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TABLE OF CONTENTS already occupied and (2) as to the other floors

People's Bank and Trust Co. v. Odom 1 to be equipped, from the date they are fully
Lopez v CA 2 equipped.
Manila Banking Corp vs. Teodoro 5 o As to the Edward J. Nell Co. Building, the
Integrated Realty v CA 8 parties agreed that Odom would bear all the
Yau Chu v. CA 10 expenses of construction until it is fully
Caltex v. CA 10 completed and in consideration thereof, Gibbs
Allied Bank v. Ordonez 13 assigned to him all the rent which it may
Ng v. People 14 produce for 8 years, 3 months from the date of
Colinares v. CA 18 the termination of its construction; this period
DBP v. Prudential Bank 19 was to be counted from the completion of each
Rosario Textile Mills v Home Bankers 22 floor in the event that the floors comprising the
Vintola vs. IBAA 24 building should not be completed and equipped
People v. Nitafan 26 at the same time.
Traders Royal Bank v. Castanares 27  Due to the contracts entered into with PBTC, Odom
Torres v. Limjap 29 obtained an overdraft from PBTC of P110,000.
Peoples Bank v Dahican 31 o To secure this overdraft, Odom assigned to
Belgian vs Magallanes 32 the PBTC all his rights, title, and interest in
Acme Shoe v CA 34 the contracts of lease with the Sugar News
Ong Liong Tiak v. Luneta Motor Co. 35 Co., Manila Machinery and Supply Co., Inc.,
Prudential v Alviar 36 and T. Yamamoto of the various parts of the
Cuyco v. Cuyco 39 Sugar News Company Building and the
rights, title, and interest which he had
People’s Bank and Trust Co. v. Odom | Gab acquired in the land on which the said
February 25, 1937 building was constructed under the contract
PEOPLE BANK AND TRUST COMPANY, Plaintiff-Appellee, v. he had with A. D. Gibbs.
W. J. ODOM, Defendant-Appellant o Also as security, Odom assigned to the
Imperial, J. PBTC an insurance policy for P100,000
issued by the Manufacturers Life Insurance
NATURE: Appeal Company. (Exhibit C)
SUMMARY: W. J. Odom entered into a contract with A. D. Gibbs  Odom’s overdraft was increased to P150,000.
whereby Gibbs authorized Odom to construct 2 buildings upon o To secure the payment thereof, Odom
Gibbs’ land. Odom then leased out various parts of the 2 assigned to PBTC by guaranty the same
buildings, with one of the lessees being People’s Bank and Trust securities which he had given for the
Co. (PBTC). Due to the contracts entered into with PBTC, Odom overdraft of P110,000. (Exhibit B)
obtained an overdraft from PBTC, the amount of which was  The overdraft was again increased to P165,000.
increased multiple times. Odom also executed various securities o To guarantee the payment thereof, Odom
for the overdraft, with its various amount increases. After drawing assigned to PBTC his rights, title, and
funds upon PBTC through overdrafts, as of January 4, 1934, interest in the contracts of lease with Edward
Odom’s account showed a balance against him of P138,403.68, J. Nell Co., El Progreso, Inc., and France &
including stipulated interest up to said date. PBTC then brought an Goulette of various parts of the Edward J. Nell
action with the Manila CFI to recover from Odom the balance of Company Building, in whatever contracts of
the overdraft and to foreclose the mortgage of properties to lease of any portion of the same building
guarantee his obligation. The CFI later ordered Odom to pay to which he may enter in the future, and the
PBTC P138,403.68, with 9% interest per annum from January 4, rights, title, and interest which he had in the
1934 until fully paid, plus P500 as attorney's fees and the costs. land occupied by the building according to his
After Odom appealed to the SC, the SC affirmed the CFI’s contract with A. D. Gibbs. (Exhibit D)
judgment, except the part ordering the public sale of the o Odom also assigned to PBTC his right to
mortgaged rights, with costs to Odom. collect the rents of the Edward J. Nell
DOCTRINE (related to topic): Company Building. (Exhibit F)
 An assignment to guarantee an obligation is, in effect,  Pursuant to the aforesaid contracts, Odom drew funds
a mortgage, not an absolute conveyance of title, upon PBTC through overdrafts.
which confers ownership on the assignee.  January 4, 1934: Odom’s account showed a balance
FACTS: against him of P138,403.68, including stipulated
 W. J. Odom entered into a contract with A. D. Gibbs interest up to said date.
(Exhibit E) whereby Gibbs authorized Odom to  PBTC then brought an action with the Manila CFI to
construct 2 buildings with 3 floors each upon Gibbs’ recover from Odom the balance of the overdraft and
land. to foreclose the mortgage of properties to guarantee
o The Sugar News Co. Building was completely his obligation.
constructed and its 1st floor was occupied by the
People’s Bank and Trust Co. (PBTC), but the 2
 The CFI ordered Odom to pay to PBTC P138,403.68,
with 9% interest per annum from January 4, 1934 until
upper floors were not fully equipped; the
fully paid, plus P500 as attorney's fees and the costs.
Edward J. Nell Co. Building was then under
construction.
o The judgment also decreed that the principal
and interest should be paid within 3 months,
o Under the contract, Odom bore all the expenses
failing which the mortgaged properties will be
of consideration of the Sugar News Co. Building
sold at public auction, consisting of the rights,
and Gibbs assigned to him all the rents which
title, and interest of Odom in the contracts of
the building may produce for 8 years from: (1)
lease of the 2 buildings and his rights, title, and
November 1, 1926 as to the 1st floor then

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interest in the land on which the 2 buildings are assignments are absolute and not by guaranty
constructed, and that the proceeds of the sale or mortgage, the stipulation would not have
should be applied to the payment of the amount been made because it would be inconsistent
of the judgment. with the will of the contracting parties.
 Odom appealed from said CFI’s judgment to the SC. ISSUE #4:
ISSUE #1:  W/N Odom’s civil liability has ceased, with him now
 W/N Exhibit D took the place of Exhibits B and C (NO) not owing PBTC anything (NO)
RATIO #1: RATIO #4:
 Exhibit D was executed, according to the contract itself,  The assignments Odom made not being absolute and
as a result of the increase of the overdraft to P165,000 PBTC having established that Odom has not paid his
and the additional guaranty given by Odom, consisting of total overdraft, he is not yet relieved of his obligation.
the assignment of guaranty of his rights in his contracts
of lease of the Edward J. Nell Company Building and of ADDITIONAL DISCUSSION:
his rights in the land occupied by the same building.  Under the contracts, PBTC was authorized to collect the
 Clause 3 of Exhibit D stipulated that Exhibit C was rents of the 2 buildings during the period which might be
incorporated therein and also constituted a guaranty of that fixed in the contract between the Odom and Gibbs.
the payment of the overdraft as increased to P165,000. o The SC said “might” because the contracts of
 Due to these facts, it is evident that the intention of the lease have not been put in evidence, hence, it
parties was neither to set aside the previous contracts could point out the duration thereof with
nor to substitute Exhibit D therefor. precision.
ISSUE #2:  However, the PBTC liquidated the account of the Odom
 W/N the CFI should have held that the obligation up to January 4, 1934 only and in the appealed
contracted by Odom was with a term and the parties judgment, it was decreed that the mortgaged rights be
not having fixed the date of payment, PBTC should sold at public auction should Odom fail to pay his
have first brought an action to fix said date under indebtedness within 3 months.
CC, Art. 11281 (NO)  If the indebtedness has already been paid with the rents
RATIO #2: which the PBTC failed to account for, then there would
 Exhibit D is a complement of Exhibits B and C, hence, be no ground to take the aforementioned step. If the
Exhibit D’s language and the intention of the parties must indebtedness has not yet been fully paid, neither would it
be interpreted in relation to and jointly with Exhibits B and be proper to sell any of the rights in the mortgage
C under CC, Art. 1285. contracts of lease because the latter have already
matured, according to the contract with Gibbs.
 It was expressly stipulated in Exhibits B and C that the
obligation contracted by Odom shall expire and be due
o Thus, it is necessary to provide for the one and
the other case.
upon demand of the PBTC and since Exhibit C was
incorporated in Exhibit D and Odom was required by the  As to the insurance policy, nothing can be said about it
PBTC to pay all his indebtedness, the obligation was as the appealed judgment was silent thereon.
without a term and it became due and demandable.
DISPOSITION
 Thus, CC, Art. 1128 is inapplicable.
ISSUE #3 (MAIN):  The appealed judgment was affirmed, except the part
ordering the public sale of the mortgaged rights, with
 W/N Exhibits B, C, and D are mortgages or
costs to Odom.
assignment of rights (MORTGAGES)
RATIO #3:
 Exhibits B, C, and D were really mortgages inasmuch Lopez v CA | CM
as they were executed to guarantee the principal June 29, 1982
obligations of the Odom, consisting of the overdrafts of BENITO H. LOPEZ, petitioner,
the indebtedness resulting therefrom. vs.
 It appears in each of Exhibits B, C, and D that the THE COURT OF APPEALS and THE PHILIPPINE AMERICAN
Odom assigned to the PBTC all his rights in the GENERAL INSURANCE CO., INC., respondents.
contracts of lease, in the land, and in the insurance GUERRERO, J.:
policy to guarantee his indebtedness resulting from Summary: Lopez obtained a loan from prudential bank. He
the overdrafts. executed a promissory note, a surety bond with Philamgen as
 An assignment to guarantee an obligation is, in effect, surety and an indemnity agreement in favour of Philamgen as well
a mortgage, not an absolute conveyance of title, as a deed of assignment of stocks over Philamgen. Lopez
which confers ownership on the assignee. (Title delivered the stock certificate to Philamgen. It was understood that
Guaranty & Surety Co. v. Witmire; Polhemus v. Trainer; Abello of Philamgen and Pedrosa of Prudential would buy the
Campbell v. Woodstock Iron Co.; Dunham v. Whitehead; shares and pay to Prudential if Lopez failed to pay on the loan.
Woodward v. Crump) Lopez failed to pay. The stocks were transferred to Philamgen.
 In Exhibits C and D, it was stipulated that if Odom Philamgen paid the bank. Philamgen is now claiming vs Lopez.
should comply with all the conditions of the contracts Philamgen claims the stocks were merely pledged. Lopez claims
and should pay his indebtedness, together with that there was a dation in payment. SC held that it was merely
interest, the assignments would become null and void; pledged and Philamgen must return the stocks to Lopez upon
otherwise, they would remain in full force. satisfaction under the Indemnity Agreement.
o If the parties' intention was that the Doctrine: 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
1 When it is to be inferred from the nature and circumstances of the obligation that it secure the payment of money, it must be construed as a pledge
was intended to grant the debtor time to pay and the term is not otherwise stated, the FACTS:
courts should fix the date of the maturity of the obligation.

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 On June 2, 1959, petitioner Benito H. Lopez obtained a Dear Mr. Sumawang: This is with reference to yours of the 13th
loan in the amount of P20,000.00 from the Prudential instant advising me of a complaint filed against us by Prudential
Bank and Trust Company. Bank & Trust Co. regarding my loan of P20,000.00. In this
 He executed a promissory note for the same amount, in connection, I would like to know what happened to my shares of
favor of the said Bank, binding himself to repay the said stocks of Baguio Military Academy which were pledged to your
sum one (1) year after the said date, with interest at the goodselves to secure said obligation. These shares of stock I think
rate of 10% per annum. are more than enough to answer for said obligation.
 He executed Surety Bond No. 14164 in which he, as  Philamgen was forced to pay the Prudential Bank the
principal, and Philippine American General Insurance sum of P27,785.89
Co., Inc. (PHILAMGEN) as surety, bound themselves  Philamgen brought an action vs. Benito H. Lopez for
jointly and severally in favor of Prudential Bank for reimbursement of the said amount.
the payment of the sum of P20,000.00.  CFI dismissed the complaint holding:
 Lopez also executed in favor of Philamgen an The contention of the plaintiff that the stock of the defendant were
indemnity agreement whereby he agreed "to indemnify merely pledged to it by the defendant is not borne out by the
the Company and keep it indemnified and hold the same evidence. On the contrary, the shares of stock of the defendant
harmless from and against any and all damages, losses, were actually transferred to the plaintiff Philamgen
costs, stamps, taxes, penalties, charges and expenses of Now that these shares of stock had already been transferred in
whatever kind and nature which the Company shall or the name of the Philamgen, it would seem that the remedy of the
may at any time sustain or incur in consequence of Philamgen is to go after Messrs. Abello and Pedrosa on their
having become surety upon the bond." promise to pay for the said stocks.
 Lopez executed a deed of assignment of 4,000 shares  CA promulgated a decision in favor of the Philamgen,
of the Baguio Military Institution entitled "Stock and declared that the stock assignment was a mere
Assignment Separate from Certificate"2 pledge that the transfer of the stocks in the name of
 With the execution of this deed of assignment, Lopez Philamgen was not intended to make it the owner
endorsed the stock certificate and delivered it to thereof; that assuming that Philamgen had appropriated
Philamgen. the stocks, this appropriation is null and void as a
 The loan of P20,000.00 was approved conditioned upon stipulation authorizing it is apactum commissorium; and
the posting of a surety bond. Thus, Lopez persuaded that pending payment, Philamgen is merely holding the
Emilio Abello, Assistant Executive Vice-President of stock as a security for the payment of Lopez' obligation
Philamgen and member of the Bond Under writing ISSUE 1/ HELD: what is the juridical nature of the transaction-a
Committee to request Atty. Timoteo J. Sumawang, dation in payment or a pledge? PLEDGE
Assistant Vice- President and Manager of the Bonding RATIO:
Department, to accommodate him in putting up the ON ITS FACE, IT LOOKS LIKE SALE
bond against the security of his shares of stock with  Considering the explicit terms of the deed denominated
the Baguio Military Institute, Inc. It was their "Stock Assignment Separate from Certificate",
understanding that if he could not pay the loan, Vice- hereinbefore copied verbatim, Lopez sold, assigned and
President Abello and Pio Pedrosa of the Prudential transferred unto Philamgen the stocks involved "for and
Bank would buy the shares of stocks and out of the in consideration of the obligations undertaken" by
proceeds thereof, the loan would be paid to the Philamgen "under the terms and conditions of the surety
Prudential Bank. bond executed by it in favor of the Prudential Bank" and
 On June 2, 1960, Lopez' obligation matured without it "for value received".
being settled. Prudential Bank sometime in August,  On its face, it is neither pledge nor dation in
1961 filed a case against Lopez and Philamgen to payment. The document speaks of an outright sale as
enforce payment on the promissory note plus interest. there is a complete and unconditional divestiture of the
 Vice-President Abello then instructed Atty. Sumawang to incorporeal property consisting of stocks from Lopez to
transfer the shares of stock to Philamgen and made a Philamgen.
commitment that thereafter he (Abello) and Pio Pedrosa BUT IT IS A PLEDGE
will buy the shares of stock from it so that the proceeds  Notwithstanding the express terms of the "Stock
could be paid to the bank, and in the meantime Assignment Separate from Certificate", however, We
Philamgen will not pay the bank because it did not want hold and rule that the transaction should not be
payment under the terms of the bank. regarded as an absolute conveyance in view of the
 The complaint was thereafter dismissed. But when no circumstances obtaining at the time of the execution
payment was still made by the principal debtor or by the thereof.
surety, the Prudential Bank filed on November 8, 1963  Lopez executed a promissory note for P20,000.00, plus
another complaint for the recovery of the P20,000.00. interest at the rate of ten (10%) per cent per annum, in
 Lopez’s letter: 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.
22 That for and in consideration of the obligations undertaken by the ASSIGNEE- In return for the undertaking of Philamgen under the
SURETY COMPANY under the terms and conditions of SURETY BOND NO. 14164, surety bond, Lopez executed on the same day not only
issued on behalf of said BENITO H. LOPEZ and in favor of the PRUDENTIAL BANK
& TRUST COMPANY, Manila, Philippines, in the amount of TWENTY THOUSAND
an indemnity agreement but also a stock assignment.
PESOS ONLY (P20,000.00), Philippine Currency, and for value received, the  The indemnity agreement and the stock assignment
ASSIGNOR hereby sells, assigns, and transfers unto THE PHILIPPINE must be considered together as related transactions
AMERICAN GENERAL INSURANCE CO., INC., Four Thousand (4,000) shares of
the Baguio military Institute, Inc. standing in the name of said Assignor on the books
because in order to judge the intention of the
of said Baguio Military Institute, Inc. represented by Certificate No. 44 herewith and contracting parties, their contemporaneous and
do hereby irrevocably constitutes and appoints THE PHILIPPINE AMERICAN subsequent acts shall be principally considered.
GENERAL INSURANCE CO., INC. as attorney to transfer the said stock on the (Article 1371, New Civil Code).
books of the within named military institute with full power of substitution in the
premises.  Thus, considering that the indemnity agreement connotes

BANKING: WEEK 5 | 3
a continuing obligation of Lopez towards Philamgen while o In addition to the requisites prescribed in article
the stock assignment indicates a complete discharge of 2085, it is necessary, in order to constitute the
the same obligation, the existence of the indemnity contract of pledge, that the thing pledged be
agreement whereby Lopez had to pay a premium of placed in the possession of the creditor, or of
P1,000.00 for a period of one year and agreed at all a third person by common agreement. (Art.
times to indemnify Philamgen of any and all kinds of 2093, N.C.C.) Incorporeal rights, including
losses which the latter might sustain by reason of it shares of stock may also be pledged (Art. 2095,
becoming a surety, is inconsistent with the theory of N.C.C.)
an absolute sale for and in consideration of the same o All these requisites are found in the transaction
undertaking of Philamgen. between the parties leading to the execution of
 There would have been no necessity for the execution of the Stock Assignment, Exhibit C. And that it is a
the indemnity agreement if the stock assignment was pledge was admitted by the defendant in his
really intended as an absolute conveyance. Hence, there letter of November 18, 1963, Exhibit G, already
are strong and cogent reasons to conclude that the quoted above, where he asked what had
parties intended said stock assignment to happened to his shares of stock "which were
complement the indemnity agreement and thereby pledged to your goodselves to secure the said
sufficiently guarantee the indemnification of obligation".
Philamgen should it be required to pay Lopez' loan to  It is not a dation in payment. According to Article 1245 of
Prudential Bank. the New Civil Code, dation in payment, whereby property
o The character of the transaction between the is alienated to the creditor in satisfaction of a debt in
parties is to be determined by their intention, money, shall be governed by the law of sales.
regardless of what language was used or o Dation in payment is the delivery and
what the form of the transfer was. If it was transmission of ownership of a thing by the
intended to secure the payment of money, it debtor to the creditor as an accepted
must be construed as a pledge; but if there equivalent of the performance of the
was some other intention, it is not a pledge. obligation. The property given may consist, not
However, even though a transfer, if regarded by only of a thing, but also of a real right (such as a
itself, appears to have been absolute, its object usufruct) or of a credit against a third person.
and character might still be qualified and Thus, it has been held that the assignment to
explained by a contemporaneous writing the creditor of the interest of the debtor in an
declaring it to have been a deposit of the inheritance in payment of his debt, is valid and
property as collateral security. It has been said extinguishes the debt.
that a transfer of property by the debtor to a o The modern concept of dation in payment
creditor, even if sufficient on its face to make an considers it as a novation by change of the
absolute conveyance, should be treated as a object, and this is to our mind the more
pledge if the debt continues in existence and is juridically correct view.
not discharged by the transfer, and that o Our Civil Code, however, provides in this article
accordingly, the use of the terms ordinarily that, where the debt is in money, the law on
importing conveyance, of absolute ownership sales shall govern; in this case, the act is
will not be given that effect in such a transaction deemed to be a sale, with the amount of the
if they are also commonly used in pledges and obligation to the extent that it is extinguished
mortgages and therefore do not unqualifiedly being considered as the price.
indicate a transfer of absolute ownership, in the o Does this mean that there can be no dation in
absence of clear and unambiguous language or payment if the debt is not in money? We do not
other circumstances excluding an intent to think so. It is precisely in obligations which are
pledge. not money debts, in which the true juridical
 We agree with the holding of the respondent Court of nature of dation in payment becomes manifest.
Appeals that the stock assignment, Exhibit C, is in There is a real novation with immediate
truth and in fact, a pledge. Indeed, the facts and performance of the new obligation. The fact that
circumstances leading to the execution of the stock there must be a prior agreement of the parties
assignment, Exhibit C, and the admission of Lopez prove on the delivery of the thing in lieu of the original
that it is in fact a pledge. prestation shows that there is a novation which,
 The appellate court is correct in ruling that the following extinguishes the original obligation, and the
requirements of a contract of pledge have been delivery is a mere performance of the new
satisfied: obligation.
(1) that it be constituted to secure the fulfillment of a principal o The dation in payment extinguishes the
obligation; obligation to the extent of the value of the thing
(2) that the pledgor be the absolute owner of the thing pledged; delivered, either as agreed upon by the parties
and or as may be proved, unless the parties by
(3) that the person constituting the pledge has the free disposal of agreement, express or implied, or by their
the property, and in the absence thereof, that he be legally silence, consider the thing as equivalent to the
authorized for the purpose. (Article 2085, New Civil Code). obligation, in which case the obligation is totally
 Article 2087 of the New Civil Code providing that it is extinguished.
also the essence of these contracts (pledge, mortgage,  We find that the debt or obligation at bar has not matured
and antichresis) that when the principal obligation on June 2, 1959 when Lopez "alienated" his 4,000
becomes due, the things in which the pledge or shares of stock to Philamgen. Such fact being adverse to
mortgage consists may be alienated for the payment the nature and concept of dation in payment, the same
to the creditor, further supports the appellate court's could not have been constituted when the stock
ruling assignment was executed.

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 In case of doubt as to whether a transaction is a necessarily imply the extinguishment of the liability of
pledge or a dation in payment, the presumption is in petitioner Lopez. Since it was not established nor shown
favor of pledge, the latter being the lesser that Lopez would be released from responsibility, the
transmission of rights and interests. same does not constitute novation
 Petitioner's argument that even assuming, arguendo that  In fine, We hold and rule that the transaction entered into
the transaction was at its inception a pledge, it gave way by and between petitioner and respondent under the
to a dation in payment when the obligation secured came Stock Assignment Separate From Certificate in relation to
into existence and private respondent had the stocks the Surety Bond No. 14164 and the Indemnity
transferred to it in the corporate books and took a stock Agreement, all executed and dated June 2, 1959,
certificate in its name, is without merit. The transfer of constitutes a pledge of the 40,000 shares of stock by
title to incorporeal property is generally an essential part the petitioner-pledgor in favor of the private respondent-
of the delivery of the same in pledge. It merely pledgee, and not a dacion en pago. It is also Our ruling
constitutes evidence of the pledgee's right of property in that upon the facts established, there was no novation of
the thing pledged. the obligation by substitution of debtor.
 By the contract of pledge, the pledgor does not part with  The promise of Abello and Pedrosa to buy the shares not
his general right of property in the collateral. The general having materialized and no action was taken against the
property therein remains in him, and only a special two by Philamgen who chose instead to sue Lopez on
property vests in the pledgee. The pledgee does not the Indemnity Agreement, it is quite clear that this
acquire an interest in the property, except as a security respondent Philam has abandoned its right and interest
for his debt. Thus, the pledgee holds possession of the over the pledged properties and must, therefore, release
security subject to the rights of the pledgor; he cannot or return the same to the petitioner-pledgor Lopez upon
acquire any interest therein that is adverse to the the latter's satisfaction of his obligation under the
pledgor's title. Moreover, even where the legal title to Indemnity Agreement.
incorporeal property which may be pledged is transferred  It must also be made clear that there is no double
to a pledgee as collateral security, he takes only a payment nor unjust enrichment in this case because We
special property therein Such transfer merely performs have ruled that the shares of stock were merely pledged.
the office that the delivery of possession does in case of DISPOSITION. AFFIRMED.
a pledge of corporeal property.
 The pledgee has been considered as having a lien on the
pledged property. The extent of such lien is measured by The Manila Banking Corporation vs. Teodoro | Karl
the amount of the debt or the obligation that is secured January 13, 1989
by the collateral, and the lien continues to exist as long THE MANILA BANKING CORPORATION, plaintiff-appellee,
as the pledgee retains actual or symbolic possession of vs. ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO,
the property, and the debt or obligation remains unpaid. defendants-appellants.
Payment of the debt extinguishes the lien. CHICO-NAZARIO, J.:
 Though a pledgee of corporation stock does not become
personally liable as a stockholder of the company, he NATURE: Appeal from the decision of the CFI of Manila
may have the shares transferred to him on the books of
the corporation if he has been authorized to do so. SUMMARY:
ISSUE2/ HELD: WON there was novation (NO)  Teodoros executed a promissory note for P10,420 and
NO NOVATION failed to pay the amount. Subsequently, Teodoro
 In his second assignment of error, petitioner contends executed in favor of MBC 2 promissory notes for 8k and
that there was a novation of the obligation by substitution 1k respectively.
of debtor.  Also, Teodoro (son) executed in favor of MBC a Deed of
 SC: We do not agree. Assignment of Receivables from EEA.
 Under Article 1291 of the New Civil Code, obligations  SC held that the assignment did not have the effect of
may be modified by: (1) changing their object or principal payment of all the loans contracted by the Teodoros from
condition; (2) substituting the person of the debtor; (3) MBC. SC held that the deed of assignment was intended
subrogating a third person in the rights of the creditor. as collateral security for the bank loans of appellants, as
And in order that an obligation may be extinguished by a continuing guaranty for whatever sums would be owing
another which substitute the same, it is imperative that it by defendants to plaintiff, as stated in stipulation No. 9 of
be so declared in unequivocal terms, or that the old and the deed.
the new obligations be on every point incompatible with  In case of doubt as to whether a transaction is a pledge
each other. (Article 1292, N.C.C.) or a dation in payment, the presumption is in favor of
 Commenting on the second concept of novation, that is, pledge, the latter being the lesser transmission of rights
substituting the person of the debtor, Manresa opines, and interests
thus:
 In this kind of novation it is not enough DOCTRINE (related to topic):
to extend the juridical relation to a third  Assignment of credit is an agreement by virtue of which
person; it is necessary that the old the owner of a credit, known as the assignor, by a legal
debtor be released from the obligation, cause, such as sale, dation in payment, exchange or
and the third person or new debtor take donation, and without the need of the consent of the
his place in the relation. Without such debtor, transfers his credit and its accessory rights to
release, there is no novation another, known as the assignee, who acquires the power
 In the case at bar, the undertaking of Messrs. Emilio to enforce it to the same extent as the assignor could
Abello and Pio Pedrosa that they would buy the shares of have enforced it against the debtor. ...
stock so that Philamgen could be reimbursed from the  It may be in the form of a sale, but at times it may
proceeds that it paid to Prudential Bank does not constitute a dation in payment, such as when a debtor, in
order to obtain a release from his debt, assigns to his

