namely: a) that the checks issued by its principal which
were supposed to pay for the premiums, bounced, hence there is no contract of surety to speak of; and 2)
that as early as 1986 and covering the time of the Surety Bond, Interworld Assurance Company (now
Phil. Pryce) was not yet authorized by the insurance Commission to issue such bonds.

The Insurance Code states that:

Sec. 177. The surety is entitled to payment of the premium as soon as the
contract of suretyship or bond is perfected and delivered to the obligor. No
contract of suretyship or bonding shall be valid and binding unless and until the
premium therefor has been paid, except where the obligee has accepted the
bond, in which case the bond becomes valid and enforceable irrespective of
whether or not the premium has been paid by the obligor to the surety. . . .
(emphasis added)

The above provision outrightly negates petitioner's first defense. In a desperate attempt to escape liability,
petitioner further asserts that the above provision is not applicable because the respondent allegedly had
not accepted the surety bond, hence could not have delivered the goods to Sagum Enterprises. This
statement clearly intends to muddle the facts as found by the trial court and which are on record. In the
first place, petitioner, in its answer, admitted to have issued the bonds subject matter of the original
action.

THE MUNICIPALITY OF GASAN, plaintiff-appellee,


vs.
MIGUEL MARASIGAN, ANGEL R. SEVILLA and GONZALO L. LUNA, defendants-appellants.

The plaintiff-appellee municipality, on December 9, 1930, put up at auction the privilege of gathering
whitefish spawn in its jurisdictional waters for the period of one year from January 1, 1931. Two bidders,
Graciano Napa and Miguel Marasigan, appeared at the auction. Both attached to their respective bids the
certificate of not being behind in the payment of any tax, issued by the municipal treasurer of Gasan,
Marinduque, as required by the provisions of resolution No. 42, series of 1930, of the council of said
municipality. Graciano Napa proposed to accept the privilege by paying P5,000 therefor, Miguel
Marasigan proposed to do likewise, but by paying only P4,200.

The council of the plaintiff-appellee municipality, in its resolution No. 161 (Exhibit 1) of December 11,
1930 rejected Graciano Napa's bid and accepted that of the appellant Miguel Marasigan, granting and
selling to the latter the privilege put up at auction for the sum of P4,200, payable quarterly in advance at
the rate of P1,050 a quarter (Exhibit A). To secure his compliance with the terms of the contract which
was immediately formalized by him and the plaintiff, and pursuant to the provisions of section 8 of
resolution No. 128, series of 1925, of the council of said plaintiff, Miguel Marasigan filed the bond, Exhibit
B, subscribed on December 15, 1930, by the defendants-appellants Angel R. Sevilla and Gonzalo L.
Luna, who bound themselves in said document to pay to the plaintiff the sum of P8,400, if Miguel
Marasigan failed to deposit one-fourth of P4,200 quarterly in advance in the municipal treasury of Gasan,
in violation of the terms of the contract executed and entered into by him and the plaintiff on December
11, 1930 (Exhibit A), for the compliance with which they became sureties.

The provincial board, passing upon Graciano Napa's protest and acting under the authority which, in its
opinion, was granted to it by section 2233 of the Administrative Code, held that resolution No. 161, series
of 1930, by virtue of which the municipal council of Gasan rejected Graciano Napa's bid and accepted
that of Miguel Marasigan, notwithstanding the fact that the latter offered to pay less, was invalid, and
suggested that the privilege should be, awarded to Graciano Napa who, in its opinion, appeared to be the
highest bidder in accordance with the provisions of sections 2323 and 2319 of the Administrative Code
(Exhibit 9). The Executive Bureau, concurring with the provincial board's points of view, declared, in turn,
that the concession made to Marasigan was illegal in view of the fact that Graciano Napa was the highest
bidder (Exhibit 13).

It is clear that it may be logically inferred from these facts that the contract regarding fishing privilege
entered into between the plaintiff and appellant Marasigan on December 11, 1930 (Exhibit A), not only
was not consummated but was cancelled. Consequently, it now appears useless and futile to discuss
whether or not resolution No. 161 (Exhibit 1) is valid and legal. In either case, it is a fact that, said contract
ceased to have life or force to bind each of the contracting parties. It ceased to be valid from the time it
was cancelled and this being so, neither the appellant Marasigan nor his sureties or the appellants were
bound to comply with the terms of their respective contracts of fishing privilege and suretyship. This is so,
particularly with respect to the sureties-appellants, because suretyship cannot exist without a valid
obligation (art. 1824 of the Civil Code).

SELEGNA MANAGEMENT AND DEVELOPMENT CORP; Spouses ANGELES, Petitioners,


vs.
UNITED COCONUT PLANTERS BANK,* Respondent.

On September 19, 1995, Petitioners Selegna Management and Development Corporation and Spouses
Edgardo and Zenaida Angeles were granted a credit facility in the amount of P70 million by Respondent
United Coconut Planters Bank (UCPB). As security for this credit facility, petitioners executed real estate
mortgages over several parcels of land located in the cities of Muntinlupa, Las Piñas, Antipolo and
Quezon; and over several condominium units in Makati. Petitioners were likewise required to execute a
promissory note in favor of respondent every time they availed of the credit facility. As required in these
notes, they paid the interest in monthly amortizations.

The parties stipulated in their Credit Agreement dated September 19, 1995,5 that failure to pay "any
availment of the accommodation or interest, or any sum due" shall constitute an event of default, 6 which
shall consequently allow respondent bank to "declare [as immediately due and payable] all outstanding
availments of the accommodation together with accrued interest and any other sum payable." 7

On December 21, 1998, respondent sent petitioners a demand letter, worded as follows:

Respondent sent another letter of demand on March 4, 1999. It contained a final demand on petitioners
"to settle in full [petitioners’] said past due obligation to [UCPB] within five (5) days from [petitioners’]
receipt of [the] letter."12

In response, petitioners paid respondent the amount of P10,199,473.96 as partial payment of the accrued
interests.13 Apparently unsatisfied, UCPB applied for extrajudicial foreclosure of petitioners’ mortgaged
properties.

In order to forestall the extrajudicial foreclosure scheduled for May 31, 1999, petitioners filed a
Complaint16(docketed as Civil Case No. 99-1061) for "Damages, Annulment of Interest, Penalty Increase
and Accounting with Prayer for Temporary Restraining Order/Preliminary Injunction." All subsequent
proceedings in the trial court and in the CA involved only the propriety of issuing a TRO and a writ of
preliminary injunction.

The Petition has no merit.

Petitioners’ Debt Considered Liquidated Despite the Alleged Lack of Accounting

Petitioners do not even attempt to deny the aforementioned matters. They assert, though, that they have
a right to a detailed accounting before they can be declared in default. As regards the three requisites of
default, they say that the first requisite -- liquidated debt -- is absent. Continuing with foreclosure on the
basis of an unliquidated obligation allegedly violates their right to due process. They also maintain that
their partial payment of P10 million averted the maturity of their obligation. 59

On the other hand, respondent asserts that questions regarding the running balance of the obligation of
petitioners are not valid reasons for restraining the foreclosure. Nevertheless, it maintains that it has
furnished them a detailed monthly statement of account.

A debt is liquidated when the amount is known or is determinable by inspection of the terms and
conditions of the relevant promissory notes and related documentation. 60 Failure to furnish a debtor a
detailed statement of account does not ipso facto result in an unliquidated obligation.

Petitioners executed a Promissory Note, in which they stated that their principal obligation was in the
amount of P103,909,710.82, subject to an interest rate of 21.75 percent per annum.61 Pursuant to the
parties’ Credit Agreement, petitioners likewise know that any delay in the payment of the principal
obligation will subject them to a penalty charge of one percent per month, computed from the due date
until the obligation is paid in full.62

It is in fact clear from the agreement of the parties that when the payment is accelerated due to an event
of default, the penalty charge shall be based on the total principal amount outstanding, to be computed
from the date of acceleration until the obligation is paid in full.63 Their Credit Agreement even provides for
the application of payments.64 It appears from the agreements that the amount of total obligation is known
or, at the very least, determinable.

RIZAL COMMERCIAL BANKING CORPORATION, petitioner,


vs.
HON. JOSE P. ARRO, and RESIDORO CHUA, respondents.

It appears that on October 19, 1976 Residoro Chua and Enrique Go, Sr. executed a comprehensive
surety agreements 3 to guaranty among others, any existing indebtedness of Davao Agricultural
Industries Corporation (referred to therein as Borrower, and as Daicor in this decision), and/or induce the
bank at any time or from time to time thereafter, to make loans or advances or to extend credit in other
manner to, or at the request, or for the account of the Borrower, either with or without security, and/or to
purchase on discount, or to make any loans or advances evidenced or secured by any notes, bills,
receivables, drafts, acceptances, checks or other evidences of indebtedness (all hereinafter called
"instruments") upon which the Borrower is or may become liable, provided that the liability shall not
exceed at any one time the aggregate principal sum of P100,000.00.

On April 29, 1977 a promissory note 4 in the amount of P100,000.00 was issued in favor of petitioner
payable on June 13, 1977. Said note was signed by Enrique Go, Sr. in his personal capacity and in behalf
of Daicor. The promissory note was not fully paid despite repeated demands; hence, on June 30, 1978,
petitioner filed a complaint for a sum of money against Daicor, Enrique Go, Sr. and Residoro Chua. A
motion to dismiss dated September 23, 1978 was filed by respondent Residoro Chua on the ground that
the complaint states no cause of action as against him. 5 It was alleged in the motion that he can not be
held liable under the promissory note because it was only Enrique Go, Sr. who signed the same in behalf
of Daicor and in his own personal capacity.

In an opposition dated September 26, 1978 6 petitioner alleged that by virtue of the execution of the
comprehensive surety agreement, private respondent is liable because said agreement covers not merely
the promissory note subject of the complaint, but is continuing; and it encompasses every other
indebtedness the Borrower may, from time to time incur with petitioner bank.

The sole issue resolved by respondent court was the interpretation of the comprehensive surety
agreement, particularly in reference to the indebtedness evidenced by the promissory note involved in the
instant case, said comprehensive surety agreement having been signed by Enrique Go, Sr. and private
respondent, binding themselves as solidary debtors of said corporation not only to existing obligations but
to future ones.

The main issue involved in this case is whether private respondent is liable to pay the obligation evidence
by the promissory note dated April 29,1977 which he did not sign, in the light of the provisions of the
comprehensive surety agreement which petitioner and private respondent had earlier executed on
October 19, 1976.

We find for the petitioner. The comprehensive surety agreement was jointly executed by Residoro Chua
and Enrique Go, Sr., President and General Manager, respectively of Daicor, on October 19, 1976 to
cover existing as well as future obligations which Daicor may incur with the petitioner bank, subject only
to the proviso that their liability shall not exceed at any one time the aggregate principal sum of
P100,000.00.

The agreement was executed obviously to induce petitioner to grant any application for a loan Daicor may
desire to obtain from petitioner bank. The guaranty is a continuing one which shall remain in full force and
effect until the bank is notified of its termination.

At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of having an
additional capital for buying and selling coco-shell charcoal and importation of activated carbon, 10 the
comprehensive surety agreement was admittedly in full force and effect. The loan was, therefore, covered
by the said agreement, and private respondent, even if he did not sign the promisory note, is liable by
virtue of the surety agreement. The only condition that would make him liable thereunder is that the
Borrower "is or may become liable as maker, endorser, acceptor or otherwise". There is no doubt that
Daicor is liable on the promissory note evidencing the indebtedness.

The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an
accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained by
Daicor as evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was
the surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual
payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen that the surety
agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally
allowable under the Civil Code. Thus —

Article 2053. — A guaranty may also be given as security for future debts, the
amount of which is not yet known; there can be no claim against the guarantor
until the debt is liquidated. A conditional obligation may also be secured.

JACINTO UY DIÑO and NORBERTO UY, petitioners,


vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY, respondents.

It appears that in 1977, Uy Tiam Enterprises and Freight Services (hereinafter


referred to as UTEFS), thru its representative Uy Tiam, applied for and obtained
credit accommodations (letter of credit and trust receipt accommodations) from
the Metropolitan Bank and Trust Company (hereinafter referred to as
METROBANK) in the sum of P700,000.00 (Original Records, p. 333). To secure
the aforementioned credit accommodations Norberto Uy and Jacinto Uy Diño
executed separate Continuing Suretyships (Exhibits "E" and "F" respectively),
dated 25 February 1977, in favor of the latter. Under the aforesaid agreements,
Norberto Uy agreed to pay METROBANK any indebtedness of UTEFS up to the
aggregate sum of P300,000.00 while Jacinto Uy Diño agreed to be bound up to
the aggregate sum of P800,000.00.

Having paid the obligation under the above letter of credit in 1977, UTEFS,
through Uy Tiam, obtained another credit accommodation from METROBANK in
1978, which credit accommodation was fully settled before an irrevocable letter
of credit was applied for and obtained by the abovementioned business entity in
1979 (September 8, 1987, tsn, pp. 14-15).

The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the
sum of P815, 600.00, covered UTEFS' purchase of "8,000 Bags Planters Urea
and 4,000 Bags Planters 21-0-0." It was applied for and obtain by UTEFS without
the participation of Norberto Uy and Jacinto Uy Diño as they did not sign the
document denominated as "Commercial Letter of Credit and Application." Also,
they were not asked to execute any suretyship to guarantee its payment. Neither
did METROBANK nor UTEFS inform them that the 1979 Letter of Credit has
been opened and the Continuing Suretyships separately executed in February,
1977 shall guarantee its payment (Appellees brief, pp. 2-3; rollo, p. 28).

However, UTEFS did not acquiesce to the obligatory stipulations in the trust
receipt. As a consequence, METROBANK sent letters to the said principal
obligor and its sureties, Norberto Uy and Jacinto Uy Diño, demanding payment of
the amount due. Informed of the amount due, UTEFS made partial payments to
the Bank which were accepted by the latter.

Answering one of the demand letters, Diño, thru counsel, denied his liability for
the amount demanded and requested METROBANK to send him copies of
documents showing the source of his liability. In its reply, the bank informed him
that the source of his liability is the Continuing Suretyship which he executed on
February 25, 1977.

Hence, the instant petition which hinges on the issue of whether or not the petitioners may be held liable
as sureties for the obligation contracted by Uy Tiam with METROBANK on 30 May 1979 under and by
virtue of the Continuing Suretyship Agreements signed on 25 February 1977.

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. 8 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. 9 Otherwise stated, 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. 11

In other jurisdictions, it has been held that the use of particular words and expressions such as payment
of "any debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or
money to be furnished the principal debtor "at any time," or "on such time" that the principal debtor may
require, have been construed to indicate a continuing guaranty. 12

I. For and in consideration of any existing indebtedness to the BANK of UY TIAM (hereinafter
called the "Borrower"), for the payment of which the SURETY is now obligated to the BANK,
either as guarantor or otherwise, and/or in order to induce the BANK, in its discretion, at any
time or from time to time hereafter, to make loans or advances or to extend credit in any other
manner to, or at the request, or for the account of the Borrower, either with or without
security, and/or to purchase or discount, or to make any loans or advances evidence or
secured by any notes, bills, receivables, drafts, acceptances, checks, or other instruments or
evidences of indebtedness (all hereinafter called "instruments") upon which the Borrower is or
may become liable as maker, endorser, acceptor, or otherwise, the SURETY agrees to
guarantee, and does hereby guarantee, the punctual payment at maturity to the loans,
advances credits and/or other obligations hereinbefore referred to, and also any and all other
indebtedness of every kind which is now or may hereafter become due or owing to the BANK
by the Borrower,

VI. This is a continuing guaranty and shall remain in full force and effect until written notice shall have
been received by the BANK that it has been revoked by the SURETY, but any such notice shall not
release the SURETY,

The foregoing stipulations unequivocally reveal that the suretyship agreement in the case at bar are
continuing in nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they
denied the fact that they had not revoked the suretyship agreements. Accordingly, as correctly held by the
public respondent:

Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made applicable to
the 1979 obligation because the latter was not yet in existence when the agreements were executed in
1977; under Article 2052 of the Civil Code, a guaranty "cannot exist without a valid obligation." We cannot
agree. First of all, the succeeding article provides that "[a] guaranty may also be given as security for
future debts, the amount of which is not yet known." Secondly, Article 2052 speaks about a valid
obligation, as distinguished from a void obligation, and not an existing or current obligation.

BANK OF COMMERCE and STEPHEN Z. TAALA, Petitioners,


vs.
Spouses ANDRES and ELIZA FLORES, Respondents.

Respondents filed a case for specific performance against petitioners before the Regional Trial Court
(RTC) of Quezon City, docketed as Civil Case No. Q-98-35425. Respondents are the registered owners
of a condominium unit in Embassy Garden Homes, West Triangle, Quezon City, registered under
Condominium Certificate of Title (CCT) No. 2130,3 issued by the Register of Deeds of Quezon City.4

On October 22, 1993, respondents borrowed money from petitioner bank in the amount of Nine Hundred
Thousand Pesos (P900,000.00). Respondents executed a Real Estate Mortgage 5 over the condominium
unit as collateral, and the same was annotated at the back of CCT No. 2130.

On October 3, 1995, respondents again borrowed One Million One Hundred Thousand Pesos
(P1,100,000.00) from petitioner bank, which was also secured by a mortgage over the same property
annotated at the back of CCT No. 2130.6

On January 2, 1996, respondents paid One Million Eleven Thousand Five Hundred Fifty-Five Pesos and
54 centavos (P1,011,555.54), as evidenced by Official Receipt No. 1477417 issued by petitioner bank. On
the face of the receipt, it was written that the payment was "in full payment of the loan and interest."
Respondents then asked petitioner bank to cancel the mortgage annotations on CCT No. 2130 since the
loans secured by the real estate mortgage were already paid in full. However, the bank refused to cancel
the same and demanded payment of Four Million Six Hundred Thirty-Three Thousand Nine Hundred
Sixteen Pesos and Sixty-Seven Centavos (P4,633,916.67), representing the outstanding obligation of
respondents as of February 27, 1998. Respondents requested for an accounting which would explain
how the said amount was arrived at. However, instead of heeding respondents’ request, petitioner bank
applied for extra-judicial foreclosure of the mortgages over the condominium unit. The public auction sale
was scheduled on September 4, 1998. Petitioner Stephen Z. Taala, a notary public, was tasked to
preside over the auction sale.8

Respondents filed suit with the RTC, Quezon City, assailing the validity of the foreclosure and auction
sale of the property. They averred that the loans secured by the property had already been paid in full.

The sole issue for resolution is whether the real estate mortgage over the subject condominium unit is a
continuing guaranty for the future loans of respondent spouses despite the full payment of the principal
loans annotated on the title of the subject property.

We resolve this issue in the affirmative.

It is petitioner bank’s contention that the said undertaking, stipulated in the Deed of Real Estate Mortgage
dated October 22, 1993 and October 3, 1995, is a continuing guaranty meant to secure future debts or
credit accommodations granted by petitioner bank in favor of respondents. On the other hand,
respondents posit that, since they have already paid the loans secured by the real estate mortgages, the
mortgage should not be foreclosed because it does not include future debts of the spouses or debts not
annotated at the back of CCT No. 2130.

A continuing guaranty is a recognized exception to the rule that an action to foreclose a mortgage must
be limited to the amount mentioned in the mortgage contract.23 Under Article 2053 of the Civil Code, a
guaranty may be given to secure even future debts, the amount of which may not be known at the time
the guaranty is executed. This is the basis for contracts denominated as a continuing guaranty or
suretyship. A continuing guaranty is not limited to a single transaction, but 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. In other words, a continuing guaranty is one that covers all transactions,
including those arising in the future, which are within the description or contemplation of the contract of
guaranty, until the expiration or termination thereof.24

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. In other jurisdictions, it
has been held that the use of particular words and expressions, such as payment of "any debt," "any
indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be
furnished the principal debtor "at any time" or "on such time" that the principal debtor may require, has
been construed to indicate a continuing guaranty.25

In the instant case, the language of the real estate mortgage unambiguously reveals that the security
provided in the real estate mortgage is continuing in nature. Thus, it was intended as security for the
payment of the loans annotated at the back of CCT No. 2130, and as security for all amounts that
respondents may owe petitioner bank. It is well settled that mortgages given to secure future advance or
loans are valid and legal contracts, and that the amounts named as consideration in said contracts do not
limit the amount for which the mortgage may stand as security if from the four corners of the instrument
the intent to secure future and other indebtedness can be gathered.26

A mortgage given to secure advancements is a continuing security and is not discharged by repayment of
the amount named in the mortgage until the full amounts of the advancements are paid.27 Respondents’
full payment of the loans annotated on the title of the property shall not effect the release of the mortgage
because, by the express terms of the mortgage, it was meant to secure all future debts of the spouses
and such debts had been obtained and remain unpaid. Unless full payment is made by the spouses of all
the amounts that they have incurred from petitioner bank, the property is burdened by the mortgage.

WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner,


vs.
HON. COURT OF APPEALS and INTERNATIONAL CORPORATE BANK, respondents.

Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with the Manila Banking
Corporation. To secure payment of the credit accomodation, Inter-Resin Industrial and the Investment
and Underwriting Corporation of the Philippines (IUCP) executed two documents, both entitled
"Continuing Surety Agreement" and dated December 1, 1978, whereby they bound themselves solidarily
to pay Manilabank "obligations of every kind, on which the [Inter-Resin Industrial] may now be indebted or
hereafter become indebted to the [Manilabank]." The two agreements (Exhs. J and K) are the same in all
respects, except as to the limit of liability of the surety, the first surety agreement being limited to
US$333,830.00, while the second one is limited to US$334,087.00.

On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp., executed a
"Continuing Guaranty" in favor of IUCP whereby "For and in consideration of the sum or sums obtained
and/or to be obtained by Inter-Resin Industrial Corporation" from IUCP, Inter-Resin Industrial and Willex
Plastic jointly and severally guaranteed "the prompt and punctual payment at maturity of the NOTE/S
issued by the DEBTOR/S . . . to the extent of the aggregate principal sum of FIVE MILLION PESOS
(P5,000,000.00) Philippine Currency and such interests, charges and penalties as hereafter may be
specified."

On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of P4,334,280.61
representing Inter-Resin Industrial's outstanding obligation. (Exh. M-1) On February 23 and 24, 1981,
Atrium Capital Corp., which in the meantime had succeeded IUCP, demanded from Inter-Resin Industrial
and Willex Plastic the payment of what it (IUCP) had paid to Manilabank. As neither one of the sureties
paid, Atrium filed this case in the court below against Inter-Resin Industrial and Willex Plastic.

On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn succeeded Atrium, the sum
of P687,600.00 representing the proceeds of its fire insurance policy for the destruction of its properties.

In its answer, Inter-Resin Industrial admitted that the "Continuing Guaranty" was intended to secure
payment to Atrium of the amount of P4,334,280.61 which the latter had paid to Manilabank. It claimed,
however, that it had already fully paid its obligation to Atrium Capital.

[3] Willex Plastic contends that the "Continuing Guaranty" cannot be retroactive. lt applied so as to secure
payments made by Interbank under the two "Continuing Surety Agreements." Willex Plastic invokes the
ruling in El Vencedor v. Canlas 11 and Diño v. Court of Appeals 12 in support of its contention that a
contract of suretyship or guaranty should be applied prospectively.

The cases cited are, however, distinguishable from the present case. In El Vencedor v. Canlas we held
that a contract of suretyship "is not retrospective and no liability attaches for defaults occurring before it is
entered into unless an intent to be so liable is indicated." There we found nothing in the contract to show
that the parties intended the surety bonds to answer for the debts contracted previous to the execution of
the bonds. In contrast, in this case, the parties to the "Continuing Guaranty" clearly provided that the
guaranty would cover "sums obtained and/or to be obtained" by Inter-Resin Industrial from Interbank.

On the other hand, in Diño v. Court of Appeals the issue was whether the sureties could be held liable for
an obligation contracted after the execution of the continuing surety agreement. It was held that by its
very nature a continuing suretyship contemplates a future course of dealing. "It is prospective in its
operation and is generally intended to provide security with respect to future transactions." By no means,
however, was it meant in that case that in all instances a contrast of guaranty or suretyship should be
prospective in application.

Indeed, as we also held in Bank of the Philippine Islands v. Foerster, 13 although a contract of suretyship
is ordinarily not to be construed as retrospective, in the end the intention of the parties as revealed by the
evidence is controlling.

MACONDRAY AND COMPANY, INC., plaintiff-appellee,


vs.
PERFECTO PIÑON, ET AL., defendants.

On 11 May 1955 the plaintiff filed a complaint1 against the defendants in the Court of First Instance of
Manila alleging that upon representation and undertaking made by Ruperto K. Kangleon, then a member
of the Senate, in a letter addressed to the plaintiff dated 30 January 1954, that he would guarantee
payment of his co-defendants' obligation, should they fail to pay on the due date (Exhibit F), on 2 and 9
February 1954, the plaintiff sold on credit and delivered to the defendants Perfecto Piñon and Conrado
Piring, known in the theater and entertainment business as "Tugak" and "Pugak", respectively and
transacting business under a common name known as "All Stars Productions," 127 rolls of
cinematographic films, F.G. release positive type 825B, 35 mm. x 1,000 ft., for the total sum of P6,985,
payable on or before 9 May 1954, 12% interest thereon from date of maturity and 20% thereof for
attorney's fee in case of suit for collection (Exhibits A, B, C, D, E; that the principal debtors have failed to
pay the amount owed by them on the due date; that upon extensive investigations made by the plaintiff as
to whether the principal debtors have any property, real or personal, which may be levied upon for the
satisfaction of their obligation, it has found that they have none; that the defendant Kangleon could not
point to the plaintiff any property of the principal debtors leviable for execution sufficient to satisfy the
obligation; and that the sum of P6,985, the amount owed or part thereof, has not been paid by the
defendants. It prayed that after hearing judgment be rendered ordering the defendants, jointly and
severally, to pay it the sum of P6,985, 12% interest thereon from 10 May 1954 until fully paid, 20% of the
amount due or P1,387 as attorney's fee, and costs, and that it be granted other just and equitable relief
(civil No. 23947).

On 10 November 1955 the defendant Kangleon answered the plaintiff's complaint setting up the defense
that the letter he had written to the plaintiff dated 30 January 1954 (Exhibit F) was only to introduce his
co-defendants; that assuming that there was an intent on his part to guarantee payment of his co-
defendants' obligation, the said letter (Exhibit F) was but an offer to act as guarantor of his co-defendants;
that as the acceptance of his offer to act as guarantor for his co-defendants has not been actually made
known to him by the plaintiff, the contract of guaranty between them has not been perfected; and that
assuming that there has been a perfected contract of guaranty between the plaintiff and the answering
defendant, the latter's obligation was extinguished by the extension for payment up to 3 May 1954
granted by the plaintiff to his co-defendants.

The appellant claims that the letter (Exhibit F) is mere a letter of introduction and does not constitute an
offer of guaranty. A cursory reading of the letter (Exhibit F) belies his assertion. While in his opening
sentence he says at that "This will introduce to you the bearers, Messrs. Conrado Piring and Perfecto
Piñon, . . ." who "wish to place an order for" cinematographic films, yet in the later part he says that "for
which by their guaranty I pledge payment." This can only mean that he undertakes to guarantee payment
of the principal debtors' obligation should they fail to pay. The appellant is a responsible man and may be
presumed to mean what he says. At that time, he was occupying the exalted position of member of the
Senate and his plighted word given to another would immediately be accepted. It is not, therefore, odd
that upon receipt of the appellant's letter (Exhibit F), the appellee readily sold on credit to the principal
debtors, the defendants in default, the cinematographic films in question.

That the appellant really meant to guarantee payment of the principal debtors' obligation should they
default, is patent in his answer to the appellee's letter dated 27 May 1954, reminding him that on 30
January he requested it "to give Messrs. Conrado Piring and Perfecto Piñon of 'All-Stars Productions',
certain rolls of negative and positive films, the cost of which was payable in three months time and
payment of which you guaranteed"; that the "films were delivered and billed at P6,985.00 on Feb. 9th
last"; and that "the amount has not been paid (and) we have difficulty locating the above gentlemen as
they cannot be found in their offices," and requesting the appellant to send a check for the amount. In his
answer to the foregoing letter, dated 31 May 1954, he acknowledged receipt of the appellee's letter of the
27th of the same month and informed it that the principal debtors were "being contacted to invite their
attention to your letter." Had the appellant meant otherwise, he would have immediately denied that he
ever guaranteed payment of the principal debtors obligation. This he did not do.

The appellant's very letter (Exhibit F) constitutes his undertaking of guaranty. "Contracts shall be
obligatory in whatever form they may have been entered into, provided all the essential requisites for their
validity are present."2 A contract of guaranty is not a formal contract and shall be valid in whatever form it
may be, provided that it complies with the statute of frauds.

The appellant insists that he should have been notified by the appellee of the acceptance of his offer of
guaranty. In the first place, his letter (Exhibit F) already constitutes his undertaking of guaranty. In the
second place, the contract entered into by and between the appellee and the defendants in default is the
principal contract and the appellee is subsidiary to the principal contract. Since the principal contract had
already been perfected, the subsidiary contract of guaranty became binding upon effectivity of the
principal contract. Hence no notice of acceptance by the appellee to the appellant is necessary for its
validity.

MARCELA ALVARAN, plaintiff-appellee,


vs.
BERNARDO MARQUEZ, defendant-appellant.

On the 5th of March, 1906, Marcela Alvaran, the wife of Isabelo Reyes, filed a written complaint while the
court of First Instance of La Laguna, stating that her husband had no interest, nor could he have any right
in the matter that she brought before the court of the attachment of a parcel of land that was exclusively
and absolutely her property.

The said parcel of land was attached by the municipal sheriff on the 17th of February, 1906, at the
request of Bernardo Marquez, as being the property of the said Marcela's husband, in the conformity with
the judgment entered against the latter in an oral action brought by said Marquez against Reyes, in the
court of the justice of the peace, for the recovery of a certain sum of money. the creditor, Marquez,
insisted upon maintaining the attachment, and furnished the necessary bond in accordance with the
provision of section 451 of Act No. 190, notwithstanding the claim made by the plaintiff, and the fact that
her title was entered in the registry of property in accordance with Act No, 496; therefore, she asked that
judgment be rendered ordering the defendant to recognize the plaintiff as the sole owner of the land in
question; that the attachment thereof be annulled, and that the defendant be sentenced to indemnify her
for damages incurred and the costs of the proceedings, together with any other remedy that might be
considered just and equitable.

It is fully proven that the land in question is owned exclusively by the plaintiff, Marcela Alvaran, as duly
shown by the title issued by the Court of Land Registration, and produced in due course in this litigation.
The plaintiff was in possession thereof for fifteen years prior to the time when it was claimed: that is, since
she inherited it from her mother, Maria Banayo, she being then already married to her present husband,
Isabelo Reyes.

The defendant alleges that the plaintiff stood as surety for her husband, but, as the judgment appealed
from rightly states, there is no evidence on record that such a bond, which would be an actual contract,
was ever undertaken, and without the consent of the party supposed to be bound thereby its existence
can not be conceived. Moreover under article 1827 of the code security is not presumed; it must be
expressed, and can not be interfered or presumed because of the existence of a contract or principal
obligations. From mere presumption it is not possible to establish contractual relations and liens which
presuppose a willingness to bind oneself. This requisite is not present in the case at bar, since it does not
appear that Marcela Alvaran had voluntarily guaranteed the solvency of her husband, and therefore the
attachment proceedings, the sale and adjudication of said land to the defendant, in payment of a debt to
which the owner of the land is in no manner liable, are notoriously contrary to law.

WISE & CO., INC., plaintiff-appellee,


vs.
DIONISIO P. TANGLAO, defendant-appellant.

In the Court of First Instance of Manila, Wise & Co. instituted civil case No. 41129 against Cornelio C.
David for the recovery of a certain sum of money David was an agent of Wise & Co. and the amount
claimed from him was the result of a liquidation of accounts showing that he was indebted in said amount.
In said case Wise & Co. asked and obtained a preliminary attachment of David's property. To avoid the
execution of said attachment, David succeeded in having his Attorney Tanglao execute on January 16,
1932, a power of attorney (Exhibit A) in his favor, with the following clause:

To sign for me as guarantor for himself in his indebtedness to Wise & Company of
Manila, which indebtedness appears in civil case No. 41129, of the Court of First
Instance of Manila, and to mortgage my lot (No. 517-F of the subdivision plan Psd-20,
being a portion of lot No. 517 of the cadastral survey of Angeles, G. L. R. O. Cad. Rec.
No. 124), to guarantee the said obligations to the Wise & Company, Inc., of Manila.

COMPROMISE

Come now the parties, plaintiff by the undersigned attorneys and defendants in his own
behalf and respectfully state:

I. That the defendant confesses judgment for the sum of six hundred forty pesos
(P640), payable at the rate of eighty pesos (P80) per month, the first payment to
be made on February 15, 1932 and successively thereafter until the full amount
is paid; the plaintiff accepts this stipulation.

II. That as security for the payment of said sum of P640, defendant binds in favor
of, and pledges to the plaintiff, the following real properties:

1. House of light materials described under tax declaration No. 9650 of


the municipality of Angeles, Province of Pampanga, assessed at P320.

2. Accesoria apartments with a ground floor of 180 sq. m. with the first
story of cement and galvanized of iron roofing located on the lot
belonging to Mariano Tablante Geronimo, said accesoria is described
under tax declaration No. 11164 of the municipality of Angeles, Province
of Pampanga, assessed at P800.

3. Parcel of land described under Transfer Certificate of Title No. 2307 of


the Province of Pampanga recorded in the name of Dionisio Tanglao of
which defendant herein holds a special power of attorney to pledge the
same in favor of Wise & Co., Inc., as a guarantee for the payment of the
claim against him in the above entitled cause. The said parcel of land is
bounded as follows: NE. lot No. 517 "Part" de Narciso Garcia; SE. Calle
Rizal; SW. lot No. 517 "Part" de Bernardino Tiongco; NW. lot No. 508 de
Clemente Dayrit; containing 431 sq. m. and described in tax declaration
No. 11977 of the municipality of Angeles, Pampanga, assessed at P423.

David paid the sum of P343.47 to Wise & Co., on account of the P640 which he bound himself to pay
under Exhibit B, leaving an unpaid balance of P296.53.

Wise & Co. now institutes this case against Tanglao for the recovery of said balance of P296.53.

There is no doubt that under Exhibit, A, Tanglao empowered David, in his name, to enter into a contract
of suretyship and a contract of mortgage of the property described in the document, with Wise & Co.
However, David used said power of attorney only to mortgage the property and did not enter into contract
of suretyship. Nothing is stated in Exhibit B to the effect that Tanglao became David's surety for the
payment of the sum in question. Neither is this inferable from any of the clauses thereof, and even if this
inference might be made, it would be insufficient to create an obligation of suretyship which, under the
law, must be express and cannot be presumed.

It appears from the foregoing that defendant, Tanglao could not have contracted any personal
responsibility for the payment of the sum of P640. The only obligation which Exhibit B, in connection with
Exhibit A, has created on the part of Tanglao, is that resulting from the mortgage of a property belonging
to him to secure the payment of said P640. However, a foreclosure suit is not instituted in this case
against Tanglao, but a purely personal action for the recovery of the amount still owed by David.

VALERIANO SOLON, NATIVIDAD SOLON and MANUEL IBAÑEZ, plaintiff-appellants,


vs.
APOLONIA SOLON, ZOILO SOLON, ROBERTA SOLON, et al, defendants-appellees.

In his lifetime Eugenio Solon, father of the parties surnamed Solon, grandfather of defendant Felisa
Suico, and husband of the plaintiff Manuela Ibañez in second marriage contract on May 23, 1899, bought,
on installments, from the Bureau of Lands the parcel of land described as "Lot No. 903 of the Banilad
Friar Lands Estate" in transfer certificate of title No. 8379 of the registry of Cebu, situated in the barrio of
Cogon, municipality of Cebu, Cebu Province having an area of 6 hectares, 46 ares and 13 centares, and
assessed by said bureau at P403. The sale took place on December 12, 1919, and the time stipulated for
the complete payment of its price was thirteen years, the first annual installment being P31, and the
subsequent twelve installments to be paid every year being P21 each. On July 30, 1925, with the amount
of P126 as part of the agreed purchase price still unpaid Eugenio Solon, after securing the consent and
approval of the Bureau of Lands, sold and conveyed for the sum of P1,00 all his rights, title and interest in
the land acquired by him executing for that purpose in favor of Apolonia Solon who agreed to pay the
installments still owing to the Bureau of Lands, the deed of transfer appearing in the record as Exhibit B.
Apolonia Solon paid to the Bureau of Lands on the same date of the execution of the deed the amount of
P21, and the balance of P105 at one time only a month thereafter. The year following, or on July 10,
1926, Eugenio Solon died, leaving no will, and two years, eight months and eight days later, or on March
18, 1929, the register of deeds of Cebu, upon compliance with the formalities of law, issued transfer
certificate of title No. 8379 in the name of Apolonia Solon. The latter took charge of the property
occupying it as her own through tenants from the time she bought the same, according to the evidence
for the defendants, and from the death of Eugenio Solon, according to the evidence for the defendants,
and from the death of Eugenio Solon, according to that for the plaintiffs.

Plaintiffs surnamed Solon, all of whom are children of the deceased Eugenio, Solon in his marriage with
his widow Manuela Ibañez, joining with the latter in maintaining that Exhibit B is false and simulated and
that if the same had been executed by Eugenio Solon, it was without just consideration, commenced this
suit praying (1) that said document be declared null and void because false and simulated, (2) that they
be adjudged the absolute owners pro indiviso of the land in question together with the other heir of
Eugenio Solon, (3) that defendants Apolonia Solon, Zoilo Solon, Roberta Solon and the latter's husband
Andres Montalban, be sentenced to pay jointly and severally, to the plaintiffs the value of the fruits of the
land in question from the death of Eugenio Solon, and (4) that said defendants be sentenced to pay, also
jointly and severally to the plaintiffs the sum of P30,000 as damages, besides the costs of the suit.

It is fact clearly shown by the evidence for the defendants, which appears to us to have more weight than
that for the plaintiffs notwithstanding the latter's efforts to show the contrary, that the transfer of the land in
question made by Eugenio Solon to Apolonia Solon, according to Exhibit B, had taken place long before
the commencement of the suit of MaCleod and Co., against Andres Montalban, husband of Roberta
Solon, as principal, and Eugenio Solon, as surety of said Montalban.

When Eugenio Solon bound himself as surety for Andres Montalban for the payment to Macleod and
Company of the amount of P5,000 which Montalban owed to the latter, he limited himself to giving as
security, by way of mortgage, the land, and no other, belonging to him and described as lot No. 892 of the
Banilad Friar Lands Estate in case No. 5988 of the Court of Land Registration and in transfer certificate of
title No. 2499 of the registry of property of the Province of Cebu. It is not possible that Macleod and
Company could have ever contemplated bringing an action against Eugenio Solon to obtain possession
not only of the land expressly mortgaged to it, which, as has been said, is lot No. 892 described in the
certificate of title above-mentioned, which is distinct from lot No. 903, but also of any other land belonging
to him or of lot No. 903 itself, for the purpose of collecting its credit against Andres Montalban, because it
would not have failed to know, better than any one else, that the contract of suretyship in its favor does
not admit of the interpretation that it could make Eugenio Solon liable for an amount greater than P5,000
and that it could require him to pay Montalban's indebtedness, should the latter fail to do so, with lands
other than that he had mortgaged. This is so because the clauses of a contract of suretyship determine
the extent of the liability of the surety (Government of the Philippine Islands vs. Herrero, 38 Phil., 410);
because said liability should not be extended farther than the clear terms of the contract of guarantee by
mere implication; and because the surety should be liable only in the manner and to the extent, and under
the circumstances pointed out in the contract of suretyship or which may be clearly deduced therefrom
(La Insular vs. Machuca Go-Tauco and Nubla Co-Siong 39 Phil., 567).

Article 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all
the property of the debtor, and has resorted to all the legal remedies against the debtor. (1830a)

Article 2059. The excussion shall not take place:

(1) If the guarantor has expressly renounced it;

(2) If he has bound himself solidarily with the debtor;

(3) In case of insolvency of the debtor;

(4) When he has absconded, or cannot be sued within the Philippines unless he has left
a manager or representative;

(5) If it may be presumed that an execution on the property of the principal debtor would
not result in the satisfaction of the obligation. (1831a)

Article 2060. In order that the guarantor may make use of the benefit of exclusion, he must set it up
against the creditor upon the latter's demand for payment from him, and point out to the creditor available
property of the debtor within Philippine territory, sufficient to cover the amount of the debt. (1832)

Article 2061. The guarantor having fulfilled all the conditions required in the preceding article, the creditor
who is negligent in exhausting the property pointed out shall suffer the loss, to the extent of said property,
for the insolvency of the debtor resulting from such negligence. (1833a)

Article 2062. In every action by the creditor, which must be against the principal debtor alone, except in
the cases mentioned in article 2059, the former shall ask the court to notify the guarantor of the action.
The guarantor may appear so that he may, if he so desire, set up such defenses as are granted him by
law. The benefit of excussion mentioned in article 2058 shall always be unimpaired, even if judgment
should be rendered against the principal debtor and the guarantor in case of appearance by the latter.
(1834a)

Article 2063. A compromise between the creditor and the principal debtor benefits the guarantor but does
not prejudice him. That which is entered into between the guarantor and the creditor benefits but does not
prejudice the principal debtor. (1835a)

Article 2064. The guarantor of a guarantor shall enjoy the benefit of excussion, both with respect to the
guarantor and to the principal debtor. (1836)

Article 2065. Should there be several guarantors of only one debtor and for the same debt, the obligation
to answer for the same is divided among all. The creditor cannot claim from the guarantors except the
shares which they are respectively bound to pay, unless solidarity has been expressly stipulated.
The benefit of division against the co-guarantors ceases in the same cases and for the same reasons as
the benefit of excussion against the principal debtor. (1837)

GENERAL INSURANCE and SURETY CORPORATION, petitioner,


vs.
REPUBLIC OF THE PHILS and CENTRAL LUZON EDUCATIONAL FOUNDATION, respondents.

