People’s Bank and Trust Co. v.

Odom | Gab
February 25, 1937
PEOPLE BANK AND TRUST COMPANY, Plaintiff-Appellee, v. W. J. ODOM, Defendant-Appellant
Imperial, J.

NATURE: Appeal
SUMMARY: W. J. Odom entered into a contract with A. D. Gibbs whereby Gibbs authorized Odom to construct 2 buildings
upon Gibbs’ land. Odom then leased out various parts of the 2 buildings, with one of the lessees being People’s Bank and
Trust Co. (PBTC). Due to the contracts entered into with PBTC, Odom obtained an overdraft from PBTC, the amount of
which was increased multiple times. Odom also executed various securities for the overdraft, with its various amount
increases. After drawing funds upon PBTC through overdrafts, as of January 4, 1934, Odom’s account showed a balance
against him of P138,403.68, including stipulated interest up to said date. PBTC then brought an action with the Manila CFI to
recover from Odom the balance of the overdraft and to foreclose the mortgage of properties to guarantee his obligation. The
CFI later ordered Odom to pay to PBTC P138,403.68, with 9% interest per annum from January 4, 1934 until fully paid, plus
P500 as attorney's fees and the costs. After Odom appealed to the SC, the SC affirmed the CFI’s judgment, except the part
ordering the public sale of the mortgaged rights, with costs to Odom.
DOCTRINE (related to topic):
 An assignment to guarantee an obligation is, in effect, a mortgage, not an absolute conveyance of title,
which confers ownership on the assignee.
FACTS:
 W. J. Odom entered into a contract with A. D. Gibbs (Exhibit E) whereby Gibbs authorized Odom to construct
2 buildings with 3 floors each upon Gibbs’ land.
o The Sugar News Co. Building was completely constructed and its 1 st floor was occupied by the People’s
Bank and Trust Co. (PBTC), but the 2 upper floors were not fully equipped; the Edward J. Nell Co.
Building was then under construction.
o Under the contract, Odom bore all the expenses of consideration of the Sugar News Co. Building and
Gibbs assigned to him all the rents which the building may produce for 8 years from: (1) November 1,
1926 as to the 1st floor then already occupied and (2) as to the other floors to be equipped, from the date
they are fully equipped.
o As to the Edward J. Nell Co. Building, the parties agreed that Odom would bear all the expenses of
construction until it is fully completed and in consideration thereof, Gibbs assigned to him all the rent which
it may produce for 8 years, 3 months from the date of the termination of its construction; this period was to
be counted from the completion of each floor in the event that the floors comprising the building should not
be completed and equipped at the same time.
 Due to the contracts entered into with PBTC, Odom obtained an overdraft from PBTC of P110,000.
o To secure this overdraft, Odom assigned to the PBTC all his rights, title, and interest in the
contracts of lease with the Sugar News Co., Manila Machinery and Supply Co., Inc., and T.
Yamamoto of the various parts of the Sugar News Company Building and the rights, title, and
interest which he had acquired in the land on which the said building was constructed under the
contract he had with A. D. Gibbs.
o Also as security, Odom assigned to the PBTC an insurance policy for P100,000 issued by the
Manufacturers Life Insurance Company. (Exhibit C)
 Odom’s overdraft was increased to P150,000.
o To secure the payment thereof, Odom assigned to PBTC by guaranty the same securities which he
had given for the overdraft of P110,000. (Exhibit B)
 The overdraft was again increased to P165,000.
o To guarantee the payment thereof, Odom assigned to PBTC his rights, title, and interest in the
contracts of lease with Edward J. Nell Co., El Progreso, Inc., and France & Goulette of various parts
of the Edward J. Nell Company Building, in whatever contracts of lease of any portion of the same
building which he may enter in the future, and the rights, title, and interest which he had in the land
occupied by the building according to his contract with A. D. Gibbs. (Exhibit D)
o Odom also assigned to PBTC his right to collect the rents of the Edward J. Nell Company Building.
(Exhibit F)
 Pursuant to the aforesaid contracts, Odom drew funds upon PBTC through overdrafts.
 January 4, 1934: Odom’s account showed a balance against him of P138,403.68, including stipulated interest
up to said date.
 PBTC then brought an action with the Manila CFI to recover from Odom the balance of the overdraft and to
foreclose the mortgage of properties to guarantee his obligation.
 The CFI ordered Odom to pay to PBTC P138,403.68, with 9% interest per annum from January 4, 1934 until fully
paid, plus P500 as attorney's fees and the costs.
o The judgment also decreed that the principal and interest should be paid within 3 months, failing which the
mortgaged properties will be sold at public auction, consisting of the rights, title, and interest of Odom in
the contracts of lease of the 2 buildings and his rights, title, and interest in the land on which the 2 buildings
are constructed, and that the proceeds of the sale should be applied to the payment of the amount of the
 judgment.
 Odom appealed from said CFI’s judgment to the SC.
ISSUE #1:
 W/N Exhibit D took the place of Exhibits B and C (NO)
RATIO #1:
 Exhibit D was executed, according to the contract itself, as a result of the increase of the overdraft to P165,000 and
the additional guaranty given by Odom, consisting of the assignment of guaranty of his rights in his contracts of
lease of the Edward J. Nell Company Building and of his rights in the land occupied by the same building.
 Clause 3 of Exhibit D stipulated that Exhibit C was incorporated therein and also constituted a guaranty of the
payment of the overdraft as increased to P165,000.
 Due to these facts, it is evident that the intention of the parties was neither to set aside the previous contracts nor to
substitute Exhibit D therefor.
ISSUE #2:
 W/N the CFI should have held that the obligation contracted by Odom was with a term and the parties not
having fixed the date of payment, PBTC should have first brought an action to fix said date under CC, Art.
11281 (NO)
RATIO #2:
 Exhibit D is a complement of Exhibits B and C, hence, Exhibit D’s language and the intention of the parties must be
interpreted in relation to and jointly with Exhibits B and C under CC, Art. 1285.
 It was expressly stipulated in Exhibits B and C that the obligation contracted by Odom shall expire and be due upon
demand of the PBTC and since Exhibit C was incorporated in Exhibit D and Odom was required by the PBTC to pay
all his indebtedness, the obligation was without a term and it became due and demandable.
 Thus, CC, Art. 1128 is inapplicable.
ISSUE #3 (MAIN):
 W/N Exhibits B, C, and D are mortgages or assignment of rights (MORTGAGES)
RATIO #3:
 Exhibits B, C, and D were really mortgages inasmuch as they were executed to guarantee the principal
obligations of the Odom, consisting of the overdrafts of the indebtedness resulting therefrom.
 It appears in each of Exhibits B, C, and D that the Odom assigned to the PBTC all his rights in the contracts
of lease, in the land, and in the insurance policy to guarantee his indebtedness resulting from the overdrafts.
 An assignment to guarantee an obligation is, in effect, a mortgage, not an absolute conveyance of title,
which confers ownership on the assignee. (Title Guaranty & Surety Co. v. Witmire; Polhemus v. Trainer;
Campbell v. Woodstock Iron Co.; Dunham v. Whitehead; Woodward v. Crump)
 In Exhibits C and D, it was stipulated that if Odom should comply with all the conditions of the contracts and
should pay his indebtedness, together with interest, the assignments would become null and void; otherwise,
they would remain in full force.
o If the parties' intention was that the assignments are absolute and not by guaranty or mortgage, the
stipulation would not have been made because it would be inconsistent with the will of the contracting
parties.
ISSUE #4:
 W/N Odom’s civil liability has ceased, with him now not owing PBTC anything (NO)
RATIO #4:
 The assignments Odom made not being absolute and PBTC having established that Odom has not paid his total
overdraft, he is not yet relieved of his obligation.

