Republic of the Philippines
It appears that on January 24, 1964,
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-53955 January 13, 1989
THE MANILA BANKING CORPORATION, plaintiff-
appellee,
vs.
ANASTACIO TEODORO, JR. and GRACE ANNA
TEODORO, defendants-appellants.
Formoso & Quimbo Law Office for plaintiff-appellee.
Serafin P. Rivera for defendants-appellants.
BIDIN, J.:
This is an appeal from the decision* of the Court of First
Instance of Manila, Branch XVII in Civil Case No.
78178 for collection of sum of money based on
promissory notes executed by the defendants-
appellants in favor of plaintiff-appellee bank. The
dispositive portion of the appealed decision (Record on
Appeal, p. 33) reads as follows:
WHEREFORE judgment is hereby
rendered (a) sentencing defendants,
Anastacio Teodoro, Jr. and Grace
Anna Teodoro jointly and severally,
to pay plaintiff the sum of
P15,037.11 plus 12% interest per
annum from September 30, 1969
until fully paid, in payment of
Promissory Notes No. 11487, plus
the sum of P1,000.00 as attorney's
fees; and (b) sentencing defendant
Anastacio Teodoro, Jr. to pay
plaintiff the sum of P8,934.74, plus
interest at 12% per annum from
September 30, 1969 until fully paid,
in payment of Promissory Notes
Nos. 11515 and 11699, plus the sum
of P500.00 an attorney's fees.
With Costs against defendants.
The facts of the case as found by the trial court are as
follows:
On April 25, 1966, defendants,
together with Anastacio Teodoro,
Sr., jointly and severally, executed in
favor of plaintiff 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 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 plaintiff
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.
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.
Credit Transactions /Pledge and Mortgage/ 1 of 55
the Son executed in favor of plaintiff
a Deed of Assignment of
Receivables from the Emergency
Employment Administration in the
sum of P44,635.00. 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. Further.
(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 plaintiff
extended loans to defendants on the
basis and by reason of certain
contracts entered into by the defunct
Emergency Employment
Administration (EEA) with
defendants 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
defendants after the latter had
complied with their contractual
obligations; and that the President of
plaintiff Bank took steps to collect
from the Commission, but no
collection was effected.
For failure of defendants to pay the
sums due on the Promissory Note,
this action was instituted on
November 13, 1969, originally
against the Father, Son, and the
latter's wife. Because the Father
died, however, during the pendency
of the suit, the case as against him
was dismiss under the provisions of
Section 21, Rule 3 of the Rules of
Court. The action, then is against
defendants Son and his wife for the
collection of the sum of P 15,037.11
on Promissory Note No. 14487; and
against defendant Son for the
recovery of P 8,394.7.4 on
Promissory Notes Nos. 11515 and
11699, plus interest on both
amounts at 12% per annum from
September 30, 1969 until fully paid,
and 10% of the amounts due as
attorney's fees.
Neither of the parties presented any
testimonial evidence and submitted
the case for decision based on their
Stipulations of Fact and on then,
documentary evidence.
The issues, as defined by the parties
are: (1) whether or not plaintiff claim
is already considered paid by the
Deed of Assign. judgment of
Receivables by the Son; and (2)
whether or not it is plaintiff who
should directly sue the Philippine
Fisheries Commission for collection.'
(Record on Appeal, p. 29- 32).
On April 17, 1972, the trial court rendered its judgment
adverse to defendants. On June 8, 1972, defendants
filed a motion for reconsideration (Record on Appeal,
p. 33) which was denied by the trial court in its order of
June 14, 1972 (Record on Appeal, p. 37). On June 23,
1972, defendants filed with the lower court their notice
of appeal together with the appeal bond (Record on
Appeal, p. 38). The record of appeal was forwarded to
the Court of Appeals on August 22, 1972 (Record on
Appeal, p. 42).
In their appeal (Brief for the Appellants, Rollo, p. 12),
appellants raised a single assignment of error, that is
— power to enforce it to the same extent as the assignor
THAT THE DECISION IN
QUESTION AMOUNTS TO A
JUDICIAL REMAKING OF THE
CONTRACT BETWEEN THE
PARTIES, IN VIOLATION OF LAW;
HENCE, TANTAMOUNT TO LACK
OR EXCESS OF JURISDICTION.
As the appeal involves a pure question of law, the
Court of Appeals, in its resolution promulgated on
March 6, 1980, certified the case to this Court (Rollo,
p. 24). The record on Appeal was forwarded to this
Court on March 31, 1980 (Rollo, p. 1).
In the resolution of May 30, 1980, the First Division of
this Court ordered that the case be docketed and
declared submitted for decision (Rollo, p. 33).
On March 7, 1988, considering the length of time that
the case has been pending with the Court and to
determine whether supervening events may have
rendered the case moot and academic, the Court
resolved (1) to require the parties to MOVE IN THE
PREMISES within thirty days from notice, and in case
they fail to make the proper manifestation within the
required period, (2) to consider the case terminated
and closed with the entry of judgment accordingly
made thereon (Rollo, p. 40).
On April 27, 1988, appellee moved for a resolution of
the appeal review interposed by defendants-appellants
(Rollo, p. 41).
The major issues raised in this case are as follows: (1)
whether or not the assignment of receivables has the
effect of payment of all the loans contracted by
appellants from appellee bank; and (2) whether or not
appellee bank must first exhaust all legal remedies
against the Philippine Fisheries Commission before it
can proceed against appellants for collections of loan
under the promissory notes which are plaintiffs bases
in the action for collection in Civil Case No. 78178.
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
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
Credit Transactions /Pledge and Mortgage/ 2 of 55
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: (Tolentino, Commentaries and
Jurisprudence on the Civil Code of the Philippines, Vol.
5, pp. 165-166).
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.
I and it trust for said Assignee ...(Ibid.
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).
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:
... the Assignor do hereby remise,
release and quit-claim unto said
assignee all its rights, title and
interest in the accounts receivable
described hereunder. (Emphasis
supplied by appellants, first par.,
Deed of Assignment).
... 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
par. 2 of Deed of Assignment).'
(Record on Appeal, p. 27)
The character of the transactions between the parties
is not, however, determined by the language used in
the document but by their intention. Thus, the Court,
quoting from the American Jurisprudence (68 2d,
Secured Transaction, Section 50) said:
The characters 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. However,
even though a transfer, if regarded
by itself, appellate 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 Id that a transfer of
property by the debtor to a creditor,
even if sufficient on its farm 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 exporting 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 ambiguous language or other
circumstances excluding an intent to
pledge. (Lopez v. Court of Appeals,
114 SCRA 671 [1982]).
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. 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 (Lopez v. Court of Appeals, supra).
In one case, the assignments of rights, title and interest
of the defendant in the contracts of lease of two
buildings as well as her rights, title and interest in the
Credit Transactions /Pledge and Mortgage/ 3 of 55
land on which the buildings were constructed to secure
an overdraft from a bank amounting to P110,000.00
which was increased to P150,000.00, then to
P165,000.00 was considered by the Court to be
documents of mortgage contracts inasmuch as they
were executed to guarantee the principal obligations of
the defendant consisting of the overdrafts or the
indebtedness resulting therefrom. The Court ruled that
an assignment to guarantee an obligation is in effect a
mortgage and not an absolute conveyance of title
which confers ownership on the assignee (People's
Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]).
proceed against appellants. It would be an exercise in
futility to proceed against a defunct office for the
collection of the receivables pledged.
WHEREFORE, the appeal is Dismissed for lack of
merit and the appealed decision of the trial court is
affirmed in toto.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr. and Cortes, JJ., concur.

II

As to whether or not appellee bank must have to

exhaust all legal remedies against the Philippine
Fisheries Commission before it can proceed against
appellants for collection of loans under their promissory
notes, must also be answered in the negative.

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.

Appellee bank did try to collect 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
(Record on Appeal, p. 16). The receivable became
virtually worthless leaving appellants' loans from
appellee bank unsecured. It is but proper that after their
repeated demands made on appellants for the
settlement of their obligations, appellee bank should

Credit Transactions /Pledge and Mortgage/ 4 of 55

 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-26001 October 29, 1968
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE
COMMERCIAL AND INDUSTRIAL
BANK, respondents.
Tomas Besa, Jose B. Galang and Juan C. Jimenez for
petitioner.
San Juan, Africa & Benedicto for respondents.
CONCEPCION, C.J.:
The Philippine National Bank — hereinafter referred to
as the PNB — seeks the review by certiorari of a
decision of the Court of Appeals, which affirmed that of
the Court of First Instance of Manila, dismissing
plaintiff's complaint against the Philippine Commercial
and Industrial Bank — hereinafter referred to as the
PCIB — for the recovery of P57,415.00.
A partial stipulation of facts entered into by the parties
and the decision of the Court of Appeals show that, on
about January 15, 1962, one Augusto Lim deposited in
his current account with the PCIB branch at Padre
Faura, Manila, GSIS Check No. 645915- B, in the sum
of P57,415.00, drawn against the PNB; that, following
an established banking practice in the Philippines, the
check was, on the same date, forwarded, for clearing,
through the Central Bank, to the PNB, which did not
return said check the next day, or at any other time, but
retained it and paid its amount to the PCIB, as well as
debited it against the account of the GSIS in the PNB;
that, subsequently, or on January 31, 1962, upon
demand from the GSIS, said sum of P57,415.00 was
re-credited to the latter's account, for the reason that
the signatures of its officers on the check were forged;
and that, thereupon, or on February 2, 1962, the PNB
demanded from the PCIB the refund of said sum, which
the PCIB refused to do. Hence, the present action
against the PCIB, which was dismissed by the Court of
First Instance of Manila, whose decision was, in turn,
affirmed by the Court of Appeals.
It is not disputed that the signatures of the General
Manager and the Auditor of the GSIS on the check, as
drawer thereof, are forged; that the person named in
the check as its payee was one Mariano D. Pulido, who
purportedly indorsed it to one Manuel Go; that the
check purports to have been indorsed by Manuel Go to
Augusto Lim, who, in turn, deposited it with the PCIB,
on January 15, 1962; that, thereupon, the PCIB
stamped the following on the back of the check: "All
prior indorsements and/or Lack of Endorsement
Guaranteed, Philippine Commercial and Industrial
Bank," Padre Faura Branch, Manila; that, on the same
date, the PCIB sent the check to the PNB, for
clearance, through the Central Bank; and that, over two
(2) months before, or on November 13, 1961, the GSIS
had notified the PNB, which acknowledged receipt of
the notice, that said check had been lost, and,
accordingly, requested that its payment be stopped.
In its brief, the PNB maintains that the lower court
erred: (1) in not finding the PCIB guilty of negligence;
(2) in not finding that the indorsements at the back of
the check are forged; (3) in not finding the PCIB liable
to the PNB by virtue of the former's warranty on the
back of the check; (4) in not holding that "clearing" is
not "acceptance", in contemplation of the Negotiable
Instruments law; (5) in not finding that, since the check
had not been accepted by the PNB, the latter is entitled
to reimbursement therefor; and (6) in denying the
PNB's right to recover from the PCIB.
The first assignment of error will be discussed later,
together with the last,with which it is interrelated.
As regards the second assignment of error, the PNB
argues that, since the signatures of the drawer are
forged, so must the signatures of the supposed
indorsers be; but this conclusion does not necessarily
follow from said premise. Besides, there is absolutely
no evidence, and the PNB has not even tried to prove
that the aforementioned indorsements are spurious.
Again, the PNB refunded the amount of the check to
the GSIS, on account of the forgery in the
signatures, not of the indorsers or supposed indorsers,
but of the officers of the GSIS as drawer of the
instrument. In other words, the question whether or not
the indorsements have been falsified is immaterial to
the PNB's liability as a drawee, or to its right to recover
from the PCIB,1 for, as against the drawee, the
indorsement of an intermediate bank does not
guarantee the signature of the drawer,2 since the
forgery of the indorsement is not the cause of the loss.3
With respect to the warranty on the back of the check,
to which the third assignment of error refers, it should
be noted that the PCIB thereby guaranteed "all
prior indorsements," not the authenticity of the
signatures of the officers of the GSIS who signed on its
behalf, because the GSIS is not an indorser of the
check, but its drawer.4 Said warranty is irrelevant,
therefore, to the PNB's alleged right to recover from the
PCIB. It could have been availed of by a subsequent
indorsee5 or a holder in due course6 subsequent to the
PCIB, but, the PNB is neither.7 Indeed, upon payment
by the PNB, as drawee, the check ceased to be a
negotiable instrument, and became a mere voucher or
proof of payment.8
Referring to the fourth and fifth assignments of error,
we must bear in mind that, in general, "acceptance", in
the sense in which this term is used in the Negotiable
Instruments Law9 is not required for checks, for the
same are payable on demand.10 Indeed, "acceptance"
and "payment" are, within the purview of said Law,
essentially different things, for the former is
"a promise to perform an act," whereas the latter is the
"actual performance" thereof.11 In the words of the
Law,12 "the acceptance of a bill is the signification by
the drawee of his assent to the order of the drawer,"
which, in the case of checks, is the payment, on
demand, of a given sum of money. Upon the other
hand, actual payment of the amount of a check
implies not only an assent to said order of the drawer
and a recognition of the drawer's obligation to pay the
aforementioned sum, but, also, a compliance with such
obligation.
Let us now consider the first and the last assignments
of error. The PNB maintains that the lower court erred
in not finding that the PCIB had been guilty of
negligence in not discovering that the check was
forged. Assuming that there had been such negligence
on the part of the PCIB, it is undeniable, however, that
the PNB has, also, been negligent, with the particularity
that the PNB had been guilty of a greater degree of
negligence, because it had a previous and formal
notice from the GSIS that the check had been lost, with
the request that payment thereof be stopped. Just as
Credit Transactions /Pledge and Mortgage/ 5 of 55
important, if not more important and decisive, is the fact
that the PNB's negligence was the main or proximate
cause for the corresponding loss.
In this connection, it will be recalled that the PCIB
did not cash the check upon its presentation by
Augusto Lim; that the latter had merely deposited it in
his current account with the PCIB; that, on the same
day, the PCIB sent it, through the Central Bank, to the
PNB, for clearing; that the PNB did not return the check
to the PCIB the next day or at any other time; that said
failure to return the check to the PCIB implied, under
the current banking practice, that the PNB considered
the check good and would honor it; that, in fact, the
PNB honored the check and paid its amount to the
PCIB; and that only then did the PCIB allow Augusto
Lim to draw said amount from his aforementioned
current account.
capacity and authority to draw the instrument;
and
(b) The existence of the payee and his then
capacity to indorse.
The prevailing view is that the same rule applies in the
case of a drawee who pays a bill without having
previously accepted it.16
WHEREFORE, the decision appealed from is hereby
affirmed, with costs against the Philippine National
Bank. It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro,
Angeles, Fernando and Capistrano, JJ., concur.
Zaldivar, J., took no part.

Thus, by not returning the check to the PCIB, by

thereby indicating that the PNB had found nothing
wrong with the check and would honor the same, and
by actually paying its amount to the PCIB, the PNB
induced the latter, not only to believe that the check
was genuine and good in every respect, but, also, to
pay its amount to Augusto Lim. In other words, the PNB
was the primary or proximate cause of the loss, and,
hence, may not recover from the PCIB.13

It is a well-settled maxim of law and equity that when

one of two (2) innocent persons must suffer by the
wrongful act of a third person, the loss must be borne
by the one whose negligence was the proximate cause
of the loss or who put it into the power of the third
person to perpetrate the wrong.14

Then, again, it has, likewise, been held that, where the

collecting (PCIB) and the drawee (PNB) banks are
equally at fault, the court will leave the parties where it
finds them.15

Lastly, Section 62 of Act No. 2031 provides:

The acceptor by accepting the instrument

engages that he will pay it according to the
tenor of his acceptance; and admits:

(a) The existence of the drawer, the

genuineness of his signature, and his

Credit Transactions /Pledge and Mortgage/ 6 of 55

 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-47669 December 7, 1987
MARINA D. NARTATES for herself and as
administratrix of the estate of the late Maximo
Nartates Sr., petitioner,
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM,
MILAGROS N. BUTIAL and COURT OF FIRST IN-
STANCE OF MANILA, BRANCH III, respondents.
No. L-47744 December 7, 1987
MARINA D. NARTATES for herself and
Administratrix of the estate of the late Maximo
Nartates Sr., petitioner,
vs.
HON. SERAFIN R. CUEVAS, in his capacity as
Presiding Judge, Branch IV, Court of First Instance
of Manila, acting as Land Registration Court,
GOVERNMENT SERVICE INSURANCE SYSTEM,
and the SHERIFF OF MANILA, respondents.
YAP, J.:
These two cases have been consolidated since they
both stem from the foreclosure by the respondent
Government Service Insurance System (GSIS for
short) of the property mortgaged to it by the petitioner.
G.R. No. L-47669 entitled "Marina D. Narrates et al.
versus Government Service Insurance System, et al."
involves an action by petitioner to annul the foreclosure
proceedings instituted by the respondent GSIS. A
complaint was filed by petitioner on June 2, 1977,
which was amended on June 27, 1977, with the then
Court of First Instance of Manila, Branch III, docketed
as Civil Case No. 108846, alleging, among other, that
the foreclosure proceeding held on March 17, 1976
was in violation of the manifest intent of P.D. 385; that
what was foreclosed included properties not covered
by the mortgage executed by plaintiff in favor of the
GSIS; that the writ of possession obtained by GSIS ex
parte on February 15, 1977 from the Court of First
Instance of Manila, Branch IV, acting as Land
Registration Court, was null and void since the
foreclosure proceeding from which it arose was invalid;
that the GSIS allowed defendant Milagros Butial to
execute an undertaking to lease from the GSIS, subject
to the approval of the latter's Board of Trustees, the
premises occupied by the said defendant-lessee which
are not covered by the mortgage executed by plaintiff
in favor of the GSIS. The trial court dismissed the
complaint, stating that "all considered, the court is of
the view, and so here invoked is vested not with it but
with Branch IV of this court which issued the herein
questioned Writ of Possession." Hence, petitioner has
come to this Court for review by writ of certiorari of the
aforesaid order dismissing the complaint.
In G.R. No. L-47744, petitioner seeks to annul the writ
of possession issued by the Court of First Instance of
Manila, Branch IV, in LRC Record No. 11546 and to
restrain its enforcement, alleging that it was issued
before title was transferred in the name of the GSIS
and while the property was stin subject to lis pendens
in Civil Case No. 108846 pending in Branch III of the
court; that the writ of possession, if not restrained,
would result in the deprivation of petitioner's property
without due process of law, since part of the building
foreclosed is built on land not covered by the mortgage;
that failure to stay the enforcement of the writ of
possession would result in multiplicity of suits, while its
implementation would result in inequity and injustice to
petitioner.
On February 3, 1977, the GSIS filed an ex-parte
petition for the issuance of a writ of possession before
the Court of First Instance of Manila, Branch IV (Judge
Serafin Cuevas, presiding), docketed as LRC Record
No. 11546, pursuant to Section 7 of Act No. 3135, as
amended, and PD No. 385, being the highest bidder in
the extrajudicial foreclosure of petitioner's property
covered by TCT No. 74641. Since the period of
redemption fixed by Section 6 of Act No. 3135 had not
yet expired the court directed the GSIS to post a bond
in the amount of P83,200.00 as a condition for the
issuance of the writ of possession. The writ was issued
on March 30, 1977, and on June 28, 1977, or a day
after petitioner amended her complaint in Civil Case
No. 108846 pending before Branch Ill of the Court of
First Instance of Manila. petitioner filed a petition in
LRC Record No. 11546 to annul the writ of possession
issued by Branch IV of the court. Said petition was
denied by Judge Cuevas on September 1, 1977. A
motion for reconsideration filed by petitioner was also
denied on November 24, 1977, but the GSIS was
directed to refrain from taking possession of that
portion of the building standing on land not included in
the mortgage.
From the orders dated September 1, 1977 and
November 24, 1977, petitioner has appealed to this
Court. On March 28, 1978, the Court issued a
temporary restraining order enjoining respondents
from further proceeding in LRC Record No. 11546.
However, on July 18, 1979, the Court lifted the
temporary restraining order and allowed the
respondent GSIS to collect the rentals from the building
in litigation and granted its motion "for authority to lease
the said premises to interested parties with the
undertaking that all the rentals collected by the GSIS
will be subject to future adjudication, thus, either
credited to the purchase price if the re-purchase of the
mortgaged parties by Marina D. Nartates is agreed
upon or divided pro-rata between the GSIS and Mrs.
Nartates if she should be held still a co-owner of the
building.
The background facts of the case are as follows:
On December 2, 1964, the spouses Maximo D.
Narrates and Marina D. Nartates applied with the GSIS
for a loan of P1 Million allegedly to finance the
construction of a four (4) storey building on a parcel of
land covered by TCT No. 74641 of the Registry of
Deeds of Manila. The spouses offered as collaterals
the parcel of land covered by TCT No. 74641, the
building to be erected thereon, a parcel of land
denominated as Lot 109, then still untitled, adjoining
the aforesaid lot, and a parcel of land located in
Caloocan City covered by TCT No. 67372. The loan
value of the said properties as appraised by the GSIS
was P332,600.00. At the time of the application of the
loan, the construction of the building had already
started.
Before the loan could be approved, however, Maximo
Nartates died on January 11, 1967. His widow, herein
petitioner Marina D. Nartates continued with the loan
application and secured court permission, as
administratrix of the intestate estate of her late
Credit Transactions /Pledge and Mortgage/ 7 of 55
husband, to mortgage the above-mentioned
properties.
On November 23, 1967, the GSIS approved a
financing loan of P350,000.00 in favor of petitioner,
Mrs. Marina D. Nartates the said loan to be repaid
within a period of ten (10) years at ten (10%) per cent
per annum, compounded monthly. However, only the
sum of P323,806.94 was actually released to the
petitioner. It turned out that the parcels of land offered
as collaterals were encumbered in favor of other
persons, to wit: TCT No. 74841 was mortgaged to Dr.
Rosendo Llamas for P323,360.00; and TCT No. 67372
(Caloocan) was under mortgage to Cenona Reyes for
P28,000.00. Lot 109, still untitled, was under sales
contract with the Bureau of Lands for P3,600.00.
To effect the release of TCT 74641, the GSIS made the
first release of the loan in the amount of P323,360.00
direct to Dr. Rosendo Llamas but for the account of
petitioner Marina D. Nartates. The remaining balance
of P27,000.00 was not released to petitioner in view of
her failure to submit the titles to the additional
collaterals which form part of the security for the
approved loan of P350,000.00. On April 29,1970, the
GSIS advised petitioner that her account at the amount
already released was being closed.
In the meantime, petitioner secured a title over Lot 109,
namely TCT No. 104650, issued in her name alone by
the Registry of Deeds for Manila on June 2, 1972.
Without the knowledge and/or consent of the GSIS,
however, she completed the construction of the
building, but part of the building encroached on the
adjoining Lot 109 and on another lot covered by TCT
No. 120922 of the Registry of Deeds for Manila, also
issued in her name as a widow.
On January 31, 1974, PD No. 385 was issued requiring
all government financial institutions to mandatorily
foreclose all loans with arrearages including interests
and charges, of at least 20% of the total outstanding
obligations. Based on the statement of account
obtained from the GSIS, the petitioner's arrearages as
of February 12, 1974 was P409,677.12.
Believing that foreclosure of her loan could be
forestalled if she complied with the minimum ceiling
under PD No. 835 and allegedly relying on the
assurances of the Manager, Collection Department of
the GSIS that the loan would be restructured if she
complied with the 20% ceiling under the decree, the
petitioner made the following payments: 1) P50,000.00
on May 17, 1974; 2) P20,000.00 on August 30, 1974;
and 3) P10,000.00 on March 10-11, 1976. Petitioner
claims that she tried to come uPwith the balance before
the deadline given her (March 19, 1976) but she was
late by a few minutes and upon arrival at the GSIS to
make her payment as arranged, she was told that the
foreclosure proceedings had already taken place.
At the foreclosure proceedings held on March 17,
1976, the GSIS was declared the highest bidder for
P693,268.93. A certificate of sale was issued to the
GSIS on April 5, 1976, and the same was registered on
May 6, 1976. On February 3, 1977, or before the expiry
date of the one-year redemption period, the GSIS filed
a petition ex-parte for the issuance of a writ of
possession.
The facts as disclosed by the records show that indeed
the petitioner was delinquent in the payment of the
mortgage loan. Her arrearages as of March 31, 1975
amounted to P450,635.21. She was given by the GSIS
seven (7) days to update her account, but to no avail.
On November 6, 1975, the GSIS instituted extrajudicial
foreclosure of the mortgage, of which notice was given
to petitioner on November 11, 1975. The Sheriff of
Manila fixed the date of the public auction sale on
March 10, 1976, which was reset to March 17, 1976
upon an "Agreement to Postpone" executed between
the petitioner and the GSIS.
There was nothing irregular in the conduct of the
foreclosure proceedings. The foreclosure proceedings
were conducted in accordance with the procedures
established by the law. The petitioner has not
questioned the regularity of the foreclosure sale. What
petitioner questions in G.R. No. L-47744 is the validity
of the writ of possession issued by the Court of First
Instance of Manila, Branch IV, on the ground that it was
issued before the redemption period fixed by law
expired; that the right of the GSIS to foreclose was
being questioned in another case (Case No. 108846);
and that part of the building foreclosed was built on
property of the petitioner not included in the mortgage.
Insofar as G.R. No. L-47744 is concerned, we find no
merit in petitioner's contention. True, the order for the
issuance of a writ of possession was made by the court
before the expiry of the period fixed by the law for the
redemption of the property, but the court issued the
order conditioned upon the firing of a bond by the
GSIS. In any event, the period for redemption expired
without the petitioner exercising her right of
redemption. And with respect to the claim that part of
the building is built on land not mortgaged to the GSIS,
the respondent court which issued the writ of
possession has excluded said portion of the building
from the writ.
As regards the questions raised by petitioner in G.R.
No. L-47669 with respect to the validity of the
foreclosure proceedings, it suffices to say that because
of the failure of the petitioner to update the loan inspite
of the chances given her by the GSIS, the latter had
the right to foreclose the mortgage. PD 835 does not
give petitioner the right to have her loan restructured
upon payment of 20% of the loan. Besides, petitioner
was unable to put up such minimum payment, but even
if she did, the GSIS as creditor can lay down the terms
and conditions for restructuring the loan. The only
question that merits consideration is the contention of
the petitioner that the foreclosure is null and void
because it included portions of the building standing on
lots which, although owned by petitioner, were not
mortgaged to the GSIS. Petitioner claims that being
controversial, the issue cannot be ventilated in a
cadastral court but in a court acting under its ordinary
civil jurisdiction.
The fact is undisputed that the spouses Maximo
Nartates and Marina D. Nartates applied on December
2, 1964 for a loan of Pl Million to finance the
construction of a four-storied building on a parcel of
land covered by TCT No. 74641, to secure which the
spouses offered as collaterals; 1) the lot as well as the
building to be erected thereon; 2) the adjoining lot
denominated as Lot 109, then still untitled; and 3) a
parcel of land in Caloocan City covered by TCT No.
673722. Based on the appraisal of these collaterals,
the GSIS approved a loan of P350,000.00. After
approval of the loan, the petitioner executed a
mortgage contract on December 12, 1967, conveying
by way of first mortgage in favor of the GSIS the
following parcels of land together with the building/s
and other improvements existing, or which may
thereafter be constructed thereon: 1) a parcel of land
with an area of 205.79 square meters, more or less,
covered by TCT No. 74641 of the Registry of Deeds of
Manila; 2) Lot 109, then still untitled, with an area of
104.06 square meters located in Manila (adjacent to
the foregoing parcel of land); and 3) a parcel of land in
Credit Transactions /Pledge and Mortgage/ 8 of 55
Caloocan City containing an area of 487 square meters Petitioner was far from honest and fair in her dealings
more or less, covered by TCT No. 673222. It turned and conduct, first, in failing or refusing to give her title
out, however, that the foregoing parcels of land had to Lot 109 to the GSIS to enable it to register the
liens in favor of other creditors; hence, the GSIS made mortgage contract, and second, in extending the
the first release of the loan in the amount of construction of the building to the adjoining lots owned
P323,360.00 to Dr. Rosendo Llamas for the account of by her, without the knowledge and consent of the
petitioner Marina D. Nartates in order to effect the GSIS. She should not be allowed to question the
release of TCT No. 74641 so that the GSIS mortgage legality of the foreclosure of the building.
could be registered. With respect to Lot 109, petitioner
was indebted to the Bureau of Lands under a Sales Considering that from the standpoint of both law and
Contract in the amount of P3,600.00; since the lot was equity, based on undisputed facts on record, the
still untitled, the mortgage contract could not be foreclosure of the building in question suffers from no
registered, hence the balance of the approved loan legal infirmity, the Court finds it unnecessary to remand
was not released to petitioner. Subsequently, petitioner the case to the court a quo in Civil Case No. 108846
secured a title to said lot, namely, TCT No. 104650 (for annulment of the mortgage) for further
issued by the Registry of Deeds of Manila in her name proceedings; however, the GSIS must pay the
as widow. An adverse claim was filed by the GSIS and petitioner the fair market value of the parcels of land
annotated on TCT 104650 on October 1, 1975 stating covered by TCT Nos. 102922 and 104650 on which a
that the property was mortgaged to the GSIS in the portion of the foreclosed building stands.
sum of P350,000.00.
Accordingly, the petitions in G.R. Nos. L-47666 and L-
Respondent GSIS claims that without its knowledge 47744 are hereby DISMISSED, without prejudice to
and consent, the construction of the building was having the court a quo in Civil Case No. 108846
completed by petitioner with portions thereof determine, if the parties are unable to agree, the fair
encroaching on the adjoining lot No. 109 and another price of the parcels of land covered by TCT No. 102927
adjacent lot covered by TCT No. 120922 of the and TCT No. 104650 which the GSIS must pay the
Registry of Deeds of Manila, was issued in petitioner's petitioner for the said lots.
name as widow. This fact is not denied or disputed by
the petitioner.
SO ORDERED.
Prescinding from the above, we find no merit in the
claim of petitioner that the foreclosure by the GSIS of Melencio-Herrera, Paras, Padilla and Sarmiento, JJ.,
the building in question is null and void. Petitioner's concur.
posture that the foreclosure of the entire building
suffers from legal infirmity because a portion thereof
stands on land not mortgaged by her to the GSIS
cannot be sustained, both from the standpoint of law
and equity. Lot No. 109 on which a portion of the
building stands was included in the mortgage contract
of December 12, 1967, although at the time the
mortgage could not be registered because the lot was
still untitled and subject to a lien in favor of the Bureau
of Lands; however, subsequently, the land was titled in
petitioner's name, but she did not deliver the title to the
GSIS, thereby compelling the GSIS to file and annotate
an adverse claim on TCT No. 104650. Moreover, the
petitioner's actuations and conduct violate the precepts
of Article 19 of the Civil Code which provides that every
person must, in the exercise of his rights and
performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith.