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creditor a credit he has against a third person, or it may on demand, ... and further, that
constitute a donation as when it is by gratuitous title; or it Assignor warrants the solvency and
may even be merely by way of guaranty, as when the credit worthiness of each and every
creditor gives as a collateral, to secure his own debt in account.
favor of the assignee, without transmitting ownership.  (7) The Assignor does hereby
 The character that it may assume determines its guarantee the payment when due on
requisites and effects. its regulation, and the capacity of all sums payable under the contracts
the parties to execute it; and in every case, the giving rise to the accounts receivable
obligations between assignor and assignee will depend ... including reasonable attorney's fees
upon the judicial relation which is the basis of the in enforcing any rights against the
assignment debtors of the assigned accounts
receivable and will pay upon demand,
FACTS: the entire unpaid balance of said
 On April 25, 1966, defendants, together with Anastacio contract in the event of non-payment
Teodoro, Sr., jointly and severally, executed in favor of by the said debtors of any monthly sum
plaintiff MBC a Promissory Note (No. 11487) for the sum at its due date or of any other default
of P10,420.00 payable in 120 days, or on August 25, by said debtors;
1966, at 12% interest per annum.  xxx xxx xxx
 Defendants Teodoro failed to pay the said amount inspire  (9) ... This Assignment shall also stand
of repeated demands and the obligation as of September as a continuing guarantee for any and
30, 1969 stood at P 15,137.11 including accrued interest all whatsoever there is or in the future
and service charge. there will be justly owing from the
 On May 3, 1966 and June 20, 1966, defendants Assignor to the Assignee ...
Anastacio Teodoro, Sr. (Father) and Anastacio Teodoro,  In their stipulations of Fact, it is admitted by the parties
Jr. (Son) executed in favor of MBC two Promissory Notes that MBC extended loans to Teodorp on the basis and by
(Nos. 11515 and 11699) for P8,000.00 and P1,000.00 reason of certain contracts entered into by the defunct
respectively, payable in 120 days at 12% interest per Emergency Employment Administration (EEA) with
annum. Teodoro for the fabrication of fishing boats, and that the
o Father and Son made a partial payment on the Philippine Fisheries Commission succeeded the EEA
May 3, 1966 promissory Note but none on the after its abolition; that non-payment of the notes was due
June 20, 1966 Promissory Note, leaving still an to the failure of the Commission to pay Teodoro after the
unpaid balance of P8,934.74 as of September latter had complied with their contractual obligations; and
30, 1969 including accrued interest and service that the President of MBC took steps to collect from the
charge. Commission, but no collection was effected.
 The three Promissory Notes stipulated that any interest  Trial Court: rendered judgments for Teodoro.
due if not paid at the end of every month shall be added  CA certified case to SC since it involves purely questions
to the total amount then due, the whole amount to bear of law.
interest at the rate of 12% per annum until fully paid; and
in case of collection through an attorney-at-law, the ISSUE #1:
makers shall, jointly and severally, pay 10% of the Whether or not the assignment of receivables has the effect
amount over-due as attorney's fees, which in no case of payment of all the loans contracted by Teodoro from MBC--
shall be leas than P200.00. NO
 It appears that on January 24, 1964, the Son executed in
favor of MBC a Deed of Assignment of Receivables RATIO#1:
from the Emergency Employment Administration in the  Assignment of credit is an agreement by virtue of which
sum of P44,635.00. the owner of a credit, known as the assignor, by a legal
o The Deed of Assignment provided that it was for cause, such as sale, dation in payment, exchange or
and in consideration of certain credits, loans, donation, and without the need of the consent of the
overdrafts and other credit accommodations debtor, transfers his credit and its accessory rights to
extended to defendants as security for the another, known as the assignee, who acquires the power
payment of said sum and the interest thereon, to enforce it to the same extent as the assignor could
and that defendants do hereby remise, release have enforced it against the debtor. ...
and quitclaim all its rights, title, and interest in  It may be in the form of a sale, but at times it may
and to the accounts receivables. constitute a dation in payment, such as when a debtor, in
o Also contained the following stipulations: order to obtain a release from his debt, assigns to his
 (1) The title and right of possession to creditor a credit he has against a third person, or it may
said accounts receivable is to remain in constitute a donation as when it is by gratuitous title; or it
the assignee, and it shall have the right may even be merely by way of guaranty, as when the
to collect the same from the debtor, creditor gives as a collateral, to secure his own debt in
and whatsoever the Assignor does in favor of the assignee, without transmitting ownership.
connection with the collection of said  The character that it may assume determines its
accounts, it agrees to do as agent and requisites and effects. its regulation, and the capacity of
representative of the Assignee and in the parties to execute it; and in every case, the
trust for said Assignee ; obligations between assignor and assignee will depend
 xxx xxx xxx upon the judicial relation which is the basis of the
 (6) The Assignor guarantees the assignment
existence and legality of said accounts  There is no question as to the validity of the
receivable, and the due and punctual assignment of receivables executed by appellants in
payment thereof unto the assignee, ... favor of appellee bank.The issue is with regard to its

BANKING: WEEK 5 | 6
legal effects.  In case of doubt as to whether a transaction is a pledge
 It is evident that the assignment of receivables executed or a dation in payment, the presumption is in favor of
by appellants on January 24, 1964 did not transfer the pledge, the latter being the lesser transmission of rights
ownership of the receivables to appellee bank and and interests.
release appellants from their loans with the bank incurred
under promissory notes Nos. 11487,11515 and 11699. ISSUE #2
 The Deed of Assignment provided that it was for and in Whether or not appellee bank must first exhaust all legal
consideration of certain credits, loans, overdrafts, and remedies against the Philippine Fisheries Commission before
their credit accommodations in the sum of P10,000.00 it can proceed against Teodoro for collections of loan under
extended to appellants by appellee bank, and as security the promissory notes which are MBC’s bases in the action for
for the payment of said sum and the interest thereon; that collection in Civil Case No. 78178.--NO
appellants as assignors, remise, release, and quitclaim to
assignee bank all their rights, title and interest in and to RATIO #2:
the accounts receivable assigned (lst paragraph). It was  The obligation of appellants under the promissory notes
further stipulated that the assignment will also stand as a not having been released by the assignment of
continuing guaranty for future loans of appellants to receivables, appellants remain as the principal debtors of
appellee bank and correspondingly the assignment shall appellee bank rather than mere guarantors. The deed of
also extend to all the accounts receivable; appellants assignment merely guarantees said obligations.
shall also obtain in the future, until the consideration on  That the guarantor cannot be compelled to pay the
the loans secured by appellants from appellee bank shall creditor unless the latter has exhausted all the property of
have been fully paid by them (No. 9). the debtor, and has resorted to all the legal remedies
 The position of appellants, however, is that the deed of against the debtor, under Article 2058 of the New Civil
assignment is a quitclaim in consideration of their Code does not therefore apply to them.
indebtedness to appellee bank, not mere guaranty, in  It is of course of the essence of a contract of pledge or
view of the following provisions of the deed of mortgage that when the principal obligation becomes
assignment: due, the things in which the pledge or mortgage consists
o ... the Assignor do hereby remise, release and may be alienated for the payment to the creditor (Article
quit-claim unto said assignee all its rights, title 2087, New Civil Code). In the instant case, appellants are
and interest in the accounts receivable both the principal debtors and the pledgors or
described hereunder. mortgagors. Resort to one is, therefore, resort to the
o ... that the title and right of possession to said other.
account receivable is to remain in said assignee  MBCollect on the pledged receivables. As the
and it shall have the right to collect directly from Emergency Employment Agency (EEA) which issued the
the debtor, and whatever the Assignor does in receivables had been abolished, the collection had to be
connection with the collection of said accounts, coursed through the Office of the President which
it agrees to do so as agent and representative of disapproved the same
the Assignee and it trust for said Assignee  The receivable became virtually worthless leaving
 The character of the transactions between the parties appellants' loans from MBC unsecured. It is but proper
is not, however, determined by the language used in that after their repeated demands made on appellants for
the document but by their intention. the settlement of their obligations, MBC should proceed
 Definitely, the assignment of the receivables did not against Teodoro.
result from a sale transaction. It cannot be said to have  It would be an exercise in futility to proceed against a
been constituted by virtue of a dation in payment for defunct office for the collection of the receivables
appellants' loans with the bank evidenced by promissory pledged.
note Nos. 11487, 11515 and 11699 which are the subject
of the suit for collection in Civil Case No. 78178. At the DISPOSITION: Appeal dismissed.
time the deed of assignment was executed, said loans
were non-existent yet. FELICIANO, J., concurring:
 The deed of assignment was executed on January 24,  I would merely wish to add a few lines in respect of the
1964 (Exh. "G"), while promissory note No. 11487 is point made by Bidin, J., that "the character of the
dated April 25, 1966 (Exh. 'A), promissory note 11515, transactions between the parties is not, however,
dated May 3, 1966 (Exh. 'B'), promissory note 11699, on determined by the language used in the document but by
June 20, 1966 (Exh. "C"). their intention.' This statement is basically not
 At most, it was a dation in payment for P10,000.00, exceptionable, so far as it goes.
the amount of credit from appellee bank indicated in  It might, however, be borne in mind that the intent of the
the deed of assignment. At the time the assignment parties to the transaction is to be determined in the first
was executed, there was no obligation to be instance, by the very language which they use. The deed
extinguished except the amount of P10,000.00. of assignment contains language which suggest that the
 Moreover, in order that an obligation may be parties intended to effect a complete alienation of title to
extinguished by another which substitutes the same, it is and rights over the receivables which are the subject of
imperative that it be so declared in unequivocal terms, or the assignment. This language is comprised of works like
that the old and the new obligations be on every point "remise," "release and quitclaim" and clauses like "the
incompatible with each other (Article 1292, New Civil title and right of possession to said accounts receivable is
Code). to remain in said assignee" who "shall have the right to
 Obviously, the deed of assignment was intended as collect directly from the debtor." The same intent is also
collateral security for the bank loans of appellants, suggested by the use of the words "agent and
as a continuing guaranty for whatever sums would representative of the assignee" in reffering to the
be owing by defendants to plaintiff, as stated in assignor.
stipulation No. 9 of the deed.

BANKING: WEEK 5 | 7
 The point that appears to me to be worth making is OVERSEAS BANK OF MANILA and THE HON. COURT OF
that although in its form, the deed of assignment of APPEALS, respondents.
receivables partakes of the nature of a complete REGALADO, J.
alienation of the receivables assigned, such form
should be taken in conjunction with, and indeed SUMMARY: Raul Santos, President of Integrated Realty (IRC)
must be qualified and controlled by, other language made two time deposits with the Overseas Bank of Manila (OBM)
showing an intent of the parties that title to the in his personal capacity. IRC, through Santos, obtained a loan
receivables shall pass to the assignee for the limited from PNB. By way of security, Santos executed a Deed of
purpose of securing another, principal; obligation Assignment of his two OBM time deposits. OBM failed to pay PNB
owed by the assignor to the assignee. when the time deposits fell due. PNB demanded payment from
 Title moves from assignor to assignee but that title is IRC, but the latter claimed that its obligation was already
defeasible being designed to collateralize the principal extinguished by the Deed of Assignment. PNB sued IRC, Santos
obligation. Operationally, what this means is that the and OBM. IRC and Santos filed a counterclaim against OBM. The
assignee is burdened with an obligation of taking the trial court held IRC and Santos liable to PNB. In turn, OBM was to
proceeds of the receivables assigned and applying such reimburse IRC and Santos for whatever it paid PNB. On appeal,
proceeds to the satisfaction of the principal obligation and the CA absolved OBM from liability. The Supreme Court held that
returning any balance remaining thereafter to the IRC’s loan obligation to PNB was not extinguished by the Deed of
assignor. Assignment as it was merely a pledge.
 The parties gave the deed of assignment the form of DOCTRINE: The character of the transaction between the parties
an absolute conveyance of title over the receivables is to be determined by their intention, regardless of what language
assigned, essentially for the convenience of the was used or what the form of the transfer was. If it was intended to
assignee. Without such formally unlimited secure the payment of money, it must be construed as a pledge;
conveyance of title, the assignee would have to treat but if there was some other intention, it is not a pledge. However,
the deed of assignment as no more than a deed of even though a transfer, if regarded by itself, appears to have been
pledge or of chattel mortgage. absolute, its object and character might still be qualified and
 In other words, in such hypothetical case, should the explained by a contemporaneous writing declaring it to have been
assignee seek to realize upon the security given to him a deposit of the property as collateral security.
through the deed of assignment (which would then have
FACTS:
to comply with the documentation and registration

requirements of a pledge or chattel mortgage), the Under date 11 January 1967 defendant Raul L. Santos
made a time deposit with defendant OBM in the amount
assignee would have to foreclose upon the securities or
of P 500,000.00.
credits assigned and place them on public sale and there
acquire the same.  Under date 6 February 1967 defendant Raul L. Santos
 also made a time deposit with defendant OBM in the
It should be recalled that under the principle which
amount of P 200,000.00.
forbids a pactum commisorium Article 2088, Civil Code),
 Under date 9 February 1967 defendant IRC thru its
a mortgagee or pledgee is prohibited from simply taking
President-defendant Raul L. Santos, applied for a loan
and appropriating the personal property turned over to
and/or credit line in the amount of P 700,000.00 with
him as security for the payment of a principal obligation.
A deed of assignment by way of security avoids the PNB.
necessity of a public sale impose by the rule on pactum o To secure the said loan, defendant Raul L.
commisorium, by in effect placing the sale of the Santos executed on August 11, 1967 a Deed of
collateral up front. (Emphasis supplied) Assignment of the two time deposits in favor of
 The foregoing is applicable where, as in the present PNB.
instance, the deed of assignment of receivables The defendant OBM after the due dates of the time
combines elements of both a complete or absolute deposit certificates, did not pay plaintiff PNB. Plaintiff
demanded payment from defendants IRC and Raul L.
alienation of the credits being assigned and a security
Santos and from defendant OBM.
arrangement to assure payment of a principal obligation.
Where the second element is absent, that is, where thereo Defendants IRC and Raul L. Santos replied that
is nothing to indicate that the parties intended the deed of the obligation (loan) of defendant IRC was
assignment to function as a security device, it would of deemed paid with the irrevocable assignment of
course follow that the simple absolute conveyance the time deposit certificates.
 PNB filed a complaint to collect from IRC and Santos the
embodied in the deed of assignment would be operative;
loan of P700,000.00 with interest as well as attorney's
the assignment would constitute essentially a mode of
payment or dacion en pago. fees. It impleaded OBM as a defendant to compel it to
 redeem and pay to it Santos' time deposit certificates with
Put a little differently, in order that a deed of assignment
interest, plus exemplary and corrective damages,
of receivables which is in form an absolute conveyance
attorney's fees, and costs.
of title to the credits being assigned, may be qualified and

treated as a security arrangement, language to suchOBM replied, acknowledging the certificates of time
deposit that it issued to Santos, and admitting its failure
effect must be found in the document itself and that
language, precisely, is embodied in the deed of to pay the same due to its distressed financial situation.
o It claimed that by reason of its state of
assignment in the instant case. Finally, it might be noted
that that deed simply follows a form in standard use in insolvency its operations have been suspended
commercial banking. by the Central Bank since August 1, 1968; that
the time deposits ceased to earn interest from
that date; that it may not give preference to any
Integrated Realty v. CA / Ish depositor or creditor; and that payment of the
June 28, 1989 plaintiffs claim is prohibited.
INTEGRATED REALTY CORPORATION and RAUL L.  The trial court ruled for PNB. IRC and Santos to pay
SANTOS, petitioners, vs. PHILIPPINE NATIONAL BANK, PNB, OBM to reimburse IRC and Santos.

BANKING: WEEK 5 | 8
 On appeal, the CA promulgated its appealed decision, unambiguous language or other circumstances
with a modification and the deletion of that portion of the excluding an intent to pledge.
judgment of the trial court ordering OBM to pay IRC and  All requisites of a pledge are present:
Santos whatever amounts they will pay to PNB with o (1) that it be constituted to secure the fulfillment
interest from the date of payment. of a principal obligation;
 Hence, this petition for review. o (2) that the pledgor be the absolute owner of the
thing pledged;
ISSUE #1 (MAIN): o (3) that the persons constituting the pledge have
 WoN the liability of IRC and Santos with PNB should the free disposal of their property, and in the
be deemed to have been paid by virtue of the deed of absence thereof, that they be legally authorized
assignment made by the former in favor of PNB. (NO) for the purpose.
RATIO #1:  Furthermore, the thing pledged was placed in the
 Lopez v. CA: Lopez obtained a loan from Prudential possession of the pledgee through the deed of
Bank. He executed a surety bond (with Philamgen as assignment.
surety) and an indemnity agreement. He likewise ISSUE #2:
assigned his shares of stock in the Baguio Military  WoN the 1 ½% interest charged by PNB is illegal.
Institute in favor of PBTC. Philamgen, the surety, caused (NO)
the transfer of shares to its name in order that it may sell RATIO #2:
the same and apply the proceeds to the loan. HELD:  It was presumably done in accordance with ordinary
Lopez still liable to pay PBTC notwithstanding the banking procedures.
assignment, as it was merely meant as a security.  Not only did IRC and Santos fail to overcome the
o There would have been no necessity for the presumption of regularity of business transactions, but
execution of the indemnity agreement if the they are likewise estopped from questioning the validity
stock assignment was really intended as an thereof for the first time in this petition.
absolute conveyance. ISSUE #3:
 Along the same vein, in the case at bar it would not have  WoN OBM is liable for interests on the time deposits
been necessary on the part of IRC and Santos to execute from the time it ceased operations until it resumed its
promissory notes in favor of PNB if the assignment of the business. (NO)
time deposits of Santos was really intended as an RATIO #3:
absolute conveyance.  What enables a bank to pay stipulated interest on money
 Bases as found by the trial court: deposited with it is that thru the other aspects of its
o It is clear from the Deed of Assignment that it operation it is able to generate funds to cover the
was only by way of security; payment of such interest.
o The promissory notes were executed on August  Unless a bank can lend money, engage in international
16, 1967. If defendants IRC and Raul L. Santos, transactions, acquire foreclosed mortgaged properties or
upon executing the Deed of Assignment on their proceeds and generally engage in other banking
August 11, 1967 had already paid their loan of P and financing activities from which it can derive income, it
700,000.00 or otherwise extinguished the same, is inconceivable how it can carry on as a depository
why were the promissory notes made on August obligated to pay stipulated interest.
16, 1967 still executed by IRC and signed by ISSUE #4:
Raul L. Santos as President?  WoN OBM is liable for damages by way of interests
o In the application for a credit line, the time due to failure to pay the time deposits when they fell
deposits were offered as collateral. due. (YES)
 Court quotes with approval from Lopez: RATIO #4:
o The character of the transaction between the  It was only on July 31, 1968 when OBM was excluded
parties is to be determined by their intention, from clearing with the CB under Monetary Board
regardless of what language was used or what Resolution No. 1263.
the form of the transfer was. If it was intended to  Subsequently, on August 2, 1968, pursuant to Resolution
secure the payment of money, it must be No. 1290 of the CB OBM's operations were suspended.
construed as a pledge; but if there was some  Thus, when PNB demanded from OBM payment of the
other intention, it is not a pledge. However, even amounts due on the two time deposits which matured on
though a transfer, if regarded by itself, appears January 11, 1968 and February 6, 1968, respectively,
to have been absolute, its object and character there was as yet no obstacle to the faithful compliance by
might still be qualified and explained by a OBM of its liabilities thereunder.
contemporaneous writing declaring it to have  Consequently, for having incurred in delay in the
been a deposit of the property as collateral performance of its obligation, OBM should be held liable
security. for damages.
o It has been said that a transfer of property by
the debtor to a creditor, even if sufficient on its DISPOSITION: Judgment is rendered ordering—
face to make an absolute conveyance, should  IRC and Santos to pay PNB the total loan obligation plus
be treated as a pledge if the debt continues in interests;
existence and is not discharged by the transfer,
 IRC and Santos to pay PNB attorney’s fees;
and that accordingly, the use of the terms
 OBM to pay IRC and Santos the amount due under the
ordinarily importing conveyance, of absolute
time deposits with interest;
ownership will not be given that effect in such a
transaction if they are also commonly used in  OBM to pay IRC and Santos interest in the concept of
pledges and mortgages and therefore do not damages;
unqualifiedly indicate a transfer of absolute  OBM to pay IRC and Santos attorney’s fees.
ownership, in the absence of clear and

BANKING: WEEK 5 | 9
Yau Chu v. CA | Nice  All that had to be done to convert the pledgor's time
September 26, 1989 deposit certificates into cash was to present them to the
VICTORIA YAU CHU, assisted by her husband MICHAEL bank for encashment after due notice to the debtor.
CHU, petitioners, vs. HON. COURT OF APPEALS, FAMILY  The encashment of the deposit certificates was not
SAVINGS BANK and/or CAMS TRADING ENTERPRISES, INC., a pacto commissorio which is prohibited under NCC
respondents. 2088. A pacto commissorio is a provision for
GRINO-AQUINO, J. the automatic appropriation of the pledged or mortgaged
property by the creditor in payment of the loan upon its
NATURE: Rule 45 Petition maturity. The prohibition against a pacto commissorio is
SUMMARY: Yau Chu had several time deposits with Family intended to protect the obligor, pledgor, or mortgagor
Savings Bank, which she used as collateral for payment of her against being overreached by his creditor who holds a
cement withdrawals with Cams Trading. She executed deeds of pledge or mortgage over property whose value is much
assignment over the time deposit certificates. When she did not more than the debt.
pay Cams Trading, the latter requested the Bank encashment of
 Where, as in this case, the security for the debt is
the certificates, to which the Bank agreed. Yau Chu filed a
also money deposited in a bank, the amount of which
complaint for recovery of the deposit, but both the RTC and CA
is even less than the debt, it was not illegal for the
dismissed the case. The SC affirmed, holding that as the pledge
creditor to encash the time deposit certificates to pay
was money, there was no need for an auction sale and that it was
the debtors' overdue obligation, with the latter's
not a pactum commissorium.
consent.
FACTS:
 Since 1980, Victoria Yau Chu had been purchasing
 Whether the debt had already been paid as alleged by
cement on credit from CAMS Trading Enterprises, Inc. Mrs. Chu is a factual question which the CA found
(Cams Trading). To guaranty payment for her cement unproven. Mrs. Chu only presented receipts for payments
made prior to July 18, 1980. Since she signed on July 18,
withdrawals, she executed in favor of Cams Trading
1980 a letter admitting her indebtedness to be in the sum
deeds of assignment of her time deposits totaling P320k
in the Family Savings Bank (Bank). of P404k, and there is no proof of payment made by her
thereafter to reduce or extinguish her debt, the
 Except for serial numbers and dates, the deeds of
application of her time deposits, which she had assigned
assignment, prepared by her own lawyer, uniformly
to the creditor to secure the payment of her debt, was
provided “that the assignment serves as a collateral or
proper.
guarantee for the payment of my obligation with the said
DISPOSITION
CAMS TRADING ENTERPRISES, INC. on account of my
cement withdrawal from said company, per separate  Petition denied. CA affirmed.
contract executed between us.”
 July 24,1980: Cams Trading notified the Bank that Mrs.
Chu had not paid P314k. It asked that it be allowed to Caltex v. CA | Kat
encash the time deposit certificates which had been August 10, 1992
assigned to it by Mrs. Chu. It submitted to the Bank a CALTEX (PHILIPPINES), INC., petitioner, vs.
letter dated July 18, 1980 of Mrs. Chu admitting that her COURT OF APPEALS and SECURITY BANK AND TRUST
outstanding account with Cams Trading was P404k. COMPANY, respondents.
REGALADO, J.
 After verbally advising Mrs. Chu of the assignee's request
to encash her time deposit certificates and obtaining her
SUMMARY: SBTC issued CTDs in favor of Dela Cruz. He
verbal conformity, the Bank agreed to encash the
delivered the CTDs to Caltex in connection with his purchase of
certificates. It gave Cams Trading P283k only, since one
fuel products. Dela Cruz went to SBTC claiming that he lost all the
time deposit certificate lacked the proper signatures.
CTDs. Replacement CTDs were then issued in favor of Dela Cruz.
 Upon being informed of the encashment, Mrs. Chu
He then obtained a loan from SBTC secured by a deed of
demanded from the Bank and Cams Trading that her
assignment of time deposit. Caltex demanded that the time
time deposit be restored. When neither complied, she
deposits be pre-terminated and claimed for payment of the value
filed a complaint with the RTC to recover the P283k from
of the CTDs but this was rejected by SBTC. SBTC then set-off the
them.
time deposits to the payment of the matured load. Caltex filed a
 The trial court dismissed the complaint for lack of merit. complaint to recover the value of the CTDs. RTC, CA and SC
Chu appealed to the CA which affirmed the dismissal of dismissed the complaint. The CTDs were delivered merely as
her complaint. security
 Chu alleges that the CA erred: DOCTRINE:
o in not annulling the encashment of her time Art. 2095. Incorporeal rights, evidenced by negotiable instruments,
deposit certificates as a pactum commissorium; may also be pledged. The instrument proving the right pledged
and shall be delivered to the creditor, and if negotiable, must be
o in not finding that the obligations secured by her indorsed.
time deposits had already been paid. Art. 2096. A pledge shall not take effect against third persons if a
ISSUE #1 (MAIN): description of the thing pledged and the date of the pledge do not
 W/N the encashment was a pactum commissorium appear in a public instrument.
prohibited by NCC 2088 (NO)
RATIO #1: FACTS:
 The CA found that the deeds of assignment were  Various dates: Security Bank and Trust Co., a
contracts of pledge, but, as the collateral was also commercial banking institution, through its Sucat Branch
money or an exchange of "peso for peso," the issued 280 certificates of time deposit (CTDs) in favor
provision in NCC 2112, for the sale at public auction of one Angel dela Cruz who deposited with SBTC the
to convert the thing pledged into money to satisfy aggregate amount of P1,120,000
the pledgor's obligation, did not have to be followed.  Dela Cruz delivered the CTDs to Caltex in connection