ADDITIONAL DISCUSSION:
 Under the contracts, PBTC was authorized to collect the rents of the 2 buildings during the period which might be
that fixed in the contract between the Odom and Gibbs.
o The SC said “might” because the contracts of lease have not been put in evidence, hence, it could point
out the duration thereof with precision.
 However, the PBTC liquidated the account of the Odom up to January 4, 1934 only and in the appealed judgment, it
was decreed that the mortgaged rights be sold at public auction should Odom fail to pay his indebtedness within 3
months.
 If the indebtedness has already been paid with the rents which the PBTC failed to account for, then there would be
no ground to take the aforementioned step. If the indebtedness has not yet been fully paid, neither would it be
proper to sell any of the rights in the mortgage contracts of lease because the latter have already matured,
according to the contract with Gibbs.
o Thus, it is necessary to provide for the one and the other case.
 As to the insurance policy, nothing can be said about it as the appealed judgment was silent thereon.

DISPOSITION

1 When it is to be inferred from the nature and circumstances of the obligation that it was intended to grant the debtor time to pay and the term is not
otherwise stated, the courts should fix the date of the maturity of the obligation.
  The appealed judgment was affirmed, except the part ordering the public sale of the mortgaged rights, with costs to
Odom.

Lopez v CA | CM
June 29, 1982
BENITO H. LOPEZ, petitioner,
vs.
THE COURT OF APPEALS and THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., respondents.
GUERRERO, J.:
Summary: Lopez obtained a loan from prudential bank. He executed a promissory note, a surety bond with Philamgen as
surety and an indemnity agreement in favour of Philamgen as well as a deed of assignment of stocks over Philamgen. Lopez
delivered the stock certificate to Philamgen. It was understood that Abello of Philamgen and Pedrosa of Prudential would buy
the shares and pay to Prudential if Lopez failed to pay on the loan. Lopez failed to pay. The stocks were transferred to
Philamgen. Philamgen paid the bank. Philamgen is now claiming vs Lopez. Philamgen claims the stocks were merely
pledged. Lopez claims that there was a dation in payment. SC held that it was merely pledged and Philamgen must return
the stocks to Lopez upon satisfaction under the Indemnity Agreement.
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 secure the payment of money, it
must be construed as a pledge
FACTS:
 On June 2, 1959, petitioner Benito H. Lopez obtained a loan in the amount of P20,000.00 from the Prudential
Bank and Trust Company.
 He executed a promissory note for the same amount, in favor of the said Bank, binding himself to repay the said
sum one (1) year after the said date, with interest at the rate of 10% per annum.
 He executed Surety Bond No. 14164 in which he, as principal, and Philippine American General Insurance
Co., Inc. (PHILAMGEN) as surety, bound themselves jointly and severally in favor of Prudential Bank for the
payment of the sum of P20,000.00.
 Lopez also executed in favor of Philamgen an indemnity agreement whereby he agreed "to indemnify the
Company and keep it indemnified and hold the same harmless from and against any and all damages, losses,
costs, stamps, taxes, penalties, charges and expenses of whatever kind and nature which the Company shall or
may at any time sustain or incur in consequence of having become surety upon the bond."
 Lopez executed a deed of assignment of 4,000 shares of the Baguio Military Institution entitled "Stock Assignment
Separate from Certificate"2
 With the execution of this deed of assignment, Lopez endorsed the stock certificate and delivered it to
Philamgen.
 The loan of P20,000.00 was approved conditioned upon the posting of a surety bond. Thus, Lopez persuaded
Emilio Abello, Assistant Executive Vice-President of Philamgen and member of the Bond Under writing Committee
to request Atty. Timoteo J. Sumawang, Assistant Vice- President and Manager of the Bonding Department, to
accommodate him in putting up the bond against the security of his shares of stock with the Baguio Military
Institute, Inc. It was their understanding that if he could not pay the loan, Vice-President Abello and Pio
Pedrosa of the Prudential Bank would buy the shares of stocks and out of the proceeds thereof, the loan would
be paid to the Prudential Bank.
 On June 2, 1960, Lopez' obligation matured without it being settled. Prudential Bank sometime in August, 1961
filed a case against Lopez and Philamgen to enforce payment on the promissory note plus interest.
 Vice-President Abello then instructed Atty. Sumawang to transfer the shares of stock to Philamgen and made a
commitment that thereafter he (Abello) and Pio Pedrosa will buy the shares of stock from it so that the proceeds
could be paid to the bank, and in the meantime Philamgen will not pay the bank because it did not want payment
under the terms of the bank.
 The complaint was thereafter dismissed. But when no payment was still made by the principal debtor or by the
surety, the Prudential Bank filed on November 8, 1963 another complaint for the recovery of the P20,000.00.
 Lopez’s letter:
Dear Mr. Sumawang: This is with reference to yours of the 13th instant advising me of a complaint filed against us by
Prudential Bank & Trust Co. regarding my loan of P20,000.00. In this connection, I would like to know what happened to my