Credit Transactions /Pledge and Mortgage/ 9 of 55

 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 3227 March 22, 1907
PEDRO ALCANTARA, plaintiff-appellee,
vs.
AMBROSIO ALINEA, ET AL., defendants-appellants.
S.D. Reyes for appellants.
J. Gerona for appellee.
TORRES, J.:
On the 13th day of March, 1905, the plaintiff filed a
complaint in the Court of First Instance of La Laguna,
praying that judgment be rendered in his behalf
ordering the defendants to de liver to him the house
and lot claimed, and to pay him in addition thereto as
rent the sum of 8 pesos per month from February of
that year, and to pay the costs of the action; and the
plaintiff alleged in effect that on the 29th day of
February, 1904, the defendants, Ambrosio Alinea and
Eudosia Belarmino, borrowed from him the sum of 480
pesos, payable in January of said year 1905 under the
agreement that if, at the expiration of the said period,
said amount should not be paid it would be understood
that the house and lot, the house being constructed of
strong materials, owned by the said defendants and
located in the town of San Pablo on the street of the
same name, Province of La Laguna, be considered as
absolutely sold to the plaintiff for the said sum; that the
superficial extent and boundaries of said property are
described in the complaint; and that, notwithstanding
that the time for the payment of said sum has expired
and no payment has been made, the defendants
refuse to deliver to plaintiff the said property, openly
violating that which they contracted to do and depriving
him to his loss of the rents which plaintiff should
received, the same counting from February, 1905.
The defendants, after the overruling of a demurrer to
the complaint herein, answered denying generally and
specifically all the allegations contained in the
complaint, except those which were expressly
admitted, and alleged that the amount claimed
included the interest; and that the principal borrowed
was only 200 pesos and that the interest was 280
pesos, although in drawing the document by mutual
consent of the parties thereto the amount of
indebtedness was made to appear in the sum of 480
pesos; and that as their special defense defendants
alleged that they offered to pay the plaintiff the sum of
480 pesos, but the plaintiff had refused to accept the
same, therefore they persisted in making said offer and
tender of payment, placing at the disposal of the
plaintiff the said 480 pesos first tendered; and
defendants asked for the costs of action.
After having taken the evidence of both parties and
attaching the documents presented in evidence to the
record, the judge on November 27, 1905, rendered a
judgment ordering the defendants to deliver to the
plaintiff the house and lot, the object of this litigation,
and to pay the costs of the action, not making any
finding upon the question of loss or damages by reason
of the absence of proof on these points. The
defendants duly took exception to this decision, and
asked for a new trial of the case on the ground that the
findings of the court below in its decision were plainly
contrary to law, which motion was overruled and from
which ruling defendants also excepted.
We have in this case a contract of loan and a promise
of sale of a house and lot, the price of which should be
the amount loaned, if within a fixed period of time such
amount should not be paid by the debtor-vendor of the
property to the creditor-vendee of same.
Either one of the contracts are perfectly legal and both
are authorized respectively by articles 1451, 1740, and
1753, and those following, of the Civil Code. The fact
that the parties have agreed at the same time, in such
a manner that the fulfillment of the promise of sale
would depend upon the nonpayment or return of the
amount loaned, has not produced any charge in the
nature and legal conditions of either contract, or any
essential defect which would tend to nullify the same.
If the promise of sale is not vitiated because, according
to the agreement between the parties thereto, the price
of the same is to be the amount loaned and not repaid,
neither would the loan be null or illegal, for the reason
that the added agreement provides that in the event of
failure of payment the sale of property as agreed will
take effect, the consideration being the amount loaned
and not paid. No article of the Civil Code, under the
rules or regulations of which such double contract was
executed, prohibits expressly, or by inference from any
of its provisions, that an agreement could not be made
in the form in which the same has been executed; on
the contrary, article 1278 of the aforesaid code
provides that "contracts shall be binding, whatever may
be the form in which they may have been executed,
provided the essential conditions required for their
validity exist." This legal prescription appears firmly
sustained by the settled practice of the courts.
The property, the sale of which was agreed to by the
debtors, does not appear mortgaged in favor of the
creditor, because in order to constitute a valid
mortgage it is indispensable that the instrument be
registered in the Register of Property, in accordance
with article 1875 of the Civil Code, and the document
of contract, Exhibit A, does not constitute a mortgage,
nor could it possibly be a mortgage, for the reason of
said document is not vested with the character and
conditions of a public instrument.
By the aforesaid document, Exhibit A, said property
could not be pledged, not being personal property, and
notwithstanding the said double contract the debtor
continued in possession thereof and the said property
has never been occupied by the creditor.
Neither was there ever nay contract of antichresis by
reason of the said contract of loan, as is provided in
articles 1881 and those following of the Civil Code,
inasmuch as the creditor-plaintiff has never been in
possession thereof, nor has he enjoyed the said
property, nor for one moment ever received its rents;
therefore, there are no proper terms in law, taking into
consideration the terms of the conditions contained in
the aforesaid contract, whereby this court can find that
the contract was null, and under no consideration
whatever would it be just to apply to the plaintiff articles
1859 and 1884 of the same code.
The contract ( pactum commissorium) referred to in
Law 41, title 5, and law 12, title 12, of the fifth Partida,
and perhaps included in the prohibition and declaration
of nullity expressed in articles 1859 and 1884 of the
Civil Code, indicates the existence of the contracts of
mortgage or of pledge or that of antichresis, none of
which have coincided in the loan indicated herein.
Credit Transactions /Pledge and Mortgage/ 10 of 55
It is a principle in law, invariably applied by the courts effect, and the necessary instrument be executed by
in the decisions of actions instituted in the matter of the vendees.
compliance with obligations, that the will of the
contracting parties is the law of contracts and that a Therefore, by virtue of the reasons given above and
man obligates himself to that to which he promises to accepting the findings given in the judgment appealed
be bound, a principle in accordance with Law 1, title 1, from, we affirm the said judgment herein, with the costs
book 10 of the Novisima Recopilacion, and article 1091 against the appellants.
of the Civil Code. That which is agreed to in a contract
is law between the parties, a doctrine established,
among others, in judgments of the supreme court of After expiration of twenty days from the date of the
Spain of February 20, 1897, and February 13, 1904. notification of this decision let judgment be entered in
accordance herewith and ten days thereafter let the
case be remanded to the court from whence it came for
It was agreed between plaintiff and defendants herein proper action. So ordered.
that if defendants should not pay the loan of 480 pesos
in January, 1905, the property belonging to the
defendants and described in the contract should Arellano, C.J., Mapa, Johnson, and Tracey,
remain sold for the aforesaid sum, and such agreement JJ., concur.
must be complied with, inasmuch as there is no ground
in law to oppose the compliance with that which has
been agreed upon, having been so acknowledged by
the obligated parties.

The supreme court of Spain, applying the

aforementioned laws of Spanish origin to a similar
case, establishes in its decision of January 16, 1872,
the following legal doctrine:

Basing the complaint upon the obligation

signed by the debtor, which judicially
recognized his signature; and after
confessing to have received from the plaintiff
a certain amount, binding himself to return
same to the satisfaction of the plaintiff within
the term of four years, or in case of default to
transfer direct domain of the properties
described in the obligation and to execute the
necessary sale; and the term having expired
and the aforesaid amount not having been
paid, said plaintiff has his right free from
impediment to claim same against the heirs of
the debtor.

The document of contract has been recognized by the

defendant Alinea and by the witnesses who signed
same with him, being therefore an authentic and
efficacious document, in accordance with article 1225
of the Civil Code; and as the amount loaned has not
been paid and continues in possession of the debtor, it
is only just that the promise of sale be carried into

Credit Transactions /Pledge and Mortgage/ 11 of 55

 Republic of the Philippines The case was set for hearing, and after trial the court PRESENT AS SHOWING BY THE
SUPREME COURT rendered a decision, the dispositive portion of which FACT THAT THEY HAD PAID THE
Manila reads as follows: REALTY TAXES.

FIRST DIVISION IN VIEW OF THE ABOVE III

CONSIDERATIONS this Court
G.R. No. L-28658 October 18, 1979 declares Vicente Reyes the true and THE LOWER COURT ERRED IN
rightful owner of the land covered by BELIEVING AND HOLDING THAT
Plan, Psu-189753 and orders the BECAUSE OPPOSITORS-
VICENTE C. REYES, applicant-appellee, registration of his title thereto,
vs. APPELLANTS AND THEIR
provided that the title to be issued PREDECESSORS-IN-INTEREST
FRANCISCO SIERRA, EMILIO SIERRA, shall be subject to a public easement
ALEJANDRA SIERRA, FELIMON SIERRA, HAD NOT TAKEN ANY ACTIVE
of right of-way over a 2.00 meter- INTEREST TO PAY REALTY
AURELIO SIERRA, CONSTANCIO SIERRA, CIRILO wide strip of the land along Lucay
SIERRA and ANTONIA SANTOS, oppositors- TAXES SINCE 1926 AND IT WAS
Street for the latter's widening and APPLICANT- APPELLEE AND HIS
appellants. improvement. PREDECESSOR-IN-INTEREST
THAT PAID THE REALTY 'TAXES
As soon as this decision is final let, FROM THE SAME PERIOD, THIS
the corresponding degree be issued CONSTITUTES STRONG
DE CASTRO, J.: in favor of VICENTE REYES, CORROBORATING EVIDENCE OF
widower, Pilipino, of legal age and APPLICANT'S ADVERSE
Appeal from the decision dated December 29, 1966 of resident of 1851 P. Guevarra Street, POSSESSION.
the Court of First Instance of Rizal Branch 1, Pasig, Santa Cruz, Manila. (P. 25, Record
which declared applicant Vicente Reyes the true and on Appeal). IV
rightful owner of the land covered by Plan Psu-189753
and ordered the registration of his title thereto. Oppositors appealed from the aforesaid decision, with THE LOWER COURT ERRED IN
the following assignment of errors: BELIEVING AND HOLDING THAT
On January 3, 1961, Vicente Reyes filed an application DOCUMENT EXH. "D" EXECUTED
for registration of his title to a parcel of land situated in I BY BASILIA BELTRAN IN 1926
Antipolo, Rizal and covered by Plan Psu-189753 of the WAS ALREADY A CONVEYANCE
Bureau of Lands. In his application, he declared that he THE LOWER COURT ERRED IN OF THE LAND I N QUESTION TO
acquired the land by inheritance from his father who BELIEVING AND HOLDING THAT VICENTE REYES AND THE
died sometime in 1944. Applicant is one of the heirs of ARTICLES 1134 AND 1137 OF THE FAILURE OF BASILIA BELTRAN
the deceased Vicente Reyes Sr. but the other heirs NEW CIVIL CODE ARE AND HER CHILDREN TO REDEEM
executed a deed of quit claim in favor of the applicant. APPLICABLE TO THIS INSTANT THE SAME, COULD BE
CASE ALTHOUGH THERE WAS CONSIDERED AS IF THE LAND
The notice of initial hearing was published in the Official NO FORECLOSURE OR SALE OF HAD ALREADY BEEN SOLD TO
Gazette, and a copy thereof was posted in a THE PROPERTY TO THE HIM. (p. 2 1, Rollo.)
conspicuous place in the land in question and in the HIGHEST BIDDER.
municipal building of Antipolo, Rizal. An opposition was The land applied for was originally owned by Basilia
filed by the Director of Lands, Francisco Sierra and II Beltran's parents, and upon their death in 1894, Basilia
Emilio Sierra. An Order of General Default was issued inherited the property. On April 19, 1926, Basilia
on June 28, 1962. A motion to set aside an Beltran, a widow, borrowed from applicant's father,
interlocutory default order was filed by Alejandra, THE LOWER COURT ERRED IN Vicente Reyes, Sr. the amount of P100.00 and secured
Felimon, Aurelio, Apolonio, Constancio, Cirilo, all BELIEVING AND HOLDING THAT the loan with the piece of land in question, AS
surnamed Sierra and Antonia Santos, thru counsel, APPLICANT-APPELLEE AND HIS evidenced by exhibit "D" quoted hereunder:
and the trial court issued an Order on February 4, 1966 PREDECESSOR-IN-INTEREST
amending the general order of default so as to include HAD BEEN IN CONSTRUCTIVE
POSSESSION OF THE LAND SA KAALAMAN NANG LAHAT NA
the aforementioned movants as oppositors. BUMASA AT
FROM APRIL 19, 1926 UP TO THE

Credit Transactions /Pledge and Mortgage/ 12 of 55

NAKAKITA NITONG KASULATAN:
Kaming mag-kakapatid may sapat
na gulang na nakalagda Sa
kasulatan ito, bilang katibayan nang
pag papahintulot sa aming Ina na si
Bacilia Beltran na ipananagutan kay
G. Vicente Reyes sa inutang ha
halagang isang daan piso (P100.00)
na walang anopamang pakinabang;
ang isang lagay na lupa sa kallehon
Sukay, Antipolo, Rizal, naliligiran
nang mga lupang may titulo
Torrents, expendientes Nos. 770,
1831, lote 1, 645 at 1839 lote 2, may
kabu-uan humigit kumulang sa apat
na raan metro; ito'y aring naiwan ng
ama naming namatay na si Melecio
Sierra.
Ang katotohanan kahit isangla o
ipag-bile man ng tuluyan ang
nasabing pag-aaral' o lupa wala
kaming kinalaman, sapagkat
ipinauubaya nang lubusan sa
arming Ina ang kapamahalaan.
Sa katunayan nagsilagda kaming
mga anak, at apo kay Esteban, sa
harap nang saksing magpapatotoo.
Ngayon ika 19 nang Abril nang
1926. Antipolo, Rizal. K.P.
A. Since 1926 we were the ones paying
the land taxes.
Q. From whom did you acquire this
property?
A. Basilia Beltran.
Q. Do you mean to say that you yourself
bought this property.
A. My father was the one who bought the
property.
Q. What is the name of your father?
A. Vicente C. Reyes.
Q. Where is he now?
Saksi: A. He is already dead.
------------------------- Q. Can you inform this Honorable Court,
if you know, how your father acquired
------------------------- this property?
Since the execution of this document, Vicente Reyes, A. Since 1926 my father bought that land.
Sr. began paying the realty taxes up to the time of his
death in 1944, after which, his children continued Q. Was that transaction evidenced by a
paying the taxes. Basilia Beltran died in 1938 before document?
Reyes could recover from the loan.
A. Yes, there is a document.
Applicant, in seeking the registration of the land, relied L
on his belief that the property belongs to his father who a
g Q. From whom did your father allegedly
bought the same from Basilia Beltran, as borne out by
d purchase the property?
his testimony during the trial on direct examination.
a
n A. Basilia Beltran.
Q. Mr. Reyes, do you claim to be the owner i
of this property included or described in your
application? From the above-quoted testimony of applicant, it is
B
evident that he considered the document marked
a
Exhibit "D as contract of Sale and not as a mortgage.
A Yes, sir. c
Oppositors contended that the words "isinangla," "na
i
ipananagutan sa inutang na halagang isang daang
Q How did you acquire this property'? lpiso," "Kahit isangla o ipagbili," etc., manifest that the
i
document should be treated as a mortgage,
a
antichresis, or pactum commission and not as an
B
Credit Transactions /Pledge and Mortgage/ 13 of 55
absolute sale or pacto de retro sale. (p. 28, Brief,
Oppositors-Appellants).
The Court is of the opinion that Exhibit "D" is a
mortgage contract. The intention of the parties at the
time of the execution of the contract must prevail, that
is, the borrowing and lending of money with security.
The use of the word Debt (utang) in an agreement
helps to point out that the transaction was intended to
be a loan with mortgage, because the term "utang"
implies the existence of a creditor-debtor relationship.
The ' Court has invariably upheld the validity of an
agreement or understanding whereby the lender of
money has taken a deed to the land as security for
repayment of the loan. Thus:
The fact that the real transaction
between the parties was a borrowing
and lending, will, whenever, or
however, it may appear, show that a
deed, absolute on its face was
intended as a security for money;
and whenever it can be ascertained
to be a security for money, it is only
a mortgage, however artfully it may
be disguised. (Villa vs. Santiago, 38
Phil. 163).
The whole case really turns on the
question of whether the written
instrument in controversy was a
mortgage or a conditional sale. ...
The real intention of the parties at
the time the written instrument was
made must concern in the
interpretation given to it by the
courts. ... The correct test, where it
can be applied, is the continued
existence of a debt or liability
between the parties. If such exists,
the conveyance may be held to be
merely a security for the debt or an
indemnity against the liability.
(Cuyugan vs. Santos, 34 Phil. 112).
The Cuyugan Case quoted some provisions in Jones'
Commentaries on Evidence, vol. 3, paragraphs 446-
447 which are likewise applicable to the facts of the
case at bar:
446. To show that instruments
apparently absolute are only
securities. ... It is an established
doctrine that a court of equity will
treat a deed, absolute in form, as a
mortgage, when it is executed as
security for loan of money, The court
looks beyond the terms of the
instrument to the real transaction;
and when that is shown to be one of
security and not of sale, it will give
effect to the actual contract of the
parties.
447. Same-Real intention of the
parties to be ascertained ... As we
have shown in the preceding
section, the intention of the
parties must govern and it matters
not what peculiar form the
transaction may have taken. The
inquiry always is, Was a security for
the loan of money or other property
intended? ... A debt owing to the
mortgagee, or a liability incurred for
the grantor, either pre-existing or
created at the time the deed is
made, is essential to give the deed
the character of a mortgage. The
relation of debtor and creditor must
appear. The existence of the debt is
one on the tests. ... In construing the
deed to be a mortgage, its character
as such must have existed from its
very inception, - created at the time
the conveyance was made.
The same principle was laid down in a later case, that
of Macapinlac vs. Gutierrez Rapide, 43 Phil. 781,
quoting 3 Pomeroy's Equity Jurisdiction, Section .1195,
wherein it was stated:
... The doctrine has been firmly
established from an early day that
when the character of a mortgage
has attached at the commencement
of the transaction, so that the
instrument, whatever be its form, is
regarded in equity as a mortgage,
that character of mortgage must and
will always continue. If the
instrument is in its essence a
mortgage, the parties cannot by any
stipulations, however express and
positive, render it anything but a
mortgage or deprive it of the
essential attributes belonging to a
mortgage in equity.
Concerning the legal effects of such contract, Pomeroy
observes:
... Whenever a deed absolute on its
face is thus treated as a mortgage,
the parties are clothed with all the
rights, are subject to all liabilities,
and are entitled to all the remedies
of ordinary mortgagors and
mortgagees. The grantee may
maintain an action for the
foreclosure of the grantor equity of
redemption; the grantor may
maintain an action to redeem and to
compel a reconvayance upon his
payment of the debt secured. If the
grantee goes into possession, and
as such is liable to account for the
rents and profits.
Obviously, from the nature of the transaction,
applicant's predecessor-in-interest is a mere
mortgagee, and ownership of the thing mortgaged is
retained by Basilia Beltran, the mortgagor. The
mortgagee, however, may recover the loan, although
the mortgage document evidencing the loan was non-
registrable being a purely private instrument. Failure of
mortgagor to redeem the property does not
automatically vest ownership of the property to the
mortgagee, which would grant the latter the right to
appropriate the thing mortgaged or dispose of it. This
violates the provision of Article 2088 of the New Civil
Code, which reads:
The creditor cannot appropriate the
things given by way of pledge or
mortgage, or dispose by them. Any
stipulation to the contrary is null and
void.
The act of applicant in registering the property in his
own name upon mortgagor's failure to redeem the
Credit Transactions /Pledge and Mortgage/ 14 of 55
property would amount to a pactum
commissorium which is against good morals and public
policy.
In declaring applicant as the "true and rightful owner of
the land in question," the trial court held that applicant
and his predecessor-in- interest acquired ownership
over the property by means of prescription having been
in constructive possession of the land applied for since
1926, applying Arts, 1134 and 1137 of the New Civil
Code:
Art. 1134. - Ownership and other
real rights over immovable property
are acquired by ordinary prescription
through possession of ten years.
Art. 1137. - Ownership and other
real rights over immovables also
prescribe through uninterrupted
adverse possession thereof for thirty
years, without need of title or good
faith.
Applicant in his testimony on cross-examination,
admitted that he and his father did not take possession
of the property but only made use of the same for the
purpose of spending vacation there, which practice
they discontinued for the last 23 years. Possession of
the property must. be in the concept of an owner. This
is a fundamental principle of the law of prescription in
this jurisdiction. In the case at bar, the possession of
applicant was not adverse, nor continuous.
An applicant for registration of title must prove his title
and should not rely on the absence or weakness of the
evidence of the oppositors. For purposes of
prescription, there is just title when adverse claimant
came into possession of the property through one of
the modes recognized by law for the acquisition of
ownership (Art. 1129, New Civil Code). Just title must
be proved and is never presumed (Art. 1131, New Civil
Code). Mortgage does not constitute just title on the
part of the mortgagee. since ownership is retained by
the mortgagor. When possession is asserted to convert
itself into ownership, a new right is sought to be
created, and the law becomes more exacting and
requires positive proof of title. Applicant failed to
present sufficient evidence to prove that he is entitled
to register the property. The trial court's finding that
since applicant and his father had been continuously
paying the realty taxes, that fact "constitutes strong
corroborating evidence of applicant's adverse
possession," does not carry much weight. Mere failure
of the owner to pay the taxes does not warrant a
conclusion that there was abandonment of a right to
the property. The payment of taxes on property does
not alone constitute sufficient evidence of title.
(Elumbaring vs. Elumbaring, 12 Phil. 389)
The belief of applicant that he owns the property in
question which he inherited from his father cannot
overthrow the fact that the transaction is a mortgage.
The doctrine "once a mortgage always a mortgage"
has been firmly established whatever be its form.
(Macapinlac vs. Gutierrez Rapide, supra) The parties
cannot by any stipulation, however express and
positive, render it anything but a mortgage. No right
passes to applicant except that of a mortgage since
one cannot acquire a right from another who was not
in possession thereof A derivative right cannot rise
higher than its source.
Applicant having failed to show by sufficient evidence
a registrable title to the land in question, the application
for registration should be dismissed.
WHEREFORE, the decision appealed from is hereby
set aside, and let another one be entered ordering the
registration of the title of the land in question in the
name of the oppositors- appellants. The said
oppositors-appellants are hereby directed to pay the
applicant- appellee within ninety (90) days from the
finality of this decision, the debt in the amount of
P100.00 plus interest at the rate of six per cent (6%)
per annum from April 19, 1926 until paid. No
pronouncement as to costs.
SO ORDERED.
Teehankee, Actg. C.J., (Chairman), Makasiar,
Fernandez, Guerrero and Melencio- Herrera, JJ.,
concur.
Credit Transactions /Pledge and Mortgage/ 15 of 55
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-44943 March 17, 1982
SOCORRO MONTEVIRGEN, et. al., petitioners,
vs.
COURT OF APPEALS, SPOUSES SERAFIN ABUTIN
and CARMEN SENIR, respondents.
DE CASTRO, J.:
This is a petition for review on certiorari of the decision
of the Court of Appeals promulgated on June 8, 1976
affirming in toto the Order of the Court of First Instance
of Cavite, Branch III in Civil Case No. N-1609,
promulgated on September 17, 1974.
The factual background of the case is as follows:
Petitioners Montevirgen filed an action against
respondent-spouses Serafin Abutin and Carmen Senir
in the Court of First Instance of Cavite, Branch III, for
the annulment of a deed of sale with pacto de
retro, over a parcel of land situated in Barrio Alima,
Bacoor, Cavite, title to which was transferred to
respondents upon the registration of the deed of pacto
de retro sale. On July 1, 1971, the trial court, by virtue
of the agreement reached by the parties, rendered a
decision declaring the transaction an equitable
mortgage and fixing a period of ten (10) months from
July 1, 1971 within which the petitioners must pay their
obligation with legal interest, otherwise execution
would follow. 1
Petitioners having failed to pay their obligation within
the ten-month period, respondents moved for
execution of the decision of July 1, 1971. Petitioners
opposed the motion for execution alleging that there
must be a foreclosure of mortgage upon failure to
redeem and not an outright execution sale. Said
opposition was denied by the trial court and an Order
of Execution was issued on May 10, 1972. Upon
implementation of said order, the Clerk of Court issued
two writs of execution, the first, directing the Provincial
Sheriff of Cavite to levy on the properties of petitioners
to satisfy the sum of P57,500.00 plus legal interest of
12% thereon commencing from February 2, 1969 and
sum of P11,104.32 plus legal interest of 12% to
commence from May 15, 1969; and second, directing
the Provincial Sheriff to sell at public auction the
described properties with all the improvements existing
thereon.
Petitioners moved to quash the writ of execution
alleging that said writ was at variance with the decision,
firstly, because the decision merely directed the
imposition of legal interest which is 6% per annum and
secondly, because it included the new construction on
the lot in question. On September 8, 1972, the lower
court denied the motion to quash writ of execution. The
Provincial Sheriff accordingly executed the writs. Upon
motion filed by respondents, the sale was confirmed by
the trial court in an Order dated September 25, 1972.
On October 5, 1972, petitioners filed a Motion to Annul
the Sheriff's Certificate of Sale alleging again that the
writ of execution was at variance and contrary to the
decision and at the same time calling attention to the
fact that on September 21, 1972 respondents
demolished the old house in the subject premises. In
an order dated October 20, 1972, the trial court granted
petitioner's Motion and ordered the writ of execution to
be amended so "that the new construction may not be
the object of the occupation by the defendant and that
the interest mentioned therein which is legal interest,
must be 6%."
Respondents went to the Court of Appeals on certiorari
(docketed as CA-G. R. No. SP-01813) alleging that the
confirmation of the sale on September 25, 1972
divested the trial court of its jurisdiction and therefor its
order amending the writ of execution was issued
without jurisdiction. The Court of Appeals dismissed
the petition in its Resolution of June 11, 1972. On
appeal to this Court, this Court denied the petition for
lack of merit in an Order dated November 6, 1973.
Motion for reconsideration was again denied on
December 7, 1973.
On July 24, 1974, respondents filed in the Court of First
Instance another motion for execution sale on the
ground that the previous auction sales conducted were
declared void either from failure to conform with the
judgment, or with the requirements of the law in the
conduct of auction sales. This was opposed by
petitioners on August 7, 1974 with prayer for the
cancellation of T.C.T. No. 35236 then registered in the
name of respondents, and the issuance of a new title
in their names subject to equitable mortgage right of
respondents. Replying to the opposition, respondents
asked for the enforcement of the judgment of July 1,
1971 by asking for an auction sale. In resolving the
issues posed, the trial court held:
Under the circumstances this Court
holds that plaintiffs cannot demand
reconveyance and there is even no
need for an auction sale of this
property since this property was
already titled in the name of the
defendants as early as February 24,
1969 even before this action was
instituted.
xxx xxx xxx
In the case at bar, the foreclosure
sale effected by the Provincial
Sheriff was a ceremonial futility
because as may be gleaned in the
Decision the only right recognized in
favor of plaintiffs Socorro
Montevirgen was to repurchase the
property within the 10 month period
prescribed therein; if they had done
so, then the defendants would have
been ordered to reconvey the
property to the plaintiffs; having
failed to do so, they have lost the
equity recognized in their favor by
the Decision. ...
WHEREFORE, in view of the
foregoing, this Court denied
defendants' Motion for Auction Sale
as well as the reliefs prayed for by
plaintiffs in their opposition on
August 7, 1974 and hereby declares
that the execution of the Decision of
July 1, 1971 does not require the
holding of any auction sale; that the
auction sale previously held were all
unnecessary; that upon failure of
Credit Transactions /Pledge and Mortgage/ 16 of 55
 plaintiffs to pay their obligation within
the ten month period from July 1,
1971, the absolute ownership over
the land with the old construction
described in the Deed of Pacto de
Retro Sale, and now registered in
the name of defendants under
T.C.T. No. 35236 of the Register of
Deeds of the Province of Cavite has
become consolidated in the
defendants, and relieved of plaintiffs
equity. Plaintiff's right to remain in
possession in a concept other than
owner should be threshed out in an
unlawful detainer or other
appropriate possessory action
including the fixing of rentals as this
suit was filed for the purpose only of
determining the nature of the Deed
of Sale with Pecto de
Retro. 2 (Emphasis supplied)
On appeal to the Court of Appeals, the trial court's
order of September 17, 1974 was affirmed in toto in its
decision of June 8, 1976, holding as follows:
But this notwithstanding, the points
sticking out like a sore thumb in
appellants thesis is, that he has not
to this date paid his obligation to the
appellees within the 10 month period
as required in the judgment. This in
fact gave occasion for the judgment
to become executory. As said
earlier, the judgment was the result
of an agreement by and between the
parties and this being so, the
judgment became executory at the
end of the 10 month period. When it
was executed, the execution may be
reasonably considered as a Dumaraogs to pay the loan of P1,500 within the period
foreclosure of the mortgage. The
appellant did not seek to redeem the
same as he has not to this date
moved in that direction. Therefore,
his right to redeem has long since
expired. 3
Upon denial of these two Motions for Reconsideration
dated August 9, 1976 and October 18, 1976,
petitioners filed this instant petition raising questions of
law in which, if reduced to essential the main issue
would be whether or not respondent Court of Appeals
correctly affirmed the trial court's Order of September
17, 1974 interpreting, in effect, its Decision of July 1,
1971. Pursuant to Our Resolution of March 9, 1977,
this Court issued a Temporary Restraining Order
restraining private respondents from entering into any
transaction affecting or disposing of the land in
question.
The appeal is impressed with merit.
1. Perusal of the Court of Appeals' decision affirming in
toto the trial court's order of September 17, 1974,
shows that it has interpreted the trial court's decision of
July 1, 1971 to mean that upon failure of the petitioners
to pay their obligation within the period as fixed in the
judgment, petitioners also lost the right to redeem the
property and as such, the absolute ownership over the
subject premises has become consolidated in the
respondents.
We do not agree with the respondent court's
interpretation. It contradicts the agreement between
the parties and the declaration in the decision that the
contract between the parties was an equitable
mortgage, not a pacto de retro sale. It would produce
the same effect as a pactum commissurium, a
forfeiture clause that has traditionally been held as
contrary to good morals and public policy and,
therefore, void. 4
Thus, in the analogous case of Guanzon vs.
Argel 5 this Court speaking thru Justice JBL Reyes,
affirmed the lower court's decision denying petitioner
Guanzon's prayer that the Provincial Sheriff be ordered
to execute the necessary conveyance of the property
in question in her favor and that she be placed in the
possession thereof, for failure of private respondents
also as specified in the judgment. As therein held:
In no way can the judgment at bar be
construed to mean that should the
Dumaraogs fail to pay the money
within the specified period then the
property would be conveyed by the
Sheriff to Guanzon. Any
interpretation in that sense would
contradict the declaration made in
the same Judgment that the contract
between the parties was in fact a
mortgage and not a pacto de retro
sale. The only right of a mortgagee
in case of non-payment of a debt
secured by mortgage would be to
foreclose the mortgage and have the
encumbered property sold to satisfy
the outstanding indebtedness. The
mortgagor's default does not
operate to vest in the mortgagee the
ownership of the encumbered
property, for any such effect is
against public policy as enunciated
by the Civil Code. 6
The declaration, therefore, in the decision of July 1,
1971 to the effect that absolute ownership over the
subject premises has become consolidated in the
respondents upon failure of the petitioners to pay their
obligation within the specified period, is a nullity, for
consolidation of ownership is an improper and
inappropriate remedy to enforce a transaction declared
to be one of mortgage. 7 It is the duty of respondents,
as mortgagees, to foreclose the mortgage if he wishes
to secure a perfect title to the mortgaged property if he
buys it in the foreclosure sale. 8
2. Neither is the petitioners' right as a mortgagor in
equity affected by the fact that the subject property was
already titled in the name of respondents as early as
1969 even before the action was instituted. In the first
place, it must be borne in mind that this equitable
doctrine that deems a conveyance intended as security
for a debt to be, in effect an equitable mortgage,
operates regardless of the form of the agreement
chosen by the contracting parties as the repository of
their will. Equity looks through the form and considers
the substance, and no kind of engagement can be
snowed which will enable the parties to escape from
the equitable doctrine adverted to. In other words, a
conveyance of land, accompanied by registration in the
name of the transferee and the issuance of a new
certificate, is no more secured from the operation of
this equitable doctrine than the most informal
conveyance that could be devised. 9
In the second place, the circumstance that the land has
been judicially registered under the Torrens System
does not change or affect civil rights and liabilities with
respect thereto except as expressly provided in the
Credit Transactions /Pledge and Mortgage/ 17 of 55
Land Registration Act (sec. 70); and as between the
immediate parties to any contract affecting such lands,
their rights will generally be determined by the same
rules of law that are applicable to unregistered land. 10