On May 15, 1954, the Central Luzon Educational Foundation, Inc. and the General Insurance and Surety
Corporation posted in favor of the Department of Education a bond.

On the same day, May 15, 1954, the Central Luzon Educational Foundation, Inc., Teofilo Sison and Jose
M. Aruego executed an indemnity agreement binding themselves jointly and severally to indemnify the
surety of "any damages, prejudices, loss, costs, payments, advances and expenses of whatever kind and
nature, including attorney's fees and legal costs, which the COMPANY may, at any time sustain or incur,
as well as to reimburse to said COMPANY all sums and amounts of money which the COMPANY or its
representatives shall or may pay or cause to be paid or become liable to pay, on account of or arising
from the execution of the above mentioned Bond."

On June 25, 1954, the surety advised the Secretary of Education that it was withdrawing and cancelling
its bond. Copies of the letter were sent to the Bureau of Private Schools and to the Central Luzon
Educational Foundation, Inc.

It appears that on the date of execution of the bond, the Foundation was indebted to two of its teachers
for salaries, to wit: to Remedios Laoag, in the sum of P685.64, and to H.B. Arandia, in the sum of
P820.00, or a total of P1,505.64.

Demand for the above amount having been refused, the Solicitor General, in behalf of the Republic of the
Philippines, filed a complaint for the forfeiture of the bond, in the Court of First Instance of Manila on July
11, 1956.

In its fifth assignment of error, the surety contends:

1. That the bond is void for being contrary to public policy insofar as it requires the surety to pay
P10,000.00 regardless of the amount of the salaries of the teachers.3 It is claimed that to enforce
forfeiture of the bond for the full amount would be to allow the Government to enrich itself since the
unpaid salaries of the teachers amount to P1,318.84 only.

There is nothing against public policy in forfeiting the bond for the amount. The bond is penal in nature.
Article 1226 of the Code states that in obligation with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation
to the contrary, and the party to whom payment is to be made is entitled to recover the sum stipulated
without need of proving damages because one of the primary purposes of a penalty clause is to avoid
such necessity. (Art. 1228, Civil Code; Lambert v. Fox, 26 Phil. 588; Palacios v. Municipality of Cavite, 12
Phil. 140; Manila Racing Club v. Manila Jockey Club, 69 Phil. 55). The mere non-performance of the
principal obligation gives rise to the right to the penalty, (IV Tolentino, Civil Code of the Philippines, p.
247.)

There is nothing against public policy in forfeiting the bond for the amount. The bond is penal in nature.
Article 1226 of the Code states that in obligation with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation
to the contrary, and the party to whom payment is to be made is entitled to recover the sum stipulated
without need of proving damages because one of the primary purposes of a penalty clause is to avoid
such necessity. (Art. 1228, Civil Code; Lambert v. Fox, 26 Phil. 588; Palacios v. Municipality of Cavite, 12
Phil. 140; Manila Racing Club v. Manila Jockey Club, 69 Phil. 55). The mere non-performance of the
principal obligation gives rise to the right to the penalty, (IV Tolentino, Civil Code of the Philippines, p.
247.)

Lastly, in its third and fourth "alternative assignments of error," the surety contends that it cannot be made
answer for more than the unpaid salaries of H. B. Arandia, which it claimed amounted to P720.00 only,
because Article 2054 states that —

A guarantor may bind himself for less, but not for more than the principal debtor, both as
regards the amount and the onerous nature of the conditions.

Should he have bound himself for more, his obligations shall be reduced to the limits of
that of the debtor.

What We said about the penal nature of the bond would suffice to dispose of this claim. For whatever
may be the amount of salaries due the teachers, the fact remains that the condition of the bond was
violated and so the surety became liable for the penalty provided for therein.

PHILIPPINE NATIONAL BANK, petitioner,


vs.
LUZON SURETY CO., INC. and THE HONORABLE COURT OF APPEALS, respondent.

... sometime prior to 27 November 1951, defendant Augusto R. Villarosa, a sugar planter adhered to the
Lopez Sugar Central Milling Company, Inc. applied for a crop loan with the plaintiff, Philippine National
Bank, Exhibit A; this application was approved on 6 March, 1952 in the amount of P32,400, according to
the complaint; but the document of approval has not been exhibited; at any rate, the planter Villarosa
executed a Chattel Mortgage on standing crops to guarantee the crop loan, Exhibit B and as shown in
Exhibits C to C-30 on various dates from 28 January, 1952 to 9 January, 1953, in consideration of
periodical sums of money by him received from PNB, planter Villarosa executed these promissory notes
from which will be seen that the credit line was that the original amount of P32,400 and was thus
maintained up to the promissory note Exhibit C-9 dated 30 May, 1952 but afterwards it was increased and
promissory notes Exhibits C-10 to C-30 were based on the increased credit line; and as of 27 September,
1953 as shown in the accounts, Exhibits D and D-1, there was a balance of P63,222.78 but as of the date
when the complaint was filed on 8 June, 1960, because of the interest accrued, it had reached a much
higher sum; that was why due to its non-payment, plaintiff filed this complaint, as has been said, on 8
June, 1960;

now the complaint sought relief not only against the planter but also against the three (3) bondsmen,
Luzon Surety, Central Surety and Associated Surety because Luzon Surety had filed the bond Exhibit E
dated 18 February, 1952 in the sum of P10,000; Central Surety Exhibit F dated 24 February, 1952 in the
sum of P20,000 and Associated Surety the bond Exhibit G dated 11 September, 1952 in the sum of
P15,000; in gist, the obligation of each of the bondsmen being to guarantee the faithful performance of
the obligation of the planter with PNB;

The next question to take up is the liability of Luzon Surety Co. for interest which, it contends, would
increase its liability to more than P10,000 which is the maximum of its bond. We cannot agree to this
reasoning. In the cases ofTagawa vs. Aldanese, 43 Phil. 852, 859; Plaridel Surety Insurance Co. vs. P. L.
Galang Machinery Co., 100 Phil. 679, 682, cited in Paras Civil Code of the Philippines, Vol. V, 7th Ed.
1972, p. 772, it was held:

If a surety upon demand fails to pay, he can be held liable for interest, even if in
thus paying, the liability becomes more than that in the principal obligation. The
increased liability is not because of the contract but because of the default and
the necessity of judicial collection. It should be noted, however, that the interest
runs from the time the complaint is filed, not from the time the debt becomes due
and demandable.

COMMONWEALTH INSURANCE CORPORATION, Petitioner,


vs.
COURT OF APPEALS and RIZAL COMMERCIAL BANKING CORPORATION, Respondents.

In 1984, plaintiff-appellant Rizal Commercial Banking Corporation (RCBC) granted two export loan lines,
one, forP2,500,000.00 to Jigs Manufacturing Corporation (JIGS) and, the other, for P1,000,000.00 to Elba
Industries, Inc. (ELBA). JIGS and ELBA which are sister corporations both drew from their respective
credit lines, the former in the amount of P2,499,992.00 and the latter for P998,033.37 plus P478,985.05
from the case-to-case basis and trust receipts. These loans were evidenced by promissory notes
(Exhibits ‘A’ to ‘L’, inclusive – JIGS; Exhibits ‘V’ to ‘BB’, inclusive – ELBA) and secured by surety bonds
(Exhibits ‘M’ to ‘Q’ inclusive – JIGS; Exhibits ‘CC’ to ‘FF’, inclusive – ELBA) executed by defendant-
appellee Commonwealth Insurance Company (CIC).

Specifically, the surety bonds issued by appellee CIC in favor of appellant RCBC to secure the obligations
of JIGS totaled P2,894,128.00 while that securing ELBA’s obligation was P1,570,000.00. Hence, the total
face value of the surety bonds issued by appellee CIC was P4,464,128.00.

JIGS and ELBA defaulted in the payment of their respective loans. On October 30, 1984, appellant RCBC
made a written demand (Exhibit ‘N’) on appellee CIC to pay JIG’s account to the full extend (sic) of the
suretyship. A similar demand (Exhibit ‘O’) was made on December 17, 1984 for appellee CIC to pay
ELBA’s account to the full extend (sic) of the suretyship. In response to those demands, appellee CIC
made several payments from February 25, 1985 to February 10, 1988 in the total amount
of P2,000,000.00. There having been a substantial balance unpaid, appellant RCBC made a final
demand for payment (Exhibit ‘P’) on July 7, 1988 upon appellee CIC but the latter ignored it. Thus,
appellant RCBC filed the Complaint for a Sum of Money on September 19, 1988 against appellee CIC. 4

Petitioner argues that it should not be made to pay interest because its issuance of the surety bonds was
made on the condition that its liability shall in no case exceed the amount of the said bonds.

We are not persuaded. Petitioner’s argument is misplaced.

Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co.9 and
reiterated inPlaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc. 10, and more
recently, in Republic vs. Court of Appeals and R & B Surety and Insurance Company, Inc. 11, we have
sustained the principle that if a surety upon demand fails to pay, he can be held liable for interest, even if
in thus paying, its liability becomes more than the principal obligation. The increased liability is not
because of the contract but because of the default and the necessity of judicial collection. 12

Petitioner’s liability under the suretyship contract is different from its liability under the law. There is no
question that as a surety, petitioner should not be made to pay more than its assumed obligation under
the surety bonds.13However, it is clear from the above-cited jurisprudence that petitioner’s liability for the
payment of interest is not by reason of the suretyship agreement itself but because of the delay in the
payment of its obligation under the said agreement.

ROMULO MACHETTI, plaintiff-appellee,


vs.
HOSPICIO DE SAN JOSE, et al, defendant-appellants.

It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written agreement
undertook to construct a building on Calle Rosario in the city of Manila for the Hospicio de San Jose, the
contract price being P64,000. One of the conditions of the agreement was that the contractor should
obtain the "guarantee" of the Fidelity and Surety Company of the Philippine Islands to the amount of
P128,800 and the following endorsement in the English language appears upon the contract:

MANILA, July 15, 1916.

For value received we hereby guarantee compliance with the terms and
conditions as outlined in the above contract.

FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.

(Sgd) OTTO VORSTER,


Vice-President.

Machetti constructed the building under the supervision of architects representing the Hospicio de San
Jose and, as the work progressed, payments were made to him from time to time upon the
recommendation of the architects, until the entire contract price, with the exception of the sum of the
P4,978.08, was paid. Subsequently it was found that the work had not been carried out in accordance
with the specifications which formed part of the contract and that the workmanship was not of the
standard required, and the Hospicio de San Jose therefore answered the complaint and presented a
counterclaim for damages for the partial noncompliance with the terms of the agreement
abovementioned, in the total sum of P71,350. After issue was thus joined, Machetti, on petition of his
creditors, was, on February 27, 1918, declared insolvent and on March 4, 1918, an order was entered
suspending the proceeding in the present case in accordance with section 60 of the Insolvency Law, Act
No. 1956.

The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and Surety
Company be made cross-defendant to the exclusion of Machetti and that the proceedings be continued
as to said company, but still remain suspended as to Machetti. This motion was granted and on February
7, 1920, the Hospicio filed a complaint against the Fidelity and Surety Company asking for a judgement
for P12,800 against the company upon its guaranty. After trial, the Court of First Instance rendered
judgment against the Fidelity and Surety Company for P12,800 in accordance with the complaint. The
case is now before this court upon appeal by the Fidelity and Surety Company form said judgment.

As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San Jose
defendant, has been converted into an action in which the Hospicio de San Jose is plaintiff and the
Fidelity and Surety Company, the original plaintiff's guarantor, is the defendant, Machetti having been
practically eliminated from the case.

The Fidelity and Surety Company having bound itself to pay only the event its principal, Machetti, cannot
pay it follows that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such
ability may be proven by the return of a writ of execution unsatisfied or by other means, but is not
sufficiently established by the mere fact that he has been declared insolvent in insolvency proceedings
under our statutes, in which the extent of the insolvent's inability to pay is not determined until the final
liquidation of his estate.

TOWERS ASSURANCE CORPORATION, petitioner,


vs.
ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG et al, respondents.

On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City, sued the
spouses Ernesto Ong and Conching Ong in the Court of First Instance of Misamis Oriental for the
collection of the sum of P 58,400 plus litigation expenses and attorney's fees (Civil Case No. 4930).
See Hong asked for a writ of preliminary attachment. On March 5, 1976, the lower court issued an order
of attachment. The deputy sheriff attached the properties of the Ong spouses in Valencia, Bukidnon and
in Cagayan de Oro City.

To lift the attachment, the Ong spouses filed on March 11, 1976 a counterbond in 'the amount of P 58,400
with Towers Assurance Corporation as surety. In that undertaking, the Ong spouses and Towers
Assurance Corporation bound themselves to pay solidarity to See Hong the sum of P 58,400.

On October 25, 1976, the lower court rendered a decision, ordering not only the Ong spouses but also
their surety, Towers Assurance Corporation, to pay solidarily to See Hong the sum of P 58,400. The court
also ordered the Ong spouses to pay P 10,000 as litigation expenses and attorney's fees.

We hold that the lower court acted with grave abuse of discretion in issuing a writ of execution against the
surety without first giving it an opportunity to be heard as required in Rule 57 of tie Rules of Court which
provides:

SEC. 17. When execution returned unsatisfied, recovery had upon bound. — If
the execution be returned unsatisfied in whole or in part, the surety or sureties on
any counterbound given pursuant to the provisions of this rule to secure the
payment of the judgment shall become charged on such counterbound, and
bound to pay to the judgment creditor upon demand, the amount due under the
judgment, which amount may be recovered from such surety or sureties after
notice and summary hearing in the same action.

Under section 17, in order that the judgment creditor might recover from the surety on the counterbond, it
is necessary (1) that execution be first issued against the principal debtor and that such execution was
returned unsatisfied in whole or in part; (2) that the creditor made a demand upon the surety for the
satisfaction of the judgment, and (3) that the surety be given notice and a summary hearing in the same
action as to his liability for the judgment under his counterbond.

The first requisite mentioned above is not applicable to this case because Towers Assurance Corporation
assumed a solidary liability for the satisfaction of the judgment. A surety is not entitled to the exhaustion
of the properties of the principal debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs. Sia, L-26449,
May 15, 1969, 28 SCRA 58, 63).

But certainly, the surety is entitled to be heard before an execution can be issued against him since he is
not a party in the case involving his principal. Notice and hearing constitute the essence of procedural
due process. (Martinez vs. Villacete 116 Phil. 326; Insurance & Surety Co., Inc. vs. Hon. Piccio, 105 Phil.
1192, 1200, Luzon Surety Co., Inc. vs. Beson, L-26865-66, January 30. 1970. 31 SCRA 313).

WHEREFORE, the order and writ of execution, insofar as they concern Towers Corporation, are set
aside.

FINMAN GENERAL ASSURANCE CORPORATION, petitioner,


vs.
ABDULGANI SALIK, BALABAGAN AMPILAN ALI KUBA GANDHI PUA, et al, respondents.

Abdulgani Salik et al., private respondents, allegedly applied with Pan Pacific Overseas Recruiting
Services, Inc. (hereinafter referred to as Pan Pacific) on April 22, 1987 and were assured employment
abroad by a certain Mrs. Normita Egil. In consideration thereof, they allegedly paid fees totalling
P30,000.00. But despite numerous assurances of employment abroad given by Celia Arandia and Mrs.
Egil, they were not employed (Ibid., p. 15).
Accordingly, they filed a joint complaint with the Philippine Overseas Employment Administration (herein
referred to as POEA) against Pan Pacific for Violation of Articles 32 and 34(a) of the Labor Code, as
amended, with claims for refund of a total amount of P30,000.00 (Ibid.).

The POEA motu proprio impleaded and summoned herein petitioner surety Finman General Assurance
Corporation (hereinafter referred to as Finman), in the latter's capacity as Pan Pacific's bonding company.

Summons were served upon both Pan Pacific and Finman, but they failed to answer.

On October 9, 1987, a hearing was called, but only the private respondents appeared. Despite being
deemed in default for failing to answer, both Finman and Pan Pacific were still notified of the scheduled
hearing. Again they failed to appear. Thus, ex-parte proceedings ensued.

Herein petitioner, in raising this third issue, is, in effect, asking this Court to review the respondent
Secretary's findings of facts.

Well-settled is the rule that findings of facts of the respondent Secretary are generally accorded great
weight unless there was grave abuse of discretion or lack of jurisdiction in arriving at such findings
(Asiaworld Publishing House, Inc. vs. Ople, 152 SCRA 219 (1987).

In the case at bar, it is undisputed that when the case was first set for hearing, only the private
respondents appeared, despite summons having been served upon both herein petitioner and Pan
Pacific. This, notwithstanding, both herein petitioner and Pan Pacific were again notified of the scheduled
hearing, but, as aforestated they also' failed to appear (Rollo, p. 15). Accordingly, owing to the absence of
any controverting evidence, respondent Secretary of Labor admitted and considered private respondents'
testimonies and evidence as substantial. Under the circumstances, no justifiable reason can be found to
justify disturbance of the findings of facts of the respondent Secretary of Labor, supported as they are by
substantial evidence and in the absence of grave abuse of discretion (Asiaworld Publishing House, Inc. v.
Ople, supra); and in line with the well established principle that the findings of administrative agencies
which have acquired expertise because their jurisdiction is confined to specific matters are generally
accorded not only respect but at times even finality.

JN DEVELOPMENT CORPORATION, and SPS. RODRIGO and LEONOR STA. ANA, Petitioners,
vs.
PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, respondent.

On 13 December 1979, petitioner JN Development Corporation ("JN") and Traders Royal Bank (TRB)
entered into an agreement whereby TRB would extend to JN an Export Packing Credit Line for Two
Million Pesos (P2,000,000.00). The loan was covered by several securities, including a real estate
mortgage2 and a letter of guarantee from respondent Philippine Export and Foreign Loan Guarantee
Corporation ("PhilGuarantee"), now Trade and Investment Development Corporation of the Philippines,
covering seventy percent (70%) of the credit line.3 With PhilGuarantee issuing a guarantee in favor of
TRB,4 JN, petitioner spouses Rodrigo and Leonor Sta. Ana 5 and petitioner Narciso Cruz6 executed
a Deed of Undertaking7 (Undertaking) to assure repayment to PhilGuarantee.

It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8 October 1980 TRB requested
PhilGuarantee to make good its guarantee.8 PhilGuarantee informed JN about the call made by TRB, and
inquired about the action of JN to settle the loan.9 Having received no response from JN, on 10 March
1981 PhilGuarantee paid TRB Nine Hundred Thirty Four Thousand Eight Hundred Twenty Four Pesos
and Thirty Four Centavos (P934,824.34).10 Subsequently, PhilGuarantee made several demands on JN,
but the latter failed to pay. On 30 May 1983, JN, through Rodrigo Sta. Ana, proposed to settle the
obligation "by way of development and sale" of the mortgaged property. 11 PhilGuarantee, however,
rejected the proposal.
PhilGuarantee thus filed a Complaint12 for collection of money and damages against herein petitioners.

On the other hand, PhilGuarantee maintains that the date of default, not the actual date of payment,
determines the liability of the guarantor and that having paid TRB when the loan became due, it should be
indemnified by petitioners.30 It argues that, contrary to petitioners’ claim, there could be no waiver of its
right to excussion more explicit than its act of payment to TRB very directly.31 Besides, the right to
excussion is for the benefit of the guarantor and is not a defense for the debtor to raise and use to evade
liability.32 Finally, PhilGuarantee maintains that there is no sufficient evidence proving the alleged forgery
of Cruz’s signature on the Undertaking, which is a notarized document and as such must be accorded the
presumption of regularity.33

The Court finds for PhilGuarantee.

Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.34 The guarantor who pays for a debtor, in turn, must
be indemnified by the latter.35 However, the guarantor cannot be compelled to pay the creditor unless the
latter has exhausted all the property of the debtor and resorted to all the legal remedies against the
debtor.36 This is what is otherwise known as the benefit of excussion.

It is clear that excussion may only be invoked after legal remedies against the principal debtor have been
expended. Thus, it was held that the creditor must first obtain a judgment against the principal debtor
before assuming to run after the alleged guarantor, "for obviously the ‘exhaustion of the principal’s
property’ cannot even begin to take place before judgment has been obtained."37 The law imposes
conditions precedent for the invocation of the defense. Thus, in order that the guarantor may make use of
the benefit of excussion, he must set it up against the creditor upon the latter’s demand for payment and
point out to the creditor available property of the debtor within the Philippines sufficient to cover the
amount of the debt.38

While a guarantor enjoys the benefit of excussion, nothing prevents him from paying the obligation once
demand is made on him. Excussion, after all, is a right granted to him by law and as such he may opt to
make use of it or waive it. PhilGuarantee’s waiver of the right of excussion cannot prevent it from
demanding reimbursement from petitioners. The law clearly requires the debtor to indemnify the
guarantor what the latter has paid.39

Petitioners’ claim that PhilGuarantee had no more obligation to pay TRB because of the alleged
expiration of the contract of guarantee is untenable. The guarantee, dated17 December 1979, states:

In the event of default by JNDC and as a consequence thereof, PHILGUARANTEE is made to pay its
obligation arising under the aforesaid guarantee PHILGUARANTEE shall pay the BANK the amount
of P1.4 million or 70% of the total obligation unpaid…

....

This guarantee shall be valid for a period of one (1) year from date hereof but may be renewed upon
payment by JNDC of the guarantee fee at the same rate of 1.5% per annum.40

The guarantee was only up to 17 December 1980. JN’s obligation with TRB fell due on 30 June 1980,
and demand on PhilGuarantee was made by TRB on 08 October 1980. That payment was actually made
only on 10 March 1981 does not take it out of the terms of the guarantee. What is controlling is that
default and demand on PhilGuarantee had taken place while the guarantee was still in force.

The benefit of excussion, as well as the requirement of consent to extensions of payment, is a protective
device pertaining to and conferred on the guarantor. These may be invoked by the guarantor against the
creditor as defenses to bar the unwarranted enforcement of the guarantee. However, PhilGuarantee did
not avail of these defenses when it paid its obligation according to the tenor of the guarantee once
demand was made on it. What is peculiar in the instant case is that petitioners, the principal debtors
themselves, are muddling the issues and raising the same defenses against the guarantor, which only the
guarantor may invoke against the creditor, to avoid payment of their own obligation to the guarantor. The
Court cannot countenance their self-seeking desire to be exonerated from the duty to reimburse
PhilGuarantee after it had paid TRB on their behalf and to unjustly enrich themselves at the expense of
PhilGuarantee.

ROMULO MACHETTI, plaintiff-appellee,


vs.
HOSPICIO DE SAN JOSE, et al, defendant-appellants.

The Fidelity and Surety Company having bound itself to pay only the event its principal, Machetti, cannot
pay it follows that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such
ability may be proven by the return of a writ of execution unsatisfied or by other means, but is not
sufficiently established by the mere fact that he has been declared insolvent in insolvency proceedings
under our statutes, in which the extent of the insolvent's inability to pay is not determined until the final
liquidation of his estate.

The judgment appealed from is therefore reversed without costs and without prejudice to such right of
action as the cross-complainant, the Hospicio de San Jose, may have after exhausting its remedy against
the plaintiff Machetti.

JOSE C. TUPAZ IV and PETRONILA C. TUPAZ, Petitioners,


vs.
THE COURT OF APPEALS and BANK OF THE PHILIPPINE ISLANDS, Respondents.

Petitioners Jose C. Tupaz IV and Petronila C. Tupaz ("petitioners") were Vice-President for Operations
and Vice-President/Treasurer, respectively, of El Oro Engraver Corporation ("El Oro Corporation"). El Oro
Corporation had a contract with the Philippine Army to supply the latter with "survival bolos."

To finance the purchase of the raw materials for the survival bolos, petitioners, on behalf of El Oro
Corporation, applied with respondent Bank of the Philippine Islands ("respondent bank") for two
commercial letters of credit. The letters of credit were in favor of El Oro Corporation’s suppliers,
Tanchaoco Manufacturing Incorporated3("Tanchaoco Incorporated") and Maresco Rubber and Retreading
Corporation4 ("Maresco Corporation"). Respondent bank granted petitioners’ application and issued Letter
of Credit No. 2-00896-3 for P564,871.05 to Tanchaoco Incorporated and Letter of Credit No. 2-00914-5
for P294,000 to Maresco Corporation.

Simultaneous with the issuance of the letters of credit, petitioners signed trust receipts in favor of
respondent bank. On 30 September 1981, petitioner Jose C. Tupaz IV ("petitioner Jose Tupaz") signed, in
his personal capacity, a trust receipt corresponding to Letter of Credit No. 2-00896-3 (for P564,871.05).
Petitioner Jose Tupaz bound himself to sell the goods covered by the letter of credit and to remit the
proceeds to respondent bank, if sold, or to return the goods, if not sold, on or before 29 December 1981.

On 9 October 1981, petitioners signed, in their capacities as officers of El Oro Corporation, a trust receipt
corresponding to Letter of Credit No. 2-00914-5 (for P294,000). Petitioners bound themselves to sell the
goods covered by that letter of credit and to remit the proceeds to respondent bank, if sold, or to return
the goods, if not sold, on or before 8 December 1981.

After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials to El Oro
Corporation, respondent bank paid the former P564,871.05 and P294,000, respectively.
Petitioners did not comply with their undertaking under the trust receipts. Respondent bank made several
demands for payments but El Oro Corporation made partial payments only. On 27 June 1983 and 28
June 1983, respondent bank’s counsel5 and its representative6 respectively sent final demand letters to El
Oro Corporation. El Oro Corporation replied that it could not fully pay its debt because the Armed Forces
of the Philippines had delayed paying for the survival bolos.

Respondent bank charged petitioners with estafa under Section 13, Presidential Decree No. 115
("Section 13")7or Trust Receipts Law ("PD 115"). After preliminary investigation, the then Makati Fiscal’s
Office found probable cause to indict petitioners. The Makati Fiscal’s Office filed the corresponding
Informations (docketed as Criminal Case Nos. 8848 and 8849) with the Regional Trial Court, Makati, on
17 January 1984 and the cases were raffled to Branch 144 ("trial court") on 20 January 1984. Petitioners
pleaded not guilty to the charges and trial ensued. During the trial, respondent bank presented evidence
on the civil aspect of the cases.

However, respondent bank’s suit against petitioner Jose Tupaz stands despite the Court’s finding that he
is liable as guarantor only. First, excussion is not a pre-requisite to secure judgment against a guarantor.
The guarantor can still demand deferment of the execution of the judgment against him until after the
assets of the principal debtor shall have been exhausted.19 Second, the benefit of excussion may be
waived.20 Under the trust receipt dated 30 September 1981, petitioner Jose Tupaz waived excussion
when he agreed that his "liability in [the] guaranty shall be DIRECT AND IMMEDIATE, without any need
whatsoever on xxx [the] part [of respondent bank] to take any steps or exhaust any legal remedies xxx."
The clear import of this stipulation is that petitioner Jose Tupaz waived the benefit of excussion under his
guarantee.

BENJAMIN BITANGA, petitioner,


vs.
PYRAMID CONSTRUCTION ENGINEERING CORPORATION, respondent.

On 6 September 2001, respondent filed with the RTC a Complaint for specific performance and damages
with application for the issuance of a writ of preliminary attachment against the petitioner and Marilyn. The
Complaint was docketed as Civil Case No. Q-01-45041.

Respondent alleged in its Complaint that on 26 March 1997, it entered into an agreement with Macrogen
Realty, of which petitioner is the President, to construct for the latter the Shoppers Gold Building, located
at Dr. A. Santos Avenue corner Palayag Road, Sucat, Parañaque City. Respondent commenced civil,
structural, and architectural works on the construction project by May 1997. However, Macrogen Realty
failed to settle respondent’s progress billings. Petitioner, through his representatives and agents, assured
respondent that the outstanding account of Macrogen Realty would be paid, and requested respondent to
continue working on the construction project. Relying on the assurances made by petitioner, who was no
less than the President of Macrogen Realty, respondent continued the construction project.

In August 1998, respondent suspended work on the construction project since the conditions that it
imposed for the continuation thereof, including payment of unsettled accounts, had not been complied
with by Macrogen Realty. On 1 September 1999, respondent instituted with the Construction Industry
Arbitration Commission (CIAC) a case for arbitration against Macrogen Realty seeking payment by the
latter of its unpaid billings and project costs. Petitioner, through counsel, then conveyed to respondent his
purported willingness to amicably settle the arbitration case. On 17 April 2000, before the arbitration case
could be set for trial, respondent and Macrogen Realty entered into a Compromise Agreement, 5with
petitioner acting as signatory for and in behalf of Macrogen Realty. Under the Compromise Agreement,
Macrogen Realty agreed to pay respondent the total amount of P6,000,000.00 in six equal monthly
installments, with each installment to be delivered on the 15th day of the month, beginning 15 June 2000.
Macrogen Realty also agreed that if it would default in the payment of two successive monthly
installments, immediate execution could issue against it for the unpaid balance, without need of judgment
or decree from any court or tribunal. Petitioner guaranteed the obligations of Macrogen Realty under the
Compromise Agreement by executing a Contract of Guaranty6 in favor of respondent, by virtue of which
he irrevocably and unconditionally guaranteed the full and complete payment of the principal amount of
liability of Macrogen Realty in the sum of P6,000,000.00. Upon joint motion of respondent and Macrogen
Realty, the CIAC approved the Compromise Agreement on 25 April 2000. 7

However, contrary to petitioner’s assurances, Macrogen Realty failed and refused to pay all the monthly
installments agreed upon in the Compromise Agreement. Hence, on 7 September 2000, respondent
moved for the issuance of a writ of execution8 against Macrogen Realty, which CIAC granted.

On 29 November 2000, the sheriff9 filed a return stating that he was unable to locate any property of
Macrogen Realty, except its bank deposit of P20,242.33, with the Planters Bank, Buendia Branch.

Respondent then made, on 3 January 2001, a written demand10 on petitioner, as guarantor of Macrogen
Realty, to pay the P6,000,000.00, or to point out available properties of the Macrogen Realty within the
Philippines sufficient to cover the obligation guaranteed. It also made verbal demands on petitioner. Yet,
respondent’s demands were left unheeded.

We further affirm the findings of both the RTC and the Court of Appeals that, given the settled facts of this
case, petitioner cannot avail himself of the benefit of excussion.

Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so. The guarantor who pays for a debtor, in turn, must
be indemnified by the latter. However, the guarantor cannot be compelled to pay the creditor unless the
latter has exhausted all the property of the debtor and resorted to all the legal remedies against the
debtor. This is what is otherwise known as the benefit of excussion. 37

Article 2060 of the Civil Code reads:

Art. 2060. In order that the guarantor may make use of the benefit of excussion, he must
set it up against the creditor upon the latter’s demand for payment from him, and point
out to the creditor available property of the debtor within Philippine territory, sufficient to
cover the amount of the debt.38

The afore-quoted provision imposes a condition for the invocation of the defense of excussion. Article
2060 of the Civil Code clearly requires that in order for the guarantor to make use of the benefit of
excussion, he must set it up against the creditor upon the latter’s demand for payment and point out to
the creditor available property of the debtor within the Philippines sufficient to cover the amount of the
debt.39

It must be stressed that despite having been served a demand letter at his office, petitioner still failed to
point out to the respondent properties of Macrogen Realty sufficient to cover its debt as required under
Article 2060 of the Civil Code. Such failure on petitioner’s part forecloses his right to set up the defense of
excussion.

Worthy of note as well is the Sheriff’s return stating that the only property of Macrogen Realty which he
found was its deposit of P20,242.23 with the Planters Bank.

Article 2059(5) of the Civil Code thus finds application and precludes petitioner from interposing the
defense of excussion. We quote:

Art. 2059. This excussion shall not take place:

xxxx
(5) If it may be presumed that an execution on the property of the principal debtor would
not result in the satisfaction of the obligation.

FLORENTINA DE GUZMAN, plaintiff-appellee,


vs.
ANASTACIO R. SANTOS, defendant-appellant.

On October 28, 1924, Jerry O. Toole, Antonio K. Abad and Anastacio R. Santos, the defendant, formed a
general mercantile partnership under the style Philippine-American Construction Company, with a capital
of P14,000, P10,000 of which were taken by way of loan from Paulino Candelaria. The partnership and
the co-partners undertook and bound themselves to pay, jointly and severally, the said indebtedness in or
before June, 1925. Having violated the conditions of the contract executed for the purpose, Paulino
Candelaria brought civil case No. 3838 of the Court of First Instance of Nueva Ecija on May 15, 1925,
against the Philippine-American Construction Company and its co-partners, for the recovery of the loan,
plus interest thereon and stipulated attorney's fees. On January 25, 1926, the said court rendered
judgment therein sentencing all the defendants to pay the plaintiff, jointly and severally, the sum of
P9,317, with legal interest thereon from the filing of the complaint, plus P500 as liquidated damages and
P1,000 as attorney's fees. On appeal this judgment was affirmed by this court on December 17, 1926
(G.R. No. 26131). A writ of execution of the affirmed judgment having been issued, the herein plaintiff, in
her capacity as judicial administratrix of the deceased Santiago Lucero, on February 10, 1932, paid to the
creditor Paulino Candelaria the sum of P5,665.55 on account of the judgment.

Upon filing of the complaint in civil case No. 3838, Paulino Candeleria obtained a writ of attachment
against the then defendants by virtue of which the sheriff attached properties of Jerry O. Toole valued at
P50; of Antonio K. Abad valued at P12,150; and of Anastacio R. Santos valued at P2,733. No property of
the partnership Philippine-American Construction Company was attached. In view of these attachments,
the Philippine-American Construction Company moved for the discharge of the attached properties and
offered to post a bond for P10,000. The court granted the motion and fixed the bond at the amount
offered. On May 29, 1925, the Philippine-American Construction Company, as principal, then represented
by the partner Antonio K. Abad, and Santiago Lucero and Meliton Carlos, as guarantors, executed a bond
for P10,000 in favor of Paulino Candelaria for the lifting of the attachment under section 440 of the Code
of Civil Procedure. In the bond thus executed, the defendant Anastacio R. Santos neither intervened nor
signed individually, but Abad testified that the former was the one who induced him to get the signature of
Lucero by taking advantage of his good relations with him. Upon the approval of the bond, the attachment
was discharged and the attached properties were returned to their owners.

After the issuance of the writ for the execution of the judgment rendered in civil case No. 3838, the sheriff
returned the same with the statement that the writ could not be executed as he found no property of the
judgment debtors. In view of this, Paulino Candelaria moved for the issuance of a writ of execution
against the guarantors of the defendants. The court granted the motion and issued a writ of execution
against the plaintiff, as judicial administratrix of the deceased Santiago Lucero, and the other guarantor
Meliton Carlos. The plaintiff tenaciously refused to pay the judgment obtained by Paulino Candelaria, but
after all her efforts had failed, she was eventually compelled to pay to said creditor the sum of P5,565.55,
the co-guarantor Meliton Carlos also paid upon the bond signed by him the sum of P5,135. The plaintiff
and Carlos later recovered from Antonio K. Abad, one of the defendants in the said civil case, the sum of
P3,800 which they divided equally. It thus appears that the payment made by the plaintiff to Candelaria
was reduced to the sum of P3,665.55. The plaintiff, in her said capacity, demanded of the defendant
Anastacio R. Santos the return of the aforesaid sum and, upon the latter's refusal, she brought the action
which culminated in the appealed judgment.

Now, then, under article 1822 of the Civil Code, by guaranty one person binds himself to pay or perform
for a third person in case the latter should fail to do so; and the article 1838 provides that any guarantor
who pays for the debtor shall be indemnified by the latter even should the guaranty have been
undertaken without the knowledge of the debtor. In the present case, the guarantor was the deceased
Santiago Lucero, now represented by the plaintiff in her capacity as judicial administratrix, and the debtor
is the defendant-appellant. Applying the provision of the last cited article, it is obvious that the appellant is
legally bound to pay what the plaintiff had advanced to the creditor upon the judgment, notwithstanding
the fact that the bond had given without his knowledge.

The obligation of the appellant to pay the plaintiff what the latter had advanced is further sanctioned by
the general provisions of the Civil Code regarding obligations. Article 1158 provides that "payment may
be made by any person, whether he has an interest in the performance of the obligation or not, and
whether the payment is known and approved by the debtor or whether he is unaware of it. Any person
who makes a payment for the account of another may recover from the debtor the amount of the
payment, unless it was made against the express will of the latter. In the latter case he can only recover
from the debtor in so far as the payment has been beneficial to the latter." According to this legal
provision, it is evident that the plaintiff-appellant is bound to pay to the plaintiff what the latter had
advanced to the creditor upon the judgment, and this is the more so because it appears that although
Lucero executed the bond without his knowledge, nevertheless he did not object thereto or repudiate the
same at any time.

From the proven facts it cannot logically be deduced that the appellant did not have knowledge of the
bond, first, because his properties were attached and the attachment could not have been levied without
his knowledge, and, secondly, because the said properties were returned to him and in receiving them he
was necessarily apprized of the fact that a bond had been filed to discharge the attachment.

MIRA HERMANOS, INC., plaintiff-appellee,


vs.
MANILA TOBACCONISTS, INC., ET AL., defendants.

By virtue of a written contract (Exhibit A) entered into between Mira Hermanos, Inc., and Manila
Tobacconists, Inc., the former agreed to deliver to the latter merchandise for sale on consignment under
certain specified terms and the latter agreed to pay to the former on or before the 20th day of each month
the invoice value of all the merchandise sold during the preceding month. Mira Hermanos, Inc., required
of the Manila Tobacconists, Inc., a bond of P3,000, which was executed by the Provident Insurance Co.,
on September 2, 1939 (Exhibit B), to secure the fulfillment of the obligation of the Tobacconists under the
contract (Exhibit A) up to the sum of P3,000.

In the month of October, 1940, the volume of the business of the Tobacconists having increased so that
the merchandise received by it on consignment from Mira Hermanos exceeded P3,000 in value, Mira
Hermanos required of the Tobacconist an additional bond of P2,000, and in compliance with that
requirement the defendant Manila Compañia de Seguros, on October 16, 1940, executed a bond of
P2,000 (Exhibit C) with the same terms and conditions (except as to the amount) as the bond of the
Provident Insurance Co.

On June 1, 1941, a final and complete liquidation was made of the transactions between Mira Hermanos
and the Tobacconists, as a result of which there was found a balance due from the latter to the former of
P2,272.79, which indebtedness the Tobacconists recognized but was unable to pay. Thereupon Mira
Hermanos made a demand upon the two surety companies for the payment of said sum.

The Provident Insurance Co., paid only the sum of P1,363.67, which is 60% of the amount owned by the
Tobacconists to Mira Hermanos, alleging that the remaining 40% should be paid by the other surety,
Manila Compañia de Seguros, in accordance with article 8137 of the Civil Code. The Manila Compañia
de Seguros refused to pay the balance, contending that so long as the liability of the Tobacconists did not
exceed P3,000, it was not bound to pay anything because its bond referred only to the obligation of the
Tobacconists in excess of P3,000 and up to P5,000. Hence Mira Hermanos, Inc., brought this action
against the Manila Tobacconists, Inc., Provident Insurance Co., and Manila Compañia de Seguros to
recover from them jointly and severally the sum of P909.12 with legal interest thereon from the date of the
complaint.
Thus it appears that the issue of fact raised by and between the two surety companies before the trial
court and decided by the latter in favor of the appellee Manila Compañia de Seguros is no longer raised
before this Court, appellant Provident Insurance Co. having limited the issue in this appeal to whether or
not it is entitled to the "benefit of division" provided in article 1837 of the Civil Code, which reads as
follows:

Art. 1837. Should there be several sureties of only one debtor for the same debt, the
liability therefor shall be divided among them all. The creditor can claim from each surety
only his proportional part unless liability in solidum has been expressly stipulated.

The right to the benefit of division against the co-sureties for their respective shares
ceases in the same cases and for the same reason as that to an exhaustion of property
against the principal debtor.

With particular reference to the second assignment of error, we find that the statement of the trial court to
the effect that the bond of P3,000 responded for the obligation of the Tobacconists up to the sum of
P3,000 and the bond of P2,000 responded for the obligation of the Tobacconists only insofar as it might
exceed P3,000 and up to P5,000, is not a mere theory but a finding of fact based upon the undisputed
testimony of the witnesses called by the defendant Manila Compañia de Seguros in support of its special
defense hereinbefore quoted.

The evidence upon which that finding is based is not only undisputed but perfectly reasonable and
convincing. For, as the trial court observed, there would have been no need for the additional bond of
P2,000 if its purpose were to cover the first P2,000 already covered by the P3,000 bond of the Provident
Insurance Co. Indeed, we might add, if the purpose of the additional bond of P2,000 were to cover not the
excess over and above P3,000 but the first P2,000 of the obligation of the principal debtor like the bond of
P3,000 which covered only the first P3,000 of said obligation, then it would result that had the obligation
of the Tobacconists exceeded P3,000, neither of the two bonds would have responded for the excess,
and that was precisely the event against which Mira Hermanos wanted to protect itself by demanding the
additional bond of P2,000. For instance, suppose that the obligation of the principal debtor, the
Tobacconists, amounted to P5,000; if both bonds were co-extensive up to P2,000 — as would logically
follow if appellant's contention were correct — the result would be that the first P2,000 of the obligation
would have to be divided between and paid equally by the two surety companies, which should pay
P1,000 each, and of the balance of P3,000 the Provident Insurance Co. would have to pay only P1,000
more because its liability is limited to the first P3,000, thus leaving the plaintiff in the lurch as to the
excess of P2,000. That was manifestly not the intention of the parties. As a matter of fact, when the
Provident gave its bond and fixed the premiums thereon it assumed an obligation of P3,000 in
solidum with the Tobacconists without any expectation of any benefit of division with any other surety.
The additional bond of P2,000 was, more than a year later, required by the creditor of the principal debtor
for the protection of said creditor and certainly not for the benefit of the original surety, which was not
entitled to expect any such benefit.

The foregoing considerations, which fortify the trial court's conclusion as to the real intent and agreement
of the parties with regard to the bond of P2,000 given by the Manila Compañia de Seguros, destroys at
the same time the theory of the appellant regarding the applicability of article 1837 of the Civil Code.