BANKING: WEEK 5 | 10
with his purchase of fuel products from the latter (Sgd. Illegible) (Sgd. Illegible)
 March 1982: Dela Cruz informed Mr. Timoteo Tiangco, ——————— ————————
the Sucat Branch Manger, that he lost all the CTDs. Mr. AUTHORIZED SIGNATURES
Tiangco advised him to execute and submit a notarized
Affidavit of Loss, as required by SBTC's procedure, if he ISSUE #1: W/N the CTDs are non-negotiable instruments? NO
desired replacement of said lost CTDs (Not important)
 March 18, 1982: Dela Cruz executed and delivered to RATIO #1:
SBTC the required Affidavit of Loss. On the basis of said CTDs are Negotiable instruments
affidavit of loss, 280 replacement CTDs were issued in  CA: CTDs are non-negotiable instruments, While the
favor of said depositor. word "bearer" appears rather boldly in the CTDs issued,
 March 25, 1982: Dela Cruz negotiated and obtained a after the word "BEARER" stamped on the space provided
loan from SBTC of P875,000. supposedly for the name of the depositor, the words "has
 Same date: Dela Cruz executed a notarized Deed of deposited" a certain amount follows. The document
Assignment of Time Deposit which stated, among further provides that the amount deposited shall be
others, that he (de la Cruz) surrenders to SBTC "full "repayable to said depositor" on the period indicated. The
control of the indicated time deposits from and after date" text manifest that they are payable, not to whoever
of the assignment and further authorizes said bank to purports to be the "bearer" but only to the specified
pre-terminate, set-off and "apply the said time deposits to person indicated therein, the depositor. In effect, SBTC
the payment of whatever amount or amounts may be acknowledges its depositor Angel dela Cruz as the
due" on the loan upon its maturity. person who made the deposit and further engages itself
 November, 1982: Mr. Aranas, Credit Manager of Caltex to pay said depositor the amount indicated thereon at the
(Phils.) Inc., went to SBTC’s Sucat branch and presented stipulated date.
for verification the CTDs declared lost by dela Cruz  SC: The CTDs in question are negotiable instruments.
alleging that the same were delivered to Caltex "as  The CTDs undoubtedly meet the requirements of the law
security for purchases made with Caltex Philippines, Inc." for negotiability3.
by said depositor  The bone of contention is with regard to requisite (d)
 November 26, 1982: SBTC received a letter from Caltex  Mr. Timoteo P. Tiangco, SBTC's Branch Manager way
formally informing it of its possession of the CTDs and of back in 1982, testified in open court that the depositor
its decision to pre-terminate the same. reffered to in the CTDs is no other than Mr. Angel de la
 December 8, 1982: Caltex was requested by SBTC to Cruz.
furnish the former "a copy of the document evidencing  The negotiability or non-negotiability of an instrument is
the guarantee agreement with Mr. Angel dela Cruz" as determined from the writing, that is, from the face of the
well as "the details of Mr. Angel dela Cruz" obligation instrument itself. In the construction of a bill or note, the
against which Caltex proposed to apply the CTDs intention of the parties is to control, if it can be legally
 No copy of the requested documents was furnished ascertained. While the writing may be read in the light of
SBTC. surrounding circumstances in order to more perfectly
 SBTC rejected the Caltex’ demand and claim for understand the intent and meaning of the parties, yet as
payment of the value of the CTDs in a letter dated they have constituted the writing to be the only outward
February 7, 1983 and visible expression of their meaning, no other words
 April 1983: the loan of Angel dela Cruz with the SBTC are to be added to it or substituted in its stead. The duty
matured and fell due of the court in such case is to ascertain, not what the
 August 5, 1983: SBTC set-off and applied the time parties may have secretly intended as
deposits to the payment of the matured loan contradistinguished from what their words express, but
 Caltex filed a complaint, praying that SBTC be ordered what is the meaning of the words they have used. What
to pay it the aggregate value of the CTDs of the parties meant must be determined by what they said.
P1,120,000.00 plus accrued interest and compounded  Case at bar: The documents provide that the amounts
interest therein at 16% per annum, moral and exemplary deposited shall be repayable to the depositor. According
damages as well as attorney's fees. to the document, the depositor is the bearer? It is the
 RTC: dismissed complaint "bearer." The documents do not say that the depositor is
 CA: affirmed RTC Angel de la Cruz and that the amounts deposited are
 Hence, petition for review on certiorari repayable specifically to him. Rather, the amounts are to
be repayable to the bearer of the documents or, for that
Sample text of the CTDs matter, whosoever may be the bearer at the time of
SECURITY BANK presentment.
AND TRUST COMPANY  If it was really the intention of SBTC to pay the amount to
6778 Ayala Ave., Makati No. 90101 Angel de la Cruz only, it could have with facility so
Metro Manila, Philippines expressed that fact in clear and categorical terms in the
SUCAT OFFICEP 4,000.00 documents, instead of having the word "BEARER"
CERTIFICATE OF DEPOSIT stamped on the space provided for the name of the
Rate 16% depositor in each CTD.
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____  The witness merely declared that Angel de la Cruz is the
This is to Certify that B E A R E R has deposited in this
Bank the sum of PESOS: FOUR THOUSAND ONLY, 3 Section 1 Act No. 2031, Negotiable Instruments Law, enumerates the requisites for
SECURITY BANK SUCAT OFFICE P4,000 & 00 an instrument to become negotiable:
CTS Pesos, Philippine Currency, repayable to said (a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
depositor 731 days. after date, upon presentation and (c) Must be payable on demand, or at a fixed or determinable future time;
surrender of this certificate, with interest at the rate (d) Must be payable to order or to bearer; and
of 16% per cent per annum. (e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.

BANKING: WEEK 5 | 11
depositor "insofar as the bank is concerned," but construed as a pledge; but if there was some other
obviously other parties not privy to the transaction intention, it is not a pledge. However, even though a
between them would not be in a position to know that the transfer, if regarded by itself, appears to have been
depositor is not the bearer stated in the CTDs. Hence, absolute, its object and character might still be qualified
the situation would require any party dealing with the and explained by contemporaneous writing declaring it to
CTDs to go behind the plain import of what is written have been a deposit of the property as collateral security.
thereon to unravel the agreement of the parties thereto A transfer of property by the debtor to a creditor,
through facts aliunde. This need for resort to extrinsic even if sufficient on its face to make an absolute
evidence is what is sought to be avoided by the conveyance, should be treated as a pledge if the debt
Negotiable Instruments Law and calls for the application continues in inexistence and is not discharged by the
of the elementary rule that the interpretation of obscure transfer, and that accordingly the use of the terms
words or stipulations in a contract shall not favor the ordinarily importing conveyance of absolute
party who caused the obscurity. ownership will not be given that effect in such a
transaction if they are also commonly used in
ISSUE #2: W/N Caltex can recover on the CTDs? NO [IMPT] pledges and mortgages and therefore do not
RATIO #2: unqualifiedly indicate a transfer of absolute
 The records reveal that Angel de la Cruz, whom Caltex ownership, in the absence of clear and unambiguous
chose not to implead in this suit for reasons of its own, language or other circumstances excluding an intent
delivered the CTDs amounting to P1,120,000.00 to to pledge.
Caltex without informing SBTC thereof at any time.  Under the Negotiable Instruments Law, an instrument is
 Unfortunately for Caltex, although the CTDs are bearer negotiated when it is transferred from one person to
instruments, a valid negotiation thereof for the true another in such a manner as to constitute the transferee
purpose and agreement between it and De la Cruz, as the holder thereof, and a holder may be the payee or
ultimately ascertained, requires both delivery and indorsee of a bill or note, who is in possession of it, or the
indorsement. bearer thereof.
 Any doubt as to whether the CTDs were delivered as  In the present case, there was no negotiation in the
payment for the fuel products or as a security has been sense of a transfer of the legal title to the CTDs in favor
dissipated and resolved in favor of the latter by Caltex’ of Caltex in which situation, for obvious reasons, mere
own authorized and responsible representative himself. delivery of the bearer CTDs would have sufficed. Here,
In a letter dated November 26, 1982 addressed to the delivery thereof only as security for the purchases of
Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, De la Cruz (and we even disregard the fact that the
wrote: "These certificates of deposit were negotiated to amount involved was not disclosed) could at the most
us by Mr. Angel dela Cruz to guarantee his purchases of constitute Caltex only as a holder for value by reason of
fuel products" This admission is conclusive upon Caltex, his lien. Accordingly, a negotiation for such purpose
its protestations notwithstanding. cannot be effected by mere delivery of the instrument
 Under the doctrine of estoppel, an admission or since, necessarily, the terms thereof and the subsequent
representation is rendered conclusive upon the person disposition of such security, in the event of non-payment
making it, and cannot be denied or disproved as against of the principal obligation, must be contractually provided
the person relying thereon. A party may not go back on for.
his own acts and representations to the prejudice of the  Where the holder has a lien on the instrument arising
other party who relied upon them. In the law of evidence, from contract, he is deemed a holder for value to the
whenever a party has, by his own declaration, act, or extent of his lien. As such holder of collateral security, he
omission, intentionally and deliberately led another to would be a pledgee but the requirements therefor and the
believe a particular thing true, and to act upon such effects thereof, not being provided for by the Negotiable
belief, he cannot, in any litigation arising out of such Instruments Law, shall be governed by the Civil Code
declaration, act, or omission, be permitted to falsify it. provisions on pledge of incorporeal rights
 If it were true that the CTDs were delivered as payment  Art. 2095. Incorporeal rights, evidenced by negotiable
and not as security, Caltex’ credit manager could have instruments, may also be pledged. The instrument
easily said so, instead of using the words "to guarantee" proving the right pledged shall be delivered to the
in the letter aforequoted. creditor, and if negotiable, must be indorsed.
 Besides, when SBTC moved for a bill of particularity  Art. 2096. A pledge shall not take effect against third
praying that Caltex be required to aver with sufficient persons if a description of the thing pledged and the
definiteness or particularity (a) the due date or dates of date of the pledge do not appear in a public
payment of the alleged indebtedness of Angel de la Cruz instrument.
to Caltex and (b) whether or not it issued a receipt  Aside from the fact that the CTDs were only delivered but
showing that the CTDs were delivered to it by De la Cruz not indorsed, the factual findings of the CA show that
as payment of the latter's alleged indebtedness to it, Caltex failed to produce any document evidencing any
Caltex opposed the motion. Had it produced the receipt contract of pledge or guarantee agreement between it
prayed for, it could have proved, if such truly was the and Angel de la Cruz. The mere delivery of the CTDs did
fact, that the CTDs were delivered as payment and not not legally vest in Caltex any right effective against and
as security. Having opposed the motion, Caltex now binding upon SBTC.
labors under the presumption that evidence willfully  The requirement under Article 2096 is not a mere rule of
suppressed would be adverse if produced. adjective law prescribing the mode whereby proof may
 Intergrated Realty Corporation, et al. vs. Philippine be made of the date of a pledge contract, but a rule of
National Bank, et al citing Lopez: The character of the substantive law prescribing a condition without which the
transaction between the parties is to be determined execution of a pledge contract cannot affect third persons
by their intention, regardless of what language was adversely.
used or what the form of the transfer was. If it was  The assignment of the CTDs made by Angel de la Cruz
intended to secure the payment of money, it must be in favor of SBTC was embodied in a public instrument.

BANKING: WEEK 5 | 12
 Civil Code, Art. 1625. An assignment of credit, right or requirement therefor.
action shall produce no effect as against third persons, Petition DENIED. CA AFFIRMED.
unless it appears in a public instrument, or the instrument
is recorded in the Registry of Property in case the
assignment involves real property. Allied Bank v. Ordonez | Apa
 SBTC duly complied with this statutory requirement. (1990)
Contrarily, Caltex, whether as purchaser, assignee or Padilla, J.
lien holder of the CTDs, neither proved the amount of its
credit or the extent of its lien nor the execution of any Summary:
public instrument which could affect or bind private
respondent. Necessarily, therefore, as between Caltex PBM, which entered into a T/R agreement, claims that they are
and SBTC, the latter has definitely the better right over not criminally liable under PD115 because the goods covered by
the CTDs in question. the T/R were not ultimately for sale, but for their own use. While
SoJ Gonzales denied their claim, the new SoJ, Ordonez, granted
ISSUE #3: W/N SBTC observed the requirements of the law in the the MR. SC reversed the latter’s decision finding that PD115
case of lost negotiable instruments and the issuance of covers all goods, whether or not they were meant to be ultimately
replacement certificates? Not raised in issued submitted (not impt) sold.
RATIO #3:
 The aspect of alleged negligence of SBTC was not Nature: Special civil action for Certiorari regarding the
included in the stipulation of the parties and in the interpretation by the DOJ of the penal provision of PD 115, the
statement of issues submitted by them to the trial court. Trust Receipts Law.
 An issue raised for the first time on appeal and not raised
timely in the proceedings in the lower court is barred by Facts:
estoppel. Questions raised on appeal must be within the
issues framed by the parties and, consequently, issues The Philippine Blooming Mills (PBM), through its authorized
not raised in the trial court cannot be raised for the first officer, respondent Ching, applied for the issuance of commercial
time on appeal. letters of credit (L/C) with petitioner's Makati branch to finance the
 Pre-trial is primarily intended to make certain that all purchase of 500 M/T Magtar Branch Dolomites and one (1) Lot
issues necessary to the disposition of a case are properly High Fired Refractory Sliding Nozzle Bricks.
raised.  Petitioner issued irrevocable letter of credit in favor of
 To accept Caltex' suggestion that respondent bank's Nikko Industry Co., Ltd., in light of which the latter drew
supposed negligence may be considered encompassed four drafts which were accepted by PBM and paid by the
by the issues on its right to preterminate and receive the bank.
proceeds of the CTDs would be tantamount to saying  To secure payment, and in consideration of the transfer
that Caltex could raise on appeal any issue. of the goods by petitioner to PBM, the latter (as
 Even assuming arguendo that said issue of negligence entrustee) through Ching executed four Trust Receipt
was raised in the court below, Caltex still cannot have the Agreements (T/R).
odds in its favor. o Such acknowledged petitioner’s ownership of
 A close scrutiny of the provisions of the Code of the goods, and PBM’s obligation to turn over the
Commerce laying down the rules to be followed in case proceeds of the sale of the goods, if sold, or to
of lost instruments payable to bearer, which it invokes, return the same, if unsold within the stated
will reveal that said provisions, even assuming their period.
applicability to the CTDs in the case at bar, are merely
permissive and not mandatory. PBM incurred a liability of of P1,475,274.09 for its failure and
 Art 548. The dispossessed owner, no matter for what refusal turn over the proceeds of the sale of the goods or to return
cause it may be, may apply to the judge or court of the same.
competent jurisdiction, asking that the principal, interest  Hence, a criminal complaint for estafa under PD115 was
or dividends due or about to become due, be not paid a filed.
third person, as well as in order to prevent the ownership  Respondent refused to participate in the preliminary
of the instrument that a duplicate be issued him. investigation, thereby the Fiscal found a prima facie case
 The use of the word "may" in said provision shows that it for violation of PD 115.
is not mandatory but discretionary on the part of the o They filed their first MR on the following
"dispossessed owner" to apply to the judge or court of grounds:
competent jurisdiction for the issuance of a duplicate of  Lack of proper preliminary
the lost instrument. The word "may" is usually permissive, investigation;
not mandatory. It is an auxiliary verb indicating liberty,  Lack of Jurisdiction;
opportunity, permission and possibility.  That a novation had been made
 Articles 548 to 558 of the Code of Commerce merely substitututing Ching with Rehabilitation
established, on the one hand, a right of recourse in favor Receivers.
of a dispossessed owner or holder of a bearer instrument  The Secretary of Justice (Gonzales) denied the MR in
so that he may obtain a duplicate of the same, and, on light of a valid and binding T/R.
the other, an option in favor of the party liable thereon o On second MR, resondets forwarded the
who, for some valid ground, may elect to refuse to issue additional ground:
a replacement of the instrument. Significantly, none of  PBM was under rehabilitation, hence
the provisions cited by Caltex categorically restricts or no criminal liability could be impured
prohibits the issuance a duplicate or replacement against it (and Ching).
instrument sans compliance with the procedure outlined  SoJ Gonzales once again denied the MR finding that:
therein, and none establishes a mandatory precedent o The offense was consummated long before the
appointment of rehabilitation receivers. The

BANKING: WEEK 5 | 13
crime of estafa for violation of the Trust Receipts
Law is a special offense or mala prohibita. Respondent Ching contends that PBM is not in the business of
 It is a fundamental rule in criminal law selling, but a manufacturer of steel products. But PBM, as
that when the crime is punished by a entrustee under the trust receipts has, under Sec. 9 of PD 115, the
special law, the act alone, irrespective following obligations:
of its motives, constitutes the offense. (a) receive the proceeds of sale, in trust for the entruster and
o Neither should the rehabilitation proceedings turn over the same to the entruster to the extent of the
stay the attempt to enforce criminal liability amount owing to him or as appears on the trust receipt;
against respondents. (b) keep said goods or proceeds thereof whether in money
 Though Sec. 4 of PD1785 provides or whatever form, separate and capable of identification
that “upon appointment of a as property of the entruster;
management committee, (c) return the goods, documents or instruments in the event
rehabilitationn all actions for claims of non-sale, or upon demand of the entruster; and
… shall be suspended”, such refers (d) observe all other terms and conditions of the trust receipt
only to money claims and not criminal not contrary to the provisions of said Decree.
liability.
 A third MR was once again filed with the additional Through a T/R, an entrustee binds himself to sell or otherwise
grounds: dispose of the entrusted goods with the obligation to turn over to
o That there was no evidence on record to show the entruster the proceeds if sold, or return the goods if unsold or
that respondent was in particeps criminis in the not otherwise disposed of.
act complained of;  A violation of this undertaking constitutes estafa under
o There could be no violation of the T/R Sec. 13 of PD115 and Art. 315 of the RPC.
agreements because the articles imported by o The act is malum prohibitum.
the corporation were fungible or consummable  Ordonez’s resolution, treating T/Rs as mere security
goods and do not form part of the steel product documents for loan transactions, thereby obliterating
itself. These goods were not procured to be criminal liability is a misjudgment.
sold in whatever state or condition they were in
or were supposed to be after the manufacturing Furthermore, respondent’s claim that Sec. 13 of PD115 covers
process. only goods destined for sale, and that no such representation was
 The new SoJ Ordonez GRANTED the MR finding: made in attaining the T/R was made, is of no merit.
o What the law contemplates or covers are goods  The non-payment of the amount covered by a T/R is an
which have, for their ultimate destination, act violative of the entrustee's obligation to pay. There is
the sale thereof or if unsold, their surrender to no reason why the law should not apply to all
the entruster, this whether the goods are in their transactions covered by trust receipts, except those
original form or in their manufactured/processed expressly excluded.
state. o In the construction of statutes, the courts start
o Since the goods covered by the T/R here in with the assumption that the legislature intended
were to be utilized in the operation of the an effective law. Hence, it is a general principle,
equipment and machineries of the corporation, embodied in the maxim, 'ut res magis valeat
they could not have been contemplated as quam pereat, that the courts should, if
being covered by PD 115. reasonably possible, interpret the statute to give
o Not all transactions are covered by T/Rs are the it efficient operation and effect as a whole.
transactions that fall within the scope of PD 115.  Hence, PD115 encompasses any act violative of an
o In this case, the T/R were executed as security obligation covered by the trust receipt; it is not limited to
for the payment of the drafts. As such, the main transactions in goods which are to be sold (retailed),
transaction was that of a loan. Hence, the case reshipped, stored or processed as a component of a
should be civil in light of the creditor-debtor product ultimately sold.
relationship.
PETITION GRANTED. DOJ REVERSED
Petitioner filed for MR of the Ordonez Resolution, which was
denied by the DOJ.
Ng vs. People | Erika
WoN Sec. 13. PD115 applies when the goods covered by a T/R 4 April 23, 2010
do not form part of the finished products which are ultimately sold ANTHONY L. NG, Petitioner,
but are instead, utilized/used up in the operation of the equipment vs.
and machineries of the entrustee-manufacturer (Yes) PEOPLE OF THE PHILIPPINES, Respondent.
VELASCO, JR.
4 Sec. 4. What constitutes a trust receipt transaction. — A trust receipt transaction, SUMMARY: Ng applied for a P3M-credit line with Asiatrust. Upon
within the meaning of this Decree, is any transaction by and between a person approval of his loan, he was required to sign, among others, Trust
referred to in this Decree as the entrustee, and another person referred to in this Receipt Agreements. Having had difficulty in collecting his
Decree as the entrustee, whereby the entruster, who owns or holds absolute title or receivables from one of his clients, Ng was unable to fully pay his
security interests over certain specified goods, documents or instruments, releases
loan with Asiatrust. Thus, upon Asiatrust’s complaint, an
the same to the possession of the entrustee upon the latter's execution and delivery
to the entruster of a signed document called a 'trust receipt' wherein the entrustee
Information for Estafa under Art 315, par 1(b) of the RPC in rel. to
binds himself to hold the designated goods, documents or instruments in trust for the the Trust Receipts Law was filed against Ng. RTC and CA
entruster and to sell or otherwise dispose of the goods, documents or instruments convicted him while SC acquitted him, ruling that the Trust Receipt
with the obligation to turn over to the entruster the proceeds thereof to the extent of Law applies only to sales transactions. This case does not involve
the amount owing to the entruster or as appears in the trust receipt or the goods, a sales transaction as the goods in this case were never intended
documents or instruments themselves, if they are unsold or not otherwise disposed for sale but for use in the fabrication of steel communication
of, in accordance with the terms and conditions specified in the trust receipt

BANKING: WEEK 5 | 14
towers. The agreement itself provides that Ng will turn over the relation to Sec. 3, PD 115 or the Trust Receipts Law, was
proceeds “as soon as received” and not before. filed with the RTC. Ng pleaded not guilty.
DOCTRINE: The true nature of a trust receipt transaction can be  During the pendency of the case, conferences between
found in the "whereas" clause of PD 115 which states that a trust Ng and Asiatrust’s Remedial Account Officer, Daniel Yap,
receipt is to be utilized "as a convenient business device to assist were held.
importers and merchants solve their financing problems."  Afterward, a Compromise Agreement was drafted by
Obviously, the State, in enacting the law, sought to find a way to Asiatrust.
assist importers and merchants in their financing in order to o One of the requirements of the Compromise
encourage commerce in the Philippines. Regardless of whether Agreement was for Ng to issue 6 postdated
the transaction is foreign or domestic, it is important to note that checks.
the transactions discussed in relation to trust receipts mainly o Ng, in good faith, tried to comply by issuing 2 or
involved sales. 3 checks, which were deposited and made
NATURE: Petition for Review on Certiorari under Rule 45 good. The remaining checks, however, were not
FACTS: deposited as the Compromise Agreement did
 Early part of 1997: petitioner Anthony Ng, then engaged not push through.
in the business of building and fabricating  RTC (May 29, 2001): guilty; from 6 years, 8 months and
telecommunication towers under the trade name "Capitol 21 days of prision mayor minimum TO 20 years reclusion
Blacksmith and Builders," applied for a credit line of P3M temporal maximum
with Asiatrust Dev’t Bank, Inc. o Ordered to return P2,971,650.00 with legal rate
 In support of Asiatrust’s credit investigation, Ng of interest from the filing of Info until fully paid
voluntarily submitted the ff. documents: o Re contracts of adhesion argument: Ng is
o (1) the contracts he had with Islacom, Smart, presumed to have read and understood and is,
and Infocom; (2) the list of projects wherein he therefore, bound by the provisions of the Letters
was commissioned by the said of Credit and Trust Receipts.
telecommunication companies to build several o It was clear that Asiatrust had furnished Ng with
steel towers; and (3) the collectible amounts he a Statement of Account enumerating therein the
has with the said companies. precise figures of the outstanding balance along
 May 30, 1997: Asiatrust approved Ng’s loan application. with the computation of other fees and charges;
Ng was then required to sign several documents: thus, Asiatrust did not violate Truth in Lending
o Credit Line Agreement, Application and Act.
Agreement for Irrevocable L/C, Trust Receipt o Ng, being the entrustee stated in the Trust
Agreements, and PNs Receipts issued by Asiatrust, is thus obliged to
 Though the PNs matured on Sept 18, 1997, the 2 hold the goods in trust for the entruster and shall
aforementioned Trust Receipt Agreements did not dispose of them strictly in accordance with the
bear any maturity dates as they were left unfilled or in terms and conditions of the trust receipts;
blank by Asiatrust. otherwise, he is obliged to return the goods in
 After Ng received the goods, consisting of chemicals and the event of non-sale or upon demand of the
metal plates from his suppliers, he utilized them to entruster, failing thus, he evidently violated the
fabricate the communication towers ordered from him by Trust Receipts Law.
his clients which were installed in 3 project sites: Isabel,  CA (Aug 29, 2003): affirmed RTC; subsequent MR
Leyte; Panabo, Davao; and Tongonan. denied
 As Ng realized difficulty in collecting from his client o Re Ng’s argument on the change in the name of
Islacom, he failed to pay his loan to Asiatrust. Asiatrust complainant: During the course of the trial, Ng
then conducted a surprise ocular inspection of Ng’s knew that the complainant Bernardez and the
business through Villarva S. Linga, Asiatrust’s other co-witnesses are all employees of
representative appraiser. Asiatrust and that she is suing in behalf of the
o Linga reported to Asiatrust that he found that bank.
approximately 97% of the subject goods of o The fact that Ng acted without malice or fraud in
the Trust Receipts were "sold-out and that entering into the transactions has no bearing,
only 3% of the goods pertaining to PN No. since the offense is punished as malum
1963 remained." prohibitum regardless of the existence of intent
 Asiatrust then endorsed Ng’s account to its Account or malice; the mere failure to deliver the
Management Division for the possible restructuring of his proceeds of the sale or the goods if not sold
loan. The parties held a series of conferences. However, constitutes the criminal offense.
efforts towards a settlement failed to be reached. o Re receivables and demand: mere query as to
 Mar 16, 1999: Remedial Account Officer Ma. Girlie C. the whereabouts of the goods and/or money is
Bernardez filed a Complaint-Affidavit before the Office of tantamount to a demand.
the City Prosecutor of QC. o Re alleged bias, hostility, and prejudice of the
 Sept 12, 1999: an Information5 for Estafa, as defined RTC against Ng: Ng failed to present any
and penalized under Art. 315, par. 1(b) of the RPC in substantial proof
ISSUE: W/N Ng is liable for Estafa under Art. 315, par. 1(b) of the
RPC in relation to PD 115 (NO)
5 On or about the 30th day of May 1997, in QC; xxx willfully, unlawfully, and RATIO: The Trust Receipts Law does not apply as there is no
feloniously defraud Ma. Girlie C. Bernardez by entering into a Trust Receipt sales transaction involved.
Agreement with said complainant whereby said Ng as entrustee received in trust from
the said complainant various chemicals in the total sum of P4.5 million with the
obligation to hold the said chemicals in trust as property of the entruster with the right
to sell the same for cash and to remit the proceeds thereof to the entruster, or to
return the said chemicals if unsold; but said Ng xxx with intent to defraud did then and refused and failed and still refuses and fails to make good of his obligation, to the
there misappropriated, misapplied and converted the said amount to his own damage and prejudice of the said Ma. Girlie C. Bernardez in the amount of
personal use and benefit and despite repeated demands made upon him, said Ng P2,971,650.00