Finally, the circumstance that the original transaction

was subsequently declared to be an equitable
mortgage must mean that the title to the subject land
which had been transferred to private respondents
actually remained or is transferred back to petitioners
herein as owners-mortgagors, conformably to the well-
established doctrine that the mortgagee does not
become the owner of the mortgaged property because
the ownership remains with the mortgagor (Art. 2088,
New Civil Code). This is precisely the reason why this
Court issued in its Resolution of March 9, 1977 a
Temporary Restraining Order, restraining private
respondents from entering into any transaction
affecting or disposing the land in question.

IN VIEW OF THE FOREGOING, the decision of

respondent Court of Appeals dated June 8, 1976
affirming in toto the trial court's order of September 17,
1974 is hereby reversed. The Temporary Restraining
Order issued pursuant to Our resolution of March 9,
1979 is hereby made permanent.

The Register of Deeds of the Province of Cavite is

hereby ordered to cancel T.C.T. No. 35236 registered
in the name of private respondents and to issue a new
title in the name of herein petitioners subject to the
equitable mortgage rights of private respondents.

SO ORDERED.

Makasiar, Fernandez, De Castro, Guerrero, Melencio-

Herrera and Plana, JJ., concur.

Credit Transactions /Pledge and Mortgage/ 18 of 55

 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-49940 September 25, 1986
GEMMA R. HECHANOVA, accompanied by her
husband, NICANOR HECHANOVA, JR., and
PRESCILLA R. MASA, accompanied by her
husband, FRANCISCO MASA, petitioners,
vs.
HON. MIDPANTAO L. ADIL, Presiding Judge,
Branch II, Court of First Instance of Iloilo, THE
PROVINCIAL SHERIFF OF ILOILO, and PIO
SERVANDO, respondents.
YAP, J.:
Petitioners seek the annulment of various orders
issued by the respondent Presiding Judge of Branch II,
Court of First Instance of Iloilo, in Civil Case No. 12312
entitled "Pio Servando versus Jose Y. Servando et
al." A temporary restraining order was issued by this
Court on May 9, 1979, staying until further orders the
execution of the decision rendered by the respondent
Judge in said case.
The case under review is for the annulment of a deed
of sale dated March 11, 1978, executed by defendant
Jose Y. Servando in favor of his co-defendants, the
petitioners herein, covering three parcels of land
situated in Iloilo City. Claiming that the said parcels of
land were mortgaged to him in 1970 by the vendor, who
is his cousin, to secure a loan of P20,000.00, the
plaintiff Pio Servando impugned the validity of the sale
as being fraudulent, and prayed that it be declared null
and void and the transfer certificates of title issued to
the vendees be cancelled, or alternatively, if the sale is
not annulled, to order the defendant Jose Servando to
pay the amount of P20,000.00, plus interests, and to
order defendants to pay damages. Attached to the
complaint was a copy of the private document
evidencing the alleged mortgage (Annex A), which is
quoted hereunder:
August 20, 1970
This is to certify that I, Jose Yusay
Servando, the sole owner of three
parcel of land under Tax Declaration
No. 28905, 44123 and 31591 at Lot
No. 1, 1863-Portion of 1863 & 1860
situated at Sto. Nino St., Arevalo,
Compania St. & Compania St.,
Interior Molo, respectively, have this
date mortgaged the said property to
my cousin Pio Servando, in the
amount of TWENTY THOUSAND
PESOS (P20,000.00), redeemable
for a period not exceeding ten (10)
years, the mortgage amount bearing
an interest of 10% per annum.
I further certify that in case I fail to
redeem the said properties within
the period stated above, my cousin
Pio Servando, shall become the sole
owner thereof.
(SGD.) JOSE YUSAY SERVANDO
WITNESSES:
(Sgd) Ernesto G. Jeruta
(Sgd) Francisco B. Villanueva
The defendants moved to dismiss the complaint on the
grounds that it did not state a cause of action, the
alleged mortgage being invalid and unenforceable
since it was a mere private document and was not
recorded in the Registry of Deeds; and that the plaintiff
was not the real party in interest and, as a mere
mortgagee, had no standing to question the validity of
the sale. The motion was denied by the respondent
Judge, in its order dated June 20, 1978, "on the ground
that this action is actually one for collection."
On June 23, 1978, defendant Jose Y. Servando died.
The defendants filed a Manifestation and Motion,
informing the trial court accordingly, and moving for the
dismissal of the complaint pursuant to Section 21 of
Rule 3 of the Rules of Court, pointing out that the action
was for. recovery of money based on an actionable
document to which only the deceased defendant was
a party. The motion to dismiss was denied on July 25,
1978, "it appearing from the face of the complaint that
the instant action is not purely a money claim, it being
only incidental, the main action being one for
annulment and damages."
On August 1, 1978, plaintiff filed a motion to declare
defendants in default, and on the very next day, August
2, the respondent Judge granted the motion and set
the hearing for presentation of plaintiff's evidence ex-
parte on August 24, 1978.
On August 2, 1978, or the same day that the default
order was issued, defendants Hechanova and Masa
filed their Answers, denying the allegations of the
complaint and repeating, by way of special and
affirmative defenses, the grounds stated in their
motions to dismiss.
On August 25, 1978, a judgment by default was
rendered against the defendants, annulling the deed of
sale in question and ordering the Register of Deeds of
Iloilo to cancel the titles issued to Priscilla Masa and
Gemma Hechanova, and to revive the title issued in the
name of Jose Y. Servando and to deliver the same to
the plaintiff.
The defendants took timely steps to appeal the
decision to the Court of Appeals by filing a notice of
appeal, an appeal bond, and a record on appeal.
However, the trial court disapproved the record on
appeal due to the failure of defendants to comply with
its order to eliminate therefrom the answer filed on
August 2, 1978 and accordingly, dismissed the appeal,
and on February 2, 1978, issued an order granting the
writ of execution prayed for by plaintiff.
We find the petition meritorious, and the same is
hereby given due course.
It is clear from the records of this case that the plaintiff
has no cause of action. Plaintiff has no standing to
question the validity of the deed of sale executed by
the deceased defendant Jose Servando in favor of his
co-defendants Hechanova and Masa. No valid
mortgage has been constituted plaintiff's favor, the
alleged deed of mortgage being a mere private
document and not registered; moreover, it contains a
stipulation (pacto comisorio) which is null and void
Credit Transactions /Pledge and Mortgage/ 19 of 55
under Article 2088 of the Civil Code. Even assuming
that the property was validly mortgaged to the plaintiff,
his recourse was to foreclose the mortgage, not to seek
annulment of the sale.

WHEREFORE, the decision of the respondent court

dated August 25, 1973 and its Order of February 2,
1979 are set aside, and the complaint filed by plaintiff
dated February 4, 1978 is hereby dismissed.

SO ORDERED.

Narvasa, Melencio-Herrera, * Paras and Feliciano,

concur.

Cruz, J., is on leave.