That article refers to several sureties of only one debtor for the same debt. In the instant case, altho the
two bonds on their face appear to guarantee the same debt co-extensively up to P2,000 — that of the
Provident Insurance Co. alone extending beyond that sum up to P3,000 — it was pleaded and
conclusively proven that in reality said bonds, or the two sureties, do not guarantee the same debt
because the Provident Insurance Co. guarantees only the first P3,000 and the Manila Compañia de
Seguros, only the excess over and above said amount up to P5,000. Article 1837 does not apply to this
factual situation.
Article 2066. The guarantor who pays for a debtor must be indemnified by the latter.

The indemnity comprises:

(1) The total amount of the debt;

(2) The legal interests thereon from the time the payment was made known to the debtor,
even though it did not earn interest for the creditor;

(3) The expenses incurred by the guarantor after having notified the debtor that payment
had been demanded of him;

(4) Damages, if they are due. (1838a)

Article 2067. The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor
had against the debtor.

If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he
has really paid. (1839)

Article 2068. If the guarantor should pay without notifying the debtor, the latter may enforce against him
all the defenses which he could have set up against the creditor at the time the payment was made.
(1840)

Article 2069. If the debt was for a period and the guarantor paid it before it became due, he cannot
demand reimbursement of the debtor until the expiration of the period unless the payment has been
ratified by the debtor. (1841a)

Article 2070. If the guarantor has paid without notifying the debtor, and the latter not being aware of the
payment, repeats the payment, the former has no remedy whatever against the debtor, but only against
the creditor. Nevertheless, in case of a gratuitous guaranty, if the guarantor was prevented by a fortuitous
event from advising the debtor of the payment, and the creditor becomes insolvent, the debtor shall
reimburse the guarantor for the amount paid. (1842a)

Article 2071. The guarantor, even before having paid, may proceed against the principal debtor:

(1) When he is sued for the payment;

(2) In case of insolvency of the principal debtor;

(3) When the debtor has bound himself to relieve him from the guaranty within a specified
period, and this period has expired;

(4) When the debt has become demandable, by reason of the expiration of the period for
payment;

(5) After the lapse of ten years, when the principal obligation has no fixed period for its
maturity, unless it be of such nature that it cannot be extinguished except within a period
longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;

(7) If the principal debtor is in imminent danger of becoming insolvent.

In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor and from the danger of insolvency of
the debtor. (1834a)

Article 2072. If one, at the request of another, becomes a guarantor for the debt of a third person who is
not present, the guarantor who satisfies the debt may sue either the person so requesting or the debtor
for reimbursement. (n)

MANILA SURETY AND FIDELITY, INC., plaintiff-appellant,


vs.
BATU CONSTRUCTION AND COMPANY, CARLOS N. BAQUIRAN, et al, defendants-appellees.

In a complaint filed in the Court of First Instance of Manila, the plaintiff, a domestic corporation engaged
in the bonding business, hereafter called the company, alleges that the Batu Construction & Company, a
partnership the members of which are the other three defendants, requested it to post, as it did, a surety
bond for P8,812 in favor of the Government of the Philippines to secure the faithful Performance of the
construction of the Bacarra Bridge, Project PR-72 (3), in Ilocos Norte, undertaken by the partnership, as
stipulated in a construction on contract entered into on 11 July 1950 by and between the partnership and
the Government of the Philippines, on condition that the defendants would "indemnify the COMPANY for
any damage, loss, costs, or charges, or expenses of whatever kind and nature, including counsel or
attorney's fees, which the COMPANY may, at any time, sustain or incur, as a consequence of having
become surety upon the above mentioned bond; said attorney's fees shall not be less than fifteen (15%)
per cent of the total amount claimed in any action which the COMPANY may institute against the
undersigned (the defendants except Andres Tunac) in Court," and that "Said indemnity shall be paid to
the COMPANY as soon as it has become liable for the payment of any amount, under the above-
mentioned bond, whether or not it shall have paid such sum or sums of money, or any part thereof," as
stipulated in a contract executed on 8 July 1950 (Exhibit B); that on 30 May 1951 because of the
unsatisfactory progress of the work on the bridge, the Director of Public Works, with the approval of the
Secretary of Public Works and Communications, annulled, the construction contract referred to and
notified the plaintiff Company that the Government would hold it (the Company) liable for any amount
incurred by the Government for the completion of the bridge, in excess of the contract price (Exhibit D);
that on 19 December 1951 (should be 23 November 1951), Ricardo Fernandez and 105 other persons
brought an action in the Justice of the Peace Court of Laoag, Ilocos Norte, against the partnership, the
individual partners and the herein plaintiff Company for the collection of unpaid wages amounting to
P5,960.10, lawful interests thereon and costs (Exhibit E); that the defendants are in imminent danger of
becoming insolvent, and are removing and disposing, or about to remove and dispose, of their properties
with intent to defraud their creditors, particularly the plaintiff Company; and that the latter has no other
sufficient security to protect its rights against the defendants. Upon these allegations, the plaintiff prays
that, upon the approval of a bond and on the strength of the allegations of the verified complaint, a writ
attachment be issued and levied upon the properties of the defendants; and that after hearing, judgment
be rendered " ordering the defendants to deliver to the plaintiff such sufficient security as shall protect
plaintiff from the any proceedings by the creditors on the Surety Bond aforementioned and from the
danger of insolvency of the defendants; and to allow costs to the herein plaintiff," and " for such other
measures of relief as may be proper and just in the premises." Attached to the complaint are a verification
and affidavit of attachment; and copies of the surety bond marked Annex A; of the indemnity contract
marked Annex B; and of the letter of the Acting Director of Public Works to the plaintiff dated 30 May
1951, marked Annex C.

The main question to determine is whether the last paragraph of article 2071 of the new Civil Code taken
from article 1843 of the old Civil Code may be availed of by a surety.
In suretyship the surety becomes liable to the creditor without the benefit of the principal debtor's
exclusion of his properties, for he (the surety) may be sued independently. So, he is an insurer of the debt
and as such he has assumed or undertaken a responsibility or obligation greater or more onerous than
that of guarantor. Such being the case, the provisions of article 2071, under guaranty, are applicable and
available to a surety. The reference in article 2047 to, the provisions of Section 4, Chapter 3, Title 1, Book
IV of the new Civil Code, on solidary or several obligations, does not mean that suretyship which is a
solidary obligation is withdrawn from the applicable provisions governing guaranty.

But the plaintiff's cause of action comes under paragraph 1 of article 2071 of the new Civil Code, because
the action brought by Ricardo Fernandez and 105 persons in the Justice of the Peace Court of Laoag,
province of Ilocos Norte, for the collection of unpaid wages amounting to P5,960.10, is in connection with
the construction of the Bacarra Bridge, Project PR-72 (3), undertaken by the Batu Construction &
Company, and one of the defendants therein is the herein plaintiff, the Manila Surety and Fidelity Co.,
Inc., and paragraph 1 of article 2071 of the new Civil Code provides that the guarantor, even before
having paid, may proceed against the principal debtor "to obtain release from the guaranty, or to demand
a security that shall protect him from any proceedings by the creditor or from the danger of insolvency of
the debtor, when he (the guarantor) is sued for payment. It does not provide that the guarantor be sued
by the creditor for the payment of the debt. It simply provides that the guarantor or surety be sued for the
payment of an amount for which the surety bond was put up to secure the fulfillment of the obligation
undertaken by the principal debtor. So, the suit filed by Ricardo Fernandez and 105 persons in the Justice
of the Peace Court of Laoag, province of Ilocos Norte, for the collection of unpaid wages earned in
connection with the work done by them in the construction of the Bacarra Bridge, Project PR-72(3), is a
suit for the payment of an amount for which the surety bond was put up or posted to secure the faithful
performance of the obligation undertaken by the principal debtors (the defendants) in favor of the creditor,
the Government of the Philippines.

Article 2073. When there are two or more guarantors of the same debtor and for the same debt, the one
among them who has paid may demand of each of the others the share which is proportionally owing
from him.

If any of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in
the same proportion.

The provisions of this article shall not be applicable, unless the payment has been made by virtue of a
judicial demand or unless the principal debtor is insolvent. (1844a)

Article 2074. In the case of the preceding article, the co-guarantors may set up against the one who paid,
the same defenses which would have pertained to the principal debtor against the creditor, and which are
not purely personal to the debtor. (1845)

ARTICLE 2075. A sub-guarantor, in case of the insolvency of the guarantor for whom he bound himself,
is responsible to the co-guarantors in the same terms as the guarantor. (1846)

Article 2076. The obligation of the guarantor is extinguished at the same time as that of the debtor, and
for the same causes as all other obligations. (1847)

Article 2077. If the creditor voluntarily accepts immovable or other property in payment of the debt, even
if he should afterwards lose the same through eviction, the guarantor is released. (1849)

Article 2078. A release made by the creditor in favor of one of the guarantors, without the consent of the
others, benefits all to the extent of the share of the guarantor to whom it has been granted. (1850)
Article 2079. An extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt
has become due does not of itself constitute any extension of time referred to herein. (1851a)

Article 2080. The guarantors, even though they be solidary, are released from their obligation whenever
by some act of the creditor they cannot be subrogated to the rights, mortgages, and preference of the
latter. (1852)

Article 2081. The guarantor may set up against the creditor all the defenses which pertain to the principal
debtor and are inherent in the debt; but not those that are personal to the debtor. (1853)

E. ZOBEL, INC., petitioner,


vs.
THE COURT OF APPEALS, CONSOLIDATED BANK AND TRUST CORP, et al, respondents.

Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers," applied for
a loan with respondent Consolidated Bank and Trust Corporation (now SOLIDBANK) in the amount of
Two Million Eight Hundred Seventy Five Thousand Pesos (P2,875,000.00) to finance the purchase of two
(2) maritime barges and one tugboat 3 which would be used in their molasses business. The loan was
granted subject to the condition that respondent spouses execute a chattel mortgage over the three (3)
vessels to be acquired and that a continuing guarantee be executed by Ayala International Philippines,
Inc., now herein petitioner E. Zobel, Inc., in favor of SOLIDBANK. The respondent spouses agreed to the
arrangement. Consequently, a chattel mortgage and a Continuing Guaranty 4 were executed.

Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence, on January
31, 1991, SOLIDBANK filed a complaint for sum of money with a prayer for a writ of preliminary
attachment, against respondents spouses and petitioner. The case was docketed as Civil Case No. 91-
55909 in the Regional Trial Court of Manila.

Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was
extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its right
to be subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the chattel
mortgage with the appropriate government agency.

SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner is not
a guarantor but a surety.

Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by petitioner,
finds no application to the case at bar. In Bicol Savings and Loan Association vs. Guinhawa, 12 we have
ruled that Article 2080 of the New Civil Code does not apply where the liability is as a surety, not as a
guarantor.

ROSA VILLA MONNA, plaintiff-appellee,


vs.
GUILLERMO GARCIA BOSQUE, ET AL., defendants.

It appears that prior to September 17, 1919, the plaintiff, Rosa Villa y Monna, viuda de E. Bota, was the
owner of a printing establishment and bookstore located at 89 Escolta, Manila, and known as La Flor de
Cataluna, Viuda de E. Bota, with the machinery, motors, bindery, type material furniture, and stock
appurtenant thereto. Upon the date stated, the plaintiff, then and now a resident of Barcelona, Spain,
acting through Manuel Pirretas, as attorney in fact, sold the establishment above-mentioned to the
defendants Guillermo Garcia Bosque and Jose Pomar Ruiz, residents of the City of Manila, for the
stipulated sum of P55,000, payable as follows: Fifteen thousand pesos (P15,000) on November 1, next
ensuing upon the execution of the contract, being the date when the purchasers were to take possession;
ten thousand pesos (P10,000) at one year from the same date; fifteen thousand pesos (P15,000) at two
years; and the remaining fifteen thousand pesos (P15,000) at the end of three years. By the contract of
sale the deferred installments bear interest at the rate of 7 per centum per annum. In the same document
the defendants France and Goulette obligated themselves as solidary sureties with the principals Bosque
and Ruiz, to answer for any balance, including interest, which should remain due and unpaid after the
dates stipulated for payment of said installments, expressly renouncing the benefit of exhaustion of the
property of the principals. The first installment of P15,000 was paid conformably to agreement.

A contention submitted exclusively in behalf of France and Goulette, the appellant sureties, is that they
were discharged by the agreement between the principal debtor and Figueras Hermanos, as attorney in
fact for the plaintiff, whereby the period for the payment of the second installment was extended, without
the assent of the sureties, and new promissory notes for unpaid balance were executed in the manner
already mentioned in this opinion. The execution of these new promissory notes undoubtedly constituted
and extension of time as to the obligation included therein, such as would release a surety, even though
of the solidary type, under article 1851 of the Civil Code. Nevertheless it is to be borne in mind that said
extension and novation related only to the second installment of the original obligation and interest
accrued up to that time. Furthermore, the total amount of these notes was afterwards paid in full, and they
are not now the subject of controversy. It results that the extension thus effected could not discharge the
sureties from their liability as to other installments upon which alone they have been sued in this action.
The rule that an extension of time granted to the debtor by the creditor, without the consent of the
sureties, extinguishes the latter's liability is common both to Spanish jurisprudence and the common law;
and it is well settled in English and American jurisprudence that where a surety is liable for different
payments, such as installments of rent, or upon a series of promissory notes, an extension of time as to
one or more will not affect the liability of the surety for the others.

RADIO CORPORATION OF THE PHILIPPINES, plaintiff-appellee,


vs.
JESUS R. ROA, ET AL., defendants.

The defendant Jesus R. Roa became indebted to the Philippine Theatrical Enterprises, Inc., in the sum of
P28,400 payable in seventy-one equal monthly installments at the rate of P400 a month commencing
thirty days after December 11, 1931, with five days grace monthly until complete payment of said sum.
On that same date the Philippine Theatrical Enterprises, Inc., assigned all its right and interest in that
contract to the Radio Corporation of the Philippines.

The paragraph of that contract in which the accelerating clause appears reads as follows:

In case the vendee-mortgagor fails to make any of the payments as hereinbefore


provided, the whole amount remaining unpaid under this mortgage shall immediately
become due and payable and this mortgage on the property herein mentioned as well as
the Luzon Surety Bond may be foreclosed by the vendor-mortgagee; and, in such case,
the vendee-mortgager further agrees to pay the vendor- mortgagee an additional sum
equivalent to 25 per cent of the principal due unpaid as costs, expenses and liquidated
damages, which said sum, shall be added to the principal sum for which this mortgage is
given as security, and shall become a part, thereof.

On March 15, 1932, Erlanger & Galinger, Inc., acting in its capacity as attorney-in-fact of the Radio
Corporation of the Philippines wrote the following letter (Exhibit 13) to the principal debtor Jesus R. Roa:

Under the above assignments of error the principal question to be decided is whether or not the extension
granted in the above copied letter by the plaintiff, without the consent of the guarantors, the herein
appellants, extinguishes the latter's liability not only as to the installments due at that time, as held by the
trial court, but also as to the whole amount of their obligation. Articles 1851 of the Civil Code reads as
follows:
ART. 1851. An extension grated to the debtor by the creditor, without the consent of the
guarantor, extinguishes the latter's liability.

The stipulation in the contract under consideration, copied above, is to the effect that upon failure to pay
any installment when due the other installments ipso facto become due and payable. In view of the fact
that under the express provision of the contract, quoted above, the whole unpaid balance automatically
becomes due and payable upon failure to pay one installment, the act of the plaintiff in extending the
payment of the installment corresponding to February, 1932, to April, 1932, without the consent of the
guarantors, constituted in fact an extension of the payment of the whole amount of the indebtedness, as
by that extension the plaintiff could not have filed an action for the collection of the whole amount until
after April, 1932. Therefore appellants' contention that after default of the payment of one installment the
act of the herein creditor in extending the time of payment discharges them as guarantors in conformity
with articles 1851 and 1852 of the Civil Code is correct.

THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., plaintiff-appellee,


vs.
MANUEL MUTUC, DOROTEO Q. MOJICA, and FAUSTO S. ALBERTO, defendants.

On July 16, 1957, defendant Manuel C. Mutuc as principal, and plaintiff, as surety, executed a surety
bond in the amount of P1,000 in behalf of defendant Mutuc and in favor of the Maersk Line, in which the
surety company guaranteed the faithful performance by said Manuel C. Mutuc of his duties in connection
with his employment as crewmember of the vessel of the Maersk Line, and more particularly, that he
would not desert said vessel while he was engaged as such crewmember while outside of the Philippines.
To protect the plaintiff company, on July 17, 1957, in consideration of plaintiff's becoming surety of the
defendant Manuel C. Mutuc, under the bond, ... the defendant Manuel C. Mutuc, Doroteo Q. Mojica, and
Fausto S. Alberto, executed an indemnity agreement in favor of the plaintiff, ... . The duration of the surety
bond, ... was for the period beginning July 16, 1957 to July 17, 1958, but at the instance of the defendant,
Manuel C. Mutuc, it was renewed for three successive one year periods, the last period of which was from
July 17, 1960 to July 17, 1961. The prior consent of the defendant Fausto S. Alberto to the aforesaid
renewal extension was not obtained by the defendant Manuel C. Mutuc or by the plaintiff. According to
the letter of the Immigration and Naturalization Service, United States Department of Justice, ... Manuel
C. Mutuc was not aboard the vessel M/S Merit Maersk when it departed from New York at 3:00 o'clock
P.M. for Charleston, South Carolina, and was presumed to be a deserter. The Compania General de
Tabacos de Filipinas which represented the Maersk Lines forwarded this letter to the plaintiff and asked
for the remittance of the forfeited bond of P1,000. On October 6, 1960, the plaintiff wrote a letter to the
defendants Doroteo Q. Mojica and Fausto S. Alberto demanding the payment of the amount of P1,000 in
accordance with the indemnity agreement. On October 25, 1960, plaintiff paid the Tabacalera the sum of
P5,000 in full settlement of the latter's claim against the bond ... .This action is for the recovery of the
amount of P1,000 against the defendants Mojica and Alberto based on the indemnity agreement ... .
From the judgment against them by the Municipal Court, defendant Alberto appealed alleging that the
renewal was made without his consent." 2

The indemnity agreement was insofar as pertinent set forth therein in this wise: "[Indemnity]:— The
undersigned agree at all times to jointly and severally indemnify the [Company] and keep it indemnified
and hold and save it harmless from and against any and all damages, losses, costs, stamps, taxes,
penalties, charges and expenses of whatsoever kind and nature which the [Company] shall or may, at
any time sustain or incur in consequence of having become surety upon this bond herein above referred
to or any extension, renewal, substitution or alteration thereof, made at the instance of the undersigned or
any of them, or any other bond executed on behalf of the undersigned or any of them; and to pay,
reimburse and make good to the [Company] its successors and assigns, all sums and amount of money
which it or its representatives shall pay or cause to be paid, or become liable to pay, on account of the
undersigned or any of them, of whatsoever kind and nature, including 15% of the amount involved in the
litigation or other matters growing out of or connected therewith, for and as attorney's fees, but in no case
less than P25.00. It is hereby further agreed that in case of any extension or renewal of the bond we
equally bind ourselves to the [Company] under the same terms and conditions as herein provided without
the necessity of executing another indemnity agreement for the purpose and that we hereby equally
waive our right to be notified of any renewal or extension of the bond which may be granted under this
indemnity agreement. [Renewals, alterations and substitutions]:— The undersigned hereby empower and
authorize the Company to grant or consent to the granting of any extension, continuation, increase
modification, change, alteration, and/or renewal of the original bond herein referred to, and to execute or
consent to the execution of any substitution for said Bond with the same or different conditions and
parties, and the undersigned hereby hold themselves jointly and severally liable to the Company for the
Original Bond herein abovementioned or for any extension, continuation, increase, modification, change,
alteration, renewal or substitution thereof, until the full amount including principal, interests, premiums,
costs and other expenses due to the Company thereunder is fully paid up." 3

The lower court after referring to the above stipulation as to "Renewals" which refers not to a single
extension but to "any extension" agreed to in advance by defendant, now appellant, found for plaintiff,
now appellee. As set forth in the decision: "The defendant having expressly empowered or authorized his
principal to the granting of any extension, his liability under the indemnity agreement necessarily
follows." 4 It is from that decision in favor of plaintiff that this appeal is taken. As set forth at the outset,
there is no legal ground for a reversal.

1. Appellant was not compelled to enter into an indemnity agreement. He did so of his own free will. He
agreed to hold himself liable for the amount therein specified. What is more, he did consent likewise to be
so bound not only for the one year period specified but to any extension thereafter made, an extension
moreover that could be had without his having to be notified. That was what the contract provided. He
gave his plighted word. The terms were definite and certain. There was no ambiguity. All that was
necessary was to see its enforcement. The Civil Code explicitly provides: "If the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its
interpretation shall control." 5 that was how it was worded under the Civil Code of Spain of 1899 formerly
in force in this jurisdiction. 6

EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners,


vs.
THE HONORABLE COURT OF APPEALS, THE PHILIPPINE NATIONAL BANK, et al, respondents.

Appellants are the registered owners of a parcel of land located in Sampaloc,


Manila, and covered by T.C.T. 35161 of the Register of Deeds of Manila. On
October 7, 1954, this property was mortgaged by the appellants to the Philippine
National Bank, hereinafter called PNB, to guarantee a loan of P1,000.00
extended to one Domingo Prudencio.

Sometime in 1955, the Concepcion & Tamayo Construction Company,


hereinafter called Company, had a pending contract with the Bureau of Public
Works, hereinafter called the Bureau, for the construction of the municipal
building in Puerto Princess, Palawan, in the amount of P36,800.00 and, as said
Company needed funds for said construction, Jose Toribio, appellants' relative,
and attorney-in-fact of the Company, approached the appellants asking them to
mortgage their property to secure the loan of P10,000.00 which the Company
was negotiating with the PNB.

After some persuasion appellants signed on December 23, 1955 the


'Amendment of Real Estate Mortgage', mortgaging their said property to the PNB
to guaranty the loan of P10,000.00 extended to the Company. The terms and
conditions of the original mortgage for Pl,000.00 were made integral part of the
new mortgage for P10,000.00 and both documents were registered with the
Register of Deeds of Manila. The promissory note covering the loan of
P10,000.00 dated December 29, 1955, maturing on April 27, 1956, was signed
by Jose Toribio, as attorney-in-fact of the Company, and by the appellants.
Appellants also signed the portion of the promissory note indicating that they are
requesting the PNB to issue the Check covering the loan to the Company. On the
same date (December 23, 1955) that the 'Amendment of Real Estate' was
executed, Jose Toribio, in the same capacity as attorney-in- fact of the Company,
executed also the 'Deed of Assignment' assigning all payments to be made by
the Bureau to the Company on account of the contract for the construction of the
Puerto Princesa building in favor of the PNB.

This assignment of credit to the contrary notwithstanding, the Bureau; with


approval, of the PNB, conditioned, however that they should be for labor and
materials, made three payments to the Company on account of the contract price
totalling P11,234.40. The Bureau's last request for P5,000.00 on June 20, 1956,
however, was denied by the PNB for the reason that since the loan was already
overdue as of April 28, 1956, the remaining balance of the contract price should
be applied to the loan.

The Company abandoned the work, as a consequence of which on June 30,


1956, the Bureau rescinded the construction contract and assumed the work of
completing the building. On November 14, 1958, appellants wrote the PNB
contending that since the PNB authorized payments to the Company instead of
on account of the loan guaranteed by the mortgage there was a change in the
conditions of the contract without the knowledge of appellants, which entitled the
latter to a cancellation of their mortgage contract.

Failing in their bid to have the real estate mortgage cancelled, appellants filed on
June 27, 1959 this action against the PNB, the Company, the latter's attorney-in-
fact Jose Toribio, and the District Engineer of Puerto Princesa, Palawan, seeking
the cancellation of their real estate mortgage. The complaint was amended to
exclude the Company as defendant, it having been shown that its life as a
partnership had already expired and, in lieu thereof, Ramon Concepcion and
Manuel M. Tamayo, partners of the defunct Company, were impleaded in their
private capacity as defendants.

There is, therefore, no question that as accommodation makers, petitioners would be primarily and
unconditionally liable on the promissory note to a holder for value, regardless of whether they stand as
sureties or solidary co-debtors since such distinction would be entirely immaterial and inconsequential as
far as a holder for value is concerned. Consequently, the petitioners cannot claim to have been released
from their obligation simply because the time of payment of such obligation was temporarily deferred by
PNB without their knowledge and consent. There has to be another basis for their claim of having been
freed from their obligation. The question which should be resolved in this instant petition, therefore, is
whether or not PNB can be considered a holder for value under Section 29 of the Negotiable Instruments
Law such that the petitioners must be necessarily barred from setting up the defense of want of
consideration or some other personal defenses which may be set up against a party who is not a holder
in due course.

This, notwithstanding, PNB approved the Bureau's release of three payments directly to the Company
instead of paying the same to the Bank. This approval was in violation of the Deed of Assignment and
without any notice to the petitioners who stood to lose their property once the promissory note falls due
without the same having been paid because the PNB, in effect, waived payments of the first three
releases. From the foregoing circumstances, PNB can not be regarded as having acted in good faith
which is also one of the requisites of a holder in due course under Section 52 of the Negotiable
Instruments Law. The PNB knew that the promissory note which it took from the accommodation makers
was signed by the latter because of full reliance on the Deed of Assignment, which, PNB had no intention
to comply with strictly. Worse, the third payment to the Company in the amount of P4,293.60 was
approved by PNB although the promissory note was almost a month overdue, an act which is clearly
detrimental to the petitioners.

We, therefore, hold that respondent PNB is not a holder in due course. Thus, the petitioners can validly
set up their personal defense of release from the real estate mortgage against PNB. The latter, in
authorizing the third payment to the Company after the promissory note became due, in effect, extended
the term of the payment of the note without the consent of the accommodation makers who stand as
sureties to the accommodated party and to all other parties who are not holders in due course or who do
not derive their right from the same, including PNB.

True, if the Bank had not been the assignee, then the petitioners would be obliged to pay the Bank as
their creditor on the promissory note, irrespective of whether or not the deed of assignment had been
violated. However, the assignee and the creditor in this case are one and the same—the Bank itself.
When the Bank violated the deed of assignment, it prejudiced itself because its very violation was the
reason why it was not paid on time in its capacity as creditor in the promissory note. It would be unfair to
make the petitioners now answer for the debt or to foreclose on their property.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals affirming the decision of
the trial court is hereby REVERSED and SET ASIDE and a new one entered absolving the petitioners
from liability on the promissory note and under the mortgage contract. The Philippine National Bank is
ordered to release the real estate mortgage constituted on the property of the petitioners and to pay the
amount of THREE THOUSAND PESOS (P3,000.00) as attorney's fees.

J.W. SHANNON and MRS. J.W. SHANNON, plaintiffs-appellees,


vs.
THE PHILIPPINE LUMBER & TRANSPORTATION CO., INC., and E.E. ELSER, defendants.

On March 1, 1926, the Philippine Lumber & Transportation Co., Inc., obtained a loan of P12,000 from
Mrs. J.W. Shannon and executed a note promising to pay the said sum to the creditor or to her husband,
J.W. Shannon, on or before March 1, 1927, with interest at 10 per cent per annum, payable monthly and
in advance on the first day of each month. The obligation with its terms was secured, jointly and severally,
by Walter E. Jones and E.E. Elser who signed the note. This note was ratified before the notary public,
Juan L. Diaz, in the City of Manila, on March 22, 1926. The principal was not paid on its due date or
thereafter, but the stipulated interest up to October, 1929, inclusive, was paid. Walter E. Jones died on
November 24, 1929, and the plaintiffs filed a claim and recovered from his estate P1,062 in part payment
of occurred interest due.

The appellant attempted to prove at the trial that the plaintiffs had been guilty of laches and had brought
their action against him tardily, because in 1927 and 1928 the principal debtor had sufficient property and
money with which it could have fully paid its obligation, and in so acting the plaintiffs caused him
damages. This kind of evidence was timely objected to, and the objection was sustained by the court.
This ruling is the subject of the second and third assigned errors. We hold that the judgment is not
erroneous on these grounds. True, the plaintiffs let pass some years from the maturity of the note before
bringing the action for the recovery of its amount. But we hold that the delay does not constitute laches in
the sense that it had the effect of releasing both the principal debtor and its sureties from their obligations,
nor did it occasion loss of rights and privileges of such moment as to give rise to the discharge of the
obligation contracted by the appellant. In the aforecited Banco Español Filipino case, in ruling upon a
similar question, we said: "The decision en casacion of the Supreme Court of Spain is jurisprudence
properly interpreting the Spanish Civil Code. The following doctrine is laid down in the judgment of March
22, 1901: `The court which pronounced sentence in this case has not violated article 1851 of the Civil
Code, because the mere circumstance that the creditor does not demand the compliance with the
obligation immediately upon the same becoming due, and that he more or less delays his action, does not
mean or reveal an intention to grant an extension to the debtor, as according to article 1847 the obligation
of the surety extinguishes at the same time as that of the debtor, and for the same causes as the other
obligations. ...' Deferring the filing of the action does not imply a change in the efficacy of the contract or
liability of any kind on the part of the debtor. It is merely, without demonstration or proof to the contrary,
respite, waiting, courtesy, leniency, passivity, inaction. It does not constitute novation, because this must
be express. It does not engender liability, because on the part of the creditor such can not arise except
from delay, and for this class of delay interpellation on the part of the party who considers himself injured
thereby is necessary. In order that this waiting or inaction, of itself beneficial to the parties obligated, can
be interpreted as injurious to any of them, it is altogether necessary that this be represented by means of
a protest or interpellation against the delay. Without action of this kind it continues to be what it is merely
a failure of the creditor to act, which it itself does not create liability. It can not do so, as we see in the
aforesaid sentencia de casacion. `.... In accordance with the provisions of number 4 of article 1843, the
surety, even before payment, may proceed against the principal debtor when the debt has become
demandable because the term in which it should have been paid has expired.' In view of this action,
which is a protection against the risk of possible insolvency on the part of the principal debtor, it is very
clearly seen that the law does not even grant the surety the right to sue the creditor for delay, as
protection against the risks of possible insolvency on the part of the debtor; but in view of the efficacy of
the action of the contract against the surety, beginning with the date when the obligation becomes due,
his vigilance must be exercised rather against the principal debtor."

JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners,


vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent.

In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an
increase in its line of credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with the
Philippine National Bank (PNB). To secure PNB's approval, PAGRICO had to give a good and sufficient
bond in the amount of P400,000.00, representing the increment in its line of credit, to secure its faithful
compliance with the terms and conditions under which its line of credit was increased. In compliance with
this requirement, PAGRICO submitted Surety Bond No. 4765, issued by the respondent R & B Surety
and Insurance Co., Inc. (R & B Surety") in the specified amount in favor of the PNB. Under the terms of
the Surety Bond, PAGRICO and R & B Surety bound themselves jointly and severally to comply with the
"terms and conditions of the advance line [of credit] established by the [PNB]." PNB had the right under
the Surety Bond to proceed directly against R & B Surety "without the necessity of first exhausting the
assets" of the principal obligor, PAGRICO. The Surety Bond also provided that R & B Surety's liability was
not to be limited to the principal sum of P400,000.00, but would also include "accrued interest" on the said
amount "plus all expenses, charges or other legal costs incident to collection of the obligation [of R & B
Surety]" under the Surety Bond.

When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment
from R & B Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R & B Surety
made a series of payments to PNB by virtue of that demand totalling P70,000.00 evidenced by detailed
vouchers and receipts.

R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K.
Villanueva for reimbursement of the payments made by it to the PNB and for a discharge of its liability to
the PNB under the Surety Bond. When petitioners failed to heed its demands, R & B Surety brought suit
against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben in the Court of First Instance of
Manila, praying principally that judgment be rendered:

2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as indemnitor under the 24
December 1963 Indemnity Agreement with R & B Surety was extinguished when the PNB agreed in the
Trust Agreement "to hold in abeyance any action to enforce its claims against R & B Surety .

PNB's undertaking under the Trust Agreement "to hold in abeyance any action to enforce its claims"
against R & B Surety did not extend the maturity of R & B Surety's obligation under the Surety Bond. The
Principal Obligation had in fact already matured, along with that of R &B Surety, by the time the Trust
Agreement was entered into. Petitioner's Obligation had in fact already matured, for those obligations
were to mature "as soon as [R & B Surety] became liable to make payment of any sum under the terms of
the [Surety Bond] — whether the said sum or sums or part thereof have been actually paid or not." Thus,
the situation was that precisely envisaged in Article 2079:

[t]he mere failure on the part of the creditor to demand payment after the debt
has become due does not of itself constitute any extension of the referred to
herein.(emphasis supplied)

The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor
without the surety’s consent deprives him of his right to pay the creditor and to be immediately
subrogated to the creditor's remedies against the principal debtor upon the original maturity date. The
surety is said to be entitled to protect himself against the contingency of the principal debtor or the
indemnitors becoming insolvent during the extended period. The underlying rationale is not present in the
instant case. As this Court has held,

mere delay or negligence in proceeding against the principal will not discharge a
surety unless there is between the creditor and the principal debtor a valid and
binding agreement therefor, one which tends to prejudice [the surety] or to
deprive it of the power of obtaining indemnity by presenting a legal objection for
the time, to the prosecution of an action on the original security. 12

In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so
minded, to PNB of the matured obligation on behalf of R & B Surety and thereupon becoming subrogated
to such remedies as R & B Surety may have against PAGRICO.

THE HONGKONG & SHANGHAI BANKING CORPORATION, plaintiff-cross-defendant,


vs.
VICENTE ALDANESE, defendant and cross-plaintiff-appellee.

1.SURETYSHIP; SOLIDARY LIABILITY; APPLICATION OF PAYMENT. — Where in a


bond the debtor and surety have bound themselves solidarily, but limiting the liability of the surety to
a lesser amount than that due from the principal debtor, any such payment as the latter may have
made on account of such obligation must be applied first to the unsecured portion of the debt, for, as
regards the principal debtor, the obligation is more onerous as to the amount not secured.

2.ID.; ID.; ID. — The principal debtor having paid an amount on account of the debt, the
surety is under obligation to pay the balance up to the amount secured by the bond executed by
him.

There arrived at the port of Manila on October 15, 1919, certain merchandise consigned to the Hong
Kong & Shanghai Banking Corporation.

Before the receipt of the bill of lading of the merchandise, Messrs. Vamenta & Co. and Isidro
Vamenta declared that the value of said merchandise was P6,854.40, and succeeded in withdrawing the
merchandise from the customhouse by giving a bond executed by the Union Guarantee Co., Ltd., as
surety for the sum of P9,450, promising to present the bill of lading within four months from the date of
said bond. The period expired without said bill of lading having been presented, notwithstanding the
repeated demands made for the purpose.
The herein plaintiff corporation presented said bill of lading, with the invoice annexed thereto,
according to which the value of merchandise in question was P18,681.60, and claimed it from the
Collector of Customs, but the latter could not deliver the same, having delivered it previously to Vamenta
& Co. and Isidro Vamenta as above stated, and an action was brought against him by the herein plaintiff.

At the instance of the Collector of Customs, Vamenta & Co., Isidro Vamenta and the surety
company, the Union Guarantee Co., Ltd., were included as defendants, against whom, as well as against
the plaintiff, said Collector of Customs filed a cross-complaint.

After trial, the court of First Instance of Manila rendered judgment, the dispositive part of which is as
follows:

The defendant Vicente Aldanese, in his capacity as Collector of Customs, is


sentenced to pay the Hong Kong & Shanghai Banking Corporation the sum of $9,840.80,
United States currency, with costs. Messrs. Vamenta & Co., Isidro Vamenta and Union
Guarantee co., Ltd., are sentenced to pay the same sum to Mr. Vicente Aldanese in his
aforesaid capacity, with the costs. In the event that the Union Guarantee Co., Ltd., be
compelled to pay the whole or any part of the said sum to the defendant Mr. Aldanese by
reason of insolvency or inability to pay Messrs. Vamenta & Co. and Isidro Vamenta, the
latter are sentenced to pay said surety company all such sum as it may have paid as
aforesaid, together with the costs. Each and every payment to be made under this
judgment shall be with legal interest at the rate of 6 per centum per annum from April 29,
1920.

The Collector of Customs had already paid to the herein plaintiff the sum of P20,334.91 as the
value of the merchandise in question, with interest thereon in compliance with the judgment above set
out.

The cause having been remanded to the court below, according to the judgment of this court, new
trial was held there, whereat the bond given by Vamenta & Co., and Isidoro Vamenta and the Union
Guarantee Co., Ltd., was presented as evidence. The latter company did not introduce any evidence. In
compliance with the judgment rendered against him, Isidro Vamenta paid the Collector of Customs
P8,000 on account. After a hearing, the court sentenced Vamenta & Co., Isidro Vamenta and the Union
Guarantee Co., Ltd., Isidro Vamenta and the Union Guarantee Co., Ltd., to pay the Collector of Customer
jointly and severally the balance of P20,334.91 paid by said Collector of Customs, after deducting the
P8,000 paid to the latter by Isidro Vamenta, that is, the sum P12,334,91 with legal interest upon the
P20,224.91 paid by the Collector of Customs, computed from October 24, 1921, when said payment was
made, and with interest also at the legal rate on the sum of P12,334.91 from August 30, 1992 by Isidoro
Vamenta.

The appellant also alleges that the liability of Vamenta & Co. and Isidro Vamenta being joint and several,
the P8,000 paid by Isidro Vamenta must be applied upon the bond for P9,450 by them. And deducting
said P8,000 from the amount of the bond, there remains only the sum of P1,450 to be paid by the
appellant.

The fact, however, is that Vamenta & Co. and Isidoro Vamenta incurred and recognized the
obligation to indemnify the Collector of Customs, defendant herein, for what he has paid, amounting to
P20,334.91; and on account of said liability, Isidoro Vamenta paid said collector of Customs the sum of
P8,000.

There remains, therefore the sum of P12,334.91 for which the Collector of Customs has the right to
be reimbursed. To determine who are liable for this sum and to what extent, the following must be borne
in mind:
For the total sum of P20,334.91, Vamenta & Co. and Isidoro Vamenta are liable although jointly
and severally with the herein appellant up to the sum of P9,450, the amount of the bond given by them.

From the standpoint of view of Vamenta & Co. and Isidoro Vamenta, their liability in connection with
said total sum is more onerous with regard to the amount for which they are liable alone and separately
from the surety the Union Guarantee Co., Ltd., that is, the sum of P10,844.91. To this amount, therefore,
must the payment of P8,000 made by them be applied, for it is so provided by article 1174 of the Civil
Code.

Therefore, Vamenta & Co., Isidro Vamenta and the Union Guarantee Co., Ltd., are jointly and
severally liable for the balance of P12,334.91 up to the sum of P9,450, Vamenta & Co. and Isidoro
Vamenta being liable only for the remaining sum, that is, P2,884.91.

STRONGHOLD INSURANCE COMPANY, INC., Petitioner,


vs.
REPUBLIC-ASAHI GLASS CORPORATION, Respondent.

On May 24, 1989, [respondent] Republic-Asahi Glass Corporation (Republic-Asahi) entered into a
contract with x x x Jose D. Santos, Jr., the proprietor of JDS Construction (JDS), for the construction of
roadways and a drainage system in Republic-Asahi’s compound in Barrio Pinagbuhatan, Pasig City,
where [respondent] was to pay x x x JDS five million three hundred thousand pesos (P5,300,000.00)
inclusive of value added tax for said construction, which was supposed to be completed within a period of
two hundred forty (240) days beginning May 8, 1989. In order ‘to guarantee the faithful and satisfactory
performance of its undertakings’ x x x JDS, shall post a performance bond of seven hundred ninety five
thousand pesos (P795,000.00). x x x JDS executed, jointly and severally with [petitioner] Stronghold
Insurance Co., Inc. (SICI) Performance Bond No. SICI-25849/g(13)9769.

"On May 23, 1989, [respondent] paid to x x x JDS seven hundred ninety five thousand pesos
(P795,000.00) by way of downpayment.

"Two progress billings dated August 14, 1989 and September 15, 1989, for the total amount of two
hundred seventy four thousand six hundred twenty one pesos and one centavo (P274,621.01) were
submitted by x x x JDS to [respondent], which the latter paid. According to [respondent], these two
progress billings accounted for only 7.301% of the work supposed to be undertaken by x x x JDS under
the terms of the contract.

"Several times prior to November of 1989, [respondent’s] engineers called the attention of x x x JDS to
the alleged alarmingly slow pace of the construction, which resulted in the fear that the construction will
not be finished within the stipulated 240-day period. However, said reminders went unheeded by x x x
JDS.

"On November 24, 1989, dissatisfied with the progress of the work undertaken by x x x JDS, [respondent]
Republic-Asahi extrajudicially rescinded the contract pursuant to Article XIII of said contract, and wrote a
letter to x x x JDS informing the latter of such rescission. Such rescission, according to Article XV of the
contract shall not be construed as a waiver of [respondent’s] right to recover damages from x x x JDS and
the latter’s sureties.

"[Respondent] alleged that, as a result of x x x JDS’s failure to comply with the provisions of the contract,
which resulted in the said contract’s rescission, it had to hire another contractor to finish the project, for
which it incurred an additional expense of three million two hundred fifty six thousand, eight hundred
seventy four pesos (P3,256,874.00).
"On January 6, 1990, [respondent] sent a letter to [petitioner] SICI filing its claim under the bond for not
less thanP795,000.00. On March 22, 1991, [respondent] again sent another letter reiterating its demand
for payment under the aforementioned bond. Both letters allegedly went unheeded.

More precisely, the issue is whether petitioner’s liability under the performance bond was automatically
extinguished by the death of Santos, the principal debtor.

The Court’s Ruling

The Petition has no merit.

Petitioner contends that the death of Santos, the bond principal, extinguished his liability under the surety
bond. Consequently, it says, it is automatically released from any liability under the bond.