2 That for and in consideration of the obligations undertaken by the ASSIGNEE-SURETY COMPANY under the terms and conditions of SURETY BOND NO.
14164, 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 PESOS ONLY (P20,000.00), Philippine Currency, and for value received, the ASSIGNOR hereby sells, assigns, and transfers unto THE
PHILIPPINE 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 of said Baguio Military Institute, Inc. represented by Certificate No. 44 herewith and do hereby irrevocably constitutes and appoints
THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC. as attorney to transfer the said stock on the books of the within named military institute
with full power of substitution in the premises.
shares of stocks of Baguio Military Academy which were pledged to your goodselves to secure said obligation. These shares
of stock I think are more than enough to answer for said obligation.
 Philamgen was forced to pay the Prudential Bank the sum of P27,785.89
 Philamgen brought an action vs. Benito H. Lopez for reimbursement of the said amount.
 CFI dismissed the complaint holding:
The contention of the plaintiff that the stock of the defendant were merely pledged to it by the defendant is not borne out by
the evidence. On the contrary, the shares of stock of the defendant were actually transferred to the plaintiff Philamgen
Now that these shares of stock had already been transferred in the name of the Philamgen, it would seem that the remedy of
the Philamgen is to go after Messrs. Abello and Pedrosa on their promise to pay for the said stocks.
 CA promulgated a decision in favor of the Philamgen, and declared that the stock assignment was a mere pledge
that the transfer of the stocks in the name of Philamgen was not intended to make it the owner thereof; that
assuming that Philamgen had appropriated the stocks, this appropriation is null and void as a stipulation authorizing
it is apactum commissorium; and that pending payment, Philamgen is merely holding the stock as a security for the
payment of Lopez' obligation
ISSUE 1/ HELD: what is the juridical nature of the transaction-a dation in payment or a pledge? PLEDGE
RATIO:
ON ITS FACE, IT LOOKS LIKE SALE
 Considering the explicit terms of the deed denominated "Stock Assignment Separate from Certificate", hereinbefore
copied verbatim, Lopez sold, assigned and transferred unto Philamgen the stocks involved "for and in consideration
of the obligations undertaken" by Philamgen "under the terms and conditions of the surety bond executed by it in
favor of the Prudential Bank" and "for value received".
 On its face, it is neither pledge nor dation in payment. The document speaks of an outright sale as there is a
complete and unconditional divestiture of the incorporeal property consisting of stocks from Lopez to Philamgen.
BUT IT IS A PLEDGE
 Notwithstanding the express terms of the "Stock Assignment Separate from Certificate", however, We hold and rule
that the transaction should not be regarded as an absolute conveyance in view of the circumstances
obtaining at the time of the execution thereof.
 Lopez executed a promissory note for P20,000.00, plus interest at the rate of ten (10%) per cent per annum, in favor
of said Bank. He likewise posted a surety bond to secure his full and faithful performance of his obligation under the
promissory note with Philamgen as his surety. In return for the undertaking of Philamgen under the surety bond,
Lopez executed on the same day not only an indemnity agreement but also a stock assignment.
 The indemnity agreement and the stock assignment must be considered together as related transactions
because in order to judge the intention of the contracting parties, their contemporaneous and subsequent
acts shall be principally considered. (Article 1371, New Civil Code).
 Thus, considering that the indemnity agreement connotes a continuing obligation of Lopez towards Philamgen while
the stock assignment indicates a complete discharge of the same obligation, the existence of the indemnity
agreement whereby Lopez had to pay a premium of P1,000.00 for a period of one year and agreed at all times to
indemnify Philamgen of any and all kinds of losses which the latter might sustain by reason of it becoming a surety,
is inconsistent with the theory of an absolute sale for and in consideration of the same undertaking of
Philamgen.
 There would have been no necessity for the execution of the indemnity agreement if the stock assignment was
really intended as an absolute conveyance. Hence, there are strong and cogent reasons to conclude that the parties
intended said stock assignment to complement the indemnity agreement and thereby sufficiently guarantee
the indemnification of Philamgen should it be required to pay Lopez' loan to Prudential Bank.
o The character of the transaction between the parties is to be determined by their intention,
regardless of what language was used or what the form of the transfer was. If it was intended to
secure the payment of money, it must be construed as a pledge; but if there was some other intention,
it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its
object and character might still be qualified and explained by a contemporaneous writing declaring it to
have been a deposit of the property as collateral security. It has been said that a transfer of property by the
debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a
pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly, the
use of the terms ordinarily importing conveyance, of absolute ownership will not be given that effect in such
a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly
indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other
circumstances excluding an intent to pledge.
 We agree with the holding of the respondent Court of Appeals that the stock assignment, Exhibit C, is in
truth and in fact, a pledge. Indeed, the facts and circumstances leading to the execution of the stock assignment,
Exhibit C, and the admission of Lopez prove that it is in fact a pledge.
 The appellate court is correct in ruling that the following requirements of a contract of pledge have been satisfied:
(1) that it be constituted to secure the fulfillment of a principal obligation;
(2) that the pledgor be the absolute owner of the thing pledged; and
(3) that the person constituting the pledge has the free disposal of the property, and in the absence thereof, that he be legally
authorized for the purpose. (Article 2085, New Civil Code).
 Article 2087 of the New Civil Code providing that it is also the essence of these contracts (pledge, mortgage, and
antichresis) that when the principal obligation becomes due, the things in which the pledge or mortgage
consists may be alienated for the payment to the creditor, further supports the appellate court's ruling
o In addition to the requisites prescribed in article 2085, it is necessary, in order to constitute the contract of
pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by
common agreement. (Art. 2093, N.C.C.) Incorporeal rights, including shares of stock may also be pledged