Credit Transactions /Pledge and Mortgage/ 20 of 55

 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-45710 October 3, 1985
CENTRAL BANK OF THE PHILIPPINES and
ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF
THE DEPARTMENT OF COMMERCIAL AND
SAVINGS BANK, in his capacity as statutory
receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and
SULPICIO M. TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E.
Eslao for petitioners.
Antonio R. Tupaz for private respondent.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as
null and void the decision of the Court of Appeals, in
C.A.-G.R. No. 52253-R dated February 11, 1977,
modifying the decision dated February 15, 1972 of the
Court of First Instance of Agusan, which dismissed the
petition of respondent Sulpicio M. Tolentino for
injunction, specific performance or rescission, and
damages with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon
favorable recommendation of its legal department,
approved the loan application for P80,000.00 of
Sulpicio M. Tolentino, who, as a security for the loan,
executed on the same day a real estate mortgage over
his 100-hectare land located in Cubo, Las Nieves,
Agusan, and covered by TCT No. T-305, and which
mortgage was annotated on the said title the next day.
The approved loan application called for a lump sum
P80,000.00 loan, repayable in semi-annual
installments for a period of 3 years, with 12% annual
interest. It was required that Sulpicio M. Tolentino shall
use the loan proceeds solely as an additional capital to
develop his other property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release
of the P80,000.00 loan was made by the Bank; and
Sulpicio M. Tolentino and his wife Edita Tolentino
signed a promissory note for P17,000.00 at 12%
annual interest, payable within 3 years from the date of
execution of the contract at semi-annual installments of
P3,459.00 (p. 64, rec.). An advance interest for the
P80,000.00 loan covering a 6-month period amounting
to P4,800.00 was deducted from the partial release of
P17,000.00. But this pre-deducted interest was
refunded to Sulpicio M. Tolentino on July 23, 1965,
after being informed by the Bank that there was no fund
yet available for the release of the P63,000.00 balance
(p. 47, rec.). The Bank, thru its vice-president and
treasurer, promised repeatedly the release of the
P63,000.00 balance (p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central
Bank, after finding Island Savings Bank was suffering
liquidity problems, issued Resolution No. 1049, which
provides:
In view of the chronic reserve
deficiencies of the Island Savings
Bank against its deposit liabilities,
the Board, by unanimous vote,
decided as follows:
1) To prohibit the bank from making
new loans and investments [except
investments in government
securities] excluding extensions or
renewals of already approved loans,
provided that such extensions or
renewals shall be subject to review
by the Superintendent of Banks, who
may impose such limitations as may
be necessary to insure correction of
the bank's deficiency as soon as
possible;
xxx xxx xxx
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding
thatIsland Savings Bank failed to put up the required
capital to restore its solvency, issued Resolution No.
967 which prohibited Island Savings Bank from doing
business in the Philippines and instructed the Acting
Superintendent of Banks to take charge of the assets
of Island Savings Bank (pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of
non-payment of the P17,000.00 covered by the
promissory note, filed an application for the extra-
judicial foreclosure of the real estate mortgage
covering the 100-hectare land of Sulpicio M. Tolentino;
and the sheriff scheduled the auction for January 22,
1969.
On January 20, 1969, Sulpicio M. Tolentino filed a
petition with the Court of First Instance of Agusan for
injunction, specific performance or rescission and
damages with preliminary injunction, alleging that since
Island Savings Bank failed to deliver the P63,000.00
balance of the P80,000.00 loan, he is entitled to
specific performance by ordering Island Savings Bank
to deliver the P63,000.00 with interest of 12% per
annum from April 28, 1965, and if said balance cannot
be delivered, to rescind the real estate mortgage (pp.
32-43, rec.).
On January 21, 1969, the trial court, upon the filing of
a P5,000.00 surety bond, issued a temporary
restraining order enjoining the Island Savings Bank
from continuing with the foreclosure of the mortgage
(pp. 86-87, rec.).
On January 29, 1969, the trial court admitted the
answer in intervention praying for the dismissal of the
petition of Sulpicio M. Tolentino and the setting aside
of the restraining order, filed by the Central Bank and
by the Acting Superintendent of Banks (pp. 65-76,
rec.).
On February 15, 1972, the trial court, after trial on the
merits rendered its decision, finding unmeritorious the
petition of Sulpicio M. Tolentino, ordering him to pay
Island Savings Bank the amount of PI 7 000.00 plus
legal interest and legal charges due thereon, and lifting
the restraining order so that the sheriff may proceed
with the foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal
by Sulpicio M. Tolentino, modified the Court of First
Instance decision by affirming the dismissal of Sulpicio
M. Tolentino's petition for specific performance, but it
ruled that Island Savings Bank can neither foreclose
Credit Transactions /Pledge and Mortgage/ 21 of 55
the real estate mortgage nor collect the P17,000.00
loan pp. 30-:31. rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M.
Tolentino for specific performance
prosper?
2. Is Sulpicio M. Tolentino liable to
pay the P17,000.00 debt covered by
the promissory note?
3. If Sulpicio M. Tolentino's liability to
pay the P17,000.00 subsists, can his
real estate mortgage be foreclosed
to satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino
entered into an P80,000.00 loan agreement on April
28, 1965, they undertook reciprocal obligations. In
reciprocal obligations, the obligation or promise of each
party is the consideration for that of the other (Penaco
vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs,
Pelarca 29 SCRA 1 [1969]); and when one party has
performed or is ready and willing to perform his part of
the contract, the other party who has not performed or
is not ready and willing to perform incurs in delay (Art.
1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the
obligation of Island Savings Bank to furnish the
P80,000.00 loan. When Sulpicio M. Tolentino executed
a real estate mortgage on April 28, 1965, he signified
his willingness to pay the P80,000.00 loan. From such
date, the obligation of Island Savings Bank to furnish
the P80,000.00 loan accrued. Thus, the Bank's delay
in furnishing the entire loan started on April 28, 1965,
and lasted for a period of 3 years or when the Monetary
Board of the Central Bank issued Resolution No. 967
on June 14, 1968, which prohibited Island Savings
Bank from doing further business. Such prohibition
made it legally impossible for Island Savings Bank to
furnish the P63,000.00 balance of the P80,000.00 loan.
The power of the Monetary Board to take over insolvent
banks for the protection of the public is recognized by
Section 29 of R.A. No. 265, which took effect on June
15, 1948, the validity of which is not in question.
The Board Resolution No. 1049 issued on August
13,1965 cannot interrupt the default of Island Savings
Bank in complying with its obligation of releasing the
P63,000.00 balance because said resolution merely
prohibited the Bank from making new loans and
investments, and nowhere did it prohibit island Savings
Bank from releasing the balance of loan agreements
previously contracted. Besides, the mere pecuniary
inability to fulfill an engagement does not discharge the
obligation of the contract, nor does it constitute any
defense to a decree of specific performance (Gutierrez
Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]).
And, the mere fact of insolvency of a debtor is never an
excuse for the non-fulfillment of an obligation but
'instead it is taken as a breach of the contract by him
(vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and
accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00
loan covering a 6-month period cannot be taken as a
waiver of his right to collect the P63,000.00 balance.
The act of Island Savings Bank, in asking the advance
interest for 6 months on the supposed P80,000.00
loan, was improper considering that only P17,000.00
out of the P80,000.00 loan was released. A person
cannot be legally charged interest for a non-existing
debt. Thus, the receipt by Sulpicio M. 'Tolentino of the
pre-deducted interest was an exercise of his right to it,
which right exist independently of his right to demand
the completion of the P80,000.00 loan. The exercise of
one right does not affect, much less neutralize, the
exercise of the other.
The alleged discovery by Island Savings Bank of the
over-valuation of the loan collateral cannot exempt it
from complying with its reciprocal obligation to furnish
the entire P80,000.00 loan. 'This Court previously ruled
that bank officials and employees are expected to
exercise caution and prudence in the discharge of their
functions (Rural Bank of Caloocan, Inc. vs. C.A., 104
SCRA 151 [1981]). It is the obligation of the bank's
officials and employees that before they approve the
loan application of their customers, they must
investigate the existence and evaluation of the
properties being offered as a loan security. The recent
rush of events where collaterals for bank loans turn out
to be non-existent or grossly over-valued underscore
the importance of this responsibility. The mere reliance
by bank officials and employees on their customer's
representation regarding the loan collateral being
offered as loan security is a patent non-performance of
this responsibility. If ever bank officials and employees
totally reIy on the representation of their customers as
to the valuation of the loan collateral, the bank shall
bear the risk in case the collateral turn out to be over-
valued. The representation made by the customer is
immaterial to the bank's responsibility to conduct its
own investigation. Furthermore, the lower court, on
objections of' Sulpicio M. Tolentino, had enjoined
petitioners from presenting proof on the alleged over-
valuation because of their failure to raise the same in
their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971).
The lower court's action is sanctioned by the Rules of
Court, Section 2, Rule 9, which states that "defenses
and objections not pleaded either in a motion to
dismiss or in the answer are deemed waived."
Petitioners, thus, cannot raise the same issue before
the Supreme Court.
Since Island Savings Bank was in default in fulfilling its
reciprocal obligation under their loan agreement,
Sulpicio M. Tolentino, under Article 1191 of the Civil
Code, may choose between specific performance or
rescission with damages in either case. But since
Island Savings Bank is now prohibited from doing
further business by Monetary Board Resolution No.
967, WE cannot grant specific performance in favor of
Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule,
however, that rescission is only for the P63,000.00
balance of the P80,000.00 loan, because the bank is in
default only insofar as such amount is concerned, as
there is no doubt that the bank failed to give the
P63,000.00. As far as the partial release of
P17,000.00, which Sulpicio M. Tolentino accepted and
executed a promissory note to cover it, the bank was
deemed to have complied with its reciprocal obligation
to furnish a P17,000.00 loan. The promissory note
gave rise to Sulpicio M. Tolentino's reciprocal
obligation to pay the P17,000.00 loan when it falls due.
His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not
entitled to rescission (Article 1191 of the Civil Code). If
there is a right to rescind the promissory note, it shall
belong to the aggrieved party, that is, Island Savings
Bank. If Tolentino had not signed a promissory note
setting the date for payment of P17,000.00 within 3
years, he would be entitled to ask for rescission of the
entire loan because he cannot possibly be in default as
Credit Transactions /Pledge and Mortgage/ 22 of 55
there was no date for him to perform his reciprocal
obligation to pay.
Since both parties were in default in the performance
of their respective reciprocal obligations, that is, Island
Savings Bank failed to comply with its obligation to
furnish the entire loan and Sulpicio M. Tolentino failed
to comply with his obligation to pay his P17,000.00
debt within 3 years as stipulated, they are both liable
for damages.
Article 1192 of the Civil Code provides that in case both
parties have committed a breach of their reciprocal
obligations, the liability of the first infractor shall be
equitably tempered by the courts. WE rule that the
liability of Island Savings Bank for damages in not
furnishing the entire loan is offset by the liability of
Sulpicio M. Tolentino for damages, in the form of
penalties and surcharges, for not paying his overdue
P17,000.00 debt. The liability of Sulpicio M. Tolentino
for interest on his PI 7,000.00 debt shall not be included
in offsetting the liabilities of both parties. Since Sulpicio
M. Tolentino derived some benefit for his use of the
P17,000.00, it is just that he should account for the
interest thereon.
WE hold, however, that the real estate mortgage of
Sulpicio M. Tolentino cannot be entirely foreclosed to
satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real
estate mortgage is the same as that of the principal
contract (Banco de Oro vs. Bayuga, 93 SCRA 443
[1979]). For the debtor, the consideration of his
obligation to pay is the existence of a debt. Thus, in the
accessory contract of real estate mortgage, the
consideration of the debtor in furnishing the mortgage
is the existence of a valid, voidable, or unenforceable
debt (Art. 2086, in relation to Art, 2052, of the Civil
Code).
The fact that when Sulpicio M. 'Tolentino executed his
real estate mortgage, no consideration was then in
existence, as there was no debt yet because Island
Savings Bank had not made any release on the loan,
does not make the real estate mortgage void for lack
of consideration. It is not necessary that any
consideration should pass at the time of the execution
of the contract of real mortgage (Bonnevie vs. C.A.,
125 SCRA 122 [1983]). lt may either be a prior or
subsequent matter. But when the consideration is The rule of indivisibility of the mortgage as outlined by
subsequent to the mortgage, the mortgage can take Article 2089 above-quoted presupposes several heirs
effect only when the debt secured by it is created as a of the debtor or creditor which does not obtain in this
binding contract to pay (Parks vs, Sherman, Vol. 176 case. Hence, the rule of indivisibility of a mortgage
N.W. p. 583, cited in the 8th ed., Jones on Mortgage, cannot apply
Vol. 2, pp. 5-6). And, when there is partial failure of
consideration, the mortgage becomes unenforceable WHEREFORE, THE DECISION OF THE COURT OF
to the extent of such failure (Dow. et al. vs. Poore, Vol. APPEALS DATED FEBRUARY 11, 1977 IS HEREBY
172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). MODIFIED, AND
Where the indebtedness actually owing to the holder of
the mortgage is less than the sum named in the
mortgage, the mortgage cannot be enforced for more 1. SULPICIO M. TOLENTINO IS HEREBY ORDERED
than the actual sum due (Metropolitan Life Ins. Co. vs. TO PAY IN FAVOR OF HEREIN PETITIONERS THE
Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie SUM OF P17.000.00, PLUS P41,210.00
on Mortgage, Vol. 1, P. 180). REPRESENTING 12% INTEREST PER ANNUM
COVERING THE PERIOD FROM MAY 22, 1965 TO
AUGUST 22, 1985, AND 12% INTEREST ON THE
Since Island Savings Bank failed to furnish the TOTAL AMOUNT COUNTED FROM AUGUST 22,
P63,000.00 balance of the P8O,000.00 loan, the real 1985 UNTIL PAID;
estate mortgage of Sulpicio M. Tolentino became
unenforceable to such extent. P63,000.00 is 78.75% of
P80,000.00, hence the real estate mortgage covering 2. IN CASE SULPICIO M. TOLENTINO FAILS TO
PAY, HIS REAL ESTATE MORTGAGE COVERING
100 hectares is unenforceable to the extent of 78.75
hectares. The mortgage covering the remainder of 21.25 HECTARES SHALL BE FORECLOSED TO
SATISFY HIS TOTAL INDEBTEDNESS; AND
21.25 hectares subsists as a security for the
P17,000.00 debt. 21.25 hectares is more than
sufficient to secure a P17,000.00 debt. 3. THE REAL ESTATE MORTGAGE COVERING
78.75 HECTARES IS HEREBY DECLARED UNEN
FORCEABLE AND IS HEREBY ORDERED
The rule of indivisibility of a real estate mortgage
provided for by Article 2089 of the Civil Code is RELEASED IN FAVOR OF SULPICIO M.
TOLENTINO.
inapplicable to the facts of this case.
NO COSTS. SO ORDERED.
Article 2089 provides:
A pledge or mortgage is indivisible Concepcion, Jr., Escolin, Cuevas and Alampay, JJ.,
even though the debt may be divided concur.
among the successors in interest of
the debtor or creditor. Aquino (Chairman) and Abad Santos, JJ., took no part.
Therefore, the debtor's heirs who
has paid a part of the debt can not
ask for the proportionate
extinguishment of the pledge or
mortgage as long as the debt is not
completely satisfied.
Neither can the creditor's heir who
have received his share of the debt
return the pledge or cancel the
mortgage, to the prejudice of other
heirs who have not been paid.
Credit Transactions /Pledge and Mortgage/ 23 of 55
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-33084 November 14, 1988
ROSE PACKING COMPANY, INC., petitioner,
vs.
THE COURT OF APPEALS, HON. PEDRO C.
NAVARRO, Judge of the Court of First Instance of
Rizal (Br. III), PHILIPPINE COMMERCIAL &
INDUSTRIAL BANK & PROVINCIAL SHERIFF OF
RIZAL, respondents.
PARAS, J.:
This is a petition for review on certiorari of the
decision 1 of the Court of Appeals in CA-G.R. No.
43198-R promulgated on December 16,1970 (Rollo,
pp. 237-249), the dispositive portion of which reads as
follows:
WHEREFORE, in view of the
foregoing, this Court hereby renders
judgment:
1. Denying the petition to set aside
and annul the questioned orders
dated January 31, 1969 and May
7,1969 rendered by respondent
Judge, the same having been issued
in consonance with the exercise of
the Court's discretion.
2. Declaring valid the foreclosure
sale of May 9, 1969 but finding the
consolidation of ownership over the
properties sold at such sale to have
been prematurely executed thereby
rendering it void ab initio.
3. In accordance with this Court's
resolution dated May 8, 1970,
petitioner is hereby granted sixty
(60) days from receipt of a copy of
this decision within which to redeem
the properties sold at the foreclosure
sale of May 9, 1969.
4. Dismissing the charge of
contempt against PCIB and its
Executive Vice-President and
General Manager, Eugenio R.
Unson,. for lack of merit.
and its Resolution 2 dated January 12, 1971 (Rollo, p.
280), denying petitioner's motion for reconsideration,
as wen as its Resolution 3 dated January 22, 1971
(Rollo, p. 281) denying petitioner's supplement to
motion for reconsideration.
The facts of the case as presented by petitioner and as
embodied in the decision of the Court of Appeals are
as follows:
On December 12, 1962 respondent bank (PCIB)
approved a letter- request by petitioner for the
reactivation of its overdraft line of P50,000.00,
discounting line of P100,000.00 and a letter of credit-
trust receipt line of P550,000.00 as wen as an
application for a loan of P300,000.00, on fully secured
real estate and chattel mortgage and on the further
condition that respondent PCIB appoint as it did
appoint its executive
vice-president Roberto S. Benedicto as its
representative in petitioner's board of directors.
On November 3, 1965 the National Investment &
Development Corporation (NIDC), the wholly owned
investment subsidiary of the Philippine National Bank,
approved a P2.6 million loan application of petitioner
with certain conditions. Pursuant thereto, the NIDC
released to petitioner on November 7, 1965 the amount
of P100,000.00. Subsequently, petitioner purchased
five (5) parcels of land in Pasig, Rizal making a down
payment thereon.
On January 5,1966, the NIDC released another
P100,000.00 to petitioner and on January 12, 1966, the
aforesaid releases totalling P200,000.00 were applied
to the payment of preferred stock which NIDC
subscribed in petitioner corporation to partially
implement its P1,000,000.00 investment scheme as
per agreement. Thereafter, the NIDC refused to make
further releases on the approved loan of petitioner.
On August 3, 1966 and October 5, 1966, respondent
PCIB approved additional accomodations to petitioner
consisting of a P710,000.00 loan for the payment of the
balance of the purchase price of those lots in Pasig
required to be bought, P500,000.00 loan for operating
capital, P200,000.00 loan to be paid directly to
petitioner's creditors, while consolidating all previous
accommodations at P1,597,000.00—all of which were
still secured by chattel and real estate mortgages.
However, PCIB released only P300,000.00 of the
P710,000.00 approved loan for the payment of the
Pasig lands and some P300,000.00 for operating
capital.
On June 29,1967, the Development Bank of the
Philippines approved an application by petitioner for a
loan of P1,840,000.00 and a guarantee for
$652,682.00 for the purchase of can making
equipment. Immediately upon receipt of notice of the
approval of the Development Bank of the loan,
petitioner advised respondent PCIB of the availability
of P800,000.00 to partially pay off its account and
requested the release of the titles to the Pasig lots for
delivery to the Development Bank of the Philippines.
Respondent PCIB verbally advised petitioner of its
refusal, stating that all obligations should be liquidated
before the release of the titles to the Pasig properties.
Following the PCIB's rejection of petitioner's counter-
proposal, petitioner purchased a parcel of land at
Valenzuela, Bulacan with the P800,000.00 DBP loan,
with the latter's consent.
On January 5, 1968 respondent PCIB filed a complaint
against petitioner and Rene Knecht, its president for
the collection of petitioner's indebtedness to
respondent bank, which complaint was docketed as
Civil Case No. 71697 of the Court of First Instance of
Manila.
On January 22, 1968, PCIB gave petitioner notice that
it would cause the real estate mortgage to be
foreclosed at an auction sale, which it scheduled for
February 27,1968. Thus, respondent Sheriff served
notice of sheriffs sale (of the real properties mortgaged
to respondent PCIB) on July 18,1968 at 10:00 a.m.,
more particularly, T.C.T. No. 73620 (barrio Sto.
Domingo, municipality of Cainta); T.C.T. No. 177019
Credit Transactions /Pledge and Mortgage/ 24 of 55
(barrio of San Joaquin, Pasig, Rizal); and T.C.T. No.
175595 (barrio San Joaquin, Pasig, Rizal).
Subsequently, on July 15, 1968, petitioner filed a
complaint docketed as Civil Case No. 11015 in the
Court of First Instance of Rizal to enjoin respondents
PCIB and the sheriff from proceeding with the
foreclosure sale, to ask the lower court to fix a new
period for the payment of the obligations of petitioner
to PCIB and for other related matters. Petitioner
likewise prayed, pending final judgment, for the
issuance ex-parte of a writ of preliminary injunction
enjoining herein respondents from proceeding with the
foreclosure sale scheduled to be held on July 18, 1968.
On January 31, 1969, the lower court issued ail order
denying the application for preliminary injunction and
dissolving its restraining order which had been issued
on July 17, 1968. Petitioner promptly filed a motion for
reconsideration which was denied by the lower court
on May 7, 1969.
On May 8, 1969 petitioner filed with respondent Court
of Appeals a petition for certiorari with application for a
restraining order and preliminary injunction against the
foreclosure sale (Rollo, p. 54).<äre||anº•1àw> On May
13, 1969 respondent Court resolved to issue a writ of
preliminary injunction upon filing by petitioner of a bond
in the amount of P60,000.00. However, petitioner
moved for amendment of the Order issuing the
preliminary injunction, on the ground that the
aforementioned resolution of respondent Court came
too late to stop the foreclosure sale which was held on
May 9, 1969, praying instead that the preliminary
injunction should now enjoin respondents, particularly
respondent Provincial Sheriff, from proceeding to give
effect to the foreclosure sale of May 9, 1969; that said
sheriff should refrain from issuing a deed of certificate
of sale pursuant thereto and from registering the
certificate of deed of sale in the Registry of Deeds; and
to toll or stop the running of the period of redemption.
Respondent Court resolved to deny said motion in its
Resolution dated May 28, 1969 (Rollo, pp. 237-242).
On May 8, 1970, on urgent motion of petitioner,
respondent Court granted petitioner a period of sixty
(60) days from receipt of the decision to be rendered in
CA-G.R. No. 43198 within which to redeem its
properties sold, should the said decision be one
declaring the execution sale in dispute to be valid
(Rollo, p. 231).
Meantime, on May 12, 1970, an affidavit of On April 2, 1971 respondent PCIB filed a motion for
consolidation of ownership executed by Eugenio R. leave to lease real estate properties in custodia
Unson for and in behalf of respondent PCIB concerning legis, more specifically the 31, 447 sq.m. lot located at
the properties involved in the instant petition for Sto. Domingo, Cainta, Rizal covered by TCT No.
certiorari, was registered with the Register of Deeds of 286176 (Rollo, p. 697). Petitioner filed its opposition to
Pasig, Rizal at 8:00 a.m.. Consequently, the old the motion on May 27, 1971 (Rollo, p. 712). The reply
transfer certificates of title covering the aforementioned to the opposition was filed on December 6,1971 (Rollo,
properties were cancelled and new ones issued in the p. 730); the rejoinder to respondent PCIB's reply to
name of respondent PCIB, the buyer at the foreclosure opposition, on November 19, 1971 (Rollo, p. 736).
sale. In view thereof, petitioner filed a motion charging Meantime the case was transferred to the Second
respondent PCIB and its Executive Vice-President and Division, by a Resolution of the First Division dated
Assistant General Manager Eugenio R. Unson with January 17, 1983
contempt of court. Petitioner prayed that (a) the Deed (Rollo, p. 752).
of Sale dated May 12, 1970 and the consolidation of
ownership of the same date be declared null and void; The issues raised in this case are the following:
(b) that the new transfer certificates of title TCT Nos.
286174, 286175, and 286176—be cancelled and the
old ones, TCT Nos. 177019,175595, and 73620 be 1. WHETHER OR NOT
RESPONDENT COURT ERRED IN
restored or revived by the Register of Deeds of Rizal;
and (c) that the respondent PCIB be ordered to FINDING THAT THE LOWER
COURT DID NOT COMMIT AN
surrender and deposit the TCT Nos. 177019, 175595,
and 73620 with respondent Court for safekeeping ABUSE OF DISCRETION IN
(Rollo. p. 243). DENYING PETITIONER'S
APPLICATION FOR A
PRELIMINARY INJUNCTION AND
On December 16, 1970 respondent Court promulgated DISSOLVING THE RESTRAINING
the questioned decision (Rollo, pp. 237-249). On ORDER PREVIOUSLY ISSUED.
January 12, 1971 it resolved (Rollo, p. 280) to deny (Brief for Petitioner, pp. 21-47);
petitioner's motion for reconsideration dated January 5,
1971 (Rollo, p. 250) and on January 22, 1971 it again
resolved (Rollo, p. 281) to deny petitioner's supplement 2. WHETHER OR NOT
RESPONDENT COURT ERRED IN
to motion for reconsideration dated January 18, 1971
(Rollo, p. 260). DECLARING VALID THE
FORECLOSURE SALE ON MAY
9,1969 OF THE MORTGAGED
The instant Petition for Review on certiorari (Rollo, p. PROPERTIES EN MASSE WHEN
12) was filed with the Court on February 16, 1971. On THEY REFER TO SEVERAL REAL
February 23, 1971, the Court resolved to give due ESTATE MORTGAGES
course to the petition and ordered the issuance of EXECUTED ON DIFFERENT
preliminary injunction enjoining respondents from DATES. (Brief for Petitioner, pp. 47-
enforcing or implementing the appealed decision of 50).
respondent Court of Appeals, upon petitioner's posting
a bond of P50,000.00 (Rollo, p. 584). The writ of
preliminary injunction was issued on April 28, 1971 The main issue is whether or not private respondents
(Rollo, p. 619). have the right to the extrajudicial foreclosure sale of
petitioner's mortgaged properties before trial on the
merits. The answer is in the negative.
The Brief for Petitioner was filed on June 18, 1971
(Rollo, p. 631). The Brief for the Respondents was filed
on September 20, 1971 (Rollo, p. 655). The Reply Brief Petitioner filed Civil Case No. 11015 in the Court of
was filed on December 6, 1971 (Rollo, p. 678). First Instance of Rizal, Branch II, to obtain judgment (1)
enjoining defendants (respondents herein) from
proceeding with the foreclosure sale of the subject real
estate mortgages, (2) fixing a new period for the
Credit Transactions /Pledge and Mortgage/ 25 of 55
payment of the obligations of plaintiff to defendant
PCIB sufficiently long to enable it to recover from the
effects of defendant PCIB's inequitable acts, (3)
ordering defendant PCIB to immediately give up
management of plaintiffs canning industry and to pay
plaintiff such damages as it may prove in the concept
of actual, compensatory and exemplary or corrective
damages, aside from attorney's fees and expenses of
litigation, plus costs (Rollo, p. 98). It is to be noted that
petitioner filed the above case mainly to forestall the
foreclosure sale of the mortgaged properties before
final judgment. The issuance of a writ of preliminary
injuction could have preserved the status quo of the
parties in relation to the subject matter litigated by them
during the pendency of the action (Lasala v.
Fernandez, 5 SCRA 79 [1962]; De Lara v. Cloribel, 14
SCRA 269 [1965]; Locsin v. Climaco, 26 SCRA 816
[1969].
When the lower court denied the issuance of the writ
prayed for and dissolved the restraining order it had
previously issued, in its order dated January 31, 1969
(Rollo, p. 138) it practically adjudicated the case before
trial on the merits.
While petitioner corporation does not deny, in fact, it
admits its indebtedness to respondent bank (Brief for
Petitioner, pp. 7-11), there were matters that needed
the preservation of the status quo between the parties.
The foreclosure sale was premature.
First was the question of whether or not petitioner
corporation was already in default. In its letter dated
August 12,1966 to petitioner corporation, among the
conditions that respondent bank set for the
consolidation of the outstanding obligations of
petitioner was the liquidation of the said obligations
together with the latter's other obligations in the
financing scheme already approved by the NIDC and
PDCP. To quote:
a) These facilities shall be temporary
and shall be fully liquidated, together
with other obligations from a
refinancing scheme already
approved by the NIDC and PDCP
totalling Pl million in equity and P2.6
million in long term financing. In this
connection, the firm shall present to
this Bank a certified copy of the
terms and conditions of the approval
by the NIDC and PDCP. (Brief for
the Respondent, p. 41).
In other words, the loans of petitioner corporation from
respondent bank were supposed to become due only
at the time that it receives from the NIDC and PDCP
the proceeds of the approved financing scheme. As it
is, the conditions did not happen. NIDC refused to
make further releases after it had made two releases
totalling P200,000.00 which were all applied to the
payment of the preferred stock NIDC subscribed in
petitioner corporation to partially implement its
P1,000,000.00 investment scheme (Brief for Petitioner,
p. 9). The efficacy or obligatory force of a conditional
obligation is subordinated to the happening of a future
and uncertain event so that if the suspensive condition
does not take place, the parties would stand as if the
conditional obligation had never existed (Gaite v.
Fonacier, 2 SCRA 831 [1961]).<äre||anº•1àw>
Petitioner corporation alleges that there had been no
demand on the part of respondent bank previous to its
filing a complaint against petitioner and Rene Knecht
personally for collection on petitioner's indebtedness
(Brief for Petitioner, p. 13). For an obligation to become
due there must generally be a demand. Default
generally begins from the moment the creditor
demands the performance of the obligation. Without
such demand, judicial or extrajudicial, the effects of
default will not arise (Namarco v. Federation of United
Namarco Distributors, Inc. 49 SCRA 238 [1973]; Borje
v. CFI of Misamis Occidental, 88 SCRA 576 [1979]).
Whether petitioner corporation is already in default or
not and whether demand had been properly made or
not had to be determined in the lower court.
Granting that the findings of the lower court after trial
on the merits answer both questions in the affirmative,
another question that had to be determined was the
question of cause or consideration.
The loan agreements between petitioner and
respondent Bank are reciprocal obligations (the
obligation or promise of each party is the consideration
for that of the other Penacio v. Ruaya, 110 SCRA 46
[1981], cited. in Central Bank of the Philippines v. Court
of Appeals, 139 SCRA 46 [1985] ). A contract of loan
is not a unilateral contract as respondent Bank thinks it
is (Brief for the Respondent, p. 19). The promise of
petitioner to pay is the consideration for the obligation
of respondent bank to furnish the loan (Ibid.).
Respondent bank had complete control of the financial
affairs and the management of petitioner corporation.
It appointed its executive vice-president Roberto S.
Benedicto as its representative in petitioner's board of
directors, giving him the position of
vice-president in petitioner corporation (Brief for
Petitioner, p. 7). Upon the resignation of Roberto S.
Benedicto as vice-president and member of the board
of directors of petitioner corporation on December 29,
1965 (Brief for Petitioner, p. 8), respondent bank
designated Rafael Ledesma as its representative in
petitioner corporation's board of directors, due
representation in the board of petitioner being a
condition for the loan granted to the petitioner (Rollo,
p. 166). In fact, Rafael Ledesma was designated
Chairman of the Board of Directors (Rollo, p. 169).
Respondent bank required petitioner to appoint Sycip,
Gorrez, Velayo & Co. as full-time comptroller-treasurer
of the corporation at a monthly salary of P1,500.00
(Brief for Petitioner, p. 9; Brief for the Respondent, p.
41). On January 2, 1967, it also required petitioner to
replace its then manager, the Management &
Investment Development Associates (MIDA) and to
appoint instead Edmundo Ledesma at a monthly salary
of P3,000.00 and transportation allowance of
P1,000.00 plus an assistant manager, Venancio
Concepcion at a salary of P1,000.00 a month. During
the next 18 months' management by defendant's
designated manager, no meeting of the board of
directors of petitioner was called- Edmundo Ledesma
exercised full control and management (Brief for
Petitioner, pp. 10-11; Rollo, p. 167). Respondent Bank
has not given up management of petitioner's food
canning industry and continues to hold it. Even Atty.
Juan de Ocampo has been retained by petitioner as
corporate counsel, at the insistence of respondent
bank (Brief for Petitioner, p. 14). This has not been
denied by respondent bank.
Respondent bank's designation of its own choice of
people holding key positions in petitioner corporation
tied the hands of petitioner's board of directors to make
decisions for the interest of petitioner corporation, in
fact, undermined the latter's financial stability. During
the 18 months of Edmundo Ledesma's management,
petitioner's factory produced some P200,000.00 worth
of canned goods which according to petitioner is only
equivalent to its normal production in three weeks
Credit Transactions /Pledge and Mortgage/ 26 of 55
(Brief for Petitioner, pp.10-11). Respondent bank
justifies the underproduction by averring that petitioner
at that time did not have sufficient capital to operate the
factory, and that said factory was only operating for the
purpose of avoiding spoilage and deterioration of the
raw materials then in store at the petitioner's factory
(Rollo. p. 168) and yet respondent bank insists, that it
had released the entire amount of P500,000.00 loan to
petitioner (Rollo, p. 167) earmarked for operating
capital purposes (Brief for the Respondent, p. 43) and
admits having granted a P40,000.00 loan at a higher
interest of 14% per annum to petitioner at the request
of the same Edmundo Ledesma (Rollo, p. 167). After
the Development Bank of the Philippines had approved
on June 29, 1967 a loan of P1,840,000.00 applied for
by petitioner in 1961, respondent bank informed of the
availability of P800,000.00 to pay off partially
petitioner's account with it and requested to release the
titles of the Pasig parcels for delivery to the
Development Bank of the Philippines, and the amount
actually released by the Development Bank, Rafael
Ledesma, in his capacity as Chairman of petitioner's
board of directors wrote a letter to the Development
Bank of the Philippines stating that Rene Knecht,
petitioner's president, had no authority to borrow for
petitioner, being a mere figurehead president, although
Rene Knecht, controlled 87% of the stockholding of
petitioner and the by-laws authorized the president to
borrow for the company (Brief for Petitioner, pp. 11-
13).<äre||anº•1àw> That Rafael Ledesma wrote a
letter to the Development Bank of the Philippines is
admitted by respondent bank (Rollo, p. 169). The
Development Bank of the Philippines refused to make
further releases on the approved loan or to issue the
dollar guaranty for the importation of can making
machinery. It was Atty. Juan de Ocampo, the corporate
counsel retained by petitioner at the insistence of
respondent bank that instituted the collection suit and
extra-judicial foreclosure for respondent bank against
petitioner (Brief for Petitioner, pp. 13-14; Rollo, p. 79).
It is apparent that it is respondent bank practically
managing petitioner corporation through its
representatives occupying key positions therein. Not
even the president of petitioner corporation could
escape control by respondent bank through the
Comptroller Treasurer assigned "to countersign all
checks and other disbursements and decide on all
financial matters regarding the operations and who
shall see to it that operations are carried out" (Brief for
the Respondent, p. 41). There is basis for petitioner's
complaint of interference by respondent bank with
petitioner's financing (Brief for Petitioner, pp. 3132) and
such interference is only a consequence of respondent
bank's management of petitioner corporation through
the officers occupying key positions therein. Thus, if
ever petitioner corporation was in financial straits
instead of being rehabilitated this can be attributed to
the mismanagement of respondent corporation
through its representatives in petitioner corporation.
In a similar case, Filipinas Marble Corporation v.
Intermediate Appellate Court (142 SCRA 180 [1986])
where the lending institution took over the
management of the borrowing corporation and led that
corporation to bankcruptcy through mismanagement or
misappropriation of the funds, defeating the very
purpose of the loan which is to develop the projects of
the corporation, the Court ruled that it is as if the loan
was never delivered to it and thus, there was failure on
the part of the respondent DBP to deliver the
consideration for which the mortgage and the
assignment of deed were executed.
It cannot be determined at this point how much of the
total loan, most especially the P500,000.00 loan for
operating capital and the P40,000.00 loan of the
manager, Edmundo Ledesma, had been mismanaged
or misspent by respondent bank through its
representatives. This matter should rightfully be
litigated below in the main action (Filipinas Marble
Corportion v. Intermediate Appellate Court. (supra).
Furthermore, respondent bank was in default in
fulfilling its reciprocal obligation under their loan
agreement. By its own admission it failed to release the
P710,000.00 loan (Rollo, p. 167) it approved on
October 13, 1966 (Brief for Respondent, p. 44) in which
case, petitioner corporation, under Article 1191 of the
Civil Code, may choose between specific performance
or rescission with damages in either case (Central
Bank of the Philippines v. Court of Appeals, 139 SCRA
46 [1985]).
As a consequence, the real estate mortgage of
petitioner corporation cannot be entirely foreclosed to
satisfy its total debt to respondent bank. (Central Bank
of the Philippines v. Court of Appeals, supra.)
The issue of whether the foreclosure sale of the
mortgaged properties en masse was valid or not must
be answered in the negative. The rule of indivisibility of
a real estate mortgage refers to the provisions of Article
2089 of the Civil Code, which provides:
Art. 2089. A pledge or mortgage is
indivisible, even though the debt
may be divided among the
successors in interest of the debtor
or of the creditor.
Therefore the debtor's heir who has
paid a part of the debt cannot ask for
the proportionate extinguishment of
the pledge or mortgage as the debt
is not completely satisfied.
Neither can the creditor's heir who
received his share of the debt return
the pledge or cancel the mortgage,
to the prejudice of the other heirs
who have not been paid.
From these provisions is excepted
the case in which, there being
several things given in mortgage or
pledge, each one of them
guarantees only a determinate
portion of the credit.
The debtor, in this case, shall have a
right to the extinguishment of the
pledge or mortgage as the portion of
the debt for which each thing is
specially answerable is satisfied.
Respondent bank cites the above-quoted article in its
argument that the mortgage contract is indivisible and
that the loan it secures cannot be divided among the
different lots (Brief for Respondent, p. 27). Respondent
Court upheld the validity of the sale en masse (Rollo,
p. 246).
The rule, however, is not applicable to the instant case
as it presupposes several heirs of the debtor or creditor
which does not obtain in this case (Central Bank of the
Philippines v. Court of Appeals, supra.) Furthermore,
granting that there was consolidation of the entire loan
of petitioner corporations approved by respondent
bank, the rule of indivisibility of mortgage cannot apply
Credit Transactions /Pledge and Mortgage/ 27 of 55
where there was failure of consideration on the part of
respondent bank for the mismanagement of the affairs
of petitioner corporation and where said bank is in
default in complying with its obligation to release to
petitioner corporation the amount of P710,000.00. In
fact the real estate mortgage itself becomes
unenforceable (Central Bank of the Philippines v. Court
of Appeals, supra). Finally, it is noted that as already
stated hereinabove, the exact amount of petitioner's
total debt was still unknown.

PREMISES CONSIDERED, (1) the decision of the

Court of Appeals is REVERSED insofar as it sustained:
(a) the lower court's denial of petitioner's application for
preliminary injunction and (b) the validity of the
foreclosure sale; (2) the lower court is ordered to
proceed with the trial on the merits of the main case
together with a determination of exactly how much are
petitioner's liabilities in favor of respondent bank PCIB
so that proper measures may be taken for their
eventual liquidation; (3) the preliminary injunction
issued by this Court on April 28, 1971 remains in force
until the merits of the main case are resolved; and (4)
the motion of respondent bank dated April 1, 1981 for
leave to lease the real properties in custodia legis is
DENIED.

SO ORDERED.

Melencio-Herrera (Chairperson), Padilla, and

Sarmiento, JJ., concur.

Regalado, J., took no part.