As a general rule, the death of either the creditor or the debtor does not extinguish the
obligation.8 Obligations are transmissible to the heirs, except when the transmission is prevented by the
law, the stipulations of the parties, or the nature of the obligation.9 Only obligations that are personal10 or
are identified with the persons themselves are extinguished by death.11

Section 5 of Rule 8612 of the Rules of Court expressly allows the prosecution of money claims arising
from a contract against the estate of a deceased debtor. Evidently, those claims are not actually
extinguished.13 What is extinguished is only the obligee’s action or suit filed before the court, which is not
then acting as a probate court.14

In the present case, whatever monetary liabilities or obligations Santos had under his contracts with
respondent were not intransmissible by their nature, by stipulation, or by provision of law. Hence, his
death did not result in the extinguishment of those obligations or liabilities, which merely passed on to his
estate.15 Death is not a defense that he or his estate can set up to wipe out the obligations under the
performance bond. Consequently, petitioner as surety cannot use his death to escape its monetary
obligation under its performance bond.

"x x x. The surety’s obligation is not an original and direct one for the performance of his own act, but
merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the
contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor
or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly and
equally bound with the principal. x x x."19

Under the law and jurisprudence, respondent may sue, separately or together, the principal debtor and
the petitioner herein, in view of the solidary nature of their liability. The death of the principal debtor will
not work to convert, decrease or nullify the substantive right of the solidary creditor. Evidently, despite the
death of the principal debtor, respondent may still sue petitioner alone, in accordance with the solidary
nature of the latter’s liability under the performance bond.

Article 2082. The bondsman who is to be offered in virtue of a provision of law or of a judicial order shall
have the qualifications prescribed in article 2056 and in special laws. (1854a)

Article 2083. If the person bound to give a bond in the cases of the preceding article, should not be able
to do so, a pledge or mortgage considered sufficient to cover his obligation shall be admitted in lieu
thereof. (1855)

Article 2084. A judicial bondsman cannot demand the exhaustion of the property of the principal debtor.
A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor or of the
surety.

Article 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged;

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

Third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property. (1857)

Article 2086. The provisions of article 2052 are applicable to a pledge or mortgage. (n)

Article 2087. It is also of the essence of these contracts that when the principal obligation becomes due,
the things in which the pledge or mortgage consists may be alienated for the payment to the creditor.
(1858)

Article 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. (1859a)

Article 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 debtor's 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 creditor's 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.

From these provisions is excepted the case in which, there being several things given in mortgage or
pledge, each one of them 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. (1860)

Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not
solidarily liable. (n)

Article 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they pure or
subject to a suspensive or resolutory condition. (1861)

Article 2092. A promise to constitute a pledge or mortgage gives rise only to a personal action between
the contracting parties, without prejudice to the criminal responsibility incurred by him who defrauds
another, by offering in pledge or mortgage as unencumbered, things which he knew were subject to some
burden, or by misrepresenting himself to be the owner of the same. (1862)
SPOUSES GODOFREDO & DOMINICA FLANCIA, Petitioners,
vs.
COURT OF APPEALS & WILLIAM ONG GENATO, Respondents.

This is an action to declare null and void the mortgage executed by defendant Oakland Development
Resources Corp. xxx in favor of defendant William Ong Genato over the house and lot plaintiffs spouses
Godofredo and Dominica Flancia purchased from defendant corporation.

In the complaint, plaintiffs allege that they purchased from defendant corporation a parcel of land known
as Lot 12, Blk. 3, Phase III-A containing an area of 128.75 square meters situated in Prater Village Subd.
II located at Brgy. Old Balara, Quezon City; that by virtue of the contract of sale, defendant corporation
authorized plaintiffs to transport all their personal belongings to their house at the aforesaid lot; that on
December 24, 1992, plaintiffs received a copy of the execution foreclosing [the] mortgage issued by the
RTC, Branch 98 ordering defendant Sheriff Sula to sell at public auction several lots formerly owned by
defendant corporation including subject lot of plaintiffs; that the alleged mortgage of subject lot is null and
void as it is not authorized by plaintiffs pursuant to Art. 2085 of the Civil Code which requires that the
mortgagor must be the absolute owner of the mortgaged property; that as a consequence of the nullity of
said mortgage, the execution foreclosing [the] mortgage is likewise null and void; that plaintiffs advised
defendants to exclude subject lot from the auction sale but the latter refused. Plaintiffs likewise prayed for
damages in the sum of P50,000.00.

For resolution before us now are the following issues:

(1) whether or not the registered mortgage constituted over the property was valid;

(2) whether or not the registered mortgage was superior to the contract to sell; and

(3) whether or not the mortgagee was in good faith.

Under the Art. 2085 of the Civil Code, the essential requisites of a contract of mortgage are: (a) that it be
constituted to secure the fulfillment of a principal obligation; (b) that the mortgagor be the absolute owner
of the thing mortgaged; and (c) that the persons constituting the mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the purpose.

All these requirements are present in this case.

FIRST ISSUE: WAS THE REGISTERED MORTGAGE VALID?

As to the first essential requisite of a mortgage, it is undisputed that the mortgage was executed on May
15, 1989 as security for a loan obtained by Oakland from Genato.

As to the second and third requisites, we need to discuss the difference between a contract of sale and a
contract to sell.

In a contract of sale, title to the property passes to the vendee upon the delivery of the thing sold; in a
contract to sell, ownership is, by agreement, reserved by the vendor and is not to pass to the vendee until
full payment of the purchase price.

In the contract between petitioners and Oakland, aside from the fact that it was denominated as
a contract to sell, the intention of Oakland not to transfer ownership to petitioners until full payment of the
purchase price was very clear. Acts of ownership over the property were expressly withheld by Oakland
from petitioner. All that was granted to them by the "occupancy permit" was the right to possess it.
Clearly, when the property was mortgaged to Genato in May 1989, what was in effect between Oakland
and petitioners was a contract to sell, not a contract of sale. Oakland retained absolute ownership over
the property.

Because Oakland retained all the foregoing rights as owner of the property, it was entitled absolutely to
mortgage it to Genato. Hence, the mortgage was valid.

SECOND ISSUE: WAS THE REGISTERED MORTGAGE SUPERIOR TO THE CONTRACT TO SELL?

In their memorandum, petitioners cite our ruling in State Investment House, Inc. v. Court of Appeals 13 to
the effect that an unregistered sale is preferred over a registered mortgage over the same property.
The citation is misplaced.

This Court in that case explained the rationale behind the rule:

The unrecorded sale between respondents-spouses and SOLID is preferred for the reason that if the
original owner xxx had parted with his ownership of the thing sold then he no longer had ownership and
free disposal of that thing as to be able to mortgage it again.

State Investment House is completely inapplicable to the case at bar. A contract of sale and a contract to
sell are worlds apart. State Investment House clearly pertained to a contract of sale, not to a contract to
sell which was what Oakland and petitioners had. In State Investment House, ownership had passed
completely to the buyers and therefore, the former owner no longer had any legal right to mortgage the
property, notwithstanding the fact that the new owner-buyers had not registered the sale. In the case
before us, Oakland retained absolute ownership over the property under the contract to sell and therefore
had every right to mortgage it.

In sum, we rule that Genato’s registered mortgage was superior to petitioner’s contract to sell, subject to
any liabilities Oakland may have incurred in favor of petitioners by irresponsibly mortgaging the property
to Genato despite its commitments to petitioners under their contract to sell.

DIONISIO MOJICA, in behalf of Spouses LEONARDO MOJICA and MARINA RUFIDO, petitioner,
vs.
HON. COURT OF APPEALS, and RURAL BANK OF YAWIT, INC., respondents.

On February 1, 1971, plaintiff Leonardo Mojica (now deceased) contracted a loan of P20,000.00 from
defendant Rural Bank of Kawit, Inc. (now respondent). This loan was secured by a real estate mortgage
executed on the same date by the plaintiffs spouses Leonardo Mojica and Marina Rufido (Rollo, Annex
"C" p. 40).

The real estate mortgage contract states among others:

... agreement for the payment of the loan of P20,000.00 and such other loans or
other advances already obtained or still to be obtained by the mortgagors ...

2. ... but if the mortgagors shall well and truly fulfill the obligation above stated
according to the terms thereof then this mortgage shall become null and void.
(Rollo Petitioner's Memorandum, pp. 86-87)

The spouses mortgaged to the Rural Bank of Kawit, a parcel of land consisting of 218,794 square meters,
located in Naic, Cavite, covered by Transfer Certificate of Title No. RT-155 (Rollo, Annex "A", p. 31). The
real estate mortgage was duly registered under Entry No. 74661 of the Registry of Deeds of Cavite
(Rollo, Annex "C", p. 41).
The loan of P20,000.00 by the plaintiffs spouses was fully and completely paid (Ibid.).

On March 5, 1974, a new loan in the amount of P18,000.00 was obtained by plaintiffs spouses from the
defendant Rural Bank which loan matured on March 5, 1975 (Rollo, pp. 32; 41).

No formal deed of real mortgage was constituted over any property of the borrowers, although the top of
the promissory note dated March 5, 1974, contained the following notation.

This promissory note is secured by a Real Estate Mortgage executed before the
Notary Public of the Municipality of Kawit, Mrs. Felisa Senti under Doc. No. 62,
Page No. 86, Book No.__, Series of 1971.

The Real Estate Mortgage mentioned above is the registered mortgage which guaranteed the already
paid loan of P20,000.00 granted on February 1, 1971 (Rollo, p. 8,7).

The spouses Leonardo Mojica and Marina Rufido failed to pay their obligation after its maturity on March
5, 1975. Respondent rural bank extrajudicially foreclosed the real estate mortgage on the justification that
it was adopted as a mortgage for the new loan of P18,000.00 (Rollo, pp. 32; 41).

The petition is devoid of merit.

The pivotal issue in this case is whether or not the foreclosure sale by the Sheriff on June 27, 1979, had
for its basis, a valid and subsisting mortgage contract. Otherwise stated, there is a need to ascertain the
intention of the parties as to the coverage of the mortgage in question with respect to future
advancements.

As earlier stated, the Real Estate Mortgage in the case at bar expressly stipulates that it serves as
guaranty —

... for the payment of the loan ... of P20,000.00 and such other loans or other
advances already obtained or still to be obtained by the mortgagors as makers ...
(Rollo, p. 14).

It has long been settled by a long line of decisions that mortgages given to secure future advancements
are valid and legal contracts; that the amounts named as consideration in said contract do not limit the
amount for which the mortgage may stand as security if from the four corners of the instrument the intent
to secure future and other indebtedness can be gathered. A mortgage given to secure advancements is a
continuing security and is not discharged by repayment of the amount named in the mortgage, until the
full amount of the advancements are paid.

CRISTINA MARCELO VDA. DE BAUTISTA, plaintiff-appellee,


vs.
BRIGIDA MARCOS, ET AL., defendants-appellants.

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, Exhibit "A", 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 give 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.

There is merit in the appeal.

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 Exhibit "A" 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.

Nor could 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.

PHILIPPINE NATIONAL BANK, petitioner,


vs.
CA, PEDRO BITANGA, FERNANDO BITANGA, GREGORIO BITANGA, et al, respondents.

It is not disputed that the property in question originally belonged to the spouses Iñigo Bitanga and Rosa
Ver as their conjugal property. At the cadastral proceedings during which the said property was submitted
for adjudication, the Cadastral Court rendered a decision dated December 27, 1934, by virtue of which a
decree of registration of the said lot bearing date of September 14, 1937 was issued. Thereafter, a
corresponding title in the name of the spouses Iñigo Bitanga and Rosa Ver was likewise issued and in the
Registry Books of the Register of Deeds of Ilocos Norte on December 15, 1937 (Exhibit "A").

Before the issuance of the said original certificate of tale (Exhibit "A"), however, death came to Iñigo
Bitanga on September 25, 1935, and was survived by his wife, Rosa Ver, and his children, the plaintiffs
herein. A little over a year from the death of her husband, or on October 20, 1936, to be exact Rosa Ver
mortgaged the entire property covered by Exhibit "A" (also known as Exhibit 1-Lagpacan) in favor of the
Philippine National Bank for the with of FIVE HUNDRED PESOS (P500.00) as shown in Exhibit 1-
Lagpacan. The mortgage document was registered in the day book of the Register of Deeds of Ilocos
Norte on November 12, 1936; this said mortgage lien was, however, not annotated in the day book of the
Register of Deeds, when the original certificate of title (Exhibit "A"), was issued. Nevertheless, the power
of attorney dated October 20, 1936 in favor of the mortgagee Philippine National Bank "to take
possession of, and retain the property herein mortgaged, to sell or lease the same or any part thereof,
and to do such other acts as necessary in the performance of the power granted to the mortgagee should
the mortgagor fail or violate the term of the mortgage" was annotated on said Exhibit "A" some five years
from October 20, 1936, i.e. on February 27, 1941, to be precise (Exhibit "A").

In the meantime, Rosa Ver had defaulted in the fulfillment of her obligation with the Manila Trading
Company. So the said company levied upon her share in the lot in question on December 13, 1939, and
had the attachment annotated on the title on February 14, 1940 (Exhibit "A-3"). Rosa Ver's interest in the
lot in question was afterwards sold at public auction, at which the Manila Trading Company was the
highest bidder; that was on March 19, 1940, and the deed of sale in favor of the Manila Trading Company
was annotated on the title on May 25, 1940 (Exhibit "A-4").

On November 14, 1940, the Manila Trading Company sold its rights over the lot in question to Santiago
Sambrano, who secured the annotation of the said sale on the title on March 20, 1941 (Exhibit "A-5").
Thereafter, as stated, one-half of the said property passed into the hands of the intervenors as a result of
Civil Case No. 1846 (Exhibits 7, 8, 9, and 9-A).

Because Rosa Ver failed to settle her obligation with the Philippine National Bank, the latter sold at public
auction the whole lot that the former had mortgaged to it, and in the same auction sale, the Philippine
National Bank emerged as the highest bidder (Exhibits 2, 3, 4 and 5); and, after the period of redemption
had expired without the property having been redeemed, the Philippine National Bank consolidated its
title over it. The document of consolidation was, however, not annotated upon the owner's duplicate
certificate of title as Rosa Ver failed to surrender the same.

So it was that on November 25, 1950, the Philippine National Bank presented a petition before the trial
court (Exhibit 14) asking, on the one hand, that the owner's certificate of title No. 7683 (Exhibit A), be
declared null and void, and praying, on the other, that a new certificate of title be issued in its name.

There is no dispute that the document of mortgage executed by Rosa Ver was in accordance with the
formalities required by law and that it was registered in the day book of the Register of Deeds of Ilocos
Norte within a month after its execution. What is here contested is whether Rosa Ver could, as she did in
fact, m the entire Lot 9068 to petitioner PNB. In other words, the issue refers to the intrinsic validity of the
mortgage, as distinguished from its formal sufficiency.

The trial court found and so held that Lot 9068 belonged to the conjugal partnership of the spouse lingo
Bitanga and Rosa Ver. Therefore, when Inigo died on September 25, 1936, his one-half share in said lot
was transmitted to his heirs (Article 777, New Civil Code; Article 657, old Civil Code) 5 and a co-ownership
was established between them and Iñigo's surviving spouse Rosa Ver. Hence, on October 20, 1936, a
little over a year after Iñigo's death, Rosa Ver, by herself alone, could not have validly mortgaged the
whole of Lot 9068 to PNB.

Under Article 2085, New Civil Code (Art. 1857, Old Civil Code), one of the essential requisites to the
contract of pledge and mortgage is that the pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged. And under Article 493, New Civil Code (Art. 399, Old Civil Code), each co-owner
shall have the full ownership of his part and of the fruits and benefits pertaining thereto, and he may
therefore alienate, assign or mortgage it, and even substitute another person in its enjoyment, except
when personal rights are involved. But the effect of the alienation or the mortgage, with respect to the co-
owners, shall be limited to the portion which may be allotted to him in the division upon the termination of
the co-ownership.

Hence, We fully agree with the trial court and the respondent Court and affirm the holding that "what the
Philippine National Bank had acquired from Rosa Ver by virtue of the mortgage was simply one-half (½)
of the entire property, for this was all she had in her power to convey — the other half being, as it still is,
the lawful share of the plaintiffs-appellees as inheritance from their father, Iñigo Bitanga. Nemo date quod
non habet — One cannot give what is not his. 6

Applying the provisions of the Old Civil Code 7 the law in force at the time of Inigo Bitanga's death in
1935, Rosa Ver, as surviving spouse, cannot take part legally in the sharing of the estate left by her
deceased husband (one-half (½) of Lot 9068) with respect to which she only had usufructuary rights. "The
usufructuary not being an owner, cannot alienate or dispose of the objects included in the usufruct. Thus,
he cannot ... mortgage or pledge the thing ... 8

It is not disputed that Tax Declaration No. 120225-A, then covering Lot 9068, was in the exclusive name
of Rosa Ver. Such fact, however, even if expressly admitted by herein respondent-heirs does not and
cannot alter the conjugal character of the lot in question, much less would it affect the mortgage in favor
of petitioner PNB. We have already held in several cases that declarations of ownership for purposes of
taxation are not sufficient evidence of title. 9 If petitioner relied upon Tax Declaration No. 120225-A in
assuming that the whole property belonged exclusively to mortgagor Rosa Ver, such erroneous
assumption should not prejudice the rights of the other co-owners, herein respondent-heirs As far as the
latter are concerned, their respective shares were not included in the mortgage in favor of PNB.

We, therefore, reject PNB's contention that the mortgage constituted by Rosa Ver in its favor on October
20, 1936 is valid and covers the entire property known as Lot 9068.

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,


vs.
COURT OF APPEALS, MYLO O. QUINTO and JESUSA CHRISTINE S. CHUPUICO, respondents.

On 20 April 1978 petitioner granted a loan of P94,000.00 to the spouses Santiago Olidiana and Oliva
Olidiana. To secure the loan the Olidiana spouses executed a real estate mortgage on several properties
among which was Lot 2029 (Pls-61) with Tax Declaration No. 2335/1, situated in Bo. Bago Capalaran,
Molave, Zamboanga del Sur, with an area of 84,108 square meters, more or less. At the time of the
mortgage the property was still the subject of a Free Patent application filed by the Olidianas with the
Bureau of Lands but registered under their name in the Office of the Municipal Assessor of Molave for
taxation purposes.2

On 2 November 1978 the Olidiana spouses filed with the Bureau of Lands a Request for Amendment of
their Free Patent applications over several parcels of land including Lot No. 2029 (Pls-61). In this request
they renounced, relinquished and waived all their rights and interests over Lot No. 2029 (Pls-61) in favor
of Jesusa Christine Chupuico and Mylo O. Quinto, respondents herein. On 10 January 1979 Free Patent
Nos. IX-5-2223 (covering one-half of Lot No. 2029 [Pls-61] and IX-5-2224 (covering the other half of the
same Lot No. 2029 [Pls-61]) were accordingly granted respectively to respondents Jesusa Christine
Chupuico and Mylo O. Quinto by the Bureau of Lands District Land Office No. IX-5, Pagadian City.
Jesusa Christine Chupuico later obtained Original Certificate of Title No. P-27,361 covering
aforementioned property while Mylo O. Quinto was also issued Original Certificate of Title No. P-27,362 in
view of the previous free patent.3

On 20 April 1979 an additional loan of P62,000.00 was extended by petitioner to the Olidiana spouses.
Thus on 23 April 1979 the Olidianas executed an additional mortgage on the same parcels of land
already covered by the first mortgage of 4 April 1978. This second mortgage also included Lot No. 2029
(Pls-61) as security for the Olidiana spouses' financial obligation with petitioner. 4
Thereafter, for failure of Santiago and Oliva Olidiana to comply with the terms and conditions of their
promissory notes and mortgage contracts, petitioner extrajudicially foreclosed all their mortgaged
properties.

Petitioner now seeks to overturn the decision of respondent Court of Appeals holding that Lot No. 2029
(Pls-61) could not have been the subject of a valid mortgage and foreclosure proceeding because it was
public land at the time of the mortgage, and that the act of Jesusa Christine S. Chupuico and Mylo O.
Quinto in securing the patents was not tainted with fraud. The crux of this appeal thus lies in the basic
issue of whether the land in dispute could have been validly mortgaged while still the subject of a Free
Patent Application with the government.9

We agree with the court a quo. We hold that petitioner bank did not acquire valid title over the land in
dispute because it was public land when mortgaged to the bank. We cannot accept petitioner's contention
that the lot in dispute was no longer public land when mortgaged to it since the Olidiana spouses had
been in open, continuous, adverse and public possession thereof for more than thirty (30)
years. 10 In Visayan Realty, Inc. v. Meer 11 we ruled that the approval of a sales application merely
authorized the applicant to take possession of the land so that he could comply with the requirements
prescribed by law before a final patent could be issued in his favor. Meanwhile the government still
remained the owner thereof, as in fact the application could still be canceled and the land awarded to
another applicant should it be shown that the legal requirements had not been complied with. What
divests the government of title to the land is the issuance of the sales patent and its subsequent
registration with the Register of Deeds. It is the registration and issuance of the certificate of title that
segregate public lands from the mass of public domain and convert it into private property. 12 Since the
disputed lot in the case before us was still the subject of a Free Patent Application when mortgaged to
petitioner and no patent was granted to the Olidiana spouses, Lot No. 2029 (Pls-61) remained part of the
public domain.

With regard to the validity of the mortgage contracts entered into by the parties, Art. 2085, par. 2, of the
New Civil Code specifically requires that the pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged. Thus, since the disputed property was not owned by the Olidiana spouses when
they mortgaged it to petitioner the contracts of mortgage and all their subsequent legal consequences as
regards Lot No. 2029 (Pls-61) are null and void. In a much earlier case 13 we held that it was an essential
requisite for the validity of a mortgage that the mortgagor be the absolute owner of the property
mortgaged, and it appearing that the mortgage was constituted before the issuance of the patent to the
mortgagor, the mortgage in question must of necessity be void and ineffective. For, the law explicitly
requires as imperative for the validity of a mortgage that the mortgagor be the absolute owner of what is
mortgaged.

NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, Petitioner,


vs.
SPOUSES FRANCISCO AND BASILISA BAUTISTA, Respondents.

The Spouses Bautista owned several lots located at Pasong Tamo, Quezon City. One such property was
a 6,368-square (sq.)-meter lot covered by Transfer Certificate of Title (TCT) No. 35034.

On 26 July 1963, the Spouses Bautista sold several lots to one Araceli Wijangco Vda. de Del Rosario
(Del Rosario). Included in the lots sold was a portion of the aforedescribed 6,368-sq.-meter lot, measuring
about 822 sq. meters. Del Rosario succeeded in securing certificates of title covering the purchased lots
in her name, including TCT No. 35034. TCT No. 35034, however, covered not just the 822-sq.-meter
portion sold to her, but the entire 6,368 sq. meters thereof. A new title, TCT No. 70813, was issued in the
names of Spouses Bautista and Del Rosario covering the entire area of 6,368 sq. meters.

Subsequently, Del Rosario mortgaged the lots she purchased from the Spouses Bautista with the
Philippine Commercial and Industrial Bank (PCIB) to secure a loan she obtained from the said bank.
Again, the whole 6,368-sq.-meter lot was subjected to the encumbrance and not just the 822-sq.-meter
portion thereof pertaining to Del Rosario.

Del Rosario apparently failed to pay her obligation to PCIB; thus, the said bank instituted proceedings for
the extrajudicial foreclosure of the mortgaged real estate properties. PCIB was issued on 24 November
1965 the Certificate of Sale for being the highest bidder of the foreclosed real properties at the public
auction sale. On 4 May 1966, PCIB assigned its rights over the aforementioned lots to NIDC. The
Certificate of Sale and subsequent assignment were annotated at the back of TCT No. 70813 on 16 May
1966.

Since only a portion of the 6,368-sq.-meter lot, measuring 882 sq. meters, was the subject of the Contract
of Sale between the Spouses Bautista and Del Rosario, the remaining portion of the said lot with an area
of 5,546 sq. meters was still owned by the Spouses Bautista. This co-ownership by the Spouses Bautista
and Del Rosario of the 6,368-sq.-meter lot, in the proportions so stated, was clearly reflected in TCT No.
70813. Not being the owner of 5,546 sq. meters of the 6,368 sq. meter lot, Del Rosario could not have
constituted a mortgage on the same in favor of PCIB as security for her loan.

The requirements of a valid mortgage are plainly laid down in Article 2085 of the New Civil Code, viz:

ART. 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1) That they be constituted to secure the fulfilment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged;

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

Third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property.

For a person to validly constitute a mortgage on real estate, he must be the absolute owner thereof as
required by Article 2085 of the New Civil Code. In other words, the mortgagor must be the owner;
otherwise, the mortgage is void.30 Del Rosario was NOT the owner of the 5,546-sq.- meter portion of the
6,368-sq.-meter lot, so she could not have mortgaged the same to PCIB. There being no valid mortgage
of the said portion to PCIB, it could not be subjected to foreclosure; it could not be sold at the public
auction; it could not be bought by PCIB as the highest bidder at the public auction; and it could not be
assigned by PCIB to NIDC.

SOUTHERN MOTORS, INC., Plaintiff-Appellee,


vs.
ELISEO BARBOSA, Defendant-Appellant.
Plaintiff, Southern Motors, Inc., brought this action against Eliseo Barbosa, to foreclose a real estate
mortgage, constituted by the latter in favor of the former, as security for the payment of the sum of
P2,889.53 due to said Plaintiff from one Alfredo Brillantes, who had failed to settle his obligation in
accordance with the terms and conditions of the corresponding deed of mortgage. Defendant Eliseo
Barbosa filed an answer admitting the allegations of the complaint and alleging, by way of “special and
affirmative” defense:
“That the Defendant herein has executed the deed of mortgage Annex A for the only purpose of
guaranteeing — as surety and/or guarantor — the payment of the above mentioned debt of Mr. Alfredo
Brillantes in favor of the Plaintiff.
“That the Plaintiff until now has no right action against the herein Defendant on the ground that
said Plaintiff, without motive whatsoever, did not intent or intent to exhaust all recourses to collect from
the true debtor Mr. Alfredo Brillantes the debt contracted by the latter in favor of said Plaintiff, and did not
resort nor intends to resort all the legal remedies against the true debtor Mr. Alfredo Brillantes,
notwithstanding the fact that said Mr. Alfredo Brillantes is solvent and has many properties within the
Province of Iloilo.”
Moreover, it is obvious that Defendant’s affirmative defense is devoid of merit for:
1. The deed of mortgage executed by him specifically provides:
“That if said Mr. Alfredo Brillantes or herein mortgagor, his heirs, executors, administrators and assigns
shall well and truly perform the full obligations above-stated according to the terms thereof, then this
mortgage shall be null and void, otherwise it shall remain in full force and effect, in which event herein
mortgagor authorizes and empowers herein mortgagee-company to take any of the following actions to
enforce said payment;.
“(a) Foreclose, judicially or extrajudicially, the chattel mortgage above referred to and/or also this
mortgage, applying the proceeds of the purchase price at public sale of the real property herein
mortgaged to any deficiency or difference between the purchase price of said chattel at public auction
and the amount of P2,889.53, together with its interest hereby secured; chan roblesvirtualawlibraryor
“(b) Simply foreclose this mortgage judicially in accordance with the provisions of section 2, Rule 70,
Rules of Court, or extra- judicially under the provisions of Act No. 3135 and Act No. 4118, to satisfy the
full amount of P2,889.53, together with its interest of 12 per cent per annum.”
2. 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. Guarantees, without any such pledge or
mortgage, are governed by Title XV of said Code, whereas pledges and mortgages fall under Title XVI of
the same Code, in which the following provisions, among others, are found:
ART. 2087. “It is also of the essence of these contracts that when the principal obligation becomes due,
the things in which the pledge or mortgage consists may be alienated for the payment to the creditor.”
ART. 2126. “The mortgage directly and immediately subjects the property upon which it is imposed,
whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted.”
3. It has been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is not entitled to the
exhaustion of the property of the principal debtor.

A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner,


vs.
CA and SPOUSES ROMULO S.A. JAVILLONAR and ERLINDA P. JAVILLONAR, respondents.

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 months; (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 owner's 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. 4

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:

PROMISSORY NOTE

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 and willfully and/or allow A.FRANCISCO REALTY
AND DEVELOPMENT CORPORATION to 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.

On the second issue, the Court of Appeals held that, even "on the assumption that the trial court has
jurisdiction over the instant case," petitioner's 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 STIPULATION
SHOULD BE FOUND IN THE MORTGAGE DEED ITSELF. 14

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 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.

Spouses FERNANDO and ANGELINA EDRALIN, Petitioners,


vs.
PHILIPPINE VETERANS BANK, Respondent.

On February 5, 1976, Veterans Bank granted petitioner spouses Fernando and Angelina Edralin
(Edralins) a loan in the amount of Two Hundred Seventy Thousand Pesos (P270,000.00). As security
thereof, petitioners executed a Real Estate Mortgage (REM)6 in favor of Veterans Bank over a real
property situated in the Municipality of Parañaque and registered in the name of petitioner Fernando
Edralin. The mortgaged property is more particularly described in Transfer Certificate of Title (TCT) No.
204889. The REM was registered with the Registry of Deeds of the Province of Rizal. 7 The REM and its
subsequent amendments8 were all duly annotated at the back of TCT No. 204889.9

The Edralins failed to pay their obligation to Veterans Bank. Thus, on June 28, 1983, Veterans Bank filed
a Petition for Extrajudicial Foreclosure10 of the REM with the Office of the Clerk of Court and Ex-Officio
Sheriff of Rizal.

Was the consolidation of title done in accordance with law?

Petitioners argue that Veterans Bank is not entitled to a writ of possession because it failed to properly
consolidate its title over the subject property.43 They maintain that the Deed of Sale executed by the
Veterans Bank in the bank’s own favor during the consolidation of title constitutes a pactum
commissorium, which is prohibited under Article 2088 of the Civil Code. 44

There is no merit in petitioners’ argument.

Pactum commissorium is "a stipulation empowering the creditor to appropriate the thing given as
guaranty for the fulfillment of the obligation in the event the obligor fails to live up to his undertakings,
without further formality, such as foreclosure proceedings, and a public sale."46 "The elements of pactum
commissorium, which enable the mortgagee to acquire ownership of the mortgaged property without the
need of any foreclosure proceedings, are: (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."47

The second element is missing to characterize the Deed of Sale as a form of pactum commissorium.
Veterans Bank did not, upon the petitioners’ default, automatically acquire or appropriate the mortgaged
property for itself. On the contrary, the Veterans Bank resorted to extrajudicial foreclosure and was issued
a Certificate of Sale by the sheriff as proof of its purchase of the subject property during the foreclosure
sale. That Veterans Bank went through all the stages of extrajudicial foreclosure indicates that there was
no pactum commissorium.
SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-ONG, Petitioners,
vs.
ROBAN LENDING CORPORATION, Respondent.

On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses Wilfredo N. Ong and Edna
Sheila Paguio-Ong obtained several loans from Roban Lending Corporation (respondent) in the total
amount ofP4,000,000.00. These loans were secured by a real estate mortgage on petitioners’ parcels of
land located in Binauganan, Tarlac City and covered by TCT No. 297840.1

On February 12, 2001, petitioners and respondent executed an Amendment to Amended Real Estate
Mortgage2consolidating their loans inclusive of charges thereon which totaled P5,916,117.50. On even
date, the parties executed a Dacion in Payment Agreement3 wherein petitioners assigned the properties
covered by TCT No. 297840 to respondent in settlement of their total obligation, and a Memorandum of
Agreement4 reading:

In April 2002 (the day is illegible), petitioners filed a Complaint,6 docketed as Civil Case No. 9322, before
the Regional Trial Court (RTC) of Tarlac City, for declaration of mortgage contract as abandoned,
annulment of deeds, illegal exaction, unjust enrichment, accounting, and damages, alleging that the
Memorandum of Agreement and the Dacion in Payment executed are void for being pactum
commissorium.7

The petition is meritorious.

The elements of pactum commissorium, which enables the mortgagee to acquire ownership of the
mortgaged property without the need of any foreclosure proceedings,30 are: (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.31

In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain no provisions for
foreclosure proceedings nor redemption. Under the Memorandum of Agreement, 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 TCT No. 297840. Respondent, in effect,
automatically acquires ownership of the properties upon petitioners’ failure to pay their debt within the
stipulated period.

Respondent argues that the law recognizes dacion en pago as a special form of payment whereby the
debtor alienates property to the creditor in satisfaction of a monetary obligation. 32 This does not persuade.
In a true dacion en pago, the assignment of the property extinguishes the monetary debt. 33 In the case at
bar, the alienation of the properties was by way of security, and not by way of satisfying the debt. 34 The
Dacion in Payment did not extinguish petitioners’ obligation to respondent. On the contrary, under the
Memorandum of Agreement executed on the same day as the Dacion in Payment, petitioners had to
execute a promissory note forP5,916,117.50 which they were to pay within one year.35

VINCENT P. DAYRIT, Petitioner,


vs.
CA, FRANCISCO ARCA, MOBIL OIL PHILIPPINES, INC., and ELADIO YLAGAN, Special Sheriff, respondents.
On July 21, 1965 the defendants Vincent Dayrit, Leonila T. Sumbillo and Reynaldo Angeles entered into a contract with the
Mobil OilPhilippines, Inc., entitled "LOAN & MORTGAGE AGREEMENT," providing, among others, that:

"(a) For and in consideration of Sales Agreement dated July 21,1965, among die parties herein, Mobil grants a loan of
P150,000 toborrowers."
(b) Defendants-Borrowers shall repay Mobil the whole amount of P150,000 plus 10% interest per annum on the diminishing
balancefor 48 months."
(c) To secure the prompt repayment of such loan by defendants borrowers to Mobil and the faithful performance by Borrowers
of that Sales Agreement, Defendants-Borrowers hereby transfer in favor of Mobil by way of first mortgage lands covered by
TCT No.45169 and TCT No. 45170, together with the improvements existing in said two (2) parcels of land."
(d) In case of default of Defendants-Borrowers in payment of any of the installments and/or their failure to purchase the quantity
of products stated therein Mobil shall have the right to foreclose this mortgage."
(e) Mobil, in case of default and foreclosure shall be entitled to attorney's fees and cost of collection equivalent to not less than
25%of total indebtedness remaining unpaid.
(f) All expenses in connection with the preparation and registration of this mortgage as well as cancellation of same shall the for
theaccount of Defendants-Borrowers."
(g) If Defendants-Borrowers shall perform the full obligation above stated according to the terms thereof, then this obligation
shallbe null and void, otherwise, it shall remain in full force and effect."

The defendants violated the Loan & Mortgage Agreement, they having paid but one installment in the amount of P3,816, of
whichP1,250 was applied to interest, and the remaining P2,566 to the principal obligation. The defendants likewise failed to buy
the quantities of products as required in the Sales Agreement (Exh. D).

In sum, the issue that must be resolved in the instant case is, whether or not the Court of First Instance of Manila erred
in ordering the sale at public auction of the mortgaged properties to answer for the entire P147,434 principal obligation after the
defendants (Dayrit, Sumbillo and Angeles) had failed to pay their respective one-third shares of the obligation to the respondent
Mobil.
Besides, well-entrenched in law is the rule that a mortgage directly and immediately subjects the property upon which it is
imposed,7the same being indivisible even though the debt may be divided,8 and such indivisibility likewise being unaffected by
the fact that 'the debtors are not solidarity liable.9

As ToIentino, in his Commentaries and Jurisprudence on the Civil Code of the Philippines,10puts it "When several things are
pledged or mortgaged, each thing for a determinate portion of the debt, the pledges or mortgage,are considered separate from
each other. But when the several things are given to secure the same debt in its entirety, all of them are liable for the debt, and
the creditor does not have to divide his action by distributing the debt among the various things pledged or mortgaged. Even
when only a part of the debt remains unpaid, all the things are still liable for such balance." Hence, a mortgage voluntarily
constituted by the debtor on two or more parcels of land is one and indivisible, and the mortgagee has the right to have either or
both parcels, jointly or singly, sold to satisfy his claim. In case the mortgaged properties are a house and lot, it can not be
claimed that the lot and the house should be sold separately and not together."

SPOUSES VICENTE YU AND DEMETRIA LEE-YU, Petitioners,


vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, Respondent.

Under a Real Estate Mortgage dated August 15, 1994 2 and Amendments of Real Estate Mortgage dated
April 4, 19953 and December 4, 1995,4 spouses Vicente Yu and Demetria Lee-Yu (petitioners) and
spouses Ramon T. Yu and Virginia A. Tiu, or Yu Tian Hock aka Victorino/Vicente Yu, mortgaged their
title, interest, and participation over several parcels of land located in Dagupan City and Quezon City, in
favor of the Philippine Commercial International Bank (respondent) as security for the payment of a loan
in the amount of P9,000,000.00.5

As the petitioners failed to pay the loan, the interest, and the penalties due thereon, respondent filed on
July 21, 1998 with the Office of the Clerk of Court and Ex-Officio Sheriff of the Regional Trial Court of
Dagupan City a Petition for Extra-Judicial Foreclosure of Real Estate Mortgage on the Dagupan City
properties.6 On August 3, 1998, the City Sheriff issued a Notice of Extra-Judicial Sale scheduling the
auction sale on September 10, 1998 at 10:00 o’clock in the morning or soon thereafter in front of the
Justice Hall, Bonuan, Tondaligan, Dagupan City.7

A. Whether or not a real estate mortgage over several properties located in different
locality [sic] can be separately foreclosed in different places.

Anent the first issue, petitioners contend that since a real estate mortgage is indivisible, the mortgaged
properties in Dagupan City and Quezon City cannot be separately foreclosed. Petitioners further point out
that two notices of extra-judicial sale indicated that petitioners’ obligation is P10,437,015.2022 each as of
March 31, 1998 or a total ofP20,874,030.40,23 yet their own computation yields only P9,957,508.90 as of
February 27, 1998.

Anent the first issue, the Court finds that petitioners have a mistaken notion that the indivisibility of a real
estate mortgage relates to the venue of extra-judicial foreclosure proceedings. The rule on indivisibility of
a real estate mortgage is provided for in Article 2089 of the Civil Code, which provides:

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 debtor’s heir who has paid a part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as the debt is not completely satisfied.

Neither can the creditor’s 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.

From these provisions is excepted the case in which, there being several things given in mortgage or
pledge, each one of them 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.

This rule presupposes several heirs of the debtor or creditor 25 and therefore not applicable to the present
case. Furthermore, what the law proscribes is the foreclosure of only a portion of the property or a
number of the several properties mortgaged corresponding to the unpaid portion of the debt where,
before foreclosure proceedings, partial payment was made by the debtor on his total outstanding loan or
obligation. This also means that the debtor cannot ask for the release of any portion of the mortgaged
property or of one or some of the several lots mortgaged unless and until the loan thus secured has been
fully paid, notwithstanding the fact that there has been partial fulfillment of the obligation. Hence, it is
provided that the debtor who has paid a part of the debt cannot ask for the proportionate extinguishment
of the mortgage as long as the debt is not completely satisfied.26 In essence, indivisibility means that the
mortgage obligation cannot be divided among the different lots,27 that is, each and every parcel under
mortgage answers for the totality of the debt.28

On the other hand, the venue of the extra-judicial foreclosure proceedings is the place where each of the
mortgaged property is located, as prescribed by Section 2 of Act No. 3135,29 to wit:

SECTION 2. Said sale cannot be made legally outside of the province in which the property sold is
situated; and in case the place within said province in which the sale is to be made is subject to
stipulation, such sale shall be made in said place or in the municipal building of the municipality in which
the property or part thereof is situated.
The indivisibility of the real estate mortgage is not violated by conducting two separate foreclosure
proceedings on mortgaged properties located in different provinces as long as each parcel of land is
answerable for the entire debt.

Article 2093. In addition to the requisites prescribed in article 2085, it is necessary, in order to constitute
the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third
person by common agreement. (1863)

Article 2094. All movables which are within commerce may be pledged, provided they are susceptible of
possession. (1864)

Article 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock,
bonds, warehouse receipts and similar documents may also be pledged. The instrument proving the right
pledged shall be delivered to the creditor, and if negotiable, must be indorsed. (n)

Article 2096. A pledge shall not take effect against third persons if a description of the thing pledged and
the date of the pledge do not appear in a public instrument. (1865a)

ATTY. DIONISIO CALIBO, JR., petitioner,


vs.
COURT OF APPEALS and DR. PABLO U. ABELLA, respondents.

The facts of the case, as summarized by respondent court, are undisputed.

"…on January 25, 1979, plaintiff-appellee [herein petitioner] Pablo U. Abella purchased
an MF 210 agricultural tractor with Serial No. 00105 and Engine No. P126M00199
(Exhibit A; Record, p.5) which he used in his farm in Dagohoy, Bohol.

Sometimes in October or November 1985, Pablo Abella's son, Mike abella rented for
residential purpose the house of defendant-appellant Dionosio R. Calibo, Jr., in
Tagbilaran City.

In October 1986, Pablo Abella pulled out his aforementioned tractor from his farm in
Dagohoy, Bohol, and left it in the safekeeping of his son, Mike Abella, in Tagbilaran City.
Mike kept the tractor in the garage of the house he was leasing from Calibo.

Since he started renting Calibo's house, Mike had been religiously paying the monthly
rentals therefor, but beginning November of 1986, he stopped doing so. The following
month, Calibo learned that Mike had never paid the charges for electric and water
consumption in the leased premises which the latter was duty-bound to shoulder. Thus,
Calibo confronted Mike about his rental arrears and the unpaid electric and water bills.
During this confrontation, Mike informed Calibo that he (Mike) would be staying in the
leased property only until the end of December 1986. Mike also assured Calibo that he
would be settling his account with the latter, offering the tractor as security. Mike even
asked Calibo to help him find a buyer for the tractor so he could sooner pay his
outstanding obligation.

In January 1987 when a new tenant moved into the house formerly leased to Mike,
Calibo had the tractor moved to the garage of his father's house, also in Tagbilaran City.

Apprehensive over Mike's unsettled account, Calibo visited him in his Cebu City address
in January, February and March, 1987 and tried to collect payment. On all three
occasions, Calibo was unable to talk to Mike as the latter was reportedly out of town. On
his third trip to Cebu City, Calibo left word with the occupants of the Abella residence
thereat that there was a prospective buyer for the tractor. The following week, Mike saw
Calibo in Tagbilaran City to inquire about the possible tractor buyer. The sale, however,
did not push through as the buyer did not come back anymore. When again confronted
with his outstanding obligation, Mike reassured Calibo that the tractor would stand as a
guarantee for its payment. That was the last time Calibo saw or heard from Mike.