BANKING: WEEK 5 | 15
 Especially in criminal cases where the accused stands to otherwise deal with them in a manner
lose his liberty by virtue of his conviction, the Court must preliminary or necessary to their sale; or
be satisfied that the factual findings and conclusions of 2. In the case of instruments: (a) to sell or
the lower courts leading to his conviction must satisfy the procure their sale or exchange; or (b) to deliver
standard of proof beyond reasonable doubt. them to a principal; or (c) to effect the
 RPC ART. 315. Swindling (estafa).—Any person who consummation of some transactions involving
shall defraud another by any of the means mentioned delivery to a depository or register; or (d) to
hereinbelow x x x effect their presentation, collection or renewal.
o 1. With unfaithfulness or abuse of confidence, The sale of good, documents or instruments by a person
namely: in the business of selling goods, documents or
a. x x x instruments for profit who, at the outset of transaction,
b. By misappropriating or converting, to the has, as against the buyer, general property rights in such
prejudice of another, money, goods, or any goods, documents or instruments, or who sells the same
other personal property received by the offender to the buyer on credit, retaining title or other interest as
in trust or on commission, or for administration, security for the payment of the purchase price, does not
or under any other obligation involving the duty constitute a trust receipt transaction and is outside the
to make delivery of or to return the same, even purview and coverage of this Decree.
though such obligation be totally or partially  TRUST RECEIPT TRANSACTION: is one where the
guaranteed by a bond; or by denying having entrustee has the obligation to deliver to the entruster the
received such money, goods, or other property x price of the sale, or if the merchandise is not sold, to
x x. return the merchandise to the entruster.
 Essential Elements of Estafa:  2 OBLIGATIONS IN A TRT:
o (1) that money, goods or other personal o 1) refers to money received under the obligation
property is received by the offender in trust or involving the duty to turn it over (entregarla) to
on commission, or for administration, or under the owner of the merchandise sold
any obligation involving the duty to make o 2) refers to the merchandise received under the
delivery of or to return it; obligation to "return" it (devolvera) to the owner
o (2) that there be misappropriation or conversion  A violation of any of these undertakings constitutes
of such money or property by the offender, or Estafa defined under Art. 315, par. 1(b) of the RPC, as
denial on his part of such receipt; provided in Sec. 13 of PD 115:
o (3) that such misappropriation or conversion or o Section 13. Penalty Clause.—The failure of an
denial is to the prejudice of another; and entrustee to turn over the proceeds of the sale
o (4) there is demand by the offended party to the of the goods, documents or instruments covered
offender. by a trust receipt to the extent of the amount
 Estafa can also be committed in what is called a owing to the entruster or as appears in the trust
"trust receipt transaction" under PD 115 receipt or to return said goods, documents or
 PD 115 Section 4. What constitutes a trust receipts instruments if they were not sold or disposed of
transaction.—A trust receipt transaction, within the in accordance with the terms of the trust receipt
meaning of this Decree, is any transaction by and shall constitute the crime of estafa
between a person referred to in this Decree as the  CASE AT BAR: the transaction between Ng and
entruster, and another person referred to in this Decree Asiatrust is not a trust receipt transaction but one of
as entrustee, whereby the entruster, who owns or holds simple loan.
absolute title or security interests over certain specified
goods, documents or instruments, releases the same to PD 115 Does Not Apply
the possession of the entrustee upon the latter’s  Ng was transparent to Asiatrust from the very beginning
execution and delivery to the entruster of a signed that the subject goods were not being held for sale but
document called a "trust receipt" wherein the entrustee were to be used for the fabrication of steel
binds himself to hold the designated goods, documents communication towers in accordance with his contracts
or instruments in trust for the entruster and to sell or with Islacom, Smart, and Infocom.
otherwise dispose of the goods, documents or  The true nature of a trust receipt transaction can be
instruments with the obligation to turn over to the found in the "whereas" clause of PD 115 which states
entruster the proceeds thereof to the extent of the that a trust receipt is to be utilized "as a convenient
amount owing to the entruster or as appears in the trust business device to assist importers and merchants solve
receipt or the goods, documents or instruments their financing problems." Obviously, the State, in
themselves if they are unsold or not otherwise disposed enacting the law, sought to find a way to assist importers
of, in accordance with the terms and conditions specified and merchants in their financing in order to encourage
in the trust receipt, or for other purposes substantially commerce in the Philippines.
equivalent to any of the following:  Regardless of whether the transaction is foreign or
1. In the case of goods or documents: (a) to sell domestic, it is important to note that the transactions
the goods or procure their sale; or (b) to discussed in relation to trust receipts mainly involved
manufacture or process the goods with the sales.
purpose of ultimate sale: Provided, That, in the  The entruster, who owns or holds absolute title or
case of goods delivered under trust receipt for security interests over specified goods, documents or
the purpose of manufacturing or processing instruments, releases the subject goods to the
before its ultimate sale, the entruster shall retain possession of the entrustee. The release of such goods
its title over the goods whether in its original or to the entrustee is conditioned upon his execution and
processed form until the entrustee has complied delivery to the entruster of a trust receipt wherein the
full with his obligation under the trust receipt; or former binds himself to hold the specific goods,
(c) to load, unload, ship or transship or documents or instruments in trust for the entruster and to

BANKING: WEEK 5 | 16
sell or otherwise dispose of the goods, documents or were one’s own, or of devoting it to a purpose or use
instruments with the obligation to turn over to the different from that agreed upon.
entruster the proceeds to the extent of the amount owing  Ng: there was no misappropriation or conversion,
to the entruster or the goods, documents or instruments because his liability arises and becomes due only upon
themselves if they are unsold. receipt of the proceeds of the sale and not prior to the
 CASE AT BAR: the goods in this case were never receipt of the full price of the goods.
intended for sale but for use in the fabrication of  SC: correct.
steel communication towers, RTC erred in ruling that  Thus, assuming arguendo that the provisions of PD 115
the agreement is a trust receipt transaction. apply, Ng is not liable for Estafa because Sec. 13 of PD
 RTC relied on the Memorandum of Asiatrust’s appraiser, 115 provides that an entrustee is only liable for Estafa
Linga, who stated that the goods have been sold by Ng when he fails "to turn over the proceeds of the sale of the
and that only 3% of the goods remained goods x x x covered by a trust receipt to the extent of the
 But RTC did not give weight to the testimony of Linga amount owing to the entruster or as appears in the trust
when he testified6 that he merely presumed that the receipt x x x in accordance with the terms of the trust
goods were sold receipt."
o Linga showed that he had no real personal  The trust receipt entered into between Asiatrust and Ng
knowledge or proof of the fact that the goods states: In case of sale I/we agree to hand the
were indeed sold. He did not notify Ng about the proceeds as soon as received to the BANK to apply
inspection nor did he talk to or inquire with Ng against the relative acceptance (as described above) and
regarding the whereabouts of the subject goods. for the payment of any other indebtedness of mine/ours
Neither did he confirm with Ng if the subject to ASIATRUST DEVELOPMENT BANK.
goods were in fact sold. The Memo which was  Ng experienced difficulties in collecting payments from
based only on his presumption and not any his clients for the communication towers. Absent proof
actual personal knowledge, should not have that the proceeds have been actually and fully received
been used by the RTC to prove that the goods by Ng, his obligation to turn over the same to Asiatrust
have in fact been sold. At the very least, it could never arose.
only show that the goods were not in the  What is more, under the Trust Receipt Agreement itself,
warehouse. no date of maturity was stipulated. The provision left
blank by Asiatrust: x x x agree to hold said goods in Trust
Ng’s liability is only limited to the satisfaction of his for the said Bank and as its property with liberty to sell
obligation from the loan the same for its account within ________ days from the
 The real intent of the parties was simply to enter into a date of execution of the Trust Receipt x x x
simple loan agreement.  In fact, Asiatrust purposely left the space designated for
 To emphasize, the Trust Receipts Law was created to "to the date blank, an action which in ordinary banking
aid in financing importers and retail dealers who do not transactions would be noted as highly irregular. Hence,
have sufficient funds or resources to finance the the only way for the obligation to mature was for Asiatrust
importation or purchase of merchandise, and who may to demand from Ng to pay the obligation, which it never
not be able to acquire credit except through utilization, as did.
collateral, of the merchandise imported or purchased."  There was no abuse of confidence to speak of nor was
 Since Asiatrust knew that Ng was neither an importer there any intention to convert the subject goods for
nor retail dealer, it should have known that the said another purpose, since Ng did not withhold the fact that
agreement could not possibly apply to Ng. they were to be used to fabricate steel communication
towers to Asiatrust. Hence, no malice or abuse of
Ng is not liable for Estafa both under the RPC and PD 115. confidence and misappropriation occurred in this
(1) Goods Were Not Received in Trust instance due to Asiatrust’s knowledge of the facts.
 The first element of Estafa under RPC requires that the
money, goods or other personal property must be Ng has fully paid
received by the offender in trust or on commission, or for  This Court also takes judicial notice of the fact that Ng
administration, or under any other obligation involving the has fully paid his obligation to Asiatrust, making the claim
duty to make delivery of, or to return it. But as we already for damage and prejudice of Asiatrust baseless and
discussed, the goods received by Ng were not held in unfounded. (Asiatrust executed an Affidavit of
trust. They were also not intended for sale and neither Desistance)
did Ng have the duty to return them. They were only
intended for use in the fabrication of steel communication Reasonable Doubt Exists
towers.  Colinares v. CA: The practice of banks of making
borrowers sign trust receipts to facilitate collection of
(2) No Misappropriation of Goods or Proceeds loans and place them under the threats of criminal
 The second element of Estafa requires that there be prosecution should they be unable to pay it may be
misappropriation or conversion of such money or unjust and inequitable, if not reprehensible. Such
property by the offender, or denial on his part of such agreements are contracts of adhesion which borrowers
receipt. have no option but to sign lest their loan be disapproved.
 This is the very essence of Estafa under Art. 315, par. The resort to this scheme leaves poor and hapless
1(b). The words "convert" and "misappropriated" connote borrowers at the mercy of banks, and is prone to
an act of using or disposing of another’s property as if it misinterpretation x x x.
 Such is the situation in this case.

6 Q So, in other words, when the goods were not there anymore. You presumed that,
DISPOSITION: ACQUITTED.
that is already sold?
A Yes, your Honor.

BANKING: WEEK 5 | 17
Colinares v CA || Celine  CA: Modified the judgment of the trial court by increasing the
MELVIN COLINARES and LORDINO VELOSO, petitioners, vs. penalty. It held that the documentary evidence of the
HONORABLE COURT OF APPEALS, and THE PEOPLE OF prosecution prevails over Velosos testimony, discredited
THE PHILIPPINES, respondents. Petitioners claim that the documents they signed were in
September 5, 2000 blank, and disbelieved that they were coerced into signing
them.
NATURE: Review on certiorari of the decision of the CA.  Petitioners filed a Motion for New Trial/Reconsideration.
o Alleged that the Disclosure Statement on
SUMMARY: Petitioners Colinares and Veloso were charged with Loan/Credit Transaction signed by them and the
violating the Trust Receipts Law based on a Trust Receipt issued Manager was suppressed by PBC during the trial.
by PBC to them, in order for them to buy building materials for o Denied by the CA.
their construction project. But the SC here ruled that the  Hence, this petition, putting in issue:
transaction was a simple by virtue of the fact that the loan was o WON the denial of the CA of the Motion for New
applied for AFTER Colinares already bought the goods and the Trial, namely, disclosure on loan/credit transaction,
goods were in their position. Normally, in a trust receipt which if introduced would allegedly change the
transaction, the buyer goes to the bank first and the bank judgment, does not constitute a denial of due
becomes the owner of the goods. In this case, goods were never process.
owned by the bank, and the “trust receipt” transaction was only o Assuming there was a valid Trust Receipt, WON the
entered into after the goods were in the possession of petitioners. accused were properly charged, tried and convicted
for violation of Sec. 13, PD 115 notwithstanding the
 In 1979, Melvin Colinares and Lordino Veloso (petitioners) “novation of the so-called Trust Receipt”
were contracted by the Carmelite Sisters of CDO to renovate  Thereafter, Petitioners filed an MTD on the ground that they
their convent. already fully paid PBC the balance of Php 70,000 for the
o Consideration: Php 40,000 balance of the loan.
 Petitioners obtained materials for the construction from CM o But the SolGen opined that payment of the loan was
Builders Centre. akin to a voluntary surrender or plea of guilty which
 They applied for the commercial letter of credit with the merely serves to mitigate Petitioners culpability, but
Philippine Banking Corporation in favor of CM Builders does not in any way extinguish their criminal liability.
o PBC approved, issued a letter of credit for Php 22,  Petition was given due course.
289 to cover value of the goods.
o Petitioners signed a trust receipt as security, due on Issue #1: WON the denial of the CA of the Motion for New
29 Jan 1980. Trial, namely, disclosure on loan/credit transaction, which if
 PBC debited Php 6,720 from Petitioners marginal deposit as introduced would allegedly change the judgment, does not
partial payment of the loan. constitute a denial of due process -- NO
 On May 1980, PBC wrote to the petitioners demanding that
the amount be paid within 7 days.  Preliminaries:
o Veloso confessed that they lost Php 19,195.83 in the o The grant or denial of a motion for new trial rests
Carmelite Monastery Project, and requested a grace upon the discretion of the judge
period of until June 15, 1980 to settle the account. o New trial may be granted if: (1) errors of law or
 On October 1980, PBC again sent a demand letter to irregularities have been committed during the trial
Petitioners asking them to pay the 20, 824 (exclusive of prejudicial to the substantial rights of the accused; or
attorney’s fees) but petitioners still did not. (2) new and material evidence has been discovered
o They later tried to modify the terms of loan, and paid which the accused could not with reasonable
Php 1k to PBC. diligence have discovered and produced at the trial,
 Petitioners were charged with the violation of PD 115 (Trust and which, if introduced and admitted, would
Receipts Law) in relation to Art. 315 of the RPC. probably change the judgment
o Information was filed with Branch 18, RTC of CDO. o For newly discovered evidence to be a ground for
o “…the said accused after receipt of the goods, with new trial, such evidence must be (1) discovered after
intent to defraud and cause damage to the entruster, trial; (2) could not have been discovered and
conspiring, confederating together and mutually produced at the trial even with the exercise of
helping one another, did then and there wilfully, reasonable diligence; and (3) material, not merely
unlawfully and feloniously fail and refuse to remit the cumulative, corroborative, or impeaching, and of
proceeds of the sale of the goods to the entruster such weight that, if admitted, would probably change
despite repeated demands but instead converted, the judgment
misappropriated and misapplied the proceeds to  SC Ruling: We find no indication in the pleadings that the
their own personal use, benefit and gain, to the Disclosure Statement is a newly discovered evidence.
damage and prejudice of the Philippine Banking o SC finds that the petitioners could not have been
Corporation, in the aforesaid sum of P22,389.80, unaware that the 2 page document exists.
Philippine Currency.” o The Disclosure Statement itself states, NOTICE TO
 Their defense was that they thought the transaction was a BORROWER: YOU ARE ENTITLED TO A COPY
“clean loan” as per verbal guarantee of PBC’s former OF THIS PAPER WHICH YOU SHALL SIGN
manager. That they signed the loan without reading the fine  Assuming Petitioners copy was then
print, and that they learned that it was a trust receipt much unavailable, they could have compelled its
later. production in court, which they never
o They were assured that the trust receipt was a mere did. Petitioners have miserably failed to
formality. establish the second requisite of the rule on
 RTC: Convicted petitioners of Estafa. Convinced that the newly discovered evidence.
transaction between the two of them was a trust receipt o The alleged newly discovered evidence is mere
transaction. forgotten evidence that jurisprudence excludes as a

BANKING: WEEK 5 | 18
ground for new trial failed to attach any significance to such fact in the judgment.
o PBC could have presented its former bank manager,
Issue #2: Assuming there was a valid Trust Receipt, WON the Cayo Garcia Tuiza, who contracted with Petitioners,
accused were properly charged, tried and convicted for to refute Velosos testimony, yet it only presented
violation of Sec. 13, PD 115 notwithstanding the “novation of credit investigator Grego Mutia. Nowhere from
the so-called Trust Receipt” -- NO Mutias testimony can it be gleaned that PBC
represented to Petitioners that the transaction they
 Definition of a Trust Receipt in Sec. 4, PD 115: Any were entering into was not a pure loan but had trust
transaction by and between a person referred to as the receipt implications.
entruster, and another person referred to as the entrustee,  The Trust Receipts Law does not seek to enforce payment of
whereby the entruster who owns or holds absolute title or the loan, rather it punishes the dishonesty and abuse of
security interest over certain specified goods, documents or confidence in the handling of money or goods to the prejudice
instruments, releases the same to the possession of the of another regardless of whether the latter is the owner. Here,
entrustee upon the latters execution and delivery to the it is crystal clear that on the part of Petitioners there was
entruster of a signed document called a trust receipt wherein neither dishonesty nor abuse of confidence in the handling of
the entrustee binds himself to hold the designated goods, money to the prejudice of PBC.
documents or instruments with the obligation to turn over to o Petitioners continually endeavored to meet their
the entruster the proceeds thereof to the extent of the amount obligations, as shown by several receipts issued by
owing to the entruster or as appears in the trust receipt or the PBC acknowledging payment of the loan.
goods, documents or instruments themselves if they are o The Information charges Petitioners with intent to
unsold or not otherwise disposed of, in accordance with the defraud and misappropriating the money for their
terms and conditions specified in the trust receipt. personal use. The mala prohibita nature of the
o Two situations in a trust receipt transaction: alleged offense notwithstanding, intent as a state of
 The first is covered by the provision which mind was not proved to be present in Petitioners
refers to money received under the situation. Petitioners employed no artifice in dealing
obligation involving the duty to deliver it with PBC and never did they evade payment of their
(entregarla) to the owner of the obligation nor attempt to abscond. Instead,
merchandise sold. Petitioners sought favorable terms precisely to meet
 The second is covered by the provision their obligation
which refers to merchandise received under  Noteworthy is the fact that Petitioners are not importers
the obligation to return it (devolvera) to the acquiring the goods for re-sale, contrary to the express
owner provision embodied in the trust receipt. They are contractors
 A thorough examination of the facts obtaining in the case at who obtained the fungible goods for their construction
bar reveals that the transaction intended by the parties was a project. At no time did title over the construction materials
simple loan, not a trust receipt agreement. pass to the bank, but directly to the Petitioners from CM
o Petitioners received the merchandise from CM Builders Centre. This impresses upon the trust receipt in
Builders Centre on 30 October 1979. On that day, question vagueness and ambiguity, which should not be the
ownership over the merchandise was already basis for criminal prosecution in the event of violation of its
transferred to Petitioners who were to use the provisions.
materials for their construction project. It was only a
day later, 31 October 1979, that they went to the WHEREFORE, the challenged Decision of 6 March 1989 and the
bank to apply for a loan to pay for the merchandise. Resolution of 16 October 1989 of the Court of Appeals in CA-GR.
o This situation belies what normally obtains in a pure No. 05408 are REVERSED and SET ASIDE. Petitioners are
trust receipt transaction where goods are owned by hereby ACQUITTED of the crime charged, i.e., for violation of P.D.
the bank and only released to the importer in trust No. 115 in relation to Article 315 of the Revised Penal Code.
subsequent to the grant of the loan. The bank
acquires a security interest in the goods as holder of
a security title for the advances it had made to the
entrustee. DBP v. Prudential Bank | Gab
o The ownership of the merchandise continues to be November 22, 2005
vested in the person who had advanced payment DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, v.
until he has been paid in full, or if the merchandise PRUDENTIAL BANK, Respondent
has already been sold, the proceeds of the sale Corona, J.
should be turned over to him by the importer or by
his representative or successor in interest NATURE: Petition for review on certiorari under ROC, Rule 45
o To secure that the bank shall be paid, it normally SUMMARY: Lirag Textile Mills, Inc. (Litex) opened an irrevocable
takes full title to the goods at the very beginning commercial letter of credit with Prudential Bank in connection with
and continues to hold that title as his its importation of 5,000 spindles for spinning machinery with
indispensable security until the goods are sold drawing frame, simplex fly frame, ring spinning frame and various
and the vendee is called upon to pay for them; accessories, spare parts, and tool gauges. These were then
hence, the importer has never owned the goods and released to Litex under covering "trust receipts" it executed in
is not able to deliver possession. favor of Prudential Bank. The items were installed and used by
 In a certain manner, trust receipts partake Litex in its textile mill in Montalban, Rizal. Later on, to secure a
of the nature of a conditional sale where the loan from DBP to Litex, Litex executed real estate and chattel
importer becomes absolute owner of the mortgages on its plant site in Montalban, Rizal, including the
imported merchandise as soon as he has buildings and other improvements, machineries, and equipment
paid its price there (which included the articles covered by the "trust receipts").
 BC attempted to cover up the true delivery date of the Prudential Bank later notified DBP of its claim over the various
merchandise, yet the trial court took notice even though it items covered by the "trust receipts," which had been installed and

BANKING: WEEK 5 | 19
used by Litex in the textile mill. However, due to Litex’s failure to o Among the machineries and equipment
pay its loan, DBP extrajudicially foreclosed on the real estate and mortgaged to DBP were the articles covered
chattel mortgages, including the articles claimed by Prudential by the "trust receipts."
Bank, acquiring the foreclosed properties. Even after further  Prudential Bank then learned about DBP’s plan for the
correspondence between Prudential Bank and DBP, DBP, without overall rehabilitation of Litex.
Prudential Bank’s knowledge, sold the Litex textile mill, as well as  In a July 14, 1982 letter, Prudential Bank notified DBP
the machineries and equipment therein, to Lyon Textile Mills, Inc. of its claim over the various items covered by the
Prudential Bank then filed a complaint for a sum of money with "trust receipts," which had been installed and used by
damages against DBP with the Makati RTC. Both the RTC and the Litex in the textile mill.
CA ruled for Prudential Bank. Upon reaching the SC, the SC o Prudential Bank informed DBP that it was the
affirmed the CA’s decision. absolute and juridical owner of the said items
DOCTRINES (related to topic): and they were thus not part of the mortgaged
 In a trust receipt transaction, the goods are released assets that could be legally ceded to DBP.
by the entruster (who owns or holds absolute title or  Due to Litex’s failure to pay its obligation, DBP
security interests over the said goods) to the extrajudicially foreclosed on the real estate and
entrustee on the entrustee’s execution and delivery chattel mortgages, including the articles claimed by
to the entruster of a trust receipt. Prudential Bank.
o The trust receipt evidences the absolute title o During the foreclosure sale, DBP acquired
or security interest of the entruster over the the foreclosed properties as the highest
goods. bidder.
 As a consequence of the release of the goods and the  DBP later caused to be published in the September 2,
execution of the trust receipt, a 2-fold obligation is 1984 issue of the Times Journal an invitation to bid in
imposed on the entrustee: (1) To hold the designated the public sale to be held on September 10, 1984.
goods, documents, or instruments in trust for selling o It called on interested parties to submit bids
or otherwise disposing of them and (2) to turn over to for the sale of the textile mill formerly owned
the entruster either the proceeds thereof to the extent by Litex, the land on which it was built, as well
of the amount owing to the entruster or as appears in as the machineries and equipment therein.
the trust receipt or the goods, documents, or
 Learning of the intended public auction, Prudential Bank
instruments themselves if they are unsold or not
wrote a letter to DBP (dated September 6, 1984)
otherwise disposed of, in accordance with the terms
reasserting its claim over the items covered by "trust
and conditions specified in the trust receipt.
receipts" in its name and advising DBP not to include
o In the case of goods, they may also be them in the auction.
released for other purposes substantially
o Prudential Bank also demanded the turnover of
equivalent to: (a) their sale or the
the articles or, alternatively, the payment of their
procurement of their sale; or (b) their
value.
manufacture or processing with the purpose
of ultimate sale, in which case the entruster  In reply to Prudential Bank’s September 6, 1984 letter,
retains his title over the said goods whether DBP requested documents to enable it to evaluate
in their original or processed form until the Prudential Bank’s claim.
entrustee has complied fully with his  Prudential Bank later gave DBP the requested
obligation under the trust receipt; or (c) the documents.
loading, unloading, shipment or  Around November 1984, Prudential Bank followed up the
transshipment, or otherwise dealing with status of its claim.
them in a manner preliminary or necessary  In a letter dated December 3, 1984, DBP informed
to their sale. Prudential Bank that its claim had been referred to
 In a trust receipt transaction, the release of the goods DBP’s legal department and instructed Prudential Bank
to the entrustee, on his execution of a trust receipt, is to get in touch with its chief legal counsel.
essentially for their sale or is necessarily connected  There being no concrete action on DBP’s part,
with their ultimate or subsequent sale. Prudential Bank, in a letter dated July 30, 1985, made a
FACTS: final demand on DBP for the turnover of the contested
 Lirag Textile Mills, Inc. (Litex) opened an irrevocable articles or the payment of their value.
commercial letter of credit with Prudential Bank for  June 8, 1987: Without Prudential Bank’s knowledge,
US$498,000 in connection with its importation of DBP sold the Litex textile mill, as well as the
5,000 spindles for spinning machinery with drawing machineries and equipment therein, to Lyon Textile
frame, simplex fly frame, ring spinning frame and Mills, Inc. (Lyon).
various accessories, spare parts, and tool gauges.  Prudential Bank filed a complaint for a sum of money
o These were released to Litex under covering with damages against DBP with the Makati RTC.
"trust receipts" it executed in favor of  The RTC, applying PD 115 (Trust Receipts Law), ruled
Prudential Bank. for Prudential Bank.
 Litex installed and used the items in its textile mill in  DBP appealed to the CA, which dismissed the appeal
Montalban, Rizal. and affirmed the RTC’s decision in toto.
 DBP later granted a foreign currency loan of  DBP filed an MR, which was also dismissed by the CA.
US$4,807,551 to Litex.
o To secure the loan, Litex executed real estate  DBP then filed the present petition or review on certiorari
and chattel mortgages on its plant site in under ROC, Rule 45 with the SC.
ISSUE #1 (MAIN):
Montalban, Rizal, including the buildings and
other improvements, machineries, and  W/N the contested articles were excluded from goods
equipment there. that could be covered by a trust receipt (NO)