Credit Transactions /Pledge and Mortgage/ 28 of 55

 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 3088 February 6, 1907
EL BANCO ESPAÑOL-FILIPINO, plaintiff-appellant,
vs.
JAMES PETERSON, sheriff of the city of Manila, ET
AL., defendants-appellees.
Del-Pan, Ortigas & Fisher for appellant.
Hartigan, Marple, Rohde, & Gutierrez for appellees.
TORRES, J.:
On the 24th of October, 1905, the Spanish-Filipino
Bank, a corporation, through its attorneys, Del-Pan,
Ortigas and Fisher, filed a complaint against the sheriff
of the city of Manila and the other defendant, Juan
Garcia, praying that judgment be rendered against the
said sheriff, declaring that the execution levied upon
the property referred to in the complaint, to wit, wines,
liquors, canned goods, and other similar merchandise,
was illegal, and directing the defendants to return the
said goods to the plaintiff corporation, and in case that
he had disposed of the same, to pay the value thereof,
amounting to P30,000, Philippine currency, and further
that it be declared that the said plaintiff corporation,
under the contract of pledge referred to in the
complaint had the right to apply the proceeds of the
sale of the said goods to the payment of the debt of
P40,000, Philippine currency, for the security of which
the said merchandise was pledged, with preference
over the claim of the other defendant, Juan Garcia and
that both defendants be held jointly liable to the plaintiff
for the sum of P500, Philippine currency, as damages,
and the said defendants to pay the costs of the
proceedings, and for such other and further relief as
the plaintiff might be entitled to under the law. Plaintiff
alleges in its complaint that under the contract entered
into on the 4th of March, 1905, by and between the
Spanish-Filipino Bank and Francisco Reyes, the
former, loaned to the latter the sum of P141,702,
Philippine currency; that on the same date Francisco
Reyes was already indebted to the bank in the sum of
P84,415.38, Philippine currency, which, added to the
amount of the loan, made a total of P226,117.38,
Philippine currency, received by the said Reyes as a
loan from the plaintiff bank, the entire sum at an annual
interest of 8 per cent; that to secure the payment of
these two sums and the interest thereon, the debtor,
Francisco Reyes, by a public instrument executed
before a notary on the aforesaid date mortgaged in
favor of the plaintiff bank several pieces of property
belonging to him, and pledged to the said bank part of
his personal property, specifying the proportion on
which the said real and personal property thus
mortgaged and pledged in favor of the plaintiff
corporation would be respectively liable for the
payment of the debt; that the property pledged by the
debtor to the bank included a stock or merchandise,
consisting of wines, liquors, canned goods, and other
similar articles valued at P90,591.75, Philippine
currency, then stored in the warehouses of the debtor,
Reyes, No. 12 Plaza Moraga, in the city of Manila,
which said goods and merchandise were liable for the
payment of the said sum of P90,591.75, Philippine
currency; that in the aforesaid deed of pledge it was
agreed by and between the bank and the debtor,
Reyes, that the goods should be delivered to Ramon
Garcia y Planas for safe-keeping, the debtor having
actually turned over to the said Garcia y Planas the
goods in question by delivering to him the keys of the
warehouse in which they were kept; that in a
subsequent contract entered into by and between the
debtor, Reyes, and the plaintiff bank on the 29th of
September, 1905, the said contract executed on the
4th of March was modified so as to provide that the
goods then (September 29) in possession the
depositary should only be liable for the sum of
P40,000, Philippine currency, the said contract of the
4th of March remaining in all other respects in full force
and effect, Luis M.a Sierra having been subsequently
appointed by agreement between the bank and the
debtor as depositary of the goods thus pledged in
substitution for the said Ramon Garcia y Planas.
On the 19th of October, 1905, in an action brought in
the Court of First Instance of the city of Manila by Juan
Garcia y Planas against Francisco Reyes and Ramon
Agtarat, judgment was rendered against the last-
mentioned two for the sum of P15,000, Philippine
currency, to be paid by them severally or jointly, upon
which judgment execution was issued against the
property of the defendants, Reyes and Agtarap. On the
aforesaid 19th day of October, for the purpose of
levying upon the property of the defendants, the sheriff
at the request of Garcia, the plaintiff in that case,
entered the warehouse where the goods pledged to the
plaintiff bank were stored under the custody of the
depositary, Sierra, and levied upon them as per list
attached to the complaint marked "Exhibit A." The
sheriff seized the goods which had been pledged to the
bank, depriving the latter of the possession of the
same, to which said contract executed on the 4th of
March, 1905. Without the authority of the bank, Reyes
could not dispose of the said goods. The value of the
goods seized by the sheriff was P30,000, Philippine
currency, the said sheriff, having refused, and still
refusing, to return to the same to the bank,
notwithstanding repeated demands made upon him to
this effect, and it being alleged in the complaint that
unless prohibited by the court the sheriff would proceed
to sell the said goods at public auction and apply the
proceeds to the satisfaction of the judgment rendered
in favor of the Juan Garcia y Planas, while the other
debtor Reyes had not paid to the bank the P40,000,
Philippine currency, to secure the payment of which the
goods mentioned in Exhibit A had been pledged to the
bank, that is, to secure the payment of a sum in excess
of the actual value of the goods in the hands of the
sheriff.
The defendant sheriff, James J. Peterson, and Juan
Garcia, his codefendant, through their attorneys,
Hartigan, Marple, Rohde and Gutierrez, answering the
complaint, stated that they admitted the allegations
contained in paragraphs 1, 2, 3, 4, 5, 12, and 17 of the
complaint, but denied the allegations contained in
paragraphs 6, 7, 8, 9, 10, 11, 14, 16, and 18. They
further denied the allegations contained in paragraph
12, with the exception that the defendant sheriff levied
upon the goods mentioned in Exhibit A attached to the
complaint for the purpose of satisfying the judgment
referred to therein; and also the allegations contained
in paragraph 13 of the complaint, with the exception
that the sheriff seized the property mentioned in Exhibit
A under the execution referred to therein; and finally
defendants denied the allegation contained in
paragraph 15 of the complaint, with the exception of
the allegation that the value of the property seized is
P30,000. They accordingly asked that the action be
dismissed and that it be adjudged that the plaintiff had
no interest whatever in the property described in the
complaint, and that the plaintiff be taxed with the costs
of these proceedings.
The testimony introduced by the parties having been
received, and the exhibits having been attached to the
Credit Transactions /Pledge and Mortgage/ 29 of 55
record, the court below entered judgment on the 4th of
January, 1906, dismissing plaintiff's action and
directing that the defendant recover from the Spanish-
Filipino Bank the costs of this action, for which
execution was duly issued. To this judgment counsel
for plaintiff excepted and announced his intention of
prosecuting a bill of exceptions, and further made a
motion for a new trial on the ground that the judgment
of the court below was contrary to law and that the
findings of fact were plainly and manifestly contrary to
the weight of the evidence.
The decision of this case depends mainly upon the
question as to whether the contract of pledge entered
into by and between the Spanish-Filipino Bank and
Francisco Reyes to secure a loan made by the former
to the latter was valid, all the requisites prescribed by
the Civil Code having been complied with.
If so, the bank's claim had preference over the claim of
a third person not secured, as was the bank's, by a
pledge, with reference to the property pledged to the
extent of its value, and therefore such property could
not have been legally levied upon by the sheriff at the
request of the defendant, Juan Garcia. (Arts. 1921,
1922, Civil Code.)
The contract in question complies with all the requisites
provided in article 1857 of the Civil Code, such as that
the property was pledged to secure a debt, the date of
the execution, the terms of the pledge, and the property
pledged, all of which appears in a public document,
and the property pledged was placed in the hands of a
third person by common consent of the debtor and
creditor, under the supervision of an agent of the bank.
(Arts. 1863, 1865, 1866, 1869, 1871, Civil Code.) The
defect alleged to exist in the said contract is that the
debtor, Reyes, continued in possession of the property
pledged; that he never parted with the said property,
and that neither the creditor nor the depositary
appointed by common consent of the parties were ever
in possession of the property pledged, and for this
reason, and upon the further ground that the contract
was fraudulent, the court below dismissed the
complaint with the costs against the plaintiff.
In the motion for a new trial it was alleged by the
plaintiff that the judgment of the court below was
contrary to law, and that the findings of fact contained
therein were plainly and manifestly against the weight
of the evidence. If plaintiffs contention is correct, then
the judgment of the court below should be reversed.
From the evidence introduced at the trial, both oral and
documentary, it appears that a third person, appointed
by the common consent of the debtor and creditor, was
in possession of the goods pledged in favor of the bank
under the direct supervision of an agent of the bank
expressly appointed for this purpose, and it has not
been shown that the said Reyes continued in the
possession of the goods after they had been pledged
to the plaintiff bank.
Exhibit C and the testimony of Francisco Reyes, Luis
M.a Sierra, and Mariano Rodriguez corroborate the
existence and authenticity of the contract of pledge
recorded in a public instrument and conclusively and
satisfactorily show that the debtor, after the pledge of
the property, parted with the possession of the same,
and that it was delivered to a third person designated
by common consent of the parties. For the purpose of
giving this possession greater effect, the pledgee
appointed a person to examine daily the property in the
warehouse where the same was kept.
The witness Matias Garcia also testified as to the
status of these goods, and informed Juan Garcia of
such status before the same were levied upon.
The sheriff's testimony supports the allegation that the
depositary, Sierra, was present at the place where the
goods were kept, as well as the representative of the
bank, Rodriguez, when he, the sheriff, went there for
the purpose of levying upon the said property. He
further testified that Rodriguez, the representative of
the bank, then protested and notified him that the
property in question was pledged to the Spanish-
Filipino Bank.
The contract in question was, therefore, a perfect
contract of pledge under articles 1857 and 1863 of the
Civil Code, it having been conclusively shown that the
pledgee took charge and possession of the goods
pledged through a depository and a special agent
appointed by it, each of whom had a duplicate key to
the warehouse wherein the said goods were stored,
and that the pledgee, itself, received and collected the
proceeds of the goods as they were sold.
The fact that the said goods continued in the
warehouse which was formerly rented by the pledgor,
Reyes, does not affect the validity and legality of the
pledge, it having been demonstrated that after the
pledge had been agreed upon, and after the depository
appointed with the common consent of the parties had
taken possession of the said property, the owner, the
pledgor, could no longer dispose of the same, the
pledgee being the only one authorized to do so through
the depositary and special agent who represented it,
the symbolical transfer of the goods by means of the
delivery of the keys to the warehouse where the goods
were stored being sufficient to show that the depositary
appointed by the common consent of the parties was
legally placed in possession of the goods. (Articles
438, 1463, Civil Code.)
The fact that the debtor, Reyes, procured purchasers
and made arrangements for the sale of the goods
pledged and that the bills for the goods thus sold were
signed by him does not affect the validity of the
contract, for the pledgor, Reyes, continued to be the
owner of the goods, (art. 1869, Civil Code), he being
the one principally interested in the sale of the property
on the best possible terms.
As to the reservation stipulated in paragraph 13 of the
contract executed on the 4th of March, 1905, it could
not affect the contract in question for the reason that
reservation referred to the rent from the property
mortgaged, to the bank and the dividends from the
shares of stock also pledged to the bank, and not the
merchandise so pledged, and such reservation could
not have rendered the contract of pledge null.
If the case is to be decided in accordance with the facts
alleged and established, the defendant not having
introduced any evidence to show that the said contract
of pledge was fraudulent as to other creditors, there
was no legal ground upon which the court below could
have held that the contract evidenced by the
instrument in question was entered into to defraud
other creditors of the pledgor.
For the reason hereinbefore set out, and the judgment
of the court below being contrary to the evidence, the
said judgment is hereby reversed, and it is hereby
adjudged that the plaintiff corporation, under and by
virtue of the contract of pledge in question, had a
preferential right over that of the defendant, Juan
Credit Transactions /Pledge and Mortgage/ 30 of 55
Garcia, to the goods pledged or the value thereof, the
value to be applied to the payment of the debt of
P40,000, Philippine currency, for the security of which
the said property was pledged, and the defendants are
accordingly hereby ordered to return to the plaintiff
corporation the property improperly levied upon, or to
pay its value, amounting to P30,000, Philippine
currency, without special provision as to costs. After
the expiration of twenty days let judgment be entered
in accordance herewith, and ten days thereafter the
case be remanded to the court below for execution. So
ordered.

Arellano, C.J., Mapa, Carson and Willard, JJ,. concur.

Credit Transactions /Pledge and Mortgage/ 31 of 55

 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-33157 June 29, 1982
BENITO H. LOPEZ, petitioner,
vs.
THE COURT OF APPEALS and THE PHILIPPINE
AMERICAN GENERAL INSURANCE CO.,
INC., respondents.
GUERRERO, J.:
On June 2, 1959, petitioner Benito H. Lopez obtained
a loan in the amount of P20,000.00 from the Prudential
Bank and Trust Company. On the same date, he
executed a promissory note for the same amount, in
favor of the said Bank, binding himself to repay the said
sum one (1) year after the said date, with interest at the
rate of 10% per annum. In addition to said promissory
note, he executed Surety Bond No. 14164 in which he,
as principal, and Philippine American General
Insurance Co., Inc. (PHILAMGEN) as surety, bound
themselves jointly and severally in favor of Prudential
Bank for the payment of the sum of P20,000.00.
On the same occasion, Lopez also executed in favor of
Philamgen an indemnity agreement whereby he
agreed "to indemnify the Company and keep it
indemnified and hold the same harmless from and
against any and all damages, losses, costs, stamps,
taxes, penalties, charges and expenses of whatever
kind and nature which the Company shall or may at any
time sustain or incur in consequence of having become
surety upon the bond." 1 At the same time, Lopez
executed a deed of assignment of 4,000 shares of the
Baguio Military Institution entitled "Stock Assignment
Separate from Certificate", which reads:
This deed of assignment executed
by BENITO H. LOPEZ, Filipino, of
legal age, married and with
residence and postal address at
Baguio City, Philippines, now and
hereinafter called the "ASSIGNOR",
in favor of the PHILIPPINE
AMERICAN GENERAL
INSURANCE CO., INC.,
corporation duly organized and
existing under and by virtue of the
laws of the Philippines, with principal
offices at Wilson Building, Juan
Luna, Manila, Philippines, now and
hereinafter called the "ASSIGNEE-
SURETY COMPANY"
— WITNESSETH —
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. 2
With the execution of this deed of assignment, Lopez
endorsed the stock certificate and delivered it to
Philamgen.
It appears from the evidence on record that the loan of
P20,000.00 was approved conditioned upon the
posting of a surety bond of a bonding company
a acceptable to the bank. Thus, Lopez persuaded Emilio
Abello, Assistant Executive Vice-President of
Philamgen and member of the Bond Under writing
Committee to request Atty. Timoteo J. Sumawang,
Assistant Vice- President and Manager of the Bonding
Department, to accommodate him in putting up the
bond against the security of his shares of stock with the
Baguio Military Institute, Inc. It was their understanding
that if he could not pay the loan, Vice-President Abello
and Pio Pedrosa of the Prudential Bank would buy the
shares of stocks and out of the proceeds thereof, the
loan would be paid to the Prudential Bank.
On June 2, 1960, Lopez' obligation matured without it
being settled. Thus, the Prudential Bank made
demands for payment both upon Lopez and
Philamgen. In turn, Philamgen sent Lopez several
written demands for the latter to pay his note (Exhibit
H, H-1 & H-2), but Lopez did not comply with said
demands. Hence, the Prudential Bank sometime in
August, 1961 filed a case against them to enforce
payment on the promissory note plus interest.
Upon receipt of the copies of complaint, Atty.
Sumawang confronted Emilio Abello and Pio Pedrosa
regarding their commitment to buy the shares of stock
of Lopez in the event that the latter failed to pay his
obligations to the Prudential Bank. 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. 3
Due to said commitment and instruction of Vice-
President Abello, Assistant Treasurer Marcial C. Cruz
requested the transfer of Stock Certificate No. 44 for
4,000 shares to Philamgen in a letter dated October 31,
1961. Stock Certificate No. 44 in the name of Lopez
was accordingly cancelled and in lieu thereof Stock
Certificate No. 171 was issued by the Baguio Military
Institute in the name of Philamgen on November 17,
1961.
Credit Transactions /Pledge and Mortgage/ 32 of 55
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. On November 18, 1963, after being
informed of said complaint, Lopez addressed the
following letter to Philamgen:
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 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. 4
On December 9, 1963, Philamgen was forced to pay
the Prudential Bank the sum of P27,785.89 which
included the principal loan and accumulated interest
and the Prudential Bank executed a subrogation
receipt on the same date.
On March 18, 1965, Philamgen brought an action in the
Court of First Instance of Manila (Civil Case No. 60272,
"The Philippine American General Insurance Co., Inc.
vs. Benito H. Lopez") for reimbursement of the said
amount. After hearing, the said court rendered
judgment dismissing 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, it
appears to be contradicted by the
facts of the case. The shares of
stock of the defendant were actually
transferred to the plaintiff when it
became clear after the plaintiff and
the defendant had been sued by the
Prudential Bank that plaintiff would
be compelled to make the payment
to the Prudential Bank, in view of the
inability of the defendant Benito H.
Lopez to pay his said obligation. The
certificate bearing No. 44 was
cancelled and upon request of the
plaintiff to the Baguio Military
Institute a new certificate of stock
was issued in the name of the
plaintiff bearing No. 171, by means
of which plaintiff became the
registered owner of the 4,000 shares
originally belonging to the
defendant.
It is noteworthy that the transfer of
the stocks of the defendant in the
name of the plaintiff company was
made at the instance of Messrs.
Abello and Pedrosa, who promised
to buy the same from the plaintiff.
Now that these shares of stock of the
defendant had already been
transferred in the name of the
plaintiff, the defendant has already
divested himself of the said stocks,
and it would seem that the remedy of
the plaintiff is to go after Messrs.
Abello and Pedrosa on their promise
to pay for the said stocks. To go after
the defendant after the plaintiff had
already become the owner of his
shares of stock and compel him to
pay his obligation to the Prudential
Bank would be most unfair, unjust
and illogical for it would amount to
double payment on his part. After the
plaintiff had already appropriated the
said shares of stock, it has already
lost its right to recover anything from
the defendant, for the reason that
the transfer of the said stocks was
made without qualification. This
transfer takes the form of a
reimbursement of what plaintiff had
paid to the Prudential Bank, thereby
depriving the plaintiff of its right to go
after the defendant herein. 5
Philamgen appealed to the Court of Appeals raising
these assignments of errors:
I
The lower court erred in finding that
the evidence does not bear out the
contention of plaintiff that the shares
of stock belonging to defendant were
transferred by him to plaintiff by way
of pledge.
II
The lower court erred in finding that
plaintiff company appropriated unto
itself the shares of stock pledged to
it by defendant Benito Lopez and in
finding that, with the transfer of the
stock in the name of plaintiff
company, the latter has already
been paid or reimbursed what it paid
to Prudential Bank.
III
The lower court erred in not finding
that the instant case is one where
the pledge has abandoned the
security and elected instead to
enforce his claim against the pledgor
by ordinary action. 6
On December 17, 1970, the Court of Appeals
promulgated a decision in favor of the Philamgen,
thereby upholding the foregoing assignments of errors.
It 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 a pactum
commissorium; and that pending payment, Philamgen
is merely holding the stock as a security for the
payment of Lopez' obligation. The dispositive portion of
the said decision states:
WHEREFORE, the decision of the
lower court is hereby reversed, and
another one is hereby entered
ordering the defendant to pay the
plaintiff the sum of P27,785.89 with
Credit Transactions /Pledge and Mortgage/ 33 of 55
 interest at the rate of 12% per
annum from December 9, 1963,
10% of the P27,785.89 as attorney's
fees and the costs of the suit. 7
The motion for reconsideration with prayer to set the
same for oral argument having been denied, Lopez
brought this petition for review on certiorari presenting
for resolution these questions:
a) Where, as in this case, a party "sells, assigns and
transfers" and delivers shares of stock to another, duly
endorsed in blank, in consideration of a contingent
obligation of the former to the latter, and, the
obligations having arisen, the latter causes the shares
of stock to be transferred in its name, what is the
juridical nature of the transaction-a dation in payment
or a pledge?
b) Where, as in this case, the debtor assigns the shares
of stock to the creditor under an agreement between
the latter and determinate third persons that the latter
would buy the shares of stock so that the obligations
could be paid out of the proceeds, was there a novation
of the obligation by substitution of debtor? 8
Philamgen failed to file its comment on the petition for
review on certiorari within the extended period which
expired on March 19, 1971. This Court thereby
resolved to require Lopez to file his brief. 9
Under the first assignment of error, Lopez argues in his
brief:
That the Court of Appeals erred in
holding that when petitioner "sold,
assigned, transferred" and delivered
shares of stock, duly endorsed in
blank, to private respondent in
consideration of a contingent
obligation of the former to the latter
and the obligation having thereafter
arisen, the latter caused the shares
of stock to be transferred to it, taking
a new certificate of stock in its name,
the transaction was a pledge, and in
not holding instead that it was a
dation in payment. 10
Considering the explicit terms of the deed denominated
"Stock Assignment Separate from Certificate",
hereinbefore copied verbatim, Lopez sold, assigned
and transferred unto Philamgen the stocks involved
"for and in consideration of the obligations undertaken"
by Philamgen "under the terms and conditions of the
surety bond executed by it in favor of the Prudential
Bank" and "for value received". On its face, it is neither
pledge nor dation in payment. The document speaks of
an outright sale as there is a complete and
unconditional divestiture of the incorporeal property
consisting of stocks from Lopez to Philamgen. The
transfer appears to have been an absolute conveyance
of the stocks to Philamgen whether or not Lopez
defaults in the payment of P20,000.00 to Prudential
Bank. While it is a conveyance in consideration of a
contingent obligation, it is not itself a conditional
conveyance.
It is true that if Lopez should "well and truly perform and
fulfill all the undertakings, covenants, terms,
conditions, and agreements stipulated" in his
promissory note to Prudential Bank, the obligation of
Philamgen under the surety bond would become null
and void. Corollarily, the stock assignment, which is
predicated on the obligation of Philamgen under the
surety bond, would necessarily become null and void
likewise, for want of cause or consideration under
Article 1352 of the New Civil Code. But this is not the
case here because aside from the obligations
undertaken by Philamgen under the surety bond, the
stock assignment had other considerations referred to
therein as "value received". Hence, based on the
manifest terms thereof, it is an absolute transfer.
Notwithstanding the express terms of the "Stock
Assignment Separate from Certificate", however, We
hold and rule that the transaction should not be
regarded as an absolute conveyance in view of the
circumstances obtaining at the time of the execution
thereof.
It should be remembered that on June 2, 1959, the day
Lopez obtained a loan of P20,000.00 from Prudential
Bank, Lopez executed a promissory note for
?20,000.00, plus interest at the rate of ten (10%) per
cent per annum, in favor of said Bank. He likewise
posted a surety bond to secure his full and faithful
performance of his obligation under the promissory
note with Philamgen as his surety. In return for the
undertaking of Philamgen under the surety bond,
Lopez executed on the same day not only an indemnity
agreement but also a stock assignment.
The indemnity agreement and the stock assignment
must be considered together as related transactions
because in order to judge the intention of the
contracting parties, their contemporaneous and
subsequent acts shall be principally considered.
(Article 1371, New Civil Code). Thus, considering that
the indemnity agreement connotes a continuing
obligation of Lopez towards Philamgen while the stock
assignment indicates a complete discharge of the
same obligation, the existence of the indemnity
agreement whereby Lopez had to pay a premium of
P1,000.00 for a period of one year and agreed at all
times to indemnify Philamgen of any and all kinds of
losses which the latter might sustain by reason of it
becoming a surety, is inconsistent with the theory of an
absolute sale for and in consideration of the same
undertaking of Philamgen. There would have been no
necessity for the execution of the indemnity agreement
if the stock assignment was really intended as an
absolute conveyance. Hence, there are strong and
cogent reasons to conclude that the parties intended
said stock assignment to complement the indemnity
agreement and thereby sufficiently guarantee the
indemnification of Philamgen should it be required to
pay Lopez' loan to Prudential Bank.
The character of the transaction
between the parties is to be
determined by their intention,
regardless of what language was
used or what the form of the transfer
was. If it was intended to secure the
payment of money, it must be
construed as a pledge; but if there
was some other intention, it is not a
pledge. However, even though a
transfer, if regarded by itself,
appears to have been absolute, its
object and character might still be
qualified and explained by a
contemporaneous writing declaring
it to have been a deposit of the
property as collateral security. It has
been said that a transfer of property
by the debtor to a creditor, even if
sufficient on its face to make an
absolute conveyance, should be
treated as a pledge if the debt
Credit Transactions /Pledge and Mortgage/ 34 of 55
 continues in existence and is not
discharged by the transfer, and that
accordingly, the use of the terms
ordinarily importing conveyance, of
absolute ownership will not be given
that effect in such a transaction if
they are also commonly used in
pledges and mortgages and
therefore do not unqualifiedly
indicate a transfer of absolute
ownership, in the absence of clear
and unambiguous language or other
circumstances excluding an intent to
pledge. 11
We agree with the holding of the respondent Court of
Appeals that the stock assignment, Exhibit C, is in truth
and in fact, a pledge. Indeed, the facts and
circumstances leading to the execution of the stock
assignment, Exhibit C, and the admission of Lopez
prove that it is in fact a pledge. The appellate court is
correct in ruling that the following requirements of a
contract of pledge have been satisfied: (1) that it be