After a long while, or on November 22, 1988, Mike's father, Pablo Abella, came to
Tagbilaran City to claim and take possession of the tractor. Calibo, however, informed
Pablo that Mike left the tractor with him as security for the payment of Mike's obligation to
him. Pablo offered to write Mike a check for P2,000.00 in payment of Mike's unpaid lease
rentals, in addition to issuing postdated checks to cover the unpaid electric and water bills
the correctness of which Pablo said he still had to verify with Mike. Calibo told Pablo that
he would accept the P2,000.00-check only if the latter would execute a promissory note
in his favor to cover the amount of the unpaid electric and water bills. Pablo was not
amenable to this proposal. The two of them having failed to come to an agreement, Pablo
left and went back to Cebu City, unsuccessful in his attempt to take possession of the
tractor."1

On November 25, 1988, private respondent instituted an action for replevin, claiming ownership of the
tractor and seeking to recover possession thereof from petitioner. As adverted to above, the trial court
ruled in favor of private respondent; so did the Court of Appeals when petitioner appealed.

The Court of Appeals sustained the ruling of the trial court that Mike Abella could not have validly pledged
the subject tractor to petitioner since he was not the owner thereof, nor was he authorized by its owner to
pledge the tractor. Respondent court also rejected petitioner's contention that, if not a pledge, then a
deposit was created. The Court of Appeals said that under the Civil Code, the primary purpose of a
deposit is only safekeeping and not, as in this case, securing payment of a debt.

In a contract of pledge, the creditor is given the right to retain his debtor's movable property in his
possession, or in that of a third person to whom it has been delivered, until the debt is paid. For the
contract to be valid, it is necessary that: (1) the pledge is constituted to secure the fulfillment of a principal
obligation; (2) the pledgor be the absolute owner of the thing pledged; and (3) the person constituting the
pledge has the free disposal of his property, and in the absence thereof, that he be legally authorized for
the purpose.2

As found by the trial court and affirmed by respondent court, the pledgor in this case, Mike Abella, was
not the absolute owner of the tractor that was allegedly pledged to petitioner. The tractor was owned by
his father, private respondent, who left the equipment with him for safekeeping. Clearly, the second
requisite for a valid pledge, that the pledgor be the absolute owner of the property, is absent in this case.
Hence, there is no valid pledge.

There also does not appear to be any agency in this case. We agree with the Court of Appeals that:

"As indicated in Article 1869, for an agency relationship to be deemed as implied, the
principal must know that another person is acting on his behalf without authority. Here,
appellee categorically stated that the only purpose for his leaving the subject tractor in
the care and custody of Mike Abella was for safekeeping, and definitely not for him to
pledge or alienate the same. If it were true that Mike pledged appeellee's tractor to
appellant, then Mike was acting not only without appellee's authority but without the
latter's knowledge as well.
EULOGIO BETITA, plaintiff-appellee,
vs.
SIMEON GANZON, ALEJO DE LA FLOR, and CLEMENTE PEDRENA, defendants-appellants.

This action is brought to recover the possession of four carabaos with damages in the sum of P200.
Briefly stated, the facts are as follows: On May 15, 1924, the defendant Alejo de la Flor recovered a
judgment against Tiburcia Buhayan for the sum of P140 with costs. Under this judgment the defendant
Ganzon, as sheriff levied execution on the carabaos in question which were found in the possession of
one Simon Jacinto but registered in the name of Tiburcia Buhayan. The plaintiff herein, Eulogio Betita,
presented a third party claim (terceria) alleging that the carabaos had been mortgaged to him and as
evidence thereof presented a document dated May 6, 1924, but the sheriff proceeded with the sale of the
animals at public auction where they were purchased by the defendant Clemente Perdena for the sum of
P200, and this action was thereupon brought.

The document upon which the plaintiff bases his cause of action is in the Visayan dialect and in
translation reads as follows:

The court below held that inasmuch as this document was prior in date to the judgment under which the
execution was levied, it was a preferred credit and judgment was rendered in favor of the plaintiff for the
possession of the carabaos, without damages and without costs. From this judgment the defendants
appeal.

The judgment must be reversed unless the document above quoted can be considered either a chattel
mortgage or else a pledge.

The alleged pledge is also ineffective for another reason, namely, that the plaintiff pledgee never had
actual possession of the property within the meaning of article 1863 of the Civil Code. But it is argued that
at the time of the levy the animals in question were in the possession of one Simon Jacinto; that Jacinto
was the plaintiff's tenant; and that the tenant's possession was the possession of his landlord.

Article 1863 of the Civil Code reads as follows:

In addition to the requisites mentioned in article 1857, it shall be necessary, in order to


constitute the contract of pledge, that the pledge be placed in the possession of the
creditor or of a third person appointed by common consent.

In his commentary on this article Manresa says:

This requisite is most essential and is characteristic of a pledge without which the
contract cannot be regarded as entered into or completed, because, precisely, in this
delivery lies the security of the pledge. Therefore, in order that the contract of pledge may
be complete, it is indispensable that the aforesaid delivery take place . . . . (P.
411, supra.)

It is, of course, evident that the delivery of possession referred to in article 1863 implies a change in the
actual possession of the property pledged and that a mere symbolic delivery is not sufficient. In the
present case the animals in question were in the possession of Tiburcia Buhayan and Simon Jacinto
before the alleged pledge was entered into and apparently remained with them until the execution was
levied, and there was no actual delivery of possession to the plaintiff himself. There was therefore in
reality no change in possession.
BENITO H. LOPEZ, petitioner,
vs.
CA and THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., respondents.

On June 2, 1959, petitioner Benito H. Lopez obtained a loan in the amount of P20,000.00 from the
Prudential Bank and Trust Company. On the same date, he executed a promissory note for the same
amount, in favor of the said Bank, binding himself to repay the said sum one (1) year after the said date,
with interest at the rate of 10% per annum. In addition to said promissory note, he executed Surety Bond
No. 14164 in which he, as principal, and Philippine American General Insurance Co., Inc. (PHILAMGEN)
as surety, bound themselves jointly and severally in favor of Prudential Bank for the payment of the sum
of P20,000.00.

On the same occasion, Lopez also executed in favor of Philamgen an indemnity agreement whereby he
agreed "to indemnify the Company and keep it indemnified and hold the same harmless from and against
any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of whatever kind
and nature which the Company shall or may at any time sustain or incur in consequence of having
become surety upon the bond." 1 At the same time, Lopez executed a deed of assignment of 4,000
shares of the Baguio Military Institution entitled "Stock Assignment Separate from Certificate", which
reads:

With the execution of this deed of assignment, Lopez endorsed the stock certificate and delivered it to
Philamgen.

It appears from the evidence on record that the loan of P20,000.00 was approved conditioned upon the
posting of a surety bond of a bonding company acceptable to the bank. Thus, Lopez persuaded Emilio
Abello, Assistant Executive Vice-President of Philamgen and member of the Bond Under writing
Committee to request Atty. Timoteo J. Sumawang, Assistant Vice- President and Manager of the Bonding
Department, to accommodate him in putting up the bond against the security of his shares of stock with
the Baguio Military Institute, Inc. It was their understanding that if he could not pay the loan, Vice-
President Abello and Pio Pedrosa of the Prudential Bank would buy the shares of stocks and out of the
proceeds thereof, the loan would be paid to the Prudential Bank.

On June 2, 1960, Lopez' obligation matured without it being settled. Thus, the Prudential Bank made
demands for payment both upon Lopez and Philamgen. In turn, Philamgen sent Lopez several written
demands for the latter to pay his note (Exhibit H, H-1 & H-2), but Lopez did not comply with said
demands. Hence, the Prudential Bank sometime in August, 1961 filed a case against them to enforce
payment on the promissory note plus interest.

Considering the explicit terms of the deed denominated "Stock Assignment Separate from Certificate",
hereinbefore copied verbatim, Lopez sold, assigned and transferred unto Philamgen the stocks involved
"for and in consideration of the obligations undertaken" by Philamgen "under the terms and conditions of
the surety bond executed by it in favor of the Prudential Bank" and "for value received". On its face, it is
neither pledge nor dation in payment. The document speaks of an outright sale as there is a complete
and unconditional divestiture of the incorporeal property consisting of stocks from Lopez to Philamgen.
The transfer appears to have been an absolute conveyance of the stocks to
Philamgen whether or not Lopez defaults in the payment of P20,000.00 to Prudential Bank. While it is a
conveyance in consideration of a contingent obligation, it is not itself a conditional conveyance.

It is true that if Lopez should "well and truly perform and fulfill all the undertakings, covenants, terms,
conditions, and agreements stipulated" in his promissory note to Prudential Bank, the obligation of
Philamgen under the surety bond would become null and void. Corollarily, the stock assignment, which is
predicated on the obligation of Philamgen under the surety bond, would necessarily become null and void
likewise, for want of cause or consideration under Article 1352 of the New Civil Code. But this is not the
case here because aside from the obligations undertaken by Philamgen under the surety bond, the stock
assignment had other considerations referred to therein as "value received". Hence, based on the
manifest terms thereof, it is an absolute transfer.

Notwithstanding the express terms of the "Stock Assignment Separate from Certificate", however, We
hold and rule that the transaction should not be regarded as an absolute conveyance in view of the
circumstances obtaining at the time of the execution thereof.

It should be remembered that on June 2, 1959, the day Lopez obtained a loan of P20,000.00 from
Prudential Bank, Lopez executed a promissory note for ?20,000.00, plus interest at the rate of ten (10%)
per cent per annum, in favor of said Bank. He likewise posted a surety bond to secure his full and faithful
performance of his obligation under the promissory note with Philamgen as his surety. In return for the
undertaking of Philamgen under the surety bond, Lopez executed on the same day not only an indemnity
agreement but also a stock assignment.

The indemnity agreement and the stock assignment must be considered together as related transactions
because in order to judge the intention of the contracting parties, their contemporaneous and subsequent
acts shall be principally considered. (Article 1371, New Civil Code). Thus, considering that the indemnity
agreement connotes a continuing obligation of Lopez towards Philamgen while the stock assignment
indicates a complete discharge of the same obligation, the existence of the indemnity agreement whereby
Lopez had to pay a premium of P1,000.00 for a period of one year and agreed at all times to indemnify
Philamgen of any and all kinds of losses which the latter might sustain by reason of it becoming a surety,
is inconsistent with the theory of an absolute sale for and in consideration of the same undertaking of
Philamgen. There would have been no necessity for the execution of the indemnity agreement if the stock
assignment was really intended as an absolute conveyance. Hence, there are strong and cogent reasons
to conclude that the parties intended said stock assignment to complement the indemnity agreement and
thereby sufficiently guarantee the indemnification of Philamgen should it be required to pay Lopez' loan to
Prudential Bank.

The character of the transaction between the parties is to be determined by their


intention, regardless of what language was used or what the form of the transfer
was. If it was intended to secure the payment of money, it must be construed as
a pledge; but if there was some other intention, it is not a pledge. However, even
though a transfer, if regarded by itself, appears to have been absolute, its object
and character might still be qualified and explained by a contemporaneous
writing declaring it to have been a deposit of the property as collateral security. It
has been said that a transfer of property by the debtor to a creditor, even if
sufficient on its face to make an absolute conveyance, should be treated as a
pledge if the debt continues in existence and is not discharged by the transfer,
and that accordingly, the use of the terms ordinarily importing conveyance, of
absolute ownership will not be given that effect in such a transaction if they are
also commonly used in pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute ownership, in the absence of clear
and unambiguous language or other circumstances excluding an intent to
pledge. 11

We agree with the holding of the respondent Court of Appeals that the stock assignment, Exhibit C, is in
truth and in fact, a pledge. Indeed, the facts and circumstances leading to the execution of the stock
assignment, Exhibit C, and the admission of Lopez prove that it is in fact a pledge. The appellate court is
correct in ruling that the following requirements of a contract of pledge have been satisfied: (1) that it be
constituted to secure the fulfillment of a principal obligation; (2) that the pledgor be the absolute owner of
the thing pledged; and (3) that the person constituting the pledge has the free disposal of the property,
and in the absence thereof, that he be legally authorized for the purpose. (Article 2085, New Civil Code).
SPOUSES BONIFACIO and FAUSTINA PARAY, and VIDAL ESPELETA, Petitioners,
vs.
DRA. ABDULIA C. RODRIGUEZ, MIGUELA R. JARIOL, et al, Respondents.

Respondents were the owners, in their respective personal capacities, of shares of stock in a corporation
known as the Quirino-Leonor-Rodriguez Realty Inc.1 Sometime during the years 1979 to 1980,
respondents secured by way of pledge of some of their shares of stock to petitioners Bonifacio and
Faustina Paray ("Parays") the payment of certain loan obligations. The shares pledged are listed below:

When the Parays attempted to foreclose the pledges on account of respondents’ failure to pay their loans,
respondents filed complaints with the Regional Trial Court (RTC) of Cebu City. The actions, which were
consolidated and tried before RTC Branch 14, Cebu City, sought the declaration of nullity of the pledge
agreements, among others. However the RTC, in its decision3 dated 14 October 1988, dismissed the
complaint and gave "due course to the foreclosure and sale at public auction of the various pledges
subject of these two cases."4 This decision attained finality after it was affirmed by the Court of Appeals
and the Supreme Court. The Entry of Judgment was issued on 14 August 1991.

Respondents then received Notices of Sale which indicated that the pledged shares were to be sold at
public auction on 4 November 1991. However, before the scheduled date of auction, all of respondents
caused the consignation with the RTC Clerk of Court of various amounts. It was claimed that respondents
had attempted to tender these payments to the Parays, but had been rebuffed. The deposited amounts
were as follows:

Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal
Espeleta successfully bidding the amount of P6,200,000.00 for all of the pledged shares. None of
respondents participated or appeared at the auction of 4 November 1991.

Respondents instead filed on 13 November 1991 a complaint seeking the declaration of nullity of the
concluded public auction. The complaint, docketed as Civil Case No. CEB-10926, was assigned to
Branch 16 of the Cebu City RTC. Respondents argued that their tender of payment and subsequent
consignations served to extinguish their loan obligations and discharged the pledge contracts. Petitioners
countered that the auction sale was conducted pursuant to the final and executory judgment in Civil
Cases Nos. R-20120 and 20131, and that the tender of payment and consignations were made long after
their obligations had fallen due.

We rule in favor of petitioners.

The appellate court’s dwelling on the right of redemption is utterly off-tangent. The right of redemption
involves payments made by debtors after the foreclosure of their properties, and not those made or
attempted to be made, as in this case, before the foreclosure sale. The proper focus of the Court of
Appeals should have been whether the consignations made by respondents sufficiently acquitted them of
their principal obligations. A pledge contract is an accessory contract, and is necessarily discharged if the
principal obligation is extinguished.

Nonetheless, the Court is now confronted with this rather new fangled theory, as propounded by the
Court of Appeals, involving the right of redemption over pledged properties. We have no hesitation in
pronouncing such theory as discreditable.

Preliminarily, it must be clarified that the subject sale of pledged shares was an extrajudicial sale,
specifically a notarial sale, as distinguished from a judicial sale as typified by an execution sale. Under the
Civil Code, the foreclosure of a pledge occurs extrajudicially, without intervention by the courts. All the
creditor needs to do, if the credit has not been satisfied in due time, is to proceed before a Notary Public
to the sale of the thing pledged.9
Indeed, as affirmed by the Civil Code,11 the decision to proceed with the sale by public auction remains in
the sole discretion of the Parays, who could very well choose not to hold the sale without violating the
final judgments in the aforementioned civil cases. If the sale were truly in compliance with a final
judgment or order, the Parays would have no choice but to stage the sale for then the order directing the
sale arises from judicial compulsion. But nothing in the dispositive portion directed the sale at public
auction as a mandatory recourse, and properly so since the sale of pledged property in public auction is,
by virtue of the Civil Code, extrajudicial in character.

The right to redeem property sold as security for the satisfaction of an unpaid obligation does not exist
preternaturally. Neither is it predicated on proprietary right, which, after the sale of property on execution,
leaves the judgment debtor and vests in the purchaser. Instead, it is a bare statutory privilege to be
exercised only by the persons named in the statute.12

The right of redemption over mortgaged real property sold extrajudicially is established by Act No. 3135,
as amended. The said law does not extend the same benefit to personal property. In fact, there is no law
in our statute books which vests the right of redemption over personal property. Act No. 1508, or the
Chattel Mortgage Law, ostensibly could have served as the vehicle for any legislative intent to bestow a
right of redemption over personal property, since that law governs the extrajudicial sale of mortgaged
personal property, but the statute is definitely silent on the point. And Section 39 of the 1997 Rules of Civil
Procedure, extensively relied upon by the Court of Appeals, starkly utters that the right of redemption
applies to real properties, not personal properties, sold on execution.

On the other hand, under the Civil Code, it is the pledgee, and not the pledgor, who is given the right to
choose which of the items should be sold if two or more things are pledged.15 No similar option is given to
pledgors under the Civil Code. Moreover, there is nothing in the Civil Code provisions governing the
extrajudicial sale of pledged properties that prohibits the pledgee of several different pledge contracts
from auctioning all of the pledged properties on a single occasion, or from the buyer at the auction sale in
purchasing all the pledged properties with a single purchase price. The relative insignificance of
ascertaining the definite apportionments of the sale price to the individual shares lies in the fact that once
a pledged item is sold at auction, neither the pledgee nor the pledgor can recover whatever deficiency or
excess there may be between the purchase price and the amount of the principal obligation. 16

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.

EULOGIO BETITA, plaintiff-appellee,


vs.
SIMEON GANZON, ALEJO DE LA FLOR, and CLEMENTE PEDRENA, defendants-appellants.

This action is brought to recover the possession of four carabaos with damages in the sum of P200.
Briefly stated, the facts are as follows: On May 15, 1924, the defendant Alejo de la Flor recovered a
judgment against Tiburcia Buhayan for the sum of P140 with costs. Under this judgment the defendant
Ganzon, as sheriff levied execution on the carabaos in question which were found in the possession of
one Simon Jacinto but registered in the name of Tiburcia Buhayan. The plaintiff herein, Eulogio Betita,
presented a third party claim (terceria) alleging that the carabaos had been mortgaged to him and as
evidence thereof presented a document dated May 6, 1924, but the sheriff proceeded with the sale of the
animals at public auction where they were purchased by the defendant Clemente Perdena for the sum of
P200, and this action was thereupon brought.
The document upon which the plaintiff bases his cause of action is in the Visayan dialect and in
translation reads as follows:

The court below held that inasmuch as this document was prior in date to the judgment under which the
execution was levied, it was a preferred credit and judgment was rendered in favor of the plaintiff for the
possession of the carabaos, without damages and without costs. From this judgment the defendants
appeal.

The judgment must be reversed unless the document above quoted can be considered either a chattel
mortgage or else a pledge. Neither did the document constitute a sufficient pledge of the property valid
against third parties. Article 1865 of the Civil Code provides that "no pledge shall be effective as against
third parties unless evidence of its date appears in a public instrument." The document in question is not
public, but it is suggested that its filing with the sheriff in connection with the terceria gave in the effect of
a public instrument and served to fix the date of the pledge, and that it therefore fulfills the requirements
of article 1865. Assuming, without conceding, that the filing of the document with the sheriff had that
effect, it seems nevertheless obvious that the pledge only became effective as against the plaintiff in
execution from the date of the filing and did not rise superior to the execution attachment previously
levied (see Civil Code, article 1227).

Manresa, in commenting on article 1865, says:

ART. 1865. A pledge will not be valid against a third party if the certainty of the date is not
expressed in a public instrument.

This article, the precept of which did not exist in our old law, answers the necessity for
not disturbing the relationship or the status of the ownership of things with hidden or
simulated contracts of pledge, in the same way and for the identical reasons that were
taken into account by the mortgage law in order to suppress the implied and legal
mortgages which produce so much instability in real property.

Considering the effects of a contract of pledge, it is easily understood that, without this
warranty demanded by law, the case may happen wherein a debtor in bad faith from the
moment that he sees his movable property in danger of execution may attempt to
withdraw the same from the action of justice and the reach of his creditors by simulating,
through criminal confabulations, anterior and fraudulent alterations in his possession by
means of feigned contracts of this nature; and, with the object of avoiding or preventing
such abuses, almost all the foreign writers advise that, for the effectiveness of the pledge,
it be demanded as a precise condition that in every case the contract be executed in a
public writing, for, otherwise, the determination of its date will be rendered difficult and its
proof more so, even in cases in which it is executed before witnesses, due to the difficulty
to be encountered in seeking those before whom it was executed.

If the mere filing of a private document with the sheriff after the levy of execution can create a lien of
pledge superior to the attachment, the purpose of the provisions of article 1865 as explained by Manresa
clearly be defeated. Such could not have been the intention of the authors of the Code.

Article 2097. With the consent of the pledgee, the thing pledged may be alienated by the pledgor or
owner, subject to the pledge. The ownership of the thing pledged is transmitted to the vendee or
transferee as soon as the pledgee consents to the alienation, but the latter shall continue in possession.
(n)

Article 2098. The contract of pledge gives a right to the creditor to retain the thing in his possession or in
that of a third person to whom it has been delivered, until the debt is paid. (1866a)
Article 2099. The creditor shall take care of the thing pledged with the diligence of a good father of a
family; he has a right to the reimbursement of the expenses made for its preservation, and is liable for its
loss or deterioration, in conformity with the provisions of this Code. (1867)

Article 2100. The pledgee cannot deposit the thing pledged with a third person, unless there is a
stipulation authorizing him to do so.

The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged. (n)

Article 2101. The pledgor has the same responsibility as a bailor in commodatum in the case under
article 1951. (n)

Article 2102. If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall
compensate what he receives with those which are owing him; but if none are owing him, or insofar as
the amount may exceed that which is due, he shall apply it to the principal. Unless there is a stipulation to
the contrary, the pledge shall extend to the interest and earnings of the right pledged.

In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged, but
shall be subject to the pledge, if there is no stipulation to the contrary. (1868a)

Article 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.

Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order
to recover it from, or defend it against a third person. (1869)

Article 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if he
should do so, or should misuse the thing in any other way, the owner may ask that it be judicially or
extrajudicially deposited. When the preservation of the thing pledged requires its use, it must be used by
the creditor but only for that purpose. (1870a)

Article 2105. 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, with expenses in a proper case. (1871)

Article 2106. If through the negligence or wilful act of the pledgee, the thing pledged is in danger of being
lost or impaired, the pledgor may require that it be deposited with a third person. (n)

Article 2107. If there are reasonable grounds to fear the destruction or impairment of the thing pledged,
without the fault of the pledgee, the pledgor may demand the return of the thing, upon offering another
thing in pledge, provided the latter is of the same kind as the former and not of inferior quality, and without
prejudice to the right of the pledgee under the provisions of the following article.

The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged. (n)

Article 2108. If, without the fault of the pledgee, there is danger of destruction, impairment, or diminution
in value of the thing pledged, he may cause the same to be sold at a public sale. The proceeds of the
auction shall be a security for the principal obligation in the same manner as the thing originally pledged.
(n)

Article 2109. If the creditor is deceived on the substance or quality of the thing pledged, he may either
claim another thing in its stead, or demand immediate payment of the principal obligation. (n)

Article 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is
extinguished. Any stipulation to the contrary shall be void.
If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there
is a prima facie presumption that the same has been returned by the pledgee. This same presumption
exists if the thing pledged is in the possession of a third person who has received it from the pledgor or
owner after the constitution of the pledge. (n)

Article 2111. A statement in writing by the pledgee that he renounces or abandons the pledge is
sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or owner, nor
the return of the thing pledged is necessary, the pledgee becoming a depositary. (n)

Article 2112. The creditor to whom the credit has not been satisfied in due time, may proceed before a
Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with
notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for
which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same
formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate
the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim. (1872a)

Article 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right
if he should offer the same terms as the highest bidder.

The pledgee may also bid, but his offer shall not be valid if he is the only bidder. (n)

Article 2114. All bids at the public auction shall offer to pay the purchase price at once. If any other bid is
accepted, the pledgee is deemed to have been received the purchase price, as far as the pledgor or
owner is concerned. (n)

Article 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. (n)

Article 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result
thereof. (n)

Article 2117. Any third person who has any right in or to the thing pledged may satisfy the principal
obligation as soon as the latter becomes due and demandable. (n)

Article 2118. If a credit which has been pledged becomes due before it is redeemed, the pledgee may
collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the
surplus, should there be any, to the pledgor. (n)

Article 2119. If two or more things are pledged, the pledgee may choose which he will cause to be sold,
unless there is a stipulation to the contrary. He may demand the sale of only as many of the things as are
necessary for the payment of the debt. (n)

ARTICLE 2120. If a third party secures an obligation by pledging his own movable property under the
provisions of article 2085 he shall have the same rights as a guarantor under articles 2066 to 2070, and
articles 2077 to 2081. He is not prejudiced by any waiver of defense by the principal obligor. (n)

FILOMENA SARMIENTO and her husband EUSEBIO M. VILLASEÑOR, plaintiffs-appellants,


vs.
GLICERIO JAVELLANA, defendant-appellant.
On August 28, 1991, the defendant loaned the plaintiffs the sum of P1,500 with interest at the rate of 25
per cent per annum for the term of one year. To guarantee this loan, the plaintiffs pledged a large medal
with a diamond in the center and surrounded with ten diamonds, a pair of diamond earrings, a small comb
with twenty-two diamonds, and two diamond rings, which the contracting parties appraised at P4,000.
This loan is evidenced by two documents (Exhibits A and 1) wherein the amount appears to be P1,875,
which includes the 25 per cent interest on the sum of P1,500 for the term of one year.

The plaintiffs allege that at the maturity of this loan, August 31, 1912, the plaintiff Eusebio M.
Villaseñor, being unable to pay the loan, obtained from the defendant an extension, with the condition that
the loan was to continue, drawing interest at the rate of 25 per cent per annum, so long as the security
given was sufficient to cover the capital and the accrued interest. In the month of August, 1919, the
plaintiff Eusebio M. Villaseñor, in company with Carlos M. Dreyfus, went to the house of the defendant
and offered to pay the loan and redeem the jewels, taking with him, for this purpose, the sum of P11,000,
but the defendant then informed them that the time for the redemption had already elapsed. The plaintiffs
renewed their offer to redeem the jewelry by paying the loan, but met with the same reply. These facts
are proven by the testimony of the plaintiffs, corroborated by Carlos M. Dreyfus.

The plaintiffs now bring this action to compel the defendant to return the jewels pledged, or their
value, upon the payment by them of the sum they owe the defendant, with the interest thereon.

The defendant alleges, in his defense, that upon the maturity of the loan, August 31, 1912, he
requested the plaintiff, Eusebio M. Villaseñor, to secure the money, pay the loan and redeem the jewels,
as he needed money to purchase a certain piece of land; that one month thereafter, the plaintiff, Filomena
Sarmiento, went to his house and offered to sell him the jewels pledged for P3,000; that the defendant
then told her to come back on the next day, as he was to see his brother, Catalino Javellana, and ask him
if he wanted to take the jewels for that sum; that on the next day the plaintiff, Filomena Sarmiento, went
back to the house of the defendant who then paid her the sum of P1,125, which was the balance
remaining of the P3,000 after deducting the plaintiff's loan.

It appearing that the defendant possessed these jewels originally, as a pledge to secure the
payment of a loan stated in writing, the mere testimony of the defendant to the effect that later they were
sold to him by the plaintiff, Filomena Sarmiento, against the positive testimony of the latter that she did
not make any such sale, requires a strong corroboration to be accepted. We do not find the testimony of
Jose Sison to be of sufficient value as such corroboration.

. But not only do we find that the defendant has not sufficiently established, by his evidence, the fact of
the purchase of the jewels, but also that there is a circumstance tending to show the contrary, which is
the fact that up to the trial of this cause the defendant continued in possession of the documents, Exhibits
A and 1, evidencing the loan and the pledge. If the defendant really bought these jewels, its seems
natural that Filomena would have demanded the surrender of the documents evidencing the loan and the
pledge, and the defendant would have returned them to plaintiff.

Our conclusion is that the jewels pledged to defendant were not sold to him afterwards.

Another point on which evidence was introduced by both parties is as to the value of the jewels in
the event that they were not returned by the defendant. In view of the evidence of record, we accept the
value of P12,000 fixed by the trial court.

From the foregoing it follows that, as the jewels in question were in the possession of the defendant
to secure the payment of a loan of P1,500, with interest thereon at the rate of 25 per cent per annum from
Augusts 31, 1911, to August 31, 1912, and the defendant having subsequently extended the term of the
loan indefinitely, and so long as the value of the jewels pledged was sufficient to secure the payment of
the capital and the accrued interest, the defendant is bound to return the jewels or their value (P12,000)
to plaintiffs, and the plaintiffs have the right to demand the same upon the payment by them of the sum of
P1,500, plus the interest thereon at the rate of 25 per cent per annum from August 28, 1911.

SOUTHERN MOTORS, INC., Plaintiff-Appellee,


vs.
ELISEO BARBOSA, Defendant-Appellant.
Plaintiff, Southern Motors, Inc., brought this action against Eliseo Barbosa, to foreclose a real estate
mortgage, constituted by the latter in favor of the former, as security for the payment of the sum of
P2,889.53 due to said Plaintiff from one Alfredo Brillantes, who had failed to settle his obligation in
accordance with the terms and conditions of the corresponding deed of mortgage. Defendant Eliseo
Barbosa filed an answer admitting the allegations of the complaint and alleging, by way of “special and
affirmative” defense:
“That the Defendant herein has executed the deed of mortgage Annex A for the only purpose of
guaranteeing — as surety and/or guarantor — the payment of the above mentioned debt of Mr. Alfredo
Brillantes in favor of the Plaintiff.
“That the Plaintiff until now has no right action against the herein Defendant on the ground that
said Plaintiff, without motive whatsoever, did not intent or intent to exhaust all recourses to collect from
the true debtor Mr. Alfredo Brillantes the debt contracted by the latter in favor of said Plaintiff, and did not
resort nor intends to resort all the legal remedies against the true debtor Mr. Alfredo Brillantes,
notwithstanding the fact that said Mr. Alfredo Brillantes is solvent and has many properties within the
Province of Iloilo.”
Moreover, it is obvious that Defendant’s affirmative defense is devoid of merit for:
1. The deed of mortgage executed by him specifically provides:
“That if said Mr. Alfredo Brillantes or herein mortgagor, his heirs, executors, administrators and assigns
shall well and truly perform the full obligations above-stated according to the terms thereof, then this
mortgage shall be null and void, otherwise it shall remain in full force and effect, in which event herein
mortgagor authorizes and empowers herein mortgagee-company to take any of the following actions to
enforce said payment;.
“(a) Foreclose, judicially or extrajudicially, the chattel mortgage above referred to and/or also this
mortgage, applying the proceeds of the purchase price at public sale of the real property herein
mortgaged to any deficiency or difference between the purchase price of said chattel at public auction
and the amount of P2,889.53, together with its interest hereby secured; chan roblesvirtualawlibraryor
“(b) Simply foreclose this mortgage judicially in accordance with the provisions of section 2, Rule 70,
Rules of Court, or extra- judicially under the provisions of Act No. 3135 and Act No. 4118, to satisfy the
full amount of P2,889.53, together with its interest of 12 per cent per annum.”
2. 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. Guarantees, without any such pledge or
mortgage, are governed by Title XV of said Code, whereas pledges and mortgages fall under Title XVI of
the same Code, in which the following provisions, among others, are found:
ART. 2087. “It is also of the essence of these contracts that when the principal obligation becomes due,
the things in which the pledge or mortgage consists may be alienated for the payment to the creditor.”
ART. 2126. “The mortgage directly and immediately subjects the property upon which it is imposed,
whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted.”
3. It has been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is not entitled to the
exhaustion of the property of the principal debtor.
4. 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
case.

Article 2121. Pledges created by operation of law, such as those referred to in articles 546, 1731, and
1994, are governed by the foregoing articles on the possession, care and sale of the thing as well as on
the termination of the pledge. However, after payment of the debt and expenses, the remainder of the
price of the sale shall be delivered to the obligor. (n)

Article 2122. A thing under a pledge by operation of law may be sold only after demand of the amount for
which the thing is retained. The public auction shall take place within one month after such demand. If,
without just grounds, the creditor does not cause the public sale to be held within such period, the debtor
may require the return of the thing. (n)

Article 2123. With regard to pawnshops and other establishments, which are engaged in making loans
secured by pledges, the special laws and regulations concerning them shall be observed, and
subsidiarily, the provisions of this Title. (1873a)

End of pre-finals

Article 2124. Only the following property may be the object of a contract of mortgage:

(1) Immovables;

(2) Alienable real rights in accordance with the laws, imposed upon immovables.

Nevertheless, movables may be the object of a chattel mortgage. (1874a)

Article 2125. In addition to the requisites stated in article 2085, it is indispensable, in order that a
mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of
Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties.

The persons in whose favor the law establishes a mortgage have no other right than to demand the
execution and the recording of the document in which the mortgage is formalized. (1875a)

Article 2126. The mortgage directly and immediately subjects the property upon which it is imposed,
whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted.
(1876)

Article 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and
the rents or income not yet received when the obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of
expropriation for public use, with the declarations, amplifications and limitations established by law,
whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third
person. (1877)

Article 2128. The mortgage credit may be alienated or assigned to a third person, in whole or in part, with
the formalities required by law. (1878)

Article 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 the terms
and with the formalities which the law establishes. (1879)
Article 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void.
(n)

Article 2131. 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. (1880a)

SPOUSES ADELINA S. CUYCO and FELICIANO U. CUYCO, Petitioners,


vs.
SPOUSES RENATO CUYCO and FILIPINA CUYCO, Respondents.

Petitioners, spouses Adelina and Feliciano Cuyco, obtained a loan in the amount of P1,500,000.00 from
respondents, spouses Renato and Filipina Cuyco, payable within one year at 18% interest per annum,
and secured by a Real Estate Mortgage4 over a parcel of land with improvements thereon situated in
Cubao, Quezon City covered by TCT No. RT-43723 (188321).5

Subsequently, petitioners obtained additional loans from the respondents in the aggregate amount of
P1,250,000.00, broken down as follows: (1) P150,000.00 on May 30, 1992; (2) P150,000.00 on July 1,
1992; (3) P500,000.00 on September 5, 1992; (4) P200,000.00 on October 29, 1992; and (5)
P250,000.00 on January 13, 1993.6

Petitioners made payments amounting to P291,700.00,7 but failed to settle their outstanding loan
obligations. Thus, on September 10, 1997, respondents filed a complaint8 for foreclosure of mortgage
with the RTC of Quezon City, which was docketed as Civil Case No. Q-97-32130. They alleged that
petitioners’ loans were secured by the real estate mortgage; that as of August 31, 1997, their
indebtedness amounted to P6,967,241.14, inclusive of the 18% interest compounded monthly; and that
petitioners’ refusal to settle the same entitles the respondents to foreclose the real estate mortgage.

In their answer,11 petitioners admitted their loan obligations but argued that only the original loan of
P1,500,000.00 was secured by the real estate mortgage at 18% per annum and that there was no
agreement that the same will be compounded monthly.

As regards what loans were secured by the real estate mortgage, respondents contended that all five
additional loans were intended by the parties to be secured by the real estate mortgage. Thus, the CA
erred in ruling that only two of the five additional loans were secured by the real estate mortgage when
the documents evidencing said loans would show at least three loans were secured by the real estate
mortgage, namely: (1) P150,000.00 obtained on May 31, 1992; (2) P150,000.00 obtained on July 1, 1992;
and (3) P500,000.00 obtained on September 5, 1992.25

The RTC held that all the additional loans were secured by the real estate mortgage, thus:

There is, therefore, a preponderance of evidence to show that the parties agreed that the additional loans
would be against the mortgaged property. It is of no moment that the Deed of Mortgage (Exh. B) was not
amended and thereafter annotated at the back of the title (Exh. C) because under Article 2125 of the Civil
Code, if the instrument of mortgage is not recorded, the mortgage is nevertheless binding between the
parties. It is extremely difficult for the court to perceive that the plaintiffs required the defendants to
execute a mortgage on the first loan and thereafter fail to do so on the succeeding loans. Such contrary
behavior is unlikely.29

With respect to the other subsequent loans of the defendants-appellants in the amount of P150,000.00,
obtained on 31 May 1992; in the amount of P200,000.00, obtained on 29 October 1992; and, in the
amount of P250,000.00, obtained on 13 January 1993, nothing in the records remotely suggests that the
mortgagor (defendants-appellants), likewise, intended the said loans to be secured by the real estate
mortgage contract. Consequently, we rule that the trial court did err in declaring said loans to be secured
by the real estate mortgage contract.30

As a general rule, a mortgage liability is usually limited to the amount mentioned in the
contract.31 However, the amounts named as consideration in a contract of mortgage do not limit the
amount for which the mortgage may stand as security if from the four corners of the instrument the intent
to secure future and other indebtedness can be gathered. This stipulation is valid and binding between
the parties and is known in American Jurisprudence as the "blanket mortgage clause," also known as a
"dragnet clause." 32

A "dragnet clause" operates as a convenience and accommodation to the borrowers as it makes available
additional funds without their having to execute additional security documents, thereby saving time, travel,
loan closing costs, costs of extra legal services, recording fees, et cetera.33

While a real estate mortgage may exceptionally secure future loans or advancements, these future debts
must be sufficiently described in the mortgage contract. An obligation is not secured by a mortgage
unless it comes fairly within the terms of the mortgage contract.34

It is clear from a perusal of the aforequoted real estate mortgage that there is no stipulation that the
mortgaged realty shall also secure future loans and advancements. Thus, what applies is the general rule
above stated.

Even if the parties intended the additional loans of P150,000.00 obtained on May 30, 1992, P150,000.00
obtained on July 1, 1992, and P500,00.00 obtained on September 5, 1992 to be secured by the same
real estate mortgage, as shown in the acknowledgement receipts, it is not sufficient in law to bind the
realty for it was not made substantially in the form prescribed by law.

In order to constitute a legal mortgage, it must be executed in a public document, besides being recorded.
A provision in a private document, although denominating the agreement as one of mortgage, cannot be
considered as it is not susceptible of inscription in the property registry. A mortgage in legal form is not
constituted by a private document, even if such mortgage be accompanied with delivery of possession of
the mortgage property.35Besides, by express provisions of Section 127 of Act No. 496, a mortgage
affecting land, whether registered under said Act or not registered at all, is not deemed to be sufficient in
law nor may it be effective to encumber or bind the land unless made substantially in the form therein
prescribed. It is required, among other things, that the document be signed by the mortgagor executing
the same, in the presence of two witnesses, and acknowledged as his free act and deed before a notary
public. A mortgage constituted by means of a private document obviously does not comply with such
legal requirements.36

What the parties could have done in order to bind the realty for the additional loans was to execute a new
real estate mortgage or to amend the old mortgage conformably with the form prescribed by the law.
Failing to do so, the realty cannot be bound by such additional loans, which may be recovered by the
respondents in an ordinary action for collection of sums of money.

MOBIL OIL PHILIPPINES, INC., plaintiff-appellant,


vs.
RUTH R. DIOCARES, ET AL., defendants-appellees.

The case for the plaintiff, Mobil Oil Philippines, Inc., now appellant, was summarized in the lower court
order of February 25, 1966, subject of this appeal. Thus: "In its complaint plaintiff alleged that on Feb. 9,
1965 defendants Ruth R. Diocares and Lope T. Diocares entered into a contract of loan and real estate
mortgage wherein the plaintiff extended to the said defendants a loan of P45,000.00; that said defendants
also agreed to buy from the plaintiff on cash basis their petroleum requirements in an amount of not less
than 50,000 liters per month; that the said defendants will pay to the plaintiff 9-1/2% per annum on the
diminishing balance of the amount of their loan; that the defendants will repay the said loan in monthly
installments of P950.88 for a period of five (5) years from February 9, 1965; that to secure the
performance of the foregoing obligation they executed a first mortgage on two parcels of land covered by
Transfer Certificates of Title Nos. T-27136 and T-27946, both issued by the Register of Deeds of Bacolod
City. The agreement further provided that in case of failure of the defendants to pay any of the
installments due and purchase their petroleum requirements in the minimum amount of 50,000 liters per
month from the plaintiff, the latter has the right to foreclose the mortgage or recover the payment of the
entire obligation or its remaining unpaid balance; that in case of foreclosure the plaintiff shall be entitled to
12% of the indebtedness as damages and attorney's fees. A copy of the loan and real estate mortgage
contract executed between the plaintiff and the defendants is attached to the complaint and made a part
thereof. The complaint further alleges that the defendant paid only the amount of P1,901.76 to the
plaintiff, thus leaving a balance of P43,098.24, excluding interest, on their indebtedness. The said
defendants also failed to buy on cash basis the minimum amount of petroleum which they agreed to
purchase from the plaintiff. The plaintiff, therefore, prayed that the defendants be ordered to pay the
amount of P43,098.24, with interest at 9-1/2% per annum from the date it fell due, and in default of such
payment that the mortgaged properties be sold and the proceeds applied to the payment of defendants'
obligation." 6

Hence this appeal, plaintiff-appellant assigning as errors the holding of the lower court that no real estate
mortgage was established and its consequent refusal to order the foreclosure of the mortgaged
properties. As set forth at the outset, we find the appeal meritorious. The lower court should not have held
that no real estate mortgage was established and should have ordered its foreclosure.

The lower court predicated its inability to order the foreclosure in view of the categorical nature of
the opening sentence of the governing article 10 that it is indispensable, "in order that a mortgage may be
validly constituted, that the document in which it appears be recorded in the Registry of Property." Note
that it ignored the succeeding sentence: "If the instrument is not recorded, the mortgage is nevertheless
binding between the parties." Its conclusion, however, is that what was thus created was merely "a
personal obligation but did not establish a real estate mortgage."