(Art. 2095, N.C.C.)
o All these requisites are found in the transaction between the parties leading to the execution of the Stock
Assignment, Exhibit C. And that it is a pledge was admitted by the defendant in his letter of November 18,
1963, Exhibit G, already quoted above, where he asked what had happened to his shares of stock "which
were pledged to your goodselves to secure the said obligation".
 It is not a dation in payment. According to Article 1245 of the New Civil Code, dation in payment, whereby property
is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales.
o Dation in payment is the delivery and transmission of ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of the obligation. The property given may
consist, not only of a thing, but also of a real right (such as a usufruct) or of a credit against a third person.
Thus, it has been held that the assignment to the creditor of the interest of the debtor in an inheritance in
payment of his debt, is valid and extinguishes the debt.
o The modern concept of dation in payment considers it as a novation by change of the object, and this is to
our mind the more juridically correct view.
o Our Civil Code, however, provides in this article that, where the debt is in money, the law on sales shall
govern; in this case, the act is deemed to be a sale, with the amount of the obligation to the extent that it is
extinguished being considered as the price.
o Does this mean that there can be no dation in payment if the debt is not in money? We do not think so. It is
precisely in obligations which are not money debts, in which the true juridical nature of dation in payment
becomes manifest. There is a real novation with immediate performance of the new obligation. The fact
that there must be a prior agreement of the parties on the delivery of the thing in lieu of the original
prestation shows that there is a novation which, extinguishes the original obligation, and the delivery is a
mere performance of the new obligation.
o The dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as
agreed upon by the parties or as may be proved, unless the parties by agreement, express or implied, or
by their silence, consider the thing as equivalent to the obligation, in which case the obligation is totally
extinguished.
 We find that the debt or obligation at bar has not matured on June 2, 1959 when Lopez "alienated" his 4,000 shares
of stock to Philamgen. Such fact being adverse to the nature and concept of dation in payment, the same could not
have been constituted when the stock assignment was executed.
 In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor
of pledge, the latter being the lesser transmission of rights and interests.
 Petitioner's argument that even assuming, arguendo that the transaction was at its inception a pledge, it gave way
to a dation in payment when the obligation secured came into existence and private respondent had the stocks
transferred to it in the corporate books and took a stock certificate in its name, is without merit. The transfer of title to
incorporeal property is generally an essential part of the delivery of the same in pledge. It merely constitutes
evidence of the pledgee's right of property in the thing pledged.
 By the contract of pledge, the pledgor does not part with his general right of property in the collateral. The general
property therein remains in him, and only a special property vests in the pledgee. The pledgee does not acquire an
interest in the property, except as a security for his debt. Thus, the pledgee holds possession of the security subject
to the rights of the pledgor; he cannot acquire any interest therein that is adverse to the pledgor's title. Moreover,
even where the legal title to incorporeal property which may be pledged is transferred to a pledgee as collateral
security, he takes only a special property therein Such transfer merely performs the office that the delivery of
possession does in case of 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 amount of the debt or the obligation that is secured by the collateral, and the lien continues to exist as long as
the pledgee retains actual or symbolic possession of the property, and the debt or obligation remains unpaid.
Payment of the debt extinguishes the lien.
 Though a pledgee of corporation stock does not become personally liable as a stockholder of the company, he may
have the shares transferred to him on the books of the corporation if he has been authorized to do so.
ISSUE2/ HELD: WON there was novation (NO)
NO NOVATION
 In his second assignment of error, petitioner contends that there was a novation of the obligation by substitution of
debtor.
  SC: We do not agree.
 Under Article 1291 of the New Civil Code, obligations may be modified by: (1) changing their object or principal
condition; (2) substituting the person of the debtor; (3) subrogating a third person in the rights of the creditor. And in
order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each
other. (Article 1292, N.C.C.)
 Commenting on the second concept of novation, that is, substituting the person of the debtor, Manresa opines, thus:
 In this kind of novation it is not enough to extend the juridical relation to a third person; it is
necessary that the old debtor be released from the obligation, and the third person or new debtor
take his place in the relation. Without such release, there is no novation
 In the case at bar, the undertaking of Messrs. Emilio Abello and Pio Pedrosa that they would buy the shares of stock
so that Philamgen could be reimbursed from the proceeds that it paid to Prudential Bank does not necessarily imply
the extinguishment of the liability of petitioner Lopez. Since it was not established nor shown that Lopez would be
released from responsibility, the same does not constitute novation
 In fine, We hold and rule that the transaction entered into by and between petitioner and respondent under the
Stock Assignment Separate From Certificate in relation to the Surety Bond No. 14164 and the Indemnity Agreement,
all executed and dated June 2, 1959, constitutes a pledge of the 40,000 shares of stock by the petitioner-pledgor
in favor of the private respondent-pledgee, and not a dacion en pago. It is also Our ruling that upon the facts
established, there was no novation of the obligation by substitution of debtor.
 The promise of Abello and Pedrosa to buy the shares not having materialized and no action was taken against the
two by Philamgen who chose instead to sue Lopez on the Indemnity Agreement, it is quite clear that this respondent
Philam has abandoned its right and interest over the pledged properties and must, therefore, release or return the
same to the petitioner-pledgor Lopez upon the latter's satisfaction of his obligation under the Indemnity Agreement.
 It must also be made clear that there is no double payment nor unjust enrichment in this case because We have
ruled that the shares of stock were merely pledged.
DISPOSITION. AFFIRMED.