constituted to secure the fulfillment of a principal
obligation; (2) that the pledgor be the absolute owner
of the thing pledged; and (3) that the person
constituting the pledge has the free disposal of the
property, and in the absence thereof, that he be legally
authorized for the purpose. (Article 2085, New Civil
Code).
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, which We also affirm. On this point further, the
Court of Appeals correctly ruled:
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.) 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". The testimony of the
defendant-appellee that it was their
agreement or understanding that if
he would be unable to pay the loan
to the Prudential Bank, plaintiff could
sell the shares of stock or
appropriate the same in full payment
of its debt is a mere after-thought,
conceived after he learned of the
transfer of his stock to the plaintiff in
the books of the Baguio Military
Institute.
We also do not agree with the contention of petitioner
that "petitioner's 'sale assignment and transfer' unto
private respondent of the shares of stock, coupled with
their endorsement in blank and delivery, comes exactly
under the Civil Code's definition of dation in payment,
a long recognized and deeply rooted concept in Civil
Law denominated by Spanish commentators as
'adjudicacion en pago'".
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.
Speaking of the concept of dation in payment, it is well
to cite that:
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. (2
Castan 525; 8 Manresa, 324) 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. (Perez
Credit Transactions /Pledge and Mortgage/ 35 of 55
Gonzales & Alguer :2-I Enneccerus,
Kipp & Wolff 317). 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. (Ignacio vs. Martinez, 33 Phil.
576)
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. 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. 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.
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. (8 Manresa 324; 3
Valverde 174 fn
 Assignment of property by the
debtor to his creditors, provided for
in article 1255, is similar to dation in
payment in that both are substitute
forms of performance of an
obligation. Unlike the assignment for
the benefit of creditors, however,
dation in payment does not involve
plurality of creditors, nor the whole of
the property of the debtor. It does not
suppose a situation of financial
difficulties, for it may be made even
by a person who is completely
solvent. It merely involves a change
of the object of the obligation by
agreement of the parties and at the
same time fulfilling the same
voluntarily. (8 Manresa 324). 12
Considering the above jurisprudence, 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. Lopez' obligation would arise only when
he would default in the payment of the principal
obligation (the loan) to the bank and Philamgen had to
pay for it. 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. Moreover, there is no express provision in
the terms of the stock assignment between Philamgen
and Lopez that the principal obligation (which is the
loan) is immediately extinguished by reason of such
assignment.
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. Under American jurisprudence,
A distinction might also be made
between delivery of property in
payment of debt and delivery of such
property as collateral security for the
debt. Generally, such a transfer was
presumed to be made for collateral
security, in the absence of evidence
tending to show an intention on the
part of the parties that the transfer
was in satisfaction of the debt. This
presumption of a transfer for
collateral security arose particularly
where the property given was
commercial paper, or some other
'specialty' chose of action, that
conferred rights upon transfer by
delivery of a different nature from the
debt, whose value was neither
intrinsic nor apparent and was not
agreed upon by the parties. 13
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 fact that the execution of the stock assignment is
accompanied by the delivery of the shares of stock,
duly endorsed in blank to Philamgen is no proof that
the transaction is a dation in payment. Likewise, the
fact that Philamgen had the shares of stock transferred
to it in the books of the corporation and took a
certificate in its name in lieu of Lopez which was
cancelled does not amount to conversion of the stock
to one's own use. 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.
xxx xxx xxx
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.
The general property in the pledge
remains in the pledgor after default
as well as prior thereto. The failure
of the pledgor to pay his debt at
maturity in no way affects the nature
of the pledgee's rights concerning
the property pledged, except that he
then becomes entitled to proceed to
make the security available in the
manner prescribed by law or by the
terms of the contract, ... . 14
In his second assignment of error, petitioner contends
that the Court of Appeals erred in not holding that since
private respondent entered into an agreement with
determinate third persons whereby the latter would buy
the said shares so sold, assigned and transferred to
the former by the petitioner for the purpose of paying
petitioner's obligation out of the proceeds, there was a
novation of the obligation by substitution of debtor.
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
Credit Transactions /Pledge and Mortgage/ 36 of 55
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.) Novation which consists in substituting a new
debtor in the place of the original one, may be made
even without the knowledge or against the will of the
latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights
mentioned in Articles 1236 and 1237. (Article 1293,
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 pot
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; the
third person who has assumed the
obligation of the debtor merely
becomes a co-debtor or a surety. If
there is no agreement as to
solidarity, the first and the new
debtor are considered obligated
jointly. (8 Manresa 435, cited in
Tolentino, Commentaries and
Jurisprudence on the Civil Code of
the Philippines, Vol. IV, p. 360)
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
and hence, Philamgen may still enforce the obligation.
As the Court of Appeals correctly held that "(t)he
representation of Mr. Abello to Atty. Sumawang that he
and Mr. Pedrosa would buy the stocks was a purely
private arrangement between them, not an agreement
between (Philamgen) and (Lopez)" and which We
hereby affirm, petitioner's second assignment of error or security for the payment of
must be rejected. defendant's obligation.
In fine, We hold and rule that the transaction entered The above holding of the appellate court is correct and
into by and between petitioner and respondent under We affirm the same.
the Stock Assignment Separate From Certificate in
relation to the Surety Bond No. 14164 and the
As to the third assignment of error which is merely the
Indemnity Agreement, all executed and dated June 2, consequence of the first two assignments of errors, the
1959, constitutes a pledge of the 40,000 shares of
same is also devoid of merit.
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 WHEREFORE, IN VIEW OF ALL THE FOREGOING,
was no novation of the obligation by substitution of the decision of the Court of Appeals is hereby
debtor. AFFIRMED in toto, with costs against the petitioner.
The promise of Abello and Pedrosa to buy the shares SO ORDERED.
from private respondent not having materialized (which
promise was given to said respondent only and not to Barredo (Chairman), Aquino, Concepcion, Jr., Abad
petitioner) and no action was taken against the two by Santos, De Castro and Escolin, JJ., concur.
said respondent who chose instead to sue the
petitioner on the Indemnity Agreement, it is quite clear
that this respondent has abandoned its right and
interest over the pledged properties and must,
therefore, release or return the same to the petitioner-
pledgor 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. As the Court of Appeals said:
The appellant (Philam) is not
enriching himself at the expense of
the appellee. True, the stock
certificate of the appellee had been
in the name of the appellant but the
transfer was merely nominal, and
was not intended to make the
plaintiff the owner thereof. No offer
had been made for the return of the
stocks to the defendant. As the
appellant had stated, the appellee
could have the stocks transferred to
him anytime as long as he
reimburses the plaintiff the amount it
had paid to the Prudential Bank.
Pending payment, plaintiff is merely
holding the certificates as a pledge
Credit Transactions /Pledge and Mortgage/ 37 of 55
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-19227 February 17, 1968
DIOSDADO YULIONGSIU, plaintiff-appellant,
vs.
PHILIPPINE NATIONAL BANK (Cebu
Branch), defendant-appellee.
Vicente Jaime, Regino Hermosisima & E. Lumontad,
Sr. for plaintiff-appellant.
Tomas Besa, R. B. de los Reyes and C. E. Medina for
defendant-appellee.
BENGZON, J.P., J.:
Plaintiff-appellant Diosdado Yuliongsiu 1 was the
owner of two (2) vessels, namely: The M/S Surigao,
valued at P109,925.78 and the M/S Don Dino, valued
at P63,000.00, and operated the FS-203, valued at
P210,672.24, which was purchased by him from the
Philippine Shipping Commission, by installment or on
account. As of January or February, 1943, plaintiff had
paid to the Philippine Shipping Commission only the
sum of P76,500 and the balance of the purchase price
was payable at P50,000 a year, due on or before the
end of the current year. 2
On June 30, 1947, plaintiff obtained a loan of
P50,000 from the defendant Philippine National Bank,
Cebu Branch. To guarantee its payment, plaintiff
pledged the M/S Surigao, M/S Don Dino and its equity
in the FS-203 to the defendant bank, as evidenced by
the pledge contract, Exhibit "A" & "1-Bank", executed
on the same day and duly registered with the office of
the Collector of Customs for the Port of Cebu. 3
Subsequently, plaintiff effected partial payment
of the loan in the sum of P20,000. The remaining
balance was renewed by the execution of two (2)
promissory notes in the bank's favor. The first note,
dated December 18, 1947, for P20,000, was due on
April 16, 1948 while the second, dated February 26,
1948, for P10,000, was due on June 25, 1948. These
two notes were never paid at all by plaintiff on their
respective due dates. 4
On April 6, 1948, the bank filed criminal charges
against plaintiff and two other accused for estafa thru
falsification of commercial documents, because
plaintiff had, as last indorsee, deposited with defendant
bank, from March 11 to March 31, 1948, seven Bank of
the Philippine Islands checks totalling P184,000. The
drawer thereof — one of the co-accused — had no
funds in the drawee bank. However, in connivance with
one employee of defendant bank, plaintiff was able to
withdraw the amount credited to him before the
discovery of the defraudation on April 2, 1948. Plaintiff
and his co-accused were convicted by the trial court
and sentenced to indemnify the defendant bank in the
sum of P184,000. On appeal, the conviction was
affirmed by the Court of Appeals on October 31, 1950.
The corresponding writ of execution issued to
implement the order for indemnification was returned
unsatisfied as plaintiff was totally insolvent. 5
Meanwhile, together with the institution of the
criminal action, defendant bank took physical
possession of three pledged vessels while they were at
the Port of Cebu, and on April 29, 1948, after the first
note fell due and was not paid, the Cebu Branch
Manager of defendant bank, acting as attorney-in-fact
of plaintiff pursuant to the terms of the pledge contract,
executed a document of sale, Exhibit "4", transferring
the two pledged vessels and plaintiff's equity in FS-
203, to defendant bank for P30,042.72. 6
The FS-203 was subsequently surrendered by
the defendant bank to the Philippine Shipping
Commission which rescinded the sale to plaintiff on
September 8, 1948, for failure to pay the remaining
installments on the purchase price thereof. 7 The other
two boats, the M/S Surigao and the M/S Don Dino were
sold by defendant bank to third parties on March 15,
1951.
On July 19, 1948, plaintiff commenced action in
the Court of First Instance of Cebu to recover the three
vessels or their value and damages from defendant
bank. The latter filed its answer, with a counterclaim for
P202,000 plus P5,000 damages. After issues were
joined, a pretrial was held resulting in a partial
stipulation of facts dated October 2, 1958, reciting most
of the facts above-narrated. During the course of the
trial, defendant amended its answer reducing its claim
from P202,000 to P8,846.01, 8 but increasing its
alleged damages to P35,000.
The lower court rendered its decision on
February 13, 1960 ruling: (a) that the bank's taking of
physical possession of the vessels on April 6, 1948 was
justified by the pledge contract, Exhibit "A" & "1-Bank"
and the law; (b) that the private sale of the pledged
vessels by defendant bank to itself without notice to the
plaintiff-pledgor as stipulated in the pledge contract
was likewise valid; and (c) that the defendant bank
should pay to plaintiff the sums of P1,153.99 and
P8,000, as his remaining account balance, or set-off
these sums against the indemnity which plaintiff was
ordered to pay to it in the criminal cases.
When his motion for reconsideration and new
trial was denied, plaintiff brought the appeal to Us, the
amount involved being more than P200,000.00.
In support of the first assignment of error, plaintiff-
appellant would have this Court hold that Exhibit "A" &
"1-Bank" is a chattel mortgage contract so that the
creditor defendant could not take possession of the
chattels object thereof until after there has been
default. The submission is without merit. The parties
stipulated as a fact that Exhibit "A" & "1-Bank" is a
pledge contract —
3. That a credit line of P50,000.00 was
extended to the plaintiff by the defendant
Bank, and the plaintiff obtained and received
from the said Bank the sum of P50,000.00,
and in order to guarantee the payment of this
loan, the pledge contract, Exhibit "A" & Exhibit
"1-Bank", was executed and duly registered
with the Office of the Collector of Customs for
the Port of Cebu on the date appearing
therein; (Emphasis supplied)1äwphï1.ñët
Necessarily, this judicial admission binds the
plaintiff. Without any showing that this was made thru
palpable mistake, no amount of rationalization can
offset it. 9
The defendant bank as pledgee was therefore
entitled to the actual possession of the vessels. While
it is true that plaintiff continued operating the vessels
after the pledge contract was entered into, his
Credit Transactions /Pledge and Mortgage/ 38 of 55
possession was expressly made "subject to the order
of the pledgee." 10 The provision of Art. 2110 of the
present Civil Code 11 being new — cannot apply to the
pledge contract here which was entered into on June
30, 1947. On the other hand, there is an authority
supporting the proposition that the pledgee can
temporarily entrust the physical possession of the
chattels pledged to the pledgor without invalidating the
pledge. In such a case, the pledgor is regarded as
holding the pledged property merely as trustee for the
pledgee. 12
Plaintiff-appellant would also urge Us to rule that
constructive delivery is insufficient to make pledge
effective. He points to Betita v. Ganzon, 49 Phil. 87
which ruled that there has to be actual delivery of the
chattels pledged. But then there is also Banco
Español-Filipino v. Peterson, 7 Phil. 409 ruling that
symbolic delivery would suffice. An examination of the
peculiar nature of the things pledged in the two cases
will readily dispel the apparent contradiction between
the two rulings. In Betita v. Ganzon, the objects
pledged — carabaos — were easily capable of actual,
manual delivery unto the pledgee. In Banco Español-
Filipino v. Peterson, the objects pledged — goods
contained in a warehouse — were hardly capable of
actual, manual delivery in the sense that it was
impractical as a whole for the particular transaction and
would have been an unreasonable requirement. Thus,
for purposes of showing the transfer of control to the
pledgee, delivery to him of the keys to the warehouse
sufficed. In other words, the type of delivery will depend
upon the nature and the peculiar circumstances of
each case. The parties here agreed that the vessels be
delivered by the "pledgor to the pledgor who shall hold
said property subject to the order of the pledgee."
Considering the circumstances of this case and the
nature of the objects pledged, i.e., vessels used in
maritime business, such delivery is sufficient.
Since the defendant bank was, pursuant to the
terms of pledge contract, in full control of the vessels
thru the plaintiff, the former could take actual
possession at any time during the life of the pledge to
make more effective its security. Its taking of the
vessels therefore on April 6, 1948, was not unlawful.
Nor was it unjustified considering that plaintiff had just
defrauded the defendant bank in the huge sum of
P184,000.
The stand We have taken is not without exercising this right of redemption. He is the only one
precedent. The Supreme Court of Spain, in a similar to blame for not doing so.
case involving Art. 1863 of the old Civil Code, 13 has
ruled: 14 Regarding the third contention, on the
assumption that the purchase price was
Que si bien la naturaleza del contrato unconscionable, plaintiff's remedy was to have set
de prenda consiste en pasar las cosas a aside the sale. He did not avail of this. Moreover, as
poder del acreedor o de un tercero y no pointed out by the lower court, plaintiff had at the time
quedar en la del deudor, como ha sucedido an obligation to return the P184,000 fraudulently taken
en el caso de autos, es lo cierto que todas las by him from defendant bank.
partes interesadas, o sean acreedor, deudor
y Sociedad, convinieron que continuaran los The last assignment of error has to do with the
coches en poder del deudor para no damages allegedly suffered by plaintiff-appellant by
suspender el trafico, y el derecho de no uso virtue of the taking of the vessels. But in view of the
de la prenda pertenence al deudor, y el de results reached above, there is no more need to
dejar la cosa bajo su responsabilidad al discuss the same.
acreedor, y ambos convinieron por creerlo util
para las partes contratantes, y estas no
reclaman perjuicios no se infringio, entre On the whole, We cannot say the lower court
otros este articulo. erred in disposing of the case as it did. Plaintiff-
appellant was not all-too-innocent as he would have Us
believe. He did defraud the defendant bank first. If the
In the second assignment of error imputed to the latter countered with the seizure and sale of the
lower court plaintiff-appellant attacks the validity of the
pledged vessels pursuant to the pledge contract, it was
private sale of the pledged vessels in favor of the only to protect its interests after plaintiff had defaulted
defendant bank itself. It is contended first, that the
in the payment of the first promissory note. Plaintiff-
cases holding that the statutory requirements as to appellant did not come to court with clean hands.
public sales with prior notice in connection with
foreclosure proceedings are waivable, are no longer
authoritative in view of the passage of Act 3135, as WHEREFORE, the appealed judgment is, as it
amended; second, that the charter of defendant bank is hereby, affirmed. Costs against plaintiff-appellant.
does not allow it to buy the property object of So ordered.
foreclosure in case of private sales; and third, that the
price obtained at the sale is unconscionable. Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal,
Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ.,
concur.
There is no merit in the claims. The rulings
in Philippine National Bank v. De Poli, 44 Phil. 763
and El Hogar Filipino v. Paredes, 45 Phil. 178 are still
authoritative despite the passage of Act 3135. This law
refers only, and is limited, to foreclosure of real estate
mortgages. 15 So, whatever formalities there are in Act
3135 do not apply to pledge. Regarding the bank's
authority to be the purchaser in the foreclosure sale,
Sec. 33 of Act 2612, as amended by Acts 2747 and
2938 only states that if the sale is public, the bank could
purchase the whole or part of the property sold " free
from any right of redemption on the part of the
mortgagor or pledgor." This even argues against
plaintiff's case since the import thereof is this if the sale
were private and the bank became the purchaser, the
mortgagor or pledgor could redeem the property.
Hence, plaintiff could have recovered the vessels by
Credit Transactions /Pledge and Mortgage/ 39 of 55
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-26371 September 30, 1969
MOBIL OIL PHILIPPINES, INC., plaintiff-appellant,
vs.
RUTH R. DIOCARES, ET AL., defendants-appellees.
Faylona, Berroya, Norte and Associates for plaintiff-
appellant.
Vivencio G. Ibrado Jr. for defendants-appellees.
FERNANDO, J.:
It may very well be, as noted by jurists of repute, that
to stress the element of a promise as the basis of
contracts is to acknowledge the influence of natural
law. 1 Nonetheless, it does not admit of doubt that
whether under the civil law or the common law, the
existence of a contract is unthinkable without one's
word being plighted. So the New Civil Code provides:
"A contract is a meeting of minds between two persons
whereby one binds himself, with respect to the other,
to give something or to render some service." 2 So it is
likewise under American law. Thus: "A contract is a
promise or a set of promises for the breach of which
the law gives a remedy, or the performance of which
the law in some way recognizes as a duty." 3
The law may go further and require that certain
formalities be executed. Thus, for a mortgage to be
validly constituted, "it is indispensable, ..., that the
document in which it appears be recorded in the
Registry of Property." The same codal provision goes
on: "If the instrument is not recorded, the mortgage is
nevertheless binding between the parties." 4
The question before us in this appeal from a lower court
decision, one we have to pass upon for the first time, is
the effect, if any, to be given to a mortgage contract
admittedly not registered, only the parties being
involved in the suit. The lower court was of the opinion
that while it "created a personal obligation [it] did not
establish a real estate mortgage." 5 It did not decree
foreclosure therefor. Plaintiff-appellant appealed. We
view the matter differently and reverse the lower court.
The case for the plaintiff, Mobil Oil Philippines, Inc.,
now appellant, was summarized in the lower court
order of February 25, 1966, subject of this appeal.
Thus: "In its complaint plaintiff alleged that on Feb. 9,
1965 defendants Ruth R. Diocares and Lope T.
Diocares entered into a contract of loan and real estate
mortgage wherein the plaintiff extended to the said
defendants a loan of P45,000.00; that said defendants
also agreed to buy from the plaintiff on cash basis their
petroleum requirements in an amount of not less than
50,000 liters per month; that the said defendants will
pay to the plaintiff 9-1/2% per annum on the
diminishing balance of the amount of their loan; that the
defendants will repay the said loan in monthly
installments of P950.88 for a period of five (5) years
from February 9, 1965; that to secure the performance
of the foregoing obligation they executed a first
mortgage on two parcels of land covered by Transfer
Certificates of Title Nos. T-27136 and T-27946, both
issued by the Register of Deeds of Bacolod City. The
agreement further provided that in case of failure of the
defendants to pay any of the installments due and
purchase their petroleum requirements in the minimum
amount of 50,000 liters per month from the plaintiff, the
latter has the right to foreclose the mortgage or recover
the payment of the entire obligation or its remaining
unpaid balance; that in case of foreclosure the plaintiff
shall be entitled to 12% of the indebtedness as
damages and attorney's fees. A copy of the loan and
real estate mortgage contract executed between the
plaintiff and the defendants is attached to the complaint
and made a part thereof. The complaint further alleges
that the defendant paid only the amount of P1,901.76
to the plaintiff, thus leaving a balance of P43,098.24,
excluding interest, on their indebtedness. The said
defendants also failed to buy on cash basis the
minimum amount of petroleum which they agreed to
purchase from the plaintiff. The plaintiff, therefore,
prayed that the defendants be ordered to pay the
amount of P43,098.24, with interest at 9-1/2% per
annum from the date it fell due, and in default of such
payment that the mortgaged properties be sold and the
proceeds applied to the payment of defendants'
obligation." 6
Defendants, Ruth R. Diocares and Lope T. Diocares,
now appellees, admitted their indebtedness as set forth
above, denying merely the alleged refusal to pay, the
truth, according to them, being that they sought for an
extension of time to do so, inasmuch as they were not
in a position to comply with their obligation. They
further set forth that they did request plaintiff to furnish
them with the statement of accounts with the view of
paying the same on installment basis, which request
was, however, turned down by the plaintiff.
Then came a motion from the plaintiff for a judgment
on the pleadings, which motion was favorably acted on
by the lower court. As was stated in the order appealed
from: "The answer of the defendants dated October 21,
1965 did not raise any issue. On the contrary, said
answer admitted the material allegations of the
complaint. The plaintiff is entitled to a judgment on the
pleadings." 7
As to why the foreclosure sought by plaintiff was
denied, the lower court order on appeal reads thus:
"The Court cannot, however, order the foreclosure of
the mortgage of properties, as prayed for, because
there is no allegation in the complaint nor does it
appear from the copy of the loan and real estate
mortgage contract attached to the complaint that the
mortgage had been registered. The said loan
agreement although binding among the parties merely
created a personal obligation but did not establish a
real estate mortgage. The document should have been
registered. (Art. 2125, Civil Code of the Phil.)" 8 The
dispositive portion is thus limited to ordering
defendants "to pay the plaintiff the account of
P43,098.24, with interest at the rate of 9-1/2% per
annum from the date of the filing of the complaint until
fully paid, plus the amount of P2,000.00 as attorneys'
fees, and the costs of the suit." 9
Hence this appeal, plaintiff-appellant assigning as
errors the holding of the lower court that no real estate
mortgage was established and its consequent refusal
to order the foreclosure of the mortgaged properties.
As set forth at the outset, we find the appeal
meritorious. The lower court should not have held that
no real estate mortgage was established and should
have ordered its foreclosure.
The lower court predicated its inability to order the
foreclosure in view of the categorical nature of the
Credit Transactions /Pledge and Mortgage/ 40 of 55
opening sentence of the governing article 10 that it is
indispensable, "in order that a mortgage may be validly
constituted, that the document in which it appears be
recorded in the Registry of Property." Note that it
ignored the succeeding sentence: "If the instrument is
not recorded, the mortgage is nevertheless binding
between the parties." Its conclusion, however, is that
what was thus created was merely "a personal
obligation but did not establish a real estate mortgage."
Such a conclusion does not commend itself for
approval. The codal provision is clear and explicit.
Even if the instrument were not recorded, "the
mortgage is nevertheless binding between the parties."
The law cannot be any clearer. Effect must be given to
it as written. The mortgage subsists; the parties are
bound. As between them, the mere fact that there is as
yet no compliance with the requirement that it be
recorded cannot be a bar to foreclosure.1awphîl.nèt
A contrary conclusion would manifest less than full
respect to what the codal provision ordains. The liability
of the mortgagor is therein explicitly recognized. To
hold, as the lower court did, that no foreclosure would
lie under the circumstances would be to render the
provision in question nugatory. That we are not allowed
to do. What the law requires in unambiguous language
must be lived up to. No interpretation is needed, only
its application, the undisputed facts calling for it. 11
served. There is thus full acknowledgment of the
binding effect of a promise, which must be lived up to,
otherwise the freedom a contracting party is supposed
to possess becomes meaningless. It could be said of
course that to allow foreclosure in the absence of such
a formality is to offend against the demands of jural
symmetry. What is "indispensable" may be dispense
with. Such an objection is far from fatal. This would not
be the first time when logic yields to what is fair and
what is just. To such an overmastering requirement,
law is not immune.
WHEREFORE, the lower court order of February 25,
1966 is affirmed with the modification that in default of
the payment of the above amount of P43,028.94 with
interests at the rate of 9-1/2% per annum from the date
of the filing of the complaint, that the mortgage be
foreclosed with the properties subject thereof being
sold and the proceeds of the sale applied to the
payment of the amounts due the plaintiff in accordance
with law. With costs against defendants-appellees.
Concepcion, C.J., Dizon, Makalintal, Zaldivar,
Sanchez, Castro, Capistrano, Teehankee and
Barredo, JJ., concur.
Reyes, J.B.L., J., is on leave.