BANKING: WEEK 5 | 20
RATIO #1: loading, unloading, shipment or
 Trust receipt transactions are governed by PD 115 transshipment, or otherwise dealing with
(Trust Receipts Law), which defines a trust receipt as: them in a manner preliminary or necessary
to their sale.7
“Section 4. What constitutes a trust receipt transaction. – A  Thus, in a trust receipt transaction, the release of the
trust receipt transaction, within the meaning of this Decree, is any goods to the entrustee, on his execution of a trust
transaction by and between a person referred to in this Decree as receipt, is essentially for their sale or is necessarily
the entruster, and another person referred to in this Decree as connected with their ultimate or subsequent sale.
entrustee, whereby the entruster, who owns or holds absolute title  Litex was not engaged in the business of selling spinning
or security interests over certain specified goods, documents or machinery, its accessories, and spare parts, but in
instruments, releases the same to the possession of the entrustee manufacturing and producing textile and various kinds of
upon the latter’s execution and delivery to the entruster of a fabric.
signed document called a "trust receipt" wherein the entrustee  The articles were not released to Litex to be sold nor
binds himself to hold the designated goods, documents or was the transfer of possession intended to be a
instruments in trust for the entruster and to sell or otherwise preliminary step for the said goods to be ultimately or
dispose of the goods, documents or instruments with the subsequently sold.
obligation to turn over to the entruster the proceeds thereof to the
 Instead, the contemporaneous and subsequent acts
extent of the amount owing to the entruster or as appears in the
of both Litex and Prudential Bank showed that the
trust receipt or the goods, documents or instruments themselves if
imported articles were released to Litex to be
they are unsold or not otherwise disposed of, in accordance with
installed in its textile mill and used in its business.
the terms and conditions specified in the trust receipt, or for other
o DBP itself was aware of this.
purposes substantially equivalent to any of the following:
 DBP: The chattels in controversy were procured by Litex
1. In the case of goods or documents, (a) to sell the goods or for the exclusive use of its textile mills. They were not
procure their sale; or (b) to manufacture or process the goods with procured: (a) to sell or otherwise procure their sale or (b)
the purpose of ultimate sale: Provided, That, in the case of goods to manufacture or process the goods with the purpose of
delivered under trust receipt for the purpose of manufacturing or ultimate sale.
processing before its ultimate sale, the entruster shall retain its o Hence, the transactions between Litex and
title over the goods whether in its original or processed form until Prudential Bank were not trust receipt
the entrustee has complied fully with his obligation under the trust transactions within the meaning of PD 115.
receipt; or (c) to load, unload, ship or tranship or otherwise deal o It follows that, contrary to the decisions of the
with them in a manner preliminary or necessary to their sale; or lower courts, the transactions were not
governed by PD 115.
2. In the case of instruments, (a) to sell or procure their sale or  The SC disagreed with DBP’s contention.
exchange; or (b) to deliver them to a principal; or (c) to effect the  The various agreements between Prudential Bank and
consummation of some transactions involving delivery to a Litex commonly denominated as "trust receipts" were
depository or register; or (d) to effect their presentation, collection valid.
or renewal. o Their provisions did not contravene the law,
morals, good customs, public order, or public
x x x x x x x x x” policy.
 In a trust receipt transaction, the goods are released  The agreements uniformly provided:
by the entruster (who owns or holds absolute title or
security interests over the said goods) to the Received, upon the Trust hereinafter mentioned from the
entrustee on the entrustee’s execution and delivery PRUDENTIAL BANK (hereinafter referred to as BANK) the
to the entruster of a trust receipt. following goods and merchandise, the property of said
o The trust receipt evidences the absolute title BANK specified in the bill of lading as follows:
or security interest of the entruster over the
goods. Amount of Bill Description of Security Marks & Nos. Vessel
 As a consequence of the release of the goods and the
execution of the trust receipt, a 2-fold obligation is
imposed on the entrustee: (1) To hold the designated and in consideration thereof, I/We hereby agree to hold said
goods, documents, or instruments in trust for selling goods in trust for the BANK and as its property with liberty to
or otherwise disposing of them and (2) to turn over to sell the same for its account but without authority to make any
the entruster either the proceeds thereof to the extent other disposition whatsoever of the said goods or any part thereof
of the amount owing to the entruster or as appears in (or the proceeds thereof) either by way of conditional sale, pledge,
the trust receipt or the goods, documents, or or otherwise.
instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms x x x x x x x x x”
and conditions specified in the trust receipt.  The articles were owned by Prudential Bank and they
o In the case of goods, they may also be were only held by Litex in trust.
released for other purposes substantially
o While it was allowed to sell the items, Litex had
equivalent to: (a) their sale or the
no authority to dispose of them or any part
procurement of their sale; or (b) their
thereof or their proceeds through conditional
manufacture or processing with the purpose
sale, pledge, or any other means.
of ultimate sale, in which case the entruster
retains his title over the said goods whether  NCC, Art. 2085 (2) requires that, in a contract of pledge
in their original or processed form until the or mortgage, it is essential that the pledgor or should be
entrustee has complied fully with his
obligation under the trust receipt; or (c) the 7 See PD 115, Sec. 4 (1)

BANKING: WEEK 5 | 21
the absolute owner of the thing pledged or mortgaged.  The RTC found that this chain of events showed DBP’s
 NCC, Art. 2085 (3) further mandates that the person fraudulent attempt to prevent Prudential Bank from
constituting the pledge or mortgage must have the free asserting its rights.
disposal of his property, and in the absence thereof, that o It smacked of bad faith, if not deceit.
he be legally authorized for the purpose.  Thus, the award of exemplary damages was in order.
 Litex had neither absolute ownership, free disposal, nor  Due to the award of exemplary damages, the grant of
the authority to freely dispose of the articles. attorney’s fees was proper.8
 Litex could not have subjected the articles to a ISSUE #4:
chattel mortgage.  W/N Prudential Bank’s right to enforce its action had
o Their inclusion in the mortgage was void and prescribed when it filed its complaint (NO)
had no legal effect. RATIO #4:
 There being no valid mortgage, there could also be no  DBP: Under NCC, Art. 1146 (1), Prudential Bank’s cause
valid foreclosure or valid auction sale. of action had prescribed as it should be reckoned from
 Thus, DBP could not be considered either as a October 10, 1980, the day the mortgage was registered
mortgagee or as a purchaser in good faith. SC: Not correct
 No one can transfer a right to another greater than what  The written extrajudicial demand by the creditor
he himself has. Nemo dat quod non habet. Hence, Litex interrupted the prescription of action.9
could not transfer a right that it did not have over the  Hence, the 4-year prescriptive period was interrupted
disputed items. when Prudential Bank wrote the extrajudicial demands
 Corollarily, DBP could not acquire a right greater than for the turnover of the articles or their value.
what its predecessor-in-interest had. o In particular, the last demand letter sent by
o The spring cannot rise higher than its source. Prudential Bank was dated July 30, 1988, which
 DBP merely stepped into the shoes of Litex as trustee was received by DBP the next day.
of the imported articles with an obligation to pay their  Thus, Prudential Bank’s right to enforce its action had not
value or to return them on Prudential Bank’s yet prescribed when it filed the complaint on May 24,
demand. 1988.
 By its failure to pay or return them, despite
Prudential Bank’s repeated demands, and by selling DISPOSITION
them to Lyon without Prudential Bank’s knowledge  The petition is denied.
and conformity, DBP became a trustee ex maleficio.
ISSUE #2:
 W/N the SC may review the evidence presented Rosario Textile Mills v Home Bankers| CM
during the trial and reverse the factual findings of the June 29, 2005
RTC concerning the award of actual damages (NO) ROSARIO TEXTILE MILLS CORPORATION and EDILBERTO
RATIO #2: YUJUICO, petitioners, vs. HOME BANKERS SAVINGS AND
 The SC is not a trier of facts and it is not its function to TRUST COMPANY,respondent.
analyze or weigh evidence anew. SANDOVAL-GUTIERREZ, J.:
Summary: RTMC was granted a credit line by Home Bankers.
 The rule is that factual findings of the trial court, when
Yujuico bound himself jointly and severally as surety. RTCM made
adopted and confirmed by the CA, are binding and
drawdowns and issued PNs and trust receipts. RTMC failed to pay
conclusive on SC and, generally, will not be reviewed on
its loan. Home Bankers sued. RTMC alleges that the agreement
appeal.
was that the bank was the owner of the goods RTMC imported by
o While there are recognized exceptions to this
virtue of the trust receipts and that RTMC did not accept the goods
rule, none of the established exceptions applies
imported. SC disagreed. The principal contact was that of a loan
at bar.
and RTMC delivered the raw materials to the bank as collateral.
ISSUE #3:
Trust receipts were executed by the parties to evidence this
 W/N the awards of exemplary and compensatory security arrangement. The trust receipts were mere securities.
damages and attorney’s fees were proper (YES) Doctrine: a trust receipt, therefore, is a security agreement,
RATIO #3: pursuant to which a bank acquires a security interest in the goods.
 The CA agreed with the RTC that the requirements for It secures an indebtedness and there can be no such thing as
the award of exemplary damages had been sufficiently security interest that secures no obligation
established. FACTS:
 Prudential Bank’s entitlement to compensatory damages  1989, Rosario Textile Mills Corporation (RTMC) applied
was also amply proven. from Home Bankers Savings & Trust Co. for an Omnibus
 It was shown that DBP was aware of Prudential Bank’s Credit Line for P10 million.
claim as early as July 1982.  The bank approved RTMCs credit line but for only P8
o However, DBP ignored Prudential Bank’s million. The bank notified RTMC of the grant of the said
demand, included the disputed articles in the loan thru a letter dated March 2, 1989 which contains
mortgage foreclosure, and caused their sale in a terms and conditions conformed by RTMC thru Edilberto
public auction, where it was declared as the V. Yujuico.
highest bidder.  Yujuico signed a Surety Agreement in favor of the
 Thereafter, in the series of communications between bank, in which he bound himself jointly and severally
them, DBP gave Prudential Bank the false impression with RTMC for the payment of all RTMCs
that its claim was still being evaluated. indebtedness to the bank from 1989 to 1990.
 Without acting on Prudential Bank’s plea, DBP included
the contested articles among the properties it sold to
8 Cf. NCC, Art. 2208 (1)
Lyon.
9 Cf. NCC, Art. 1155

BANKING: WEEK 5 | 22
 RTMC availed of the credit line by making numerous  CAB: The principal transaction between petitioner RTMC
drawdowns, each drawdown being covered by a and the bank is a contract of loan. RTMC used the
separate promissory note and trust receipt. RTMC, proceeds of this loan to purchase raw materials from a
represented by Yujuico, executed in favor of the bank a supplier abroad. In order to secure the payment of the
total of eleven (11) promissory notes. loan, RTMC delivered the raw materials to the bank as
 RTMC failed to pay its loans. Hence, the bank filed a collateral. Trust receipts were executed by the parties to
complaint for sum of money against RTMC and Yujuico evidence this security arrangement. Simply stated, the
 RTMC and Yujuico contend that they should be absolved trust receipts were mere securities.
from liability. They claimed that although the grant of the  In Samo vs. People, we described a trust receipt as a
credit line and the execution of the suretyship agreement security transaction intended to aid in financing importers
are admitted, the bank gave assurance that the and retail dealers who do not have sufficient funds or
suretyship agreement was merely a formality under resources to finance the importation or purchase of
which Yujuico will not be personally liable. They merchandise, and who may not be able to acquire credit
argue that the importation of raw materials under the except through utilization, as collateral, of the
credit line was with a grant of option to them to turn-over merchandise imported or purchased.
to the bank the imported raw materials should these fail  In Vintola vs. Insular Bank of Asia and America, we
to meet their manufacturing requirements. RTMC offered elucidated further that a trust receipt, therefore, is a
to make such turn-over since the imported materials did security agreement, pursuant to which a bank
not conform to the required specifications. However, the acquires a security interest in the goods. It secures
bank refused to accept the same, until the materials were an indebtedness and there can be no such thing as
destroyed by a fire security interest that secures no obligation.
 RTC ruled in favor of the bank  Section 3 (h) of the Trust Receipts Law (P.D. No. 115)
 RTMC and Yujuico appealed contending that under the defines a security interest as follows: (h) Security Interest
trust receipt contracts between the parties, they merely means a property interest in goods, documents, or
held the goods described therein in trust for instruments to secure performance of some obligation of
respondent Home Bankers Savings and Trust the entrustee or of some third persons to the entruster
Company (the bank) which owns the same. Since the and includes title, whether or not expressed to be
ownership of the goods remains with the bank, then it absolute, whenever such title is in substance taken or
should bear the loss. With the destruction of the goods by retained for security only.
fire, petitioners should have been relieved of any  Petitioners insistence that the ownership of the raw
obligation to pay. materials remained with the bank is untenable. In Sia vs.
 CA affirmed the RTC, holding that the bank is merely the People, Abad vs. Court of Appeals, and PNB vs.
holder of the security for its advance payments to Pineda, we held that:
petitioners; and that the goods they purchased, through  If under the trust receipt, the bank is made to appear as
the credit line extended by the bank, belong to them and the owner, it was but an artificial expedient, more of legal
hold said goods at their own risk. fiction than fact, for if it were really so, it could dispose of
ISSUE 1/ HELD: WON RTMC and Yujuico are relieved of their the goods in any manner it wants, which it cannot do, just
obligation to pay their loan after they tried to tender the goods to to give consistency with purpose of the trust receipt of
the bank which refused to accept the same (NO) giving a stronger security for the loan obtained by the
RATIO: importer. To consider the bank as the true owner from
 RTC and Yujuico theorize that when RTMC imported the the inception of the transaction would be to
raw materials needed for its manufacture, using the credit disregard the loan feature thereof...
line, it was merely acting on behalf of the bank, the true  Thus, petitioners cannot be relieved of their obligation to
owner of the goods by virtue of the trust receipts. pay their loan in favor of the bank.
Hence, under the doctrine of res perit domino, the bank ISSUE 2/ HELD: WON RTMC and Yujuico are solidarily liable for
took the risk of the loss of said raw materials. RTMCs the payment of their obligations to the bank (YES)
role in the transaction was that of end user of the raw RATIO:
materials and when it did not accept those materials as  Yujuico contends that the suretyship agreement he
they did not meet the manufacturing requirements signed does not bind him, the same being a mere
 SC: this however, conveniently ignores the true nature of formality.
its transaction with the bank. We recall that RTMC filed  SC: NO. First, there is no record to support his allegation
with the bank an application for a credit line in the that the surety agreement is a mere formality; and the
amount ofP10 million, but only P8 million was approved. Suretyship Agreement signed by petitioner Yujuico binds
RTMC then made withdrawals from this credit line and him. The terms clearly show that he agreed to pay the
issued several promissory notes in favor of the bank. bank jointly and severally with RTMC.
 In banking and commerce, a credit line is that amount of  The parole evidence rule under Section 9, Rule 130 of
money or merchandise which a banker, merchant, or the Revised Rules of Court is in point, thus:
supplier agrees to supply to a person on credit and  SEC. 9. Evidence of written agreements. When the terms
generally agreed to in advance. It is the fixed limit of of an agreement have been reduced in writing, it is
credit granted by a bank, retailer, or credit card issuer to considered as containing all the terms agreed upon and
a customer, to the full extent of which the latter may avail there can be, between the parties and their successors in
himself of his dealings with the former but which he must interest, no evidence of such terms other than the
not exceed and is usually intended to cover a series of contents of the written agreement.
transactions in which case, when the customers line of  However, a party may present evidence to modify,
credit is nearly exhausted, he is expected to reduce his explain, or add to the terms of the written agreement if he
indebtedness by payments before making any further puts in issue in his pleading:
drawings. (a) An intrinsic ambiguity, mistake, or imperfection in
the written agreement;

BANKING: WEEK 5 | 23
(b) The failure of the written agreement to express the Philippine currency, the equivalent, of the
true intent and agreement of the parties thereto; aforementioned amount or such portion thereof as may
(c) The validity of the written agreement; or be drawn or paid, upon the faith of the said credit
(d) The existence of other terms agreed to by the together with the usual charges."
parties or their successors in interest after the  On the same day, August 20, 1975, having received from
execution of the written agreement. Stalin Tan the puka and olive shells worth P40,000.00,
 Under this Rule, the terms of a contract are rendered the VINTOLAS executed a Trust Receipt agreement with
conclusive upon the parties and evidence aliunde is not IBAA, Cebu City.
admissible to vary or contradict a complete and  Under that Agreement, the VINTOLAS agreed to hold the
enforceable agreement embodied in a document. goods in trust for IBAA as the "latter's property with
 There is no ambiguity in the Suretyship Agreement liberty to sell the same for its account, " and "in case of
signed by Yujuico. sale" to turn over the proceeds as soon as received to
ISSUE 3/ HELD: WON the CA violated the Trust Receipts Law (IBAA) the due date indicated in the document was
(NO) October 19, 1975.
 The contract between the parties is a loan. What  Having defaulted on their obligation, IBAA demanded
respondent bank sought to collect as creditor was the payment from the VINTOLAS in a letter dated January 1,
loan it granted to petitioners. Petitioners recourse is to 1976. The VINTOLAS, who were unable to dispose of the
sue their supplier, if indeed the materials were defective. shells, responded by offering to return the goods.
DISPOSITION. AFFIRMED  IBAA refused to accept the merchandise, and due to the
continued refusal of the VINTOLAS to make good their
undertaking, IBAA charged them with Estafa for having
Vintola vs Insular Bank of Asia and America| Karl misappropriated, misapplied and converted for their own
May 29, 1987 personal use and benefit the aforesaid goods.
 During the trial of the criminal case the VINTOLAS turned
SPOUSES TIRSO I. VINTOLA and LORETO DY VINTOLA, over the seashells to the custody of the Trial Court.
defendants-appellants, vs. INSULAR BANK OF ASIA AND  CFI: acquitted Vintolas after finding that the element of
AMERICA, plaintiff-appellee. misappropriation or conversion was inexistent.
MELENCIO-HERRERA, J.:  Shortly thereafter, IBAA commenced the present civil
NATURE: Appeal to SC action to recover the value of the goods before the
Regional Trial Court of Cebu, Branch XVI.
SUMMARY:  Holding that the complaint was barred by the judgment of
 The Vintolas were granted a letter of credit by IBAA. The acquittal in the criminal case, said Court dismissed the
Vintolas executed a Trust Receipt Agreement with IBAA complaint. However, on IBAA's motion, the Court granted
involving the seashells. The Vintolas defaulted. reconsideration.
Thereafter, IBAA filed a case for estafa but the Vintolas  Vintolas’ Contentions:
were acquitted. Subsequently, IBAA filed a civil case to o The VINTOLAS rest their present appeal on the
collect from the Vintolas. The SC held that the acquittal in principal allegation that their acquittal in the
the criminal case did not bar the civil action and that the Estafa case bars IBAA's filing of the civil action
Vintolas were still liable to IBAA despite the return of the because IBAA had not reserved in the criminal
seashells which were subject of the Trust Receipt case its right to enforce separately their civil
Agreement. liability. They maintain that by intervening
DOCTRINE (related to topic): actively in the prosecution of the criminal case
 A letter of credit-trust receipt arrangement is endowed through a private prosecutor, IBAA had chosen
with its own distinctive features and characteristics. to file the civil action impliedly with the criminal
Under that set-up, a bank extends a loan covered by the action, pursuant to Section 1, Rule 111 of the
Letter of Credit, with the trust receipt as a security for the 1985 Rules on Criminal Procedure, reading:
loan. In other words, the transaction involves a loan  Section 1. Institution of criminal and
feature represented by the letter of credit, and a security civil action. — When a criminal action
feature which is in the covering trust receipt is instituted, the civil action for the
 A trust receipt, therefore, is a security agreement, recovery of civil liability arising from the
pursuant to which a bank acquires a "security interest" in offense charged is impliedly instituted
the goods. "It secures an indebtedness and there can be with the criminal action, unless the
no such thing as security interest that secures no offended party expressly waives the
obligation." civil action or reserves his right to
institute it separately. ...
FACTS: o and that since the judgment in the criminal case
 On August 20, 1975 the spouses Tirso and Loreta Vintola had made a declaration that the facts from
(the VINTOLAS, for short), doing business under the which the civil action might arise did not exist,
name and style "Dax Kin International," engaged in the the filing of the civil action arising from the
manufacture of raw sea shells into finished products, offense is now barred, as provided by Section 3-
applied for and were granted a domestic letter of credit b of Rule 111 of the same Rules providing:
by the Insular Bank of Asia and America (IBAA), Cebu  (b) Extinction of the penal action does
City in the amount of P40,000.00. not carry with it extinction of the civil,
 The Letter of Credit authorized the bank to negotiate for unless the extinction proceeds from a
their account drafts drawn by their supplier, one Stalin declaration in a final judgment that the
Tan, on Dax Kin International for the purchase of puka fact from which the civil might arise did
and olive seashells. not exist. In other cases, the person
 In consideration thereof, the VINTOLAS, jointly and entitled to the civil action may institute
severally, agreed to pay the bank "at maturity, in it in the jurisdiction in the manner

BANKING: WEEK 5 | 24
provided by law against the person the merchandise imported or purchased."
who may be liable for restitution of the  Contrary to the allegation of the VINTOLAS, IBAA did not
thing and reparation or indemnity for become the real owner of the goods. It was merely the
the damage suffered. holder of a security title for the advances it had made to
o Further, the VINTOLAS take the position that the VINTOLAS The goods the VINTOLAS had purchased
their obligation to IBAA has been extinguished through IBAA financing remain their own property and
inasmuch as, through no fault of their own, they they hold it at their own risk. The trust receipt
were unable to dispose of the seashells, and arrangement did not convert the IBAA into an investor;
that they have relinguished possession thereof the latter remained a lender and creditor.
to the IBAA, as owner of the goods, by  Since the IBAA is not the factual owner of the goods, the
depositing them with the Court. VINTOLAS cannot justifiably claim that because they
have surrendered the goods to IBAA and subsequently
Preliminaries: deposited them in the custody of the court, they are
 A letter of credit-trust receipt arrangement is endowed absolutely relieved of their obligation to pay their loan
with its own distinctive features and characteristics. because of their inability to dispose of the goods. The
Under that set-up, a bank extends a loan covered by the fact that they were unable to sell the seashells in
Letter of Credit, with the trust receipt as a security for the question does not affect IBAA's right to recover the
loan. In other words, the transaction involves a loan advances it had made under the Letter of Credit. In so
feature represented by the letter of credit, and a security arguing, the VINTOLAS conveniently close their eyes to
feature which is in the covering trust receipt. their application for a Letter of Credit wherein they
 Thus, Section 4 of P.D. No. 115 defines a trust receipt expressly obligated themselves in these terms:
transaction as: o IN CONSIDERATION THEREOF, I/we promise
... any transaction by and between a person referred to in this and agree to pay you at maturity in Philippine
Decree as the entruster, and another person referred to in this Currency the equivalent of the above amount or
Decree as the entrustee, whereby the entruster, who owns or such portion thereof as may be drawn or paid
holds absolute title or security interests over certain specified upon the faith of said credit together with the
goods, documents or instruments, releases the same to the usual charges. ...
possession of the entrustee upon the latter's execution and  They further agreed that their marginal deposit of
delivery to the entruster of a signed document called a "trust P8,000.00, later increased to P11,000.00 be applied,
receipt" wherein the entrustee binds himself to hold the designated without further proceedings or formalities to pay or
goods, documents or instruments in trust for the entruster and to reduce our obligation under this letter of credit or its
sell or otherwise dispose of the goods, documents or instrument corresponding Trust Receipt
thereof to the extent of the amount owing to the entruster or as
appears in the trust receipt or the goods, documents or ISSUE #2
instruments themselves if they are unsold or not otherwise Whether or not the Vintolas’ acquittal in the Estafa case bars
disposed of, in accordance with the terms and conditions specified IBAA's filing of the civil action because IBAA had not reserved in
in the trust receipt, or for other purposes substantially equivalent the criminal case its right to enforce separately their civil liability.--
to any one of the following: NO
1. In the case of goods or documents, (a) to sell the goods or RATIO #2:
procure their sale  The foregoing premises considered, it follows that the
acquittal of the VINTOLAS in the Estafa case is no bar to
 A trust receipt, therefore, is a security agreement, the institution of a civil action for collection.
pursuant to which a bank acquires a "security interest" in  It is inaccurate for the VINTOLAS to claim that the
the goods. "It secures an indebtedness and there can be judgment in the estafa case had declared that the facts
no such thing as security interest that secures no from which the civil action might arise, did not exist, for, it
obligation." will be recalled that the decision of acquittal expressly
(h) "Security Interest"means a property interest in goods, declared that "the remedy of the Bank is civil and not
documents or instruments to secure performance of some criminal in nature."
obligations of the entrustee or of some third persons to the  This amounts to a reservation of the civil action in IBAA's
entruster and includes title, whether or not expressed to be favor, for the Court would not have dwelt on a civil liability
absolute, whenever such title is in substance taken or retained for that it had intended to extinguish by the same decision.
security only. The VINTOLAS are liable ex contractu for breach of the
Letter of Credit — Trust Receipt, whether they did or they
did not "misappropriate, misapply or convert" the
ISSUE #1: merchandise as charged in the criminal case.
 Their civil liability does not arise ex delicto, the action for
Whether or not the Vintolas’ obligation to IBAA has been the recovery of which would have been deemed instituted
extinguished inasmuch as, through no fault of their own, they were with the criminal-action (unless waived or reserved) and
unable to dispose of the seashells, and that they have where acquittal based on a judicial declaration that the
relinguished possession thereof to the IBAA, as owner of the criminal acts charged do not exist would have
goods, by depositing them with the Court.--NO extinguished the civil action.
 Rather, the civil suit instituted by IBAA is based ex
RATIO#1: contractu and as such is distinct and independent from
 As elucidated in Samo vs. People "a trust receipt is any criminal proceedings and may proceed regardless of
considered as a security transaction intended to aid in the result of the latter. Under the situational
financing importers and retail dealers who do not have circumstances of the parties, they are governed by Article
sufficient funds or resources to finance the importation or 31 of the Civil Code, explicitly providing:
purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral of Art. 31. When the civil action is based on an obligation not arising

BANKING: WEEK 5 | 25
from the act or omission complained of as a felony, such civil
action may proceed independently of the criminal proceedings and ISSUE #1 (MAIN):
regardless of the result of the latter.  WoN failure of an entrustee to turn over the proceeds
of the sale or to return the goods subject of the trust
receipt can be held liable for estafa. (YES)
DISPOSITION: Affirmed. RATIO #1:
 Allied Banking Corp. v. Hon. Ordoñez (1990): SC
reversed the pronouncement of the Secretary of Justice
People v. Nitafan / Ish limiting the application of the penal provision of P.D. 115
April 6, 1992 only to goods intended to be sold to the exclusion of
PEOPLE OF THE PHILIPPINES and ALLIED BANKING those still to be manufactured.
CORPORATION, petitioners, vs. HON. JUDGE DAVID G.  Lee v. Rodil (1989) and Sia v. CA (1988): Acts involving
NITAFAN and BETTY SIA ANG, respondents. the violation of trust receipt agreements occuring after 29
GUTIERREZ, JR., J. January 1973 (date of enactment of P.D. 115) would
make the accused criminally liable for estafa under
SUMMARY: Betty Sia Ang was charged with estafa under Art. paragraph 1 (b), Article 315 of the Revised Penal Code
315, par. 1 (b) of the RPC in relation to PD 115 (The Trus (RPC) pursuant to the explicit provision in Section 13 of
Receipts Law). She filed a motion to quash on the ground that the P.D. 115.
facts charged do not constitute an offense. Judge Nitafan granted  PD 115 provides:
the motion to quash. SC reversed.
DOCTRINE: An entrustee in a trust receipt agreement who fails to Sec. 13. Penalty clause. - The failure of an entrustee to
deliver the proceeds of the sale or to return the goods if not sold to turn over the proceeds of the sale of the goods,
the entruster-bank is liable for the crime of estafa. Trust receipts documents or instruments covered by a trust receipt to
are indispensable contracts in international and domestic business the extent of the amount owing to the entruster or as
transactions. The prevalent use of trust receipts, the danger of appears in the trust receipt or to return said goods,
their misuse and/or misappropriation of the goods or proceeds documents or instruments if they were not sold or
realized from the sale of goods, documents or instruments disposed of in accordance with the terms of the trust
held in trust for entruster-banks, and the need for regulation of receipt shall constitute the crime of estafa, punishable
trust receipt transactions to safeguard the rights and enforce the under the provisions of Article Three Hundred and
obligations of the parties involved are the main thrusts of P.D. Fifteen, paragraph one (b) of Act Numbered Three
115. Thousand Eight Hundred and Fifteen, as amended,
otherwise known as the Revised Penal Code. If the
FACTS: violation or offense is committed by a corporation,
 Betty Sia Ang was the proprietress of Eckart Enterprises. partnership, association or other juridical entities, the
 She executed a trust receipt in favor of petitioner Allied penalty provided for in this Decree shall be imposed upon
Banking Corporation and received in trust from the bank the directors, officers, employees or other officials or
Gordon Plastics, plastic sheeting and Hook Chromed, in persons therein responsible for the offense, without
the total amount of P398,000.00. prejudice to the civil liabilities arising from the criminal
o The trust receipt contained an express offense.
obligation on the part of Ang to sell the same
and account for the proceeds of the sale
thereof, if sold, or to return said merchandise, if  Par. 1 (b), Art. 315, RPC states:
not sold, on or before October 16, 1980, or upon
demand. Swindling (estafa). - Any person who shall
 Despite demands from Allied Bank, Ang paid only the defraud another by any of the means mentioned herein
amount of P283,115.78, thereby leaving unaccounted for below x x x:
the amount of P114,884.22. xxx xxx xxx
 The accused filed a motion to quash the information on b. By misappropriating or converting, to the prejudice of
the ground that the facts charged do not constitute an another, money, goods, or any other personal property
offense. received by the offender in trust or on commission, or for
 Respondent Judge Nitafan granted the motion to quash. administration, or under any other obligation involving the
o A trust receipt transaction is an evidence of a duty to make delivery of or to return the same, even
loan being secured so that there is, as between though such obligation be totally or partially guaranteed
the parties to it, a creditor-debtor relationship. by a bond; or by denying having received such money,
o The penal clause of Presidential Decree No. goods, or other property.
115 on the Trust Receipts Law is inoperative
because it does not actually punish an offense  The factual circumstances in the present case show that
mala prohibita. It merely refers to the provision the alleged violation was committed sometime in 1980 or
on estafa in the RPC. during the effectivity of P.D. 115. The failure, therefore,
o People v. Cuevo: for lack of the required to account for the P114,884.22 balance is what makes
number of votes, the SC upheld the dismissal of the accused-respondent criminally liable for estafa.
a charge for estafa for a violation of a trust  The Court reiterates its definitive ruling that, in
receipt agreement. the Cuevo and Sia (1983) cases relied upon by
o Sia v. People (1983): violation of PD 115 merely the accused, P.D. 115 was not applied because the
gives rise to a civil obligation. questioned acts were committed before its effectivity.
 At the time the order to quash was issued or on January  Contrary to the reasoning of the respondent court and the
7, 1988, these two decisions were the only most recent accused, a trust receipt arrangement does not involve a
ones. simple loan transaction between a creditor and a debtor-
 Hence, this petition.