The Manila Banking Corporation vs. Teodoro | Karl

January 13, 1989
THE MANILA BANKING CORPORATION, plaintiff-appellee,
vs. ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO, defendants-appellants.
CHICO-NAZARIO, J.:

NATURE: Appeal from the decision of the CFI of Manila

SUMMARY:
 Teodoros executed a promissory note for P10,420 and failed to pay the amount. Subsequently, Teodoro executed in
favor of MBC 2 promissory notes for 8k and 1k respectively.
 Also, Teodoro (son) executed in favor of MBC a Deed of Assignment of Receivables from EEA.
 SC held that the assignment did not have the effect of payment of all the loans contracted by the Teodoros
from MBC. SC held that the deed of assignment was intended as collateral security for the bank loans of
appellants, as a continuing guaranty for whatever sums would be owing by defendants to plaintiff, as stated
in stipulation No. 9 of the deed.
 In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor
of pledge, the latter being the lesser transmission of rights and interests

DOCTRINE (related to topic):

 Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal
cause, such as sale, dation in payment, exchange or donation, and without the need of the consent of the debtor,
transfers his credit and its accessory rights to another, known as the assignee, who acquires the power to enforce it
to the same extent as the assignor could have enforced it against the debtor. ...
 It may be in the form of a sale, but at times it may constitute a dation in payment, such as when a debtor, in order to
obtain a release from his debt, assigns to his creditor a credit he has against a third person, or it may constitute a
donation as when it is by gratuitous title; or it may even be merely by way of guaranty, as when the creditor gives as
a collateral, to secure his own debt in favor of the assignee, without transmitting ownership.
 The character that it may assume determines its requisites and effects. its regulation, and the capacity of the parties
to execute it; and in every case, the obligations between assignor and assignee will depend upon the judicial
relation which is the basis of the assignment

FACTS:
 On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and severally, executed in favor of
plaintiff MBC a Promissory Note (No. 11487) for the sum of P10,420.00 payable in 120 days, or on August 25,
1966, at 12% interest per annum.
  Defendants Teodoro failed to pay the said amount inspire of repeated demands and the obligation as of
September 30, 1969 stood at P 15,137.11 including accrued interest and service charge.

 On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father) and Anastacio Teodoro, Jr. (Son)
executed in favor of MBC two Promissory Notes (Nos. 11515 and 11699) for P8,000.00 and P1,000.00
respectively, payable in 120 days at 12% interest per annum.
o Father and Son made a partial payment on the May 3, 1966 promissory Note but none on the June 20,
1966 Promissory Note, leaving still an unpaid balance of P8,934.74 as of September 30, 1969
including accrued interest and service charge.
 The three Promissory Notes stipulated that any interest due if not paid at the end of every month shall be added to
the total amount then due, the whole amount to bear interest at the rate of 12% per annum until fully paid; and in
case of collection through an attorney-at-law, the makers shall, jointly and severally, pay 10% of the amount over-
due as attorney's fees, which in no case shall be leas than P200.00.
 It appears that on January 24, 1964, the Son executed in favor of MBC a Deed of Assignment of Receivables
from the Emergency Employment Administration in the sum of P44,635.00.
o The Deed of Assignment provided that it was for and in consideration of certain credits, loans,
overdrafts and other credit accommodations extended to defendants as security for the payment of
said sum and the interest thereon, and that defendants do hereby remise, release and quitclaim all
its rights, title, and interest in and to the accounts receivables.
o Also contained the following stipulations:
 (1) The title and right of possession to said accounts receivable is to remain in the assignee, and
it shall have the right to collect the same from the debtor, and whatsoever the Assignor does in
connection with the collection of said accounts, it agrees to do as agent and representative of the
Assignee and in trust for said Assignee ;
 xxx xxx xxx
 (6) The Assignor guarantees the existence and legality of said accounts receivable, and the due
and punctual payment thereof unto the assignee, ... on demand, ... and further, that Assignor
warrants the solvency and credit worthiness of each and every account.
 (7) The Assignor does hereby guarantee the payment when due on all sums payable under the
contracts giving rise to the accounts receivable ... including reasonable attorney's fees in
enforcing any rights against the debtors of the assigned accounts receivable and will pay upon
demand, the entire unpaid balance of said contract in the event of non-payment by the said
debtors of any monthly sum at its due date or of any other default by said debtors;
 xxx xxx xxx
 (9) ... This Assignment shall also stand as a continuing guarantee for any and all whatsoever
there is or in the future there will be justly owing from the Assignor to the Assignee ...
 In their stipulations of Fact, it is admitted by the parties that MBC extended loans to Teodoro on the basis and by
reason of certain contracts entered into by the defunct Emergency Employment Administration (EEA) with
Teodoro for the fabrication of fishing boats, and that the Philippine Fisheries Commission succeeded the EEA
after its abolition; that non-payment of the notes was due to the failure of the Commission to pay Teodoro
after the latter had complied with their contractual obligations; and that the President of MBC took steps to
collect from the Commission, but no collection was effected.