Moreover to rule as the lower court did would be to

show less than fealty to the purpose that animated the
legislators in giving expression to their will that the
failure of the instrument to be recorded does not result
in the mortgage being any the less "binding between
the parties." In the language of the Report of the Code
Commission: "In article [2125] an additional provision
is made that if the instrument of mortgage is not
recorded, the mortgage is nevertheless binding
between the parties." 12 We are not free to adopt then
an interpretation, even assuming that the codal
provision lacks the forthrightness and clarity that this
particular norm does and, therefore, requires
construction, that would frustrate or nullify such
legislative objective.

Nor is the reason difficult to discern why such an

exception should be made to the rule that is
indispensable for a mortgage to be validly constituted
that it be recorded. Equity so demands, and justice is

Credit Transactions /Pledge and Mortgage/ 41 of 55

 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 48941 May 6, 1946
NORBERTO L. DILAG, as administrator of the
intestate estate of Laureano Marquez, petitioner,
vs.
THE LEGAL HEIRS OF FORTUNATO
RESURRECCION, ET AL., respondents.
Vicente J. Francisco for petitioner.
Magno S. Gatmaitan and Jose Borlongan for
respondents.
OZAETA, J.:
This case is before us on certiorari to review a decision
of the First Division of the Court of Appeals affirming,
with modification, that of the Court of First Instance of
Bulacan. The record as reconstituted by the parties
consist only of the supplemental petition for certiorari;
the brief for the petitioner, which contains as an
appendix the decision of the Court of Appeals; the brief
for the respondents; the memorandum for the
petitioner in lieu of oral argument; and the reply
memorandum for the respondents.
The facts found by the Court of Appeals may be
restated as follows:
Before the year 1936 Laureano Marquez was indebted
to Fortunato Resurreccion in the sum of P5,000 as the
balance of the purchase price of a parcel of land which
the former had bought and received from the latter.
Fortunato Resurreccion in turn was indebted to the
Luzon Surety Company in the same amount, which
was secured by a mortgage on three parcels of land,
one of which was that bought by Laureano Marquez
from him. The formal deed of sale from Resurreccion
to Marquez was to have been executed after Marquez
shall have fully paid the purchase price and after
Ressurreccion shall have secured the cancellation of
the mortgage by the Luzon Surety Company.
As early as 1933 Laureano Marquez had agreed to pay
Fortunato Resurreccion's indebtedness of P5,000 to
the Luzon Surety Company by way of satisfaction of
his own indebtedness to Fortunato Resurreccion in the
same amount (Exhibits O and Q). In Exhibit Q signed
by Laureano Marquez on July 10, 1933, he bound
himself as follows: "In the event an action is presented
by the Luzon Surety Company against Fortunato
Resurreccion for the recovery of the said indebtedness
and the interests thereon, I, Laureano Marquez,
obligate myself to indemnify Fortunato Resurreccion
for all the damages he may suffer in case the parcels
of land mortgaged to the Luzon Surety Company are
sold at public auction, including the fees of the
attorneys of Fortunato Resurreccion in the suit brought
by the Luzon Surety Company as well as in the action
that Fortunato Resurreccion may bring against me in
relation to this agreement." .
Laureano Marquez failed to pay the indebtedness of
Fortunato Resurreccion to the Luzon Surety Company,
and the latter foreclosed judicially the mortgage
executed in its favor by Fortunato Resurreccion.
On April 25, 1936, pending the foreclosure sale of the
lands mortgaged by Resurreccion to the Luzon Surety
Company, Laureano Marquez executed and delivered
to Fortunato Resurreccion another document in the
following terms:
Sepan todos los que la presente vieren:
Que yo, Laureano Marquez, de 51 anos de
edad, filipino, viudo, y vecino del barrio de
Paco, municipio de Obando, Provincia de
Bulacan, libre y voluntariamente hago constar
y otorgo:
Primero. — Que yo, Laureano Marquez, me
comprometo y me obligo en pagar a la "Luzon
Surety Co., Inc.," una corporacion domiciliada
en la Ciudad de Manila, toda la deuda del Sr.
Fortunato Resurreccion, con todos sus
intereses vencidos y que en adelante
vencieren, los honorarios de abogados, y
todos los gastos de ejecucion y costas
judiciales, segun estan especificados en la
sentencia y orden de ejecucion de hipoteca
en la causa civil No. 5037 del Juzgado de
Primeria Instancia de Bulacan, intitulado
Credit Transactions /Pledge and Mortgage/ 42 of 55
"Luzon Surety Company, Inc," demandante,
contra Fortunato Resurreccion, cuyo pago
hare efectivo antes de hacerse la subasta en
el momento en que se haga la subasta de las
tres (3) parcelas de terrenos convertidos en
pesquerias constituidos en hipoteca por dicho
demandado Fortunato Resurreccion a favor
de dicha "Luzon Surety Co., Inc." con el fin de
que dichas tres (3) parcelas de terrenos y
cualquiera de ellas no puedan venderse en
subasta publica en el dia senalado en el aviso
del Sheriff Provincial de Bulacan.
Segundo. — Que este compromiso y
obligacion de pago arriba especificado se
debe en consideracion al hecho de que el
deudor y demandado Sr. Fortunato
Resurreccion no ha podido pagar toda su
deuda con sus intereses a la citada acreedora
"Luzon Surety Co., Inc." porque yo, Laureano
Marquez, no he pagado a mi vez al Sr.
Fortunato Resurreccion mi deuda como parte
del precio de venta a mi favor de una de las
tres pesquerias objeto de hipoteca, y por
efecto de mi morosidad, el Sr. Fortunato
Resurreccion incurrio a su vez en morosidad
en el pago de su deuda con sus intereses a
la "Luzon Surety Co., Inc. "
Tercero. — Que en el caso de que yo,
Laureano Marquez, no pudiera pagar a la
Luzon Surety Co., Inc., todas las obligaciones
del demandado Fortunato Resurreccion
especificadas en el parrafo Primero de esta
escritura, y por dicha falta de pago de mi
parte, se llevara a cabo y se efectuara la
Subasta Publica de todas o cualquiera de las
tres (3) parcelas de terrenos objeto de
hipoteca a favor de la Luzon Surety Co., Inc.,
entonces y en tal caso, yo, Laureano
Marquez, quedo obligado a pagar al Sr.
Fortunato Resurreccion o a las personas que
sean duenas de todas o cualquiera de dichas
tres (3) parcelas de terrenos pesquerias, el
valor real de todas o cualesquiera de dichas
tres (3) pesquerias que se vendieran
definitivamente en Subasta Publica, y pagare
ademas la correspondiente indemnizacion a
dicho Fortunato Resurreccion o a las
personas que sean duenas de dichas tres (3)
pesquerias, con los correspondientes
honorarios de sus abogados, y costas
judiciales, en caso de pleito.
Cuarto. — Que en y como garantia de mi
obligacion de pagar y de indemnizar al Sr.
Fortunato Resurreccion, en consideracion a
la suma de un peso (P1) y en consideracion
ademas, a todo lo expuesto en el parrafo
tercero de este documento, por la presente
constituyo en segunda hipoteca a favor de
dicho Sr. Fortunato Resurreccion, y sus
cesionarios, las siguientes cinco (5) parcelas
de terrenos de mi propiedad que se describen
como sigue: .
1. Una parcela de terreno (lote No.
2569 of the S. M. de Pandi Estate,
G. L. R. O. Reeord No. 8503),
situated in the municipality of Bigaa,
Province of Bulacan, Island of
Luzon. Bounded on the north by lots
Nos. 2567 and 2571, on the East by
lot No. 2570, on the South by lots
Nos. 2570 and 2568, and on the
West by lot No. 2567, containing an
area of thirty-two thousand eight
hundred six (32,806) square meters,
more or less. Transfer Certificate of
Title No. 16561.
2. A parcel of land (lot No. 2012 of
the S. M. de Pandi Estate, G. L. R.
O. Record No. 8503), situated in the
municipality of Bigaa, Province of
Bulacan, Island of Luzon. Bounded
on the Northeast by lots Nos. 2827,
2826, 2825, 2824 and 2813, on the
Southeast by lot No. 2811, on the
Southwest by lot No. 2811, and on
the Northwest by lot No. 2828.
Containing an area of thirty-one
thousand one hundred twenty-four
(31,124) square meters, more or
less. Transfer Certificate of Title No.
16563.
3. A parcel of land (lot No. 2871 of
the S. M. de Pandi Estate, G. L. R.
O. Record No. 8503), situated in the
municipality of Bigaa, Province of
Bulacan, Island of Luzon. Bounded
on the Northeast by lots Nos. 5090
and 2880, on the Southeast by lot
No. 2870, on the Southwest by
Manatal creek, and on the Northwest
by lot No. 2872. Containing an area
of nineteen thousand four hundred
and one (19,401) square meters,
more or less. Transfer Certificate of
Title No. 16564.
4. A parcel of land (lot No. 2873 of
the S. M. de Pandi Estate, G. L. R.
O. Record No. 8603), situated in the
municipality of Bigaa, Province of
Bulacan, Island of Luzon. Bounded
on the Northeast by lots Nos. 5089
and 2879, on the Southeast by lot
No. 2872, on the Southwest by
Manatal creek, and on the Northwest
by lot No. 2874. Containing an area
of nineteen thousand thirteen
(19,013) square meters, more or
less. Transfer Certificate of Title No.
16565.
5. A parcel of land (lot No. 2880 of
the S. M. de Pandi Estate, G. L. R.
O. Record No.8503), situated in the
municipality of Bigaa, Province of
Bulacan, Island of Luzon. Bounded
on the Northeast by lot No. 2883, on
the Southeast by lot No. 2881, on
the Southwest by lots Nos. 2870 and
2871, and on the Northwest by lots
Nos. 5090 and 2879. Containing an
area of twenty-two thousand one
hundred fourteen (22,114) square
meters, more or less. Transfer
Certificate of Title No. 16566.' .
Quinto. — Que siendo el valor real de las
cinco (5) parcelas de terrenos arriba descritos
en el parrafo cuarto de este documento
insuficientes para cubrir todas mis
obligaciones y responsibilidades objeto de
este documento a favor del Sr. Fortunato
Resurreccion, constituyo tambien en garantia
a favor del Sr. Fortunato Resurreccion y sus
cesionarios cualesquiera bienes que hoy y en
adelante tuviere, y cualesquiera derechos y
acciones que hoy y en adelante tuviere.
Sexto. — Que hoy he recibido del Sr.
Fortunato Resurreccion el Certificado de
Transferencia de Titulo No. 16562 sobre el
terreno lote No. 2811 de mi propiedad, en
Bigaa, Bulacan, con el objeto de vender dicha
parcela de terreno, y su precio de venta se
pagara tambien a la "Luzon Surety Co., Inc."
para completar el pago total de las
obligaciones del Sr. Fortunato Resurreccion
conforme en que yo venda en venta absoluta
dicho terreno lote No. 2811, aunque dicho
terreno formaba parte de mi garantia a favor
del citado Sr. Fortunato Resurreccion sobre
mis obligaciones objeto de este documento.
En testimonio de todo lo cual, firmo la
presente en Malolos, Bulacan, hoy a 25 de
abril de 1936.
(Fdo.) LAUREANO MARQUEZ.
Firmado en presencia de:
(Fdo.) JOSE R. PLATON
(Fdo.) ILEGIBLE (Exhibit A.)
Since Laureano Marquez did not fulfill his promise
contained in the first clause of the instrument above
quoted, with the result that the mortgaged properties
were sold at public auction and were totally lost by
Fortunato Resurreccion, the latter commenced the
present action against Laureano Marquez upon the
instrument above quoted (1) to recover the value of the
lost properties amounting to P16,500, with legal
interest thereon from the date of the filing of the
complaint, plus P2,000 as indemnity for the rents of the
lands sold and P1,000 as attorney's fees, and (2) to
foreclose the mortgage embodied in said instrument.
As we do not have the record on appeal before us, we
have to rely entirely upon the statements found in the
decision of the Court of Appeals as to the issues raised
by the parties in the lower courts. The issues raised in
the Court of First Instance were stated by the Court of
Appeals in its decision as follows:.
Credit Transactions /Pledge and Mortgage/ 43 of 55
 El demandado, ademas de una negacion
general, alego como defensa especial,
hechos que en sintesis significan que el firmo
el Exhibit A por acomodacion, reclamando en
contrademanda la suma de P5,000 por danos
y perjuicios y honorarios de abogados,
contestacion que fue enmendada para incluir
como partes contrademandados a Honorio
Resurreccion y Emilia Resurreccion, y alega
que de la suma de P8,397 que el debia al
demandante ya habia pagado P8,103.29.
El demadante tambien enmendo su demanda
y su contestacion enmendada a la
contrademanda enmendada, alegando entre
otras cosas, que Honorio y Emilia
Resurreccion no tomaron parte en la venta
del terreno descrito en el certificado original
de titulo No. 437, que el precio convenido era
de P2,000 y no P1,500, y que el Exhibit A
expresa la verdadera intencion de las partes,
contestacion que volvio a enmendarse el 5 de
agosto de 1940.
The questions discussed and decided by the Court of
Appeals were the following:.
1. La primera cuestion que suscita el
demandado y apelante es la de que el
demandante no tienie derecho de cobrar los
danos y perjuicios, objetos de la demanda,
porque las parcelas primera y tercera de las
hipotecadas a la Luzon Surety Company,
Inc., no le pertenecen, sino a Honorio
Resurreccion y a los hijos del abogado
Vicente Platon, segun la particion de los
bienes del finado Arcadio Resurreccion. . .
2. La siguiente cuestion es la de si el
demandado tiene derecho a rescindir el
contrato, porque el demandante no ha
querido otorgar la escritura de venta a su
favor. . .
3. Dejaremos para mas tarde discutir los
senalamientos de error 3.o y 4.o y pasemos
al 5.o y 8.o. Segun estos el demandado firmo
el Exhibit A por acomodacion. . . .
4. En cuanto a la posesion del terreno, la
conclusion del Juzgado de que la tenia el
demandado esta sostenida por el testimonio
de Vicente Platon, corroborado por el
guardian o encargado de la pesqueria,
Roman Sto. Tomas.
5. En cuanto al 3. senalamiento de error, o
sea, el precio por hectarea del terreno
vendido, el Juzgado estimo que era el de
P2,000 por hectarea. . . .
All these questions were decided favorably to the
plaintiff, who had died in the meantime and who is now
represented by the herein respondents. The dispositive
part of the decision of the Court of Appeals reads as
follows:
En resumen el demandado debe pagar a los
hectaderos del demandante la suma de
P16,500, por la unica que se reclama en la
demanda, mas P1,246 por las rentas de dos
de los terrenos vendidos por la Luzon Surety
Company, Inc., y mas P1,000 por honorarios
de abogados, pero con deduccion de la suma
de P5,255.99 que dicho demandado habia
pagado al demandante, con los intereses
legales de la primera cantidad desde la
interposicion de la demanda y las costas. En
el caso de que el demandando dejara de
verificar dicho pago dentro del plazo de 90
dias, se vendera en subasta publica los
bienes hipotecados en el Exhibit A.
The petitioner makes the following assignment of
errors alleged to have been committed by the Court of
Appeals:
1. The Court of Appeals erred in not holding
that the verbal sale agreement between
Fortunato Resurreccion and Laureano
Marquez covering the land under Title 437
which belonged to the estate of Arcadio
Resurreccion and which was then under
judicial administration, was void ab initio or
nonexistent, because it was not consented to
nor approved by the probate court taking
cognizance of the settlement of the estate of
said Arcadio Resurreccion.
2. The Court of Appeals erred in not holding
that the agreement purported to be contained
by Exhibits O, Q and A, or any other
agreement based upon the verbal agreement
to sell the land under Title 437, was void ab
initio or nonexistent due to absolute lack of
consideration, because the said verbal
agreement, being in itself void ab initio,
cannot serve as consideration under the law.
3. The Court of Appeals erred in denying the
motion for reconsideration submitted by the
herein petitioner as appellant to that court,
and in declaring in its resolution of denial that
the invalidity of Exhibit A may not be invoked
by Laureano Marquez or his legal
representative but only by the heirs of Arcadio
Resurreccion.
4. The Court of Appeals erred in holding that
Fortunato Resurreccion had the right to
enforce and foreclose Exhibit A as regards
the damages caused by the loss of the lands
under Titles 435 and 877, adjudicated,
respectively, to Emiliana Resurreccion and
the children of Vicente Platon under the
project of partition, notwithstanding the fact
that Fortunato Resurreccion did not, and his
legal heirs now do not, claim any damages for
the loss of the land under Title 437.
5. The Court on Appeals erred in ordering (if
it is the meaning of the decision) the sale in
public auction of the five parcels of land
mentioned in the complaint of Fortunato
Resurreccion (pages 10-12 of the bill of
exceptions, accompanying the petition
herein), which lands were not mortgaged in
legal contemplation in favor of Fortunato
Resurreccion under Exhibit A.
1 and 2. The main ground of this appeal by certiorari is
contained in the first and second assignments of error.
But all the argument adduced by the counsel in support
thereof is premised upon alleged facts which do not
appear in the decision of the Court of Appeals and
which are disputed by the respondents herein. In truth,
that decision does not even give any hint that any
question pertaining to the supposed nullity of the sale
agreement between Fortunato Resurreccion and
Credit Transactions /Pledge and Mortgage/ 44 of 55
Laureano Marquez and of Exhibit A upon which this
action is based, was ever raised in the lower courts.
According to the Court of Appeals the special defense
alleged by the defendant was that he signed Exhibit A
as an accommodation. In rejecting that defense the
Court of Appeals stated that Exhibit A was not the only
document executed by the defendant in favor of the
plaintiff obligating himself to pay the latter's
indebtedness to the Luzon Surety Company, but also
Exhibit O and Q, dated March 9 and July 10, 1933,
wherein said defendant declared that he was obligated
to make said payment because he owned the plaintiff
P5,000 as part of the purchase price of the land bought
by him. The Court of Appeals further set forth the
negotiations had by the defendant with the Luzon
Surety Company to secure extensions of the time
within which to pay the mortgage of the plaintiff. The
Court of Appeals made no mention whatsoever of the
facts involved in the first two errors now assigned by
the petitioner before this Court.
We find no factual basis upon which to consider and
decide the questions raised in petitioner's first and
second assignments of error. We cannot reverse the
judgment of the Court of Appeals upon alleged facts
different from, and even contradictory to, those found
by that court.
3. Neither can we pass upon the third assignment of
error, first, because it is a mere sequence of the first
two assignments of error and, second, because we do
not even have before us petitioner's motion for
reconsideration in the Court of Appeals and the latter's
resolution thereon.
4. Under his fourth assignment of error the petitioner
contends that Fortunato Resurreccion had no right to
enforce and foreclose Exhibit A as regards the
damages caused by the loss of two of the three parcels
of land mortgaged to the Luzon Surety Company
because they did not belong to Fortunato Resurreccion
but to Emiliana Resurreccion and the children of
Vicente Platon. He contends that it was only the said
owners of those lands who could have brought the
present action.
This contention runs counter to the provision of section
3 of Rule 3 of the Rules of Court, which says that "a
party with whom or in whose name a contract has been
made for the benefit of another . . . . may sue or be
sued without joining the party for whose benefit the
action is presented or defended."
It will be noted that in the third clause of Exhibit A
Laureano Marquez obligated himself to pay to
Fortunato Resurreccion or to the persons who may be
the owners of all or any of the three parcels of land, the
real value thereof in case they were sold at public
auction.
In his memorandum in lieu of oral argument counsel for
the petitioner says that at first glance section 3 of Rule
3 above cited would appear applicable against his
contention. But he argues that it should not be applied
because Exhibit A is a unilateral promise by Laureano
Marquez to indemnify Fortunato Resurreccion or those
who might become the owners of the lands in question;
and that Fortunato Resurreccion was not a party to the
contract Exhibit A, for as a matter of fact it was signed
by Laureano Marquez only.
We do not think that the word "contract" used in section
3 of Rule 3 refers exclusively to a bilateral contract. It
obviously refers to any contract — bilateral or unilateral
— enforcible in court. The rule in question refers to a
suit by or against "a party with whom or in whose name
a contract has been made for the benefit of another."
Article 1254 of the Civil Code says that a contract exists
from the moment one or more persons consent to be
bound with respect to another or others to deliver
something or to render some service. A deed of sale or
mortgage is usually a unilateral contract in the sense
that only the vendor or mortgagor signs it. Likewise a
promissory note is a unilateral contract in the sense
that only the promisor or maker signs it. But these do
not mean that the signer is the only party to that
contract and the only one entitled to sue thereon. The
obligee is as much a part to the contract as the obligor,
for there can be no obligor without an obligee; and as
a matter of course it is the obligee who has the right to
sue on and enforce the obligation.
In his supplemental petition for certiorari the petitioner
expresses the fear that the decision of the Court of
Appeals may not preclude Emiliana Resurreccion and
the children of Vicente Platon from enforcing the pour
autrui stipulation in Exhibit A. We think such fear is
unfounded. Once Exhibit A is enforced by the court
under the authority of section 3 of Rule 3 above cited,
at the instance of one of the parties thereto, there is no
room for the apprehension that it may be enforced
anew at the instance of any other party. In authorizing
a suit by a trustee or a party in a representative
capacity, said rule necessarily precludes the necessity
and authority for the beneficiary to bring a separate suit
on his own account upon the same cause of action; for
the law does not countenance a multiplicity of suits,
and much less an injustice.
5. The fifth assignment of error assails the judgment of
the Court of Appeals in so far as it authorizes the sale
at public auction of five parcels of land mentioned in
plaintiff's complaint but not specifically described in the
mortgage deed Exhibit A. Those five parcels are said
to have been acquired by Laureano Marquez
subsequent to the execution of Exhibit A. In the fifth
clause of said document Laureano Marquez stipulated
that inasmuch as the five parcels of land described in
the fourth clause were not sufficient to cover all his
obligations in favor of Fortunato Resurreccion, he also
constituted a mortgage in favor of the latter and his
assignees on any other property he then might have
and on those he might acquire in the future.
Did such a stipulation constitute a valid mortgage on
the five other parcels of land which Laureano Marquez
subsequently acquired? We do not think so. In the first
place, Laureano Marquez could not legally mortgage
any property he did not yet own (see paragraph 2,
article 1857, Civil Code). In the second place, in order
that a mortgage may be validly constituted the
instrument by which it is created must be recorded in
the registry of deeds (article 1875, id.); and so far as
the additional as parcels of land are concerned, the
registration of Exhibit A did not affect and could not
have affected them because they were not specifically
described therein.
The contention of the respondents that after the
institution of the present action notice of lis
pendens was filed in the registry of deeds affecting the
said five additional parcels of land, merely serves to
emphasize the fact that there was no mortgage
thereon; otherwise there would have been no necessity
for any notice of lis pendens.
The fifth assignment of error is well taken and is
therefore sustained.
Credit Transactions /Pledge and Mortgage/ 45 of 55
We observe that the Court of Appeals awarded to the
plaintiff not only the value of the land, amounting to
P16,500, which the plaintiff or his co-heirs lost as a
result of the foreclosure sale made at the instance of
the Luzon Surety Company, plus legal interest thereon
from the date of the filing of the complaint but also the
sum of P1,246 as rent or income of said land which the
plaintiff failed to receive. We do not think the last-
mentioned amount was included in Laureano Marquez'
undertaking. In the third clause of Exhibit A he
obligated himself, in the event said parcels of land were
auctioned off, to pay their real value to Fortunato
Resurreccion. If the plaintiff is entitled to indemnity for
the land he lost, he is not entitled to the subsequent
rent or income of that land. He is entitled only to the
interest on the amount of the indemnity from the time
he sues therefor to the time it is paid. We do not find in
the decision of the Court of Appeals any basis for
awarding the said rent or income of P1,246. To what
period of time that rent or income was supposed to
correspond, has not even been shown. If it was rent
before the sale of said land at public auction, the
defendant could not be held liable therefor; and if it was
rent after the sale, neither could the defendant be held
liable for it, since his undertaking was to pay for the
value of the land as of the date of the sale, and once
the owner is indemnified for the land, he is not entitled
to the subsequent income therefrom.

We consider that error plain enough to authorize us to

notice it, although it was not specifically assigned by
the petitioner, under section 5 of Rule 53. Moreover,
the petitioner questions his entire liability under Exhibit
A, and if he cannot be absolved entirely he may be
absolved at least partially.

With the elimination of the item of P1,246 and with the

understanding that the foreclosure sale shall be limited
to the five parcels of land described in the mortgage
deed Exhibit A that the judgment of the Court of
Appeals is for the heirs of Vicente Platon, said
judgment is affirmed, without any finding as to costs in
this instance.

Moran, C.J., Jaranilla, Feria, De Joya, Hilado and

Bengzon, JJ., concur.