Such a conclusion does not commend itself for approval. The codal provision is clear and explicit.
Even if the instrument were not recorded, "the mortgage is nevertheless binding between the parties."
The law cannot be any clearer. Effect must be given to it as written. The mortgage subsists; the parties
are bound. As between them, the mere fact that there is as yet no compliance with the requirement that it
be recorded cannot be a bar to foreclosure.1awphîl.nèt

A contrary conclusion would manifest less than full respect to what the codal provision ordains. The
liability of the mortgagor is therein explicitly recognized. To hold, as the lower court did, that no
foreclosure would lie under the circumstances would be to render the provision in question nugatory. That
we are not allowed to do. What the law requires in unambiguous language must be lived up to. No
interpretation is needed, only its application, the undisputed facts calling for it. 11

Nor is the reason difficult to discern why such an exception should be made to the rule that is
indispensable for a mortgage to be validly constituted that it be recorded. Equity so demands, and justice
is served. There is thus full acknowledgment of the binding effect of a promise, which must be lived up to,
otherwise the freedom a contracting party is supposed to possess becomes meaningless. It could be said
of course that to allow foreclosure in the absence of such a formality is to offend against the demands of
jural symmetry. What is "indispensable" may be dispensed with. Such an objection is far from fatal. This
would not be the first time when logic yields to what is fair and what is just. To such an overmastering
requirement, law is not immune.

GEMMA R. HECHANOVA, et al, petitioners,


vs.
HON. MIDPANTAO L. ADIL, et al, respondents.
The case under review is for the annulment of a deed of sale dated March 11, 1978, executed by
defendant Jose Y. Servando in favor of his co-defendants, the petitioners herein, covering three parcels
of land situated in Iloilo City. Claiming that the said parcels of land were mortgaged to him in 1970 by the
vendor, who is his cousin, to secure a loan of P20,000.00, the plaintiff Pio Servando impugned the validity
of the sale as being fraudulent, and prayed that it be declared null and void and the transfer certificates of
title issued to the vendees be cancelled, or alternatively, if the sale is not annulled, to order the defendant
Jose Servando to pay the amount of P20,000.00, plus interests, and to order defendants to pay damages.
Attached to the complaint was a copy of the private document evidencing the alleged mortgage (Annex
A), which is quoted hereunder:

The defendants moved to dismiss the complaint on the grounds that it did not state a cause of action, the
alleged mortgage being invalid and unenforceable since it was a mere private document and was not
recorded in the Registry of Deeds; and that the plaintiff was not the real party in interest and, as a mere
mortgagee, had no standing to question the validity of the sale. The motion was denied by the respondent
Judge, in its order dated June 20, 1978, "on the ground that this action is actually one for collection."

We find the petition meritorious, and the same is hereby given due course.

It is clear from the records of this case that the plaintiff has no cause of action. Plaintiff has no standing to
question the validity of the deed of sale executed by the deceased defendant Jose Servando in favor of
his co-defendants Hechanova and Masa. No valid mortgage has been constituted in plaintiff's favor, the
alleged deed of mortgage being a mere private document and not registered.

RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners,


vs.
THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF COMMERCE, respondents.

The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with the Court of First Instance
of Rizal against respondent Philippine Bank of Commerce sought the annulment of the Deed of Mortgage
dated December 6, 1966 executed in favor of the Philippine Bank of Commerce by the spouses Jose M.
Lozano and Josefa P. Lozano as well as the extrajudicial foreclosure made on September 4, 1968. It
alleged among others that (a) the Deed of Mortgage lacks consideration and (b) the mortgage was
executed by one who was not the owner of the mortgaged property. It further alleged that the property in
question was foreclosed pursuant to Act No. 3135 as amended, without, however, complying with the
condition imposed for a valid foreclosure. Granting the validity of the mortgage and the extrajudicial
foreclosure, it finally alleged that respondent Bank should have accepted petitioner's offer to redeem the
property under the principle of equity said justice.

The factual findings of respondent Court of Appeals being conclusive upon this Court, We hereby adopt
the facts found the trial court and found by the Court of Appeals to be consistent with the evidence
adduced during trial, to wit:

It is not disputed that spouses Jose M. Lozano and Josefa P. Lozano were the
owners of the property which they mortgaged on December 6, 1966, to secure
the payment of the loan in the principal amount of P75,000.00 they were about to
obtain from defendant-appellee Philippine Bank of Commerce; that on December
8, 1966, executed in favor of plaintiff-appellant the Deed of Sale with Mortgage ,,
for and in consideration of the sum of P100,000.00, P25,000.00 of which amount
being payable to the Lozano spouses upon the execution of the document, and
the balance of P75,000.00 being payable to defendant- appellee; that on
December 6, 1966, when the mortgage was executed by the Lozano spouses in
favor of defendant-appellee, the loan of P75,000.00 was not yet received them,
as it was on December 12, 1966 when they and their co-maker Alfonso Lim
signed the promissory note for that amount; that from April 28, 1967 to July 12,
1968, plaintiff-appellant made payments to defendant-appellee on the mortgage
in the total amount of P18,944.22; that on May 4, 1968, plaintiff-appellant
assigned all his rights under the Deed of Sale with Assumption of Mortgage to his
brother, intervenor Raoul Bonnevie; that on June 10, 1968, defendant-appellee
applied for the foreclosure of the mortgage, and notice of sale was published in
the Luzon Weekly Courier on June 30, July 7, and July 14, 1968; that auction
sale was conducted on August 19, 1968, and the property was sold to defendant-
appellee for P84,387.00; and that offers from plaintiff-appellant to repurchase the
property failed, and on October 9, 1969, he caused an adverse claim to be
annotated on the title of the property. (Decision of the Court of Appeals, p. 5).

Petitioners admit that they did not secure the consent of respondent Bank to the sale with assumption of
mortgage. Coupled with the fact that the sale/assignment was not registered so that the title remained in
the name of the Lozano spouses, insofar as respondent Bank was concerned, the Lozano spouses could
rightfully and validly mortgage the property. Respondent Bank had every right to rely on the certificate of
title. It was not bound to go behind the same to look for flaws in the mortgagor's title, the doctrine of
innocent purchaser for value being applicable to an innocent mortgagee for value. (Roxas vs. Dinglasan,
28 SCRA 430; Mallorca vs. De Ocampo, 32 SCRA 48). Another argument for the respondent Bank is that
a mortgage follows the property whoever the possessor may be and subjects the fulfillment of the
obligation for whose security it was constituted.

Spouses RODRIGO PADERES and SONIA PADERES, Petitioners,


vs.
The Hon. COURT OF APPEALS,1 Hon. CARLOTA P. VALENZUELA, Respondents.

On September 14, 1982, Manila International Construction Corporation (MICC) executed a real estate
mortgage4 over 21 registered parcels of land including the improvements thereon in favor of Banco
Filipino Savings and Mortgage Bank (Banco Filipino) in order to secure a loan of P1,885,000.00. The
mortgage was registered with the Registry of Deeds of Pasay City and annotated on the corresponding
transfer certificates of title (TCTs) covering the properties on December 17, 1982.5

The 21 mortgaged properties included two lots, one with an area of 264 square meters, and the other with
an area of 263, both located in the then Municipality of Parañaque (now Parañaque City) covered by TCT
Nos. 610626 and 61078,7 respectively.

Subsequently or in August 1983, MICC sold the lot8 covered by TCT No. 61078, together with the
house9 thereon, to the petitioners in the first case, the Paderes spouses. And on January 9, 1984, MICC
sold the house10 built on the lot covered by TCT No. 61062 to the petitioners in the second case, the
Bergado spouses. Neither sale was registered, however.11

On January 25, 1985, for failure of MICC to settle its obligations, Banco Filipino filed a verified
Petition12 for the extrajudicial foreclosure of MICC’s mortgage. At the auction sale of the foreclosed
properties on March 25, 1985, Banco Filipino submitted a bid of P3,092,547.82 and was declared the
highest bidder. A Certificate of Sale13 was issued in its favor which was registered with the Registry of
Deeds and annotated on the corresponding TCTs covering the mortgaged properties on July 29, 1985.

That petitioners purchased their properties from MICC in good faith is of no moment. The purchases took
place after MICC’s mortgage to Banco Filipino had been registered in accordance with Article 2125 20 of
the Civil Code and the provisions of P.D. 1529 (property registry decree).21 As such, under Articles
131222 and 212623 of the Civil Code, a real right or lien in favor of Banco Filipino had already been
established, subsisting over the properties until the discharge of the principal obligation, whoever the
possessor(s) of the land might be.
Sale or transfer cannot affect or release the mortgage. A purchaser is necessarily bound to
acknowledge and respect the encumbrance to which is subjected the purchased thing and which
is at the disposal of the creditor "in order that he, under the terms of the contract, may recover the
amount of his credit therefrom." For, a recorded real estate mortgage is a right in rem, a lien on
the property whoever its owner may be. Because the personality of the owner is disregarded; the
mortgage subsists notwithstanding changes of ownership; the last transferee is just as much of a
debtor as the first one; and this, independent of whether the transferee knows or not the person of
the mortgagee. So it is, that a mortgage lien is inseperable from the property mortgaged. All
subsequent purchasers thereof must respect the mortgage, whether the transfer to them be with
or without the consent of the mortgagee. For, the mortgage, until discharge, follows the property.

TOMASA VDA. DE JACOB, petitioner,


vs.
CA, BICOL SAVINGS & LOAN ASSOCIATION, JORGE CENTENERA, et al, respondents.

Dr. Alfredo E. Jacob was the registered owner of a parcel of land described under Transfer Certificate of
Title No. 1433 of the Register of Deeds of Naga City. 1 Sometime in 1972 Jorge Centenera was appointed
as administrator of Hacienda Jacob until January 1, 1978 when the Special Power of Attorney executed in
his favor by Dr. Jacob was revoked by the latter. 2 The land in question is located at Liboton, Naga City
and has an area of approximately 3,376 square meters. Because of the problem of paying realty taxes,
internal revenue taxes and unpaid wages of farm laborers of the hacienda, Dr. Jacob asked Centenera to
negotiate for a loan. For this purpose, a special power of attorney was executed and acknowledged by
Dr. Jacob before notary public Lorenzo Rosales the material portions of which read as follows:

Consequently, Centenera secured a loan in the amount of P18,000.00 from the Bicol Savings & Loan
Association sometime in September 1972. Centenera signed and executed the real estate mortgage and
promissory note as attorney-in-fact of Dr. Jacob. 4 When the loan fell due in 1975 Centenera failed to pay
the same but was able to arrange a restructuring of the loan using the same special power of attorney
and property as security. Another set of loan documents, namely: an amended real estate mortgage and
promissory note dated November 27, 1975 was executed by Centenera as attorney-in-fact of Dr.
Jacob. 5 Again, Centenera failed to pay the loan when it fell due and so he arranged for another
restructuring of the loan with the bank on November 23, 1976. The corresponding promissory note was
again executed by Centenera on behalf of Jacob under the special power of attorney.

The mortgage was annotated on the title 6 and when the loan was twice re-structured, the proceeds of the
same were not actually given by the bank to Centenera since the transaction was actually nothing but a
renewal of the first or original loan and the supposed proceeds were applied as payment for the loan. The
accrued interest for sixty (60) days was, however, paid by Centenera.

Centenera again failed to pay the loan upon the maturity date forcing the bank to send a demand
letter. 7 A copy of the demand letter was sent to Dr. Jacob but no reply or denial was received by the
bank. Thus, the bank foreclosed the real estate mortgage and the corresponding provisional sale of the
mortgaged property to the respondent bank was effected. On November 5, 1982 a definite deed of sale of
the property was executed in favor of the respondent bank as the sole and highest bidder. 8

Tomasa Vda. de Jacob who was subsequently named administratrix of the estate of Dr. Jacob and who
claimed to be an heir of the latter, conducted her own investigation and therefore she filed a complaint in
the Regional Trial Court of Camarines Sur alleging that the special power of attorney and the documents
therein indicated are forged and therefore the loan and/or real estate mortgages and promissory notes
are null and void. After trial on the merit a decision was rendered on July 30, 1987, the dispositive part of
which reads as follows:

Petitioner contends that the extrajudicial foreclosure proceedings and the sale of the property mortgaged
under the amended real estate mortgage after the mortgagor died are null and void. It is pointed out that
Dr. Jacob died on March 9, 1979 and that the extrajudicial foreclosure proceedings were effected after his
death, that is, the public auction sale was made on May 11, 1979. Petitioner argues that such extrajudicial
foreclosure can only be prosecuted during the lifetime of Dr. Jacob for the reason that such kind of
foreclosure under Act No. 3135, as amended, is authorized only because of the special power of attorney
inserted in the mortgage deed; and that said special power of attorney cannot extend beyond the lifetime
of the supposed mortgagor.

Section 7, Rule 86 of the Rules of Court provides as follows:

Sec. 7. Mortgage debt due from estate. — A creditor holding a claim against the
deceased secured by mortgage or other collateral security, may abandon the
security and prosecute claim in the manner provided in this rule, and share in the
general distribution of the assets of the estate; or he may foreclose his mortgage
or realize upon his security, by action in court, making the executor or
administrator a party defendant, and if there is a judgment for a deficiency, after
the sale of the mortgaged premises, or the property pledged, in the foreclosure or
other proceeding to realize upon the security, he may claim his deficiency
judgment in the manner provided in the preceding section; or he may rely upon
his mortgage or other security alone, and foreclose the same at any time within
the period of the statute of limitations, and in that event he shall not be admitted
as a creditor, and shall receive no share in the distribution of the other assets of
the estate; but nothing herein contained shall prohibit the executor or
administrator from redeeming the property mortgaged or pledged, by paying the
debt for which it is held as security, under the direction of the court, if the court
shall adjudge it to be for the best interest of the estate that such redemption shall
be made

From the foregoing provision of the Rules it is clearly recognized that a mortgagee has three remedies
that may be alternately availed of in case the mortgagor dies, to wit:

(1) to waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim;

(2) to foreclose the mortgage judicially and prove the deficiency as an ordinary claim; and;

(3) to rely on the mortgage exclusively, or other security and foreclose the same at anytime, before it is
barred by prescription, without the right to file a claim for any deficiency.

From the foregoing it is clear that the mortgagee does not lose its light to extrajudicially foreclose the
mortgage even after the death of the mortgagor as a third alternative under Section 7, Rule 86 of the
Rules of Court.

The power to foreclose a mortgage is not an ordinary agency that contemplated exclusively the
representation of the principal by the agent but is primarily an authority conferred upon the mortgagee for
the latter's own protection. That power survives the death of the mortgagor. 13

The right of the mortgagee bank to extrajudicially foreclose the mortgage after the death of the mortgagor,
acting through his attorney-in-fact, did not depend on the authority in the deed of mortgage executed by
the latter. That right existed independently of said stipulation and is clearly recognized in Section 7, Rule
86 of the Rules of Court aforecited. 14

SAMUEL BISCHOFF, plaintiff-appellant,


vs.
JUAN D. POMAR and COMPAÑIA GENERAL DE TABACOS DE FILIPINAS, defendants-appellees.
On the 27th of December, 1905, counsel for Samuel Bischoff filed a complaint, alleging that the latter was
the owner of the steam sugar mill fitted with a portable 8-horse-power boiler with its attachments, a
complete tramway with rails and other fittings for a distance of not less than 3 kilometers, and fifteen small
cars, all of which were at the Hacienda San Jose, of San Carlos, occidental Negros; that the defendant
Compañia de Tabacos had asked and obtained from the Court of First Instance, in or about the month of
October of the same year, the appointment of a receive for the property of Romana Ganzon, among
which property that the described above was included at the instance of the defendant as belonging to
the debtor Ganzon; that at the designation of the Compañia de Tabacos Juan Pomar was appointed
receiver and upon taking charge of the property of the said Romana Ganzon he did not confine himself
thereto, but unlawfully and without any right whatever took possession, as receive, of the property of the
plaintiff herein before described; that notwithstanding the repeated demands made by the plaintiff,
Bischoff, the latter was unable to secure from the defendants the return of the said property; that they
refused to deliver the said property to him and continued to use the same to the prejudice of the plaintiff,
whose loss and damages amounted to P30 a day; the plaintiff therefore prayed that judgment be entered
in his favor, declaring that the property described in the first paragraph of the complaint belonged to him,
and that the said defendants be ordered to pay the said losses and damages with costs.

Supposing that the steam sugar mill and portable boiler, and the tramway with fifteen small wagons, rail,
and other fittings, mounted at the Hacienda San Jose and in use thereon, were improvements upon said
hacienda, are they to be considered for this sole reason as necessarily included in the mortgage of the
said hacienda, even though not specifically described in the instruments as included therein?

Article 1877 of the Civil Code contains the same precept but treats as greater length than in the
preinserted article 110 of the Mortgage Law; it is as follows:

A mortgage includes the natural accessions, improvements, growing fruits, and rents not
collected when the obligation is due, and the amount of the indemnities granted or due
the owner by the underwriters of the property mortgaged or by virtue of the exercise of
eminent domain by reason of public utility, with the declarations, amplifications, and
limitations established by law, in case the estate continues in the possession of the
person who mortgaged it, as well as when it passes into the hands of a third person.

So that even though no mention had been made of said machinery and tramway in the mortgage
instrument, the mortgage of the property whereon they are located is understood by law to extend to them
and they must be considered as included therein, as well as all other improvements, unless there was an
express stipulation between the parties that they should be excluded. Such exclusion, however, certainly
does not appear in the record; on the contrary, they are manifestly included in the mortgage.

It has already been stated that the machinery in question was already mounted on said property and was
in use thereon when the mortgage given to secure the debt of Romana Ganzon to the original creditor,
Lazaro Mota was created; but even if these were not so, article 111 of the Mortgage Law, hereinbefore
cited, provides that the following shall be considered as mortgaged with the estate, provided they belong
to the owner of said estate, although they not be mentioned in the contract:

1. Chattels permanently located in a building, either useful or ornamental, or for the


service of some industry even though they were placed there after the creation of the
mortgage.

Spouses RODRIGO PADERES and SONIA PADERES, Petitioners,


vs.
The Hon. COURT OF APPEALS,1 Hon. CARLOTA P. VALENZUELA, Respondents.

On September 14, 1982, Manila International Construction Corporation (MICC) executed a real estate
mortgage4 over 21 registered parcels of land including the improvements thereon in favor of Banco
Filipino Savings and Mortgage Bank (Banco Filipino) in order to secure a loan of P1,885,000.00. The
mortgage was registered with the Registry of Deeds of Pasay City and annotated on the corresponding
transfer certificates of title (TCTs) covering the properties on December 17, 1982.5

The 21 mortgaged properties included two lots, one with an area of 264 square meters, and the other with
an area of 263, both located in the then Municipality of Parañaque (now Parañaque City) covered by TCT
Nos. 610626 and 61078,7 respectively.

Subsequently or in August 1983, MICC sold the lot8 covered by TCT No. 61078, together with the
house9 thereon, to the petitioners in the first case, the Paderes spouses. And on January 9, 1984, MICC
sold the house10 built on the lot covered by TCT No. 61062 to the petitioners in the second case, the
Bergado spouses. Neither sale was registered, however.11

On January 25, 1985, for failure of MICC to settle its obligations, Banco Filipino filed a verified
Petition12 for the extrajudicial foreclosure of MICC’s mortgage. At the auction sale of the foreclosed
properties on March 25, 1985, Banco Filipino submitted a bid of P3,092,547.82 and was declared the
highest bidder. A Certificate of Sale13 was issued in its favor which was registered with the Registry of
Deeds and annotated on the corresponding TCTs covering the mortgaged properties on July 29, 1985.

Respecting petitioners’ claim that their houses should have been excluded from the auction sale of the
mortgaged properties, does not lie. The provision of Article 44839 of the Civil Code, cited by petitioners,
which pertain to those who, in good faith, mistakenly build, plant or sow on the land of another, has no
application to the case at bar.

Being improvements on the subject properties constructed by mortgagor MICC, there is no question that
they were also covered by MICC’s real estate mortgage following the terms of its contract with Banco
Filipino and Article 2127 of the Civil Code:

Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the
rents or income not yet received when the obligation becomes due, and to the amount of the indemnity
granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation
for public use, with the declarations, amplifications and limitations established by law, whether the estate
remains in the possession of the mortgagor, or it passes into the hands of a third person. (Underscoring
supplied).

The early case of Cu Unjieng e Hijos v. Mabalacat Sugar Co.40 is illustrative. In that case, this Court held:

. . . (1) That a mortgage constituted on a sugar central includes not only the land on which it is built but
also the buildings, machinery, and accessories installed at the time the mortgage was constituted
as well as all the buildings, machinery and accessories belonging to the mortgagor, installed after
the constitution thereof.

SERVICEWIDE SPECIALISTS, INCORPORATED, petitioner,


vs.
THE HON. COURT OF APPEALS, JESUS PONCE, and ELIZABETH PONCE, respondents.

Sometime in 1975, respondent spouses Atty. Jesus and Elizabeth Ponce bought on installment a Holden
Torana vehicle from C.R. Tecson Enterprises. They executed a promissory note and a chattel mortgage
on the vehicle dated December 24, 1975 in favor of the C.R. Tecson Enterprises to secure payment of
the note. The mortgage was registered both in the Registry of Deeds and the Land Transportation Office.
On the same date, C.R. Tecson Enterprises, in turn, executed a deed of assignment of said promissory
note and chattel mortgage in favor of Filinvest Credit Corporation with the conformity of respondent
spouses. The latter were aware of the endorsement of the note and the mortgage to Filinvest as they in
fact availed of its financing services to pay for the car. In 1976, respondent spouses transferred and
delivered the vehicle to Conrado R. Tecson by way of sale with assumption of mortgage. Subsequently,
in 1978, Filinvest assigned all its rights and interest over the same promissory note and chattel mortgage
to petitioner Servicewide Specialists Inc. without notice to respondent spouses. Due to the failure of
respondent spouses to pay the installments under the promissory note from October 1977 to March 1978,
and despite demands to pay the same or to return the vehicle, petitioner was constrained to file before
the Regional Trial Court of Manila on May 22, 1978 a complaint for replevin with damages against them,
docketed as Civil Case No. 115567. In their answer, respondent spouses denied any liability claiming
they had already returned the car to Conrado Tecson pursuant to the Deed of Sale with Assumption of
Mortgage. Thus, they filed a third party complaint against Conrado Tecson praying that in case they are
adjudged liable to petitioner, Conrado Tecson should reimburse them.

The resolution of the petition hinges on whether the assignment of a credit requires notice to the debtor in
order to bind him. More specifically, is the debtor-mortgagor who sold the property to another entitled to
notice of the assignment of credit made by the creditor to another party such that if the debtor was not
notified of the assignment, he can no longer be held liable since he already alienated the property?
Conversely, is the consent of the creditor-mortgagee necessary when the debtor-mortgagor alienates the
property to a third person?

Only notice to the debtor of the assignment of credit is required. His consent is not required. In contrast,
consent of the creditor-mortgagee to the alienation of the mortgaged property is necessary in order to
bind said creditor. To evade liability, respondent spouses invoked Article 1626 of the Civil Code which
provides that "the debtor who, before having knowledge of the assignment, pays his creditor shall be
released from the obligation." They argue that they were not notified of the assignment made to petitioner.
This provision, however, is applicable only where the debtor pays the creditor prior to acquiring
knowledge of the latter's assignment of his credit. It does not apply, nor is it relevant, to cases of non-
payment after the debtor came to know of the assignment of credit. This is precisely so since the debtor
did not make any payment after the assignment.

In the case at bar, what is relevant is not the assignment of credit between petitioner and its assignor, but
the knowledge or consent of the creditor's assignee to the debtor-mortgagor's sale of the property to
another.

As the new assignee, petitioner's consent is necessary before respondent spouses' alienation of the
vehicle can be considered as binding against third persons. Petitioner is considered a third person with
respect to the sale with mortgage between respondent spouses and third party defendant Conrado
Tecson.

In this case, however, since the alienation by the respondent spouses of the vehicle occurred prior to the
assignment of credit to petitioner, it follows that the former were not bound to obtain the consent of the
latter as it was not yet an assignee of the credit at the time of the alienation of the mortgaged vehicle.

The next question is whether respondent spouses needed to notify or secure the consent of petitioner's
predecessor to the alienation of the vehicle. The sale with assumption of mortgage made by respondent
spouses is tantamount to a substitution of debtors. In such case, mere notice to the creditor is not
enough, his consent is always necessary as provided in Article 1293 of the Civil Code. 8 Without such
consent by the creditor, the alienation made by respondent spouses is not binding on the former. On the
other hand, Articles 1625, 9 1626 10and 1627 of the Civil Code on assignment of credits do not require the
debtor's consent for the validity thereof and so as to render him liable to the assignee. The law speaks not
of consent but of notice to the debtor, the purpose of which is to inform the latter that from the date of
assignment he should make payment to the assignee and not to the original creditor. Notice is thus for
the protection of the assignee because before said date, payment to the original creditor is valid.

When Tecson Enterprises assigned the promissory note and the chattel mortgage to Filinvest, it was
made with respondent spouses' tacit approval. When Filinvest in turn, as assignee, assigned it further to
petitioner, the latter should have notified the respondent spouses of the assignment in order to bind them.
This, they failed to do. The testimony of petitioner's witness that notice of assignment was sent to
respondent spouses was stricken off the record. Having asserted the affirmative on the issue of notice,
petitioner should have substantiated its allegations in order to obtain a favorable judgment. In civil cases,
the burden is on the party who would be defeated if no evidence is given on either side. 11 Being the
plaintiff in the trial below, petitioner must establish its case, relying on the strength of its own evidence
and not upon the weakness of that of its opponent. 12 The consent to the assignment given by respondent
spouses to Filinvest cannot be construed as the spouses' knowledge of the assignment to petitioner
precisely because at the time of the assignment to the latter, the spouses had earlier sold the vehicle to
another.

One thing, however, that militates against the posture of respondent spouses is that although they are not
bound to obtain the consent of the petitioner before alienating the property, they should have obtained the
consent of Filinvest since they were already aware of the assignment to the latter. So that, insofar as
Filinvest is concerned, the debtor is still respondent spouses because of the absence of its consent to the
sale. Worse, Filinvest was not even notified of such sale. Having subsequently stepped into the shoes of
Filinvest, petitioner acquired the same rights as the former had against respondent spouses. The
defenses that could have been invoked by Filinvest against the spouses can be successfully raised by
petitioner. Therefore, for failure of respondent spouses to obtain the consent of Filinvest thereto, the sale
of the vehicle to Conrado R. Tecson was not binding on the former. When the credit was assigned by
Filinvest to petitioner, respondent spouses stood on record as the debtor-mortgagor.

MANUEL GO CINCO and ARACELI S. GO CINCO, Petitioners,


vs.
CA, ESTER SERVACIO and MAASIN TRADERS LENDING CORPORATION Respondents.

In December 1987, petitioner Manuel Cinco (Manuel) obtained a commercial loan in the amount
of P700,000.00 from respondent Maasin Traders Lending Corporation (MTLC). The loan was evidenced
by a promissory note dated December 11, 1987,4 and secured by a real estate mortgage executed on
December 15, 1987 over the spouses Go Cinco’s land and 4-storey building located in Maasin, Southern
Leyte.

Under the terms of the promissory note, the P700,000.00 loan was subject to a monthly interest rate of
3% or 36% per annum and was payable within a term of 180 days or 6 months, renewable for another
180 days. As of July 16, 1989, Manuel’s outstanding obligation with MTLC amounted to P1,071,256.66,
which amount included the principal, interest, and penalties.5

To be able to pay the loan in favor of MTLC, the spouses Go Cinco applied for a loan with the Philippine
National Bank, Maasin Branch (PNB or the bank) and offered as collateral the same properties they
previously mortgaged to MTLC. The PNB approved the loan application for P1.3 Million6 through a letter
dated July 8, 1989; the release of the amount, however, was conditioned on the cancellation of the
mortgage in favor of MTLC.

On July 16, 1989, Manuel went to the house of respondent Ester Servacio (Ester), MTLC’s President, to
inform her that there was money with the PNB for the payment of his loan with MTLC. Ester then
proceeded to the PNB to verify the information, but she claimed that the bank’s officers informed her that
Manuel had no pending loan application with them. When she told Manuel of the bank’s response,
Manuel assured her there was money with the PNB and promised to execute a document that would
allow her to collect the proceeds of the PNB loan.

On July 20, 1989, Manuel executed a Special Power of Attorney7 (SPA) authorizing Ester to collect the
proceeds of his PNB loan. Ester again went to the bank to inquire about the proceeds of the loan. This
time, the bank’s officers confirmed the existence of the P1.3 Million loan, but they required Ester to first
sign a deed of release/cancellation of mortgage before they could release the proceeds of the loan to her.
Outraged that the spouses Go Cinco used the same properties mortgaged to MTLC as collateral for the
PNB loan, Ester refused to sign the deed and did not collect the P1.3 Million loan proceeds.

As the MTLC loan was already due, Ester instituted foreclosure proceedings against the spouses Go
Cinco on July 24, 1989.

Ester countered these allegations by claiming that she had not been previously informed of the spouses
Go Cinco’s plan to obtain a loan from the PNB and to use the loan proceeds to settle Manuel’s loan with
MTLC. She claimed that she had no explicit agreement with Manuel authorizing her to apply the proceeds
of the PNB loan to Manuel’s loan with MTLC; the SPA merely authorized her to collect the proceeds of
the loan. She thus averred that it was unfair for the spouses Go Cinco to require the release of the
mortgage to MTLC when no actual payment of the loan had been made.

Obligations are extinguished, among others, by payment or performance,13 the mode most relevant to the
factual situation in the present case. Under Article 1232 of the Civil Code, payment means not only the
delivery of money but also the performance, in any other manner, of an obligation. Article 1233 of the Civil
Code states that "a debt shall not be understood to have been paid unless the thing or service in which
the obligation consists has been completely delivered or rendered, as the case may be." In contracts of
loan, the debtor is expected to deliver the sum of money due the creditor. These provisions must be read
in relation with the other rules on payment under the Civil Code,14 which rules impliedly require
acceptance by the creditor of the payment in order to extinguish an obligation.

In the present case, Manuel sought to pay Ester by authorizing her, through an SPA, to collect the
proceeds of the PNB loan – an act that would have led to payment if Ester had collected the loan
proceeds as authorized. Admittedly, the delivery of the SPA was not, strictly speaking, a delivery of the
sum of money due to MTLC, and Ester could not be compelled to accept it as payment based on Article
1233. Nonetheless, the SPA stood as an authority to collect the proceeds of the already-approved PNB
loan that, upon receipt by Ester, would have constituted as payment of the MTLC loan. 15 Had Ester
presented the SPA to the bank and signed the deed of release/cancellation of mortgage, the delivery of
the sum of money would have been effected and the obligation extinguished. 16 As the records show,
Ester refused to collect and allow the cancellation of the mortgage.

Under these facts, Manuel posits two things: first, that Ester’s refusal was based on completely
unjustifiable grounds; and second, that the refusal was equivalent to payment that led to the
extinguishment of the obligation.

Ester refused to accept the payment because the bank required her to first sign a deed of
release/cancellation of the mortgage before the proceeds of the PNB loan could be released. As a prior
mortgagee, she claimed that the spouses Go Cinco should have obtained her consent before offering the
properties already mortgaged to her as security for the PNB loan. Moreover, Ester alleged that the SPA
merely authorized her to collect the proceeds of the loan; there was no explicit agreement that the MTLC
loan would be paid out of the proceeds of the PNB loan.

There is nothing legally objectionable in a mortgagor’s act of taking a second or subsequent mortgage on
a property already mortgaged; a subsequent mortgage is recognized as valid by law and by commercial
practice, subject to the prior rights of previous mortgages. Section 4, Rule 68 of the 1997 Rules of Civil
Procedure on the disposition of the proceeds of sale after foreclosure actually requires the payment of the
proceeds to, among others, the junior encumbrancers in the order of their priority. 17 Under Article 2130 of
the Civil Code, a stipulation forbidding the owner from alienating the immovable mortgaged is considered
void. If the mortgagor-owner is allowed to convey the entirety of his interests in the mortgaged property,
reason dictates that the lesser right to encumber his property with other liens must also be recognized.
Ester, therefore, could not validly require the spouses Go Cinco to first obtain her consent to the PNB
loan and mortgage. Besides, with the payment of the MTLC loan using the proceeds of the PNB loan, the
mortgage in favor of the MTLC would have naturally been cancelled.
SAMUEL BISCHOFF, plaintiff-appellant,
vs.
JUAN POMAR and THE COMPAÑIA GENERAL DE TABACOS DE FILIPINAS, defendants-appellees.

On the 27th of December, 1905, counsel for Samuel Bischoff filed a complaint, alleging that the latter was
the owner of the steam sugar mill fitted with a portable 8-horse-power boiler with its attachments, a
complete tramway with rails and other fittings for a distance of not less than 3 kilometers, and fifteen small
cars, all of which were at the Hacienda San Jose, of San Carlos, occidental Negros; that the defendant
Compañia de Tabacos had asked and obtained from the Court of First Instance, in or about the month of
October of the same year, the appointment of a receive for the property of Romana Ganzon, among
which property that the described above was included at the instance of the defendant as belonging to
the debtor Ganzon; that at the designation of the Compañia de Tabacos Juan Pomar was appointed
receiver and upon taking charge of the property of the said Romana Ganzon he did not confine himself
thereto, but unlawfully and without any right whatever took possession, as receive, of the property of the
plaintiff herein before described; that notwithstanding the repeated demands made by the plaintiff,
Bischoff, the latter was unable to secure from the defendants the return of the said property; that they
refused to deliver the said property to him and continued to use the same to the prejudice of the plaintiff,
whose loss and damages amounted to P30 a day; the plaintiff therefore prayed that judgment be entered
in his favor, declaring that the property described in the first paragraph of the complaint belonged to him,
and that the said defendants be ordered to pay the said losses and damages with costs.

Owing to the non -payment of the said sum of P21,423.93, notwithstanding the demands made upon and
extensions of time granted to the debtor, on September 30, 1904, the creditor, Lazaro Mota, assigned
and transferred the said mortgage to Compania de Tabacos by means of a public instrument which was
recorded in the registry, and appears as Exhibit B herein.

So that even though no mention had been made of said machinery and tramway in the mortgage
instrument, the mortgage of the property whereon they are located is understood by law to extend to them
and they must be considered as included therein, as well as all other improvements, unless there was an
express stipulation between the parties that they should be excluded. Such exclusion, however, certainly
does not appear in the record; on the contrary, they are manifestly included in the mortgage.

RULE 68

Foreclosure of Real Estate Mortgage

Section 1. Complaint in action for foreclosure. — In an action for the foreclosure of a mortgage or other
encumbrance upon real estate, the complaint shall set forth the date and due execution of the mortgage;
its assignments, if any; the names and residences of the mortgagor and the mortgagee; a description of
the mortgaged property; a statement of the date of the note or other documentary evidence of the
obligation secured by the mortgage, the amount claimed to be unpaid thereon; and the names and
residences of all persons having or claiming an interest in the property subordinate in right to that of the
holder of the mortgage, all of whom shall be made defendants in the action. (1a)

Section 2. Judgment on foreclosure for payment or sale. — If upon the trial in such action the court shall
find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the
mortgage debt or obligation, including interest and other charges as approved by the court, and costs,
and shall render judgment for the sum so found due and order that the same be paid to the court or to the
judgment obligee within a period of not less than ninety (90) days nor more than one hundred twenty
(120) days from the entry of judgment, and that in default of such payment the property shall be sold at
public auction to satisfy the judgment. (2a)

Section 3. Sale of mortgaged property; effect. — When the defendant, after being directed to do so as
provided in the next preceding section, fails to pay the amount of the judgment within the period specified
therein, the court, upon motion, shall order the property to be sold in the manner and under the provisions
of Rule 39 and other regulations governing sales of real estate under execution. Such sale shall not affect
the rights of persons holding prior encumbrances upon the property or a part thereof, and when confirmed
by an order of the court, also upon motion, it shall operate to divest the rights in the property of all the
parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may
be allowed by law.

Upon the finality of the order of confirmation or upon the expiration of the period of redemption when
allowed by law, the purchaser at the auction sale or last redemptioner, if any, shall be entitled to the
possession of the property unless a third party is actually holding the same adversely to the judgment
obligor. The said purchaser or last redemptioner may secure a writ of possession, upon motion, from the
court which ordered the foreclosure. (3a)

Section 4. Disposition of proceeds of sale. — The amount realized from the foreclosure sale of the
mortgaged property shall, after deducting the costs of the sale, be paid to the person foreclosing the
mortgage, and when there shall be any balance or residue, after paying off the mortgage debt due, the
same shall be paid to junior encumbrancers in the order of their priority, to be ascertained by the court, or
if there be no such encumbrancers or there be a balance or residue after payment to them, then to the
mortgagor or his duly authorized agent, or to the person entitled to it. (4a)

Section 5. How sale to proceed in case the debt is not all due. — If the debt for which the mortgage or
encumbrance was held is not all due as provided in the judgment as soon as a sufficient portion of the
property has been sold to pay the total amount and the costs due, the sale shall terminate; and
afterwards as often as more becomes due for principal or interest and other valid charges, the court may,
on motion, order more to be sold. But if the property cannot be sold in portions without prejudice to the
parties, the whole shall be ordered to be sold in the first instance, and the entire debt and costs shall be
paid, if the proceeds of the sale be sufficient therefor, there being a rebate of interest where such rebate
is proper. (5a)

Section 6. Deficiency judgment. — If upon the sale of any real property as provided in the next preceding
section there be a balance due to the plaintiff after applying the proceeds of the sale, the court, upon
motion, shall render judgment against the defendant for any such balance for which, by the record of the
case, he may be personally liable to the plaintiff, upon which execution may issue immediately if the
balance is all due at the time of the rendition of the judgment; otherwise; the plaintiff shall be entitled to
execution at such time as the balance remaining becomes due under the terms of the original contract,
which time shall be stated in the judgment. (6a)

Section 7. Registration. — A certified copy of the final order of the court confirming the sale shall be
registered in the registry of deeds. If no right of redemption exists, the certificate of title in the name of the
mortgagor shall be cancelled, and a new one issued in the name of the purchaser.

Where a right of redemption exists, the certificate of title in the name of the mortgagor shall not be
cancelled, but the certificate of sale and the order confirming the sale shall be registered and a brief
memorandum thereof made by the registrar of deeds upon the certificate of title. In the event the property
is redeemed, the deed of redemption shall be registered with the registry of deeds, and a brief
memorandum thereof shall be made by the registrar of deeds on said certificate of title.

If the property is not redeemed, the final deed of sale executed by the sheriff in favor of the purchaser at
the foreclosure sale shall be registered with the registry of deeds; whereupon the certificate of title in the
name of the mortgagor shall be cancelled and a new one issued in the name of the purchaser. (n)

Section 8. Applicability of other provisions. — The provisions of sections 31, 32 and 34 of Rule 39 shall
be applicable to the judicial foreclosure of real estate mortgages under this Rule insofar as the former are
not inconsistent with or may serve to supplement the provisions of the latter. (8a)
A.M. No. 99-10-05-0

PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF MORTGAGE

In line with the responsibility of an Executive Judge under Administrative Order No. 6, dated June 30,
1975, for the management of courts within his administrative area, included in which is the task of
supervising directly the work of the Clerk of Court, who is also the Ex-Officio Sheriff, and his staff, and the
issuance of commissions to notaries public and enforcement of their duties under the law, the following
procedures are hereby prescribed in extrajudicial foreclosure of mortgages:

1. All applications for extra-judicial foreclosure of mortgage whether under the direction of the sheriff or a
notary public, pursuant to Act 3135, as amended by Act 4118, and Act 1508, as amended, shall be filed
with the Executive Judge, through the Clerk of court who is also the Ex-Officio Sheriff.

2. Upon receipt of an application for extra-judicial foreclosure of mortgage, it shall be the duty of the Clerk
of Court to:

a) receive and docket said application and to stamp thereon the corresponding file number, date and time
of filing;

b) collect the filing fees therefore pursuant to rule 141, Section 7(c), as amended by A.M. No. 00-2-01-
SC, and issue the corresponding official receipt;

c) examine, in case of real estate mortgage foreclosure, whether the applicant has complied with all the
requirements before the public auction is conducted under the direction of the sheriff or a notary public,
pursuant to Sec. 4 of Act 3135, as amended;

d) sign and issue the certificate of sale, subject to the approval of the Executive Judge, or in his absence,
the Vice-Executive Judge. No certificate of sale shall be issued in favor of the highest bidder until all fees
provided for in the aforementioned sections and in Rule 141, Section 9(1), as amended by A.M. No. 00-2-
01-SC, shall have been paid; Provided, that in no case shall the amount payable under Rule 141, Section
9(1), as amended, exceed P100,000.00;

e) after the certificate of sale has been issued to the highest bidder, keep the complete records, while
awaiting any redemption within a period of one (1) year from date of registration of the certificate of sale
with the Register of Deeds concerned, after which, the records shall be archived. Notwithstanding the
foregoing provision, juridical persons whose property is sold pursuant to an extra-judicial foreclosure,
shall have the right to redeem the property until, but not after, the registration of the certificate of
foreclosure sale which in no case shall be more than three (3) months after foreclosure, whichever is
earlier, as provided in Section 47 of Republic Act No. 8791 (as amended, Res. Of August 7, 2001).

Where the application concerns the extrajudicial foreclosure of mortgages of real estates and/or chattels
in different locations covering one indebtedness, only one filing fee corresponding to such indebtedness
shall be collected. The collecting Clerk of Court shall, apart from the official receipt of the fees, issue a
certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages
sought to be foreclosed, the real estates and/or chattels mortgaged and their respective locations, which
certificate shall serve the purpose of having the application docketed with the Clerks of Court of the
places where the other properties are located and of allowing the extrajudicial foreclosures to proceed
thereat.

3. The notices of auction sale in extrajudicial foreclosure for publication by the sheriff or by a notary public
shall be published in a newspaper of general circulation pursuant to Section 1, Presidential Decree No.
1079, dated January 2, 1977, and non-compliance therewith shall constitute a violation of Section 6
thereof.

4. The Executive Judge shall, with the assistance of the Clerk of Court, raffle applications for extrajudicial
foreclosure of mortgage under the direction of the sheriff among all sheriffs, including those assigned to
the Office of the Clerk of Court and Sheriffs IV assigned in the branches.

5. The name/s of the bidder/s shall be reported by the sheriff or the notary public who conducted the sale
to the Clerk of Court before the issuance of the certificate of sale.

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner


vs.
ALEJANDRO and ADELAIDA LICUANAN, Respondents.