 Trial Court: rendered judgments for Teodoro.

 CA certified case to SC since it involves purely questions of law.

ISSUE #1:
Whether or not the assignment of receivables has the effect of payment of all the loans contracted by Teodoro from
MBC--NO

RATIO#1:
 Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a
legal cause, such as sale, dation in payment, exchange or donation, and without the need of the consent of
the debtor, transfers his credit and its accessory rights to another, known as the assignee, who acquires
the power to enforce it to the same extent as the assignor could have enforced it against the debtor. ...
o It may be in the form of a sale, but at times it may constitute a dation in payment, such as when a debtor, in
order to obtain a release from his debt, assigns to his creditor a credit he has against a third person, or it
may constitute a donation as when it is by gratuitous title; or it may even be merely by way of guaranty, as
when the creditor gives as a collateral, to secure his own debt in favor of the assignee, without transmitting
ownership.
 The character that it may assume determines its requisites and effects. its regulation, and the capacity of the
parties to execute it; and in every case, the obligations between assignor and assignee will depend upon the judicial
relation which is the basis of the assignment
  There is no question as to the validity of the assignment of receivables executed by appellants in favor of
appellee bank.The issue is with regard to its legal effects.
 It is evident that the assignment of receivables executed by appellants on January 24, 1964 did not transfer
the ownership of the receivables to appellee bank and release appellants from their loans with the bank
incurred under promissory notes Nos. 11487,11515 and 11699.
 The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts,
and their credit accommodations in the sum of P10,000.00 extended to appellants by appellee bank, and as
security for the payment of said sum and the interest thereon; that appellants as assignors, remise, release,
and quitclaim to assignee bank all their rights, title and interest in and to the accounts receivable assigned
(lst paragraph). It was further stipulated that the assignment will also stand as a continuing guaranty for
future loans of appellants to appellee bank and correspondingly the assignment shall also extend to all the
accounts receivable; appellants shall also obtain in the future, until the consideration on the loans secured by
appellants from appellee bank shall have been fully paid by them (No. 9).
 TEODORO ARG: The position of appellants, however, is that the deed of assignment is a quitclaim in
consideration of their indebtedness to appellee bank, not mere guaranty, in view of the following provisions
of the deed of assignment:
o ... the Assignor do hereby remise, release and quit-claim unto said assignee all its rights, title and
interest in the accounts receivable described hereunder.
o ... that the title and right of possession to said account receivable is to remain in said assignee and
it shall have the right to collect directly from the debtor, and whatever the Assignor does in connection
with the collection of said accounts, it agrees to do so as agent and representative of the Assignee and it
trust for said Assignee
 The character of the transactions between the parties is not, however, determined by the language used in
the document but by their intention.
 Definitely, the assignment of the receivables did not result from a sale transaction. It cannot be said to have
been constituted by virtue of a dation in payment for appellants' loans with the bank evidenced by
promissory note Nos. 11487, 11515 and 11699 which are the subject of the suit for collection in Civil Case
No. 78178.
o At the time the deed of assignment was executed, said loans were non-existent yet.
 The deed of assignment was executed on January 24, 1964 (Exh. "G"), while promissory note No. 11487 is dated
April 25, 1966 (Exh. 'A), promissory note 11515, dated May 3, 1966 (Exh. 'B'), promissory note 11699, on June 20,
1966 (Exh. "C").
 At most, it was a dation in payment for P10,000.00, the amount of credit from appellee bank indicated in the
deed of assignment. At the time the assignment was executed, there was no obligation to be extinguished
except the amount of P10,000.00.
 Moreover, in order that an obligation may be extinguished by another which substitutes the same, it is imperative
that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible
with each other (Article 1292, New Civil Code).
 Obviously, the deed of assignment was intended as collateral security for the bank loans of appellants, as a
continuing guaranty for whatever sums would be owing by defendants to plaintiff, as stated in stipulation
No. 9 of the deed.
 In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of
pledge, the latter being the lesser transmission of rights and interests.

ISSUE #2
Whether or not appellee bank must first exhaust all legal remedies against the Philippine Fisheries Commission
before it can proceed against Teodoro for collections of loan under the promissory notes which are MBC’s bases in
the action for collection in Civil Case No. 78178.--NO

RATIO #2:
 The obligation of appellants under the promissory notes not having been released by the assignment of receivables,
appellants remain as the principal debtors of appellee bank rather than mere guarantors. The deed of assignment
merely guarantees said obligations.
 That the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the
debtor, and has resorted to all the legal remedies against the debtor, under Article 2058 of the New Civil Code does
not therefore apply to them.
 It is of course of the essence of a contract of pledge or mortgage that when the principal obligation becomes due,
the things in which the pledge or mortgage consists may be alienated for the payment to the creditor (Article 2087,
New Civil Code). In the instant case, appellants are both the principal debtors and the pledgors or mortgagors.
Resort to one is, therefore, resort to the other.
 MBCollect on the pledged receivables. As the Emergency Employment Agency (EEA) which issued the receivables
had been abolished, the collection had to be coursed through the Office of the President which disapproved the
same
 The receivable became virtually worthless leaving appellants' loans from MBC unsecured. It is but proper that after
 their repeated demands made on appellants for the settlement of their obligations, MBC should proceed against
Teodoro.
 It would be an exercise in futility to proceed against a defunct office for the collection of the receivables pledged.