BANKING: WEEK 5 | 26
importer. requisites for legal compensation are present. Voluntary or
o Apart from a loan feature, the trust receipt conventional compensation is not limited to obligations which are
arrangement has a security feature that is not yet due.
covered by the trust receipt itself. FACTS:
o That second feature is what provides the much  1977-1978: Norberto and Milagros Castañares (Spouses
needed financial assistance to our traders in the Castañares) obtained from Traders Royal Bank (Traders)
importation or purchase of goods or various loans and credit accommodations for their export
merchandise through the use of those goods or business. They executed two real estate mortgages
merchandise as collateral for the advancements (REMs) dated April 18, 1977 and January 25, 1978
made by a bank. covering their properties. As evidenced by a Promissory
o The title of the bank to the security is the one Note dated May 10, 1977, Traders released only P35k
sought to be protected and not the loan which is although the mortgage deeds indicated the principal
a separate and distinct agreement. amounts as P86k and P60k.
 The Spouses were further granted additional funds on
ISSUE #2: various dates (6 dates) under separate promissory
 WoN PD 115 violates the constitutional prohibition notes they executed in favor of Traders, totaling P100.4k.
against imprisonment for debt. (NO)  By the 2nd quarter of 1978, the loans began to mature
RATIO #2: and the letters of credit against which the packing
 The Trust Receipts Law punishes the dishonesty and advances were granted started to expire. Meanwhile, on
abuse of confidence in the handling of money or goods to December 7, 1979, Traders, without notifying the
the prejudice of another regardless of whether the latter Spouses, applied to the payment of their outstanding
is the owner or not. obligations the sum of $4,220 or P30,930 which was
 The law does not seek to enforce payment of the loan. remitted to the Spouses thru telegraphic transfer from
 Thus, there can be no violation of a right against AMROBANK, Amsterdam by one Richard Wagner.
imprisonment for non-payment of a debt.  For failure to pay, Traders proceeded with the
 Moreover, PD 115 is a valid exercise of police power. extrajudicial foreclosure of the REMs. Thereafter, a
(Lee v. Rodil) Certificate of Sale covering all the mortgaged properties
was issued by the sheriff to Traders as the lone bidder for
ISSUE #3: P117k during the auction sale. Said certificate of sale
 WoN PD 115 punishes a malum prohibitum. (YES) was registered with the Register of Deeds on February 4,
RATIO #3: 1982.
 It is in the context of upholding public interest that the law  November 24, 1982: Traders filed a complaint for
now specifically designates a breach of a trust receipt deficiency judgment, claiming that after applying the
agreement to be an act that “shall” make one liable for proceeds of the foreclosure sale to the total unpaid
estafa. obligations (P200k), the Spouses were still indebted by
 The offense is punished as P83k.
a malum prohibitum regardless of the existence of intent  February 10, 1983: the Spouses filed a case for recovery
or malice. of the sums of P2,584.27 debited from their savings
 A mere failure to deliver the proceeds of the sale or the account passbook and the equivalent amount of $4,220
goods if not sold, constitutes a criminal offense that telegraphic transfer. In addition, they sought $55,258.85
causes prejudice not only to another, but more to the representing the damage they suffered from letters of
public interest. credit left un-negotiated because of Traders’ refusal to
pay the $4,220 demanded by the Spouses.
DISPOSITION: Petition granted. Order granting motion to quash  The cases were consolidated before the RTC of Cebu,
set aside. which ruled in favor of Traders and ordered the Spouses
to pay the deficiency judgment. The trial court found that
despite the Spouses’ insistence that the REM covered
Traders v. Castañares | Nice only a separate loan for P86k, the evidence clearly
December 6, 2010 showed that said REM was constituted as security for all
TRADERS ROYAL BANK, Petitioner, vs. NORBERTO the promissory notes.
CASTAÑARES and MILAGROS CASTAÑARES, Respondents. o No separate demand was made for the amount
VILLARAMA, J. of P86k stated in the REM, as the demand was
limited to the amounts of the promissory notes.
NATURE: Rule 45 Petition The trial court further noted that respondents
SUMMARY: The Spouses Castañares obtained from Traders never questioned the judgment for extrajudicial
various loans and accommodations under several promissory foreclosure, the certificate of sale and the
notes, to secure which they executed REMs over their properties. deficiency in that case.
The loans began to mature. Meanwhile, Traders applied to the  Upon appeal, the CA reversed the RTC and ruled for the
payment of the loans a telegraphic transfer of $4,220 sent to the Spouses. It held that:
account of the Spouses, which they contested. Upon the Spouses’ o the RTC overlooked the fact that there were no
failure to pay, Traders extrajudicially foreclosed on the REMs, and adequate evidence presented to prove that
then filed a complaint to recover the deficiency judgment. The Traders released in full to the Spouses the
Spouses, on the other hand, sued Traders for the recovery of the proceeds of the REM loan;
$4,220. The SC held that Traders could validly apply the amount o where there was failure of the mortgagee bank
as payment for the indebtedness, since the parties had stipulated to deliver the consideration for which the
it in the promissory notes. mortgage was executed, the contract of loan
DOCTRINE: Agreements for compensation of debts or any was invalid and consequently the accessory
obligations when the parties are mutually creditors and debtors contract of mortgage is likewise null and void,
are allowed under NCC 1282 even though not all the legal citing the cases of Filipinas Marble v. IAC and

BANKING: WEEK 5 | 27
Naguiat v. CA;  The subject REMs contained a stipulation10 which is
o in this case, only P35k out of the P86k stated in known as a "dragnet clause" or "blanket mortgage
the REMs was released to the Spouses, and clause" in American jurisprudence that would subsume
hence the REMs was valid only to that extent. all debts of past and future origins.
o the rule is that a pledge, real estate mortgage or  It has been held as a valid and legal undertaking, the
antichresis may exceptionally secure after- amounts specified as consideration in the contracts do
incurred obligations only as long as these debts not limit the amount for which the pledge or mortgage
are accurately described therein, citing Acme stands as security, if from the four corners of the
Shoe v. CA. instrument, the intent to secure future and other
o in this case, neither of the two REMs accurately indebtedness can be gathered.
described or even mentioned the securing of
 A pledge or mortgage given to secure future
future debts or obligations.
advancements is a continuing security and is not
 As to the $4,220 telegraphic transfer, the CA ruled that discharged by the repayment of the amount named in the
sincethe transfer transaction was separate and distinct mortgage until the full amount of all advancements shall
from the contract of loan between the parties, Traders have been paid.
had no authority to convert it into cash since the
participation of the Spouses was necessary to sign and
 A "dragnet clause" operates as a convenience and
indorse the disbursement voucher and check. accommodation to the borrowers as it makes available
o Moreover, Traders did not inform the Spouses additional funds without their having to execute additional
security documents, thereby saving time, travel, loan
of its intention to apply the proceeds of the
closing costs, costs of extra legal services, recording
telegraphic transfer to their loan account and
worse, it did not even present an official receipt fees, et cetera. While a real estate mortgage may
to prove payment. Section 5 of the Foreign exceptionally secure future loans or advancements,
these future debts must be sufficiently described in the
Currency Deposit Act provides that there shall
mortgage contract. An obligation is not secured by a
be no restriction on the withdrawability by the
depositor of his deposit or the transferability of mortgage unless it comes fairly within the terms of the
the same abroad except those arising from mortgage contract.
contract between the depositor and the bank.  A reading of the said stipulation of the REMs shows that
 Hence, this Petition, where Traders argues that: its terms are broad enough to cover packing credits and
o there is a specific stipulation in the REMs that export advances granted by Traders to the Spouses.
the mortgage extends not only to the amounts That the Spouses subsequently availed of letters of credit
specified therein but also to loans or credits and export advances in various amounts as reflected in
subsequently granted. the promissory notes, buttressed the claim of Traders
o the amounts indicated on the REMs are only the that the amounts of P86k and P60k stated in the REMs
maximum sum or "ceiling" which the REM merely represent the maximum total loans which will be
secures. secured by the mortgage. The Spouses even confirmed
o the cases cited by the CA do not support its that the mortgage was constituted for the purpose of
conclusion that the promissory notes were obtaining additional capital as dictated by the needs of
totally unrelated to the REMs: their export business.
 In the Acme case, the pronouncement  Significantly, no complaint was made by the Spouses as
was that the after-incurred obligations to the non-release of P86k and P60k and no demand for
must, at the time they are contracted, the said specific amounts was ever made by Traders.
only be accurately described in a Considering that they deemed it a serious "banking
proper instrument as in the case of a malpractice" for Traders not to release in full the loan
promissory note. (no “therein”) amount stated in the REMs, it can only be inferred that
 In the Filipinas Marble case, there was they themselves understood that the amounts were
misappropriation by some individuals intended merely to fix a ceiling.
of the loan proceeds, so there was  The cases relied upon by the CA are all inapplicable to
failure to deliver all the loan proceeds. the present controversy. The Spouses never denied
 In the Naguiat case, there was receiving the amounts under the promissory notes which
evidence that an agent of the creditor were all covered by the REMs and the very obligations
withheld from the debtor the checks subject of the extrajudicial foreclosure. Having expressly
representing the proceeds of the loan agreed to the terms of the REMs which are phrased to
pending delivery of additional secure all such loans and advancements to be obtained
collateral. from Traders, although the principal amount stated
o it had the right by way of set-off the telegraphic therein were not released at one time and under several,
transfer of $4,220 against the unpaid loan not just one, subsequently issued promissory notes, the
account of the Spouses. Citing BPI v. CA, both Spouses may not be allowed to complain later that the
parties are bound principally as both creditors amounts they received were unrelated to the REMs.
and debtors of each other, the debts consisting ISSUE #2 (MAIN): W/N Traders could apply the $4,220
of a sum of money, both due, liquidated and
demandable, and are not claimed by a third
10 That, for and in consideration of certain loans, overdrafts and other credit
person. accommodations obtained, from the Mortgagee by the Mortgagor and/or SPS.
ISSUE #1: NORBERTO V. CASTAÑARES & MILAGROS M. CASTAÑARES and to secure the
 W/N the REMs secured after-incurred obligations as payment of the same, the principal of all of which is hereby fixed at EIGHTY-SIX
THOUSAND PESOS ONLY – (P86,000.00) Pesos, Philippine Currency, as well as
well (YES) those that the Mortgagee may hereafter extend to the Mortgagor x x x, including
RATIO #1: interest and expenses or any other obligation owing to the Mortgagee, whether direct
or indirect, principal or secondary, as appears in the accounts, books and records of
the Mortgagee x x x.

BANKING: WEEK 5 | 28
telegraphic transfer to the Spouses’ loan obligation (YES) DOCTRINE: A stipulation in the mortgage, extending its scope
RATIO #2: and effect to after-acquired property, is valid and binding
 The CA erred in holding that Traders had no authority to
do so by way of compensation or set off. FACTS:
 The parties themselves stipulated on the manner of
11  April 16, 1930: 2 actions were commenced in CFI Manila
such set off in case of non-payment of the amount due for the purpose of securing from Limjap the
under each promissory note. possession of two drug stores located in the City of
 Agreements for compensation of debts or any Manila, covered by two chattel mortgages executed by
obligations when the parties are mutually creditors the deceased Jose B. Henson in favor of the plaintiffs
and debtors are allowed under NCC 1282 even Torres, et. al.
though not all the legal requisites for legal  1st case: Plaintiffs Torres, et. al. alleged that Jose B.
compensation are present. Voluntary or conventional Henson, in his lifetime, executed in their favor a chattel
compensation is not limited to obligations which are mortgage on his drug store at Nos. 101-103 Calle
not yet due. Rosario, known as Farmacia Henson, to secure a loan of
P7,000, although it was made to appear in the
 The only requirements for conventional compensation instrument that the loan was for P20,000.
are
 2nd case: Plaintiffs Vergara et. al. alleged that they were
o (1) that each of the parties can fully dispose of
the heirs of the late Don Florentino Torres
the credit he seeks to compensate, and
o Jose B. Henson, in his lifetime, executed in
o (2) that they agree to the extinguishment of their
favor of Don Florentino Torres a chattel
mutual credits.
mortgage (same CM) on his three drug stores
 Consequently, Traders validly applied, by way of known as Henson's Pharmacy, Farmacia
compensation, the $4,220 telegraphic transfer remitted Henson and Botica Hensonina, to secure a
by the Spouses’ foreign client through Traders. loan of P50,000, which was later reduced to
DISPOSITION P26,000, and for which, Henson's Pharmacy at
 Petition GRANTED. CA reversed. RTC decision Nos. 71-73 Escolta, remained as the only
reinstated. security by agreement of the parties.
 Both cases: Plaintiffs Torres et.al. alleged that Limjap
violated the terms of the mortgage and that, in
Torres v. Limjap | Kat consequence thereof they became entitled to the
September 21, 1931 possession of the chattels and to foreclose their
G.R. No. 34385 mortgages thereon.
ALEJANDRA TORRES, ET AL., plaintiff-appellees, vs.  Upon the petition of the plaintiffs Torres et. al. and after
FRANCISCO LIMJAP, Special Administrator of the estate of the the filing of the necessary bonds, the court issued in each
deceased Jose B. Henson, defendant-appellant. case an order directing the sheriff of the City of Manila to
G.R. No. 34386 take immediate possession of said drug stores.
SABINA VERGARA VDA. DE TORRES, ET AL., plaintiffs-  Limjap denied generally and specifically the plaintiffs'
appellees, vs. allegations, and set up the following special defenses:
FRANCISCO LIMJAP, Special Administration of the estate of the o (1) That the chattel mortgages are null and
deceased Jose B. Henson, defendant-appellant. void for lack of sufficient particularity in the
JOHNSON, J. description of the property mortgaged; and
o (2) That the chattels which the plaintiffs
SUMMARY: Henson executed in favor of Toreres a chattel sought to recover were not the same
mortgage on his drug stores to secure a loan. Since he allegedly property described in the mortgage.
violated the terms of such loans, the plaintiffs as heirs of Torres o He also filed a counterclaim for damages of
instituted actions to secure possession of the drug stores from P20,000 in the first case and P100,000 in the
Limjap, the special administrator of the estate of deceased second case.
Henson. Torres claims that the CMs are null and void for lack of
 CFI (July 17, 1930): in favor of the plaintiffs and against
sufficient particularity in the description of the property mortgaged
Limjap, confirming the attachment of said drug stores by
and that the chattels sought to be recovered are not the same as
the sheriff of the City of Manila and the delivery thereof to
those described in the CM. The CFI and SC ruled in favor of the
the plaintiffs.
plaintiffs. (1) The provision of the last paragraph of section 7 of Act
o (a) Limjap defaulted in the payment of interest
No. 1508 is not applicable to drug stores, bazaars and all other
on the loans secured by the mortgages, in
stores in the nature of a revolving and floating business. (2) The
violation of the terms thereof;
stipulation in the chattel mortgages in question, extending their
o (b) By reason of said failure said mortgages
effect to after-acquired property, is valid and binding. The lower
became due, and
court committed no error in not permitting the Limjap to introduce
o (c) Pplaintiffs, as mortgagees, were entitled to
evidence tending to show that the goods seized by the sheriff
the possession of the drug stores Farmacia
were in the nature of after-acquired property.
Henson at Nos. 101-103 Calle Rosario and
Henson's Pharmacy at Nos. 71-73 Escolta.
11 In case of non-payment of this note or any installments thereof at maturity, I/We
jointly and severally, agree to pay an additional amount equivalent to two per cent
(2%) per annum of the amount due and demandable as penalty and collection ISSUE 1: W/N the lower court erred in refusing to allow the
charges, in the form of liquidated damages, until fully paid; and the further sum of ten defendant to introduce evidence tending to show that the stock of
per cent (10%) thereof in full, without any deduction, as and for attorney’s fees merchandise found in the two drug stores was not in existence or
whether actually incurred or not, exclusive of costs and judicial/extrajudicial
expenses; moreover, I/We, jointly and severally, further empower and authorize the owned by the mortgagor at the time of the execution of the
TRADERS ROYAL BANK, at its option, and without notice, to set-off or to apply to the mortgages in question.
payment of this note any and all funds, which may be in its hands on deposit or RATIO 1:
otherwise belonging to anyone or all of us, and to hold as security therefor any real or
personal property, which may be in its possession or control by virtue of any other
 Limjap attacks the validity of the stipulation in said
contract. mortgages authorizing the mortgagor to sell the goods

BANKING: WEEK 5 | 29
covered thereby and to replace them with other goods o . . . where the after-acquired property is in
thereafter acquired. He insists that a stipulation renewal of, or in substitution for, goods on hand
authorizing the disposal and substitution of the chattels when the mortgage was executed, or is
mortgaged does not operate to extend the mortgage to purchased with the proceeds of the sale of such
after-acquired property, and that such stipulation is in goods, etc. (11 C.J., p. 436.)
contravention of the express provision of the last  Cobbey, a well-known authority on Chattel Mortgages,
paragraph of section 7 Act No. 1508, which reads as recognizes the validity of stipulations relating to after-
follows: acquired and substituted chattels. He says:
o A chattel mortgage shall be deemed to cover o "A mortgage may, by express stipulations,
only the property described therein and not like be drawn to cover goods put in stock in
or substituted property thereafter acquired by place of others sold out from time to time. A
the mortgagor and placed in the same mortgage may be made to include future
depository as the property originally mortgaged, acquisitions of goods to be added to the
anything in the mortgage to the contrary original stock mortgaged, but the mortgage
notwithstanding. must expressly provide that such future
 In order to give a correct construction to the above- acquisitions shall be held as included in the
quoted provision of our Chattel Mortgage Law (Act No. mortgage. ... Where a mortgage covering the
1508), the spirit and intent of the law must first be stock in trade, furniture, and fixtures in the
ascertained. mortgagor's store provides that "all goods, stock
 When said Act was placed on our statute books by the in trade, furniture, and fixtures hereafter
United States Philippine Commission on July 2, 1906, the purchased by the mortgagor shall be included in
primary aim of that law-making body was undoubtedly to and covered by the mortgage," the mortgage
promote business and trade in these Islands and to give covers all after-acquired property of the classes
impetus to the economic development of the country. mentioned, and, upon foreclosure, such
 Bearing this in mind, it could not have been the intention property may be taken and sold by the
of the Philippine Commission to apply the provision of mortgagee the same as the property in
section 7 above quoted to stores open to the public for possession of the mortgagor at the time the
retail business, where the goods are constantly sold and mortgage was executed." (Vol. I, Cobbey on
substituted with new stock, such as drug stores, grocery Chattel Mortgages, sec. 361, pp. 474, 475.)
stores, dry-goods stores, etc.  In harmony with the foregoing, we are of the opinion
 If said provision were intended to apply to this class of o (a) that the provision of the last paragraph of
business, it would be practically impossible to constitute section 7 of Act No. 1508 is not applicable to
a mortgage on such stores without closing them, contrary drug stores, bazaars and all other stores in the
to the very spirit about a handicap to trade and business, nature of a revolving and floating business;
would restrain the circulation of capital, and would defeat o (b) that the stipulation in the chattel mortgages
the purpose for which the law was enacted, to wit, the in question, extending their effect to after-
promotion of business and the economic development of acquired property, is valid and binding; and
the country. o (c) that the lower court committed no error in not
 In the interpretation and construction of a statute the permitting the Limjap to introduce evidence
intent of the law-maker should always be ascertained tending to show that the goods seized by the
and given effect, and courts will not follow the letter sheriff were in the nature of after-acquired
of a statute when it leads away from the true intent property.
and purpose of the Legislature and to conclusions
inconsistent with the spirit of the Act. ISSUE 2: W/N the lower court erred in failing to make a finding on
 Vol. II Sutherland, Statutory Construction, pp. 693-695 the question of the sufficiency of the description of the chattels
o The Intent of Statute is the Law. — If a statute mortgaged and in failing to hold that the chattel mortgages were
is valid it is to have effect according to the null and void for lack of particularity in the description of the
purpose and intent of the lawmaker. The chattels mortgaged? NO
intent is the vital part, the essence of the RATIO 2:
law, and the primary rule of construction is  We deem it unnecessary to discuss the question therein
to ascertain and give effect to that intent. raised, Limjap is estopped from questioning the validity of
The intention of the legislature in enacting a law these chattel mortgages.
is the law itself, and must be enforced when
ascertained, although it may not be consistent ISSUE 3: W/N the lower court erred in holding that the
with the strict letter of the statute. Courts will not administrator of the deceased is now estopped from contesting the
follow the letter of a statute when it leads away validity of the mortgages in question? NO
from the true intent and purpose of the RATIO 3:
legislature and to conclusions inconsistent with  Limjap is estopped from contenting the validity of the
the general purpose of the act. Intent is the spirit mortgages in question. This feature of the case has been
which gives life to a legislative enactment. In very ably and fully discussed by the lower court in its
construing statutes the proper course is to start decision, and said discussion is made, by reference, a
out and follow the true intent of the legislature part of this opinion.
and to adopt that sense which harmonizes best DISPOSITION: For all of the foregoing, we are of the opinion and
with the content and promotes in the fullest so hold that the judgment appealed from is in accordance with the
manner the apparent policy and objects of the facts and the law, and the same should be and is hereby affirmed,
legislature. with costs. So ordered.
 A stipulation in the mortgage, extending its scope
and effect to after-acquired property, is valid and
binding —

BANKING: WEEK 5 | 30
People’s Bank & Trust Company & Atlantic Gulf and Pacific DAMCO, P2.15 million.
Co. of Manila v. Dahican Lumber Company, et al., (1967)  Later, the Board of Directors of DALCO agreed to the
rescission of the sales of the equipment. Thus, there
Summary: would be no more after acquired properties.
DALCO obtained various loans from the Export-Import Bank and  PBTC, on its own behalf and that of Atlantic, demanded
Atlantic Bank, respectively, both secured under a deed of the cancellation of the agreements. DAMCO and Connell
mortgage. Both deeds contained a clause committing after refused.
acquired properties. Upon DALCO’s failure to pay, the banks  Thus, both PBTC and Atlantic commenced foreclosure
sought to collect, and subsequently foreclosed on the properties in proceedings against DALCO and DAMCO. They prayed
light of the former’s failure to pay. Before the SC, DALCO argues for the issuance of a writ of preliminary injunction to
that the after acquired properties should not be considered as the restrain DALCO from removing its properties.
properties mortgaged because the corporation had decided to  The court appointed a receiver, Evans. He was
rescind the purchases. The SC rejects said claim and rules that subsequently discharged. Connell sought to intervene
the after acquired properties of DALCO were meant to be included alleging ownership of the properties covered by the lien.
in the first and second mortgages under foreclosure. His motion was granted. Evans was reinstated as
receiver.
FACTS:  The court ordered the sale of all the machineries at public
Atlantic Gulf & Pacific Co. (hereinafter, Atlantic) sold and assigned auction. The same were sold for a total consideration of
all its rights in the Dahican Lumber concession to the Dahican P175,000.
Lumber Co. (DALCO) for the total amount of $500,000. Only o Half – represented undebated properties (those
$50,000 was paid. not claimed by DAMCO and Connell);
 To develop the concession, DALCO obtained various o Other half – represented after acquired
loans from petitioner PBTC in the total amount of properties.
$200,000.  Trial court’s order: declared DALCO indebted to PBTC
 It also obtained a loan of $250,000 from the Export- and Atlantic, on one hand, and Connell and DAMCO on
Import Bank. the other.
o Covered by five promissory notes of $50,000 o P87,500 to plaintiffs;
each. o P87,500 to DAMCO and Connell.
o Signatories: DALCO and Dahican American  Supplementary decision: If the balance of the claims are
Lumber Corp. (DAMCO, a stockholder of not paid, the court will cause the sale of the lands subject
DALCO). of the mortgage to satisfy the mortgages.
 By way of security, DALCO, for itself and as trustee of
the Export-Import Bank, executed a deed of mortgage Are the after acquired properties covered by and subject to the
covering five parcels of land in Camarines Norte together deeds of mortgage subject to foreclosure? YES.
with the improvements thereon and all personal  The mortgage contract clearly states that “all property of
properties of the mortgagor located in its place of every nature and description taken in exchange or
business. replacement, as well as all buildings, machineries,
 A second mortgage was executed by DALCO in favor of fixtures, tools, equipments, and other property that the
Atlantic to secure the payment of the balance of the mortgagor may acquire, construct, install, attach; or use
purchase price of the lumber concession ($450,000). in, to, upon, or in connection with the premises—that is,
o Both deeds contained the following clause on its lumber concession—‘shall immediately be and
after acquired properties: become subject to the lien’ of both mortgages in the
same manner and to the same extent as if already
All property of every nature and description taken in exchange or included therein at the time of their execution.
replacement, and all buildings, machinery, fixtures, tools,  The language used by the parties is clear and leaves no
equipment and other property which the Mortgagor may room for interpretation.
hereafter acquire, construct, install, attach, or use in, to, upon, or  The stipulation is logical in cases where the property
in connection with the premises, shall immediately be and mortgaged is perishable or subject to inevitable wear and
become subject to the lien of this mortgage in the same tear.
manner and to the same extent as if now included therein, and the  PURPOSE: to maintain the original value of the
Mortgagor shall from time to time during the existence of this properties given as security.
mortgage furnish the Mortgagee with an accurate inventory of
such substituted and subsequently acquired property. Are the mortgages valid and binding on the properties in spite of
the fact that they were not registered in accordance with the
 As to the $200,000 loan from the Bank, payment was Chattel Mortgage Law? YES.
secured by pledge involving 7,296 shares of DALCO and  DAMCO and Connell: Mortgage not registered in
9,286 shares of DAMCO. accordance with Act No. 1508. Properties not particularly
 DALCO and DAMCO failed to pay the fifth promissory described. Stipulations in the contract merely partake of
note due to the Export-Import Bank. PBTC paid the same an “agreement to give a lien” over the after acquired
and the Export-Import Bank assigned its credit to PBTC. property.
 After the execution of the deeds of mortgage, DALCO  Court: the stipulations of the contract are clear. The after
purchased various machineries, equipment, spare parts, acquired properties “shall immediately be and become
and supplies in addition to, or in replacement of some subject to the lien of this mortgage in the same manner
already owned and used by it. and to the same extent as if now included therein.”
o PBTC asked for the list of the new equipment,  Act No. 1508 does not apply. The mortgages were
but DALCO refused. executed when the Old Civil Code was still in force.
o The purchase of the machinery caused DALCO Besides, the equipment in this case is considered real
to be indebted to the Connell Bros. Company property under Art. 334, now 415 of the Civil Code.
(Connell) in the amount of P452,860, and to