Respondent spouses Alejandro and Adelaida Licuanan were granted a piggery loan in the amount
of P4,700 by petitioner, evidenced by a promissory note dated September 20, 1974 and secured by a real
estate mortgage4over a 980-square meter parcel of land with a two-storey building. The loan’s maturity
date was September 23, 1979.5

Petitioner granted respondents an additional loan of P12,000 evidenced by a promissory note dated May
29, 1975 payable on or before the year 1980. This was secured by a real estate mortgage over four
parcels of land situated in Pangasinan covered by TCT Nos. 109825, 109762, 109763 and 109764. 6

On October 2, 1975, petitioner granted respondent spouses another loan of P22,000 evidenced by a
promissory note maturing on October 3, 1985. This was secured by a real estate mortgage executed in
favor of petitioner over three parcels of land covered by TCT Nos. 112608, 112607 and 112609, all of the
Registry of Deeds of Pangasinan.7

On August 6, 1979, petitioner and respondents restructured the P12,000 loan, extending the maturity
date from June 22, 1979 to June 22, 1982. On the same date, respondents executed a promissory note
for P12,320.73 and another for P6,519.90.8

On July 6, 1981, petitioner sent a letter by registered mail to respondents informing them that, since the
conditions of the mortgage had been breached, petitioner would have the mortgaged properties sold by
the sheriff under Act 3135. The total amount due from the three loans had by then ballooned
to P75,298.32.9

On July 20, 1981, petitioner filed an application for extrajudicial foreclosure.10 The mortgaged properties
were sold in a public auction on December 16, 1981. Petitioner, as the highest bidder, acquired them for
a total ofP16,340. The certificate of sale was registered on January 25, 1982.11

On February 4, 1983, petitioner consolidated its ownership over the properties. After more than a year or
on October 16, 1984, petitioner wrote respondents by registered mail, informing them that the properties
(now acquired assets of the bank) would be disposed of by public auction. On November 11, 1984,
petitioner published an advertisement stating that on November 14, 1984, the properties would be sold by
oral bidding. On this date, however, there were no bidders.12

On November 16, 1984, petitioner sent respondents a letter informing them that the properties could be
reacquired by negotiated sale for cash or installment.13 Three days later, however, on November 19,
1984, the properties were sold through negotiated sale to one Emelita A. Peralta. Respondents were
informed of the sale by petitioner through a letter dated December 6, 1984.
On the same day, petitioner executed a deed of conditional sale in favor of Peralta.14 On December 11,
1984, respondents offered to repurchase the properties from petitioner but they had already been sold to
Peralta.15

Respondents then filed a complaint for recovery of real properties and damages on July 18, 1985 in the
Regional Trial Court (RTC) of Lingayen, Pangasinan, Branch 39 against petitioner and Peralta. 16 The
RTC rendered judgment dated September 17, 1991 in favor of respondents.

3) whether or not respondents are liable for the deficiency claim of petitioner and

Petitioner assigns as error the failure of the CA to rule on its deficiency claim. It alleged that the price the
mortgaged property was sold for (P104,000) was less than the amount of respondents’ indebtedness
(P131,642.33), thus it is entitled to claim the difference (P27,642.33) with interest. Respondents cannot
be held liable for the deficiency claim. While it is true that in extrajudicial foreclosure of mortgage, the
mortgagee has the right to recover the deficiency from the debtor,36 this presupposes that the foreclosure
must first be valid.37

PHILIPPINE NATIONAL BANK, Petitioner,


vs.
SPOUSES AGUSTIN and PILAR ROCAMORA, Respondents.

On September 25, 1981, the spouses Rocamora obtained a loan from PNB in the aggregate amount
ofP100,000.00 under the Cottage Industry Guarantee and Loan Fund (CIGLF). The loan was payable in
five years, under the following terms: P35,000 payable semi-annually and P65,000 payable annually. In
addition to the principal amount, the spouses Rocamora agreed to pay interest at the rate of 12% per
annum, plus a penalty fee of 5% per annum in case of delayed payments. The spouses Rocamora signed
two promissory notes2 evidencing the loan.

To secure their loan obligations, the spouses Rocamora executed two mortgages: a real estate
mortgage3 over a property covered by Transfer Certificate of Title No. 7160 in the amount of P10,000,
and a chattel mortgage4 over various machineries in the amount of P25,000. Payment of the
remaining P65,000 was under the CIGLF guarantee, with the spouses Rocamora paying the required
guarantee fee.

Both the promissory note and the real estate mortgage deed contained an escalation clause that
allowed PNB to increase the 12% interest rate at anytime without notice, within the limits allowed by law.
The pertinent portion of the promissory note stated:

For value received, we, jointly and severally, promise to pay to the ORDER of the PHILIPPINE
NATIONAL BANK, at its office in Pto. Princesa City, Philippines, the sum of xxx together with interest
thereon at the rate of 12% per annum until paid, which interest rate the Bank may at any time, without
notice, raise within the limits allowed by law, and I/we also agree to pay jointly and severally, 5% per
annum penalty charge, by way of liquidated damages, should this note be unpaid or is not renewed on
due date. [Emphasis supplied.]

While paragraph (k) of the real estate mortgage deed provided:

(k) INCREASE OF INTEREST RATE

The MORTGAGEE reserves the right to increase the interest rate charged on the obligation
secured by this mortgage including any amount which it may have advanced within the limits
allowed by law at any time depending on whatever policy it may adopt in the future; Provided, that
the interest rate on the accommodation/s secured by the mortgage shall be correspondingly decreased in
the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either
case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in that maximum interest rate. [Emphasis supplied.]

The spouses Rocamora only paid a total of P32,383.655 on the loan. Hence, the PNB commenced
foreclosure proceedings in August and October 1990. The foreclosure of the mortgaged properties
yielded P75,500.00 as total proceeds.

After the foreclosure, PNB found that the recovered proceeds and the amounts the spouses Rocamora
previously paid were not sufficient to satisfy the loan obligations. PNB thus filed, on January 18, 1994,
a complaint for deficiency judgment6 before the Regional Trial Court (RTC) of Puerto Princesa City,
Branch 48. The PNB alleged that as of January 7, 1994, the outstanding balance of the spouses
Rocamora’s loan (including interests and penalties) was P206,297.47, broken down as follows:

Principal………………………………………............. P 79,484.65
Total interest due up to 01-07-94…………………….. 51,229.35
Total penalty due up to 01-07-94…………………….. 75,583.47
TOTAL AMOUNT DUE AND PAYABLE P 206,297.477

In insisting that it is entitled to a deficiency judgment of P206,297.47, PNB argues that the RTC and the
CA erred in invalidating the escalation clause in the parties’ agreement because it fully complied with the
requirements for a valid escalation clause under this Court’s following pronouncement in Banco Filipino
Savings and Mortgage Bank v. Navarro:12]

Proof of Deficiency Claim Necessary

The foreclosure of chattel and real estate mortgages is governed by Act Nos. 1508 and 3135,
respectively. Although both laws do not contain a provision expressly or impliedly authorizing the
mortgagee to recover the deficiency resulting after the foreclosure proceeds are deducted from the
principal obligation, the Court has construed the laws’ silence as a grant to the mortgagee of the right to
maintain an action for the deficiency; the mortgages are given merely as security, not as settlement or
satisfaction of the indebtedness.13

As in any claim for payment of money, a mortgagee must be able to prove the basis for the deficiency
judgment it seeks. The right of the mortgagee to pursue the debtor arises only when the proceeds of the
foreclosure sale are ascertained to be insufficient to cover the obligation and the other costs at the time of
the sale.14 Thus, the amount of the obligation prior to foreclosure and the proceeds of the foreclosure are
material in a claim for deficiency.

In this case, both the RTC and the CA found that PNB failed to prove the claimed deficiency; its own
testimonial and documentary evidence in fact contradicted one another. The PNB alleged that the
spouses Rocamora’s obligation at the time of foreclosure (September 19, 1990) amounted
to P250,812.10, yet its own documentary evidence15 showed that, as of that date, the total obligation was
only P206,664.34; the PNB’s own witness, Mr. Reynaldo Caso, testified that the amount due from the
spouses Rocamora was only P206,664.34.

At any rate, whether the total obligation due at the time of foreclosure was P250,812.10 as PNB insisted
orP206,664.34 as its own record disclosed, our own computation of the amounts involved does not add
up to theP206,297.47 PNB claimed as deficiency.16 We find it significant that PNB has been consistently
unable to provide a detailed and credible accounting of the claimed deficiency. What appears clear is that
after adding up the spouses Rocamora’s partial payments and the proceeds of the foreclosure, the PNB
has already received a total of P107,883.68 as payment for the spouses Rocamora’s P100,000.00 loan;
the claimed P206,297.47 deficiency consisted mainly of interests and penalty charges (or about 61.5% of
the amount claimed). The spouses Rocamora posit that their loan would not have bloated to more than
double the original amount if PNB had not increased the interest rates and had it immediately foreclosed
the mortgages.

PD 385 mandates immediate foreclosure of collaterals and securities when the arrearages amount
to at least 20% of the total outstanding obligation

Another reason that militates against the deficiency claim is PNB’s own admitted delay in instituting the
foreclosure proceedings.29

Section 1 of PD 385 states:

Section 1. It shall be mandatory for government financial institutions, after the lapse of sixty (60)
days from the issuance of this Decree, to foreclose the collaterals and/or securities for any loan,
credit, accommodation, and/or guarantees granted by them whenever the arrearages on such
account, including accrued interest and other charges, amount to at least twenty percent (20%) of
the total outstanding obligations, including interest and other charges, as appearing in the books of
account and/or related records of the financial institution concerned. This shall be without prejudice to the
exercise by the government financial institutions of such rights and/or remedies available to them under
their respective contracts with their debtors, including the right to foreclose on loans, credits,
accommodations and/or guarantees on which the arrearages are less than twenty percent (20%).
[Emphasis supplied.]

Under PD 385, government financial institutions – which was PNB’s status prior to its full privatization in
1996 – are mandated to immediately foreclose the securities given for any loan when the arrearages
amount to at least 20% of the total outstanding obligation.30

As stated in the narrated facts, PNB commenced foreclosure proceedings in 1990 or three years after the
spouses defaulted on their obligation in 1987. On this factual premise, the PNB now insists as a legal
argument that its right to foreclose should not be affected by the mandatory tenor of PD 385, since it
exercised its right still within the 10-year prescription period allowed under Articles 1142 and 1144 (1) of
the Civil Code.

PNB’s argument completely misses the point. The issue before us is the effect of the delay in
commencing foreclosure proceedings on PNB’s right to recover the deficiency, not on its right to
foreclose. The delay in commencing foreclosure proceedings bears a significant function in the deficiency
amount being claimed, as the amount undoubtedly includes interest and penalty charges which accrued
during the period covered by the delay. The depreciation of the mortgaged properties during the period of
delay must also be factored in, as this affects the proceeds that the mortgagee can recover in the
foreclosure sale, which in turn affects its deficiency claim. There was also, in this case, the four-year gap
between the foreclosure proceedings and the filing of the complaint for deficiency judgment – during
which time interest, whether at the 12% per annum rate or higher, and penalty charges also accrued. For
the Court to grant the PNB’s deficiency claim would be to award it for its delay and its undisputed
disregard of PD 385.

HUERTA ALBA RESORT INC., petitioner,


vs.
COURT OF APPEALS and SYNDICATED MANAGEMENT GROUP INC., respondents.

Section 78 of R.A. No. 337 provides that "in case of a foreclosure of a mortgage in favor of a bank,
banking or credit institution, whether judicially or extrajudicially, the mortgagor shall have the right, within
one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to
redeem the property."
In a complaint for judicial foreclosure of mortgage with preliminary injunction filed on October 19, 1989,
docketed as Civil Case No. 89-5424 before the Regional Trial Court of Makati City, the herein private
respondent sought the foreclosure of four (4) parcels of land mortgaged by petitioner to Intercon Fund
Resource, Inc. ("Intercon").

Private respondent instituted Civil Case No. 89-5424 as mortgagee-assignee of a loan amounting to P8.5
million obtained by petitioner from Intercon, in whose favor petitioner mortgaged the aforesaid parcels of
land as security for the said loan.

In its answer below, petitioner questioned the assignment by Intercon of its mortgage right thereover to
the private respondent, on the ground that the same was ultra vires. Petitioner also questioned during the
trial the correctness of the charges and interest on the mortgage debt in question.

From the various decisions, resolutions and orders a quo it can be gleaned that what petitioner has been
adjudged to have was only the equity of redemption over subject properties. On the distinction between
the equity of redemption and right of redemption, the case of Gregorio Y. Limpin vs. Intermediate
Appellate Court,7 comes to the fore. Held the Court in the said case:

"The equity of redemption is, to be sure, different from and should not be confused with
the right of redemption.

The right of redemption in relation to a mortgage – understood in the sense of a


prerogative to re-acquire mortgaged property after registration of the foreclosure sale –
exists only in the case of the extrajudicial foreclosure of the mortgage. No such right is
recognized in a judicial foreclosure except only where the mortgagee is the Philippine
National Bank or a bank or banking institution.

Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right
of redemption within one (1) year from the registration of the sheriff's certificate of
foreclosure sale.

Where the foreclosure is judicially effected, however, no equivalent right of redemption


exists. The law declares that a judicial foreclosure sale 'when confirmed be an order of
the court. . . . shall operate to divest the rights of all the parties to the action and to vest
their rights in the purchaser, subject to such rights of redemption as may be allowed by
law.' Such rights exceptionally 'allowed by law' (i.e., even after confirmation by an order of
the court) are those granted by the charter of the Philippine National Bank (Acts No. 2747
and 2938), and the General Banking Act (R.A. 337). These laws confer on the mortgagor,
his successors in interest or any judgment creditor of the mortgagor, the right to redeem
the property sold on foreclosure — after confirmation by the court of the foreclosure
sale — which right may be exercised within a period of one (1) year, counted from the
date of registration of the certificate of sale in the Registry of Property.

But, to repeat, no such right of redemption exists in case of judicial foreclosure of a


mortgage if the mortgagee is not the PNB or a bank or banking institution. In such a case,
the foreclosure sale, 'when confirmed by an order of the court. . . shall operate to divest
the rights of all the parties to the action and to vest their rights in the purchaser.' There
then exists only what is known as the equity of redemption. This is simply the right of the
defendant mortgagor to extinguish the mortgage and retain ownership of the property by
paying the secured debt within the 90-day period after the judgment becomes final, in
accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation.

Section 2, Rule 68 provides that —


'. . If upon the trial . . the court shall find the facts set forth in the complaint to be true, it
shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation,
including interest and costs, and shall render judgment for the sum so found due and
order the same to be paid into court within a period of not less than ninety (90) days from
the date of the service of such order, and that in default of such payment the property be
sold to realize the mortgage debt and costs.'

This is the mortgagor's equity (not right) of redemption which, as above stated, may be
exercised by him even beyond the 90-day period 'from the date of service of the order,'
and even after the foreclosure sale itself, provided it be before the order of confirmation
of the sale. After such order of confirmation, no redemption can be effected any
longer."8 (Emphasis supplied)

Petitioner failed to seasonably invoke its purported right under Section 78 of R.A. No. 337.

BANCO FILIPINO SAVINGS AND MORTGAGE BANK, Petitioners,


vs.
COURT OF APPEALS and SANTIAGO (Isabela) MEMORIAL PARK, INC., Respondents.

On December 20, 1993, private respondent Santiago (Isabela) Memorial Park, Inc. filed a complaint for
redemption and specific performance with the Regional Trial Court of Santiago, Isabela, Branch 21,
against herein petitioner Banco Filipino Savings & Mortgage Bank, the material and relevant allegations
of which read as follows:

COMPLAINT

Plaintiff, by counsel, to this Honorable Court most respectfully alleges:

1. …………….

2. …………….

3. That in February 1981, plaintiff mortgaged the above described property in favor of defendant to secure
a loan of P500,000.00 obtained by plaintiff from defendant;

4. That due to the failure of plaintiff to pay the aforementioned loan, defendant foreclosed the mortgage
and in consequence thereof Sheriff David R. Medina of this Honorable Court issued a SHERIFF’S
CERTIFICATE OF SALE in favor of defendant which is dated October 9, 1990 and which instrument was
inscribed at the back of TCT T-128647 of Isabela on January 21, 1991;

5. That in a letter of the President of plaintiff dated August 6, 1991, plaintiff made manifest its interest to
exercise its right of redemption and made an offer of P700,000.00 as redemption to defendant through
the then Deputy Liquidator, ROSAURO NAPA; this started the negotiation for the redemption of the
above described property;

6. That in a letter of the Deputy Liquidator dated January 23, 1992, plaintiff was given up to the end of
March 1992 to negotiate and make special arrangement for any satisfactory plan of payment for the
redemption;

7. That in a letter of the Deputy Liquidator dated March 12, 1992, plaintiff was directed to remit at
leastP50,000.00 to defendant which would manifest the interest and willingness of plaintiff to redeem the
property, and forthwith on March 24, 1992, plaintiff remitted the sum of P50,000.00 to defendant which
was duly receipted by the latter under Official Receipt No. 279968 A dated March 24, 1992;
8. That in a letter of the President of plaintiff dated January 20, 1993, plaintiff amended its first offer and
made an offer of P1,000,000.00 as redemption which offer included a plan of payment;

9. That between January 20, 1993 to November 1993, plaintiff exerted earnest efforts in order to finally
effect the redemption, but defendant dilly dallied on the matter.

10. That in a letter of Atty. ORLANDO O. SAMSON, Senior Vice President of defendant, dated November
5, 1993, there is a turn-around by defendant and is now demanding P5,830,000.00 as purchase price of
the property, instead of the original agreed redemption;

11. That the delay of the defendant in the finalization of the terms of redemption did not in any manner
alter the right of plaintiff to redeem the property from defendant;

12. That plaintiff is still in actual possession of the property and intend to remain in actual possession of
the property, while defendant was never in actual possession of said property;

13. That plaintiff is ready and willing to pay the redemption money, which is the total bank claim
of P925,448.17 plus lawful interest and other allowable expenses incident to the foreclosure proceedings:

14. That the latest actuations of defendant are indicative of the refusal of defendant to allow the exercise
of redemption by herein plaintiff, reason for which there is a need for judicial determination of the rights
and obligations of the parties to this case;

15. That on account of the unlawful actuations of defendant in refusing the redemption of the property by
plaintiff, the latter engaged the services of counsel for a fee of P30,000.00 which defendant should pay to
plaintiff.

The basic issue is whether private respondent’s complaint for redemption and specific performance states
a cause of action against petitioner.

Based on the allegations in the complaint, we find that private respondent has no cause of action for
redemption against petitioner.

Clearly, the right of redemption should be exercised within the specified time limit, which is one year from
the date of registration of the certificate of sale. The redemptioner should make an actual tender in good
faith of the full amount of the purchase price as provided above, i.e., the amount fixed by the court in the
order of execution or the amount due under the mortgage deed, as the case may be, with interest thereon
at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the
bank or institution concerned by reason of the execution and sale and as a result of the custody of said
property less the income received from the property.

The general rule in redemption is that it is not sufficient that a person offering to redeem manifests his
desire to do so. The statement of intention must be accompanied by an actual and simultaneous tender of
payment. This constitutes the exercise of the right to repurchase.

...

Whether or not respondents were diligent in asserting their willingness to pay is irrelevant. Redemption
within the period allowed by law is not a matter of intent but a question of payment or valid tender of the
full redemption price within said period.
CHINA BANKING CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS, PAULINO ROXAS CHUA and KIANG MING CHU CHUA, respondents.

By virtue of the adverse decision of the Regional Trial Court of Manila, Branch 46, in Civil Case No. 82-
14134, entitled "Metropolitan Bank and Trust Company v. Pacific Multi Commercial Corporation and
Alfonso Roxas Chua,"the residential land covered by Transfer Certificate of Title No. 410603 in the name
of spouses Alfonso Roxas Chua and Kiang Ming Chu Chua was levied on execution. Kiang Ming Chu
Chua filed an action questioning the levy on the ground that the land was conjugal partnership property.
This resulted in a compromise agreement to the effect that the levy shall be valid only to the extent of the
½ share pertaining to Alfonso Roxas Chua. Accordingly, an alias notice of levy was issued affecting the
said ½ undivided portion of the property. After the execution sale, a certificate of sale was executed in
favor of Metrobank, the judgment creditor, and the same was annotated on TCT No. 410603 on
December 22, 1987.

Meanwhile, China Banking Corporation filed a complaint for sum of money against Pacific Multi Agro-
Industrial Corporation and Alfonso Roxas Chua, docketed as Civil Case No. 85-31257 of the Regional
Trial Court of Manila, Branch 29. On November 7, 1985, judgment was rendered ordering defendants to
pay Chinabank the aggregate amount of P2,500,000.00 plus interests, penalties and attorney’s fees.
Defendants appealed to the Court of Appeals but the same was dismissed for failure to file appellants’
brief. Thus, notice of levy on execution was issued on February 4, 1991 against the right and interest of
Alfonso Roxas Chua in TCT No. 410603. The same was later sold at public auction and a certificate of
sale was executed in favor of Chinabank, and inscribed on TCT 410603 on May 4, 1992.

Previously, however, on November 21, 1988, Alfonso Roxas Chua executed in favor of his son, Paulino
Roxas Chua, an "Assignment of Right to Redeem," pertaining to his right to redeem the ½ undivided
portion of the land sold to Metrobank. On January 11, 1989, Paulino redeemed the property from
Metrobank. On March 14, 1989, the Assignment of Right to Redeem and the redemption by Paulino
Roxas Chua of the property from Metrobank were annotated on TCT No. 410603.

Private respondents Paulino Roxas Chua and Kiang Ming Chu Chua filed Civil Case No. 63199 before
the Regional Trial Court of Pasig, Branch 163, alleging that Paulino has a prior and better right over
Chinabank inasmuch as the assignment to him of the right to redeem and his redemption of Alfonso’s
share in the property were inscribed on the title on an earlier date than the annotation of the notice of levy
and certificate of sale in favor of Chinabank. Both the trial court and the Court of Appeals ruled in favor of
private respondents and enjoined Chinabank, the Sheriff of Manila and the Register of Deeds of San
Juan from causing the transfer of possession, ownership and certificate of title, or otherwise disposing of
the property covered by TCT No. 410603 in favor of Chinabank or any other person.

In the case at bar, private respondents sufficiently established that the conveyance was made in good
faith and for valuable consideration. Paulino maintains that he had no knowledge of his father Alfonso’s
financial problem with petitioner Chinabank until he was about to cause the cancellation of TCT No.
410603.5 Furthermore, he paid the sum of P100,000.00 to Alfonso for the right to redeem,6 and paid the
redemption amount of P1,463,375.39 to Metrobank.7

Expectedly, petitioner refutes these, saying that the amounts paid by Paulino were grossly
disproportionate to the right to redeem the property, which is a residential house and lot located in North
Greenhills, San Juan, Metro Manila. But as correctly pointed out by private respondents, the amount of
P100,000.00 paid by Paulino to Alfonso was not for the property itself, but merely for the right to redeem
the same. As a matter of fact, Paulino still had to pay Metrobank the redemption price of P1,463,375.39.
Whether or not the latter amount was adequate is beyond the scope of this inquiry. Suffice it to state that
Metrobank accepted the same and reconveyed the property to Paulino. Moreover, only Alfonso’s conjugal
share in the property was affected, and the determination of its value was still subject to liquidation of
debts and charges against the conjugal partnership.
BPI FAMILY SAVINGS BANK, INC., petitioner,
vs.
SPS. JANUARIO ANTONIO VELOSO AND NATIVIDAD VELOSO, respondents.

On January 8, 1983, respondent spouses obtained a loan of P1,300,000 from petitioner’s predecessor-in-
interest Family Bank and Trust Company. To secure payment of the loan, respondent spouses executed
in favor of the bank a deed of mortgage over three parcels of land, with improvements, registered in their
names under TCT Nos. 272227, 272228 and 272229 of the Registry of Deeds of Quezon City.

On February 9, 1983, respondents, for value received, executed a promissory note for P1,300,000.
Subsequently, however, respondents defaulted in the monthly installments due on their loan. When
efforts to update the account failed, Family Bank instituted extra-judicial foreclosure proceedings on the
respondents’ mortgaged properties.

On July 1, 1985, the properties were sold at public auction with Family Bank as the highest bidder
forP2,782,554.66.

On August 5, 1985, Family Bank assigned all its rights and interests in the foreclosed properties to
petitioner BPI Family Bank, Inc. (BPI).

On August 28, 1985, the sheriff’s certificate of sale was registered with the Registry of Deeds of Quezon
City.

On July 24, 1986, respondents, through counsel, wrote BPI offering to redeem the foreclosed properties
forP1,872,935. This was, however, rejected by petitioner.

On August 27, 1986, respondents filed in the RTC of Quezon City, Branch 94, a complaint for annulment
of foreclosure, with consignation and prayer for damages. On motion of respondents, the trial court, in an
order dated August 27, 1986, allowed respondents to deposit with the clerk of court the sum
of P1,500,000 representing the redemption price. Thereafter, trial on the merits ensued.

Meanwhile, in Branch 76 of the Regional Trial Court of Quezon City, BPI was able to secure a writ of
possession over the foreclosed properties. This prompted respondents to file with the Court of Appeals a
petition for certiorari with preliminary injunction docketed as CA-G.R. SP No. 22681. On October 8, 1990,
the Court of Appeals resolved to grant respondents’ motion for preliminary mandatory injunction.

Eventually, however, in a decision promulgated on May 31, 1991, the Court of Appeals, in CA-G.R. SP
No. 22681, resolved the issue of possession in favor of BPI and accordingly lifted the preliminary
mandatory injunction it had earlier issued, denying altogether respondents’ petition. From this decision,
respondents came to this Court via a petition for review which was, however, denied in a resolution dated
January 13, 1992. The resolution affirmed, in effect, petitioner’s right to the possession of the subject
properties.

On December 16, 1992, upon motion of respondents and despite the opposition of petitioner, Branch 94
ordered the release of P1,400,000 of the consigned amount to respondents, with the balance of P100,000
to take the place of the injunction bond to answer for whatever damages petitioner might suffer because
of the issuance of the preliminary injunction (previously issued and later lifted) in favor of respondents.

Finally, on August 18, 1995, after almost a decade of protracted litigation, the trial court rendered a
decision declaring the validity of the extra-judicial foreclosure of the mortgaged properties of respondents
but allowed the redemption of the same at a redemption price of P2,140,000.
The sole question therefore that remains to be resolved is: did respondent spouses comply with all the
requirements for the redemption of the subject properties?

We answer in the negative.

The general rule in redemption is that it is not sufficient that a person offering to redeem manifests his
desire to do so. The statement of intention must be accompanied by an actual and simultaneous tender of
payment. This constitutes the exercise of the right to repurchase.6

In several cases7 decided by the Court where the right to repurchase was held to have been properly
exercised, there was an unequivocal tender of payment for the full amount of the repurchase price.
Otherwise, the offer to redeem is ineffectual.8 Bona fide redemption necessarily implies a reasonable and
valid tender of the entire repurchase price, otherwise the rule on the redemption period fixed by law can
easily be circumvented.

Article 2132. By the contract of antichresis the creditor acquires the right to receive the fruits of an
immovable of his debtor, with the obligation to apply them to the payment of the interest, if owing, and
thereafter to the principal of his credit. (1881)

Article 2133. The actual market value of the fruits at the time of the application thereof to the interest and
principal shall be the measure of such application. (n)

Article 2134. The amount of the principal and of the interest shall be specified in writing; otherwise, the
contract of antichresis shall be void. (n)

Article 2135. The creditor, unless there is a stipulation to the contrary, is obliged to pay the taxes and
charges upon the estate.

He is also bound to bear the expenses necessary for its preservation and repair.

The sums spent for the purposes stated in this article shall be deducted from the fruits. (1882)

Article 2136. The debtor cannot reacquire the enjoyment of the immovable without first having totally
paid what he owes the creditor.

But the latter, in order to exempt himself from the obligations imposed upon him by the preceding article,
may always compel the debtor to enter again upon the enjoyment of the property, except when there is a
stipulation to the contrary. (1883)

Article 2137. The creditor does not acquire the ownership of the real estate for non-payment of the debt
within the period agreed upon.

Every stipulation to the contrary shall be void. But the creditor may petition the court for the payment of
the debt or the sale of the real property. In this case, the Rules of Court on the foreclosure of mortgages
shall apply. (1884a)

Article 2138. The contracting parties may stipulate that the interest upon the debt be compensated with
the fruits of the property which is the object of the antichresis, provided that if the value of the fruits should
exceed the amount of interest allowed by the laws against usury, the excess shall be applied to the
principal. (1885a)
Article 2139. The last paragraph of article 2085, and articles 2089 to 2091 are applicable to this contract.
(1886a)

CECILIO DIEGO, plaintiff-appellee,


vs.
SEGUNDO FERNANDO, defendant-appellant.

On May 26, 1950, the defendant Segundo Fernando executed a deed of mortgage in favor of plaintiff
Cecilio Diego over two parcels of land registered in his name, to secure a loan P2,000, without interest,
payable within four years from the date of the mortgage (Exhibit "A"). After the execution of the deed,
possession of the mortgaged properties were turned over to the mortagagee.

The debtor having failed to pay the loan after four years, the mortagagee Diego made several demands
upon him for payment; and as the demands were unheeded, Diego filed this action for foreclosure of
mortgage.

Defendant Fernando's defense was that the true transaction between him and plaintiff was one of
antichresis and not of mortgage; and that as plaintiff had allegedly received a total of 120 cavans of palay
from the properties given as security, which, at the rate of P10 a cavan, represented a value of P5,200,
his debt had already been paid, with plaintiff still owing him a refund of some P2,720.00.

The main issue raised is whether the contract between the parties is one of mortgage or of antichresis.
Appellant, while admitting that the contract Exhibit "A" shows a deed of mortgage, contends that the
admitted fact that the loan was without interest, coupled with the transfer of the possession of the
properties mortgaged to the mortgagee, reveals that the true transaction between him and appellee was
one of antichresis. As correctly pointed out by appellee and the lower court, however, it is not an essential
requisite of a mortgage that possession of the mortgaged premises be retained by the mortagagor
(Legaspi and Salcedo vs. Celestial, 66 Phil., 372). To be antichresis, it must be expressly agreed between
creditor and debtor that the former, having been given possession of the properties given as security, is to
apply their fruits to the payment of the interest, if owing, and thereafter to the principal of his credit (Art.
2132, Civil Code, Barretto vs. Barretto, 37 Phil., 234; Diaz vs. De Mendezona, 48 Phil., 666); so that if a
contract of loan with security does not stipulate the payment of interest but provides for the delivery to the
creditor by the debtor of the property given as security, in order that the latter may gather its fruits, without
stating that said fruits are to be applied to the payment of interest, if any, and afterwards that of the
principal, the contract is a mortgage and not antichresis (Legaspi vs. Celestial, supra). The court below,
therefore, did not err in holding that the contract Exhibit "A" is a true mortgage and not an antichresis.

The true position of appellee herein under his contract with appellant is a "mortgagee in possession" as
that term is understood in American equity jurisprudence; that is "one who has lawfully acquired actual or
constructive possession of the premises mortgaged to him, standing upon his rights as mortgagee and
not claiming under another title, for the purpose of enforcing his security upon such property or making its
income help to pay his debt" (Diaz vs. De Mendezona, citing 27 Cyc. 1237, 48 Phil., 666). As such
mortgagee in possession, his rights and obligations are, as pointed out by this Court in Macapinlac vs.
Gutierrez Repide (43 Phil., 770), similar to those of an antichretic creditor:

The respective rights and obligations of the parties to a contract of antichresis, under the
Civil Code, appear to be similar and in many respects identical with those recognized in
the equity jurisprudence of England and America as incident to the position of a
mortgagee in possession, in reference to which the following propositions may be taken
to be established, namely, that if the mortgagee acquires possession in any lawful
manner, he is entitled to retain such possession until the indebtedness is satisfied and
the property redeemed; that the non-payment of the debt within the term agreed does not
vest the ownership of the property in the creditor; that the general duty of the mortgagee
in possession towards the premises is that of the ordinary prudent owner; that the
mortgagee must account for the rents and profits of the land, or its value for purposes of
use and occupation, any amount thus realized going towards the discharge on the
mortgage debt; that if the mortgage remains in possession after the mortgage debt has
been satisfied, he becomes a trustee for the mortgagor as to the excess of the rents and
profits over such debt; and lastly, that the mortgagor can only enforce his rights to the
land by an equitable action for an account and to redeem. (3 Pom. Eq. Jur. secs. 1215-
1218)

Similarly, in Enriquez vs. National Bank, 55 Phil., 414, we ruled that a creditor with a lien on real property
who took possession thereof with the consent of the debtor, held it as an "antichretic creditor with the right
to collect the credit with interest from the fruits, returning to the antichretic creditor the balance, if any,
after deducting the expenses," because the fact that the debtor consented and asked the creditor to take
charge of managing his property "does not entitle the latter to appropriate to itself the fruits thereof unless
the former has expressly waived his right thereto."

In the present case, the parties having agreed that the loan was to be without interest, and the appellant
not having expressly waived his right to the fruits of the properties mortgaged during the time they were in
appellee's possession, the latter, like an antichretic creditor, must account for the value of the fruits
received by him, and deduct it from the loan obtained by appellant. According to the findings of the trial
court, appellee had received a net share of 55 cavans of palay out of the mortgaged properties up to the
time he filed the present action; at the rate of P9.00 per cavan (a rate admitted by the parties), the total
value of the fruits received by appellee is P495.00. Deducting this amount from the loan of P2,000.00
received by appellant from appellee, the former has only P1,505.00 left to pay the latter.

Article 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a
security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the
creditor or a third person, the contract is a pledge and not a chattel mortgage. (n)

Article 2141. The provisions of this Code on pledge, insofar as they are not in conflict with the Chattel
Mortgage Law shall be applicable to chattel mortgages. (n)

Procedure (Act 1508):


Sec. 14. Sale of property at public auction; Officer's return; Fees; Disposition of proceeds. — The
mortgagee, his executor, administrator, or assign, may, after thirty days from the time of condition broken,
cause the mortgaged property, or any part thereof, to be sold at public auction by a public officer at a
public place in the municipality where the mortgagor resides, or where the property is situated, provided
at least ten days' notice of the time, place, and purpose of such sale has been posted at two or more
public places in such municipality, and the mortgagee, his executor, administrator, or assign, shall notify
the mortgagor or person holding under him and the persons holding subsequent mortgages of the time
and place of sale, either by notice in writing directed to him or left at his abode, if within the municipality,
or sent by mail if he does not reside in such municipality, at least ten days previous to the sale.

The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and
file the same in the office of the register of deeds where the mortgage is recorded, and the register of
deeds shall record the same. The fees of the officer for selling the property shall be the same as in the
case of sale on execution as provided in Act Numbered One hundred and ninety,4 and the amendments
thereto, and the fees of the register of deeds for registering the officer's return shall be taxed as a part of
the costs of sale, which the officer shall pay to the register of deeds. The return shall particularly describe
the articles sold, and state the amount received for each article, and shall operate as a discharge of the
lien thereon created by the mortgage. The proceeds of such sale shall be applied to the payment, first, of
the costs and expenses of keeping and sale, and then to the payment of the demand or obligation
secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in
their order, and the balance, after paying the mortgages, shall be paid to the mortgagor or person holding
under him on demand.
If the sale includes any "large cattle," a certificate of transfer as required by section sixteen of Act
Numbered Eleven hundred and forty-seven5 shall be issued by the treasurer of the municipality where
the sale was held to the purchaser thereof.

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners,
vs.
CA, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY,respondents.

Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic
Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of
private respondent Producers Bank of the Philippines. The mortgage stood by way of security for
petitioner's corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage
agreement was to this effect —

(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly
perform the full obligation or obligations above-stated according to the terms
thereof, then this mortgage shall be null and void. . . .

In case the MORTGAGOR executes subsequent promissory note or notes either


as a renewal of the former note, as an extension thereof, or as a new loan, or is
given any other kind of accommodations such as overdrafts, letters of credit,
acceptances and bills of exchange, releases of import shipments on Trust
Receipts, etc., this mortgage shall also stand as security for the payment of the
said promissory note or notes and/or accommodations without the necessity of
executing a new contract and this mortgage shall have the same force and effect
as if the said promissory note or notes and/or accommodations were existing on
the date thereof. 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. 1

In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it
obtained from respondent bank additional financial accommodations totalling P2,700,000.00. 2 These
borrowings were on due date also fully paid.

On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million
pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial
constraints, the loan was not settled at maturity. 3 Respondent bank thereupon applied for an extra judicial
foreclosure of the chattel mortgage, herein before cited, with the Sheriff of Caloocan City, prompting
petitioner corporation to forthwith file an action for injunction, with damages and a prayer for a writ of
preliminary injunction, before the Regional Trial Court of Caloocan City (Civil Case No. C-12081).
Ultimately, the court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held
petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage.

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations
so long as these future debts are accurately described, 10 a chattel mortgage, however, 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. 11 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.

MANUEL C. MANARANG and LUCIA D. MANARANG, Petitioners-Appellants,


vs.
MACARIO M. OFILADA, Sheriff and ERNESTO ESTEBAN, Respondents-Appellees.
On September 8, 1951, Petitioner Lucia D. Manarang obtained a loan of P200 from Ernesto Esteban, and
to secure its payment she executed a chattel mortgage over a house of mixed materials erected on a lot
on Alvarado Street, Manila. As Manarang did not pay the loan as agreed upon, Esteban brought an action
against her in the municipal court of Manila for its recovery, alleging that the loan was secured by a
chattel mortgage on her property. Judgment having been entered in Plaintiff’s favor, execution was issued
against the same property mortgaged.
Before the property could be sold Manarang offered to pay the sum of P277, which represented the
amount of the judgment of P250, the interest thereon, the costs, and the sheriff’s fees, but the sheriff
refused the tender unless the additional amount of P260 representing the publication of the notice of sale
in two newspapers be paid also. SoDefendants therein brought this suit to compel the sheriff to accept
the amount of P277 as full payment of the judgment and to annul the published notice of sale.
There cannot be any question that a building of mixed materials may be the subject of a chattel mortgage,
in which case it is considered as between the parties as personal property.
The question now before us, however, is: Does the fact that the parties entering into a contract regarding
a house gave said property the consideration of personal property in their contract, bind the sheriff in
advertising the property’s sale at public auction as personal property?
These considerations notwithstanding, we hold that the rules on execution do not allow, and we should
not interpret them in such a way as to allow, the special consideration that parties to a contract may have
desired to impart to real estate, for example, as personal property, when they are not ordinarily so. Sales
on execution affect the public and third persons. The regulation governing sales on execution are for
public officials to follow. The form of proceedings prescribed for each kind of property is suited to its
character, not to the character which the parties have given to it or desire to give it. When the rules speak
of personal property, property which is ordinarily so considered is meant; and when real property is
spoken of, it means property which is generally known as real property. The regulations were never
intended to suit the consideration that parties, may have privately given to the property levied upon.
Enforcement of regulations would be difficult were the convenience or agreement of private parties to
determine or govern the nature of the proceedings. We, therefore, hold that the mere fact that a house
was the subject of a chattel mortgage and was considered as personal property by the parties does not
make said house personal property for purposes of the notice to be given for its sale at public auction.
This ruling is demanded by the need for a definite, orderly and well- defined regulation for official and
public guidance and which would prevent confusion and misunderstanding.
We, therefore, declare that the house of mixed materials levied upon on execution, although subject of a
contract of chattel mortgage between the owner and a third person, is real property within the purview of
Rule 39, section 16, of the Rules of Court as it has become a permanent fixture on the land, which is real
property.

GAVINO A. TUMALAD and GENEROSA R. TUMALAD, plaintiffs-appellees,


vs.
ALBERTA VICENCIO and EMILIANO SIMEON, defendants-appellants.

This case was originally commenced by defendants-appellants in the municipal court of Manila in Civil
Case No. 43073, for ejectment. Having lost therein, defendants-appellants appealed to the court a quo
(Civil Case No. 30993) which also rendered a decision against them, the dispositive portion of which
follows:

WHEREFORE, the court hereby renders judgment in favor of the plaintiffs and
against the defendants, ordering the latter to pay jointly and severally the former
a monthly rent of P200.00 on the house, subject-matter of this action, from March
27, 1956, to January 14, 1967, with interest at the legal rate from April 18, 1956,
the filing of the complaint, until fully paid, plus attorney's fees in the sum of
P300.00 and to pay the costs.

It appears on the records that on 1 September 1955 defendants-appellants executed a chattel mortgage
in favor of plaintiffs-appellees over their house of strong materials located at No. 550 Int. 3, Quezon
Boulevard, Quiapo, Manila, over Lot Nos. 6-B and 7-B, Block No. 2554, which were being rented from
Madrigal & Company, Inc. The mortgage was registered in the Registry of Deeds of Manila on 2
September 1955. The herein mortgage was executed to guarantee a loan of P4,800.00 received from
plaintiffs-appellees, payable within one year at 12% per annum. The mode of payment was P150.00
monthly, starting September, 1955, up to July 1956, and the lump sum of P3,150 was payable on or
before August, 1956. It was also agreed that default in the payment of any of the amortizations, would
cause the remaining unpaid balance to becomeimmediately due and Payable and —

the Chattel Mortgage will be enforceable in accordance with the provisions of


Special Act No. 3135, and for this purpose, the Sheriff of the City of Manila or
any of his deputies is hereby empowered and authorized to sell all the
Mortgagor's property after the necessary publication in order to settle the
financial debts of P4,800.00, plus 12% yearly interest, and attorney's fees... 2

When defendants-appellants defaulted in paying, the mortgage was extrajudicially foreclosed, and on 27
March 1956, the house was sold at public auction pursuant to the said contract. As highest bidder,
plaintiffs-appellees were issued the corresponding certificate of sale. 3 Thereafter, on 18 April 1956,
plaintiffs-appellant commenced Civil Case No. 43073 in the municipal court of Manila, praying, among
other things, that the house be vacated and its possession surrendered to them, and for defendants-
appellants to pay rent of P200.00 monthly from 27 March 1956 up to the time the possession is
surrendered. 4 On 21 September 1956, the municipal court rendered its decision —

... ordering the defendants to vacate the premises described in the complaint;
ordering further to pay monthly the amount of P200.00 from March 27, 1956, until
such (time that) the premises is (sic) completely vacated; plus attorney's fees of
P100.00 and the costs of the suit. 5

Defendants-appellants, in their answers in both the municipal court and court a quo impugned the legality
of the chattel mortgage, claiming that they are still the owners of the house.