DISPOSITION: Appeal dismissed.

FELICIANO, J., concurring:

 I would merely wish to add a few lines in respect of the point made by Bidin, J., that "the character of the
transactions between the parties is not, however, determined by the language used in the document but by their
intention.' This statement is basically not exceptionable, so far as it goes.
 It might, however, be borne in mind that the intent of the parties to the transaction is to be determined in the first
instance, by the very language which they use. The deed of assignment contains language which suggest that
the parties intended to effect a complete alienation of title to and rights over the receivables which are the
subject of the assignment. This language is comprised of works like "remise," "release and quitclaim" and
clauses like "the title and right of possession to said accounts receivable is to remain in said assignee"
who "shall have the right to collect directly from the debtor." The same intent is also suggested by the use of
the words "agent and representative of the assignee" in reffering to the assignor.
 The point that appears to me to be worth making is that although in its form, the deed of assignment of
receivables partakes of the nature of a complete alienation of the receivables assigned, such form should
be taken in conjunction with, and indeed must be qualified and controlled by, other language showing an
intent of the parties that title to the receivables shall pass to the assignee for the limited purpose of
securing another, principal; obligation owed by the assignor to the assignee.
 Title moves from assignor to assignee but that title is defeasible being designed to collateralize the principal
obligation. Operationally, what this means is that the assignee is burdened with an obligation of taking the proceeds
of the receivables assigned and applying such proceeds to the satisfaction of the principal obligation and returning
any balance remaining thereafter to the assignor.
 The parties gave the deed of assignment the form of an absolute conveyance of title over the receivables
assigned, essentially for the convenience of the assignee. Without such formally unlimited conveyance of
title, the assignee would have to treat the deed of assignment as no more than a deed of pledge or of
chattel mortgage.
 In other words, in such hypothetical case, should the assignee seek to realize upon the security given to him
through the deed of assignment (which would then have to comply with the documentation and registration
requirements of a pledge or chattel mortgage), the assignee would have to foreclose upon the securities or credits
assigned and place them on public sale and there acquire the same.
 It should be recalled that under the principle which forbids a pactum commisorium Article 2088, Civil Code), a
mortgagee or pledgee is prohibited from simply taking and appropriating the personal property turned over to him as
security for the payment of a principal obligation. A deed of assignment by way of security avoids the necessity of a
public sale impose by the rule on pactum commisorium, by in effect placing the sale of the collateral up front.
(Emphasis supplied)
 The foregoing is applicable where, as in the present instance, the deed of assignment of receivables combines
elements of both a complete or absolute alienation of the credits being assigned and a security arrangement to
assure payment of a principal obligation. Where the second element is absent, that is, where there is nothing to
indicate that the parties intended the deed of assignment to function as a security device, it would of course follow
that the simple absolute conveyance embodied in the deed of assignment would be operative; the assignment
would constitute essentially a mode of payment or dacion en pago.
 Put a little differently, in order that a deed of assignment of receivables which is in form an absolute conveyance of
title to the credits being assigned, may be qualified and treated as a security arrangement, language to such effect
must be found in the document itself and that language, precisely, is embodied in the deed of assignment in the
instant case. Finally, it might be noted that that deed simply follows a form in standard use in commercial banking.
Integrated Realty v. CA / Ish
June 28, 1989
INTEGRATED REALTY CORPORATION and RAUL L. SANTOS, petitioners, vs. PHILIPPINE NATIONAL BANK,
OVERSEAS BANK OF MANILA and THE HON. COURT OF APPEALS, respondents.
REGALADO, J.

SUMMARY: Raul Santos, President of Integrated Realty (IRC) made two time deposits with the Overseas Bank of
Manila (OBM) in his personal capacity. IRC, through Santos, obtained a loan from PNB. By way of security, Santos
executed a Deed of Assignment of his two OBM time deposits. OBM failed to pay PNB when the time deposits fell due. PNB
demanded payment from IRC, but the latter claimed that its obligation was already extinguished by the Deed of Assignment.
PNB sued IRC, Santos and OBM. IRC and Santos filed a counterclaim against OBM. The trial court held IRC and Santos
liable to PNB. In turn, OBM was to reimburse IRC and Santos for whatever it paid PNB. On appeal, the CA absolved OBM
from liability. The Supreme Court held that IRC’s loan obligation to PNB was not extinguished by the Deed of Assignment as
it was merely a pledge.
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 secure the payment of money, it must be
construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded
by itself, appears to have been absolute, its object and character might still be qualified and explained by a contemporaneous
writing declaring it to have been a deposit of the property as collateral security.