BANKING: WEEK 5 | 31
o They are machinery, receptacles, instruments or Belgian vs. Magallanes | Erika
replacements intended by the owner of the November 24, 1926
tenement for an industry or works which may be THE BELGIAN CATHOLIC MISSIONARIES, INC., plaintiff-
carried on in a building or on a piece of land, appellee,
and shall tend directly to meet the needs of the vs.
said industry or works. MAGALLANES PRESS, INC., ET AL., defendants.
 Since the after acquired properties in this case were JOSE MARIA MEMIJE, appellant.
immobilized, they became real property, with the VILLA-REAL, J.
inevitable result that the real estate mortgage did not NATURE: Appeal from CFI of Manila
have to be registered a second time in order to bind such SUMMARY: Defendant Memije was the transferee of J.P.
property. Heilbronn’s mortgage credit against Magallanes Press, Inc.
 DAMCO and Connell, citing Davao Sawmill, make much Another creditor of Magallanes Press, plaintiff Belgian Catholic
of the fact that the land wherein the properties are Missionaries, Inc, filed a complaint to prevent Memije from
located did not exclusively belong to DALCO. foreclosing his chattel mortgage on Magallanes Press’ properties
o Facts are different. In Davao Sawmill, the when the loan became due and unpaid. Previously, a fire
parties repeatedly treated the property involved destroyed the mortgaged properties. CFI granted the complaint of
as personal property, even subjecting the same Belgian Missionaries, ruling among others that the Belgian
to a chattel mortgage. Missionaries has the right to the insurance proceeds. SC modified,
o Here, the parties characterized the machinery ruling that Memije has a right to the said proceeds up to the
as real property by agreeing that they shall be amount of his credit, P8,280.90. However, as to the increase of
subjected to the lien of the real estate the amount and the extension of the mortgage Memije granted to
mortgages. Magallanes Press, Memije only has the rights of a regular creditor,
the same being prejudicial to Belgian Missionaries’ rights.
What is the effect of the rescission of the sales to DALCO by DOCTRINE: Where the statute provides that the parties to a
DAMCO and Connell? Nothing. chattel mortgage must make oath that the debt is a just debt,
 DAMCO and Connell: As unpaid sellers, their lien is honestly due and owing from the mortgagor to the mortgagee, it is
superior to that of the mortgage. obvious that a valid mortgage cannot be made to secure a debt to
 Court: The auditor’s report shows that all the items be thereafter contacted.
subject of the mortgage were not supplied by the FACTS:
defendants.  Dec 1, 1921: Magallanes Press, through its general
 DAMCO was a mere stockholder of DALCO. On the manager H. Camena, executed a promissory note in
other hand, Connell was its general agent, charging 5% favor of J. P. Heilbronn & Co., Inc., for P3,472.92
service charge on top of the purchase price. o with interest at 10% per annum, payable at
o At most, the defendants can be considered P250 a month, plus the interest earned on the
financiers, who do not hold liens superior to that unpaid balance, until the whole amount is paid,
constituted by virtue of the deeds of mortgage. the first payment to be made on Jan 1, 1922,
 Both defendants had known and admitted from the with the condition that upon the failure to pay
beginning that the after acquired properties of DALCO any monthly installment or the interest, the
were meant to be included in the first and second whole amount of the indebtedness shall become
mortgages under foreclosure. due, and the maker shall pay an additional sum
 That Belden, of Atlantic, consented to the rescission is of of 15% of the total balance, for attorney's fee
no moment. He, as board member of DALCO, objected and expenses of collection, forfeiting all right of
to the resolution passed by the Board. exemption.
 Same date: Magallanes Press executed another PN in
Was the action to foreclose the mortgages premature? NO. favor of J. P. Heilbronn (same terms except this is for
 Promissory note was due on April 1, but foreclosure filed P10,715.77, with 12% interest, payable at P500 a month)
on Feb. 12.  To secure the payment of said promissory notes,
 DALCO was insolvent. Camena (as GM of Magallanes Press) executed a
o Chairman of the Board: DALCO was “without chattel mortgage on all its printing machinery and its
funds, nether does it expect to have any funds accessories in favor of J. P. Heilbronn
in the foreseeable future.”  June 19, 1922: Magallanes Press Co., Inc., successor of
 Under Art. 1198, the debtor shall lose every right to make Magallanes Press, thru its duly authorized president, E.
use of the period when after the obligation has been F. Clemente, executed a chattel mortgage on the same
contracted, he becomes insolvent, unless he gives a printing machinery and its accessories in favor of the
guaranty or security for the debt. Belgian Catholic Missionaries Co., Inc. to secure the
 The guaranty was plainly inadequate because the debt payment of a loan it obtained from Belgian
already reached P1.2 million, exclusive of interests, while Missionaries of P30,500, with 12% p.a. interest, the
the chattels only sold for P175,000. Connell, however, duration of the mortgage loan being 1 year from the
was claiming that the aggregate price of the after execution of the mortgage deed
acquired properties was P1.6 million.  Dec 1922: defendant Jose Ma. Memije made a loan of
P2K to Clemente (Pres. of Magallanes Press, Inc) which
How should the proceeds of the foreclosure sale be divided? All was paid on account of the indebtedness of Magallanes
to plaintiffs. Press to J. P. Heilbronn & Co., Inc., together with P1,641
 As already stated, defendants do not even have liens in which A. F. Mendoza owed said Clemente.
their favor over the properties.  Feb 21, 1923: a writ of attachment was issued in a civil
 As to damages, claim should be remanded to the court a case in CFI Manila (Jose Ma. Cavanna vs. Magallanes
quo. Press Co., Inc.). Defendant Memije filed an intervention.
DISPOSITION: Judgment modified.

BANKING: WEEK 5 | 32
 All the PNs executed by Magallanes Press in favor of J. credit, without the knowledge or consent of any other
P. Heilbronn became overdue for non-payment of the mortgagee, inasmuch as whoever acquired it, would
installments as well as the respective chattel mortgage have exactly the same status as the transferor with
 J. P. Heilbronn then transferred all its mortgage the same rights and obligations.
credit against Magallanes Press to Memije in  The fact, therefore, that Magallanes Press Co., Inc., had
consideration of P8,280.90, the balance of said mortgage consented to the transfer of the mortgage credit of J. P.
credit. Heilbronn does not constitute a fraud that can vitiate the
 Mar 14, 1923: Clemente, as manager of the Magallanes said transfer, inasmuch as the order of preference of the
Press Co., Inc., executed a deed in favor of Memije mortgages has not been altered, and its allegations does
where the chattel mortgage which was given by not constitute a cause of action to annul the said transfer.
Magallanes Press in favor of J. P. Heilbronn (and later
transferred to Memije), was made to cover an additional Yes fraud as to increase and extension
loan of P5,895.79, which included the sum of P2K which  The increase made by Memije in the mortgage credit
Memije had advanced Clemente in Dec 1922. acquired by him from J.P. Heilbronn, and the extension
 Apr 21, 1923: a fire occurred in the building where the made by Magallanes Press, Inc., of the mortgage to said
printing machinery, accessories and other personal additional credit without the knowledge or consent of
property of Magallanes Press Co., Inc., were located and Belgian Missionaries, Inc, as second mortgagee,
which were covered by said chattel mortgages. prejudices the credit of the latter, inasmuch as the
 The property was insured. The insurance companies security for the payment of said credit was reduced
were disposed to pay but due to the issuance of the as to it, and, therefore, constitute a fraud that vitiates
above-mentioned WPI, payment could not be made. the contract of extension of the mortgage evidence by
 May 9, 1923: Memije having attempted to foreclose the the deed Exhibit D, rendering it void.
mortgage, Belgian Catholic Missionaries Co., Inc., filed a
complaint, with a petition for a writ of preliminary  Thus, the facts alleged in par. 9 of the complaint are
injunction against the sheriff, in whose hands the sufficient to constitute a cause of action of nullity
foreclosure of the mortgage was placed.
 May 10, 1923: WPI was issued upon the filing of a P15K ISSUE #2: W/N CFI erred in giving the Belgian Missionaries
bond, there being no person more interested in the possession of the property mortgaged to Memije (NO)
conservation and custody of the property covered by the RATIO #2:
mortgage than Belgian Missionaries  Contrary to the contention of Memije, this case is not one
 Thus, Memije was unable to collect the amount of the of replevin but simply a proceeding instituted by Belgian
insurance policies, and when he was summoned under Missionaries, Inc for the deposit of the property in
the complaint on May 14, 1923, he made demand on litigation, upon the filing of a bond
Magallanes Press Co., Inc., for the payment of his  Belgian Missionaries, acting as a receiver by authority of
mortgage credit the court, being the person most interested in the
 Clemente of Magallaness Press, Inc permitted the conservation and care of the same
secretary to place the property in the hands of Memije in
order that the same might be sold, but the sale could not ISSUE #3 (ON TOPIC): Who has preference over the insurance
be consummated due to the issuance of the WPI proceeds between Belgian Missionaries and Memije? (Memije,
 CFI of Manila: Exhibits C and D (the mortgage deeds in only up to P8,280.90)
question), in so far as they prejudice the rights of Belgian RATIO #3:
Missionaries, Inc, are null and void  J. P. Heilbronn & Co., Inc., at the time of the transfer of
o The WPI issued against Memije is final and this mortgage rights to Memije, had a preferential right
absolute over that of the Belgian Missionaries for the remainder of
o Belgian Missionaries, Inc to recover the amount the amount of the mortgage credit, that is, P8,280.90.
of the fire insurance policies; Magallanes Press  Belgian Missionaries had a preferential right to the rest
Inc is ordered to endorse said insurance policies of the value of the mortgaged property after deducting
to Belgian Missionaries, Inc the remaining mortgage credit of J. P. Heilbronn
 The increase of P5,895.59 made by Memije in favor of
ISSUE #1: W/N CFI erred in overruling the demurrer filed by Magallanes Press Co., Inc., and the extension of the
Memije (NO) mortgage thereto, are not only subordinate to the
RATIO #1: mortgage credit of Belgian Missionaries, Inc, being
No fraud as to transfer subsequent in time and in registration, but said increase
 Memije: one of the grounds of said demurrer was that in the security is also void.
the complaint did not allege facts sufficient to constitute a  The increase of the mortgage security becomes a new
cause of action against Memije mortgage in itself, inasmuch as the original mortgage did
o notwithstanding the fact that the complaint was not contain any stipulation in regard to the increase of the
instituted to annul the document of transfer of mortgage credit, and even if it did, said increase would
the mortgage credit Exhibit C, it was not alleged take effect only from the date of the increase.
that Memije had any intention to defraud the  A mortgage that contains a stipulation in regard to future
interests of Belgian Missionaries, Inc, which was advances in the credit will take effect only from the date
absolutely impossible due to the nature of the the same are made and not from the date of the
transaction and the preferential character of the mortgage
mortgage credit of J. P. Heilbronn  In accordance with Sec 5 of Act No. 1508 or the
 SC: Belgian Missionaries, Inc having known of the Chattel Mortgage Law: [the parties to the original deeds
existence of a chattel mortgage in favor of J. P. swore that the same was mortgaged] "to secure the
Heilbronn, the latter, either as the 1st or as the 2nd obligations specified therein and for no other purpose."
mortgage, had a perfect right to transfer its mortgage

BANKING: WEEK 5 | 33
 Neither the increase in question, nor the extension of o "(c) If the MORTGAGOR, his heirs, executors or
the mortgage to secure the payment of the same is administrators shall well and truly perform the full
specified in the deed, consequently said extension is obligation or obligations above-stated according to
void. "Where the statute provides that the parties to a the terms thereof, then this mortgage shall be null
chattel mortgage must make oath that the debt is a just and void. x x x.
debt, honestly due and owing from the mortgagor to the o "In case the MORTGAGOR executes subsequent
mortgagee, it is obvious that a valid mortgage cannot be promissory note or notes either as a renewal of the
made to secure a debt to be thereafter contacted." former note, as an extension thereof, or as a new
 THUS: loan, or is given any other kind of accommodations
o (a) Memije has a preferential right to the value such as overdrafts, letters of credit, acceptances and
of the chattels mortgage and the amount of the bills of exchange, releases of import shipments on
insurance policies up to the sum of P8,280.90; Trust Receipts, etc., this mortgage shall also stand
o (b) Belgian Missionaries, Inc has a right to the as security for the payment of the said promissory
remainder of the value of said chattels and the note or notes and/or accommodations without the
insurance policies up to the amount of P30,500, necessity of executing a new contract and this
after deducting the preferential credit of Memije; mortgage shall have the same force and effect as if
o (c) That as to the increase of P5,895.59, the the said promissory note or notes and/or
right of defendant Memije is that of an ordinary accommodations were existing on the date thereof.
creditor. This mortgage shall also stand as security for said
obligations and any and all other obligations of the
Re: Memije’s claim for damages MORTGAGOR to the MORTGAGEE of whatever
 Memije has a right to interest at 12% on the P8,280.90 kind and nature, whether such obligations have been
the amount of the mortgage credit acquired by him from contracted before, during or after the constitution of
J. P. Heilbronn from Feb 26, 1923, the date of the this mortgage."
acquisition until fully paid.  The loan was paid by Acme.
o It then secured more accomodations from the bank,
DISPOSITION: Judgment revoked and another entered declaring totaling Php 2.7M, also paid on their due dates.
all the mortgages overdue. The mortgage credit of Memije o It then secured another loan, Php 1M, covered by
preferential over Belgian Missionaries’ up to P8,280.90, 12% p.a. four promissory notes for Php 250K each.
interest from Feb 26, 1923, until fully paid; the mortgage credit of  The latest loan was not settled at maturity, prompting
Belgian Missionaries for P30,500 with 12% p.a. interest from June Producers Bank to extrajudicially forclosure of the chattel
19, 1922, until fully paid, plusP3K for attorney's fees, over the mortgage above-cited.
additional credit of Memije for P5,895.59; and ordering the o Acme filed an action for injunction with damages and
foreclosure of the said mortgages, to the proceeds of which shall prayer for a writ of preliminary injunction with the
be added the amount of the insurance policies and the above- RTC.
mentioned credits in the order of preference above established, o RTC dimissed the complaint and ordered the
without special pronouncement as to costs. extrajudicial foreclosure of the chattel mortgage.
 Acme appealed to the CA which affirmed, in all respects, the
RTC decision.
ACME Shoe, Rubber and Plastic vs. CA || Celine  Hence, this instant petition.
ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA
PAC, petitioners, vs. HON. COURT OF APPEALS, Issue #1: Would it be valid and effective to have a clause in a
PRODUCERS BANK OF THE PHILIPPINES and REGIONAL chattel mortgage that purports to likewise extend its
SHERIFF OF CALOOCAN CITY, respondents. coverage to obligations yet to be contracted or incurred? -
August 22, 1996 NO

NATURE: Petition for review on certiorari.  Preliminaries:


o Contracts of security are either personal or real. In
SUMMARY: ACME applied for a 3M loan with Producers Bank of contracts of personal security, such as a guaranty or
the Philippines, secured by a Chattel Mortgage. Such loan was a suretyship, the faithful performance of the
fully paid, but ACME applied for 2 more loans subsequently. It obligation by the principal debtor is secured by the
failed to pay on its latest loan, and Producers Bank tried to personal commitment of another (the guarantor or
foreclose on the chattel mortgage to satisfy ACME’s default on its surety). In contracts of real security, such as a
latest loan. SC said that Chattel Mortgages cannot extend to loan pledge, a mortgage or an antichresis, that fulfillment
subsequently entered into by the same parties, as the Chattel is secured by an encumbrance of property.
Mortgage Law expressly requires that the Chattel Mortgage to be  In chattel mortgage, by the execution of the
executed contain an affidavit of good faith which says that the corresponding deed substantially in the
mortgage is made for the purpose of securing the obligation form prescribed by law
specified in the conditions thereof, and for no other purpose, and o This is upon the essential condition that if the
that the same is a valid and just obligation, and one not entered principal obligation becomes due and the debtor
into the for the purpose of fraud. defaults, then the property encumbered can be
alienated for the payment of the obligation, but that
 Chua Pac is the president and general manager of Acme should the obligation be duly paid, then the contract
Shoe, Rubber and Plastic Company. is automatically extinguished proceeding from the
o He executed on June 27, 1978 a chattel mortgage in accessory character of the agreement.
favor of Producers Bank of the Philippines.  As the law so puts it, once the obligation is
o Secured a corporate loan of 3M Php. complied with, then the contract of security
 The Chattel Mortgage had the following provision: becomes, ipso facto, null and void.

BANKING: WEEK 5 | 34
o While a pledge, real estate mortgage, or appropriate legal recourse by private respondent as may still be
antichresis may exceptionally secure after- warranted as an unsecured creditor. No costs.
incurred obligations so long as these future
debts are accurately described,[10] a chattel
mortgage, however, can only cover obligations Ong Liong Tiak v. Luneta Motor Co. | Gab
existing at the time the mortgage is constituted. November 7, 1938
 Although a promise expressed in a chattel ONG LIONG TIAK, Plaintiff-Appellant, v. LUNETA MOTOR
mortgage to include debts that are yet to be COMPANY and the SHERIFF OF MANILA, Defendant-
contracted can be a binding commitment Appellees
that can be compelled upon, the security Diaz, J.
itself, however, does not come into
existence or arise until after a chattel NATURE: Appeal
mortgage agreement covering the newly SUMMARY: S. Arellano Choa Siong purchased a Chrysler Sedan
contracted debt is executed either by from the Luneta Motor Co. He executed 18 promissory notes in
concluding a fresh chattel mortgage or by favor of Luneta Motor. To secure the payment of said 18
amending the old contract conformably with promissory notes, the payment of articles he might take from
the form prescribed by the Chattel Luneta Motor, and to also secure the payment of any other
Mortgage Law. obligation that he might contract with it, he constituted a chattel
 Refusal on the part of the borrower to mortgage on the Chrysler Sedan. Choa Siong then acted as a
execute the agreement so as to cover the surety up to P300 on Jeronimo Angeles’ indebtedness to
after-incurred obligation can constitute an Macondray & Co. Macondray later assigned to Luneta Motor
act of default on the part of the borrower of Macondray’s credit against Choa Siong. After the payments Choa
the financing agreement whereon the Siong had made on Angeles’ account, the balance against Choa
promise is written but, of course, the Siong was P100. Choa Siong then made the last payment of the
remedy of foreclosure can only cover the 18 promissory notes which he had executed in favor of Luneta
debts extant at the time of constitution and Motor. However, as there was still a balance against Choa Siong
during the life of the chattel mortgage on Angeles’ indebtedness, the chattel mortgage on the Chrysler
sought to be foreclosed. Sedan was not cancelled. Luneta Motor then foreclosed the
o One of the requisites under Section 5 of the chattel mortgage, causing the Sheriff of Manila to attach the
Mortgage Law is an affidavit of good faith, which Chrysler Sedan. Choa Siong transferred the ownership of the
says that “the mortgage is made for the purpose of Chrysler Sedan to Ong Liong Tiak. Ong Liong Tiak later filed a
securing the obligation specified in the conditions complaint with the CFI to set aside the attachment on the Chrysler
thereof, and for no other purpose, and that the same Sedan, which the CFI dismissed. After appealing to the SC, the
is a valid and just obligation, and one not entered SC held that the Chrysler Sedan was still encumbered when it was
into the for the purpose of fraud.” sold by Choa Siong to Ong Liong Tiak, affirming the CFI’s
 It makes it obvious that the debt referred to decision.
in the law is a current one, and not one DOCTRINE (related to topic):
merely contemplated.  Instruments of mortgage are binding, while they
 In the chattel mortgage involved in this case, he only subsist, not only upon the parties executing them, but
obligation specified in the chattel mortgage contract was the also upon those who later, by purchase or otherwise,
P3,000,000.00 loan which petitioner corporation later fully acquire the properties referred to in the mortgage.
paid. By virtue of Section 3 of the Chattel Mortgage Law, the o The right of those who acquire said
payment of the obligation automatically rendered the chattel properties should not and cannot be
mortgage void or terminated. superior to that of the creditor who has in his
o Since the 1978 chattel mortgage had ceased to exist favor an instrument of mortgage executed
coincidentally with the full payment of the with the formalities of the law, in good faith,
P3,000,000.00 loan, there no longer was any chattel and without the least indication of fraud.
mortgage that could cover the new loans that were FACTS:
concluded thereafter.  August 21, 1933: Choa Siong, the registered owner of
the Chrysler Sedan, transferred the ownership thereof
Issue #2: Should the case be remanded to the RTC for a to Ong Liong Tiak, to which effect Choa Siong
specific finding on the amount of damages ACME has endorsed his certificate of registration in favor of
allegedly sustained? – NO. Ong Liong Tiak.

 Such a prayer was not reflected on its complaint, where is Before the transfer of ownership
merely asked for the amount of Php 3M by way of moral  June 11, 1931: S. Arellano Choa Siong purchased a
damages. Chrysler Sedan from the Luneta Motor Co.
 But the SC says that mental suffering can be experienced
 However, instead of paying the price of the car (P1,800),
only by one having a nervous system and it flows from real Choa Siong executed 18 promissory notes for P100
ills, sorrows, and griefs of life - all of which cannot be suffered each in favor of Luneta Motor.
by respondent bank as an artificial person o To secure the payment of said 18 promissory
o While Chua Pac is included in the case, the notes, the payment of articles he might take
complaint, however, clearly states that he has from Luneta Motor, and to also secure the
merely been so named as a party payment of any other obligation that he
in representation of petitioner corporation. might contract with it, he constituted a
chattel mortgage on the Chrysler Sedan:
WHEREFORE, the questioned decisions of the appellate court
and the lower court are set aside without prejudice to the
“…it being expressly agreed…that this mortgage shall also as

BANKING: WEEK 5 | 35
security for the payment to the said mortgagee in addition to the with the formalities of the law, in good faith,
aforesaid notes of the purchase price or cost of any and all and without the least indication of fraud.
gasoline, tires, automobile accessories or parts, and repairs  The aforementioned principle is all the more true in at
furnished or made by the said mortgagee at any time up to the bar because, when Ong Liong Tiak purchased the
date this mortgage is completely satisfied as and when the same Chrysler Sedan, he knew or, at least, it is presumed
becomes due, and of any other indebtedness of the mortgagor in that he knew, by the mere fact that the instrument of
favor of the mortgagee incurred in any other manner whatever.” mortgage was registered in the Office of the Register
 Jeronimo Angeles obtained from Macondray & Co., of Deeds of Manila that the car was subject to a
Inc. (Macondray) paints and other merchandise mortgage lien.
totaling P407. o In purchasing it, with full knowledge that
o For the payment of this amount, Choa Siong such circumstances existed, it should be
acted as surety up to P300. presumed that he did so, very much willing to
 Choa Siong later paid P160 on account for Angeles’ respect the lien existing thereon since he
indebtedness, leaving a balance against him of P140. should not have expected that with the
 Macondray then assigned to Luneta Motor purchase, he would acquire a better right than
Macondray’s credit against Choa Siong, who offered that which the vendor then had.
no objection thereto. ISSUE #3:
 Choa Siong later paid P40 on account for Angeles’  W/N the chattel mortgage over the Chrysler Sedan
indebtedness, leaving a balance of P100. was extinguished upon payment of the last
promissory note (NO)
 About April 4, 1933: Choa Siong then made the last
RATIO #3:
payment of the 18 promissory notes which he had
executed in favor of Luneta Motor.  (No discussion by the SC)
o However, as there still existed in Luneta ISSUE #4:
Motor’s favor a credit of P100 for Angeles’  W/N the Chrysler Sedan was, at the time of the levy
indebtedness, which was under the personal on execution by the Sheriff of Manila, the exclusive
guaranty of Choa Siong, Luneta Motor property of Ong Liong Tiak (NO)
refused to cancel the chattel mortgage. RATIO #4:
 Luneta Motor foreclosed the chattel mortgage,  (No discussion by the SC)
causing the Sheriff of Manila to attach the Chrysler
Sedan. (Gab: I’m not sure if this was really before or after DISPOSITION
the transfer of the car’s ownership from Choa Siong to  The CFI’s decision was affirmed, with costs to Ong Liong
Ong Liong Tiak.) Tiak.