Credit Transactions /Pledge and Mortgage/ 46 of 55

 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-17500 May 16, 1967
PEOPLE'S BANK AND TRUST CO. and ATLANTIC
GULF AND PACIFIC CO. OF MANILA, plaintiffs-
appellants,
vs.
DAHICAN LUMBER COMPANY, DAHICAN
AMERICAN LUMBER CORPORATION and
CONNELL BROS. CO. (PHIL.), defendants-
appellants.
Angel S. Gamboa for defendants-appellants.
Laurel Law Offices for plaintiffs-appellants.
DIZON, J.:
On September 8, 1948, Atlantic Gulf & Pacific
Company of Manila, a West Virginia corporation
licensed to do business in the Philippines —
hereinafter referred to as ATLANTIC — sold and
assigned all its rights in the Dahican Lumber
concession to Dahican Lumber Company —
hereinafter referred to as DALCO — for the total sum
of $500,000.00, of which only the amount of
$50,000.00 was paid. Thereafter, to develop the
concession, DALCO obtained various loans from the
People's Bank & Trust Company — hereinafter
referred to as the BANK — amounting, as of July 13,
1950, to P200,000.00. In addition, DALCO obtained,
through the BANK, a loan of $250,000.00 from the
Export-Import Bank of Washington D.C., evidenced by
five promissory notes of $50,000.00 each, maturing on
different dates, executed by both DALCO and the
Dahican America Lumber Corporation, a foreign
corporation and a stockholder of DALCO, —
hereinafter referred to as DAMCO, all payable to the
BANK or its order.
As security for the payment of the abovementioned
loans, on July 13, 1950 DALCO executed in favor of
the BANK — the latter acting for itself and as trustee
for the Export-Import Bank of Washington D.C. — a
deed of mortgage covering five parcels of land situated
in the province of Camarines Norte together with all the
buildings and other improvements existing thereon and
all the personal properties of the mortgagor located in
its place of business in the municipalities of Mambulao
and Capalonga, Camarines Norte (Exhibit D). On the
same date, DALCO executed a second mortgage on
the same properties in favor of ATLANTIC to secure
payment of the unpaid balance of the sale price of the
lumber concession amounting to the sum of
$450,000.00 (Exhibit G). Both deeds contained the
following provision extending the mortgage lien to
properties to be subsequently acquired — referred to
hereafter as "after acquired properties" — by the
mortgagor:
All property of every nature and description
taken in exchange or replacement, and all
buildings, machinery, fixtures, tools
equipment and other property which the
Mortgagor may hereafter acquire, construct,
install, attach, or use in, to, upon, or in
connection with the premises, shall
immediately be and become subject to the
lien of this mortgage in the same manner and
to the same extent as if now included therein,
and the Mortgagor shall from time to time
during the existence of this mortgage furnish
the Mortgagee with an accurate inventory of
such substituted and subsequently acquired
property.
Both mortgages were registered in the Office of the
Register of Deeds of Camarines Norte. In addition
thereto DALCO and DAMCO pledged to the BANK
7,296 shares of stock of DALCO and 9,286 shares of
DAMCO to secure the same obligations.
Upon DALCO's and DAMCO's failure to pay the fifth
promissory note upon its maturity, the BANK paid the
same to the Export-Import Bank of Washington D.C.,
and the latter assigned to the former its credit and the
first mortgage securing it. Subsequently, the BANK
gave DALCO and DAMCO up to April 1, 1953 to pay
the overdue promissory note.
After July 13, 1950 — the date of execution of the
mortgages mentioned above — DALCO purchased
various machineries, equipment, spare parts and
supplies in addition to, or in replacement of some of
those already owned and used by it on the date
aforesaid. Pursuant to the provision of the mortgage
deeds quoted theretofore regarding "after acquired
properties," the BANK requested DALCO to submit
complete lists of said properties but the latter failed to
do so. In connection with these purchases, there
appeared in the books of DALCO as due to Connell
Bros. Company (Philippines) — a domestic corporation
who was acting as the general purchasing agent of
DALCO — thereinafter called CONNELL — the sum of
P452,860.55 and to DAMCO, the sum of
P2,151,678.34.
On December 16, 1952, the Board of Directors of
DALCO, in a special meeting called for the purpose,
passed a resolution agreeing to rescind the alleged
sales of equipment, spare parts and supplies by
CONNELL and DAMCO to it. Thereafter, the
corresponding agreements of rescission of sale were
executed between DALCO and DAMCO, on the one
hand and between DALCO and CONNELL, on the
other.
On January 13, 1953, the BANK, in its own behalf and
that of ATLANTIC, demanded that said agreements be
cancelled but CONNELL and DAMCO refused to do
so. As a result, on February 12, 1953; ATLANTIC and
the BANK, commenced foreclosure proceedings in the
Court of First Instance of Camarines Norte against
DALCO and DAMCO. On the same date they filed
an ex-parte application for the appointment of a
Receiver and/or for the issuance of a writ of preliminary
injunction to restrain DALCO from removing its
properties. The court granted both remedies and
appointed George H. Evans as Receiver. Upon
defendants' motion, however, the court, in its order of
February 21, 1953, discharged the Receiver.
On March 2, 1953, defendants filed their answer
denying the material allegations of the complaint and
alleging several affirmative defenses and a
counterclaim.
On March 4 of the same year, CONNELL, filed a
motion for intervention alleging that it was the owner
and possessor of some of the equipments, spare parts
and supplies which DALCO had acquired subsequent
to the execution of the mortgages sought to be
foreclosed and which plaintiffs claimed were covered
by the lien. In its order of March 18,1953 the Court
granted the motion, as well as plaintiffs' motion to set
Credit Transactions /Pledge and Mortgage/ 47 of 55
aside the order discharging the Receiver.
Consequently, Evans was reinstated.
On April 1, 1953, CONNELL filed its answer denying
the material averment of the complaint, and asserting
affirmative defenses and a counterclaim.
Upon motion of the parties the Court, on September
30, 1953, issued an order transferring the venue of the
action to the Court of First Instance of Manila where it
was docketed as Civil Case No. 20987.
On August 30, 1958, upon motion of all the parties, the
Court ordered the sale of all the machineries,
equipment and supplies of DALCO, and the same were
subsequently sold for a total consideration of
P175,000.00 which was deposited in court pending
final determination of the action. By a similar
agreement one-half (P87,500.00) of this amount was
considered as representing the proceeds obtained
from the sale of the "undebated properties" (those not
claimed by DAMCO and CONNELL), and the other half
as representing those obtained from the sale of the
"after acquired properties".
After due trial, the Court, on July 15, 1960, rendered
judgment as follows:
IN VIEW WHEREFORE, the Court:
1. Condemns Dahican Lumber Co. to pay
unto People's Bank the sum of P200,000,00
with 7% interest per annum from July 13,
1950, Plus another sum of P100,000.00 with
5% interest per annum from July 13, 1950;
plus 10% on both principal sums as attorney's
fees;
2. Condemns Dahican Lumber Co. to pay
unto Atlantic Gulf the sum of P900,000.00
with 4% interest per annum from July 3, 1950,
plus 10% on both principal as attorney's fees;
3. Condemns Dahican Lumber Co. to pay
unto Connell Bros, the sum of P425,860.55,
and to pay unto Dahican American Lumber
Co. the sum of P2,151,678.24 both with legal
interest from the date of the filing of the
respective answers of those parties, 10% of
the principals as attorney's fees;
4. Orders that of the sum realized from the
sale of the properties of P175,000.00, after
deducting the recognized expenses, one-half
thereof be adjudicated unto plaintiffs, the
court no longer specifying the share of each
because of that announced intention under
the stipulation of facts to "pool their
resources"; as to the other one-half, the same
should be adjudicated unto both plaintiffs, and
defendant Dahican American and Connell
Bros. in the proportion already set forth on
page 9, lines 21, 22 and 23 of the body of this
decision; but with the understanding that
whatever plaintiffs and Dahican American and
Connell Bros. should receive from the
P175,000.00 deposited in the Court shall be
applied to the judgments particularly rendered
in favor of each;
5. No other pronouncement as to costs; but
the costs of the receivership as to the debated
properties shall be borne by People's Bank,
Atlantic Gulf, Connell Bros., and Dahican
American Lumber Co., pro-rata.
On the following day, the Court issued the following
supplementary decision:
IN VIEW WHEREOF, the dispositive part of
the decision is hereby amended in order to
add the following paragraph 6:
6. If the sums mentioned in paragraphs 1 and
2 are not paid within ninety (90) days, the
Court orders the sale at public auction of the
lands object of the mortgages to satisfy the
said mortgages and costs of foreclosure.
From the above-quoted decision, all the parties
appealed.
Main contentions of plaintiffs as appellants are the
following: that the "after acquired properties" were
subject to the deeds of mortgage mentioned
heretofore; that said properties were acquired from
suppliers other than DAMCO and CONNELL; that even
granting that DAMCO and CONNELL were the real
suppliers, the rescission of the sales to DALCO could
not prejudice the mortgage lien in favor of plaintiffs; that
considering the foregoing, the proceeds obtained from
the sale of the "after acquired properties" as well as
those obtained from the sale of the "undebated
properties" in the total sum of P175,000.00 should
have been awarded exclusively to plaintiffs by reason
of the mortgage lien they had thereon; that damages
should have been awarded to plaintiffs against
defendants, all of them being guilty of an attempt to
defraud the former when they sought to rescind the
sales already mentioned for the purpose of defeating
their mortgage lien, and finally, that defendants should
have been made to bear all the expenses of the
receivership, costs and attorney's fees.
On the other hand, defendants-appellants contend that
the trial court erred: firstly, in not holding that plaintiffs
had no cause of action against them because the
promissory note sued upon was not yet due when the
action to foreclose the mortgages was commenced;
secondly, in not holding that the mortgages aforesaid
were null and void as regards the "after acquired
properties" of DALCO because they were not
registered in accordance with the Chattel Mortgage
Law, the court erring, as a consequence, in holding that
said properties were subject to the mortgage lien in
favor of plaintiffs; thirdly, in not holding that the
provision of the fourth paragraph of each of said
mortgages did not automatically make subject to such
mortgages the "after acquired properties", the only
meaning thereof being that the mortgagor was willing
to constitute a lien over such properties; fourthly, in not
ruling that said stipulation was void as against DAMCO
and CONNELL and in not awarding the proceeds
obtained from the sale of the "after acquired properties"
to the latter exclusively; fifthly, in appointing a Receiver
and in holding that the damages suffered by DAMCO
and CONNELL by reason of the depreciation or loss in
value of the "after acquired properties" placed under
receivership was damnum absque injuria and,
consequently, in not awarding, to said parties the
corresponding damages claimed in their counterclaim;
lastly, in sentencing DALCO and DAMCO to pay
attorney's fees and in requiring DAMCO and
CONNELL to pay the costs of the Receivership,
instead of sentencing plaintiffs to pay attorney's fees.
Plaintiffs' brief as appellants submit six assignments of
error, while that of defendants also as appellants
Credit Transactions /Pledge and Mortgage/ 48 of 55
submit a total of seventeen. However, the multifarious
issues thus before Us may be resolved, directly or
indirectly, by deciding the following issues:
Firstly, are the so-called "after acquired properties"
covered by and subject to the deeds of mortgage
subject of foreclosure?; secondly, assuming that they
are subject thereto, are the mortgages valid and
binding on the properties aforesaid inspite of the fact
that they were not registered in accordance with the
provisions of the Chattel Mortgage Law?; thirdly,
assuming again that the mortgages are valid and
binding upon the "after acquired properties", what is
the effect thereon, if any, of the rescission of sales
entered into, on the one hand, between DAMCO and
DALCO, and between DALCO and CONNELL, on the
other?; and lastly, was the action to foreclose the
mortgages premature?
A. Under the fourth paragraph of both deeds of
mortgage, it is crystal clear that all property of every
nature and description taken in exchange or
replacement, as well as all buildings, machineries,
fixtures, tools, equipments, and other property that the
mortgagor may acquire, construct, install, attach; or
use in, to upon, or in connection with the premises —
that is, its lumber concession — "shall immediately be
and become subject to the lien" of both mortgages in
the same manner and to the same extent as if already
included therein at the time of their execution. As the
language thus used leaves no room for doubt as to the
intention of the parties, We see no useful purpose in
discussing the matter extensively. Suffice it to say that
the stipulation referred to is common, and We might
say logical, in all cases where the properties given as
collateral are perishable or subject to inevitable wear
and tear or were intended to be sold, or to be used —
thus becoming subject to the inevitable wear and tear
— but with the understanding — express or implied —
that they shall be replaced with others to be thereafter
acquired by the mortgagor. Such stipulation is neither
unlawful nor immoral, its obvious purpose being to
maintain, to the extent allowed by circumstances, the
original value of the properties given as security.
Indeed, if such properties were of the nature already
referred to, it would be poor judgment on the part of the
creditor who does not see to it that a similar provision
is included in the contract.
B. But defendants contend that, granting without
admitting, that the deeds of mortgage in question cover
the "after acquired properties" of DALCO, the same are
void and ineffectual because they were not registered
in accordance with the Chattel Mortgage Law. In
support of this and of the proposition that, even if said
mortgages were valid, they should not prejudice them,
the defendants argue (1) that the deeds do not
describe the mortgaged chattels specifically, nor were
they registered in accordance with the Chattel
Mortgage Law; (2) that the stipulation contained in the
fourth paragraph thereof constitutes "mere executory
agreements to give a lien" over the "after acquired
properties" upon their acquisition; and (3) that any
mortgage stipulation concerning "after acquired
properties" should not prejudice creditors and other
third persons such as DAMCO and CONNELL.
The stipulation under consideration strongly belies
defendants contention. As adverted to hereinbefore, it
states that all property of every nature, building,
machinery etc. taken in exchange or replacement by
the mortgagor "shall immediately be and become
subject to the lien of this mortgage in the same manner
and to the same extent as if now included therein". No
clearer language could have been chosen.
Conceding, on the other hand, that it is the law in this
jurisdiction that, to affect third persons, a chattel
mortgage must be registered and must describe the
mortgaged chattels or personal properties sufficiently
to enable the parties and any other person to identify
them, We say that such law does not apply to this case.
As the mortgages in question were executed on July
13, 1950 with the old Civil Code still in force, there can
be no doubt that the provisions of said code must
govern their interpretation and the question of their
validity. It happens however, that Articles 334 and 1877
of the old Civil Code are substantially reproduced in
Articles 415 and 2127, respectively, of the new Civil
Code. It is, therefore, immaterial in this case whether
we take the former or the latter as guide in deciding the
point under consideration.
Article 415 does not define real property but
enumerates what are considered as such, among them
being machinery, receptacles, instruments or
replacements intended by owner of the tenement for
an industry or works which may be carried on in a
building or on a piece of land, and shall tend directly to
meet the needs of the said industry or works.
On the strength of the above-quoted legal provisions,
the lower court held that inasmuch as "the chattels
were placed in the real properties mortgaged to
plaintiffs, they came within the operation of Art. 415,
paragraph 5 and Art. 2127 of the New Civil Code".
We find the above ruling in agreement with our
decisions on the subject:
(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We
held that Article 334, paragraph 5 of the Civil Code (old)
gives the character of real property to machinery, liquid
containers, instruments or replacements intended by
the owner of any building or land for use in connection
with any industry or trade being carried on therein and
which are expressly adapted to meet the requirements
of such trade or industry.
(2) In Cu Unjieng e Hijos vs. Mabalacat Sugar Co., 58
Phil. 439, We held that a mortgage constituted on a
sugar central includes not only the land on which it is
built but also the buildings, machinery and accessories
installed at the time the mortgage was constituted as
well as the buildings, machinery and
accessories belonging to the mortgagor, installed after
the constitution thereof .
It is not disputed in the case at bar that the "after
acquired properties" were purchased by DALCO in
connection with, and for use in the development of its
lumber concession and that they were purchased in
addition to, or in replacement of those already existing
in the premises on July 13, 1950. In Law, therefore,
they must be deemed to have been immobilized, with
the result that the real estate mortgages involved
herein — which were registered as such — did not
have to be registered a second time as chattel
mortgages in order to bind the "after acquired
properties" and affect third parties.
But defendants, invoking the case of Davao Sawmill
Company vs. Castillo, 61 Phil. 709, claim that the "after
acquired properties" did not
become immobilized because DALCO did not own the
whole area of its lumber concession all over which said
properties were scattered.
The facts in the Davao Sawmill case, however, are not
on all fours with the ones obtaining in the present. In
the former, the Davao Sawmill Company, Inc., had
Credit Transactions /Pledge and Mortgage/ 49 of 55
repeatedly treated the machinery therein involved
as personal property by executing chattel mortgages
thereon in favor of third parties, while in the present
case the parties had treated the "after acquired
properties" as real properties by expressly and
unequivocally agreeing that they shall automatically
become subject to the lien of the real estate mortgages
executed by them. In the Davao Sawmill decision it
was, in fact, stated that "the characterization of the
property as chattels by the appellant is indicative of
intention and impresses upon the property the
character determined by the parties" (61 Phil. 112,
emphasis supplied). In the present case, the
characterization of the "after acquired properties" as
real property was made not only by one but by both
interested parties. There is, therefore, more reason to
hold that such consensus impresses upon the
properties the character determined by the parties who
must now be held in estoppel to question it.
Moreover, quoted in the Davao Sawmill case was that
of Valdez vs. Central Altagracia, Inc. (225 U.S. 58)
where it was held that while under the general law of
Puerto Rico, machinery placed on property by a tenant
does not become immobilized, yet, when the tenant
places it there pursuant to contract that it shall belong
to the owner, it then becomes immobilized as to that
tenant and even as against his assignees and creditors
who had sufficient notice of such stipulation. In the
case at bar it is not disputed that DALCO purchased
the "after acquired properties" to be placed on, and be
used in the development of its lumber concession, and
agreed further that the same shall become immediately
subject to the lien constituted by the questioned
mortgages. There is also abundant evidence in the
record that DAMCO and CONNELL had full notice of
such stipulation and had never thought of disputed
validity until the present case was filed. Consequently
all of them must be deemed barred from denying that
the properties in question had become immobilized.
What We have said heretofore sufficiently disposes all
the arguments adduced by defendants in support their
contention that the mortgages under foreclosure are
void, and, that, even if valid, are ineffectual as against
DAMCO and CONNELL.
Now to the question of whether or not DAMCO
CONNELL have rights over the "after acquired
properties" superior to the mortgage lien constituted
thereon in favor of plaintiffs. It is defendants' contention
that in relation to said properties they are "unpaid
sellers"; that as such they had not only a superior lien
on the "after acquired properties" but also the right to
rescind the sales thereof to DALCO.
This contention — it is obvious — would have validity
only if it were true that DAMCO and CONNELL were
the suppliers or vendors of the "after acquired
properties". According to the record, plaintiffs did not
know their exact identity and description prior to the
filing of the case bar because DALCO, in violation of its
obligation under the mortgages, had failed and refused
theretofore to submit a complete list thereof. In the
course of the proceedings, however, when defendants
moved to dissolve the order of receivership and the writ
of preliminary injunction issued by the lower court, they
attached to their motion the lists marked as Exhibits 1,
2 and 3 describing the properties aforesaid. Later on,
the parties agreed to consider said lists as identifying
and describing the "after acquire properties," and
engaged the services of auditors to examine the books
of DALCO so as to bring out the details thereof. The
report of the auditors and its annexes (Exhibits V, V-1
— V4) show that neither DAMCO nor CONNELL had
supplied any of the goods of which they respective
claimed to be the unpaid seller; that all items were
supplied by different parties, neither of whom appeared
to be DAMCO or CONNELL that, in fact, CONNELL
collected a 5% service charge on the net value of all
items it claims to have sold to DALCO and which, in
truth, it had purchased for DALCO as the latter's
general agent; that CONNELL had to issue its own
invoices in addition to those o f the real suppliers in
order to collect and justify such service charge.
Taking into account the above circumstances together
with the fact that DAMCO was a stockholder and
CONNELL was not only a stockholder but the general
agent of DALCO, their claim to be the suppliers of the
"after acquired required properties" would seem to be
preposterous. The most that can be claimed on the
basis of the evidence is that DAMCO and CONNELL
probably financed some of the purchases. But if
DALCO still owes them any amount in this connection,
it is clear that, as financiers, they can not claim any
right over the "after acquired properties" superior to the
lien constituted thereon by virtue of the deeds of
mortgage under foreclosure. Indeed, the execution of
the rescission of sales mentioned heretofore appears
to be but a desperate attempt to better or improve
DAMCO and CONNELL's position by enabling them to
assume the role of "unpaid suppliers" and thus claim a
vendor's lien over the "after acquired properties". The
attempt, of course, is utterly ineffectual, not only
because they are not the "unpaid sellers" they claim to
be but also because there is abundant evidence in the
record showing that both DAMCO and CONNELL had
known and admitted from the beginning that the "after
acquired properties" of DALCO were meant to be
included in the first and second mortgages under
foreclosure.
The claim that Belden, of ATLANTIC, had given his
consent to the rescission, expressly or otherwise, is of
no consequence and does not make the rescission
valid and legally effective. It must be stated clearly,
however, in justice to Belden, that, as a member of the
Board of Directors of DALCO, he opposed the
resolution of December 15, 1952 passed by said Board
and the subsequent rescission of the sales.
Finally, defendants claim that the action to foreclose
the mortgages filed on February 12, 1953 was
premature because the promissory note sued upon did
not fall due until April 1 of the same year, concluding
from this that, when the action was commenced, the
plaintiffs had no cause of action. Upon this question the
lower court says the following in the appealed
judgment;
The other is the defense of prematurity of the
causes of action in that plaintiffs, as a matter
of grace, conceded an extension of time to
pay up to 1 April, 1953 while the action was
filed on 12 February, 1953, but, as to this, the
Court taking it that there is absolutely no
debate that Dahican Lumber Co., was
insolvent as of the date of the filing of the
complaint, it should follow that the debtor
thereby lost the benefit to the period.
x x x unless he gives a guaranty or security
for the debt . . . (Art. 1198, New Civil Code);
and as the guaranty was plainly inadequate
since the claim of plaintiffs reached in the
aggregate, P1,200,000 excluding interest
while the aggregate price of the "after-
acquired" chattels claimed by Connell under
the rescission contracts was P1,614,675.94,
Exh. 1, Exh. V, report of auditors, and as a
Credit Transactions /Pledge and Mortgage/ 50 of 55
 matter of fact, almost all the properties were
sold afterwards for only P175,000.00, page
47, Vol. IV, and the Court understanding that
when the law permits the debtor to enjoy the
benefits of the period notwithstanding that he
is insolvent by his giving a guaranty for the
debt, that must mean a new and efficient
guaranty, must concede that the causes of
action for collection of the notes were not
premature.
Very little need be added to the above. Defendants,
however, contend that the lower court had no basis for
finding that, when the action was commenced, DALCO
was insolvent for purposes related to Article 1198,
paragraph 1 of the Civil Code. We find, however, that
the finding of the trial court is sufficiently supported by
the evidence particularly the resolution marked as
Exhibit K, which shows that on December 16, 1952 —
in the words of the Chairman of the Board — DALCO
was "without funds, neither does it expect to have any
funds in the foreseeable future." (p. 64, record on
appeal).
The remaining issues, namely, whether or not the
proceeds obtained from the sale of the "after acquired
properties" should have been awarded exclusively to
the plaintiffs or to DAMCO and CONNELL, and if in law
they should be distributed among said parties, whether
or not the distribution should be pro-rata or otherwise;
whether or not plaintiffs are entitled to damages; and,
lastly, whether or not the expenses incidental to the
Receivership should be borne by all the parties on a
pro-rata basis or exclusively by one or some of them
are of a secondary nature as they are already impliedly
resolved by what has been said heretofore.
As regard the proceeds obtained from the sale of the
of after acquired properties" and the "undebated
properties", it is clear, in view of our opinion sustaining
the validity of the mortgages in relation thereto, that
said proceeds should be awarded exclusively to the
plaintiffs in payment of the money obligations secured
by the mortgages under foreclosure.
On the question of plaintiffs' right to recover damages
from the defendants, the law (Articles 1313 and 1314
of the New Civil Code) provides that creditors are
protected in cases of contracts intended to defraud
them; and that any third person who induces another
to violate his contract shall be liable for damages to the Concepcion, C.J., Reyes, J.B.L., Regala, Makalintal,
other contracting party. Similar liability is demandable Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ.,
under Arts. 20 and 21 — which may be given concur.
retroactive effect (Arts. 225253) — or under Arts. 1902
and 2176 of the Old Civil Code.
The facts of this case, as stated heretofore, clearly
show that DALCO and DAMCO, after failing to pay the
fifth promissory note upon its maturity, conspired jointly
with CONNELL to violate the provisions of the fourth
paragraph of the mortgages under foreclosure by
attempting to defeat plaintiffs' mortgage lien on the
"after acquired properties". As a result, the plaintiffs
had to go to court to protect their rights thus
jeopardized. Defendants' liability for damages is
therefore clear.
However, the measure of the damages suffered by the
plaintiffs is not what the latter claim, namely, the
difference between the alleged total obligation secured
by the mortgages amounting to around P1,200,000.00,
plus the stipulated interest and attorney's fees, on the
one hand, and the proceeds obtained from the sale of
"after acquired properties", and of those that were not
claimed neither by DAMCO nor CONNELL, on the
other. Considering that the sale of the real properties
subject to the mortgages under foreclosure has not
been effected, and considering further the lack of
evidence showing that the true value of all the
properties already sold was not realized because their
sale was under stress, We feel that We do not have
before Us the true elements or factors that should
determine the amount of damages that plaintiffs are
entitled recover from defendants. It is, however, our
considered opinion that, upon the facts established, all
the expenses of the Receivership, which was deemed
necessary to safeguard the rights of the plaintiffs,
should be borne by the defendants, jointly and
severally, in the same manner that all of them should
pay to the plaintiffs, jointly a severally, attorney's fees
awarded in the appealed judgment.
In consonance with the portion of this decision
concerning the damages that the plaintiffs are entitled
to recover from the defendants, the record of this case
shall be remanded below for the corresponding
proceedings.
Modified as above indicated, the appealed judgment is
affirmed in all other respects. With costs.
Credit Transactions /Pledge and Mortgage/ 51 of 55
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-49101 October 24, 1983
RAOUL S.V. BONNEVIE and HONESTO V.
BONNEVIE, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and THE
PHILIPPINE BANK OF COMMERCE, respondents.
Edgardo I. De Leon for petitioners.
Siguion Reyna, Montecillo & Associates for private
respondent.
GUERRERO, J:
Petition for review on certiorari seeking the reversal of
the decision of the defunct Court of Appeals, now
Intermediate Appellate Court, in CA-G.R. No. 61193-
R, entitled "Honesto Bonnevie vs. Philippine Bank of
Commerce, et al.," promulgated August 11, 1978 1 as
well as the Resolution denying the motion for
reconsideration.
The complaint filed on January 26, 1971 by petitioner
Honesto Bonnevie with the Court of First Instance of
Rizal against respondent Philippine Bank of
Commerce sought the annulment of the Deed of
Mortgage dated December 6, 1966 executed in favor
of the Philippine Bank of Commerce by the spouses
Jose M. Lozano and Josefa P. Lozano as well as the
extrajudicial foreclosure made on September 4, 1968.
It alleged among others that (a) the Deed of Mortgage
lacks consideration and (b) the mortgage was
executed by one who was not the owner of the
mortgaged property. It further alleged that the property
in question was foreclosed pursuant to Act No. 3135 as
amended, without, however, complying with the
condition imposed for a valid foreclosure. Granting the
validity of the mortgage and the extrajudicial
foreclosure, it finally alleged that respondent Bank
should have accepted petitioner's offer to redeem the
property under the principle of equity said justice.
On the other hand, the answer of defendant Bank, now
private respondent herein, specifically denied most of
the allegations in the complaint and raised the following
affirmative defenses: (a) that the defendant has not
given its consent, much less the requisite written
consent, to the sale of the mortgaged property to
plaintiff and the assumption by the latter of the loan
secured thereby; (b) that the demand letters and notice
of foreclosure were sent to Jose Lozano at his address;
(c) that it was notified for the first time about the alleged
sale after it had foreclosed the Lozano mortgage; (d)
that the law on contracts requires defendant's consent
before Jose Lozano can be released from his bilateral
agreement with the former and doubly so, before
plaintiff may be substituted for Jose Lozano and
Alfonso Lim; (e) that the loan of P75,000.00 which was
secured by mortgage, after two renewals remain
unpaid despite countless reminders and demands; of
that the property in question remained registered in the
name of Jose M. Lozano in the land records of Rizal
and there was no entry, notation or indication of the
alleged sale to plaintiff; (g) that it is an established
banking practice that payments against accounts need
not be personally made by the debtor himself; and (h)
that it is not true that the mortgage, at the time of its
execution and registration, was without consideration
as alleged because the execution and registration of
the securing mortgage, the signing and delivery of the
promissory note and the disbursement of the proceeds
of the loan are mere implementation of the basic
consensual contract of loan.
After petitioner Honesto V. Bonnevie had rested his
case, petitioner Raoul SV Bonnevie filed a motion for
intervention. The intervention was premised on the
Deed of Assignment executed by petitioner Honesto
Bonnevie in favor of petitioner Raoul SV Bonnevie
covering the rights and interests of petitioner Honesto
Bonnevie over the subject property. The intervention
was ultimately granted in order that all issues be
resolved in one proceeding to avoid multiplicity of suits.
On March 29, 1976, the lower court rendered its
decision, the dispositive portion of which reads as
follows:
WHEREFORE, all the foregoing
premises considered, judgment is
hereby rendered dismissing the
complaint with costs against the
plaintiff and the intervenor.
After the motion for reconsideration of the lower court's
decision was denied, petitioners appealed to
respondent Court of Appeals assigning the following
errors:
1. The lower court erred in not
finding that the real estate mortgage
executed by Jose Lozano was null
and void;
2. The lower court erred in not
finding that the auction sale decide
on August 19, 1968 was null and
void;
3. The lower court erred in not
allowing the plaintiff and the
intervenor to redeem the property;
4. The lower court erred in not
finding that the defendant acted in
bad faith; and
5. The lower court erred in
dismissing the complaint.
On August 11, 1978, the respondent court promulgated
its decision affirming the decision of the lower court,
and on October 3. 1978 denied the motion for
reconsideration. Hence, the present petition for review.
The factual findings of respondent Court of Appeals
being conclusive upon this Court, We hereby adopt the
facts found the trial court and found by the Court of
Appeals to be consistent with the evidence adduced
during trial, to wit:
It is not disputed that spouses Jose
M. Lozano and Josefa P. Lozano
were the owners of the property
which they mortgaged on December
6, 1966, to secure the payment of
the loan in the principal amount of
Credit Transactions /Pledge and Mortgage/ 52 of 55
 P75,000.00 they were about to
obtain from defendant-appellee
Philippine Bank of Commerce; that
on December 8, 1966, executed in
favor of plaintiff-appellant the Deed
of Sale with Mortgage ,, for and in
consideration of the sum of
P100,000.00, P25,000.00 of which
amount being payable to the Lozano
spouses upon the execution of the
document, and the balance of
P75,000.00 being payable to
defendant- appellee; that on
December 6, 1966, when the
mortgage was executed by the
Lozano spouses in favor of
defendant-appellee, the loan of
P75,000.00 was not yet received
them, as it was on December 12,
1966 when they and their co-maker
Alfonso Lim signed the promissory
note for that amount; that from April
28, 1967 to July 12, 1968, plaintiff-
appellant made payments to
defendant-appellee on the mortgage
in the total amount of P18,944.22;
that on May 4, 1968, plaintiff-
appellant assigned all his rights
under the Deed of Sale with
Assumption of Mortgage to his
brother, intervenor Raoul Bonnevie;
that on June 10, 1968, defendant-
appellee applied for the foreclosure
of the mortgage, and notice of sale
was published in the Luzon Weekly
Courier on June 30, July 7, and July
14, 1968; that auction sale was
conducted on August 19, 1968, and
the property was sold to defendant-
appellee for P84,387.00; and that
offers from plaintiff-appellant to
repurchase the property failed, and
on October 9, 1969, he caused an
adverse claim to be annotated on
the title of the property. (Decision of
the Court of Appeals, p. 5).
Presented for resolution in this review are the following
issues:
I mortgage was executed. The promissory note
Whether the real estate mortgage
executed by the spouses Lozano in
favor of respondent bank was validly
and legally executed.
II
Whether the extrajudicial
foreclosure of the said mortgage
was validly and legally effected.
III
Whether petitioners had a right to
redeem the foreclosed property.
IV
Granting that petitioners had such a
right, whether respondent was
justified in refusing their offers to
repurchase the property.
As clearly seen from the foregoing issues raised,
petitioners' course of action is three-fold. They primarily
attack the validity of the mortgage executed by the
Lozano spouses in favor of respondent Bank. Next,
they attack the validity of the extrajudicial foreclosure
and finally, appeal to justice and equity. In attacking the
validity of the deed of mortgage, they contended that
when it was executed on December 6, 1966, there was
yet no principal obligation to secure as the loan of
P75,000.00 was not received by the Lozano spouses
"So much so that in the absence of a principal
obligation, there is want of consideration in the
accessory contract, which consequently impairs its
validity and fatally affects its very existence."
(Petitioners' Brief, par. 1, p. 7).
This contention is patently devoid of merit. From the
recitals of the mortgage deed itself, it is clearly seen
that the mortgage deed was executed for and on
condition of the loan granted to the Lozano spouses.
The fact that the latter did not collect from the
respondent Bank the consideration of the mortgage on
the date it was executed is immaterial. A contract of
loan being a consensual contract, the herein contract
of loan was perfected at the same time the contract of
executed on December 12, 1966 is only an evidence
of indebtedness and does not indicate lack of
consideration of the mortgage at the time of its
execution.
Petitioners also argued that granting the validity of the
mortgage, the subsequent renewals of the original
loan, using as security the same property which the
Lozano spouses had already sold to petitioners,
rendered the mortgage null and void,
This argument failed to consider the provision 2 of the
contract of mortgage which prohibits the sale,
disposition of, mortgage and encumbrance of the
mortgaged properties, without the written consent of
the mortgagee, as well as the additional proviso that if
in spite of said stipulation, the mortgaged property is
sold, the vendee shall assume the mortgage in the
terms and conditions under which it is constituted.
These provisions are expressly made part and parcel
of the Deed of Sale with Assumption of Mortgage.
Petitioners admit that they did not secure the consent
of respondent Bank to the sale with assumption of
mortgage. Coupled with the fact that the
sale/assignment was not registered so that the title
remained in the name of the Lozano spouses, insofar
as respondent Bank was concerned, the Lozano
spouses could rightfully and validly mortgage the
property. Respondent Bank had every right to rely on
the certificate of title. It was not bound to go behind the
same to look for flaws in the mortgagor's title, the
doctrine of innocent purchaser for value being
applicable to an innocent mortgagee for value. (Roxas
vs. Dinglasan, 28 SCRA 430; Mallorca vs. De Ocampo,
32 SCRA 48). Another argument for the respondent
Bank is that a mortgage follows the property whoever
the possessor may be and subjects the fulfillment of
the obligation for whose security it was constituted.
Finally, it can also be said that petitioners voluntarily
assumed the mortgage when they entered into the
Deed of Sale with Assumption of Mortgage. They are,
therefore, estopped from impugning its validity whether
on the original loan or renewals thereof.
Petitioners next assail the validity and legality of the
extrajudicial foreclosure on the following grounds:
a) petitioners were never notified of
the foreclosure sale.
Credit Transactions /Pledge and Mortgage/ 53 of 55
 b) The notice of auction sale was not
posted for the period required by
law.
c) publication of the notice of auction
sale in the Luzon Weekly Courier
was not in accordance with law.
The lack of notice of the foreclosure sale on petitioners
is a flimsy ground. Respondent Bank not being a party
to the Deed of Sale with Assumption of Mortgage, it
can validly claim that it was not aware of the same and
hence, it may not be obliged to notify petitioners.
Secondly, petitioner Honesto Bonnevie was not
entitled to any notice because as of May 14, 1968, he
had transferred and assigned all his rights and
interests over the property in favor of intervenor Raoul
Bonnevie and respondent Bank not likewise informed
of the same. For the same reason, Raoul Bonnevie is
not entitled to notice. Most importantly, Act No. 3135
does not require personal notice on the mortgagor. The
requirement on notice is that:
Section 3. Notice shall be given by
posting notices of the sale for not
less than twenty days in at least
three public places of the
municipality or city where the
property is situated, and if such
property is worth more than four
hundred pesos, such notice shall
also be published once a week for at
least three consecutive weeks in a
newspaper of general circulation in
the municipality or city
In the case at bar, the notice of sale was published in
the Luzon Courier on June 30, July 7 and July 14, 1968
and notices of the sale were posted for not less than
twenty days in at least three (3) public places in the
Municipality where the property is located. Petitioners
were thus placed on constructive notice.
The case of Santiago vs. Dionisio, 92 Phil. 495, cited
by petitioners is inapplicable because said case
involved a judicial foreclosure and the sale to the
vendee of the mortgaged property was duly registered
making the mortgaged privy to the sale.
As regards the claim that the period of publication of
the notice of auction sale was not in accordance with
law, namely: once a week for at least three consecutive
weeks, the Court of Appeals ruled that the publication
of notice on June 30, July 7 and July 14, 1968 satisfies
the publication requirement under Act No. 3135
notwithstanding the fact that June 30 to July 14 is only
14 days. We agree. Act No. 3135 merely requires that
such notice shall be published once a week for at least
three consecutive weeks." Such phrase, as interpreted
by this Court in Basa vs. Mercado, 61 Phil. 632, does
not mean that notice should be published for three full
weeks.
The argument that the publication of the notice in the
"Luzon Weekly Courier" was not in accordance with
law as said newspaper is not of general circulation
must likewise be disregarded. The affidavit of
publication, executed by the Publisher,
business/advertising manager of the Luzon Weekly
Courier, stares that it is "a newspaper of general
circulation in ... Rizal, and that the Notice of Sheriff's
sale was published in said paper on June 30, July 7
and July 14, 1968. This constitutes prima facie
evidence of compliance with the requisite publication.
Sadang vs. GSIS, 18 SCRA 491).
To be a newspaper of general circulation, it is enough
that "it is published for the dissemination of local news
and general information; that it has a bona fide
subscription list of paying subscribers; that it is
published at regular intervals." (Basa vs. Mercado, 61
Phil. 632). The newspaper need not have the largest
circulation so long as it is of general circulation. Banta
vs. Pacheco, 74 Phil. 67). The testimony of three
witnesses that they do read the Luzon Weekly Courier
is no proof that said newspaper is not a newspaper of
general circulation in the province of Rizal.
Whether or not the notice of auction sale was posted
for the period required by law is a question of fact. It
can no longer be entertained by this Court. (see Reyes,
et al. vs. CA, et al., 107 SCRA 126). Nevertheless, the
records show that copies of said notice were posted in
three conspicuous places in the municipality of Pasig,
Rizal namely: the Hall of Justice, the Pasig Municipal
Market and Pasig Municipal Hall. In the same manner,
copies of said notice were also posted in the place
where the property was located, namely: the Municipal
Building of San Juan, Rizal; the Municipal Market and
on Benitez Street. The following statement of Atty.
Santiago Pastor, head of the legal department of
respondent bank, namely:
Q How many days
were the notices
posted in these
two places, if you
know?
A We posted
them only once in
one day. (TSN, p.
45, July 25, 1973)
is not a sufficient countervailing evidence to prove that
there was no compliance with the posting requirement
in the absence of proof or even of allegation that the
notices were removed before the expiration of the
twenty- day period. A single act of posting (which may
even extend beyond the period required by law)
satisfies the requirement of law. The burden of proving
that the posting requirement was not complied with is
now shifted to the one who alleges non-compliance.
On the question of whether or not the petitioners had a
right to redeem the property, We hold that the Court of
Appeals did not err in ruling that they had no right to
redeem. No consent having been secured from
respondent Bank to the sale with assumption of
mortgage by petitioners, the latter were not validly
substituted as debtors. In fact, their rights were never
recorded and hence, respondent Bank is charged with
the obligation to recognize the right of redemption only
of the Lozano spouses. But even granting that as
purchaser or assignee of the property, as the case may
be, the petitioners had acquired a right to redeem the
property, petitioners failed to exercise said right within
the period granted by law. Thru certificate of sale in
favor of appellee was registered on September 2, 1968
and the one year redemption period expired on
September 3, 1969. It was not until September 29,
1969 that petitioner Honesto Bonnevie first wrote
respondent and offered to redeem the property.
Moreover, on September 29, 1969, Honesto had at that
time already transferred his rights to intervenor Raoul
Bonnevie.
On the question of whether or not respondent Court of
Appeals erred in holding that respondent Bank did not
act in bad faith, petitioners rely on Exhibit "B" which is
Credit Transactions /Pledge and Mortgage/ 54 of 55
the letter of lose Lozano to respondent Bank dated De Castro, J., is on leave.
December 8, 1966 advising the latter that Honesto
Bonnevie was authorized to make payments for the
amount secured by the mortgage on the subject
property, to receive acknowledgment of payments,
obtain the Release of the Mortgage after full payment
of the obligation and to take delivery of the title of said
property. On the assumption that the letter was
received by respondent Bank, a careful reading of the
same shows that the plaintiff was merely authorized to
do acts mentioned therein and does not mention that
petitioner is the new owner of the property nor request
that all correspondence and notice should be sent to
him.

The claim of appellants that the collection of interests

on the loan up to July 12, 1968 extends the maturity of
said loan up to said date and accordingly on June 10,
1968 when defendant applied for the foreclosure of the
mortgage, the loan was not yet due and demandable,
is totally incorrect and misleading. The undeniable fact
is that the loan matured on December 26, 1967. On
June 10, 1968, when respondent Bank applied for
foreclosure, the loan was already six months overdue.
Petitioners' payment of interest on July 12, 1968 does
not thereby make the earlier act of respondent Bank
inequitous nor does it ipso facto result in the renewal
of the loan. In order that a renewal of a loan may be
effected, not only the payment of the accrued interest
is necessary but also the payment of interest for the
proposed period of renewal as well. Besides, whether
or not a loan may be renewed does not solely depend
on the debtor but more so on the discretion of the bank.
Respondent Bank may not be, therefore, charged of
bad faith.

WHEREFORE, the appeal being devoid of merit, the

decision of the Court of Appeals is hereby AFFIRMED.
Costs against petitioners.

SO ORDERED.

Aquino, J., concur.

Makasiar (Chairman), Abad Santos and Escolin, JJ.,

concurs in the result.

Concepcion J J., took no part.

Credit Transactions /Pledge and Mortgage/ 55 of 55