FACTS:
 Under date 11 January 1967 defendant Raul L. Santos made a time deposit with defendant OBM in the amount of P
500,000.00.
 Under date 6 February 1967 defendant Raul L. Santos also made a time deposit with defendant OBM in the amount
of P 200,000.00.
 Under date 9 February 1967 defendant IRC thru its President-defendant Raul L. Santos, applied for a loan
and/or credit line in the amount of P 700,000.00 with PNB.
o To secure the said loan, defendant Raul L. Santos executed on August 11, 1967 a Deed of Assignment
of the two time deposits in favor of PNB.
 The defendant OBM after the due dates of the time deposit certificates, did not pay plaintiff PNB . Plaintiff
demanded payment from defendants IRC and Raul L. Santos and from defendant OBM.
o Defendants IRC and Raul L. Santos replied that the obligation (loan) of defendant IRC was deemed
paid with the irrevocable assignment of the time deposit certificates.
 PNB filed a complaint to collect from IRC and Santos the loan of P700,000.00 with interest as well as
attorney's fees. It impleaded OBM as a defendant to compel it to redeem and pay to it Santos' time deposit
certificates with interest, plus exemplary and corrective damages, attorney's fees, and costs.
 OBM replied, acknowledging the certificates of time deposit that it issued to Santos, and admitting its failure to pay
the same due to its distressed financial situation.
o It claimed that by reason of its state of insolvency its operations have been suspended 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 depositor or creditor; and that payment of the plaintiffs claim is prohibited.
 The trial court ruled for PNB. IRC and Santos to pay PNB, OBM to reimburse IRC and Santos.
 On appeal, the CA promulgated its appealed decision, with a modification and the deletion of that portion of the
judgment of the trial court ordering OBM to pay IRC and Santos whatever amounts they will pay to PNB with interest
from the date of payment.
 Hence, this petition for review.

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

DISPOSITION: Judgment is rendered ordering—

 IRC and Santos to pay PNB the total loan obligation plus interests;
 IRC and Santos to pay PNB attorney’s fees;
 OBM to pay IRC and Santos the amount due under the time deposits with interest;
 OBM to pay IRC and Santos interest in the concept of damages;
 OBM to pay IRC and Santos attorney’s fees.
Yau Chu v. CA | Nice
September 26, 1989
VICTORIA YAU CHU, assisted by her husband MICHAEL CHU, petitioners, vs. HON. COURT OF APPEALS, FAMILY
SAVINGS BANK and/or CAMS TRADING ENTERPRISES, INC., respondents.
GRINO-AQUINO, J.

NATURE: Rule 45 Petition

SUMMARY: Yau Chu had several time deposits with Family Savings Bank, which she used as collateral for payment of her
cement withdrawals with Cams Trading. She executed deeds of assignment over the time deposit certificates. When she did
not pay Cams Trading, the latter requested the Bank encashment of the certificates, to which the Bank agreed. Yau Chu filed
a complaint for recovery of the deposit, but both the RTC and CA dismissed the case. The SC affirmed, holding that as the
pledge was money, there was no need for an auction sale and that it was not a pactum commissorium.
FACTS:
 Since 1980, Victoria Yau Chu had been purchasing cement on credit from CAMS Trading Enterprises, Inc. (Cams
Trading). To guaranty payment for her cement withdrawals, she executed in favor of Cams Trading deeds of
assignment of her time deposits totaling P320k in the Family Savings Bank (Bank).
 Except for serial numbers and dates, the deeds of assignment, prepared by her own lawyer, uniformly provided “that
the assignment serves as a collateral or guarantee for the payment of my obligation with the said CAMS TRADING
ENTERPRISES, INC. on account of my cement withdrawal from said company, per separate 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
encash the time deposit certificates which had been assigned to it by Mrs. Chu. It submitted to the Bank a letter
dated July 18, 1980 of Mrs. Chu admitting that her outstanding account with Cams Trading was P404k.
 After verbally advising Mrs. Chu of the assignee's request to encash her time deposit certificates and obtaining her
verbal conformity, the Bank agreed to encash the certificates. It gave Cams Trading P283k only, since one time
deposit certificate lacked the proper signatures.
 Upon being informed of the encashment, Mrs. Chu demanded from the Bank and Cams Trading that her time
deposit be restored. When neither complied, she filed a complaint with the RTC to recover the P283k from them.
 The trial court dismissed the complaint for lack of merit. Chu appealed to the CA which affirmed the dismissal of her
complaint.
 Chu alleges that the CA erred:
o in not annulling the encashment of her time deposit certificates as a pactum commissorium; and
o in not finding that the obligations secured by her time deposits had already been paid.
ISSUE #1 (MAIN):
 W/N the encashment was a pactum commissorium prohibited by NCC 2088 (NO)
RATIO #1:
 The CA found that the deeds of assignment were contracts of pledge, but, as the collateral was also money or an
exchange of "peso for peso," the provision in NCC 2112, for the sale at public auction to convert the thing
pledged into money to satisfy the pledgor's obligation, did not have to be followed.
 All that had to be done to convert the pledgor's time deposit certificates into cash was to present them to the bank
for encashment after due notice to the debtor.
 The encashment of the deposit certificates was not a pacto commissorio which is prohibited under NCC 2088.
A pacto commissorio is a provision for the automatic appropriation of the pledged or mortgaged property by the
creditor in payment of the loan upon its maturity. The prohibition against a pacto commissorio is intended to protect
the obligor, pledgor, or mortgagor against being overreached by his creditor who holds a pledge or mortgage over
property whose value is much more than the debt.
 Where, as in this case, the security for the debt is also money deposited in a bank, the amount of which is
even less than the debt, it was not illegal for the creditor to encash the time deposit certificates to pay the
debtors' overdue obligation, with the latter's consent.
 Whether the debt had already been paid as alleged by Mrs. Chu is a factual question which the CA found unproven.
Mrs. Chu only presented receipts for payments made prior to July 18, 1980. Since she signed on July 18, 1980 a
letter admitting her indebtedness to be in the sum of P404k, and there is no proof of payment made by her
thereafter to reduce or extinguish her debt, the application of her time deposits, which she had assigned to the
creditor to secure the payment of her debt, was proper.
DISPOSITION
 Petition denied. CA affirmed.