Defendants-appellants mortgagors question the jurisdiction of the municipal court from which the case
originated, and consequently, the appellate jurisdiction of the Court of First Instance a quo, on the theory
that the chattel mortgage is void ab initio; whence it would follow that the extrajudicial foreclosure, and
necessarily the consequent auction sale, are also void. Thus, the ownership of the house still remained
with defendants-appellants who are entitled to possession and not plaintiffs-appellees. Therefore, it is
argued by defendants-appellants, the issue of ownership will have to be adjudicated first in order to
determine possession. lt is contended further that ownership being in issue, it is the Court of First
Instance which has jurisdiction and not the municipal court.

Defendants-appellants predicate their theory of nullity of the chattel mortgage on two grounds, which are:
(a) that, their signatures on the chattel mortgage were obtained through fraud, deceit, or trickery; and (b)
that the subject matter of the mortgage is a house of strong materials, and, being an immovable, it can
only be the subject of a real estate mortgage and not a chattel mortgage.

In the case of Manarang and Manarang vs. Ofilada, 17 this Court stated that "it is undeniable that the
parties to a contract may by agreement treat as personal property that which by nature would be real
property", citing Standard Oil Company of New York vs. Jaramillo.

The view that parties to a deed of chattel mortgage may agree to consider a
house as personal property for the purposes of said contract, "is good only
insofar as the contracting parties are concerned. It is based, partly, upon the
principle of estoppel" (Evangelista vs. Alto Surety, No. L-11139, 23 April 1958). In
a case, a mortgaged house built on a rented land was held to be a personal
property, not only because the deed of mortgage considered it as such, but also
because it did not form part of the land (Evangelists vs. Abad, [CA]; 36 O.G.
2913), for it is now settled that an object placed on land by one who had only a
temporary right to the same, such as the lessee or usufructuary, does not
become immobilized by attachment (Valdez vs. Central Altagracia, 222 U.S. 58,
cited in Davao Sawmill Co., Inc. vs. Castillo, et al., 61 Phil. 709). Hence, if a
house belonging to a person stands on a rented land belonging to another
person, it may be mortgaged as a personal property as so stipulated in the
document of mortgage. (Evangelista vs. Abad, Supra.) It should be noted,
however that the principle is predicated on statements by the owner declaring his
house to be a chattel, a conduct that may conceivably estop him from
subsequently claiming otherwise. (Ladera vs. C.N. Hodges, [CA] 48 O.G.
5374): 22

In the contract now before Us, the house on rented land is not only expressly designated as Chattel
Mortgage; it specifically provides that "the mortgagor ... voluntarily CEDES, SELLS and TRANSFERS by
way of Chattel Mortgage 23 the property together with its leasehold rights over the lot on which it is
constructed and participation ..." 24 Although there is no specific statement referring to the subject house
as personal property, yet by ceding, selling or transferring a property by way of chattel
mortgage defendants-appellants could only have meant to convey the house as chattel, or at least,
intended to treat the same as such, so that they should not now be allowed to make an inconsistent stand
by claiming otherwise.

MAKATI LEASING and FINANCE CORPORATION, petitioner,


vs.
WEAREVER TEXTILE MILLS, INC., and HONORABLE COURT OF APPEALS, respondents.

It appears that in order to obtain financial accommodations from herein petitioner Makati Leasing and
Finance Corporation, the private respondent Wearever Textile Mills, Inc., discounted and assigned
several receivables with the former under a Receivable Purchase Agreement. To secure the collection of
the receivables assigned, private respondent executed a Chattel Mortgage over certain raw materials
inventory as well as a machinery described as an Artos Aero Dryer Stentering Range.

Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure of the properties
mortgage to it. However, the Deputy Sheriff assigned to implement the foreclosure failed to gain entry into
private respondent's premises and was not able to effect the seizure of the aforedescribed machinery.
Petitioner thereafter filed a complaint for judicial foreclosure with the Court of First Instance of Rizal,
Branch VI, docketed as Civil Case No. 36040, the case before the lower court.

The next and the more crucial question to be resolved in this Petition is whether the machinery in suit is
real or personal property from the point of view of the parties, with petitioner arguing that it is a
personality, while the respondent claiming the contrary, and was sustained by the appellate court, which
accordingly held that the chattel mortgage constituted thereon is null and void, as contended by said
respondent.

If a house of strong materials, like what was involved in the above Tumalad case, may be considered as
personal property for purposes of executing a chattel mortgage thereon as long as the parties to the
contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no reason
why a machinery, which is movable in its nature and becomes immobilized only by destination or
purpose, may not be likewise treated as such. This is really because one who has so agreed is estopped
from denying the existence of the chattel mortgage.

URBANO JACA and BONIFACIO JACA, petitioners,


vs.
DAVAO LUMBER COMPANY and HONORABLE MANASES REYES, respondents.

In November, 1963, Urbano Jaca and Bonifacio Jaca filed with the Court of First Instance of Davao a
complaint for Accounting, Return of Price Differentials and Damages against the Davao Lumber
Company. The case was docketed as Civil Case No. 4189.

The complaint alleges that the plaintiff Urbano Jaca has been, and still is, a licensee of a logging
concession located in the City of Davao, and together with his co-plaintiff, Bonifacio Jaca, engaged in the
logging business of producing timber and logs for export and/or domestic purposes; that the defendant is
a business corporation with which plaintiffs had business dealings covering the sale and/or exportation of
their logs; that sometime in 1954, the herein parties-litigants entered into an agreement whereby plaintiffs
may secure, by way of advances, either cash or materials, foodstuffs, and/or equipment's from the
defendant corporation; that the payment of such account was to be made either in cash and/or by
plaintiff's turning over all the logs that they produce in the aforesaid concession to the defendant, and in
the latter case, the current prices, either export or domestic, of the logs at the time of their delivery was to
be considered; that while the aforesaid business relationship between the parties was subsisting,
defendant made plaintiff Urbano Jaca execute in its favor a chattel mortgage, a copy of which instrument.
however, plaintiffs were never furnished but that as far as they can recollect the primary conditions of
such chattel mortgage were that plaintiffs would turn over to defendant corporation all the logs they may
produce from the aforesaid concession the same to be priced either as export or domestic and their value
to be applied by defendant to, and be credited for, the account of plaintiff's indebtedness, and further that
in case of need, plaintiffs may secure, by way of advances, either cash, foodstuffs, materials or
equipment's, under an "open credit account"; that under the aforementioned "open credit account"
relationship between the plaintiffs and defendant, orders were secured by plaintiffs, by way of advances,
from the defendant, this to be paid by them with plaintiffs' production from their concession, liquidating
those old accounts and keeping all accounts current; that in pursuance to the agreement, as aforestated,
plaintiff Urbano Jaca executed assignments of letters of credit in favor of the defendant, in order that the
latter may be able to use, as defendant corporation did in fact use, the said letters of credit for bank
negotiations of the former in the exportation of logs; that the plaintiffs and the defendant had this business
relationship, as aforementioned, from 1954 up to sometime in August, 1963; that during this whole period
of time, the plaintiffs had been faithfully delivering all their log production to the defendant for export or
domestic purposes; that before the filing of this complaint, the plaintiff made repeated demands on the
defendant for a formal accounting of their business relationship from 1954 up to August, 1963, but that
the defendant failed and refused, and still fails and refuses, to effect such formal accounting, asserting
that it had no time as yet to examine into all the details of the accounting; that sometime on October 30,
1963, much to their surprise, plaintiffs received letters of demand from the defendant in which they were
requested to pay their accounts in favor of defendant, which according to the latter had long been
overdue; (Copies of such letters are hereto attached marked as Annexes "A" and "B", and made integral
parts of this complaint) that plaintiffs are no longer indebted to the defendant, and as a matter of act it is
their belief that, if a formal accounting be made, there would still appear a claim in their favor in the
amount of P250,000.00 more or less, representing the price differentials of logs which they delivered to
the defendant from 1954 up to August, 1963; and that further, there was a deliberate fraud practiced by
the defendant on them, especially in defendant's under grading and/or reclassification of logs delivered to
it by plaintiffs; that further, there were many errors committed in the monthly statements submitted to the
plaintiffs, arising from the fact that there were charges of cash, equipment's, materials and foodstuffs in
said statements never ordered and/or received by the plaintiffs; and still further that the proceeds of the
letter of credit were not fully applied and/or credited to the account of plaintiffs; that defendant has up to
the present denied the plaintiffs the benefits of a formal accounting and inasmuch as the invoices,
receipts, vouchers, requisition slips and other pertinent papers and document of their business
transactions are in the possession of defendant, it is difficult for plaintiffs to ascertain with accuracy the
ledger balance between the parties, unless a detailed examination of the matter is had; that plaintiffs have
thereby been constrained to file this case in Court in order to compel defendant to have a formal
accounting between them, and that it is the desire of plaintiffs that pending the formal hearing of this
case, three commissioners, constituting accountants be judicially appointed for the purpose of examining
all the books, pertinent papers and documents and all other data in relation with their business
transaction; that in order to protect their interest and to litigate this case, the plaintiffs were compelled to
secure and retain the services of attorneys, and that they have thereby suffered damages in the sum of
Twenty Thousand Pesos (P20,000.00) by way of attorney's fees. 2

This deed of chattel mortgage is void because it provides that the security stated therein is for the
payment of any and all obligations herein before contracted and which may hereafter be contracted by
the Mortgagor in favor of the Mortgagee. 24 In the case of Belgian Catholic Missionaries vs. Magallanes
Press this Court held:

A mortgage that contains a stipulation in regard to future advances in the credit


will take effect only from the date the same are made and not from the date of
the mortgage (11 CJ, 448; 5 RCL 420-421). ... Where the statute provides that
the parties to a chattel mortgage must make oath that the debt is a just debt,
honestly due and owing from the mortgagor to the mortgagee, it is obvious that a
valid mortgage cannot be made to secure a debt to be thereafter contracted. (11
CJ. 448) 25

W. R. GIBERSON, plaintiff-appellee,
vs.
A. N. JUREIDINI BROS., INC., defendant-appellant.

H. K. Motoomul & Co. was, at the times mentioned in the complaint, a partnership doing business in the
cities of Cebu and Iloilo. Sometime prior to May 24, 1921, the company became financially embarrassed.
A. N. Jureidini Bros., Inc., a larger creditor of Motoomul & Co., became aware of the precarious condition
of the latter, because of the diminishing payments on account of a debt. Ultimately, Motoomul & Co.
delivered to Jureidini Brothers, on May 24, 1921, one of the debtor's Iloilo stores known as Bazar Aguila
de Oro. On the same day also, credits receivable belonging to Motoomul & Co. were transferred to
Jureidini Bros. Still later, on June 13, 1921, another stock of goods belonging to Motoomul & Co. passes
to Jureidini Bros. The documents evidencing these transfer appears in the record.

Within thirty days after these assignments were made, or, to be exact, on June 22, 1921, a number of
creditors of H. K. Motoomul & Co. initiated successfully involuntary insolvency proceedings against it.
Later, action was brought by the receiver appointed by the court, with the results above related.

But, in this connection, appellant relies on Exhibit 1, which purports to be a chattel mortgage executed in
the sum of P100,000 by H. Dialdas Motoomul and A. N. Jureidini Bros., Inc., on December 1, 1919, but
not registered until May 5, 1921.

The trial judge held, and properly, that Exhibit 1 was invalid because the oath required by law did not
appear therein, and because the subject-matter was not described therein with sufficient particularity. The
Chattel Mortgage Law, in its section 5, in describing what shall be deemed sufficient to constitute a good
chattel mortgage, includes the requirements of an affidavit of good faith appended to the mortgage and
recorded therewith. It has been held by reputable courts that the absence of the affidavits vitiates a
mortgage as against creditors and subsequent encumbrancers.

URBANO JACA and BONIFACIO JACA, petitioners,


vs.
DAVAO LUMBER COMPANY and HONORABLE MANASES REYES, respondents.

In November, 1963, Urbano Jaca and Bonifacio Jaca filed with the Court of First Instance of Davao a
complaint for Accounting, Return of Price Differentials and Damages against the Davao Lumber
Company. The case was docketed as Civil Case No. 4189.

The complaint alleges that the plaintiff Urbano Jaca has been, and still is, a licensee of a logging
concession located in the City of Davao, and together with his co-plaintiff, Bonifacio Jaca, engaged in the
logging business of producing timber and logs for export and/or domestic purposes; that the defendant is
a business corporation with which plaintiffs had business dealings covering the sale and/or exportation of
their logs; that sometime in 1954, the herein parties-litigants entered into an agreement whereby plaintiffs
may secure, by way of advances, either cash or materials, foodstuffs, and/or equipment's from the
defendant corporation; that the payment of such account was to be made either in cash and/or by
plaintiff's turning over all the logs that they produce in the aforesaid concession to the defendant, and in
the latter case, the current prices, either export or domestic, of the logs at the time of their delivery was to
be considered; that while the aforesaid business relationship between the parties was subsisting,
defendant made plaintiff Urbano Jaca execute in its favor a chattel mortgage, a copy of which instrument.
however, plaintiffs were never furnished but that as far as they can recollect the primary conditions of
such chattel mortgage were that plaintiffs would turn over to defendant corporation all the logs they may
produce from the aforesaid concession the same to be priced either as export or domestic and their value
to be applied by defendant to, and be credited for, the account of plaintiff's indebtedness, and further that
in case of need, plaintiffs may secure, by way of advances, either cash, foodstuffs, materials or
equipment's, under an "open credit account"; that under the aforementioned "open credit account"
relationship between the plaintiffs and defendant, orders were secured by plaintiffs, by way of advances,
from the defendant, this to be paid by them with plaintiffs' production from their concession, liquidating
those old accounts and keeping all accounts current; that in pursuance to the agreement, as aforestated,
plaintiff Urbano Jaca executed assignments of letters of credit in favor of the defendant, in order that the
latter may be able to use, as defendant corporation did in fact use, the said letters of credit for bank
negotiations of the former in the exportation of logs; that the plaintiffs and the defendant had this business
relationship, as aforementioned, from 1954 up to sometime in August, 1963; that during this whole period
of time, the plaintiffs had been faithfully delivering all their log production to the defendant for export or
domestic purposes; that before the filing of this complaint, the plaintiff made repeated demands on the
defendant for a formal accounting of their business relationship from 1954 up to August, 1963, but that
the defendant failed and refused, and still fails and refuses, to effect such formal accounting, asserting
that it had no time as yet to examine into all the details of the accounting; that sometime on October 30,
1963, much to their surprise, plaintiffs received letters of demand from the defendant in which they were
requested to pay their accounts in favor of defendant, which according to the latter had long been
overdue; (Copies of such letters are hereto attached marked as Annexes "A" and "B", and made integral
parts of this complaint) that plaintiffs are no longer indebted to the defendant, and as a matter of act it is
their belief that, if a formal accounting be made, there would still appear a claim in their favor in the
amount of P250,000.00 more or less, representing the price differentials of logs which they delivered to
the defendant from 1954 up to August, 1963; and that further, there was a deliberate fraud practiced by
the defendant on them, especially in defendant's under grading and/or reclassification of logs delivered to
it by plaintiffs; that further, there were many errors committed in the monthly statements submitted to the
plaintiffs, arising from the fact that there were charges of cash, equipment's, materials and foodstuffs in
said statements never ordered and/or received by the plaintiffs; and still further that the proceeds of the
letter of credit were not fully applied and/or credited to the account of plaintiffs; that defendant has up to
the present denied the plaintiffs the benefits of a formal accounting and inasmuch as the invoices,
receipts, vouchers, requisition slips and other pertinent papers and document of their business
transactions are in the possession of defendant, it is difficult for plaintiffs to ascertain with accuracy the
ledger balance between the parties, unless a detailed examination of the matter is had; that plaintiffs have
thereby been constrained to file this case in Court in order to compel defendant to have a formal
accounting between them, and that it is the desire of plaintiffs that pending the formal hearing of this
case, three commissioners, constituting accountants be judicially appointed for the purpose of examining
all the books, pertinent papers and documents and all other data in relation with their business
transaction; that in order to protect their interest and to litigate this case, the plaintiffs were compelled to
secure and retain the services of attorneys, and that they have thereby suffered damages in the sum of
Twenty Thousand Pesos (P20,000.00) by way of attorney's fees. 2

This deed of chattel mortgage is void because it provides that the security stated therein is for the
payment of any and all obligations herein before contracted and which may hereafter be contracted by
the Mortgagor in favor of the Mortgagee. 24 In the case of Belgian Catholic Missionaries vs. Magallanes
Press this Court held:

A mortgage that contains a stipulation in regard to future advances in the credit


will take effect only from the date the same are made and not from the date of
the mortgage (11 CJ, 448; 5 RCL 420-421). ... Where the statute provides that
the parties to a chattel mortgage must make oath that the debt is a just debt,
honestly due and owing from the mortgagor to the mortgagee, it is obvious that a
valid mortgage cannot be made to secure a debt to be thereafter contracted. (11
CJ. 448) 25

CEBU INTERNATIONAL FINANCE CORPORATION, petitioner,


vs.
COURT OF APPEALS, ROBERTO ONG AND ANG TAY, respondents.

On 4 March 1987, Jacinto Dy executed a Special Power of Attorney 1 in favor of private respondent Ang
Tay, authorizing the latter to sell the cargo vessel Owned by Dy and christened LCT "Asiatic."

On 28 April 1987, through a Deed of Absolute Sale, 2 Ang Tay sold the subject vessel to private
respondent Robert Ong (Ong) for P900,000.00. Ong paid the purchase price by issuing three (3) checks
in the following amounts: P150,000.000, P600,000.00 and P150,000.00. However, since the payment
was not made in cash, it was specifically stipulated in the deed of sale that the "LCT Asiatic shall not be
registered or transferred to Robert Ong until complete payment." 3 Thereafter, Ong obtained possession
of the subject vessel so he could begin deriving economic benefits therefrom. He, likewise, obtained
copies of the unnotarized deed of sale allegedly to be shown to the banks to enable him to acquire a loan
to replenish his (Ong's) capital. The aforequoted condition, however,which was handwritten on the
original deed of sale does not appear on Ong's copies.

Contrary to the aforementioned agreements and without the knowledge of Ang Tay, Ong had his copies
of the deed of sale (on which the aforementioned prohibition does not appear) notarized on 18 May
1987. 4 Ong presented the notarized deed to the Philippine Coast Guard which subsequently issued him a
Certificate of Ownership 5 and a Certificate of Philippine Register 6 over the subject vessel on 27 May
1987. Ong also succeeded in having the name of the vessel changed to LCT "Orient Hope."

On 29 October 1987, Ong acquired a loan from petitioner in the amount of P496,008.00 to be paid in
installments as evidenced by a promissory note of even date. 7

As security for the loan, Ong executed a chattel mortgage over the subject vessel, 8 which mortgage was
registered with the Philippine Coast Guard and annotated on the Certificate of Ownership. 9 In paragraph
3 of the Deed of Chattel Mortgage, it was stated that:

3. The said sum of FOUR HUNDRED NINETY SIX THOUSAND EIGHT ONLY
(496,008.00) represents the balance due on of MORTGAGOR(S) from the
MORTGAGEE and is payable in the office of the MORTGAGEE at Cebu City or
in the office of the latter's assignee, in case the rights and interests of the
MORTGAGEE in the foregoing mortgage are assigned to a third person, under
the terms of said promissory note, as follows: (a) TWENTY THOUSAND SIX
HUNDRED SIXTY SEVEN ONLY** Pesos (P20,667.00) on or before . . . . . . and
(b) the balance in Twenty Four (24) equal successive monthly installments on the
. . . . . . day of each and every succeeding month thereafter until the amount is
fully paid. The interest on the foregoing installments shall be paid on the same
date that the installments become payable and additional interest at the rate of
fourteen (14%) per cent per annum will be charged on all amounts, principal and
interest, not paid on due date. 10(Emphasis ours.)

Ong defaulted in the payment of the monthly installments. Consequently, on 11 May 1988, petitioner sent
him a letter 11 demanding delivery of the mortgaged vessel for foreclosure or in the alternative to pay the
balance of P437,802.00 pursuant to paragraph 11 of the deed of chattel mortgage. 12

Meanwhile, the two checks (worth P600,000.00 and P150,000.00) paid by Ong to Ang Tay for the
purchase of the subject vessel bounced. Ang Tay's search for the elusive Ong and all attempts to confer
with him proved to be futile. A subsequent investigation and inquiry with the Office of the Coast Guard
revealed that the subject vessel was already in the name of Ong, in violation of the express undertaking
contained in the original deed of sale.

As a result thereof, on 13 January 1988, Ang Tay and Jacinto Dy filed a civil case for rescission and
replevin with damages against Ong and his wife (docketed as Civil Case No. CEB-6565) with the
Regional Trial Court of Cebu . City, Branch 10. The trial court issued a writ of replevin and the subject
vessel was seized and subsequently delivered to Ang Tay.

The special affidavit of good faith, on the other hand, is required only for the purpose of transforming an
already valid mortgage into a "preferred mortgage." 30 Thus, the abovementioned affidavit is not
necessary for the validity of the chattel mortgage itself but only to give it a preferred status.

BUENAVENTURA T. SALDANA, plaintiff-appellant,


vs.
PHILIPPINE GUARANTY COMPANY, INC., et al., defendants-appellees.

The facts are that on May 8, 1953, in order to secure an indebtedness of P15,000.00, Josefina Vda. de
Aleazar executed in favor of the plaintiff-appellant Buenaventura Saldana a chattel mortgage covering
properties described as follows:

A building of strong materials, used for restaurant business, located in front of the San
Juan de Dios Hospital at Dewey Boulevard, Pasay City, and the following personal
properties therein contained:

1 Radio, Zenith, cabinet type.

1 Cooler.

1 Electric range, stateside, 4 burners.

1 Frigidaire, 8 cubic feet.

1 G.E. Deepfreezer.
8 Tables, stateside.

32 Chromium chairs, stateside.

1 Sala set upholstered, 6 pieces.

1 Bedroom set, 6 pieces.

And all other furniture's, fixtures or equipment found in the said premises.

Subsequent to the execution of said mortgage and while the same was still in force, the defendant
Hospital de San Juan de Dios, Inc. obtained, in Civil Case No. 1930 of the Municipal Court of Pasay City,
a judgment was duly Josewfina Vda. de Eleazar. A writ of execution was duly issued and, on January 28,
1957, the same was served on the judgment debtor by the sheriff of Pasay City; whereupon the following
properties of Josefina Eleazar were levied upon:

8 Tables with 4 (upholstered) chairs each.

1 Table with 4 (wooden) chairs.

1 Table (large) with 5 chairs.

1 Radio-phono (Zenith, 8 tubes).

2 Showcases (big, with mirrors).

1 Rattan sala set with 4 chairs, 1 table and 3 sidetables .

1 Wooden drawer.

1 Tocador (brown with mirror).

1 Aparador .

2 Beds (single type).

1 Freezer (deep freeze).

1 Gas range (magic chef, with 4 burners).

1 Freezer (G.E.).

On January 31, 1957, the plaintiff-appellant Saldana filed a third-party claim asserting that the above-
described properties levied are subject to his chattel mortgage of May 8, 1953. In virtue thereof, the
sheriff released only some of the property originally included in the levy of January 28, 1957, to wit:

1 Radio, Zenith, cabinet type.

8 Tables, stateside.

32 Chromiun chairs, stateside.


1 G.E. Deep freezer.

Appellants claims that the phrase in the chattel mortgage contract — "and all other furnitures, fixtures and
equipment found in the said premises", validly and sufficiently covered within its terms the personal
properties disposed of in the auction sale, as to warrant an action for damages by the plaintiff mortgagee.

There is merit in appellant's contention. Section 7 of Act No. 1508, commonly and better known as the
Chattel Mortgage Law, does not demand a minute and specific description of every chattel mortgaged in
the deal of mortgage but only requires that the description of the properties be such "as to enable the
parties in the mortgage, or any other person, after reasonable inquiry and investigation to identify the
same". Gauged by this standard, general description have been held by this Court.
(See Stockholder vs. Ramirez, 44 Phil., 993; Pedro de Jesus vs. Guam Bee Co., Inc., 72 Phil., 464).

A similar rule obtains in the United States courts and decisions there have repeatedly upheld clauses of
general import in mortgages of chattels other than goods for trade, and containing expressions similar to
that of the contract now before us. Thus, "and all other stones belonging to me and all other goods and
chattels" (Russel vs. Winne, 97 Am. Dec. 755); "all of the property of the said W.W. Allen used or situated
upon the leased premises" (Dorman vs. Crooks State Bank, 64 A.L.R. 614); "all goods in the store where
they are doing business in E. City, N.C." (Davis vs. Turner, 120 Fed. 605); "all and singular the goods,
wares, stock, iron tools manufactured articles and property of every description, being situated in or about
the shop or building now occupied by me in Howley Stree" (Winslow vs. Merchants Ins. Co., 38 Am. Dec.
368,) were held sufficient description, on the theory that parol evidence could supplement it to render
identification rule is expressed in Walker vs. Johnson.

Act 1508

Sec. 8. Failure of mortgagee to discharge the mortgage. — If the mortgagee, assign, administrator,
executor, or either of them, after performance of the condition before or after the breach thereof, or after
tender of the performance of the condition, at or after the time fixed for the performance, does not within
ten days after being requested thereto by any person entitled to redeem, discharge the mortgage in the
manner provided by law, the person entitled to redeem may recover of the person whose duty it is to
discharge the same twenty pesos for his neglect and all damages occasioned thereby in an action in any
court having jurisdiction of the subject-matter thereof.

Sec. 13. When the condition of a chattel mortgage is broken, a mortgagor or person holding a
subsequent mortgage, or a subsequent attaching creditor may redeem the same by paying or delivering
to the mortgagee the amount due on such mortgage and the reasonable costs and expenses incurred by
such breach of condition before the sale thereof. An attaching creditor who so redeems shall be
subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner that
the mortgagee could foreclose it by the terms of this Act.

PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES, et al, petitioners,


vs.
HON. COURT OF APPEALS and DEVELOPMENT BANK OF THE PHILIPPINES, respondents.

On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA) obtained a loan of
US$267,881.67, or the equivalent of P2,000,000.00 from respondent Bank. By virtue of this loan,
petitioner PAMECA, through its President, petitioner Herminio C. Teves, executed a promissory note for
the said amount, promising to pay the loan by installment. As security for the said loan, a chattel
mortgage was also executed over PAMECA's properties in Dumaguete City, consisting of inventories,
furniture and equipment, to cover the whole value of the loan.
On January 18, 1984, and upon petitioner PAMECA's failure to pay, respondent bank extrajudicially
foreclosed the chattel mortgage, and, as sole bidder in the public auction, purchased the foreclosed
properties for a sum of P322,350.00. On June 29, 1984, respondent bank filed a complaint for the
collection of the balance of P4,366,332.46 3 with Branch 132 of the Regional Trial Court of Makati City
against petitioner PAMECA and private petitioners herein, as solidary debtors with PAMECA under the
promissory note.

Sec. 14 of Act No. 1508, as amended, or the chattel Mortgage Law, states:

It is clear from the above provision that the effects of foreclosure under the Chattel Mortgage Law run
inconsistent with those of pledge under Article 2115. Whereas, in pledge, the sale of the thing pledged
extinguishes the entire principal obligation, such that the pledgor may no longer recover proceeds of the
sale in excess of the amount of the principal obligation, Section 14 of the Chattel Mortgage Law expressly
entitles the mortgagor to the balance of the proceeds, upon satisfaction of the principal obligation and
costs.

Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale
proceeds there is a corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case
of a reduction in the price at public auction. As explained in Manila Trading and Supply Co. vs. Tamaraw
Plantation Co. 17, cited in Ablaza vs. Ignacio, supra:

The theory of the lower court would lead to the absurd conclusion that if the
chattels mentioned in the mortgage, given as security, should sell for more than
the amount of the indebtedness secured, that the creditor would be entitled to the
full amount for which it might be sold, even though that amount was greatly in
excess of the indebtedness. Such a result certainly was not contemplated by the
legislature when it adopted Act No. 1508. There seems to be no reason
supporting that theory under the provision of the law. The value of the chattels
changes greatly from time to time, and sometimes very rapidly. If for example,
the chattels should greatly increase in value and a sale under that condition
should result in largely overpaying the indebtedness, and if the creditor is not
permitted to retain the excess, then the same token would require the debtor to
pay the deficiency in case of a reduction in the price of the chattels between the
date of the contract and a breach of the condition.

PHILIPPINE NATIONAL BANK, Petitioner,


vs.
SPOUSES AGUSTIN and PILAR ROCAMORA, Respondents.

On September 25, 1981, the spouses Rocamora obtained a loan from PNB in the aggregate amount
ofP100,000.00 under the Cottage Industry Guarantee and Loan Fund (CIGLF). The loan was payable in
five years, under the following terms: P35,000 payable semi-annually and P65,000 payable annually. In
addition to the principal amount, the spouses Rocamora agreed to pay interest at the rate of 12% per
annum, plus a penalty fee of 5% per annum in case of delayed payments. The spouses Rocamora signed
two promissory notes2 evidencing the loan.

To secure their loan obligations, the spouses Rocamora executed two mortgages: a real estate
mortgage3 over a property covered by Transfer Certificate of Title No. 7160 in the amount of P10,000,
and a chattel mortgage4 over various machineries in the amount of P25,000. Payment of the
remaining P65,000 was under the CIGLF guarantee, with the spouses Rocamora paying the required
guarantee fee.
Both the promissory note and the real estate mortgage deed contained an escalation clause that
allowed PNB to increase the 12% interest rate at anytime without notice, within the limits allowed by law.
The pertinent portion of the promissory note stated:

For value received, we, jointly and severally, promise to pay to the ORDER of the PHILIPPINE
NATIONAL BANK, at its office in Pto. Princesa City, Philippines, the sum of xxx together with interest
thereon at the rate of 12% per annum until paid, which interest rate the Bank may at any time, without
notice, raise within the limits allowed by law, and I/we also agree to pay jointly and severally, 5% per
annum penalty charge, by way of liquidated damages, should this note be unpaid or is not renewed on
due date. [Emphasis supplied.]

While paragraph (k) of the real estate mortgage deed provided:

(k) INCREASE OF INTEREST RATE

The MORTGAGEE reserves the right to increase the interest rate charged on the obligation
secured by this mortgage including any amount which it may have advanced within the limits
allowed by law at any time depending on whatever policy it may adopt in the future; Provided, that
the interest rate on the accommodation/s secured by the mortgage shall be correspondingly decreased in
the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either
case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in that maximum interest rate. [Emphasis supplied.]

The spouses Rocamora only paid a total of P32,383.655 on the loan. Hence, the PNB commenced
foreclosure proceedings in August and October 1990. The foreclosure of the mortgaged properties
yielded P75,500.00 as total proceeds.

After the foreclosure, PNB found that the recovered proceeds and the amounts the spouses Rocamora
previously paid were not sufficient to satisfy the loan obligations. PNB thus filed, on January 18, 1994,
a complaint for deficiency judgment6 before the Regional Trial Court (RTC) of Puerto Princesa City,
Branch 48. The PNB alleged that as of January 7, 1994, the outstanding balance of the spouses
Rocamora’s loan (including interests and penalties) was P206,297.47, broken down as follows:

Principal………………………………………............. P 79,484.65
Total interest due up to 01-07-94…………………….. 51,229.35
Total penalty due up to 01-07-94…………………….. 75,583.47
TOTAL AMOUNT DUE AND PAYABLE P 206,297.477

In insisting that it is entitled to a deficiency judgment of P206,297.47, PNB argues that the RTC and the
CA erred in invalidating the escalation clause in the parties’ agreement because it fully complied with the
requirements for a valid escalation clause under this Court’s following pronouncement in Banco Filipino
Savings and Mortgage Bank v. Navarro:12]

The foreclosure of chattel and real estate mortgages is governed by Act Nos. 1508 and 3135,
respectively. Although both laws do not contain a provision expressly or impliedly authorizing the
mortgagee to recover the deficiency resulting after the foreclosure proceeds are deducted from the
principal obligation, the Court has construed the laws’ silence as a grant to the mortgagee of the right to
maintain an action for the deficiency; the mortgages are given merely as security, not as settlement or
satisfaction of the indebtedness.13

CC, Article 1484. In a contract of sale of personal property the price of which is payable in installments,
the vendor may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should
the vendee's failure to pay cover two or more installments. In this case, he shall have no
further action against the purchaser to recover any unpaid balance of the price. Any
agreement to the contrary shall be void. (1454-A-a)

SPOUSES BONIFACIO and FAUSTINA PARAY, and VIDAL ESPELETA, Petitioners,


vs.
DRA. ABDULIA C. RODRIGUEZ, et al, Respondents.

Respondents were the owners, in their respective personal capacities, of shares of stock in a corporation
known as the Quirino-Leonor-Rodriguez Realty Inc.1 Sometime during the years 1979 to 1980,
respondents secured by way of pledge of some of their shares of stock to petitioners Bonifacio and
Faustina Paray ("Parays") the payment of certain loan obligations. The shares pledged are listed below:

When the Parays attempted to foreclose the pledges on account of respondents’ failure to pay their loans,
respondents filed complaints with the Regional Trial Court (RTC) of Cebu City. The actions, which were
consolidated and tried before RTC Branch 14, Cebu City, sought the declaration of nullity of the pledge
agreements, among others. However the RTC, in its decision3 dated 14 October 1988, dismissed the
complaint and gave "due course to the foreclosure and sale at public auction of the various pledges
subject of these two cases."4 This decision attained finality after it was affirmed by the Court of Appeals
and the Supreme Court. The Entry of Judgment was issued on 14 August 1991.

Respondents then received Notices of Sale which indicated that the pledged shares were to be sold at
public auction on 4 November 1991. However, before the scheduled date of auction, all of respondents
caused the consignation with the RTC Clerk of Court of various amounts. It was claimed that respondents
had attempted to tender these payments to the Parays, but had been rebuffed. The deposited amounts
were as follows:

Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal
Espeleta successfully bidding the amount of P6,200,000.00 for all of the pledged shares. None of
respondents participated or appeared at the auction of 4 November 1991.

Respondents instead filed on 13 November 1991 a complaint seeking the declaration of nullity of the
concluded public auction. The complaint, docketed as Civil Case No. CEB-10926, was assigned to
Branch 16 of the Cebu City RTC. Respondents argued that their tender of payment and subsequent
consignations served to extinguish their loan obligations and discharged the pledge contracts. Petitioners
countered that the auction sale was conducted pursuant to the final and executory judgment in Civil
Cases Nos. R-20120 and 20131, and that the tender of payment and consignations were made long after
their obligations had fallen due.

The 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.
Article 2236. The debtor is liable with all his property, present and future, for the fulfillment of his
obligations, subject to the exemptions provided by law. (1911a)

Article 2237. Insolvency shall be governed by special laws insofar as they are not inconsistent with this
Code. (n)

Article 2238. So long as the conjugal partnership or absolute community subsists, its property shall not
be among the assets to be taken possession of by the assignee for the payment of the insolvent debtor's
obligations, except insofar as the latter have redounded to the benefit of the family. If it is the husband
who is insolvent, the administration of the conjugal partnership or absolute community may, by order of
the court, be transferred to the wife or to a third person other than the assignee. (n)

Article 2239. If there is property, other than that mentioned in the preceding article, owned by two or
more persons, one of whom is the insolvent debtor, his undivided share or interest therein shall be among
the assets to be taken possession of by the assignee for the payment of the insolvent debtor's
obligations. (n)

Article 2240. Property held by the insolvent debtor as a trustee of an express or implied trust, shall be
excluded from the insolvency proceedings. (n)

Article 2241. With reference to specific movable property of the debtor, the following claims or liens shall
be preferred:

(1) Duties, taxes and fees due thereon to the State or any subdivision thereof;

(2) Claims arising from misappropriation, breach of trust, or malfeasance by public


officials committed in the performance of their duties, on the movables, money or
securities obtained by them;

(3) Claims for the unpaid price of movables sold, on said movables, so long as they are in
the possession of the debtor, up to the value of the same; and if the movable has been
resold by the debtor and the price is still unpaid, the lien may be enforced on the price;
this right is not lost by the immobilization of the thing by destination, provided it has not
lost its form, substance and identity; neither is the right lost by the sale of the thing
together with other property for a lump sum, when the price thereof can be determined
proportionally;

(4) Credits guaranteed with a pledge so long as the things pledged are in the hands of
the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or
mortgaged, up to the value thereof;

(5) Credits for the making, repair, safekeeping or preservation of personal property, on
the movable thus made, repaired, kept or possessed;

(6) Claims for laborers' wages, on the goods manufactured or the work done;

(7) For expenses of salvage, upon the goods salvaged;

(8) Credits between the landlord and the tenant, arising from the contract of tenancy on
shares, on the share of each in the fruits or harvest;

(9) Credits for transportation, upon the goods carried, for the price of the contract and
incidental expenses, until their delivery and for thirty days thereafter;
(10) Credits for lodging and supplies usually furnished to travellers by hotel keepers, on
the movables belonging to the guest as long as such movables are in the hotel, but not
for money loaned to the guests;

(11) Credits for seeds and expenses for cultivation and harvest advanced to the debtor,
upon the fruits harvested;

(12) Credits for rent for one year, upon the personal property of the lessee existing on the
immovable leased and on the fruits of the same, but not on money or instruments of
credit;

(13) Claims in favor of the depositor if the depositary has wrongfully sold the thing
deposited, upon the price of the sale.

In the foregoing cases, if the movables to which the lien or preference attaches have been wrongfully
taken, the creditor may demand them from any possessor, within thirty days from the unlawful seizure.
(1922a)

Article 2242. With reference to specific immovable property and real rights of the debtor, the following
claims, mortgages and liens shall be preferred, and shall constitute an encumbrance on the immovable or
real right:

(1) Taxes due upon the land or building;

(2) For the unpaid price of real property sold, upon the immovable sold;

(3) Claims of laborers, masons, mechanics and other workmen, as well as of architects,
engineers and contractors, engaged in the construction, reconstruction or repair of
buildings, canals or other works, upon said buildings, canals or other works;

(4) Claims of furnishers of materials used in the construction, reconstruction, or repair of


buildings, canals or other works, upon said buildings, canals or other works;

(5) Mortgage credits recorded in the Registry of Property, upon the real estate
mortgaged;

(6) Expenses for the preservation or improvement of real property when the law
authorizes reimbursement, upon the immovable preserved or improved;

(7) Credits annotated in the Registry of Property, in virtue of a judicial order, by


attachments or executions, upon the property affected, and only as to later credits;

(8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the
real property thus divided;

(9) Claims of donors or real property for pecuniary charges or other conditions imposed
upon the donee, upon the immovable donated;

(10) Credits of insurers, upon the property insured, for the insurance premium for two
years. (1923a)
Article 2243. The claims or credits enumerated in the two preceding articles shall be considered as
mortgages or pledges of real or personal property, or liens within the purview of legal provisions
governing insolvency. Taxes mentioned in No. 1, article 2241, and No. 1, article 2242, shall first be
satisfied. (n)

Article 2244. With reference to other property, real and personal, of the debtor, the following claims or
credits shall be preferred in the order named:

(1) Proper funeral expenses for the debtor, or children under his or her parental authority
who have no property of their own, when approved by the court;

(2) Credits for services rendered the insolvent by employees, laborers, or household
helpers for one year preceding the commencement of the proceedings in insolvency;

(3) Expenses during the last illness of the debtor or of his or her spouse and children
under his or her parental authority, if they have no property of their own;

(4) Compensation due the laborers or their dependents under laws providing for
indemnity for damages in cases of labor accident, or illness resulting from the nature of
the employment;

(5) Credits and advancements made to the debtor for support of himself or herself, and
family, during the last year preceding the insolvency;

(6) Support during the insolvency proceedings, and for three months thereafter;

(7) Fines and civil indemnification arising from a criminal offense;

(8) Legal expenses, and expenses incurred in the administration of the insolvent's estate
for the common interest of the creditors, when properly authorized and approved by the
court;

(9) Taxes and assessments due the national government, other than those mentioned in
articles 2241, No. 1, and 2242, No. 1;

(10) Taxes and assessments due any province, other than those referred to in articles
2241, No. 1, and 2242, No. 1;

(11) Taxes and assessments due any city or municipality, other than those indicated in
articles 2241, No. 1, and 2242, No. 1;

(12) Damages for death or personal injuries caused by a quasi-delict;

(13) Gifts due to public and private institutions of charity or beneficence;

(14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a
final judgment, if they have been the subject of litigation. These credits shall have
preference among themselves in the order of priority of the dates of the instruments and
of the judgments, respectively. (1924a)

Article 2245. Credits of any other kind or class, or by any other right or title not comprised in the four
preceding articles, shall enjoy no preference. (1925)
Article 2246. Those credits which enjoy preference with respect to specific movables, exclude all others
to the extent of the value of the personal property to which the preference refers.

Article 2247. If there are two or more credits with respect to the same specific movable property, they
shall be satisfied pro rata, after the payment of duties, taxes and fees due the State or any subdivision
thereof. (1926a)

Article 2248. Those credits which enjoy preference in relation to specific real property or real rights,
exclude all others to the extent of the value of the immovable or real right to which the preference refers.

Article 2249. If there are two or more credits with respect to the same specific real property or real rights,
they shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable
property or real right. (1927a)

Article 2250. The excess, if any, after the payment of the credits which enjoy preference with respect to
specific property, real or personal, shall be added to the free property which the debtor may have, for the
payment of the other credits. (1928a)

Article 2251. Those credits which do not enjoy any preference with respect to specific property, and
those which enjoy preference, as to the amount not paid, shall be satisfied according to the following
rules:

(1) In the order established in article 2244;

(2) Common credits referred to in article 2245 shall be paid pro rata regardless of dates.
(1929a)