Back to the present


 Ong Liong Tiak filed a complaint with the Manila CFI Prudential v Alviar| CM
to set aside the attachment on the Chrysler Sedan. July 28, 2005
o Ong Liong Tiak sought an injunction against PRUDENTIAL BANK, Petitioner,
Luneta Motor and a judgment in his favor for v. AUSTRIA-MARTINEZ,DON A. ALVIAR and GEORGIA B.
damages of P500, plus the costs. ALVIAR,Respondents.
 The CFI overruled and dismissed Ong Liong Tiak’s TINGA, J.:
complaint. Summary: Sps Alviar obtained a loan with Prudential Bank for
250k secured by a REM with a dragnet clause. Another PN was
 Ong Liong Tiak then filed the present appeal with the SC.
issued secured by a hold-out on the FCSA, and another PN for
ISSUE #1:
545k secured by a Clean-Phase out TOD. Sps paid 2M to be
 W/N the indebtedness of Angeles to Macondray was applied to the loan of G.B. Alviar and released the REM.
also guaranteed by the chattel mortgage executed by Prudential scheduled the foreclosure of the property of the Sps.
Choa Siong in favor of Luneta Motor (YES) Sps averred that there had been a 2M payment on the loan
RATIO #1: covered by the REM and that the other unpaid loans are not
 (No discussion by the SC) secured by the REM. The bank says the REM applies to the other
ISSUE #2 (MAIN): loans by virtue of the dragnet clause. SC held that the REM does
 W/N the Chrysler Sedan was still encumbered at the not cover the other loans as these were secured by other
time it was sold by Choa Siong to Ong Liong Tiak securities.
(YES) Doctrine:
RATIO #2:  A mortgage with such a clause will not secure a note that
 The CFI was right in holding that, by interpreting the expresses on its face that it is otherwise secured as to its
terms of the chattel mortgage, the Chrysler Sedan still entirety, at least to anything other than a deficiency after
remained subject to the lien stated in the chattel exhausting the security specified therein, such deficiency
mortgage inasmuch as the account, which Choa being an indebtedness within the meaning of the
Siong accepted and bound himself to pay for mortgage, in the absence of a special contract excluding
Angeles, had not been completely settled. it from the arrangement.
 Instruments of mortgage are binding, while they  The parties having conformed to the blanket mortgage
subsist, not only upon the parties executing them, but clause or dragnet clause, it is reasonable to conclude
also upon those who later, by purchase or otherwise, that they also agreed to an implied understanding that
acquire the properties referred to in the mortgage. subsequent loans need not be secured by other
o The right of those who acquire said securities, as the subsequent loans will be secured by
properties should not and cannot be the first mortgage. In other words, the sufficiency of the
superior to that of the creditor who has in his first security is a corollary component of the dragnet
favor an instrument of mortgage executed clause. But of course, there is no prohibition, as in the

BANKING: WEEK 5 | 36
mortgage contract in issue, against contractually  Prudential averred that the payment of P2,000,000.00
requiring other securities for the subsequent loans. Thus, made on 6 March 1979 was not a payment made by
when the mortgagor takes another loan for which another respondents, but by G.B. Alviar Realty and Development
security was given it could not be inferred that such loan Inc., on separate loan and mortgage.
was made in reliance solely on the original security with  TC dismissed the complaint and ordered the Sheriff to
the dragnet clause, but rather, on the new security given. proceed with the extra-judicial foreclosure.
This is the reliance on the security test.  TC reversed on MR. It found that only the P250,000.00
 A mortgage containing a dragnet clause will not be loan is secured by the mortgage on the land covered by
extended to cover future advances unless the document TCT No. 438157. On the other hand, the P382,680.83
evidencing the subsequent advance refers to the loan is secured by the foreign currency deposit account
mortgage as providing security therefor. of Don A. Alviar, while the P545,000.00 obligation was an
FACTS: unsecured loan, being a mere conversion of the
 Respondents, spouses Don A. Alviar and Georgia B. temporary overdraft of Donalco Trading, Inc. in
Alviar, are the registered owners of a parcel of land in compliance with a Central Bank circular.
San Juan, Metro Manila, covered by TCT No. 438157. o The blanket mortgage clause relied upon by
 On 10 July 1975, they executed a deed of real estate petitioner applies only to future loans obtained
mortgage in favor of petitioner Prudential Bank to secure by the mortgagors, and not by parties other than
the payment of a loan worth P250,000.00. and the said mortgagors, such as Donalco Trading,
annotated at the back of the TCT. Inc., for which respondents merely signed as
 On 4 August 1975, respondents executed the officers thereof.
corresponding promissory note, PN BD#75/C-252 and  CA affirmed.
that the note is secured by a real estate mortgage  The Court of Appeals, however, found that the Sps have
 22 October 1976, Don Alviar executed another PN not yet paid the P250,000.00 covered by PN BD#75/C-
BD#76/C-345 for P2,640,000.00, secured by D/A 252 since the payment of P2,000,000.00 adverted to by
SFDX #129, signifying that the loan was secured by a the Sps was issued for the obligations of G.B. Alviar
hold-out on the mortgagors foreign currency savings Realty and Development, Inc.
account ISSUE/ HELD: WON the blanket mortgage clause applies even to
 On 27 December 1976, respondent spouses executed for subsequent advancements (NO, if there are new securities)
Donalco Trading, Inc., of which the husband and wife RATIO:
were President and Chairman of the Board and Vice  Prudential maintains that the blanket mortgage clause or
President, respectively, PN BD#76/C-430 the dragnet clause in the real estate mortgage expressly
covering P545,000.000. As provided in the note, the covers not only theP250,000.00 under PN BD#75/C-252,
loan is secured by Clean-Phase out TOD CA 3923, but also the two other promissory notes included in the
which means that the temporary overdraft incurred by application for extrajudicial foreclosure of real estate
Donalco Trading, Inc. with petitioner is to be converted mortgage.
into an ordinary loan in compliance with a Central Bank o Although PN BD#76/C-345 was specifically
circular directing the discontinuance of overdrafts. secured by a foreign currency deposit account,
o On 16 March 1977, Prudential Bank wrote petitioner states that there is no law or rule
Donalco Trading, Inc., informing the latter of its which prohibits an obligation from being covered
approval of a straight loan of P545,000.00, by more than one security.
the proceeds of which shall be used to liquidate o As for PN BD#76/C-345, which the CA found to
the outstanding loan of P545,000.00 TOD. The be exclusively secured by the Clean-Phase
letter likewise mentioned that the securities for outTOD 3923, petitioner posits that such
the loan were the deed of assignment on two security is not exclusive, as the dragnet clause
promissory notes executed by Bancom of the real estate mortgage covers all the
Realty Corporation with Deed of Guarantee obligations of the respondents.
in favor of A.U. Valencia and Co. and the o The Sps attempt to evade foreclosure by the
chattel mortgage on various heavy and expediency of stating that the promissory notes
transportation equipment. were executed by them not in their personal
 On 06 March 1979, Sps paid Prudential P2,M, to be capacity but as corporate officers.
applied to the obligations of G.B. Alviar Realty and  SPS: the dragnet clause cannot be applied to the
Development, Inc. and for the release of the real estate subsequent loans extended to Don Alviar and Donalco
mortgage for the P450,000.00 loan covering the two (2) Trading, Inc. since these loans are covered by separate
lots in Greenhills. The payment was acknowledged and promissory notes that expressly provide for a different
the mortgage released. form of security.
 On 15 January 1980, Prudential moved for the NO NEED TO PIERCE VEIL OF CORPORATE FICTION
extrajudicial foreclosure of the mortgage on the  At this point, it is important to note that one of the loans
property covered by TCT No. 438157. Per petitioners sought to be included in the blanket mortgage clause was
computation, respondents had the total obligation obtained by respondents for Donalco Trading, Inc.
of P1,608,256.68, covering the three (3) promissory Indeed, PN BD#76/C-430 was executed by respondents
notes: PN BD#75/C-252 for P250,000.00, PN BD#76/C- on behalf of Donalco Trading, Inc. and not in their
345 for P382,680.83, and PN BD#76/C-340 for personal capacity. Petitioner asks the Court to pierce the
P545,000.00, plus assessed past due interests and veil of corporate fiction
penalty charges.  The mortgage contract states that the mortgage covers
 The Sps. filed a complaint for damages with a prayer for as well as those that the Mortgagee may extend to the
the issuance of a WPI, claiming that they have paid their Mortgagor and/or DEBTOR, including interest and
principal loan secured by the mortgaged property, and expenses or any other obligation owing to the Mortgagee,
thus the mortgage should not be foreclosed. whether direct or indirect, principal or secondary.

BANKING: WEEK 5 | 37
 Well-settled is the rule that a corporation has a  Thus, contrary to the finding of the Court of Appeals,
personality separate and distinct from that of its officers petitioner and respondents intended the real estate
and stockholders. However, the legal fiction that a mortgage to secure not only theP250,000.00 loan from
corporation has a personality separate and distinct from the petitioner, but also future credit facilities and
stockholders and members may be disregarded if it is advancements that may be obtained by the respondents.
used as a means to perpetuate fraud or an illegal act or The terms of the above provision being clear and
as a vehicle for the evasion of an existing obligation, the unambiguous, there is neither need nor excuse to
circumvention of statutes, or to confuse legitimate issues. construe it otherwise.
 CAB: PN BD#76/C-430, being an obligation of Donalco  In the case at bar, the subsequent loans obtained by
Trading, Inc., and not of the respondents, is not within the respondents were secured by other securities, thus: PN
contemplation of the blanket mortgage clause. Moreover, BD#76/C-345, executed by Don Alviar was secured by a
Prudential is unable to show that the Sps are hiding hold-out on his foreign currency savings account, while
behind the corporate structure to evade payment of their PN BD#76/C-430, executed by respondents for Donalco
obligations. Save for the notation in the promissory note Trading, Inc., was secured by Clean-Phase out TOD CA
that the loan was for house construction and personal 3923 and eventually by a deed of assignment on two
consumption, there is no proof showing that the loan was promissory notes executed by Bancom Realty
indeed for respondents personal consumption. Corporation with Deed of Guarantee in favor of A.U.
DRAGNET CLAUSE Valencia and Co., and by a chattel mortgage on various
 A blanket mortgage clause, also known as a dragnet heavy and transportation equipment.
clause in American jurisprudence, is one which is  Under American jurisprudence, two schools of thought
specifically phrased to subsume all debts of past or future have emerged on this question.
origins. Such clauses are carefully scrutinized and strictly o One school advocates that a dragnet clause so
construed. worded as to be broad enough to cover all other
 Mortgages of this character enable the parties to provide debts in addition to the one specifically secured
continuous dealings, the nature or extent of which may will be construed to cover a different debt,
not be known or anticipated at the time, and they avoid although such other debt is secured by another
the expense and inconvenience of executing a new mortgage.
security on each new transaction. A dragnet clause o The contrary thinking maintains that a mortgage
operates as a convenience and accommodation to with such a clause will not secure a note that
the borrowers as it makes available additional funds expresses on its face that it is otherwise
without their having to execute additional security secured as to its entirety, at least to anything
documents, thereby saving time, travel, loan closing other than a deficiency after exhausting the
costs, costs of extra legal services, recording fees, et security specified therein, such deficiency being
cetera. Indeed, it has been settled in a long line of an indebtedness within the meaning of the
decisions that mortgages given to secure future mortgage, in the absence of a special contract
advancements are valid and legal contracts, and the excluding it from the arrangement.
amounts named as consideration in said contracts do not  SC: The latter school represents the better position.
limit the amount for which the mortgage may stand as The parties having conformed to the blanket mortgage
security if from the four corners of the instrument the clause or dragnet clause, it is reasonable to conclude
intent to secure future and other indebtedness can be that they also agreed to an implied understanding that
gathered. subsequent loans need not be secured by other
 The blanket mortgage clause in the instant case states: securities, as the subsequent loans will be secured by
That for and in consideration of the first mortgage. In other words, the sufficiency of the
certain loans, overdraft and other credit first security is a corollary component of the dragnet
accommodations obtained from the clause. But of course, there is no prohibition, as in the
Mortgagee by the Mortgagor and/or mortgage contract in issue, against contractually
________________ hereinafter referred to,
irrespective of number, as DEBTOR, and to
requiring other securities for the subsequent loans. Thus,
secure the payment of the same when the mortgagor takes another loan for which another
and those that may hereafter be security was given it could not be inferred that such loan
obtained, the principal or all of which is was made in reliance solely on the original security with
hereby fixed at Two Hundred Fifty the dragnet clause, but rather, on the new security given.
Thousand (P250,000.00) Pesos, Philippine This is the reliance on the security test.
Currency, as well as those that the  Hence, based on the reliance on the security test, the
Mortgagee may extend to the Mortgagor
California court in the cited case made an inquiry whether
and/or DEBTOR, including interest and
expenses or any other obligation owing the second loan was made in reliance on the original
to the Mortgagee, whether direct or security containing a dragnet clause. Accordingly, finding
indirect, principal or secondary as a different security was taken for the second loan no
appears in the accounts, books and records intent that the parties relied on the security of the first
of the Mortgagee, the Mortgagor does loan could be inferred, so it was held. The rationale
hereby transfer and convey by way of involved, the court said, was that the dragnet clause in
mortgage unto the Mortgagee, its the first security instrument constituted a continuing offer
successors or assigns, the parcels of land
by the borrower to secure further loans under the security
which are described in the list inserted on
the back of this document, and/or appended of the first security instrument, and that when the lender
hereto, together with all the buildings and accepted a different security he did not accept the offer.
improvements now existing or which may  Indeed, in some instances, it has been held that in the
hereafter be erected or constructed thereon, absence of clear, supportive evidence of a contrary
of which the Mortgagor declares that he/it is intention, a mortgage containing a dragnet clause will
the absolute owner free from all liens and not be extended to cover future advances unless the
incumbrances. . .

BANKING: WEEK 5 | 38
document evidencing the subsequent advance refers  A dragnet clause operates as a convenience and
to the mortgage as providing security therefor. accommodation to the borrowers as it makes available
 It was therefore improper for Prudential to seek additional funds without their having to execute additional
foreclosure of the mortgaged property because of non- security documents, thereby saving time, travel, loan
payment of all the three promissory notes. closing costs, costs of extra legal services, recording
 There is a need to respect the existence of the other fees, et cetera.
security given for PN BD#76/C-345. The foreclosure of  While a real estate mortgage may exceptionally secure
the mortgaged property should only be for future loans or advancements, these future debts must
the P250,000.00 loan covered by PN BD#75/C-252, and be sufficiently described in the mortgage contract. An
for any amount not covered by the security for the obligation is not secured by a mortgage unless it comes
second promissory note. fairly within the terms of the mortgage contract.
 The security specifically executed for subsequent loans
must first be exhausted before the mortgaged property FACTS(note: didn’t change the designations of petitioners
can be resorted to. and respondents because they’re both Cuyco. Mas
 The mortgage contract, as well as the promissory notes nakakalito):
subject of this case, is a contract of adhesion, to which  Petitioners, spouses Adelina and Feliciano Cuyco,
respondents only participation was the affixing of their obtained a loan in the amount of P1,500,000.00 from
signatures or adhesion thereto. A contract of adhesion is respondents, spouses Renato and Filipina Cuyco,
one in which a party imposes a ready-made form of payable within one year at 18% interest per annum, and
contract which the other party may accept or reject, but secured by a Real Estate Mortgage over a parcel of land
which the latter cannot modify. It must be strictly with improvements thereon situated in Cubao, Quezon
construed against the party responsible for its City covered by TCT No. RT-43723 (188321).
preparation- Prudential  Subsequently, petitioners obtained additional loans from
 Petitioner, however, is not without recourse. Both the the respondents in the aggregate amount of
Court of Appeals and the trial court found that P1,250,000.00, broken down as follows: (1) P150,000.00
respondents have not yet paid theP250,000.00, and gave on May 30, 1992; (2) P150,000.00 on July 1, 1992; (3)
no credence to their claim that they paid the said amount P500,000.00 on September 5, 1992; (4) P200,000.00 on
when they paid petitioner P2,000,000.00. Thus, the October 29, 1992; and (5) P250,000.00 on January 13,
mortgaged property could still be properly subjected to 1993.
foreclosure proceedings for the unpaid P250,000.00 loan,  Petitioners made payments amounting to P291,700.00,
and as mentioned earlier, for any deficiency after but failed to settle their outstanding loan obligations.
D/A SFDX#129, security for PN BD#76/C-345, has been  Thus, on September 10, 1997, respondents filed a
exhausted, subject of course to defenses which are complaint for foreclosure of mortgage with the RTC of
available to respondents. Quezon City, which was docketed as Civil Case No. Q-
DISPOSITION: AFFIRMED 97-32130.
o They alleged that petitioners loans were
secured by the real estate mortgage; that as of
Cuyco vs. Cuyco | Karl August 31, 1997, their indebtedness amounted
April 19, 2006 to P6,967,241.14, inclusive of the 18% interest
SPOUSES ADELINA S. CUYCO and FELICIANO U. CUYCO, compounded monthly; and that petitioners
Petitioners, - versus - SPOUSES RENATO CUYCO and FILIPINA refusal to settle the same entitles the
CUYCO, Respondents. respondents to foreclose the real estate
mortgage.
YNARES-SANTIAGO, J.:  Petitioners filed a motion to dismiss on the ground that
the complaint states no cause of action which was denied
NATURE: This petition for review on certiorari assails the Decision by the RTC for lack of merit.
of the Court of Appeals (CA).  In their answer, petitioners admitted their loan obligations
SUMMARY: but argued that only the original loan of P1,500,000.00
 The petitioners obtained a loan from respondents which was secured by the real estate mortgage at 18% per
was secured by a REM. The petitioners obtained annum and that there was no agreement that the same
subsequent loans. The petitioners defaulted. The will be compounded monthly.
respondents wanted to foreclose on the mortgage. The  RTC: rendered judgment in favor of the respondents
SC held that the REM only covers the original loan and  CA: partially granted the petition and modified the RTC
not the subsequent ones for failure of the contract to decision insofar as the amount of the loan obligations
include a dragnet clause. Also, the SC clarified the rules secured by the real estate mortgage.
on the payment of interest. o It held that by express intention of the parties,
the real estate mortgage secured the original
DOCTRINE (related to topic): P1,500,000.00 loan and the subsequent loans
 As a general rule, a mortgage liability is usually limited to of P150,000.00 and P500,000.00 obtained on
the amount mentioned in the contract. July 1, 1992 and September 5, 1992,
 However, the amounts named as consideration in a respectively.
contract of mortgage do not limit the amount for which o As regards the loans obtained on May 31, 1992,
the mortgage may stand as security if from the four October 29, 1992 and January 13, 1993 in the
corners of the instrument the intent to secure future and amounts of P150,000.00, P200,000.00 and
other indebtedness can be gathered. P250,000.00, respectively, the appellate tribunal
 This stipulation is valid and binding between the parties held that the parties never intended the same to
and is known in American Jurisprudence as the blanket be secured by the real estate mortgage.
mortgage clause, also known as a dragnet clause. o The Court of Appeals also found that the trial

BANKING: WEEK 5 | 39
court properly imposed 12% legal interest on the mortgage and earned an interest of 18% per annum.
stipulated interest from the date of filing of the Upon default thereof, respondents demanded payment
complaint from the petitioners by filing an action for foreclosure of
the real estate mortgage. Clearly, the case falls under the
ISSUE #1: rule stated in paragraph 1.
 Applying the rules in the computation of interest, the
Whether or not the imposition of the 12% legal interest per annum principal amount of loans subject of the real estate
on the stipulated interest of 18% per annum computed from the mortgage must earn the stipulated interest of 18% per
filing of the complaint until fully paid was not provided in the real annum, which interest, as long as unpaid, also earns
estate mortgage contract, thus, the same has no legal basis.--NO legal interest of 12% per annum, computed from the date
of the filing of the complaint on September 10, 1997 until
RATIO#1: finality of the Courts Decision. Such interest is not due to
 While a contract is the law between the parties, it is also stipulation but due to the mandate of the law[21] as
settled that an existing law enters into and forms part of a embodied in Article 2212 of the Civil Code. From such
valid contract without the need for the parties expressly date of finality, the total amount due shall earn interest of
making reference to it. 12% per annum until satisfied.[22]
 Thus, the lower courts correctly applied Article 2212 of  Certainly, the computed interest from the filing of the
the Civil Code as the basis for the imposition of the legal complaint on September 10, 1997 would no longer be
interest on the stipulated interest due. It reads: true upon the finality of this Courts decision. In
o Art. 2212. Interest due shall earn legal interest accordance with the rules laid down in Eastern Shipping
from the time it is judicially demanded, although Lines, Inc. v. Court of Appeals, we derive the following
the obligation may be silent upon this point. formula for the RTCs guidance:
 The foregoing provision has been incorporated in the TOTAL AMOUNT DUE = [principal + interest + interest on interest]
comprehensive summary of existing rules on the - partial payments made
computation of legal interest enunciated by the Court in
Eastern Shipping Lines, Inc. v. Court of Appeals: Interest = principal x 18 % per annum x no. of years from due date
o When an obligation is breached, and it consists until finality of judgment
in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should Interest on interest = Interest computed as of the filing of the
be that which may have been stipulated in complaint (September 10, 1997) x 12% x no. of years until finality
writing. Furthermore, the interest due shall itself of judgment
earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the Total amount due as of the date of finality of judgment will earn an
rate of interest shall be 12% per annum to be interest of 12% per annum until fully paid.
computed from default, i.e., from judicial or
extrajudicial demand under and subject to the ISSUE #2
provisions of Article 1169 of the Civil Code. Which loans were secured by the REM?—only the original loan
o When an obligation, not constituting a loan or
forbearance of money, is breached, an interest RATIO #2:
on the amount of damages awarded may be  As a general rule, a mortgage liability is usually limited to
imposed at the discretion of the court at the rate the amount mentioned in the contract.
of 6% per annum. No interest, however, shall be  However, the amounts named as consideration in a
adjudged on unliquidated claims or damages contract of mortgage do not limit the amount for which
except when or until the demand can be the mortgage may stand as security if from the four
established with reasonable certainty. corners of the instrument the intent to secure future and
Accordingly, where the demand is established other indebtedness can be gathered.
with reasonable certainty, the interest shall  This stipulation is valid and binding between the
begin to run from the time the claim is made parties and is known in American Jurisprudence as
judicially or extrajudicially (Art. 1169, Civil Code) the blanket mortgage clause, also known as a
but when such certainty cannot be so dragnet clause.
reasonably established at the time the demand  A dragnet clause operates as a convenience and
is made, the interest shall begin to run only from accommodation to the borrowers as it makes available
the date the judgment of the court is made (at additional funds without their having to execute additional
which time the quantification of damages may security documents, thereby saving time, travel, loan
be deemed to have been reasonably closing costs, costs of extra legal services, recording
ascertained). The actual base for the fees, et cetera.
computation of legal interest shall, in any case,  While a real estate mortgage may exceptionally secure
be on the amount finally adjudged. future loans or advancements, these future debts must
o When the judgment of the court awarding a sum be sufficiently described in the mortgage contract. An
of money becomes final and executory, the rate obligation is not secured by a mortgage unless it comes
of legal interest, whether the case falls under fairly within the terms of the mortgage contract.
paragraph 1 or paragraph 2, above, shall be  The pertinent provisions of the November 26, 1991 real
12% per annum from such finality until its estate mortgage reads:
satisfaction, this interim period being deemed to
That the MORTGAGOR is indebted unto the MORTGAGEE in the
be by then an equivalent to a forbearance of sum of ONE MILLION FIVE THOUSAND PESOS (sic)
credit.
(1,500,000.00) Philippine Currency, receipt whereof is hereby
 In the case at bar, the evidence shows that petitioners acknowledged and confessed, payable within a period of one
obtained several loans from the respondent, some of year, with interest at the rate of eighteen percent (18%) per
which as held by the CA were secured by real estate

BANKING: WEEK 5 | 40
annum;
RATIO #3:
That for and in consideration of said indebtedness, the  Section 2, Rule 68 of the Rules of Court provides:
MORTGAGOR does hereby convey and deliver by way of o SEC. 2. Judgment on foreclosure for payment or
MORTGAGE unto said MORTGAGEE, the latters heirs and sale. If upon the trial in such action the court
assigns, the following realty together with all the improvements shall find the facts set forth in the complaint to
thereon and situated at Cubao, Quezon City, and described as be true, it shall ascertain the amount due to the
follows: plaintiff upon the mortgage debt or obligation,
including interest and other charges as
xxxx approved by the court, and costs, and shall
render judgment for the sum so found due and
PROVIDED HOWEVER, that should the MORTGAGOR duly pay order that the same be paid to the court or to the
or cause to be paid unto the MORTGAGEE or his heirs and judgment obligee within a period of not less than
assigns, the said indebtedness of ONE MILLION FIVE HUNDRED ninety (90) days nor more than one hundred
THOUSAND PESOS (1,500,000.00), Philippine Currency, twenty (120) days from the entry of judgment,
together with the agreed interest thereon, within the agreed term and that in default of such payment the property
of one year on a monthly basis then this MORTGAGE shall be shall be sold at public auction to satisfy the
discharged, and rendered of no force and effect, otherwise it shall judgment. (Emphasis added)
subsist and be subject to foreclosure in the manner and form  Indeed, the above provision of the Rules of Court
provided by law. provides that the mortgaged property may be charged
not only for the mortgage debt or obligation but also for
 It is clear from a perusal of the aforequoted real the interest, other charges and costs approved by the
estate mortgage that there is no stipulation that the court. Thus, to discharge the real estate mortgage,
mortgaged realty shall also secure future loans and petitioners must pay the respondents (1) the total amount
advancements. Thus, what applies is the general rule due, as computed in accordance with the formula
above stated. indicated above, that is, the principal loan of
 Even if the parties intended the additional loans of P1,500,000.00, the stipulated interest of 18%, the interest
P150,000.00 obtained on May 30, 1992, P150,000.00 on the stipulated interest due of 12% computed from the
obtained on July 1, 1992, and P500,00.00 obtained on filing of the complaint until finality of the decision less
September 5, 1992 to be secured by the same real partial payments made, (2) the 12% legal interest on the
estate mortgage, as shown in the acknowledgement total amount due from finality until fully satisfied, (3) the
receipts, it is not sufficient in law to bind the realty for it reasonable attorneys fees of P25,000.00 and (4) the
was not made substantially in the form prescribed by law. costs of suit, within the period specified by the Rules.
 In order to constitute a legal mortgage, it must be Should the petitioners default in the payment thereof, the
executed in a public document, besides being recorded. property shall be sold at public auction to satisfy the
A provision in a private document, although denominating judgment.
the agreement as one of mortgage, cannot be considered
as it is not susceptible of inscription in the property DISPOSITION: AFFIRMED with the MODIFICATIONS that
registry. petitioners are ordered to pay the respondents (1) the total amount
 A mortgage in legal form is not constituted by a private due, as computed by the RTC in accordance with the formula
document, even if such mortgage be accompanied with specified above, (2) the legal interest of 12% per annum on the
delivery of possession of the mortgage property. total amount due from such finality until fully paid, (3) the
 Besides, by express provisions of Section 127 of Act No. reasonable amount of P25,000.00 as attorneys fees, and (4) the
496, a mortgage affecting land, whether registered under costs of suit, within a period of not less than 90 days nor more
said Act or not registered at all, is not deemed to be than 120 days from the entry of judgment, and in case of default of
sufficient in law nor may it be effective to encumber or such payment the property shall be sold at public auction to satisfy
bind the land unless made substantially in the form the judgment.
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
 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.

ISSUE #3
Whether or not to discharge the real estate mortgage, payment
only of the principal and the stipulated interest of 18% per annum
is sufficient as the mortgage document does not contain a
stipulation that the legal interest on the stipulated interest due,
attorneys fees, and costs of suit must be paid first before the same
may be discharged.--NO

BANKING: WEEK 5 | 41